Earnings Call: H2 2019

Jun 25, 2019

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Axys Technologies Plc Preliminary Results for the Year Ended ended 31st March 2019 Conference Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise you that this conference is being recorded today, Tuesday, 25th of June 2019. I would now like to hand the conference over to your speaker today, Mr. Paul Clegg. Please go ahead, sir. Good morning, everybody, and welcome to the results call for the 31st March 2019. You have in the room here myself, Paul Clegg, the CEO and Will Rudge, the Finance Director. I think that if you're looking at the screen, you'll see that there's a disclaimer, which I think that as always we have to go through. So please have a take a chance to have a look at it. And then I will switch straight through to page 4. And I think both seeing those who are on the call, I don't think this is really necessary, but it is there as a reminder of who we are and what we do. But in summary, we are a company that combines chemistry technology and ingenuity to make a highly sustainable product for the built environment, which of course is very passionate in today's environment. If I ask you to switch to next slide, if you have that, we've had a very strong year given where we are. The demand remains continues to exceed supply. Capacity was running at full capacity with all the production that we could produce. And this has resulted in a revenue of $75,200,000 which is up 23%. This is also followed by a gross profit number of up to $18,600,000 which is up 37%, which is very encouraging and this will be further examined by Will later on. And this is produced for the first time an operating or an underlying EBITDA of positive of €900,000 versus a loss of €3,500,000 in 2018, so quite a term. The expansion in Arnhem was completed as expected and as you probably know is running at full capacity now. The whole Tricoia plant had a delay that we announced in early in March and is now expected to be operational in mid-twenty 20. We've had a very significant period of CapEx, and as I've mentioned earlier, positive cash flow. So a very good start to the new financial year with the Board's expectations unchanged. If I ask you to go to the next slide, this is something that's slightly more information about what we see and how do we see the market and where we are at the moment. We believe that the through a bit of luck and design, our product is extremely well positioned for this time and age. It is a highly sustainable and ecologically responsible product. And these trends remain very strong across the world and particularly in the built environment. They our products will outperform most man made, if not all man made products that are competitive. And we are not a polluter in the way that aluminum and PVC are. We sell our material through our distributors, both the Acoya, which is directly sold by Axis, as well as the Tricoia panels that are manufactured by Medite and Cynza are sold through their distribution network. We have put on the right hand side here where we see our current volume sold of 49,716 cubes and where we believe in the long run, as we have stated before, that the ultimate potential market is for the company of 2,600,000 cubic meters, which is a significant increase from where we are today. Again, just to focus a little bit on sustainability before we get into the more into the numbers. Sustainability remains very, very important for us. We run the company as sustainably conscious as we can do. We are a cradle to cradle the product is cradle to cradle gold and platinum for material health, which is extremely important. The bar to get that certification rises every year. The product the process has no waste, as I think many of you know. And the product fits very well into the sustainable circular economy bio cycle, whilst it outperforms the nonrenewable technicycle product. And clearly, this is an aim that us and industry in general should try to achieve. As an example, an Acoya window made out of Acoya is now regarded to be a carbon negative application. As far as strategic progress is concerned, there's a picture on the next slide of Hull, which shows the big silos, both the raw material silo on the left and the finished product silo on the right. The construction is progressing. We have had some hiccups, as we've discussed before, on the civil works and the remedial action, I'm pleased to say, manufacturing or the operations of that site won't be complete until the middle of next calendar year. As far as Arnhem is concerned, 3rd reactor is on stream. This has increased our capacity to about 60,000 cubic meters, up from 40,000 cubic meters. What is very encouraging is that the it is running at full capacity. And basically, it was running at full capacity within 9 months of the startup, which very encouraging. And we're already underway of planning the 4th reactor, of which some of the basic infrastructure had already been included in the construction of the 3rd reactor. We will be adding additional capacity as far as storage facilities are in being able to take advantage of the increase in volumes of the company to fully benefit from the economies of scale. We are making progress with our U. S. Discussions. But like all of these discussions, they aren't we can't announce it until it's completed. And until it's completed, it is not completed. But I'm very encouraged by the progress, both as far as the relationship with the partner who we've known for a long time, as well as from the market's response to potential capacity being built in the U. S. As I mentioned earlier on the Tricoia, the construction, if I flip to page slide 10 now, we've invested about $28,000,000 in the year. It will be operational in the middle of next year. I think the only additional point is to say is that Medite, who is our key partner on this as an offtake partner, will take up to 40% of the capacity and has an option to go up to 60%. And their final demand reflection has been very good. We have shown 49% increase in sales of aquaia for tricoia purposes, which shows the strong final demand. But we've also added Cynza as a key partner during this period of time. And again, I'm very encouraged by the initial work that Cynzer has done and we're very grateful and excited about the future with them. And lastly, progression with the Petronas Chemical Group PCG is going well. We are in a feasibility period, which will last at least another year. But we have both got encouraging feedback from the final demand market as well as the technical aspects of the construction of the plant and also the possibility of an acetile or a cracker on-site, which is part of the original plan. So good progress, but quite a way to go on that. So with that, I will now turn it over to my colleague Will Rudge, the Finance Director, who will take us through the financial numbers. Good morning, everybody. If you look at the financial highlights, these figures, we think, represent our best set of results so far. Key to this is the three things: 23% increase in revenue to €75,200,000 for the year. And this was driven by demand, but limited by our production capacity, as well as higher pricing and €1,600,000 of license income in the period. Secondly, a 37% increase in our gross profit to €18,600,000 for the year. This enabled ultimately us to report an EBITDA positive figure for the year of €900,000 as Paul mentioned earlier. But importantly, this also reflected a progression within the year with us reporting €2,300,000 of EBITDA in the second half year compared to the €1,400,000 loss in the first half of the year. Lastly, our net debt has increased, but the underlying operating cash flow was positive in the period, with the net debt increase being driven by CapEx. And I'll come on to detail all of this in a bit more. Overall, this means that we are well positioned and expect to benefit from the further increase in the profitability and revenue in the next period of time, the medium to longer term. We will benefit from the significant CapEx investment. First of all, the full year benefit of the 3rd reactor as we can move into the new financial year. And then in the following financial year, from the whole plant when that becomes operational in mid-twenty 20 calendar year. Ultimately, this means that we think that a 30% acquired gross margin is still achievable, noting that 46 percent of our volumes sold in the period was at discounted or lower prices, which is only for a period of time. And secondly, when the whole plant turns on, we expect this to have higher margins than that. Our corporate costs and R and D costs remained relatively stable, a small increase. And we do expect that to increase a little bit as our activity levels increase. But that is relative to our overall performance. If I move on to the next slide to look at the revenue growth in a bit more detail. Revenue increased in all regions. This is driven by acquired sales, up 16% by volume. But within that, the 33% increase in the second half year compared to the first half year as we benefited from the 3rd reactor. The 3rd reactor, which started partway through the year, ramped up production. It was only in the final quarter of the year that it was operating near its full capacity. And to put that into perspective, in the final quarter of the year, we sold 14,926 cubic meters to give an indication of what we should be able to achieve going forward. The higher volume was also coupled with higher average selling prices, and that resulted in the Ocoya wood revenue increasing by 19% to €66,900,000 The increase in sales volumes is attributable to consistent and growing demand across the regions, driven by repeat business. However, the volumes were limited by capacity, and that's throughout the year even with the addition of the 3rd reactor. As a result of that, we have concentrated our sales volume allocation on our core customers, focused on developing our relationship with that core distributor base. And as a result, we have seen the number of distributors reduce by 12 from 64. Moving into the new financial year, we have started that as we finished the old one. Demand remains very strong throughout the regions, including, in particular, the U. S. A. In what continues to be a priority market for us. Moving on to the next slide, a little bit more detail with our profitability. In the year, our profitability was driven by the Acoia business ahead of the whole time coming operation in the following year. The Acoia segmental EBITDA almost doubled to €9,000,000 from €4,600,000 last year. The chart on the bottom left there sets out the Ocoya EBITDA excluding licensing income, and that shows a 77% increase to €7,800,000 last year. This is driven by a couple of things. One is that we continue to benefit from economies of scale. And as I said, we really start to see the benefit of the 3rd reactor in the last quarter. And that has enabled our second the manufacturing gross margin in the second half of the year to increase to 24.7% compared to 23.8% for the same period the year before. Looking at our pricing and our costs. Our raw wood cost price saw relatively small increases during the period. Our CCARs costs, however, increased more significantly earlier in the financial year before decreasing a bit towards the end of the year. Looking forward, we expect our raw material prices to be relatively stable throughout the new financial year. However, we did implement a price increase to our customers in January 2019, and that was to take account of the net increase in costs that we have seen. But that price increase, we do also expect that to have some margin benefit into the 2019 calendar year. The combination of all of those matters meant that the our EBITDA did improve significantly to 2.3 €1,000,000 in the second half of the year, as I mentioned before. So in summary, looking ahead, the full year benefit of the 3rd reactor will result in higher volumes. We should also benefit from the price increases implemented from January 2019. Our TRICOYA volumes, which represented a significant proportion of our volumes, we expect to while we expect to remain, we'll not increase in the same proportion as it has done in the past. And as a result, we do expect further profitability improvements into the medium and longer term and in particular when the whole plant turns on in the following financial year. Move on to the next slide and looking at net debt. The bridge here reflects the 3 sort of key movements. Firstly, is the operating cash flow positive figure of €300,000 And that's made up of a few areas. Firstly, there's €9,000,000 EBITDA generated by the Ecoya business, despite the fact the 3rd reactor was only at capacity in the final quarter. That was offset by CHF 1,900,000 cash outflow for the Tricoia business, and that's reflecting its preoperating phase ahead the whole plant start up as well as costs associated with the broader Tricoia business, which is focused on building future plants. The €6,200,000 cash outflow for corporate costs and R and D increased only marginally compared to the previous year. That means that the overall increase in net debt, which ultimately has increased from €3,800,000 to €50,100,000 was driven by €48,000,000 of CapEx for the period, and that reflects our significant investments in our production facilities. €8,400,000 was for the final cost associated with the 3rd reactor for the Akoya plant in Arnhem. Euros 27,800,000 spended in the whole plant during the period. The remaining costs will be incurred in the new financial year and into the year after that. And then finally, euros 12,000,000 the remaining €12,000,000 of CapEx predominantly relates to the purchase of the land and buildings in Arnhem, which we purchased from the previous landlord, Braul, in the first half of the year, and that replaced a finance lease arrangement. The net debt has increased to fund the new capacity, but to do that, we have taken on some new facilities in the year, and that has enabled us to reduce our effective interest rates from the year, down to 7.3% from 9.3% the year before. And with that, I shall pass back to Paul to look at the outlook. Thank you, Will. And as you can imagine, just pick up from Will said that we will continue to try and improve our cost of capital as time goes on. So as far as the outlook is concerned, if you flip to the last chart, I don't know what page it is, but I hope that you can see it. Positive, we've had a very strong to the start to the financial year. Demand continues to exceed capacity. Force reactor is working very well. EBITDA continues to grow, which I think is extremely encouraging for us as a company. I think that what I would like to just concentrate on, which because most of this is otherwise a repetition, is that if I can ask you to look at the bar graph on the right hand side, What we've tried to do here is to show where we are on production. You'll see that in the second half of twenty eighteen, we had 40,000 cubic meters of production. Second half of twenty nineteen, we are at 60,000. Once hull turns on, which is the next step, that will add the equivalent of 40,000 cubic meters in capacity. The additional reactor in Arnhem, if that happens, that will add another 20,000. The capacity in Malaysia would add equivalent of 40,000 cubic meters of capacity. And adding to that, the U. S, if that goes ahead, that would add another 40,000, making a total of 200,000 cubic meters of total capacity if all of our plans are executed. I would add that in addition to that, the whole site has always had the capacity and the intention to expand to further to a second train and possibly even a third train, which would double and therefore double the size of hull. So we believe that at this time, we are entering into a very intense period of construction and expansion around the world, which I think will underpin the success of our technology and the commercialization of that technology. And to conclude, the final statement is that the Board also made an announcement early on today, where it says that I will be as CEO will be stepping down at the end of this year in order to really drive the company to increase its expertise in manufacturing and production around the world. And I look forward to helping the company during this transition process, and I am sure that we will find a very capable person to take on the mantle after 10 years of working at this company. So with that, I will turn it over to questions. And I think that we turn it over back to the moderator who will give the instructions of how to ask questions. Thank you. Ladies and gentlemen, we'll now begin the question and answer session. And your first question is coming from the line of Christian Hjors from Numis. Please go ahead. Good morning, guys. Thanks for taking my questions. Just a couple from me, really. First of all, it sounds like with at Arnhem, everything is going very well currently with the 3rd reactor. As you say, you are planning for a 4th reactor. I just want to get a bit more sense of timing. How soon can construction around that 4th reactor actually start? And then just maybe a bit more color on timing in terms of when production could start from it as well. And then maybe just a bit more on the Petronas Malaysia opportunity. Just since you last updated, what work has been done? How does this reflect in their thinking? And just really progress with that work would be much appreciated. Thank you. Hi, Christian. I'll answer, in fact, both questions. The planning process at the moment is the following. We will aim to complete what is called a FEED study or front end engineered design study by the end of this year. That will allow us to then turn that information to detailed engineering, which will then allow construction to happen. The process to get the FEED study done is underway. We have yet to choose a partner to do that FEED study. But the expectation is that the contractor who will help build us will do both the FEED study and the full construction. The second part of it is, as I'm sure is that before we can start construction, we will have to be clear on how we finance this. And I think, again, that will be addressed in due course. As far as Petronas is concerned, we have had, I think now, 3 steering group sessions since we signed the agreement in Malaysia. I have regular contract with the CEO of PCG, and PCG is a quoted subsidiary of the Petronas Group, Datuk Sazali, and I hope to see him again in the next couple of weeks. We have done an extensive market work where we have visited multiple panel manufacturers, door skins, door manufacturers, window manufacturers, panel operators. Recently, we have engaged in a full third party market study, which will start fairly shortly with 1 of the world's leading agencies in that world, which called Pori. We have had several detailed exchanges on engineering and engineering design. And to be clear, the engineering design splits really into 2 pieces. Petronas has a big chemical site on the East Peninsula of Malaysia in a city called Kote or a place called Kote where they have an acid plant. The aim is that we would build a chip acetylating plant there as well as a key team cracker to convert the acid into anhydride. So there are several work streams that are fully engaged. As you can imagine, PCG is a much larger organization than us, so they will have many more engineers to throw at it. And we are we sometimes struggle a little bit with bandwidth, but progress is being made and milestones have been hit so much so that the initial payment from PCG was done on time for the milestones that were set. Your next question is coming from the line of Toby Thorrington, Edison Investments. Please go ahead. Thank you. Good morning all. A couple of questions. Thank you. A couple of questions for me. 1 on sort of current market agreements with Inocoia. And the second one is just a follow-up on the international potential international new plants that you've been referring to. So first of all, I was just curious with regard to Echoyex. I think the well, it's actually Tricor, I suppose, through the Arnhem plant. What the Finza experience has been today because they're a relatively new customer. And the follow on related to the company currently known as Surdia. I think there's a reference in the statement to the offtake agreement with them ending in 2020. Perhaps you could give a bit more detail around that as well, please. So the experience with FINSA has been really good, in fact. FINSA is about 4 times the size of Medite just for clarity sake. FINSA also has multiple manufacturing sites. It also has a distribution. It has a very large distribution network across the Spain and all the Belarus. And they have I believe it's 12 centers. In each center, they have architectural support practices. They have run, I think, 5 campaigns now, so I. E, 5 batches of it. Batch 1 was a huge success. Batch 2 had some learning difficulties. 3, 45 have been very successful. Their major issue is that we can't supply them with enough material. And so they have been very supportive because frankly, we've had to tell them that we can't give them as much as we'd originally hoped. And that is largely because of the delay in Hull. But from all other aspects, they are very creative, very innovative, looking at multiple ways of optimizing the TRICOIA chips and fines for that panel product, whether it's going to go into flooring applications or traditional windows and panels. So as good as we could have hoped for, they are a partner that we have known for a long time. And just to show you how enthused they are about it, they have covered their headquarters in Acoya in the last 18 months. Regarding Surdia, formerly known as Rovia, they have made and it might be worth looking at, they made a restructuring announcement yesterday where about their other businesses. They do the license agreement that we have with them does have an ultimate drop dead date of November of next year with a preliminary date of May of next year. And their obligations under the license agreement was that they need to build a plant in order to maintain that. There is no evidence of them building a plant. So it is highly likely that there will be a change. We are very close to them. They are a good customer of ours. I think that they took 12,000 cubes of material over the last 24 last 12 months. They have a 5 man sales team and 1 or 2 marketing team. So we have very good relationship with them. And it is one of those things that the next step will be revealed when the next step will be revealed, and that will be done at some stage. Okay. Is there an inference or conversations ongoing there already, Paul? Yes, yes. We have, again, I think we have a quarterly steering group on the business front. We have I have very regular contacts with Philippe Rozier, who's the CEO. So and in fact, I was in Basel, which is their new headquarters, only 2 weeks ago or 3 weeks ago. So there are ongoing discussions. But I wouldn't I don't want you to read into that any near term expectations. Understood. Okay. And sorry, my other question related to follow-up to Christian's, I think, relating to the Malaysia and U. S. Discussions, which are underway. Obviously, I think Malaysia is probably more than a discussion. But just wondering how the costs associated with those two sort of projects are being treated. They're all being expensed as we go. They're being put through the corporate line? Or are they being treated differently? Will, do you want to answer that? So I think expenses relating to the pre any pre work will be put through the respective divisional costs, say, for Tricoire into Tricoire and the coir plant in the U. S. And at coir. Clearly, if anything progresses to a later stage, we may start to capitalize costs, but we're not at that point yet. And so costs are expensed in the relative respective divisions. But there is some income that has come in from the PetroNav discussions into the Tricoire division. Sorry, I didn't quite catch that. Into Tricoir, did you say? So for the there's some income relating to that relationship, which is being reported in the Tricoya segment as well. Got it. And final question unrelated to the previous 2. When are you planning the maintenance shutdown at Arnhem this year, please? And how long does that have to take? So we've had the maintenance shutdown in May, Andrew. So it's an annual stop that is usually it's 2 weeks of shutdown and a couple of days of startup. So that is included in this Q1's activity. Perfect. Thank you very much. Okay. I did see a written question on that. Oh, that was Andrew. Shall I there's a question here. Can you talk about the sourcing of radiator part volumes ramp up 200,000,000 cubic meters in the long term? Can New Zealand supply this and or more volume? So the 200,000 cubic meters is split between a coir and tricoir. Can I just to remind everybody that tricoir does not necessarily have to use radiatopine and hull will be sourcing its chips from local chip manufacturers? So they will be a multiple species, primarily, a Scots pine, but possibly even some spruce in there. So the tri coir aspect of sourcing material and availability of material is not the issue. From an aqua point of view, the New Zealand harvest cycle is going through an extended increase in harvestable forests over the next 15 years. So we do not believe that there are any issues of supply from New Zealand. In addition to which, we are looking at other materials, particularly geared towards the U. S. In the long run, we expect the U. S. To be using indigenous U. S. Species and or a mix of Radiata and indigenous U. S. Species. Radiata is already known in the market. So if you go into Home Depot and you look at the high end, the best wide board clear offering, it is radiatopine that is supplied by from New Zealand, but it is billed as and is accepted. But we are looking at tayde, we're looking at ponderosa pine, we're looking at various other materials that would be able to be used in the U. S. So we at this stage, we feel very comfortable that as far as the supply material is concerned that we are comfortable on the wood element of that. And your next question is coming from the line of Rudolf Stegler from Salida. Please go ahead. Yes, Paul. First of all, my compliments with what you performed in the past 10 years. I regret that you're stepping down, and I hope you find a good successor. I have 3 short questions. The one is, will the next this coming year show a net profit? And the second question is, with your expansion, how are you going to do the funding? And the third is, is it possible to pay a visit to Arnheim? Thank you. So Rudolf, I'll answer the last question first. Of course, it is possible to visit Arnheim. And if you can either drop me an email so I and then we can arrange that. I think Hans Powley locally, who I think that you may have met, will we can arrange that. Right. Thank you. To the second question as far as capital raise is concerned or capital needed for expansion, I think it is that's an open question. And I think that it is often discussed that how we would fund that. We have always said that if we have to do the 4th reactor early, and I believe that we're doing it early, that we would have to look for outside sources of capital and we will do that as Will suggested earlier, we will do that as cost effectively as we possibly can do. And then to the first question, when will we report a net profit? I will pass it over to Finance Director, Will Raj. Thank you, Paul. Net profit, I think not in this next in this new financial year. I think net profit will follow on from the whole plant turning on and becoming operational and starting to ramp up volumes. So it's the following financial year at earliest before net profit and is likely to be reported. All right. Thank you very much. Thank you, Rudolf. And don't forget to e mail me and we'll arrange for you to go and see the total volume. Yes. Okay. There's a question here from which says here, please could you describe the actions taken to improve the repeatability of volume sales of acquire to give more visibility? Thank you. That's almost a prompted question, but I'm very grateful for it. It is very important to recognize that most of our business is repeat order business. Most of our customers are joinery companies around the world who are making doors and windows on a regular basis. They buy their material from the distributors and they buy that on a month in month out basis. So we continue to press on that. We believe that this I've always believed that this repeat business of doors and windows and decking and cladding is core to our business. It may not be as showy as wonderful iconic projects, but it is extremely important to recognize that that is our core driver. We work extensively with our distributors to make sure that they do focus on that core repeat business that make sure that they understand the ordering patterns, the ordering visibility patterns that we need to have for the fast moving items that serve this market. So it is very much front and center of our business relationship with our distributors. And that's why we also have a very strong relationship with their customers, the machinery, the joinery companies and often their final customers who may be assembling the building companies. But it is very important that a very important part of our business model. Well, I'm very glad to say that it looks as if I've exhausted all the questions or we've exhausted all the questions. So it only leaves me to thank everybody for taking the time and look forward to as we're looking forward to a very good year. Thank you very much, everybody. Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.