Welcome back, everyone, to ABG Investor Days. My name is Henric Hintze, and I'm an equity research analyst here at ABG. With me now, I have a company that I cover, namely I-Tech, and the CEO of the company, Philip Chaabane, here to present for us. Please, go ahead.
Thank you so much, and thank you all for being here today. We have the lovely opportunity to present to you a company originally from Gothenburg, the sunny side of Sweden, as you know. It's also within shipping, which is part of the West Coast's heritage in our country. So what we're talking about here is actually a microbiology kind of product that is included as an ingredient in marine coatings. In the front page here, you see barnacles. We love barnacles more than anyone else, and they happen to be good to know because if they're on the wrong spot, they cause a lot of damage in terms of excessive fuel consumption on ships. So I-Tech AB is a growing company. It's growing with customers, it's growing on ships as terms of being a technology.
So we are part of, the portfolio of six of the nine largest paint makers in the world, and it should be said that those nine constitute the vast majority, not to say almost all, volumes that go into this commercial shipping industry when it comes to marine paints. It is also so that more and more ships are experiencing these kind of coatings containing our product, Selektope, and to date, it's beyond 1,000 ships that in one way or the other, are using this technology. And I will come back to you a bit about what the technology is. If we could be integrated in every single liter of antifouling coatings, we would have a market sales value then for our product of around $350 million-$500 million.
Remember that all the ships around the world who are circulating or traveling through oceanic waters need antifouling coatings. All of those coatings need to have some sort of mechanism to manage hard fouling, i.e., barnacle fouling. So it's very important that to understand that the need for coatings is there all the time. Not only that, it's so that all ships need to be recoated at least every five years on general terms. Could be every three years, depending on the age of the ship. So it's a recurring business. It's condensed to maybe six to nine suppliers around the world, and the number of components possible to use in the paints are less than 10, and we're one of only three that are having any sort of effect against barnacle fouling.
So that's our position, and that's have taken us to be a listed company, unique because of the mode of action, because of the product that we're using, highly unique, protected by patents and regulatory approvals. It's used then as a bio- as an ingredient technology, and it's actually a heritage from the biotechnology research in Gothenburg more than 20 years ago. We call this now Selektope. It's selective, and it attacks the octopamine receptor, which I will talk about soon. The purpose of it is to enhance the properties of paint and mainly make sure that ships stay clean longer time, even if they're found in longer periods of static or in warmer waters, where the fouling pressure is quite higher than what it is in the Nordics here. So the value chain that we're in is quite simple.
We're a super slimmed company in this sense because we outsource the production to quite complicated production sites, also known for producing pharma products. So the standards here are quite high, when it comes to safety, when it comes to environmental care, and control and impurity transmission. So it's a very fine, solid, fine-grained powder that is supplied in a container, normally 1 kilo big, as an example. It is so small quantities in a liter of paint that we actually can supply it in a dishwasher tablet form. So what you see up there can actually be introduced directly into the paint system without opening it. The small amounts come from the biological mode of action that this product has.
And when I say small, you could compare 0.1% loading to 50% loading of the copper oxide, most premium-containing paints. Regulatory parts is another important aspect. You need to have at least the shipping industries under control to be successful. And now, 23 years later, we cover the main shipping countries, and, and it's a bit interesting to see a lot of gray countries here, but it's also the world evolving into having a few parts of the world deciding what the rest should do. So Europe, very heavy regulatory schemes, China, Japan, Korea. And if you have all those, all the gray follows. There's no one else to have the capacity to evaluate on this deep level. So those are the important. With those, you can go anywhere with a ship.
You have the possibility to apply on all the yards that a ship normally addresses, with one small exception. There are local markets in the U.S., red-marked here, also, Canada, Australia, New Zealand, but they are not important from a shipping perspective. The only way you would dry dock in those countries is because you have a huge issue, and you cannot, for emergency reasons, move back to more reasonable countries, meaning Europe or Asia. So why are we not doing anything there? Well, as obviously, because the shipping industry is not that interested in those countries.
But we are actually trying to look into some of these, mainly U.S., because it's an it has a huge coastline, there's a lot of coastal vessels that we do want to address, and notably, a huge leisure boat market, where you can find a different sales pitch than in the commercial landscape. So that's why we have this collaboration there since a few years. And let's see how that develops. It's not so much on us as it is on the political landscape and reducing resources over there in the regulatory world. Anyway, there are three companies, paint makers, to give you an idea of who we work with. So I-Tech being about 14 people, are working with companies that are many, many thousands on the list of employees.
Hempel, Jotun, and Chugoku are the ones that are official, and there are a few more that we are selling to, three more to be exact, and we think more is developing. To give you a bit more view of the customer base, we see that you can see from this chart, these are nine different customers. All of them are working with Selektope. And just to put your mindset in, what does this mean? Well, to develop a new paint, even if you're just adding 0.1%, a few grams per liter of paint, you need about 10 years to make sure that it works on a ship without having any other secondary issues or so. So all of these checks are symbols that we have been working with this for quite some time.
So ongoing R&D in all of them, most of them for more than seven to eight years. Meaning that we're in a position to grow the customer base if we are a bit lucky here with pushing forward the final steps in the development process. But maybe more important, there are six of these involved in the newbuilding process. So the newbuilding is a huge opportunity to introduce new technology. First of all, because the ship is actually laying idle quite some time. You know, it's launched into sea, but it's not complete. So it's sitting there for quite some time, and needs to be delivered without any fouling, of course, as you come as a ship owner, you want to have your ship top-notch and ready for five-year service. Therefore, Selektope made its entry in Korea, 2014.
So the newbuilding area is super important. It's probably the most difficult area when it comes to static exposure and keeping fouling pressure under control. And that's where Selektope has a footprint, notably in Korea. So in Korea, this is quite a big brand. It is quite a popular way and is known by all the big yards in Korea. And therefore, six of the biggest paint makers in the world are using it. We're betting on a few more, at least one more coming in during the next 12 months. However, the newbuilding market is 1,500 ships, roughly per year. The dry docking market is 15,000 ships, and that's the bigger ships. We can add another 15,000 of the smaller ships, which are then tugboats or supplier ships or offshore industry ships. That creates quite an opportunity.
So every year, there are 15,000 reasons to select an antifouling coating. We hope that many of those reasons will go into the direction of higher performing paints with a more sustainable profile than what they've been using in the past. So once you're in the paint bucket, it's quite sticky. It's not that easy to change. And if you're happy with something, this industry doesn't change that quickly, unless a regulator forces them to change. That's also a hurdle for us to get in, so be aware, it takes a lot of time. You have to be very patient to be a selling man in this world. I've been here for 10 years, so that shows something at least.
And we're quite happy then that there are two potential candidates of entry here for new products coming from some of the biggest paint makers in the world. We hope that those processes are finalized within short, and that there will be some noise around those possible initiatives of new products. I should also mention in this line that the overall reason to develop is to make this paint stronger. It's to reduce biocide loading. That's a sustainability argument, and it's to follow the trend of new coating systems, meaning siliconees. All of the - not all of these, some of these are looking into enhancing silicone products as a part of their niche, and in that case, also, biocides are needed. So Selektope, as I mentioned, is the barnacle-preventing active agent. It looks like the molecule on the screen.
It is super unique because it repels the target organism. It pushes them away from the surface rather than killing them. It's used in, I said, as I said, very small quantities, but it's, it's super powerful. So the picture on the vessel here, it's provided by, by our customer, Chugoku, shows how powerful it is when it's used in a commercial available paint. This is in the barnacle paradise area, Tokyo Bay, exposed to static under longer periods, comparing them to conventional, premium antifouling coatings. So it's super powerful in small concentrations, meaning that they can be more creative, and that's why you see the high interest in the development from the last slide. So bear in mind, repelling is very specific and it's super powerful.
So, why do you, why do we then—I mean, this will go to arguments itself, but it's not enough to push a paint maker over the, over the cliff to actually work with it. So we need, together with the paint maker, address the mega trends, and the mega trends are reducing fuel, and then emissions to air. The whole industry is 2%-6%, so 2.3%-2.6% of global CO₂ emissions. They have similar size of the output of Germany as a country. Hence, it is also transporting 80% of all goods that we consume around the world.
This can be reduced considerably, and only looking at the hull, it can be saving about 100 million tons of CO₂, if the best possible antifouling products were used on all ships compared to how the average ship is looking a few years back. So there's a huge correlation, a clear correlation between selecting the most appropriate, the best possible antifouling coating with the ability to save fuel. So in the last few years, the sales process has gone from discount discussions, same thing from other every paint maker, "Looks red as always, who cares?" To actually complete value-based offer. And of course, being able to present a new technology inside of that value discussion is helpful. That's very helpful for the paint maker, and it drives our sales. This is the main reason why Selektope is growing.
The second reason why it's growing is because another issue has come to light when it comes to hull sides and fouling. As you may know, invasive species or is a problem all over the place. Difficult to put a monetary value on it, but it's quite ecologically disturbing, to say the least. Ballast water has been an issue, and that's mainly resolved, at least from an engineering perspective. It's then been shown and proven that a fouled hull has an equal risk of damaging the ecosystem that it may transport an alien species into. Certainly, if those alien species happen to be invasive, and then you have a big problem. There's a big focus on IMO level.
IMO is a UN organ for controlling ship, shipping, I should say, to actually try to reduce the risk of transporting alien species by assuring that the best possible antifoulings are used. An example is ships trying to go to Australia earlier this year in January, who were rejected port calls and also happened to be a cruise ship. So all the passengers on the cruise ship didn't have a chance to visit the ports or the cities they were supposed to because the ship were too fouled, hence posed a too big risk to bring in alien species to Australian waters, and hence had to spend a week out in the international waters, doing nothing but watching a diver trying to clean the ship.
This is a reason why paint makers have to pay a lot of attention now to increase the power of the paints, because they don't want to supply something that the ship owner then, at the end of the day, would have to have a rejected port call on. The final thing is the fact that we have a reason to reduce chemical leaching altogether, and biocides is one of those. And with our small loadings, we can help reduce this leaching from paints. Three good reasons why you want to work for I-Tech or why I-Tech should grow considerably in the future. Speeding up a bit here, we can see that incentives to move forward is coming from IMO, where they set targets all the way actually to 2050, where they have stretched and said that should be almost zero emissions.
On the way to there, there should be sharp emissions on CO₂ on the shipping industry, forcing investments into the industry. What you then invest in? Many different things, but if you fail on certainly the hull side, you can have a huge negative impact. It's actually so that a hull with a lot of barnacles, meaning 10%-15% of the surface, would have 40% extra drag. You have normalized all this down to a potential saving of 5-25 across the different ships and different trade zones. So if you don't take care of this, there's no chance that we're gonna reach the IMO targets displayed on the previous slide. It's also so that without these improvements, the transition to carbon-free fuels is impossible.
A carbon-free fuel is much more expensive than what we use as fuel today, so all these things will help the transition altogether. To give an example, we have donated Selektope and collaborated with Jotun on a hospital ship. Why a hospital ship? Well, of course, we wanna do something good for the world, but also because it's static in the wrong places of the world, meaning West and East Africa, where it's hot and very foul intense, and it's a good example to see how resistant is this coating. So after 33 months, we can see there is some soft fouling, the green stuff, but there's no barnacles. That's exceptionally long periods in exceptionally troublesome waters that are then showing performance in this coating type. In this case, combined with copper oxide, seems to perform really well.
This is a slide I put together yesterday because it wasn't available as a slide deck before that. Chugoku, our main, largest customer, released a new company update. In one of the slides, somewhere down page 21, we can see how they address their antifouling products. That's the main part of their business. They're listed in Japan, so they are public. You can go and find a lot of information. The two products that they talk about happen surprisingly to be Selektope. So the first one is a copper-free Selektope version. The second one is their new Selektope copper hybrid, both super advanced, trying to help them grow their market share. And actually, for the first time in a long time, they are now profitable in all regions.
They are heavily invested in our technology, and they are number two or three in the world in size. So a few words on the quarter. Growing, as I said on the first slide, growing with 51% even. This is quarter three figures, so it's comparing to quarter three the year before, and it has a strong profitability margin of 25% EBIT. And that is a very nice position to be, to be able to grow this and still make money, and quite a lot. Actually, the profitability margins are actually growing a bit faster than the sales margins. And the net results gives good contribution to our strong cash position. That's already quite strong, SEK 84.6 million over the quarter. And here you can see the more detailed numbers.
Important things to take away here is the the growth, of course, and then the, our currency-adjusted growth, which is important. Our, our weak krona is, playing, in our favor at the moment, may not always be so. We are trading in dollars, buying dollars, selling dollars, and then, of course, we have sellers in SEK. So important to see that growth is actually quite strong, even after adjusting for currency. EBITDA, very strong, as I said, and then the net profit margin, also very strong. This means we're prepared to take next steps at I-Tech, whatever they will be. Maybe just continue as is, giving dividends or trying to find something to invest in. But we're certainly in a very good position.
And if you would display the balance sheet here, you would see it says, oh, zero debt. It is, virtually not much, to be concerned about on the, on the balance sheet. So it's very strong. My last slide is about the outlook here. And as you know, there is a big customer drive here to use, a new technology. We see that, all these premium-grade antifouling coatings that need to be sold in a much larger quantity than before, because the regulations do contain advanced biocides and binders. That's the only thing you can use. Maybe you could combine with robots.
You have the IMO targets, which are squeezing the industry all the time, justifying the use of efficiency technologies across the value chain. On the challenge side, and I think I will have questions on this, is the regulatory developments around the world, certainly in the European Union, which is putting some issues in front of all of us who are chemical or specialty chemical suppliers in the world. We're also looking in how to broaden our business quicker. It's, you know, annoyingly slow sometimes to go from newbuilding to dry docking. So that's something we have to work on. That's more technically driven work than something else. And then finally, enhance the technical compatibility with some new coating matrices.
In Europe, siliconees are quite well received, so we have to find where and we know that they only work with biocides at least over the five-year scheme, so it's important for us to find a way, together with the customers, to work in this area. This is the final slide. I just wanna show you the magnitude here. You have a big container ship over there. I think it's 14,000 TEUs. It contains 14,000 containers. That's quite a lot of shoes, if it was only shoes. And then you see the length of it, which is 350 meters or something. And then you see the small leisure boat on the side there, right? You see something next to Henric there, you know, trying to... Is it? Yeah, exactly. Thank you.
Quite a big difference in the magnitude of paint consumption, I can tell you. This is one of the reasons why this is so much more important than chasing around different leisure boat markets. With that, Henric, I let you in with questions and say thank you.
Yes, thanks a lot for that, Philip. To start off, maybe you could just expand a bit on the competition and give us a review there.
Sure. So it all comes down into what is the competition? As we're compatible with different biocides, we don't really see other biocides as competitor as such. We see them as complementary needs to develop a good paint. But in this part of the world, competition may come from a biocide-free mentality, so to say, right? That the idea is to go biocide-free. Biocides are harmful and should be taken away from the market. In that sense, we see that siliconees could, you know, certain siliconees without biocides could be a competitor, would take us out of the market. On the other hand, we don't see how that's working over time. There's no good products so far displayed that has a five-year performance cycle on the, at least on the bulk of the ships used for commercial shipping.
I'm saying still, Viking Line might think differently because it's cold waters, quite quick, back and forth, but that's a niche market. If you look at the ships I displayed previously, that's not at all that easy. So that's one way. And then you could envision some people always come and say: "How about cleaning mechanism?" Robots, you know, you throw in a robot into the water, search line, it's supposed to clean the surface. It does, as long as there's no barnacles on it. So in that case, it will be very complementary. We're actually welcoming the technology of robots. It would take care of that green stuff you saw on the slide, which is on the slide. But when it starts, if it starts to have barnacles on it, it would be not possible to use that technology in that way.
Mm-hmm.
I hope that answered your questions.
Yeah, sure. Thank you. Looking at your sales growth-
Mm.
You've grown very rapidly.
Mm
-lately, but most of it has been driven by one customer, Chugoku, right?
Mm.
I was just wondering if you could expand a bit on why, of the three customers that do have products on the market, Chugoku has grown so much faster for you than the others, and what's it gonna take to, for other customers to catch up in volume here?
So, first of all, Chugoku is the only company around, of all these nine, basically, that are only focusing on marine paint. So they are super focused on technical developments. They have an advantage. They're sitting on loads of patents and so on. So they have a technology-leading selling point, if you wish. I think that's part of it. I think different paint makers have different mentalities on which way to go. If we take Hempel, it's very silicones focused. Now, they understood that they work best with biocide, so let's see what's going on there, right? While Jotun may have their way of working, right? That's more difficult to adapt, or they have chosen different-I mean, they invest in this cleaning mechanism and so on, right?
I think step by step, we will all get them there, but, you know, it's their culture and their way of thinking about products that is the main difference, I would say. And to your point, yes, Chugoku is big, but the second biggest, which we cannot still say who it is, is growing quite rapidly as well. Asian-based, and Asians are much more coating chemically friendly than some of the European-
Mm
-competitors.
Yeah, interesting. We'll stay tuned for updates on that.
Okay.
Finally, you mentioned in the beginning of the presentation that you have patents for this product, and I was just wondering if you could tell us a bit how you think about what's gonna happen when those patents expire. How are you going to continue competing then?
Well, patents is only one small part of the defense lines in this industry. The regulatory global approvals, combined with the regulatory know-how, is even more important. It, it's not so that you can copy our regulatory file, and you need to file it over again if you're gonna do this copy of medetomidine. Speaking, if you wanna serve the global shipping community, you can do local infringements and get away with it, probably in China and so on. But on the low global scale, you have to master all these different regulations. You have to master all the toxicological scientific data that goes into it, and all the environmental toxicology data that goes into it. It took us 15 years. It's gonna take the next, at least 10 years, right? A huge investment and very difficult.
The other thing is our knowledge about paints. To work with us, it's not only selling and buying a product, it's buying know-how on how to adapt to certain problems, how to scale it up in the production, how to get into new coating systems. They know that we invest in knowledge. So all these things are just as important or even more than patents.
Mm-hmm. Yeah. Thanks a lot for that. That's all we have time to, for today. Thank you all for listening.