Hello, and welcome to this Q4 presentation with I-Tech. With us today we have CEO Philip Chaabane. My name is Kristopher Berggren, and I work for Finwire Media. After the presentation, there will be a Q&A session, so if you have any questions, please visit finwire.tv and click on this Q4 webcast, and to the right on the page you can write your question. With that said, I hand over the word to Philip.
Hello, and thank you so much. Very welcome to I-Tech's presentation on our quarter four performance, as well as the full year of 2021. As said, I'm Philip Chaabane, and I'm the CEO, and I will guide you through this presentation. I-Tech is a biotech company, for you who are not familiar with us. We rely on discoveries and innovation from research at the University of Gothenburg in the field of marine biology.
The purpose of the product that came through all that research is to contribute to the saving of fuel and emissions to air by reducing marine biofouling attachment on ship hulls. What we have is a product that repels and keeps marine growth away from the ship hull. That saves fuels and emissions to air.
The product is available and included in quite some paint maker products, so we're an ingredient technology in paint maker antifouling paint, so to say. The product is approved, which is a big thing in this industry. The regulatory approval process is rigorous and lengthy, and we have approvals on all the key markets. That qualifies us as a global supplier to the shipping industry, which as per definition, is very global and has its key activities in the Asian part of the world, at least when it comes to larger commercial fleets.
The product has been around quite some time, not only because of the research, but also in the context of its application.
There's over 700 vessels now traveling around using this technology as an ingredient to secure the hull performance in various conditions in all oceans around the world. We'll come back to more about that, and specifically into the technology, which we call Selektope, by the way. It's nothing else than a molecule that is available in this coating and specifically at the very end of the surface of the coating.
When it's available there, it repels specifically then the barnacle larvas from attaching. Attachment from barnacle larva is disastrous if it happens. They build large shells and they create a lot of drag, and drag is directly related to increase of fuel consumption and inefficiencies. That is something you want to avoid.
The problem is that when the ship is static, certainly in warmer waters over a longer timeframe, you're exposed to quite a high risk of getting barnacle attachment on the hull. We have seen from studies that even if the hull surface coverage is 10% in terms of barnacle fouling, that contributes alone to some 30%-40% increase in drag and fuel consumption. This molecule doesn't solve the full problem of the marine biofouling issue, but it solves one of the key problems, something you really do not want to experience.
Certainly it's so that barnacle fouling is quite difficult to clean off in contrast to other fouling organisms, which is the more soft fouling types.
Selektope in the paint is very important to keep the hull performing even when traveling in long warmer waters and having certain periods of anchorage and idling. The markets that we target and our customer targets is the global commercial fleet represented by the tanker ship here, but also the more coastal type of ships. We call them industrial ships, represented by a tugboat here. Of course the leisure boat side, which comprises a large variation of different boats and types.
They're quite many in size, although a lot smaller normally than the other segments. If we could include our product Selektope in all antifouling paints sold over a year, the value of the sales of all that would be somewhere around $300-$500 million.
That would be the potential at the end of the day that we would enjoy if we had 100% market penetration. Where the products are used now mostly is in the leftmost area, which is under commercial fleet with global range, where you have some 50,000 vessels being active. They have to dry dock every 3-5 years normally. That depends on the age of the ship. That means around 10,000-15,000 dry dockings per year. That is another occasion for applying new paint.
At every dry docking, new paint is applied, hence there's a continuous demand of antifouling systems around the world. Adding to this is about 1,500 in a good year of new building projects that go into water.
The smaller but more coastal boats are also quite many in number, less so in size. Still important as there is some 10,000 dry dockings per year, but of course they consume a lot less paint than the bigger ones. These two segments is where our customers are focusing the most, and certainly so again than on the global large ships represented here.
We are also taking some steps into the leisure boat segment through our customer, the main customers, but also doing some activity with more regional strong leisure boat companies. That is an area that is upcoming over the years that we look forward to here. That, that's about the potential of the technology. Now going into what we actually deliver in the quarter.
Quarter four was a strong quarter in terms of the customer development that helped to fuel the increase in gross margin as an example, but also the results that were better than the same quarter the year before. We witnessed also an increase in sales actually in this quarter by 6%. We're quite happy with how that came through despite the big uncertainties out there in the world. What we are most proud of is the steady contribution from a larger and expanding customer base.
We talked about that already earlier this year, and we're now pleased to see that those are coming back over the quarters to contribute to the top line, and so also in this fourth quarter.
We see, you know, the pandemic having some effects, but also now in the later days, the raw material prices are creating some obstacles in the ability to regain the growth curve that we had in 2019. High raw material prices makes everything obviously more expensive, and it's more difficult then to raise the price on high-end products than maybe on medium-grade products. Even if we can keep our material prices in order, our customers are suffering a lot from increased copper prices and solvent prices and so on. This is a bit of an obstacle. We think it's not so long in time. It's quite temporary, so let's see.
We should also reflect on the cash flow, on operating cash flow. That is quite good in quarter four here. That's largely due to previous payments, prepayments, mainly inventory and reallocation of inventory that now was shipped out. We did all that prepayments to secure and reduce risks related to the pandemic and possible lockdowns that we witnessed over the periods before.
This is quarter four, and as we are then at the end of the year, we also show some figures how the year actually turned out compared to the previous years. As you can see on the big picture, the growth is marginal between this year and last year.
It is still a small growth, and it's certainly bigger sales figures than in 2019. Looking at the more holistic view of 2021 and 2020 where they had the pandemic and all that, we came through that hoping that we are seeing the last effects of the pandemic as we speak. If so, we think we've come, you know, it's obvious that we've come through this quite well, both on the net sales side, and also on the gross margin, which managed to increase in these tough times where logistics became more expensive and we had to spend more money on getting things to the customer in time.
We actually target every single delivery in time, which we're quite proud about. EBITDA third year in a row positive.
Obviously we all want to see an increase there, but that will come with higher sales driven by a lot of interesting factors that I will come back to in the future. A word on the operating cash flow, which was actually hampered a bit by large prepayments to regulatory bodies and inventory during the year, and also quite late shipments, which makes payments come in a bit later here in the year, actually coming in 2022. Overall, we would see quite an interesting positive cash flow.
Due to these things, it's on the slight negative side. The cash balance is strong, SEK 35 million, which allows us to continue to invest as planned, both in regulatory files all over the world.
We have previously mentioned the U.S. EPA as one. We're upgrading the European status, and we're spending some efforts in other countries to open new markets and not to say some R&D activities. For the year, the highlights again is a higher customer contribution. 26% of the sales actually came from others than our leading customer, Chugoku. And it's good for us to have a certain balance here, to not be too dependent on one customer, although being very proud about what they do, of course.
We also see that this largest customer, Chugoku Marine Paints, expands and invest more in the Selektope track by having more products available containing our technology.
Apart from them, then also we see more, other companies moving from R&D into commercial levels, and we see some of those effects in this year, hoping that they will obviously grow step by step, in the years to come. What's similar for all of those is that they're quite dependent on the new building side. They're offering their Selektope products on the new building projects, meaning Korea, China, and Japan.
That industry has had quite weak deliveries over the year, which I'll come back to, hoping that that will improve. It could obviously make a big difference for us.
The year also included big changes in the regulatory scheme, which I will come back to, meaning IMO, the global organization governing shipping, announced implementation, I should say, on efficiency measures to bring the marine transportation sector into much more sustainable industry than it was before. That's basically the year as we see it. We move on to give you some more details on key parameters that we think are important for the future here.
As I mentioned, most of all the customers are active in new building. Except for Chugoku, the others are heavily depending on the new building side when it comes to Selektope product. Therefore, we give you some insights here.
Looking at deliveries out of our yards, and then meaning the biggest yards, we see that 2020-2021 were actually quite low. The deliveries has been quite hampered by the pandemic and the effects around that with delays and canceled orders and everything. We don't see that 2022 will look that much better when it comes to output in deadweight tons, so to say.
Looking at the order book, which is the more interesting factor here, we see that orders have increased dramatically into these yards in 2021, meaning that deliveries will be expected to grow considerably in 2023, where many yards are actually completely booked. We also see that booking and deliveries are now scheduled for 2024.
There's a positive development here in the new building programs. Partially because general renewal of a fleet, partially because one needs, if you have cash and a good position, invest in new ships with higher efficiency possibilities than the older ones. Certainly that goes for the bigger container ships, which, by the way, is an industry that makes a lot of money at the moment. Bulk ships and container ships, as you can see in the graphs, are over-represented in the number of contracting for the years to come.
We hope that they will get some Selektope coatings on them, at least as an outfitting layer. And let's see how far our customers can push that.
We talked a bit about the portfolio and the expansion of the portfolio, and this is a slide we used at earlier this year, and just a reminder that there's actually been introduction of quite a few new products from the Chugoku side, both on the new building maintenance side, for the larger ocean-going ships, but certainly maybe then on the more local Japanese markets where they are dominant with some 60% market share, targeting some smaller vessels in that case, of course, but still, a good expansion of the product's portfolio.
They also took their first steps into the Japanese leisure boat market with a state-of-the-art product called Seajet Premium.
Besides all of that, as mentioned before, six of the nine largest players in the world are now offering Selektope-specific coatings for the new building stage. That's actually six of eight largest players because the ninth one is not really too active in this area. We have a good penetration in terms of the customer. We just need to get it into more products and get those products in also to the maintenance side of it. It's a footprint that is growing step by step, and this is an important parameter for us, of course.
Mentioning the regulatory landscape where IMO then is imposing guidelines and also regulations on efficiency measures for ships. There are two different versions. One is the new building efficiency step, which is the EEXI.
It's how the ship is expected to perform, as its best, its design value, so to say, on efficiency. Then it's the CII index, which is more the continuous improvement index of a ship, meaning if you don't do anything in a ship, you would perform really bad here, even if it's newly built and with a good, efficiency rating. This one, this index actually targets the continuous improvements.
As you know, antifouling product is very relevant in this context, as a good antifouling product can clearly reduce the CO2 footprint over the years, as opposed to poor functioning antifouling coating, which will actually create more CO2, emissions over the year. The CII index actually is nothing else than a measurement of what actual fuel has been consumed over the year.
It's very important here to use good antifouling paints, and we think this is gonna be the big shift from having quite large portion of the market share in low-grade antifoulings will shift to high-grade antifoulings for virtually all operators and ship owners. This is also fueled by other angles of the equation, meaning big shippers, Amazon, IKEA, and so on, who are demanding and requesting best possible ships with the best possible efficiency measure to transport their goods.
We see similar things on the financial side where banks and others are implementing variations in interest rates and so on, depending on how well the ships are performing in these kind of indices. Let's see.
It's kicking in 2023, but it looks quite important and certainly we see a lot of activity in the industry already to prepare for this. Looking a bit on the opportunity side forward and also on the challenges side, to give you some more details on our world that we are facing. We see additional strong case stories on Selektope.
You can find those on our web, but also from Chugoku and others, that the product seems to perform very, very well, both on container ships but also on more slow speed and more idling kind of vessels, such as the tanker side. And that is for a range of different products, which is obviously building comfort that the small addition of Selektope actually makes a certain difference.
As I mentioned, the implementation of the regulatory schemes will come in. That's an opportunity. The larger customer base is an opportunity, as they are still on quite low levels compared to what they obviously could consume in terms of Selektope. We hope that step by step will increase, and if step by step occurs on many different levels at the same time, it will have an interesting effect on the top line. As we mentioned, the new building market and the output of deliveries in 2023 onwards looks really interesting so far.
On the downside, raw material prices are an issue mostly for our customers, but we obviously are following this trend for our own sake. So far, it's been mitigated, but let's see.
We hope that the customers who are focused on new building will eventually find the reasons and the comfort, I should say, to move the products away from not only new building but also to the larger dry docking market where you have much more volume per year. A challenge on the short term is obviously the lower output in this year of new building projects. Let's see where the balance of all this turns out in 2022, but this is a bit of the life we're living in at the moment.
As a final slide, I wanna show you this ship that is a Japanese fully electric tanker ship that is coated with a Selektope product called Sea Premier 3000 Plus.
It's been displayed here by our customer Chugoku, and they are clearly indicating that this coating is powered by Selektope, which is important ingredient and actually a strong brand in Japan right now, certainly with the help of Chugoku's promotional work here. We wish Chugoku and everyone else good luck in getting these kind of deals where the antifouling coating is clearly related to the transition of clean ships, highly efficient and as sustainable as possible when it comes to their operational profile. With those words, I thank you for your attention and look forward to any questions.
Excellent. Thank you for that, Philip. See if we can get you in the picture as well. There you are.
Yeah.
Let's start the Q&A session then. If we look at 2021, is there anything special that you would like to highlight from the year? It could be organizational, it could be, you know, new orders, et cetera. Is there anything special?
Yeah. There are good things that we should highlight here in response to that question. Starting on the organization, we actually built the organization a bit stronger, both on the marketing side and on the R&D side, aligned with the strategy of building a stronger R&D base to understand better how Selektope can be mixed into paint systems more efficiently and to overcome certain challenges maybe. That's one area.
On the branding marketing side, I think it's quite obvious that the more we can contribute to build confidence in the power of the product, the better it is for us. That's good changes over the year. I have highlighted a few times the increase in the customer base.
You know, it gives comfort and proudness to us that virtually all of the bigger paint makers are now engaged quite deeply in this technology. Some contribute to top line, others are still in R&D, but they are spending time and they see the value of it. that's been a long journey, I should say. therefore we highlight that that's important event for us.
Okay. Thank you. How much of Q4 sales came from other accounts than CMP?
Well, for the full fiscal year, we mentioned 26%. I have to get back to the number on the fourth quarter, but we look at it a bit longer than quarter by quarter. The 26% of total sales for 2021 is an all-time high record. We hope to grow that number even this year.
Okay. Thank you. Previously you have mentioned an unnamed customer, and you thought you could announce that customer during 2021. When do you think you will be able to announce this customer?
Well, that's a good question, and we're clearly falling behind there on our target to announce it over the year. That's not due to us, it's due to the counterpart who wants to stay confidential on what they're doing, although volumes are quite significant as we speak from them. There are business reasons in that culture that makes it relevant for them to stay silent. In addition, we do actually have two other customers that are picking up quite good that we cannot announce either for strategic reasons for them.
All of these three are also in some sort of contract discussions to sort out the last bits and pieces of IPR rights and so on. There are reasons like that in the background as well.
We wished we could name all these, but for now we have to go with the fact that 6 of the 9 biggest in the world are contributing to our top line.
Okay. Thank you. You mentioned earlier that 26% of the total of the full year of 2021 was from other parties than CMP. Are you having any, like, target for clients apart from CMP contributing to the overall turnover?
Well, yeah, ideally we would have a similar penetration in all the paint makers' premium coating lines, and that would then reflect the market share that each and everyone has in the industry. Meaning that Chugoku should be around 20%-22%, maybe Jotun 25%, and of course, Hempel coming up strongly to those figures as well. But then there's also strategic things within these companies that will give it a different twist.
Chugoku's taking a big not a safe bet, but they're building a lot on the Selektope technology, and let's see if the others are gonna go the same way with the same force or if they're gonna find other ways.
It's gonna be difficult to say, but of course for the company itself, it's good if we have a certain balance between all of these players as we don't wanna be too exposed with our one product to one customer.
Okay. Thank you. If we look at 2021, it has improved the results, but sales, as you mentioned, was low, flat, and you have been affected by higher costs in the business. Could you please elaborate on the company managing to have these results even though you have had the challenges with the turnover or the sales and the higher prices?
The gross margin increase comes from a larger customer mix and hard work to actually mitigate this cost and try to transfer them as much as we can. We've been very fortunate this year to actually escape the negative effects of higher raw material prices and also significantly higher logistics costs, and actually in that same time built a bigger gross margin. It's purely related to hard work and a larger customer base.
Okay. Thank you. We have seen a big increase in energy prices. Have you seen a change in communication from potential clients as an effect of this? Are they more interested in your product now compared to previously when we have lower energy prices? Because you mentioned in the presentation that the coating will help reduce the drag effects, so to speak, in the vessels.
Yeah.
In that case, I assume that there will be less. It would be more energy efficient to transport the vessel. Have you seen any different communication from the companies due to the higher prices?
Not yet, specifically due to higher pricing. We are, however, aligned with the reasoning that clearly helps the case of investing in a good antifouling coating. We welcome, in that sense, higher energy prices and are quite convinced that that will help the growth in the years to come if it remains. Don't forget, however, that in the same time, these IMO indices are coming into place which have a similar effect. We see a big transition in the behavior since maybe quarter, end of quarter three and onwards in the view from the ship owners on products like antifouling coatings.
Due to the regulations, the need for the ship owner to be efficient and demonstrate efficiency, and now also, as you said, to mitigate the higher energy prices which may stay, right?
Combining all these factors, it certainly plays in the right direction for us and our customers with their high-end products.
Okay. Thank you. I think you mentioned in the report that you've been affected by higher material prices as many companies have been. How have you been affected, and how are you planning to handle these higher material prices if they continue going further in the organization?
Well, so far we have managed to avoid, although discussions are getting tighter and tighter, the transition of raw material price increase into our cost. That's gonna get trickier and trickier to go in that line and to keep that margin, so to say, in that case. On the other hand, we've been quite successful transferring certain costs to customers.
We hope that our work from 2021 will keep on the same level in 2022, meaning that hopefully we can maintain the same margin as we now reported for the full year. You know, in that we would do our utmost to compensate for raw material price increase versus transferring those onwards to customers.
Let's see how that goes, but that's, we can't do much else than fight for that.
Okay. Thank you. You mentioned there that the order book for new vessels looked quite good if we look, I think it was 2022, 2023. How are you working with these companies, like in the sales process in selling your products, so to speak, to these companies that will produce these new vessels?
We have different interfaces as you know. We have the direct customer, which is the paint maker. We try to work with them and, you know, find reasons and opportunities together with them maybe in some cases. We do build our brand directly with the shipyards and the ship owners by informing them about the technology and what it can do and about the case stories we have through our customers. To build awareness is important part, and that started in 2020, 2014 and so on.
Much of that work is now actually the reason why we see six of the nine biggest paint makers applying Selektope paint in the yards in Korea and the countries nearby.
Because those yards are suffering a lot from barnacle attachments during new building, and Selektope has been proven by both yards and ship owners to have an effect here. That is a relevant part for us to continuously try to keep a relationship and monitor what's going on at the ship owner side, at the yard side, but also make sure we're treating every customer equally in all these discussions.
Okay. Thank you. Let me see. I think that was the final question for today. Let me see if we have received any other questions. No, we haven't. Yep, final question for today. A big thank you to Filip for the presentation, and thank you to all our viewers. Thank you to all who sent in questions for the Q&A. I hope to see you again on next presentation with I-Tech. I wish you all a good day. Thank you. Bye-bye.
Thank you.