Earnings Call: Q3 2023

Oct 19, 2023

Quarterly report

Welcome to Nexium Chemicals live broadcasted presentation for the Q3 of 2023. The presentation will be followed by a Q and A and viewers can ask their questions in the chat next to the video and I will raise them during the Q and A. So let me introduce to you the new CEO of Nexium Chemicals, Mr. Ronny Ton Mr. Please welcome. Thank you, Matthias. Nice to have you here in the studio. Okay. Thank you. So This will be the first presentation from you as the CEO. Could you give us a brief description of your first time within the company? Well, this job is a dream job for me. I really love what we do at Nexium Chemical. The first time has been a little bit special, extremely intensive, working on Market development and saving costs at the same time. So it's been intensive start. Okay, great. And with that, I will hand over to you and your CFO, Markus Neubeld to do the presentation, and I will be back for the Q and A. All right. Thank you, Mattias. Okay. So welcome to this Q3 presentation for this year. Before I go into the meat of the presentation, the Q3 numbers and the activities that we're up to, I want to set the scene a little bit. Plastics is a material class of great importance in the world. A lot of the things that are important to us and provide Good life quality is given by plastics. If we wouldn't have that, we would have much less good lives. All home electronics, Smartphones, computers and so on built on plastics. Majority or every instrument that is used in advanced treatment is made with plastic materials and rubbers, for example, advanced cancer treatments or other Important medical procedures that are out there based on plastic materials and a lot of the safety materials that we have around us. Here's a picture of helmets and there are safety belts, airbags and other things and also many other systems in the For example, vehicles like buses and cars and so on are based on plastic materials. So a world without plastic wouldn't be a great place. But on the other hand, plastics is also a problem. So if we could imagine a world without plastic waste in our oceans, rivers, seas, Without plastic in landfills and so on, it would be a much better place to live at. And now for us at Nexam, We sit with a lot of solutions to improve the use of plastic, both taking care of the problem and also advance the use So plastic materials to more advanced applications. And we have a lot of patents that cover this and a lot of core competencies to Provide these solutions for the future. Our world and our activities It's based on additives for plastic material. We're a small entrepreneurial cleantech company In the south of Sweden, we have subsidiaries in Eastern Europe and in the U. K. And we have a global network. So we're a small innovative company, but we have big plans, big ambitions for the future Of the plastic materials, what we do is that we develop, produce and sell additives, so material that's Add it into plastic to make them better and more sustainable. It's used in the the same chemicals are used in a very wide Array of applications going for lightweighting, miniaturization, technical components, Future materials for high temperature applications such as more fuel efficient jet Engines and more efficient microelectronics. And then we have a big part of our, so to say, focus on renewable energy and recycling of plastics, and both of these are driven by really strong megatrends. When I started at Nexam, we did a retake and Really detailed analysis of what we do and updated the strategy quite a bit. So during the umbrella, you could say, which is reactive chemistry, which is added to plastics, similar molecular ideas, you could say, we reached really different markets. And we have done a subdivision of the activities and the markets there we are in Into 4 main areas depending on which property of the plastic materials that we are actually working on with that same chemistry. So the first area is lightweighting, where we especially drive and develop the PET foam market. It's mainly used In wind energy as a core material in the blades. And there, our material is key to make these cores Strong and light and good. And in this area, we work with a lot of current But also new customers that are interested in the use of this. High temperature is composites and varnishes For microelectronics and hot parts in jet engines and so on, where plastics and composite can then replace metals And increase the efficiency of these highly performant systems, thanks to our additives into the plastic. Here, we have had Quite a positive development after many, many years of hard work. Aesthetics is a new way of Approaching the market, which is originally Performance Master Batch. We have a really Strong market presence in both in the Nordics and in the Eastern Europe on this segment. It's a lot about coloring and changing functionality of And with combining this with the, let's say, knowledge and experience from the chemical side, we can make very potent upgrade packages for recycled plastics also in this market. And then that is, of course, related to recycling where we are Using virtually the same ideas and technologies that are used in the The PET foam cores and in the high temperature materials to use that to upgrade recycled plastics To become, so to say, repaired and much more performant than they would otherwise be. And this segment is starting to be We've been working on it for a couple of years now, and it's starting to become more and more commercial, and we see more and more need and use for this out on the market. And all of the areas, all these four areas have in common that whatever we do and add into these markets Really make a difference to the products and it makes a difference to the customers' market success. So that's why we decided to group them like this. So coming into the quarter 3 more concrete. We still suffer from low volumes due to the Fairly weak volume needs in the past month and in the wind energy and also For the general industry, however, it is quite an improvement compared to the Q2. We see that we have increasing order volumes. It's gone up about 10% compared to quarter 2 and but it's still far away behind the Q3 in 2022. This in spite of the fact that we have the same orders as we had before, we have new business that has come in, but the general industry Yes, it's a little bit of a weak market out there. One trend that we have had Over a year, it's a continuously improving gross margin. It was 39% a year ago and it's now up to 43%. This has been gradual, and we're working quite hard to continue this route. The EBITDA was SEK 700,000 in this quarter and was in line with actually last quarter but with much, much lower top line. So and also a substantially improved cash flow situation compared to Q3 last year. So and this is mainly due to, of course, improvements that we do. Part of this improvement is Cost saving program, but it's also efficiency actions, you could say. But the cost saving programs are worth to mention. In the beginning of the year, we announced a SEK 5,000,000 savings program, SEK 5,000,000 per year savings program. It's now fully executed. Everything is implemented. And we extended this program as one of my first activities in the company with an additional SEK 8,000,000 Per year and here we are it's going according to plan and we will reach full effect during the Q1 of next year. Other updates that could be worth mentioning is, of course, the strategic reorientation, new direction and sharpened commercial strategy, We're focused really on the customer benefits and try to build our markets at high pace and with high value add for our customers. On the innovation side, we had 2 patents that were finally coming into play here, covering recycling of polyethylene Polypropylene, which is more than 50% of all virgin plastic in the materials. And here, we have something very strong for future market development. Okay. With this, I would like to hand over to Markus Nieberg, our CFO, to go into more details around the quarter 3 financials. Please, Markus? Thanks a lot, Roni. I will give you some more background related to the figures. First of all, as Ronny mentioned, we had sales of the Q3 Of roughly SEK46 1,000,000, that's a decrease compared to last year, but actually an increase compared To the spring. And if we look into the 2 different, let's call it main areas, We can see that for the master batch that is very much more the general plastic industry. We see that there is a decrease. But we still see that the number of orders, they're very much the same compared to last year, but The volumes for every single order is a bit lower. And this is really what we've been seeing as a trend For this year, it's actually that the interest rate is really impacting how our customers see on working capital. We see that and we think that this is that it will improve going further. And this is a little bit some histories coming related to sales. If you look at the years from 2018 to '21, we had a very solid growth and that's, of course, our target to get back to this growth path Going forward. But also, when we now go forward, also make sure that the growth is actually profitable. And here are some more details and a few things that I think we should Give a few comments around is the EBITDA. We have actually a sales office A bit lower at least compared to last year, but our profit remains more or less the same. That's what Roni mentioned is that we can really see the impact of the cost savings program that we've done. And also keep in mind, we had inflation as well and also a quite weak Swedish currency. So we are really working on the cost side and to ensure that we really use our And also to the cash flow, I know we get a lot of Questions related to the cash flow, but in our message, it stays the same. We said as Roughly a month ago that we don't have any plans for the capital raise and we're looking for And when it comes to our financial target, we more or less, our target used to be Big cash flow positive during next year and we see that still as a fair target. So we haven't changed our mind In that way. So, but I would actually hand over back to Roni again To move on, we will go presentation. Okay. Markus, thank you for providing some more details on that. To run off the presentation, I would like to come into an outlook for the future. The wind is really turning for us. We sense that we're out of the pit that we were in, in the Q2. It is improving a lot. And we have growth and we have an improving cost situation. So this is providing a good situation for us going forward. This cost saving program is really it's hurtful, but it's on the same time, it's been done in such a way that we do not impact Our ability to sell and be present on the market and also not for the technical support and R and D activities that That are needed to support that sales activity. The sharpened commercial strategy focus our internal resources In a very pointed way towards the areas that we sense that we have the best potentials and it's working really well and We feel everybody at Nexam that we are working on the right things and that we have a strong team spirit as we do this. If you detail the various areas, we have lightweighting where we have a clear market recovery in the wind energy and the PET foam in general. It's a positive situation both with the existing customers and new customers that work with PET Foam that want to develop the collaboration with us. And we truly provide additional value for this industry. High temperature. We have had an enormous stamina over many, many years to support this industry and now it's starting to pay off. We have already confirmed very high order levels for late 2023 and for 2024 and a big interest From that market also for future projects. So there's a lot of growth potential in that too. But end of 'twenty three and 'twenty four will be good years in that area. Aesthetics, it is of course very much influenced by the general industry Economy, so to say, but by more product innovation and combining with the increased focus In this industry to work more with the recycling, we try to set ourselves apart from competition and provide really additional value, helping our customers to become more sustainable. And in the pure recycling area, reactive recycling, we've been very intensive on this for a couple of years, both in R and D and commercially. We go through the same type of process here for recycling as we've done before with light weighting and high Temperature that we start with R and D, do some patents, try to find the unique selling points on the markets, find customers, start with Small production deliveries validate economical and technical question marks and then grow by multiplication in those areas. And that is a process which is it takes some time, of course, but we'd like it to go even quicker. But we sense that we are Always moving forward with this and it's going better and better. We have a few key areas where we have our first projects that are selling And they have been communicated when they happen. They might be small, but they are, so to say, Start offs into new markets where we will continue to grow this area in the future. Longer term, we have a really Strong global development of wind energy in the world, an average approximately 6% per year and goes up and down. Last year was down. Next year is hopefully up. But also our contribution to that market is steadily increasing And also outside of the wind energy, marine, transportation, etcetera. Recycling, of course, has an unlimited future. There are so strong global megatrends here that we have enormous amount of possibilities here, especially since we have Pointed very good technologies that are also patented. And the Stamulene advanced high temperature will Starts to give better results and it will continue. And I would also like to point out the future growth Basis, which is a strong reach in the local markets, we talk about the Nordics and Eastern Europe here and the niche markets Such as PET foam, high temperature composites and so on, which is then complemented with a global representative network all over the world almost. So we feel that we have a really, really strong case for the future. So there we have it. We feel that We're an important player for the future of plastics and we have patents on it and core competencies to support that, right? So, thank you so much for your presentation. We move on to the Q and A. And I will start off with a few questions before we let in equity analysts. So you made a huge change In cash flow, with a positive EBITDA amounting SEK 25,000 compared to last year's Q3 minus SEK9,300,000. What is the what was the key drivers in this change? I think the most important is the savings program, but it's also activities relating really to Gross margin improvements in terms of production in sourcing and Product innovation to make recipe cost lower for the same function and so on. So it's been a combination of both, I would say. Okay. Despite this result, your net sales decreased amounted to SEK45,800,000 compared to SEK56,700,000. How would you analyze this difference? Is it strictly market? Yes, I wouldn't say it's funny, we have the same Business agreements, same customers and we have new business on top of that and still the sales are much lower. So we haven't really lost any business. We have actually gained. But the economy on each of these markets come together to a lower number. Maybe you want to add on that, Markus? No. That's a little bit what you're saying also when we're coming to the inventory situation at our customers. Everyone is really looking Have them as low as possible. So that I think that's also what we have been seeing during this year. Compared to last year, the situation was very different. Then there was this post effect of the pandemic. Everyone was a little bit worried, so they added more To the inventory, and there were more or less no interest rate. So it's a big change. It's also that effect, yes, indeed. But we sense that we're getting out of the destocking situation behavior, talking to customers and so on. It looks better in terms of That our deliveries out there more in balance with their production. Yes. And you have close In the months to come. Yes. You have a close relationship with your clients. Indeed. Yes. Tight dialogue. Yes. Very, very close. Okay. So it's time to hand over to Mr. Henrik Hinze, Equity Research Analyst at ABG Sundal Courier. Please welcome, Henrik. Thank you. Please go ahead with your questions. Yes, I will. Just to follow-up on the last Point you talked about there, you seem to think that your customers have been reducing inventories quite a bit. Could you just clarify if you Feel like you see any indication of when they may be done with this? Martin, yes. It is a little bit the visibility isn't totally clear. Everybody does not like to speak About how their market is going and what is stock and what is not stock. So it's a little bit invisible for us. But we do speak To them regularly, and we notice that more and more customers are ordering More normal levels of running production are being more concerned about the delivery date and so on. So we Sense that there is a strong movement in the general sentiment in both the PET industry, but also in the general industry Towards that they have found, let's say, good stock level. But we're not totally out of it. And during Q3, we still had a lot of that effect. Then in Q2, we had very much of that effect. Maybe we want to add to that, Markus? Yes, I think it's a different behavior from our customers. A year ago, we they were really trying to push the orders to Have them even later on. We don't really see that anymore. Now they're more they order it and they want it More or less right away. So there is a change in behavior from our customers compared to last year, Even though our sales is lower, but there is a change. So it's difficult in some, it's difficult to say when The situation is actually over. It's not totally over, but I think it's almost over. Maybe we're to I just say a guess number here, 60% to 80% of the process of destocking and capital optimization on the stock is about Done, I would say. Thank you for that. So you seem pretty satisfied with how the cost savings program is going. Do you feel like you're on track to continue with that during the second half? And how are you balancing the cost savings program with Sales growth? Yes. You could say there are 2 parts of that. Yes, it's going according to plan. Most of the Effects that we talk about that will have full impact in the Q1 next year have already been executed, but there is a lead time with In terms of contract delays and so on. So everything is already Done. And we know it will happen. So that we feel happy with. We have, as I think I mentioned in the presentation, been very, very careful Not to do anything to compromise the, let's say, market sales activities and The technology support behind that is always needed in these fairly technical transactions that we do, So that we have the R and D and technical support for the salespeople out there in order to continue to be active on the market. Part of this is, of course, new commercial strategy where we decide exactly what we go for, so to say. So we might not go for as many Potentials, but the ones that are the most promising. We can also add here that we have really been focused on this 2nd program is focused on negotiations with the raw material suppliers and freight forwarder And to go to really standard pigments, for instance. So we have we're really looking Into everything more or less, see where we can save money, without hurting our capacity To grow going forward? Yes. Does the day to day work more or less? Yes. I will work with it every day and everybody, so to say. It's a strong cultural movement in the company. That's good. On the gross margin level, you seemed pretty satisfied The increase there. Could you comment on how much work you still have To do on the gross margin, do you expect it to keep increasing from here? What's the potential here? Yes. We have some actions in place that don't have full effect yet in the Q3, 3? You can say relating to in sourcing of product and changing product recipes and so on. So that There is a trend there of improving gross margin. Also, the higher margin segment of high temperature Sure, it's growing. So that is also a positive sign for improved gross margin, I would say. But then there's always from quarter to quarter. It Depends a lot on the product mix also. But we haven't finalized all the activities, and we'll continue to work on it. I think that is what we can answer to that one, Henrik. All right. Thanks. I also noticed that your financial costs were a Bit higher in this quarter than they've been in previous ones. Could you comment on that? It's quite simple. It is interest rates For leasing, for instance, and so on. Yes. I just wanted to check if there's anything else there. No, that's what it is. All right. So summing it all up, what is it going to take for you to get back to the volumes you had In the previous years, just inventory reductions, general market or anything else as well? No, like this. We believe that the let's say, the inventory level out will help a bit, But the general economy, considering the difficult world situation, will not come back in very short time. So We need to compensate for that with growth of new customers, new projects, new deliveries, so to say, to come back to the same levels that we had last year. So that's what we're focused on right now. If we're helped by the general economy, that would be, of course, great, But we cannot count on that right now. So we really work hard on developing business and increased sales. All right. Thank you. That's all for me. Thank you, Henrik. Okay. Thank you so much, Henrik. And I will continue with a question regarding inventory. It's been up a few times here already. But when it comes to your 4 big PET foam clients, what do their inventory look like? Markus, do you know? No, we don't really know yet. But This is a bit what I mentioned for that was a different behavior from them. Before a year ago, They were really trying to push the orders to be delivered later on. We don't see that anymore. So we that's a little bit what we are They don't share us all the details, but there is a different behavior. Now when they place orders, They want them that data, they placed them. So we think that they are on the more And inventory levels that are quite okay for them, they were a bit higher, of course, a year ago. I have another question from a viewer here. Out of your sales, how big part of that was from Diab? Well, we've been asked by all especially the PET customers, but also many others not Talk about specifically how much we do for them. They are, of course, in a competitive situation against each other. So prefer not to answer exactly on one single customer, but What we can say is that on the, let's say, running year, DAB is, of course, a very important customer and partner for us. But on the running year, we have no single customer, which is bigger than 15% of the total sales level. So we have a compared to a few years back, Nexium has managed To build up a fairly balanced portfolio of customers so that we're not depending on 1 or 2. Okay. Thank you. I have another question. Could you add some color to the competition? Would you like to? You can start. Yes. That's a little bit a tricky one, I have to say. I think the competition is different in the different areas. If you look into the masterbatch, that's very much a Mature market situation and so on. We are seeing that there is competition every single day. And we really think that for us, it's really important to ensure that we are we have the correct service level, For instance, and those kind of things. So that's very traditional way to see competitive. It's Price, service and quality, of course. So that hasn't really changed. And we don't really see that that market may have Go up and down a bit. So that's a different way. But when it comes to the more special chemicals, I think you're a better person. Yes, but I would like to just underline what Markus just said. The traditional value is Take care of your customer, be customer focused, helpful and supportive. This is a basic element in every business that you do, and we Focus a lot on that. There is, of course, a lot of difficulties and so on, but we do push that harder and harder. I've put in a lot of energy to put this view also out in the organization, so everybody should know about that this is the key. That is one thing. So we hope that the customers like us. The increase of orders in high performance, for example, I've heard from the customer that this is actually due to quality reasons, that we are good in quality. And Nexa is a meticulous company. We want to do good things always And this pays off. So that's good. But competition is not only companies that offer the same thing. It can The alternative technologies and so on, especially in recycling, it's a little bit Wild West in terms of how you should fix Your recycled material make them good enough to use them and so on. So we try to absorb and understand and know what's going on out there and We try to be a good partner. How many projects within RR, I guess that's reactive recycling, have been finalized? Yes. We were thinking through this. As I said, we are in this process from Coming from R and D and making patents and testing ideas on lab scale and then taking it into, let's say, the Primary commercial projects and learning more and then taking that into business multiplication and, let's say, study Rolling business. And we are in that process on all the places you could say. The ones that are out there and rolling, there are not So maybe 4 or 5 projects could be determined or explained as running businesses, but they are in key areas like PET Food Packaging, they are in PET Fiber Production. They are in, Yes, some other areas. And they can now start to produce multiplications. So we see a good potential of, Let's say multiplying them, but we also have other projects that are in more early stage and not quite there yet, but very well advanced. So if we have 4 or 5 commercial projects, we might have 15 to 20 almost commercialized projects in the pipeline. And how many of these projects is possible for you to handle in, let's say, 1 year? Yes. It depends on the complexity. Certain markets and certain areas, let's say PET food packaging, we have standardized the product offering. We know what the product does and so on. It doesn't require very Sales support, so to say, to do it. And then we can handle very many. Then it slots in like any other material in our ordinary operations. But some of them require that are more in the early stages, we cannot do so many at the time. And we've actually decided Narrow down the number of projects in the early stages in order to focus activities on making the broader ones. So I cannot answer in a number, but explain the process. Yes. Thank you. When it comes to the masterbatch area, what does the rest of the year look like? Have you reached the bottom? Or will it become even worse before it gets better? My feeling is that it's better now than it was before. Q2 was quite difficult. Q3 beginning of Q3 was very slow. After the summer, we've seen orders back. But as Markus mentioned before, the orders are lower volume if they maybe A year ago, we'd ordered 200 kilos of a specific yellow color. It's now 100 or 150 with every order. But we see that on the top the order intake for this, it looks okay, Let's say, but you also have to keep in mind that we get the orders and we ship an invoice to maybe the week after. So I mean There is a there's more Yes, it's not the same visibility in the future, no. But it looks okay. Yes. In September, you announced that you have received a really big order. What can you tell us about this? Yes. This was a high temperature order from an American customer that we have worked with for many, many Yes. 1 of the first important customers in Nexium's history. Also they don't want to be mentioned by name, unfortunately, but It is a key player in the defense industry and you will say for high temperature composite materials and resins. And because of quality, they wanted to increase, let's say, our material in their production. So our material adds quality, you could say, to their resin, and that's why they placed a big order. And to assure volumes, they put a very long order. They usually put shorter orders, but now they didn't order all the way until end of quarter 3 or into quarter 4 next year. Yes, and it amounted to SEK22 1,000,000. SEK22 1,000,000, yes. Yes. Absolutely. So that's with that customer almost doubled sales next year compared So let's say, 12 months backwards from today. If we move on to innovation, you mentioned 2 new Patents in the quarter, what does your IP pipeline look like? We have We always I mean Nexium has been known for releasing more patents than financial data, so to say, Or performance over the many years. We're not so focused on exactly making patents today as we maybe before, but when we find innovations that are unique and requires protection, we do it. So we have a continuous Process of watching which patents come out on the market from competitors, customers, suppliers and so on to understand what's going on. And when we feel that we have something unique, we usually file a patent for it. But there are also other ways to protect your intellectual property like publication In order to prevent others from taking patents on things that you think is not worth patenting, but still important for growing business. But there is, As always, a big element of knowing how to do things and understanding your technology, which is even more important than actually Protected patent IP. Another question regarding development projects. Can you name some development projects that are starting to approach production? Projects that are starting to approach production? Yes. We made a press release of a The Spanish customer is upgrading PET for food packaging. This one is in the early phase And that one is about to go into production. It's preproduction orders, you could say now, and that is close to becoming rolling production orders. The system that this particular customer is using to upgrade his polyesters It's used by very many other companies around the world and they would have an advantage in terms of, let's say, product value for them By using our materials. So that is an example, you could say. But also, I think one thing that is worth to mention is our Initiative that we call Recolor Plus, which is oriented to component manufacturers to help them to Convert from virgin materials to recycled materials, but using our combination of, let's say, color, Other additives for long term stability of the material and so on and combining it with the chemical products Can actually upgrade the recycled material to be really good enough for this technical application, which is then much, much higher value than to make, let's say, a flower Pot or garbage bags or something like this. All right. And to wrap this up then, Ronny, besides the cost saving program, what will be your main focus in this quarter? Yes, making sure that everything in the cost saving program Land, so to say, then it is continue to work hard on the details on the, Let's say, gross margin improvement and obviously market development, launching New initiatives, vitalize the market activities and continue to follow-up meticulously on every market Initiative that will actually gain success. Okay. Thank you, Romy. And Markus, thank you for participating. Thank you, Matthias. Thank you. And thank you, all the viewers.