Morning, ladies and gentlemen. Thank you for standing by. Welcome to the EcoSynthetix 2025 First Quarter Results Conference call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided for you at the time for questions. If anyone has any difficulty hearing the conference, you may press star zero for the operator assistant at any time. Listeners are reminded that portions of today's discussion may contain forward-looking statements that reflect current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. For more information on EcoSynthetix's forward-looking statements, please refer to the company's annual information form dated February 18, 2025, which is posted on SEDAR. This morning's call is being recorded on Friday, May 9, 2025, at 8:30 A.M.
Eastern Time. I would now like to turn the call over to Mr. Jeff MacDonald, Chief Executive Officer of EcoSynthetix. Please go ahead, sir.
Thank you. Good morning, and thank you all for joining us today. Yesterday afternoon, we reported our first quarter results. It's been a soft start to 2025, with sales down 14% compared to Q1 2024. Like many companies, we're experiencing a level of uncertainty and concern among our global customer base, which has translated into lower demand for their products and for our biopolymers. There is no single culprit in terms of one end market or key customer that is underperforming relative to another. Demand is down a little bit across each of the end markets we serve.
On the positive side, our key strategic accounts in the pulp and wood composites end markets have continued with steady order patterns, and they each took important strategic steps in the first quarter from an operational standpoint that demonstrate their conviction and commitment toward increased usage of our biopolymers, which I'll address specifically in a moment. In doing so, it's clear that they're taking the long view and looking beyond today's choppiness caused by tariff and trade issues. This is also evidenced in our broader and growing progress in trial activity through the start of the year. Specifically on the tariffs, we do not see any impact on our finished goods or primary inputs as of today. That's good news. However, some of our customers are closer to the risk of tariffs on their end products, which can impact demand for us.
The primary risks to us, in our view, are twofold. The first risk is the same as for everyone that trades internationally, which is the potential for a general economic slowdown. The second is more specific to us. Our biopolymers represent change. In an environment where a pullback is anticipated, there can be a reluctance to make change until you have greater certainty. The strength and conviction of the change agenda at our strategic accounts is a key asset for us. Neither account has shown any signs of breaking that commitment toward change, and they've each made progress at least as fast as we could have expected since the start of the year. In the pulp, packaging, and tissue end market, we commercialized our SurfLock strength aids with a global leader in the production of pulp during the quarter.
This successful win came after multiple positive mill trials in 2024, and this customer is a market leader with more than 10% of the global pulp market share. The CAD 1.1 million purchase order we announced from this customer was based on early customer demand that the first mill has secured in 2025 after initial proof-of-concept trials in 2024. Based on their order pattern, we expect them to work through this first commercial purchase order ahead of these initial expectations. We see in the market that this account is actively marketing the strategic importance of adding value to their products to fill the supply gap for stronger fiber in the market, and they believe that gap continues to grow with a shortage of stronger long fiber. At the same time, they've evolved their customer support team for this value-added category, which includes the product that is using our biopolymer.
They're expanding the team globally from the centralized model they were operating previously. It's a more distributed model where they're using their team members to help customers understand the application of their hardwood pulp and help with the implementation phase to continue to drive adoption among their customer base. From an operational perspective, the account is also testing a larger piece of equipment that our product would be used on. This equipment represents a more efficient method for using our product. We believe it can unlock greater use of our product in an easier and more cost-efficient way. We expect the pulp end market will be a major growth driver for the business as our SurfLock strength aids represent a value-added ingredient that addresses the long fiber gap in the pulp value chain.
With more expensive long fibers in increasingly short supply as applications like packaging and tissue continue to grow globally, it's clear that shorter hardwood fiber and recycled fiber will be needed to fill the gap. This week, the spot market price gap between long and short fiber reached a high of CAD 275 a ton. This creates a strong driver to substitute in shorter hardwood fiber, which SurfLock helps to solve. During the quarter, we won a new commercial tissue line at an existing customer. This customer was the first customer to originally implement SurfLock strength aids and are now using SurfLock broadly across their network, demonstrating its value. We also continue to advance trials on additional lines with our first pulp customer and are engaged in trials with many tissue, pulp, and packaging companies on a global basis.
While these programs require investment and change in an uncertain time, their payback is ultimately in cost savings, improved performance, and supply chain resilience, and should therefore remain an attractive priority. Based on the performance benefits of SurfLock, we're seeing continued progress, and trial activity remains as strong as ever. On the wood composites front, we've seen steady order patterns from our key strategic account's first facility that's been commercial for some time now. We've also successfully completed our work at their second facility. They've now installed permanent equipment to enable the use of our product in commercial quantities, and as I've mentioned on prior calls, we expect that facility to go commercial in the near term. At that stage, we would be on two of the strategic account's commercial lines.
This international retailer, which is backward integrated into particle board production, produces approximately 30% of the particle board they require annually. The remaining 70% comes from third-party suppliers. Altogether, that represents approximately 17 lines' worth of production, and we're nearing two. The retailer has set a clear target of moving to bio-based wood glues by 2030. They are scorecarding their suppliers' sustainability efforts and their transition to bio-based glues. More than just that, they're working with two different members of their supply chain and our team to trial our biopolymers at the suppliers' facilities. We've all been involved together in the technical trialing and qualification of the process. We believe these two suppliers have reached a stage where they could come online with our product sometime in the next year.
The depth of knowledge on the market and the technology of the international retailer is strong, given the backward integrated production assets they operate. They have complete clarity on what they're asking of their suppliers, given their use of our product in their own facilities. Our DuraBind biopolymers are competitive with conventional formaldehyde-based binders, but there is a cost and time investment associated with change. We believe the best way to drive adoption in the long run is through constant innovation, and we continue to make really good progress with further steps in our DuraBind product offering that we believe will help accelerate change faster with an even more cost-effective product. On the personal care side of the business, our marketing and development partner, Dow, remains highly engaged. They're leaning into opportunities that they believe can have an impact for them and, as a result, also for us.
We saw good growth from them last year, and we expect to see additional growth through the course of 2025. The feedback from both small and large customers they're working with is very positive. How does this all fit together? Our first commercial account in the pulp end market represents a CAD 60 million-plus opportunity to us. That figure is based on the business case they have laid out to customers and investors, which they want to achieve by 2028. That is without considering any growth in the tissue and packaging end markets or work with other pulp players. The 17 lines that serve our key strategic account in wood composites represent another CAD 50 million-plus opportunity to us. The international retailer continues to publicly report they want to move to bio-based glues across their supply chain by 2030. They are the thought leader in the market.
They tend to set the standard for change when change like this happens in the industry. The 17 lines that they draw from are part of a global market that is more than 1,000 wood composite production lines. The personal care opportunity and the growth that Dow believes exists in the all-natural category is a warrant over and above the tissue, pulp, and packaging and the wood composites end markets. The start of 2025 has been frustrating from a demand perspective, but you can see why we remain so confident in the progress we've made and the opportunity in front of us, which is as large as it's ever been. With that, I'll turn it over to Rob to review the financials. Rob?
Thanks, Jeff, and good morning. Net sales were CAD 4 million in Q1 2025, down 14% compared to the same period in 2024. The change was primarily due to lower volumes of 500,000, or 12%, primarily as a result of inventory buildup by distributor in the prior period and challenging market conditions. Net of manufacturing depreciation, gross profit as a percentage of sales was 27.2% in the quarter compared to 29.2% in the same period in 2024. The change was primarily due to lower average selling price. Gross profit was CAD 870,000 in Q1 2025, which was down 24% compared to the same period in 2024. This change was primarily due to lower volumes. SG&A expenses were CAD 1.5 million in the quarter compared to CAD 1.7 million in the same period in 2024.
The 15% improvement is primarily due to asset relocation costs incurred in the prior period from our manufacturing footprint realignment project, which was completed in 2024. R&D expenses were CAD 380,000 in the quarter, essentially in line with the CAD 450,000 investment in the same period in 2024. Our R&D efforts continue to focus on further enhancing the value of our existing products and expanding our addressable opportunities. Adjusted EBITDA loss was CAD 500,000 in the quarter and flat to the same period in 2024. Cash provided by operating activities was CAD 120,000 in the quarter compared to CAD 1.1 million in the same period in 2024. The primary driver was an unwinding of working capital in the prior period of CAD 1.3 million versus Q1 2025, where working capital CAD 200,000 was used. As of March 31st, 2025, we had CAD 31.4 million of cash and term deposits compared to CAD 32.2 million as of December 31st, 2024.
During Q1, we invested CAD 330,000 into the NCIB to purchase and retire 106,000 shares. We have demonstrated our ability to responsibly manage our cash reserves through multiple cycles while continuing to invest in our long-term growth strategy. With that, I'll turn it back to Jeff for closing comments.
Thanks, Rob. We've seen important progress made by our two key strategic accounts in the pulp and wood composites end markets. The uncertainty in the market from the trade and tariff issues impacted demand and sales in the quarter, which is frustrating. We believe the momentum in our key end markets since the new year and the commitment of the key accounts to take the long view and look past this near-term uncertainty is encouraging. We're engaged with the right partners to build this business beyond our CAD 100 million target. Before turning to questions, later this month, we'll be holding our AGM on May 22nd. After that meeting, the board expects to appoint Jeff Nodland as chair. Jeff has served on the board since January of 2016. He is a veteran of our industry, specifically consumer packaged goods and chemicals.
He's been an effective and thoughtful contributor to the board during that period, and I'm excited to continue working with him. We're also poised to welcome a new member, Greg Yull, to the board. Greg is the former president, CEO, and board member of Intertape Polymer Group, which was publicly listed on the TSX. Greg has deep experience in industrial manufacturing and sales, including packaging and adhesives. We look forward to benefiting from his expertise and background. Lastly, these changes were a result of the retirement of Paul Lucas as our chair and board member. I've worked with Paul during the last 10 years. We've seen many positive changes that began with him taking over the role of chair. He was instrumental in establishing a highly functional and effective board to lead us.
While we're still a relatively small company, I believe he helped establish the strongest possible governance practices and a strong board culture for us. On behalf of the company, I'd like to thank Paul for these contributions and for the constructive approach he's consistently taken with myself, our board, and our team. With that, I'll ask the operator to open up the call for your questions. Thanks for joining us.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star, followed by the number one on your touchstone phone, and you will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star, followed by the number two. If you use the speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Brian Morrison, a private investor. Please go ahead, sir.
Good morning, Jeff. Good morning, Rob.
Good morning, Brian.
Good morning. All right. Just a comment. I appreciate you highlighting that the key players in pulp and wood products continue to progress because that's certainly important from a value standpoint. As you indicated last quarter, there's really nothing surprising in the numbers here. I want to start with pulp. You say that the pipeline for SurfLock, it continues to build. In a recent sell-side research report, I saw a reference of fiber- to- fiber mentioned with another pulp producer. I know aside from your large commercial account that others have been trialing, as you stated, but can you just talk about the progression that they are making?
Yeah, it's interesting that that term is being used by others, though. I think it was coined by our initial customer, and I think others have caught on that obviously this is a critical trend in the industry and that they need to find ways to take advantage of it. I think fiber- to- fiber has become kind of a colloquial term. We are engaged with multiple other players, but I think it's safe to say that our first customer had a significant head start in working with us, and none of those are at this point anywhere near close to where they are, but I would say good initial progress is being made.
Okay. When you talk about this CAD 2 million structural hardwood pulp gap, that it is a CAD 60 million-CAD 80 million opportunity, you mentioned that price gap between hardwood and softwood pulp at CAD 275 per ton, and your cost add is a fraction of that. The question is, since SurfLock enhances towards softwood pulp, would it make sense for existing hardwood lines to also employ your product, creating greater profitability for your customer and a significant increase to your TAM?
Yeah, absolutely. I think for any supplier of hardwood pulp, they're recognizing that that gap exists. As an opportunity, even just to fill the gap, let's say, at existing hardwood pulp prices at the EBITDA margin some of these companies make, it's a very, very attractive proposition if they can substitute hardwood pulp in. Of course, they're all going to be interested in that. At the end customer level, that we're serving directly and that the pulp players will also be serving in their own way, the opportunity to shift away from a fiber source that's CAD 275 a ton more expensive than what they can buy otherwise is very attractive.
The key objective at most of the companies that we're trialing with in the end markets, let's say in tissue, is to significantly reduce or even just this week completely turn off the reliance on softwood pulp fiber for strength. We're helping customers to do that on a consistent basis now.
You mentioned that 2020, pardon me, the 2028 timeframe. Was that new? Just repeat what that comment was about your commercial pulp producer.
Yeah. We just don't want to speculate on when things could happen. We like to rely on what our customers are actually saying their own goals are. I tried to mention it for both of the key accounts. When we look at the materials that our customers are putting out there in terms of their change agenda and when they want to have certain things complete, that's what we're referring to. The materials of our one customer say that they want to achieve those goals in the pulp market in the 2028 timeframe.
Okay. The CAD 1.1 million order that you alluded to earlier, it sounds like it's ahead of schedule. I mean, it sounds like indications. I'm not sure you're going to address it, but you would assume with the progress that they're making that they would have to come back and reorder. The question that I have is, are you getting any feedback on their end consumer satisfaction?
I think the end consumer satisfaction is borne out in the pace that they're seeing and in the continued deployment of people in the market to serve those customers. They are obviously seeing really good results and I'm assuming very good economics as a result of what they're doing. The fact that the orders are ahead of their expectations as they started the year and that they continue to invest in putting people in the field is going very well for them.
Good. You mentioned in your MD&A, and then you said in your prepared comments that SurfLock will be a material growth driver in coming years. Would you consider doing a dedicated line for this product? If so, what commitment would you require to do so in terms of either tons or dollars?
Yeah. The volumes would have to be concentrated and built to a level where that makes sense for us, but we're absolutely open-minded to doing that. In fact, we'd love to use some of our capital to do that. Given that at least initially, we could be robbing from existing capacity, we'd need to be seeing growth through the 10,000-15,000 ton range before we could really justify doing that. The volumes that we're talking about here just from this one customer could well justify that at some point.
In dollar terms, Jeff, do you want to state what that is or no?
I mean, if we're talking about that opportunity being a CAD 60 million opportunity, if we start to see revenue growth going through, let's say, half of that, and we're on the right trajectory to CAD 60 million, half of that would be probably a good level to be targeting additional investment.
Okay. Okay. As you're considering that, obviously, the opportunity looks pretty attractive. I want to switch gears a little quieter on the tissue and paper front, a little bit of inventory build due to macro factors. Why at this time would the customers not try to take advantage of the cost savings and speed and improve product quality that seems to be proven out now? Other than time, is it sales personnel? Is it service providers? Are we growing the service providers? Also, you said, I think the trialing is as strong as ever. What flips that switch?
What flips the switch to it being as strong as ever? Or flips the switch to it?
No, to get this trialing to become commercial.
I see. I guess maybe just to ground it, I should say we've been at this, I would say, for a relatively short time in terms of change agendas within the pulp and paper industry. We've now converted directly eight lines during a fairly short timeframe. I don't know of another product in the pulp and paper industry that's converted eight mills in that way. It has been a significant amount of change, I would say. I think the industry is clearly taking note. I'll give you a little bit of color on why we see that. Among those eight, there's obviously no one of them that's more important than the big pulp line that we're on. We still clearly see that as having the greatest potential and possibly also the easiest path for everybody to success.
In the meantime, we're continuing to support anyone that wants to take advantage of SurfLock in the market. When I say we see some indicators of that interest and success in the market, we're now having service providers come to us and want to get on board with providing this product to their customers. Since the start of the year, we've added additional service providers. One of them, even since coming on in the start of the year, has put two already fairly successful trial programs in place. Things are expanding and in some cases accelerating. What it takes to flip the switch, it is time. Unfortunately, there's an element of scale as we expand geographically, for sure. I think you have to have your proof points and then expand out that way. That's happening.
I think it's happening at a really good pace through these service providers. Once they lock on to opportunities, it is just a matter of time and putting the effort in and doing the iterative process to get to success. Again, I'll remind everybody, eight lines within the timeframe we've been working at this is pretty substantial in this market.
Okay. Should we start to see those numbers reflected sort of in the back half of the year?
Yeah, I think so.
Okay. I guess another good story is wood products line two. Sounds like it's going to go commercial soon. And then I believe there's two more internal, 13 external. I think you said that two of those are now moving forward. How quickly do they need to move with the, I'm talking about your wood products customer, obviously. How quickly do they need to move with those lines in aggregate to hit their 2030 target?
It means they need to be adding a few new lines of capacity through their supply chain on an annual basis now to meet that target. It is quite a bit of change that is going to be required within what is now a fairly short period of time. We are talking about still 15 lines worth of capacity being converted in a five-year period.
Jeff, can they leverage best practices from what they've already done? You mentioned 1,000 lines, I think, in aggregate for the industry. We focus on your key player, but are you seeing any progress from competitors or other players in the market?
There are always a lot of players out there, even since prior to us getting started with DuraBind, that have been chasing bio-based alternatives, but we still believe we have a significant head start there. I think the broader beyond the 17 and extending out to 1,000, that's the influence factor of our key partner in this space. Once they move to that level and fully walk the talk, that's when other changes they've made in the industry begin to become the standard and you get a watershed among others as well.
Okay. Last question, sorry to dominate the call, but you sounded quite optimistic with opportunities with Dow as opposed to recent calls. That was just my interpretation. Do you think we're going to see something notable play out here in personal care in 2025?
Yeah. I guess if I sounded more optimistic, it's probably because from their marketing team. Again, we don't have great clarity into their pipeline, but we haven't heard as optimistic a tone from their marketing team as we have as they've begun this year. If you look at everything that they've done to proliferate Maize Care beyond the initial hair care space into a bunch of new SKUs and expand their customer efforts, I guess I can see why. I'll continue to call it a warrant until it's really ringing the cash register more, but it's been growing successively quarter- by- quarter, and they sound to me to be more optimistic than we've heard them before. We are excited.
Yeah. I find it quite impressive that even at these lower levels of profitability right now, that you're still generating positive free cash flow prior to your NCIB. That's commendable and obviously should take off going forward. I just have one last question. Can you comment? I'm a little bit excited here about the new board member. Can you just comment on Greg Yull, the qualifications he brings to your board?
Yeah, sure. We're really excited. Greg joined this week's meeting as an observer and was more than an observer right away. He's going to be a great contributor. He's got great experience in the spaces that we play in directly or indirectly. Moreover, he's been through a lot of the business steps that in some cases we've gone through and in some cases we'll need to get through in growing from a struggling company, a struggling emerging company into something that was very successful and ultimately went through a very successful transaction at the end of his tenure with Intertape. He's got a lot of stuff that I'm going to be very interested personally just to tap into and run by him as we make progress on our next steps. Yeah, hopefully you can hear I'm pretty excited to have him.
He's shown up well already.
I appreciate all the detail, Jeff, and I wish you good luck going forward.
Thanks a lot, Brian.
Thank you. Once again, should you have a question, please press the star followed by the number one on your touchstone phone, and you will hear a prompt that your hand has been raised. The next question comes from Philand Ted, private investor. Please go ahead.
Hi there.
Good morning.
Oh. Yeah. I just had a question on the Dow contract. Is there any way a royalty shouldn't have been worked into this contract to kind of ensure that they bring something to market a little quicker than what they're doing? Could that have not? I take it you got another four years on this contract?
Approximately. Yeah. That's right.
It's an exclusive. You can't do anything or you can't approach any other company in personal care? What's the definition of personal care?
Personal care.
We've got a really bad echo on the line. Sorry. Personal care really encompasses anything that you'd go into the Shoppers Drug Mart counter for. It is a pretty broad definition. When we got this started and understanding what we had as a product, we were very feet on the ground to understand we did not have the applications know-how nor the marketing reach to take this product to market in the way that we needed a market leader to. They were very keen to do that, demonstrated themselves to be a market leader, but the price of entry was exclusivity. The exclusivity does carry certain volume thresholds, so they do have to demonstrate performance on this.
I can't provide all the details into the commercial structure of the deal, but there's a very, very fair two-way sharing of the proceeds of success on this, which is very motivational to both sides. We feel like if we have a product that works, we feel like we have a deal that works that really incents both sides to get this successful.
Okay. All right. I mean, the revenues are a little disappointing this term. What about reducing operational costs to try to ensure a match of profitability? Have you looked at those areas?
We were forced to look at those areas earlier in the history of the business, and we took some significant steps to right-size the business to be a few steps ahead of where we are in terms of revenue. Not 10-year steps, but let's say a few-year steps. We need to be as an emerging growth company. This is all about growth. We're going to continue to invest roughly CAD 2 million a year in R&D to make sure our value proposition stays ahead of everybody else in what we're working on. I'll also say I'll invite you to come and see it for yourself anytime you want. We have a pretty lean footprint in getting done what we are getting done.
I feel like we've right-sized the business to the point where it is meaningfully ahead of where we need to be on growth, but not too far.
Okay. I mean, you talk about pricing and I mean, when I go to the supermarket, I don't see people reducing their prices. Why can't you get more? Why are you continuing to reduce the price you're selling the product for?
Yeah. We're not, actually. You're seeing some reflection of that in the quarter-to-quarter numbers, but that has more to do with mix than a direct price reduction. Through the escalation, through and since the pandemic of costs, we pushed price up significantly. If you look back at the history of our pricing, we have pushed it up significantly. We're not unlike probably other products that you've seen.
Okay. All right. Okay. I mean, you've lost Paul Lucas, who certainly had a great reputation. Have you got any directors in the pulp and paper industry? Can you look for them in pulp and paper?
I would say indirectly, we do have two board members that have worked very closely with the pulp and paper industry, and Jeff Nodland and now Greg Yull, in servicing those markets through chemicals, through adhesives, through tapes. There is good application knowledge of that industry. What we also do, in addition to drawing on our board for that kind of input, is we do engage external consultants on very specific issues when we need them. That obviously includes the pulp and paper industry. Part of that is also the SurfLock part of the pulp and paper industry for us is relatively new to us. That is why we made a decision to engage these third-party distribution partners to be able to help us with the introduction of our product and the implementation of it.
We're not afraid to go out and ask for help and pay fairly for it when we need it to drive growth.
Okay. Okay. And then my usual question about shareholder return, it hasn't been great. I don't know if you've, I mean, I think you guys in management are doing okay. I'm still concerned about the share float keeps increasing. We're up to CAD 58 million shares now. You're continuing to buy back shares, but issue more at the same time. For all shareholders to benefit, the share float should be decreasing so everyone benefits. It also seems like you've attracted a short seller who keeps increasing the short as the price rises and then decreasing it. We're just playing the market, just buying up the shares that you're buying back. Anyway, that's a concern. I would like to see the float actually decrease after all these buybacks to benefit all shareholders. You can make a comment on that if you want.
It's a fair position. The thing that I think we need to do in order to deliver that return is to drive the growth that's there in front of us. The buyback is there to support the share price, to show our confidence in the value that we have as a company, and to strike a balance between shares issued and shares retired. By far, the biggest thing we need to do to achieve what you're looking for is to deliver the growth. That's what we're most focused on.
Okay. Agreed. All right. Thank you.
Thanks for checking in.
Thank you. There are no further questions at this time. I would now like to turn the call over to Mr. Jeff MacDonald, Chief Executive Officer of EcoSynthetix, for closing remarks. Please go ahead, sir.
Thanks again to everybody for joining us, and we'll look forward to talking to you again soon.
Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.