Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the EcoSynthetix 2021 Third 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 to you at the time for questions. If anyone has difficulty hearing the conference, you may press star zero for operator assistance 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 forward-looking statements. For more information on EcoSynthetix risks and uncertainties related to these forward-looking statements, please refer to the company's annual information form dated March 2nd, 2021, posted on SEDAR.
This morning's call is being recorded on Thursday, November 4th, 2021 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, everyone, and thank you for joining us today. Yesterday afternoon, we released our 2021 third quarter results, which you can find on our website at ecosynthetix.com. You can also download a copy of the slides that accompany today's call from our website or alternatively access them on the webcast. The momentum we're building in the business continued in the quarter, which more than offset the macro level headwinds in the paper market. We expect this momentum will accelerate as we move into 2022 and beyond. Sales were up 57% coming in at CAD 4.7 million. Adjusted EBITDA loss improved to CAD 100,000 in the quarter. Once again, in Q3, we posted positive cash from operating activities. During the quarter, we made significant progress with our two key strategic wood composites accounts.
SWISS KRONO continues to demonstrate leadership in offering renewable, healthier products with good progress on two separate fronts. As a result, they increased their volumes during the third quarter. With the BE.YOND particleboard launch, they are seeing increased interest and demand from their customers. At the same time, we're also seeing interest to expand the use of DuraBind™ in OSB applications at new lines. This interest is primarily being driven by two factors, the pricing dynamics of alternative chemistries for OSB binders, as well as the reduced carbon footprint that DuraBind™ offers. The improvements and innovation we've added to our original DuraBind™ offering are helping to support this increased interest and demand. Our tackifier and our catalyst technologies that we introduced as part of our ongoing investment in development have increased the operating efficiency and the processability at the plant level.
Based on commercial scale production runs at existing facilities, the operating rates with DuraBind™ are now faster than even conventional urea formaldehyde binders. That is a major accomplishment in direct comparison to a chemistry that has been in the market for 50+ years. The combination of attractive pricing relative to other chemistries in OSB, the improvements we offer to a manufacturer's carbon footprint, and the ability to increase a manufacturer's production capacity during a period of high demand is an attractive profile. Our opportunity set has expanded in wood composites during the past 6 months. These fundamentals are also driving increased interest from other wood composites manufacturers, specifically prospects that have engaged with us previously and run trials but did not at the time move to commercial operations. Our investment to diversify beyond paper is beginning to show results. The multiple shots on goal commercialization strategy is working.
Our other key strategic wood composites account continues to show great progress in their adoption of DuraBind™. They are running regular production on one line for select product SKUs. This account has invested a great deal of time and capital over the last six years with us. It has been a long process, but we believe it's a meaningful account, not only to our top line growth, but as a thought leader in the market. We believe that success with them will encourage other manufacturers to evaluate alternative resins to conventional formaldehyde. Overall, we believe sales of DuraBind™ will continue to form an increasing proportion of our revenue in 2022. The market is moving to us. Our bio-based resins offer significant advantages over traditional binders. Consumers, retailers, and manufacturers are increasingly aware of what they use and the impact of their products and the supply chain on the environment.
Our bio-based technology checks all the boxes, value, performance, and a more sustainable and healthier alternative to conventional petroleum-based binders. On the paper and paperboard side of the business, the macro picture remains mixed. The structural decline of demand for graphic paper continues. During Q3, we continued to see consolidation in the market, and this time it impacted one of our accounts, which fully exited from the North American graphic paper market. The annualized impact to our sales of losing that one mill is approximately CAD 1.4 million. Not insurmountable based on the growth we've experienced in the past 12 months, but not insignificant either.
On the positive side, the pricing dynamics of SB latex are creating tailwinds for us. As both oil and SB latex move higher, the value we're able to capture as a replacement for SB latex and the substitution rates mills run with our EcoSphere® binder continue to gain momentum. This positively impacted our sales volume and average price in the quarter. In the paperboard and packaging market, we are working on new opportunities in specialty applications like green sustainable packaging, tissue, and pulp. We consider these applications to be more niche markets that offer high value compared to the larger graphic paper market. We continue to invest in development for these end markets, where the characteristics of our biopolymer are attractive to manufacturers.
We believe our EcoSphere® solution will continue to be a standard ingredient for the paper manufacturers that use it, and it will remain foundational as part of their business. We will continue to invest in specialty applications that deliver value to manufacturers, but paper will not be the primary growth driver of the business relative to wood composites and personal care. On the personal care front, we continue our work with the global chemical company that is our development and marketing partner in personal care. We are developing both new hair fixative ingredients for them, as well as new ingredients for other product lines in personal and home care. We expect these new ingredients and new customer formulations to be launched into a more receptive personal care market in 2022.
The hair fixative market on its own represents an approximately $350 million opportunity for our binder with strong margins. We believe the demand and interest in sustainable, healthier ingredients will be a continuing tailwind in the personal care category. Our partner continues to support the product launch with refreshed marketing strategies and materials and is working with distribution partners to support adoption. We view the personal care opportunity as a warrant to our growth. Our strongest growth opportunity remains the wood composites market. With that, I'll turn it over to Rob to review the financials. Rob?
Thanks, Jeff, and good morning. Net sales were CAD 4.7 million in Q3 2021, up 57% compared to CAD 3 million in the same period in 2020. The increase was due to higher volumes, which impacted sales by CAD 1 million or 34%, and higher average selling price, which impacted sales by CAD 700,000 or 23%. As Jeff mentioned, the volume increase was driven by both the rebound in paper and higher volumes from the wood composites market as we advance our commercial strategies. The pricing increase was the result of higher market pricing for incumbent chemistries and some recovery of manufacturing cost escalations experienced year to date. Gross profit was CAD 1.1 million in the quarter, up CAD 700,000 compared to the same period in 2020.
The improvement was due to higher volumes and higher average selling price, partially offset by higher manufacturing costs. Net manufacturing depreciation, gross profit as a percentage of sales was 27.8% in the quarter, compared to 21.7% in the same period in 2020. Supply chain constraints on freight and raw material supply has created operational challenges and higher manufacturing costs. However, the pricing dynamics of the petroleum-based chemicals we compete with are creating pricing tailwinds for us, allowing us to implement pricing actions to offset the cost escalations today and restore our margin profile. SG&A expenses were CAD 1.4 million in the quarter, an increase of CAD 500,000 compared to the same period in 2020.
The change is primarily due to CAD 100,000 in lower payments received under the Canadian government CEWS program, an increase of CAD 100,000 in share-based compensation, and CAD 200,000 in variable-based compensation. R&D expenses were CAD 500,000 in the quarter, compared to CAD 300,000 in the same period in 2020. The company's R&D efforts continue to focus on enhancing value for our existing products and expanding our addressable opportunities. Adjusted EBITDA loss was CAD 100,000 in the quarter, compared to a loss of CAD 200,000 in the same period in 2020. As of September 30, 2021, we had CAD 40.8 million in cash, compared to CAD 42 million as of December 31, 2020. During the quarter, we invested CAD 400,000 in NCIB share buybacks and CAD 800,000 year to date.
This represents the majority of the cash used in each period. We've 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. The business has demonstrated tremendous resiliency since the initial downturn of the pandemic. Momentum is building in the broader market for more sustainable offerings, and we're seeing more interest in our platform as manufacturers and retailers search for ways to improve the sustainability profile of their supply chain networks. The level of urgency and the demand for alternatives that support carbon footprint reduction targets is driving a different tone in our inbound calls today. We are seeing continued momentum in both the recovery of paper and our progress with key strategic accounts in wood composites. We believe this momentum with wood composites is poised to accelerate as we enter 2022. Our first wood composites account is expanding the use of DuraBind™ in each of the OSB and particle board verticals. Our long-standing key strategic account is running regular production using DuraBind™ and placing new orders with us.
Prospects that we have worked with before have reengaged with us given the pricing dynamics of alternative chemistries in the market and the demand for carbon footprint reduction. The attributes of DuraBind™ offer manufacturers value, performance, and a more sustainable and healthier alternative to conventional petroleum-based binders. That is a winning combination. We believe wood composites will continue to form an increasing proportion of our sales in 2022. We have the technology and the financial strength, and we're working with the right customers and partners to make a difference in our target markets. We appreciate the trust and the patience that our shareholders have shown, and I look forward to updating you further on our progress. With that, I'd like to turn it back over to the operator to open up the call for questions. Thank you.
Thank you, ladies and gentlemen. We will now begin question and answer session. Should you have a question, please press star followed by one on your touch-tone phone. You will hear a 3-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press star followed by two. If you're using a speakerphone, please lift a handset before pressing any keys. One moment for your first question. Again, ladies and gentlemen, should you have any questions, please press star followed by one on your touch-tone phone. Your first question comes from Daniel Mark from Stonehouse Capital. Please go ahead.
Good morning, Jeff and Rob. Well done. Good quarter.
Good morning, Dan. Thanks.
Thanks, Dan. Good morning.
Good morning. Just to start off, I guess, with a small one. I see in your slide presentation online and a comment you made, Jeff, you've referred to personal care and home care. It's the first time we've seen home care. Can you just tell us what's behind that?
Yeah, that's actually been the case then since we started our relationship with the large chemical company. The combined business that we have our agreements with is their home and personal care division. Yeah, I think the lion's share of the activity that we've had together has been on the personal care front, and then within that, specifically for hair fixatives. We've also had some activity with the home care side of the business, which is an interesting one too, in its pursuit of green ingredients. The volumes are very interesting there as well. These are much longer-term developments to get something into, you know, things like dishwasher detergents and products like that. The near-term opportunity and what we're almost focused on is still hair fixatives and then step-by-step expanding from there.
Okay. You've for the first time given us some a bit of a target by saying things to begin in 2022. Are there specific opportunities that you have in a pipeline that you think are gonna come out then? Is that just a general you know feedback from your global partner?
I mean, relative to our visibility and our closeness to a market like wood composites, it's always going to be more general in the personal care space because we are one step removed. We're not the direct face to the market. I mean, we're taking a general view from our partner and basically sharing the enthusiasm that they have. From time to time, we do get a glimpse into their pipeline, and certainly, there's some interesting things on the go there that give them confidence and therefore us confidence. I wouldn't pin it on any one in particular.
It's been a really broad-based marketing effort that they've undertaken, and then they've also signed up a sub-distributor, which is a very significant company as well in its ability to distribute to sort of the smaller medium-sized, more far-flung geographies. That investment has actually continued to ramp up, which we think is a great sign. I mean, they've already refreshed some of their marketing materials, expanded some of their campaigns, both them and their sub-distributor. That's where we're really taking our cues from. I would say to your question, it's always gonna be a little bit more general for us than the visibility and granularity we have in wood or paper.
Got it. The arrangement you have with that global partner is one with an exclusivity clause. As I recall, that is an annual renewal or something like that. Is it assumed that that is going to be your partner and you're going to remain exclusive for the foreseeable future?
Yeah. We don't wanna give granular details of what's contained in the agreement, but it is exclusive, and we've said that. We couldn't ask for a better partner. It's definitely taken longer, I think, largely due to the pandemic. For us to consider an alternative right now would be a really difficult choice. They're so good at what they do, and they're entrenched and invested in this. We're comfortable to, you know, wait this out and continue to support them as new launches come to light.
I think, you know, when we look to 2022 with some optimism, like here in Ontario, we're expecting early in the new year that we go to phase four, and that's pretty much whatever this new normal is, that's pretty much normal. I think that's kind of the level of normalcy that people are looking for to trigger new launches. It's just a fact that companies have not been launching new products in this space into the market in a down market. Yeah, we're optimistic because they are, and those are the signals that we're seeing.
Okay. With respect to that, Jeff, you've said a few times that your long-term goal is to be CAD 100 million revenue in 3-5 years. Just being the math guy that I am, that implies that if you were to hit it in three years, you need to grow your revenues by about 17% a quarter. Obviously I don't expect it to be a straight line, 17% every quarter. There's gonna be some steps in there. Can you just give us some flavor as to how we can expect your revenue to grow in the long run, since we're looking at 2022 and beyond? How is that...
How should we expect to forecast your revenues or at least have some guess as to whether they're gonna be, you know, going up smoothly, in chunks, in big chunks? How is that gonna look for us?
I think, well, you kinda described it pretty well. But, you know, as a small growth company, there is some lumpiness in what we do. We're focused on a smaller number of partners to do big things with them, and they're doing big things, but I would say more in a stepwise fashion. We're not selling little widgets and, you know, we can't project a ramp on a quarter over quarter over quarter basis. It's going to be stepwise changes. I think you saw a meaningful one of those steps in Q2, which I would say we've, you know, largely sustained. With some lumpiness in the background, we've largely sustained in Q3, which we view as a really good thing.
Like, we're up in both quarters 57% with a really impressive, I would say, change in the mix of our revenues and our customer base within that, which is totally in line with our diversification strategy. I mean, we feel pretty good about that step, and we expect that, you know, we'll see similar steps going forward as adoption, you know, continues to move on with both of our strategic wood accounts and then snowballs into accounts outside of them as well. For sure, don't expect a straight line trend with us for a while. That's gonna take a basket of accounts that allow you to smooth it out a little bit more.
Got it. One last question. You talked about in particular the pricing advantages as well as basically all the advantages in wood composites and OSB. With pMDI prices being very high, obviously OSB gives you a great competitive advantage now, price advantage. What's involved for accounts to switch over? Like, is there a big operational ordeal in both the particle board and the OSB markets? I understand they're different. What's involved in getting accounts to switch? Is it a big deal?
I think
Operationally.
Yeah. I think the biggest deal in every case is just getting around the change program and getting, you know, leadership and project leadership on site to drive the change ahead. That's by far the biggest thing. Then that can have a varying degree of dollars and timelines tied to it, depending on the vintage of the line, some of the options they may have already installed on the line or not, in some cases. Operationally, you know, when we got started with SWISS KRONO in the first operation that we're working on with them, there wasn't a lot operationally that needed to change. A few small investments in equipment needed to handle our product. I think by anyone's terms, it would be considered minor.
There are other lines where it could be several hundred thousand dollars or euros of change to allow a change like this to happen. I think the value proposition that we offer and the need for some of these companies to change to green solutions, you know, even when it's, you know, that kind of magnitude, they're still looking through that as a, you know, a reasonable investment to get to where they need to be. Our, I mean, I can give you without speaking too much out of school here, our large strategic customer in wood composites, one of the things that happened in the last quarter was another meaningful investment on their part to be able to run our product more efficiently on their line.
As I've said in the past, you know, let's say in a quarter, you'll undertake a long sustained run with a customer, and you'll learn a bunch of stuff every time. I'll say, like, even when they're running with formaldehyde, they're learning and improving all the time. For us specifically, you'll get a long run, you'll learn, you'll analyze the data, and you'll make some changes to your processing conditions, but also in some cases to the configuration of the line. We had some of that happening in a very positive way, just in the last quarter. Those investments are continuing to be made. There's not one answer to your question.
It could be zero, and I'll say could be as much as a million dollars, let's say, if a real overhaul was needed to a line, and everything in between.
Got it. Jeff, thanks very much.
Thanks a lot, Dan.
Ladies and gentlemen, as a reminder, should you have a question, please press star followed by 1. Your next question comes from Gerry Wimmer from Investorfile. Please go ahead.
Hi, Jeff. Thanks for taking my call and, congratulations on another good quarter.
Thanks, Gerry.
Got a couple of questions. You talked about your major strategic partner, unnamed partner in the wood composite business, and you talk about that you're on one line with them. I guess, is this a continuous line or is it small runs for different, you know, for different product lines? Could you just characterize what's happening on that one line? And at the same time, are you seeing any, and maybe this is too premature to talk about this, but any pressures from the strategic customer in terms of their own supply chain issues of running continuous lines that would support your resin?
Yeah, good question. First of all, the runs that we do with them are intermittent and growing, although they are intermittent, growing each time. The program that's laid out with them calls for, you know, increasingly long runs and over an increasing number of SKUs, which, it's the logical way to approach it as an operational person. If I was in their chair, it's exactly the way I would do it. Those, you know, even over the course of this year, those runs have continued to go longer, more success out of them as a result of what I just said to Dan, learning stuff and changing the line and processing conditions, and that gives everybody confidence to go longer.
Yeah, it's fair to characterize them still as intermittent but growing and, you know, growing to the point where I don't want it to sound like it's niche and almost not at all. We did announce last quarter that they crossed a level of meaningfulness for us, where we consider them a meaningful commercial account within our basket of customers. Yeah. To your other question, the supply chain world for us and I think for just about everybody in any of the markets we touch has been a challenge and is gonna continue to be a challenge going forward. I think we represent an interesting solution to the challenge in that we are able to continue to secure our raw materials.
Despite escalations in some of those raw material prices, we do continue to be able to allow value relative to the more rapid escalation in oil-based products. Yeah, I mean, our supply chain people have had their challenges in getting product and getting it shipped on time. We have not missed a customer commitment, and we're confident that we can continue to do that going forward. It's certainly put pressure onto our customers' businesses, and for the most part, we would see that as a positive thing. Anything tied to natural gas right now is a big challenge, and in particular in Europe. One of the paths from natural gas is methanol, which then goes into formaldehyde.
The sourcing of formaldehyde resins, as well as the pricing of it, has been a real challenge, which is obviously a positive for us. Yeah, we're gonna continue to manage our own challenges on the supply chain side to make sure we can continue to grow on the back of these dynamics, which overall we see as pretty positive.
Would you say that you had any feedback from your strategic customer or SWISS KRONO suggesting there could be supply chain issues within their productions that could slow down the ramp-up of what you're providing them?
No.
No.
We haven't seen that at all. I guess if there were any alternative resins, we would see that as a good thing to be able to help them move even faster.
Right. Well, fair enough. Okay. Moving on to personal care market, and I understand being, you know, one party removed, it's harder to, you know, predict a, you know, market ramp of their products. You did say that you're providing new formulations or constantly providing new formulations or ingredients. Is this for additional products or is this changes to formulation changes to some of their existing products that they want to roll out? Or is it formulations for a broader range of products that you're doing for them?
When we talk formulations, we're talking about what they do. They're constantly looking at combining different ingredients, including ours, into new formulations for their customers. We've been providing them with an increasing set of ingredients with which to do that. If you wanna think about it in simple terms, when we got started with them, we provided them, let's say, the vanilla ingredient for hair fixatives. Since then we've added a few more flavors because there are different hair fixatives out there. Think of like a gel versus a spray, think about an opaque product versus a clear product. We've managed to offer them a broader suite to satisfy all those kinda sensory needs that are just part of what personal care is.
We've actually begun to do that outside of just hair fixatives as well. We've provided them some ingredients for other personal care items that we're hopeful could be the next parts of their pipeline.
It's not necessarily changes they needed to make, but it's more a broadening, providing solutions for a broader line of products down the road.
Yeah, a full suite. If you think about haircare, I think right now we probably have a set of solutions for them that satisfy all parts of the hair fixative requirements. Whereas we started with a vanilla, a very important big chunk, but it was just the vanilla part. Now I think we have probably a full set to satisfy that hair fixative space.
Okay, fair enough. I'm moving on to your historic business, the paper business. You mentioned some relationships in the past are re-engaging with you due to some of the pricing dynamic changes that they are feeling that makes your product even more attractive. How quickly can they change? Do they have to go back? Changing production lines to include your product versus what they used prior, isn't that a very long-term process? People reconnecting with you is, realistically, how quickly could they choose your product and change over their line where they're actually gonna be ordering commercial quantities?
It really depends on what they've done historically with us. If they've qualified our product on a given line, the path could be very short. Actually, in the last quarter, we had a good example of that. We had a customer in an emerging market who had worked with our product previously, qualified it on a line, had a local source of SB latex that became very attractive from a pricing perspective, so we didn't do anything with them for a long period of time. When that pricing dynamic shifted, they ordered our product and in very short order, with a little bit of help from our applications people, they had us on the line again and running very well.
If they've done that homework up front, it can be, you know, literally within a few days. If they haven't, I mean, the kind of rule of thumb average we have is it usually does take about 12 months to get our product on a paper line and proven in, you know, the full range of grades that may be on that line.
Okay, fair enough. Moving on to the investor relations front. I heard that recently you were asked to present to new, I guess, investors or institutional clients from a particular brokerage firm, who, I guess, their analysts had looked at the, or is aware of your company, maybe from a previous relationship. I just wondered how that went and what was the general feedback from some of their accounts that you had presented to.
The feedback from the one you've found out about specifically has been really positive. It's hard for us to know whether there's been any direct buying behavior stimulated from that, but I would say at the very least, we have a new set of watchers looking at us. You know, you've picked out one, but we're on the trail with investors quite frequently. I think especially in this environment, it's a really fun story to tell and gets great reception. It resonates with people right away. We'd just like to continue to get that out there more broadly. As an event, it was, I think, quite positive.
Are you receiving more inbound inquiries from the investment community, say today than you did, six months ago?
I would say it's pretty sustained, maybe up a little bit, but I would say for the last year it's been pretty sustained, positive interest.
Okay. Are you still planning to continue this process of engaging with the investment community as things develop in the near term at least?
Yeah, absolutely. I think that's a part of what Rob and I continue to invest our time in. Yeah, we'll continue to do that. I think, I mean, we've got a couple more opportunities like that coming up.
Okay.
We're gonna keep doing it. Yep.
Okay. Okay. Well, a good quarter and thanks for asking for providing answers to my questions.
Oh, thanks for your interest, Gerry.
There are no more further questions at this time. Jeff, please proceed.
Thanks very much, and thanks everyone for joining us today, and I look forward to talking to you again soon.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.