Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the EcoSyntec's twenty eighteen Fourth Quarter and Year End 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 that time for questions.
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 EcoSynthetics' risks and uncertainties related to these forward looking statements, please refer to the company's annual information form dated 03/06/2018, posted on SEDAR. This morning's call is being recorded on Wednesday, 03/06/2019 at 08:30AM Eastern Standard Time. I would now like to turn the call over to Mr.
Jeff McDonald, Chief Executive Officer of Decosynthetics. Please go ahead, sir.
Thank you. Good morning, and thank you all for joining us today. Yesterday afternoon, we released our twenty eighteen fourth quarter and year end results, which you can find on our website at ecosynthetics.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. It was a good quarter.
Net sales were up 19% to $6,000,000 driven by higher volumes. We improved our adjusted EBITDA loss to just $70,000 from 1,100,000 in the prior year period. And we generated positive cash flow from operations. Before we outline the highlights and developments during the quarter, let's step back and take stock of where we are and where we're headed. The platform we have developed and commercialized at EcoSynthetics has tremendous potential as a sustainable bio based binder given its breadth of application and flexibility to deliver value and performance.
Our two primary markets today are wood composites and paper and paperboard packaging. Our paper and paperboard packaging business has matured to a stage where it is delivering a solid base of sustainable sales through cycles with some lumpiness in volume and margin depending on the relative price of the primary ingredient it replaces, which is SB latex. The primary market drivers for the adoption of ECOSPHERE historically are economics and performance. But more recently, we are generating increased interest from a sustainability perspective. Our wood composites business is at an earlier stage of adoption in the market.
We are commercial with our first account, which has expanded the number of lines and SKUs that use DuraBind. We also have a pipeline of highly engaged prospects that are pursuing alternatives to conventional formaldehyde based binders. These prospects include dedicated manufacturers as well as integrated retailer manufacturers. The primary driver in the wood composites market is health and safety, but performance and value are also essential. Successfully penetrating these two core markets is our priority.
However, we also believe in the flexibility of our platform and that other markets exist where we can make small bets with partners, which could contribute to shareholder value over time. From an operational standpoint, in the past three years, we have made changes to our cost structure to deliver profitable growth. In Q4, we generated positive cash from operations. We are managing the business to deliver a profitable 2019. At this stage, we still expect some lumpiness in our results from quarter to quarter, but we are confident in our ability to achieve that goal in the twelve month period.
So that's where we are today. Where are we going? We believe additional growth exists in the paper and paperboard market. In the long term, we believe that business could double or more. However, the scale of the wood composites market and the demand from manufacturers, retailers and customers for no added formaldehyde or NAF alternatives that are cost effective and offer comparable performance make wood composites our number one priority.
Our DuraBind technology is a bio based binder that delivers value and performance as an alternative to conventional formaldehyde binders in the manufacture of engineered wood products. DuraBind works as a co binder with another industrial binder called PMDI to replace formaldehyde binders. There are three primary wood composites markets. One, oriented strand board or OSB, which is used in new home construction and for shipping goods. Two, medium density fiber board or MDF, which is used in flooring.
And three, particle board, which is used in furniture. Today, formaldehyde binders dominate the manufacture of MDF and particle board, while formaldehyde and PMDI are both used in OSB. In the absence of a viable alternative technology, MDF and particle board manufacturers were left to use formaldehyde, which is cheap and it works. However, as awareness of the harmful effects of exposure to formaldehyde emissions grows and customers, retailers and manufacturers are searching for safer economical alternatives to formaldehyde based binders. Our Durabind technology is the first viable bio based alternative that can replace formaldehyde binders in the MDF and particle board markets by working with TMDI.
The question now is one of the pace of change from formaldehyde to a bio based alternative. The end customer can be a key driver of change, but we haven't seen that yet in this market. Regulators like the California Air Resource Board and those in Germany continue to raise the standard on reducing formaldehyde emissions. But in our view, the key stakeholders that will drive change and respond to it are retailers and the manufacturers in their supply chains. Large retailers like IKEA are at the forefront of this agenda, setting standards that drive formaldehyde based binders and other harmful chemicals out of their supply chains.
The conviction of IKEA to adopt NAF alternatives is as strong as ever. They are committed to reducing formaldehyde and increasing bio content in their resins and to introducing NAF products into the market. We continue to work with IKEA on their goals. They are highly engaged. But for competitive reasons and out of respect for them, we cannot detail their work.
What we can say is that we're making progress and our confidence in the capabilities of DuraBind remains as high as ever. IKEA's level of commitment is also driving change among other manufacturers. In October, our first commercial wood composites account Swiss Crono launched a new particle board line, which they have branded SENZA NAF Solutions. SENZA uses our DuraBind technology as an alternative to formaldehyde binders. SENZA received certification for the highest quality and ecological standards for wood based materials.
It has the highest natural content of any particle board to our knowledge. This launch represents an expansion of our relationship with SwissKrono. We are already commercial with them on another line in a German plant across multiple SKUs. And SENSA has been validated in two plants, one line in Poland and another line in Switzerland. Swiss Kerno invested in the particle board development program through a period where PMDI prices were historically high.
It demonstrates their conviction in the potential of NAF solutions and the advantage of being a first mover in the market. The industry certainly took note of the launch. Manufacturers were taken aback that Swiss Crono had taken steps through a challenging pricing period and emerged as a leading player in the NAS space. As a result, we received renewed interest from prospects that we have worked with in the past, but deferred development due to the pricing dynamics and supply constraints of PMDI. You can see the movement of PMDI on Slide 10.
The supply constraints from 2017 and 2018 have eased. Capacity utilization has moved back into the 80s and the price is now below historical norms. At today's pricing levels of PMDI, our NAS alternative of Durabind and PMDI can provide manufacturers variable resin costs at or below parity to formaldehyde binders. However, the falling cost of PMDI makes progress in the smaller OSB market more challenging. When PMDI prices were high, we were generating significant interest in Durabind as a method for manufacturers to reduce resin costs.
But given the current PMDI pricing dynamics, there is less of an economic incentive for OSB manufacturers to use Durabind. Our primary focus today is the larger market opportunities in particle board and MDF where conversion away from formaldehyde is the priority. We have a focused pipeline of prospects. We're engaged with the right accounts to drive material adoption in the market. Converting those prospects already in the pipeline to commercial accounts is our top priority.
Moving to Ecosphere, higher volumes in the paper and paperboard packaging markets drove our increased sales in 2018. What we know from experience is that converting an account to Ecosphere is the primary challenge. Once we have secured an account, they become sticky given our ability to offer them a lower cost binder even when SB latex prices regress. The stickiness of an account is why we view ECOSphere as a strong base business. However, the recent pricing dynamics of SB Latex and its oversupply in Europe are creating some headwinds for us.
On Slide 12, you can see that since December SB Latex is priced below $1 a pound, which narrows the savings a new account generates by adopting Ecosphere. There has been a significant amount of consolidation within the paper and packaging market. The remaining players are stronger showing improved results and operations. While these players are reporting a softening in demand for coated paper in the current economic cycle, we are positioned with the right players in the market. We're also seeing more opportunities in the specialty paper market where the sustainability benefits that Ecosphere offers continue to attract significant interest.
An example of this is using Ecosphere in oil and grease resistant paper wrap in food packaging as a replacement to fluorocarbons as a substance of concern. We expect paper and packaging to contribute growth as SB latex returns to historic levels. In the interim, ECOSPHERE provides a strong foundational business for eco synthetics. Wood composites remain our high growth opportunity as the pace of change accelerates and retailers promote change within their supply chains to NAF alternatives. We are committed to profitability in 2019 by delivering top line growth and executing on items that are fully within our control.
With that, I'll turn it over to Rob to review the financial highlights. Thanks, Jeff, and good morning. From a top line perspective, net sales were $6,000,000 in Q4 twenty eighteen, an increase of 19% compared to the same period in 2017. This increase is primarily due to higher sales volumes of 15% and higher average selling prices of 4%. Net sales were $22,800,000 in 2018, an increase of 27% compared to 2017.
'20 '2 percent of this increase was due to higher volumes and 5% was a result of higher average selling prices. Gross profit was $1,200,000 in the quarter, up 42% compared to the same period in 2017. In the annual period, gross profit was $4,500,000 up 23% compared to 2017. These increases were primarily due to higher sales volume and higher average selling prices, partially offset by an increase in manufacturing costs. Net of manufacturing depreciation, gross profit as a percentage of sales was 23.5% in the quarter compared to 22.1% in the same period in 2017.
In the annual period, gross profit percentage as net of depreciation was 23.4% compared to 25.1% in 2017. The change in the annual period was primarily due to higher manufacturing costs, partially offset by the increase in average selling prices. Adjusted EBITDA loss was $70,000 for the quarter, an improvement of 94% compared to a loss of $1,100,000 in the same period in 2017. During the quarter, we incurred a $200,000 unrealized foreign exchange loss under Canadian dollar cash held at year end, which directly impacted our reported adjusted EBITDA in the quarter. Adjusted EBITDA loss for the year was $1,400,000 an improvement of 71% compared to $4,800,000 in 2017.
Improvements in both periods were due to lower operating expenses and higher gross profit. We continue to be disciplined in our approach to cost management. SG and A expenses were $1,400,000 in the quarter compared to $1,000,000 in the same period of 2017, an increase of 4%. In the annual period, SG and A was 5,500,000 compared to $6,000,000 in 2017, a decrease of 8%. R and D expenses were $410,000 in the quarter compared to $1,100,000 in the same period of 2017, a decrease of 63%.
R and D expenses in the annual period were $2,200,000 compared to $4,700,000 in 2017, a decrease of 53%. The decreases were primarily due to lower people related costs, discretionary spending and lower mill trial related costs. The company's R and D efforts continue to focus on further enhancing value for its products for its product lines and expanding our addressable opportunities. We are confident that our current investment level is appropriate to deliver significant growth. As of December 31, we had $44,800,000 in cash and term deposits compared to $49,300,000 as of December.
During fiscal twenty eighteen, the company acquired and canceled approximately 2,000,000 common shares for a total investment of $2,500,000 under our normal course issuer bid for an average price of approximately CAD 1.87 per share. It is our opinion that these purchase have been made on terms which will enhance the value of the outstanding remaining shares. We have more than sufficient cash reserves to execute our growth strategy and will remain disciplined and manage our cash responsibly, while continuing to invest in our long term growth strategy. With that, I will turn it back to Jeff for closing comments.
Thanks, Rob. We're committed to maintaining the trajectory of the business and delivering profitable growth, while investing in product development and our sales platform. Our activity on the normal course issuer bid underscores the confidence we have in the long term prospects of the business. As we enter 2019, we are encountering headwinds from the paper and paperboard business with the softening of SB latex pricing and some softening of demand for coated paper. But the accounts that we are already active with are strong and they have demonstrated consistent buying through multiple pricing cycles.
On wood composites, we are working closely with the two most important players in the market. They are recognized for their operational excellence and desire to position their companies in a different and better way for consumers that value bio based sustainable solutions. The pace of change in wood composites is challenging to predict, but the market is moving toward us. We are engaged with accounts that have conviction and the retail pull to deliver on an agenda of change. We appreciate the trust and patience that our investors have shown and I look forward to updating you again on our progress very soon.
With that, I'll turn it back over to the operator to open up the call for questions. Thank you.
Your first question comes from the line of Rivel Zelezal from Canaccord Genuity. Your line is open.
Good morning, Jeff and Rob. Thank you for hosting the call. My first question relates to oil prices or SP Latex prices. Can you help quantify what the impact could be to your paper revenues by changes in SP Latex prices?
Good morning, Raveel, and thanks for joining us. I think let me start by saying that the hurdle that we've always consistently used and which is demonstrated to be the right hurdle to predict the impact on our business has really been $60 a barrel oil. And we said that when we're $60 and above, the prospects for expansion of our volume and good pricing are quite positive. And when we drop below that, we do face headwinds. And we saw the positive side of that cycle last year.
We're seeing a little bit of a negative with oil dropping into the 40s in December. That's really working its way through the system today. The customers, as I mentioned, the customers that we're with, we believe have pretty good staying power in the market. So we don't expect them to go away. They are seeing some pressure on volume and we are seeing some pressure on price as a result of SB latex.
So quantifying it, still pretty uncertain. We've heard from some of the public paper companies that they are seeing some softening in demand, but they haven't quantified it. So it's kind of difficult for us to. Anything to add Rob? Yes.
Good morning, Rafael. Good morning.
I mean the way to kind of think about it, I would say we had we saw some stronger movements in the SB latex market in 02/2008. And with that, we were able to increase our average selling prices in the range of it was 5% for the full year. So I kind of think about the prior year if it remains at these levels, we could see pressure in that range again. The other side to also think about it though is on our cost of goods sold. We also actually had a higher increase if we just isolate our cost increase to our selling price increases last year.
We essentially had more cost increase by approximately $100,000 over our average selling price on the full book of business for the year. So we do have an expectation that and we are seeing some of our cost of goods sold also reduced. So we're actively looking at trying to keep those two in balance.
Got it. And these customers certainly the ones that you have proven to be very sticky. I'm wondering though, I mean, can they not use more SB latex during this time compared to EcoSphere? Or is there some reason why they have to continuously use pretty much the same proportion of SB latex to EcoSaphere in their product?
I mean, a change in formulation for a customer is always an exercise that they have to go through and there's certainly cost and time associated with that. They could change to SB latex though and replace us. But as long as we're offering some savings, there's really no motivation to do that. And we've shown even when oil prices have been into the 30s, we've still been able to price our product to offer enough savings that they stick with their current formulation and we'll follow a similar strategy if this down cycle persists.
Very helpful. That's great. And then just moving on to the wood vertical. We are certainly seeing increasingly stringent regulatory requirements. Can you speak to how that's translated into growth in the sale of NF products?
Like are we seeing more sale of NF furniture, wood particles, if you can just speak to that?
I think in the North American market, you saw when the CARB II regulation came in, everyone really focused on ensuring they were consistently conforming to that as a first step. NAF would be the next step that people would be working on in the North American market. There's more uncertainty though in terms of where Europe is going. And I think that uncertainty plays well for us. The German market has sort of broken ranks with the rest of Europe and they've announced what they're calling a half step reduction.
So essentially reducing allowable emissions by half in their market for anything that's produced or sold in Germany. And so that's got the rest of the European market trying to figure out how they're either going to follow or somehow remain different than Germany as one of the largest markets in Europe. That's driving questions within customers as to whether they take steps to buy formaldehyde resins are more expensive in order to achieve lower emissions, whether they change their processes and slow their machines down in order to achieve lower emissions, or do they go all the way to the NAS step. And certainly, Swiss Crono as an example is definitely exploring going all the way to the NAS step. But ultimately it has to make sense for them from a market perspective and from an operational perspective.
And that's really what Swiss Crono is pushing to find out and make good on at this
point. Perfect. Just one more question for me. So when we look at the existing lines that you have, especially the first two lines on the wood side that you've that were awarded to you. Can you speak to what sort of ramp up we have seen at these lines?
And what's been stopping these lines to ramp up to your target of $3,000,000 per line? Is it just been the PMDI prices being higher last year? Or is there something else that's also impacting that?
Yes. We have to be a little bit careful because we can't disclose exactly what the applications are that those customers are working on. But we as we got started with Swisscrono on their first line, we talk about the range of $500,000 to $3,000,000 They started right around the $500,000 mark and have progressed up beyond sort of the middle of that range. What's preventing it from being more is adoption across more SKUs, expansion of their substitution rates. And I'll just say simply that economics in the current PMDI pricing cycle haven't worked in favor of that.
I won't say anything more on the application itself, but I think you can understand where we face that pressure.
Makes sense. I mean, but have they or other customers given you some indication of what type of ramp up they expect to see in 2019 or is it something that's still being discussed?
Well, I think we stick with and our customers support that range that we've put out there $500,000 to $3,000,000 And I think if you look at a particle board line within Swiss Crono, we would expect a similar trajectory as they get started. I think we do need to say that they did announce that product to the market in November. They've got several launch events coming up over the next few months. So that product is still in the early stages of launch. And while there was a very important announcement about it, we haven't considered it to be of commercial volumes yet.
That's still to come.
Perfect. Thank you for taking my questions.
Thanks a lot,
Rupil. Your next question comes from the line of Robert Nimi from Nami International. Your line is open.
Good morning, guys. Good morning, Rob.
I just jumped on the call late, so I just wanted to get up with a few things. As far as obviously your top two customers are wrapping up and starting to do well. But I think you were in 13 to 15 of the top 20 in wood and like how is it going there? How is your traction? What stage of trials are you in the other 10 or 12 that you were into?
So I think we I mean, we definitely suffered from a slowdown in the higher PMDI pricing environment. And so there were some customers that simply didn't progress during that time. Some of them have picked up and restarted. Exposure across the top players and we're still active and working with the ones we were working with before. No one has really dropped out of that.
We have trials on the go though that are everywhere from lab phase to later stage industrial work. So that profile of trial activity has remained the same, but it definitely took a slowdown in the last year with higher PMDI prices.
And how about on the paper market? Are you getting any traction with new customers in the paper side?
Yes. I mean, we had a fair bit of trial activity in the last year and especially I think some interesting new stuff in specialty paper, which has led to, I'll say some small initial wins, not ones that we would report as big commercial wins yet at this point. The SB latex market moving against us here in the last quarter, again puts a bit of a damper on that when it comes to cost savings, but we see that the specialty projects in particular continue to progress. They're much less Latex.
And you gave sort of a breakeven point as far as demand on the oil price of about $60 How about PMDI? What's your mark there on demand? Where you seem to get a pickup in demand?
Well, when we really got started with our Durbine trialing efforts, we were at PMDI prices. I'll use the European price of somewhere between €1,200 and €1,400 per ton. And we saw a good activity then customers were looking at that as being sort of parity or maybe a small premium to their formaldehyde resins. We're below that level now. So we're definitely in a good spot now, but that kind of 1,200 to 1,400 range is an important range economically.
Where exactly are we at on PMBR right now?
With the number we put up there. Around $1,400 even a little bit lower than $1,400
today. And Rob, you got to think about that is actually a market rate. The customers that we're dealing with there and the prices that Jeff's referencing would be more at the customer level and you can see upwards to a 10% discount off what a market rate would be for a very large customer.
Yes, or even more. So if the spot in Europe today is €1,400 per tonne, we see some customers that are buying even in the €1,200 range.
Okay. And my final question, you may have answered this early in the call, but I guess I missed that. Are you still pursuing a government grant?
We are. It's actually there is a note in our release. We've been successful in securing a nice government grant in the fourth quarter. There's a as these usually go, there's a nice announcement to go along with it. With the cabinet shuffle, I think that announcement's been delayed a little bit, but there should be a press release to go along with that in the next little bit.
It's a nice five year grant that supports our efforts in in R and D in the wood composite space specifically. Yes, so we are and we're successful in that pursuit.
Okay. That's it. Thanks guys.
Thanks a lot, Rob.
Your next question comes from the line of Raveel Assel from Concord Genuity. Your line is open.
Hi, guys. Just one more question. You mentioned that you are also looking at some complementary products to go. Can you just speak a little bit more about these complementary products and how they fit into your overall vision?
Sure. So specifically in wood composites, when we talk about complementary products, we had the core Durabine product, which is the co binder that works with PMDI. But as we got deeper into applications with customers, we saw the need for some other, let's say, benefits that we could offer to the line such as TAC, which is essentially just holding the board together as it moves through the line, and some catalyst products, which are able to help speed up the line. So we've spent a fair bit of time developing those and those are actually instrumental in some of the important trials that we're working on literally today. So that's in the core market of wood composites, that's one.
The other thing I referred to earlier was just placing small bets in other markets where our biopolymer could be interesting. And there we've had some limited success in the past at arm's length with ingredients for personal care products. And the move toward all natural ingredients in the personal care space is a really, really interesting opportunity. And there we continue to look for partners and specific opportunities where we could take that one further. That's an example.
There are a few other partnership opportunities like that that we're pursuing as well. Perfect. Thank you very much. Thanks again, Raveel.
There are no further questions at this time. I'd like to turn the call over to Jeff McDonald for final thoughts.
Okay. Thanks again everyone for joining us today and we look forward to speaking with you all again soon.
This concludes today's conference call. You may now disconnect.