© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the EcoSynthetix 2023 Fourth Quarter and Year-End Results Conference Call. [Operator Instructions]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 risks and uncertainties related to these forward-looking statements, please refer to the company's annual information form, dated the 27th of February 2024, which is posted on SEDAR.This morning's call is being recorded on Wednesday, February 28, 2024, 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. I'll start this morning's call a little differently than we normally do just by saying that we are in a very polar situation here.The results we issued yesterday afternoon, I would characterize as the most disappointing we've had relative to expectations. That's one end of the spectrum. At the other end, the progress we've made on the most strategic aspects of our commercial strategy has never been stronger.We'll dig into some of those highlights this morning. While we don't provide forward guidance, my belief is that we have endured the bottom. We expect to get back on our path of long-term sustainable and profitable growth with our midterm target of $100 million in sales.Our two primary target markets are wood composites and paperboard, pulp, and tissue. I think of these opportunities as 1a and 1b with the personal care opportunity positioned like a warrant on our growth.The wood composites opportunity is well proven and in sustained commercial use with a key strategic account in hand. The large international retailer that is backward integrated into wood panel manufacturing reported sales of more than EUR 49 billion last year. That's the type of end customer that you want to be selling to.Our work with them, including both the trial activity and more recently, the commercial production has been proven and validated over several years. And that account is the thought leader in the space with a tremendous amount of influence over industry standards and its supply chain partners.The movement to bio-based glues is being driven by the market leader commercially. In very practical terms, that's why I've been so confident in the wood composites opportunity. All of that remains true today. In the paperboard, pulp, and tissue end-market, we are gaining traction with our commercial strategy, again, with market leaders. The proof points we're seeing with SurfLock are showing manufacturers the positive impact our solution can bring to their offerings.We enable compelling economics for companies producing pulp-based products. We are a stand-alone solution in this use case, so, we can go faster as we're not working with other chemistries, unlike in wood composites where we're used together with pMDI, which carries its own pricing dynamics into the buying decision.It's an earlier-stage opportunity with less certainty behind it. We don't have the years of successful trials behind us as we do in wood composites, so, more work still needs to be done, and we need to see the consistency in the proof points, but we are increasingly bullish on the opportunity in front of us for SurfLock.Our products build strength in a matrix of pulp fibers. We've seen early success in paperboard and tissue applications. But let's focus for a moment on the use case in pulp, which is the input material to all paper products. The market for pulp products has macro tailwinds that are expected to drive long-term sustainable growth. Pulp feeds into tissue and paperboard for packaging. These are growing markets.The best and most valuable pulp comes from softwood. Softwood pulp in absolute terms and certainly in relative terms is expected to be in shorter and shorter supply given the market growth and the finite forest resources for softwood.In order to meet the growing demand for pulp products, manufacturers need to use alternative sources of fiber, which come from the more efficient, faster-growing hardwood fiber. While it grows more efficiently, it is a shorter and weaker fiber.In addition to more hardwood fiber, there's also an increased use of recycled fiber to make up for the shortage expected in the supply of softwood. The shorter and weaker recycled and hardwood fibers require modification to perform at the same strength level as the softwood fiber.These are the market dynamics that are driving the need for enhanced fiber with increased strength. And these dynamics play directly into the advantages that our SurfLock strength base offer to pulp manufacturers. In Q4 and now into Q1, we are gaining momentum in the pulp application. We're working with a global pulp manufacturer that is a leader in that segment of the market. We mentioned on our last call that they ran a successful trial in Q4 with SurfLock. They use that production commercially to seed the market and solicit feedback. We expected that process to take up to 12 months based on our experience with that account.What we've seen since then has been a pleasant surprise. The manufacturer has ramped up both their marketing efforts for the enhanced fiber offering with their customers, and they have put in place a customer support unit specifically for that business line. These are both positive signals of their conviction in this end-market. In January, the prospect came back to us and made a much larger order for material that is meant for new trials. That's a promising development. We've also begun steps with additional pulp manufacturers that recognize the value of our strength aids. The benefits our solutions provide can help them address the macro demand drivers I mentioned earlier.The quantum of the opportunity at a pulp mill is significantly larger than the other applications we serve. A large-scale pulp mill could represent an opportunity of up to tens of millions of dollars per mill. You can see the difference compared to wood composite lines or a paperboard mill that represents anywhere from $1.5 million to $3 million or in some cases, as large as $5 million per line depending on the usage level of our ingredients.In addition to the pulp application, we've also made progress in the paperboard and tissue applications. In the tissue application, the prospect pipeline moves faster. These are smaller, less complex lines and less change needs to be made to the production line with the addition of SurfLock. That means adoption carries less risk for the manufacturer.The value is derived from an improvement in strength, which provides a compelling economic improvement in the form of reduced fiber costs, increased line speed, and reduced energy, among others. So, that end of the market can move faster for us. However, the volumes used are smaller, think hundreds of thousands of dollars per line annually rather than millions. The established paperboard account, which uses SurfLock, came back on more strongly in January. We're qualified on multiple SKUs for them today on a very new line. They're working to expand their usage of SurfLock across more products on that first line. And in addition to that account, we've also expanded into several more paperboard opportunities through the start of the year. A paperboard line is larger, more complex, and carries a more complex recipe of pulp and chemistry. As a result, they take longer and carry more risk to prove than a tissue line.Based on discussions with various investors, I appreciate it can be frustrating to hear us report positive trial results and then not see an impact in the short term on our financial results. It's simply a matter of the validation process of these lines and the certainty that manufacturers require before moving to the commercial stage.It's also fair to say that these producers have faced a challenging environment in the past 1 to 2 years, where capacity reductions and restructuring have taken priority over recipe changes. But clearly, cost reduction will prevail.Moving to wood composites. Earlier this year, the key strategic account that is an international retailer backward integrated into wood panel manufacturing published their 2023 sustainability report. In it, they continue to raise the public profile of bio-based glues.The report references the introduction of a new bio-based glue at one of its factories as a milestone that will impact the company's future carbon footprint. It's not the first year they referenced bio-based glues. But in this year's report, they've made their movement to bio-based glues, one of the top 5 highlights. It's not very deep in the detailed background.It speaks to their conviction. They have a clear road map toward their 2030 climate goals, and they identify the increased use of bio-based clues across their supply chain as an important driver. That is a tremendous amount of change for suppliers in what is now a relatively short period of time.So, you can see why we continue to have such confidence in the opportunity for our DuraBind resin in the wood composite space. Our core focus in this end market is two-fold, supporting and expanding usage with our key strategic account that is already commercial. And two, working with a core group of identified prospects that are committed to the investment and movement to bio-based glues.We are allocating our resources to optimize the impact of our business. We're not running trials with anyone just for the sake of delivering a good trial result. We have a proven track record of commercial results now. Instead, we're working with the prospects that we have qualified as ready to make an investment in our product.We have multiple opportunities at this stage that are committed to change and following the agenda of the market leader. It's clear to us that a growing number of manufacturers are committed to the green agenda, and that is important for the long-term success of our DuraBind offering. In the past, our overall development efforts have focused on expanding our application range. Today, we're expanding more development efforts on enhancing the economic value of our wood composites offering and further across our product line. We already offer superior value on the carbon footprint.What really accelerates the movement to bio-based clues are economics that are compelling. We're investigating ways to make that economic argument as consistently compelling as our green argument, which is outstanding.We are competitive from a pricing perspective today compared to traditional petroleum-based resins. Now, that said, we are better positioned during one part of the cycle and at the other end of the cycle, we can be in a worse position. And with that in mind, our development focus is making our value proposition as compelling as possible.In the personal care end market, we continue to make progress with our marketing and development partner, Dow. They made another step up in volumes in 2023, albeit from a small base with some additional wins that Dow achieved with new customers and new SKUs with existing customers.Based on their pipeline as well as their enthusiasm for some of the larger opportunities they are working on, it's clear that they remain highly engaged. Their Maize Care offering is expected to be a key focus at the upcoming In-Cosmetics personal care ingredients show held in April in Paris.Dow is looking to expand the range of applications Maize Care addresses beyond hair care, and we look forward to seeing what they have in store for the show. Before turning it over to Rob, let's step back and take stock of where we were a year ago and where we are today. At the start of last year, the biggest challenge we faced was feedstock availability. It was issued #1, 2 and 3 at that time.Today, through both the overall recovery of the market and our work to identify and qualify new suppliers and new raw materials, the availability issue is behind us. The price of feedstock has improved, although it's still elevated compared to 2019 and 2020 levels.However, we've been able to successfully navigate that higher cost by passing it on to customers. Last year, at this time, we announced plans to internalize our North American production. Earlier this month, we announced the commissioning of the new line at our Center of Innovation facility here in Burlington, which came in under budget.We continue to work with our toll manufacturing partner in the Netherlands, and that relationship is strong. We see no need to change how we supply our European and Asian customers with our partners at that facility.With the new line in Burlington, we now have greater control and flexibility across the supply chain and the manufacturing process. We've already seen benefits not just from the production standpoint, but even in our learning and the pace at which we can turn around a commercial scale run, make a change from a product development perspective, and see immediate results all under one roof.We successfully shipped the first orders from the new line, and we're expanding the SKUs and making productivity gains, which is a result of the great work done by our team. With that, I'll turn it over to Rob to review the financials, Rob?
Yes. Thanks, Jeff, and good morning. Net sales were $2.8 million in Q4 2023 down 49% compared to the same period in 2022. Annual sales were $12.7 million, down 33% from 2022.The primary driver of pressure in each period was lower volumes. The decline in volumes was primarily due to lower demand in the graphic paper end market. According to third-party reports, production of coated freesheet paper was down 30% in North America in 2023 compared to the prior year.Based on the composition of our revenue base and the success of our diversification strategy, Legacy Graphic Paper should not have a material drag in our volumes moving forward. Gross profit was $460,000 in the quarter, a decrease of $460,000 from the same period last year.In the annual period, gross profit was $2.8 million, down 33% or $1.4 million compared to 2022. In both periods, the change was due to the lower volumes with a higher average selling price, partially offsetting the pressure in the annual period.Net of manufacturing depreciation, gross profit as a percentage of sales was 21.9% in the quarter, which was in line with the same period in 2022. In the annual period, gross profit percentage net of depreciation was 28.9% compared to 25.5% in 2022. The improvement in the annual period is primarily due to a higher average selling price, partially offset by higher cost of manufacturing. SG&A expenses were $1.3 million down during the quarter and $5 million for the annual period, which is in line with the prior periods.R&D expenses were $560,000 in the quarter, which was in line with the prior period. R&D expense for the annual period was $2.3 million compared to $1.9 million in 2022. The increase in the annual period was primarily due to an increase of new product scale-up costs incurred during 2023.Adjusted EBIT loss was $970,000 in the quarter compared to $334,000 in the same period of 2022. In the annual period, adjusted EBIT loss was $2.5 million compared to $880,000 in 2022.The increase in loss in both periods was primarily due to the lower gross profit as a result of the lower volumes when compared to last year. Cash used in operating activities was $980,000 in the quarter compared to $1.2 million in the prior period.In the annual period, cash from operating activities was $320,000 compared to cash used in operating activities of $4.9 million in 2022. This significant improvement in 2023 was enabled by lower working capital investments.In the prior period, we built up inventory levels significantly to manage through the feedstock availability issues that impacted the business in 2022. As of year-end, we had $33.3 million of cash and term deposits compared to $36 million as of December 31, 2022. In 2023, we invested $2.4 million in the NCIB to purchase and retire 968,000 shares, including an investment of $730,000 in Q4.We have demonstrated our ability to responsibly manage our cash reserves through multiple cycles while continuing to invest in our long-term growth cycle. With that, I'll turn it back to Jeff for closing comments.
Thanks, Rob. The results were disappointing. There's no way around that. However, the progress we've made with our key strategic account and prospects in wood composites and the momentum we're generating with the large pulp prospect and the accounts in the paperboard, pulp, and tissue market position us for a return to growth.We're working with the right players. They're investing in our biopolymers because they believe in the impact they can deliver to their customers in the markets they serve. As a result, our trial activity is strong across both of our primary end markets.The traction we have gained with our key accounts and prospects set the stage for us to deliver long-term sustainable returns for investors.With that, I'll ask the operator to open the call up for questions. Thank you.
[Operator Instructions] Our first question comes from the line of Brian Morrison, who is a private investor.
So, Jeff, you said that the year was polarized. And I guess if I was to summarize and have read through the materials here in your prepared remarks now, it appears Q4 would be the bottom.Your free cash flow bleed was less than $1 million for the year, including the build-out of capacity. So, your balance sheet remains immaculate. Opportunities seem to be multiplying and not moving off your $100 million target. Is that fair? And if so, I just want to focus on your outlook.
Yes, I think you framed it up very well, Brian. So, message delivered and received, it sounds like. Thank you.
So, let's start with the one end. You referred last quarter to pulp as the well of opportunities. And now it looks like the cadence of this opportunity looks to be accelerating.So, you previously said you were trialing with a major pulp producer, and now the release that indicates pearl pulp manufacturers. So, is this correct? How many are you referring to? You did frame that one line could be in the tens of millions of dollars. Like, how big could a line be? And then what are the next steps in the process to commercialization?
Yes. So, we did mention multiple pulp manufacturers and that is accurate. We're working with several now. It's a fairly recent development. So, some of those are at early stages. But with some very interesting results, we're actually spanning out into some other varieties of pulp, and we're showing some interesting results there as well. So, that's encouraging.Among the largest pulp producers, the ones that are very large and very efficient at what they do, the opportunity is in the range of kind of $50 million, $60 million per pulp mill in terms of the usage potential of our product. And that would be for very large ones.So, there's a range of sizes and efficiency rates of those pulp mills. So, tens of millions is the way we've characterized it. I'd say that's very consistent. The largest of them is sort of in the $50 million, $60 million range.
Are you in multiple mills that could be $50 million to $60 million? And what are the next steps to get this to commercialization?
Yes. So, there are multiple mills around the world and even within single customers that are in that size range. So, that's not a uniform by any means.The next steps to get there, I think, are continued momentum in what the pulp manufacturers have been doing with our product. And I would say they've been doing that at a pace that, as I said in the prepared remarks, is a bit surprising to us how well this is going. So, it's really getting these pulp products out to their customers. They've invested in some customer support.Resources to be able to do some handholding and help customers in using this and implementing it into their end products, whether that's tissue or paperboard. So, it's getting the product out there into key customers' hands and getting their customers to be using that pulp according to the value case that they've presented to them.And the value case is really compelling. They're out there presenting it now, and it's really exciting for us to see what they're talking about with their product, along with our product inside.
So, this is high-margin business for the pulp players as well. And then can you just explain, you did in the prepared remarks, but just to give us a little bit of goal post. What is the size of the structural shortage of softwood to fill that gap, like dollar value and potential to you?
Yes. So, you started by saying that pulp can be a very high-margin opportunity for producers. And the most efficient of producers, even though pulp is a highly commoditized product, they're making 50% EBITDA margins.So, every additional ton of pulp that they can sell by enhancing it and selling it into new applications is very, very interesting to them, obviously. One of the large pulp producers has characterized the opportunity to fill the gap as being something like 2 million tonnes of pulp, which is a lot of pulp. That would represent for the largest of producers, something like a 20% increase in their throughput.And so, therefore, a 20% increase in their EBITDA. And the way that that works is that demanding applications, in particular, require softwood pulp. And softwood pulp is long fiber and the strongest of fibers.Softwood forests around the world are in short supply, softwood trees take longer to grow. So, it's much harder for that softwood fiber to fill the gap of growth as tissue and paperboard packaging continue to grow. So, to fill that gap, they need faster growing hardwood fiber. So, trees like eucalyptus trees grow at like a 7-year reproduction cycle.So, those fibers are coming to market more quickly from very efficient fibers and very efficient forests and pulp-making operations. In addition to that, recycled fiber becomes a more important input to the paper manufacturing process, also short fibers that have been beat up as they go through the recycling system.So, those hardwood fibers and the recycled fibers need strength enhancement to allow them to perform at the levels of softwood fiber and fill that gap. So, in the simplest of terms, if they simply fill that gap on a parity basis, you can imagine that for a ton of pulp, they're making the same EBITDA margin that they did on the last ton of pulp that they sold. But if they can sell that at a little bit higher value, i.e., closer to the value of softwood pulp, which is more expensive, they can even improve their margins a little bit.So, that's why it's so interesting to them. I mean it's not only interesting. It's a need in order to continue to support the growth of pulp-based products, but those who jump on board and I think drive their ability to fill that gap are going to be the ones that earn the new volume. So, we're excited that they're excited about it, and I was there presenting it that way.
Just, if I look at packaging, it sounded like you were referring to industry destocking potentially being complete. Is that what you're seeing now? And are we seeing existing major customers ramp again and putting orders for us?
Yes. I would temper that a bit by, I wouldn't say ramp again. The industry, and I'll say, particularly in Europe, which is where we got started. So, that is where we've been more focused. But particularly in Europe, they went through a really tough time with just collapse of demand in late 2022 and all the way through 2023.So, we actually just saw some statistics on the European paperboard market from 2023, and it was down again 15%. That report says that destocking is in a better condition, but not all the way through yet, but it's definitely better times as we start 2024 than 2023, and we're seeing that show up in an uptick in the use of our product from our first customer.And I think more importantly, even the engagement of others who now have the time and see the runway to be able to be looking at cost reductions on their volumes of paperboard.So, it was slower and tougher to get online when companies were thinking about restructuring, and it wasn't as much a priority to change a recipe on a given line when they were thinking about whether that line was going to stay in production.I think that tone has changed and what we've seen is some increased trial opportunities for us as we start the year.
And then, I guess, tissue, I guess, to be frank, I wouldn't have expected to hear contracts on this one. Probably close, is the distributor model working? And if so, are the distributors increasing their equipment spend and commitments to your tissue straight date?
I think the distributor model is not only working, I think it's imperative. I think it's the only way to get our product out there with the support that it requires to satisfy the opportunity in front of us.So, I'm 100% convinced of that, and the distributors that we're working with, I think, are doing a great job to introduce our product. And that includes the investment in equipment in some cases. Yes, we discussed at the beginning of this week with one of the distributors their need to put some equipment in place at a new opportunity and how we were going to approach that together.So, that's a very live discussion. Yes. And I mean, to your first comment, we also would have expected some of these to cross the goal line and I don't know if it's a little more seasonal and cyclical in this space or not, but we definitely saw just a slowdown in activity and spending in December, which seemed to then pick up again as we started the year. And we've never been busier with trial activity.The distributors are having to make decisions on which are the top priorities that they could get across the goal line faster, and we're making decisions like that alongside them to be able to support them.
It sounds like these opportunities are so good. You have seen with your CapEx you spend; do you have the capacity from a manufacturing and from a people perspective to handle all of this? Or do you have to evaluate and be selective to compile your optimal customer profile?
I think to make good on the opportunity, the constraint is going to be having enough distributor partner engagement to get our product out there. It's not our capacity. That will come but I'm really confident that when that time comes, we're demonstrating it here in our own operation right now. We can put a line in place and it'd be up and running to meet another significant chunk of capacity very quickly.So, I really don't see that capital side of it as being a constraint. As we've got the operation up and running here in Burlington, we've added a few people on the production side, obviously, a necessity as we get into manufacturing ourselves.So, we've got a few good new team members here. But other than that, we have a lot of capacity still to grow into. So, we can support our large wood composite customer. We can support the large pulp manufacturer through some significant chunks of growth before we have to think about where the next line goes.
Can I just move to Personal Care for a minute? Are you seeing incremental contracts on the hair fix of the market? Any visibility on more meaningful size? And then I also want you to talk about, you have disclosure about colored cosmetics, what products does this encapsulate?
Yes. So, we don't have direct visibility into anything bigger being unlocked yet, but we do see just regular steady upticks in volume as new SKUs and new customers are being won by Dow and their distributors. So, from a small base, steady growth, I would say.But it's pretty clear they're banking on unlocking a couple of bigger opportunities as well, and they remain optimistic in that. And that's kind of the best visibility we have is that they are optimistic in it. What they have told us, though, is that they've seen really interesting usage cases of our Maize Care product, which if you remember what it does, it's an all-natural film former.And it's been used to form that film on hair to keep it in place. But there are lots of other places in the personal care world where you form a film. And color cosmetics is one of those. So think about mascaras, eyeliners, lipsticks, things you put on your face to give it some color in one way or another.And through some of the niche wins that they've had, we actually have seen some successes in some of those spaces already. And I think they're really just building on that. I think they're probably going to showcase that as part of their offering at In Cosmetics.
So, it's a pretty material market [Indiscernible] the investable market for you?
No, we actually haven't explored that deeply with them yet. And I would say like keeping feet on the ground, we're still really focused on the $460 billion hair care space should be a very, very compelling opportunity for Dow, their distributors, and for us.Like, we're offering all natural with same or better performance at roughly the same price as the incumbent polyvinylpyrrolidone in the market. And the value proposition looks almost too good to be true. So, I think that's the most important thing is making good on that. But expanding the runway beyond that for the future is also pretty exciting.
With the margin dynamics that's 75%, 80% EBITDA margin, would that be the same in the colored cosmetics market?
I mean, so far, that's the way we're looking at it. It's Maize Care. We've got a few different SKUs of Maize Care, but it's the existing Maize Care products, and that's sort of the pricing and margin sharing dynamics that we have in that space.
I just have 2 more questions, and then I'll pass the phone over. Wood Products, are we now on your major customer second line? Are they making moves to build out their external supply chain as well?
Yes. So, we talked, I think, last quarter, about trial activity starting on the second line. That happened in the fourth quarter. That's happened again in the first quarter, some really interesting results just last week. So, things are progressing on that second line.They are different products than the established first line. And so, there's a little bit of work to do there. But, yes, some of the results we're seeing suggests that that could move along nicely in addition to just continuing to grow our share of wallet within the existing lines.So, I think things are set up really nicely for that strategic customer this year. And then the other thing, too, is they are backing up what they said they would do and almost kind of holding our hand into the first supply chain partner that they want to be working with on bio-based clues, and we've got a trial program starting there now as well.
Capital return, I mean, it looks like you've done a lot of work behind the scenes in 2023 and now it seems maybe proof of concept. I don't know how you want it, but it's now turned into building up the commercial opportunity, revenue ramps, you should see this all fall to the bottom line and driving the free cash flow inflection point. You have really no CapEx, no interest, no taxes. I assume we'll continue with an NCIB on a measured basis?
Yes, I'd correct one point there. Our interest line is actually positive now. But, yes, the plan is and I mean, right up through the end of this quarter, we continued on with the NCIB pretty much according to our past approach to it. So, we don't see a change there.
[Operator Instructions] Okay. There seems to be no further questions from the phones at this time. So, I'll hand the floor back to our speakers for the closing comments.
Great. Thanks again, everyone, for joining us today, and look forward to updating you again soon.
Thank you. This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.