Alexium International Group Limited (AJX.AX) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the presentation by Alexium International to discuss the acquisition of the Microencapsulation and PCM business of Microtek and the associated entitlement offer, which was announced yesterday. Next page, please. Just to do a quick transaction overview. And on the call today with me is Billy Blackburn, the Chief Executive Officer of Alexium International and my name is Simon Moore, and I'm the Interim Chairman of Alexium International. Yesterday, Alexium International made 2 very important announcements of and what we think will be a very significant transaction in the development of the company. First, we were very pleased to announce the acquisition of the Microencapsulation and PCM businesses of Microtek. Microtek is an industry-leading company based in Dayton, Ohio. And our acquisition involves intellectual property, some of the manufacturing assets and key employees and customer relationships of Microtek. Importantly, the transaction is funded through an equity issuance to the current owners of Microtek, who post the completion of both the acquisition and the associated entitlement offer will end up with about an 11.6% interest in the outstanding shares of Alexium International, and we welcome them on to the register as part of this transaction. In conjunction with the acquisition, the company announced a non-renounceable entitlement offer. This offering is an important stage of continued development of the capital structure of the organization. The company will be raising $6.8 million, approximately USD 4.5 million. The entitlement is struck at [ 3.44 1/4 ] shares for every 5 shares held by the investors and at an issue price of [ $0.006 ], which constitutes approximately a 14.3% discount to the closing price on Friday and fairly consistent with where the shares have been trading over the course of the last 20 to 30 business days. The offer is fully underwritten by Colinton Capital Partners, Wentworth, Williamson, Billy Blackburn and 1 of our nonexecutive directors, Randy Lane. Outstanding shareholder loans and accumulated interest of $4.6 million as of December 12, will be converted to equity as part of the entire loan offer and the company will end up raising fresh equity of approximately AUD 2.16 million in cash on the balance sheet. And with that, I will pass over to Billy Blackburn to explain in more detail the strategic logic of the acquisition and how it fits into the strategy that he has been and the management team have been developing over the course of the last 3 years. Billy?

Thank you, Simon. Hope everybody in Australia is doing well. We'll give a brief presentation tonight to talk about the transaction rationale and what it means for the business going forward, the merged manufacturing and sales of Microtek and Alexium. So tonight, it will be fairly brief, and then we will come back in the new year, early in the new year, after the half year audit and foresee and give a much deeper dive into the business and the go-forward plan. So bear with us. We'll also be having a Q&A session at the end of the call here. I believe some of you have sent some questions in advance. And then Lisa Hubka will be fielding some of the questions at the end. She'll ask them to me, and I'll do my best to answer those. So with that, the transaction rationale, it brings together 2 of the industry's most established innovators in microencapsulation and phase-change materials. Microtek is really the founder, Marvin Kidd is one of the original inventors of microcapsule and microcapsule applications in the North American market. It dates back to the 1960s and 1970s. The original technology goes back to a company called National Cash Register, NCR, they were based in Ohio. And they replaced carbon paper with microencapsulated microcapsule papers that basically revolutionized some of the printing and transaction documents used for shipping. That's somehow morphed into change materials in cooling and delivering color and delivering all sorts of performance materials via microcapsules. Fast forward to today, they have manufacturing facilities in Dayton, Ohio, about 80,000 square feet under roof, a couple of tenants in the building that are other businesses from the founder. Alexium is going to occupy a large percentage of that manufacturing footprint, and we'll be taking over the manufacturing processes here and the employees of Microtek Laboratories. Bringing the 2 businesses together is really a vertical integration of Alexium into manufacturing and it's a vertical integration of Microtek into formulated products and moving Microtek's business closer to the end customer. So both businesses would benefit from the combined technology, combined teams and the integration of manufacturing and proximity to the customer. So we're bringing formulated products to the business in Ohio and they're bringing very stable manufacturing of microcapsules. We will continue to manufacture in 2 locations, one in South Carolina and the other here in Dayton, Ohio. So as you can see, this chart gives you an idea of what the combination of the two achieves. Going forward, from a sales perspective, this more than doubles the revenues of Alexium, the run rate over the last year and the current run rate. And the forward-looking potential is much larger than that. We'll report on that with the go-forward plan in the new year, but we're expecting significant growth and very positive financial results as a result of the merger here. So outcomes we expect after the acquisition, I'm actually in Ohio today. We've been meeting with the team. We met with all the employees today after the announcement was made to the markets and after signing the acquisition agreements last week. But what you can expect is cost-effective and secure supply. You're going to have an integrated organization, and this is -- I've been talking a lot about this in the Alexium's strategy and investor webinars in recent times. And talking about the transition from a technology organization to a sales and manufacturing organization and this is certainly a giant leap in that direction. So we -- not only will stabilize manufacturing for Alexium, we're going to bring scale through the plants in Ohio. And there's also pilot plants in development, micro works here where we can develop the new products and the next-generation technologies that Alexium plans to roll out. Meanwhile, in parallel running manufacturing that streamlined with great processes and quality and cost advantages. We do expect the technology development to drive aggressive growth and again, underpinned by manufacturing and sales in the two companies. Our customers will benefit from a secure supply chain from redundant manufacturing capabilities in the Southeast United States and in Ohio. And that's something we get asked for a lot from our customers is redundancy where if one plant were to go down, we're able to ship production and keep their products moving at the other. So this does deliver that for us. The merger energy -- entity is going to leverage vast technical intelligence. Both companies have significant patents and IP in North America and multiple other markets like Europe, also Australia. And we're going to be working on the next generation of flame retardant and thermal management here in Dayton in the pilot works. There are new technologies under development from Microtek right now and from Alexium that can be taken to market over the next 12 to 16, 18 months. We do plan to leverage that into manufacturing and bring our expertise to ramp up the R&D and development processes around that to bring them to market sooner. And we do expect improved financial results from the increased scale in manufacturing and cost efficiencies. In our due diligence and the work and looking at the structure of both businesses, we've already found significant savings in our raw materials by bundling those or going with the supplier to each business that has a better position. We've also found manufacturing efficiencies that are readily achievable in the new year. So we expect those to roll out in financial results as we report quarter-over-quarter in '26. So the continued sales and marketing focus. We're going to continue to focus on our enhanced Microencapsulated and PCM products going into global bedding and furniture markets. The Microtek business was more supporting microcapsules being sold in the form of slurries, which are usually lower PCM solids, wet slurries that go into textile formulations. They also sell wet cakes that are nominally 70% to 80% PCM solids, and they also sell dry PCMs. Those go into formulas that Alexium makes thus vertically integrating our business. And they also are sold to formulators that have positions in global markets that may be Microtek or Alexium don't have a position yet. So we will continue to support the formulators and then continue to work with the end-use customers that Alexium is bringing to the table and expand on the combination of the two. We want to continue pushing the expansion of BioCool products globally in mattress and pillow applications. We will be moving production of BioCool formulated products to Dayton and splitting that production between South Carolina and Ohio. AlexiShield for FR barriers will also be made in South Carolina and Dayton, the lion's share of that being in Dayton by the end of 2026. AlexiCool is our standard workhorse paraffin-based PCM. So we'll continue pushing growth there in mattress and pillows and furniture, also in foam applications. The stability that we've achieved and our ability to drive paraffin-based in Melamine shells over the last year has really opened up foam applications, which I've reported on in recent webinars. Microtek also has a suite of melamine based pipe PCM shells. We're going to be merging the production of the 2. They're very similar and expanding on that combined volume. So we expect significant sales growth and stability to come out of the AlexiCool PCM and electrical products. You'll hear us begin to talk about Nextek. Nextek is the microencapsulated PCM of Microtek, which will be the foundational feedstock for the formulated products. And then AlexiCool and BioCool will be the formulas that go to market under the Alexium brands. And then lastly, Alexiflam, we will continue our work there, but that product is made through a different process that would not be made at Dayton. So we'll continue making that in the Southeastern United States, and that's truly a synthesized material, is a high hazard process. And we've had success recently with the military and being down selected in making it to user evaluations. They've made more requests for more material from us, and we reported in the last webinar that we've passed the PyroMan again at North Carolina State University, which is moving that project forward. So really, I won't spend too much time on the products here, but the formulated products are AlexiCool and BioCool and the Nextek. So bringing Nextek into the picture is the foundation of microcapsules that are produced in Dayton, Ohio at Microtek. And again, those are slurries, cakes and dry powders that go into a host of different formulated products. So really, this gives you the integrated picture of the product lines for PCM, and these are the baseload for the manufacturing operations in Dayton. Our goal is to transition up to 80% of the manufacturing to Dayton by the end of calendar year 2026 and in the process, deliver favorable financial results in the merged business. So we talked last time in the webinar about expanding our addressable market. And what we were doing there is really paving the way for this acquisition to be announced and the integration of the 2 businesses. And then also the high solid PCM and high solid PCM formulas with thermal stability opened up the foam markets and some other global markets as well. So these combined microcapsule technologies extend the market really around the globe and to the other parts of the market traditionally, where Alexium didn't have a strong position. Alexium had been very concentrated in textiles and textile coatings in the mattress industry and in North America. With this merger, we're immediately into other markets around the globe. In addition to the new starts that Alexium has around the globe as well. And then foam to formulators has really opened up, and that will show up in our reports coming forward in the combined sales of the 2 companies. So all in all, we really have expanded the reach here and shored up the businesses manufacturing. With that, it's a very brief presentation tonight. So won't dwell on it much and I promise that we're going to return in the new year with more detail, but we thought it a good idea to reach out to everyone and put a little more color around the announcements that hit the market over the weekend. And from there, I would ask Lisa, if she could open up some of the questions and see if we can address the questions, the viewers may have sent in.

Okay. We've had a few that were submitted ahead of time and 1 entered through the webinar. Just a reminder to all participants, if you do have questions, you can hit your Q&A button. They are at the bottom and submit those in writing. But one of the questions that was submitted ahead of time was the entire business for sale with Microtek and what did we have to gain from it?

So no, the entire business was not for sale. It was the microcapsule manufacturing business. And we did approach them. Microtek had been a supplier to Alexium over the years and a good supplier in that and we saw the opportunity for consolidation in the PCM manufacturing market. So we approach them. Microtek's owners have multiple companies under their parent company, CAVU Group. And they're into other markets that provide cooling and electronics and also electronic and metering devices for temperature control. So markets that are pretty far afield from what Alexium does in the textile and foam space and FR space. So we did not pursue those businesses or try to acquire them. We went after the business that was strategic to Alexium only and that was rightsized for Alexium's growth in the next few quarters.

Okay. Another question is, does Alexium plan to eventually do a relocation to Dayton and are the premises in Dayton bigger than the Greer facilities?

So 2 questions. we will be co-located. So we will be in the Greer and in Dayton. We plan to keep our corporate front office in South Carolina. Sales group and the finance and development group in South Carolina. There will be R&D and development in Dayton. They have nice laboratories and pilot works where we actually can get into that middle ground between developing things on the bench in a lab to small manufacturing that doesn't disrupt the big manufacturing that pays the bills. So there's -- I call it the Skunk Works or mini works, but that pilot plant operation is very attractive to us to be able to prove out and make small batches for trials, for customers without disrupting manufacturing. But we do continue to continue with both locations. It gives us supply chain resiliency that our customers require especially large bedding brands that have large volumes and large placements depending on our technology. They want to see redundancy in manufacturing. So we're going to keep that. We will put the lion's share of our manufacturing emphasis in Ohio to baseload the operation and make sure it's profitable, but we will keep the 2 sites for derisking and supply chain resiliency. So no plan 100% wholesale move to date at this time.

Okay. How many extra staff will Alexium have as a result of the acquisition?

We are adding 12 employees from Microtek. So the operation there has been scaled back over the last 3 years, commensurate to market conditions. It's about half the size it was some 3 to 5 years ago. It's also been scaled back because they had some integrated businesses that were sold off during that period. So we're bringing on 12 to our team. I'm happy to report that none of the 12 people that are joining are redundant to any of the people that are on our staff currently at Alexium. It was a very nice fit. It was a very good fit in integrating the 2 businesses. So when you look at the org chart, there was really no 2 people within either organizations doing the same job. It's extremely complementary to bring the groups together. Both groups are very skinny, meaning we've narrowed staff down through attrition and market conditions over the last few years. And that's allowed us to merge together the business to really get the strength of the combined personnel. So there's some nice skills there. They're bringing in supply chain and manufacturing that are very complementary to Alexium's technological and finance teams and sales teams, so 12.

Do we have any signed and sealed contracts yet with any of our products, excluding Microtek's customers?

Do we have -- so we have a few -- there's legacy contracts, and we have a few that are in negotiation that will be announced into the market in the new year, underway, but at this moment, no.

Okay. And do we have any information on when a military decision is likely because the company seem more confident than ever and is our choice of material provider critical in this?

So what was the last part of that question, Lisa?

It's our choice of material provider critical in this decision.

Very good. Yes, it is. So we -- the military is signaling that they're going to put the FR fabric for apparel especially for the Army out to bid at the end of calendar year 2026. They are moving to user evaluations now. And what that means is they're ordering fabric from those that are in the development pipeline and Alexium is one of them, to make yardage to be cut and sewn into uniforms that will then go to a U.S. military base for 12 months of user evaluation on deployed solders, that are specifically going to wear these uniforms and give feedback. Also, while the military continues, their bench top testing and burn testing. The criticality of picking the right material supplier, meaning textile, I would -- I'm assuming that question means textiles is absolutely critical. The way Alexium has positioned itself, though, is that we intend to offer the Alexiflam coating to the textile supplier of choice of the military. On the development work, we're working directly with DEVCOM out of Natick, Massachusetts, which is the military development and testing labs. We've stayed at the pointy end of this to make sure we are tuned directly into the end users' requirements for improvements to the fabric, improvements to the performance and their ever-evolving specifications. But we've also worked with critical suppliers, textile suppliers in their existing supply chain to do the testing and to deliver the fabric that's going to the testing. When the Army does select the primary contractor for the selection would be a Tier 2, and we would work with the partners. We've been working with to codevelop the fabric that's going to be offered in the bid to the military. We believe that is the strongest approach. It also gives the military the ability to direct our coating to be used by other textile producers in their supply chain and gives us a larger chance of success. So yes, the material partner we pick is absolutely critical. And that's been the change really over the last 2 years that's brought us to this point of having successful results. So our coating works well. Having the right textile producer that's already in that supply chain has also been very critical. It's a good question.

Will this work with the military extend to workwear, which is also a huge market.

Yes, that is a natural evolution for this. Frankly, Alexium is -- most of the bandwidth has been put towards the bedding market and delivering short-term success in FR and cooling products for the betting market. We do want to take our products into workwear, which we call an adjacent market. So taking an existing technologies to an adjacent market. We've narrowed our focus over the last year to really focus on our core markets, in bedding and put our limited resources to that short-term success. But yes, we do have designs on moving into workwear. And all the work we've been doing for the Army and other military branches over the last 18 to 24 months is really narrowed in on our ability to have a coating that's wash durable and that's the key to success in industrial workwear is. You have to be washed durable and you have to be able to make it through industrial laundering, which are very harsh cleaning cycles that are required in workwear. The other key to that success is getting into production and bringing costs down. So you have to be very cost competitive to play in that space. And very much like the military, you have to pick the right textile partners that are cost effective and have scale that can move into that space and support it. So again, we would be an ancillary supplier of a coating in that space. We would also be replacing inherent fibers that are very expensive, things like motor acrylics and para-aramid that go into expensive things like Nomex and other products like that, that are hot, heavy and pricey. So our intent is to move into that market, but we're taking a disciplined approach right now. We're not putting a lot of resources there. But yes, it is in our designs for the future and it is a natural evolution segueing from our work with the military.

And the last question on the evening is, has Alexium considered going private now or in the future?

I'd be lying if I said we haven't considered it, but no. We have no plans to go private. We want to deliver success to the public market. We owe it to our shareholders, especially many of you that have been with us for a very long time. We realize this has been a long journey. So we want to see that through. We believe delivering success in this manufacturing scenario and delivering success in bedding and then on to the military is the best way to do that. Future plans for the business beyond that. I can't tell you right now. But no, we -- every intent is to stay public at this point.

That's all the questions everybody has submitted.

Okay. Well, on behalf of the management team at Alexium, we do thank you for your patience, and those of you that have been with us a long time and your loyalty. We are dedicated to delivering results this year. This acquisition of Microtek and the integration of the 2 businesses is really a pivotal moment for the company. It really gives us leverage to really get to the market faster. It's bringing the customers of 2 established businesses together. And as the market turns around and recover it gives us an even stronger position to deliver success and be in the right place at the right time when the market returns. So we intend to deliver value through an uplift at share price and good financial results in the calendar year 2026, and we appreciate your continued support. With that, I'll turn it over to our Chair, Mr. Moore.

Thank you, Billy, and thank you again, everyone, for joining our call today. We do think that this is an exciting turning point for the company. We feel the combination of the Alexium and Microtek Microencapsulation and PCM businesses. will create the market leader in this segment of the market, and we feel that on top of that, the progress the team has been making on the flame retardant side of the business is also very exciting. The materials for the entitlement offer will be distributed to shareholders in coming days. And the offer itself will be closing on the 16th of January. We will continue, as we always do with our disclosure regime and should we enter into any material contracts between now and that time, we'll be making public announcements to that effect. And with that, I'd like to thank everybody for joining today and wish you a good day in Australia, and good evening in the United States. Thank you.

Thank you, everyone.

Goodbye.