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

My name is Simon Moore, and I'm the Chairman of Alexium International. With me today is William Blackburn, the Chief Executive Officer. There has been a detailed written presentation lodged with the ASX and is available on the ASX website as well as the company's website. Willy today will talk to the presentation but focus his remarks on the key areas and developments that have affected the business over the last quarter and going into the future. We encourage questions from the audience, and please submit those through the website, and we will answer them at the end of the presentation. Thank you again for joining us, and I'll hand over to Billy.

Hello, everyone. I hope everyone out there is doing well. As Simon said, I'm going to speak to the key points on the presentation today. And I want to give an update today in more plain terms. As a historically technology-based company, we've been -- without a propensity to get more technical in our explanation of what's going on in the business. Today, I'd like to speak to what all these developments and technologies mean and what does it mean to success for the company. So the last several quarters, and you've heard us report throughout 4Cs, quarterly updates, and through our webinars that we've been going through a transformation, and we've shifted the strategy of the company. And that's the focus on our thermal regulation and flame retardant technologies, mostly focused in the sleep products and furniture markets, and then also our flame-resistant and wash durable FR coatings for apparel in the military and industrial workwear sectors. But more than that, we've narrowed the focus of the company to really just focus on key markets in the near term to deliver success. And really, what that means is we're creating more focus by focusing on less. When I arrived at Alexium, it was very apparent we had great technologies that needed to be developed further into actually manufacturable and sellable products. So we needed to work on the commercial bits of the business to focus on selling those, but also making them on cost, making them on specification, and on time. And we've been in that pursuit for the last several quarters, and we're making significant strides there. We've had a number of breakthroughs with the technologies as we've moved them from design into actual products that can be readily manufactured and sold right now in our current supply chain. So we've rolled out some new FR technologies over the last 12 months, and we've made significant strides in our microencapsulated PCM thermal technologies, and then also new developments for projects in our bedding cooling products with DelCool, specifically in mattresses. So staying on this pursuit, we continue to work with our customers and component manufacturers to roll these products out to the market. As an overview, year-to-date through the first 3 quarters, the focus has stayed to grow and diversify. And as a recap, diversification is not only with the products and technologies we're pushing into the market, but it's diversifying within the core markets, the customer base, and the global market. We've been concentrated historically in North America, and we now have active projects across the globe, Europe, Asia, and Australia region. Key focus of the business, retain the customers we have despite a really slow and weak bedding market and consumer indexes remain quite low right now, but there's a lot of pent-up demand in that space, and we still remain poised to take advantage of growth and a recovery of sales that we had circa '21 at the peak of the market before market softened in '22. So said differently, when the market recovers, we intend for those customers to return to historical levels and then grow on top of that. Additionally, though, we've broken into new projects that we expect to be closing over the rest of the calendar year, that should drive significant growth in our core market in bedding. On top of that, we've been focused on product and customer diversification across the globe. And what does that mean? We're concentrated in the bedding markets in microencapsulated PCM and thermal products, but we've been diversifying the products there with FR opportunities on textiles and foams, mainly in the furniture space and bedding space, but also opportunities coming up in the transportation space. So international expansion is driving that diversity. And then we're also moving into those adjacent markets outside of bedding with FR. The focus there has been in apparel for the military, apparel for flame-resistant workwear textiles, also FR applications on foam that goes into furniture, bedding, and the transportation markets. And then lastly, as we've transformed the company to ready it for growth and be ready to scale, we've worked to form new alliances with our textile and foam producers. And what we've done there is we've gone and reached agreement with a handful of producers that sell components in those spaces to push our products and technologies into those components to get differentiation in cooling and flame-resistant protection. So what we really mean by that is we are positioning ourselves to help them sell more components in those spaces, but we're also having some of our core vendors in those spaces create base products that carry our technologies into those markets where we can sell the components to ultimate brands or users. And that increases our revenue and also increases our speed to market and control of the customer channel. And I have neglected to click through the slide. So I'm doing that now. Forgive me. So key initiative updates and global trade and tariff impacts. And I'm sure you all have been tracking what's going on in the United States with our new administration and a lot of the global trade standoffs that we've been in, particularly with Asia, and how that's playing off. For our key initiatives, we've made noteworthy progress in our diversification of the products. In short, we focus on our thermal products and bedding, and furniture, and we've diversified the customer base to open up opportunities where we've been historically concentrated in textile in that space. We now have products and live projects in our pipeline that will close this calendar year in the foam space. In applications, especially in mattresses, the foam segment of that market is much larger and presents a much larger growth opportunity for us near term. Into the global trade scenario, our products are made in North America, mostly in the United States, some in Mexico where we have free trade agreements. In short, the impact to Alexium's business from the global trade, you'll hear some say global trade war, but I believe it's more of a negotiating tactic. But the global trade negotiations actually have a net positive for Alexium. From the supply side of making our products, we have very few impacts to our supply chain. We have not been sourcing any long-range materials that are subject to any high tariffs, specifically China. And we have a few materials that we've gotten from China, but there is such a small percentage that the impact to our costs are negligible, less than $0.01 in most cases. So it really hasn't impacted our cost structure. For our supply chain, we have a few customers that have been using long, long away international finishers, particularly in textiles, to do add-ons of chemistries. We've seen a little bit of impact there, but those are very small percentage of our business and really are impacting our go forward. And in the recent -- as recent as this week, relaxation of those tariffs has really the markets here in the United States, and it's moved the customers back to their typical order patterns. I'll be very specific. We only had one order delayed going to China, and that was for a finished product that actually comes back to the United States. So that stalled for some 30 days and is now moving again. Otherwise, across the rest of our products, very little impact. We expect that to actually -- if the trade tariffs stay in balance, we expect a net positive to our business because of our Made in America position with most of our products now. And the markets we're looking to export to the tariffs should not have a significant impact to those products. So, driving near-term growth and speaking to our products, one of the things that's important to understand in the transformation that we've been through over the last several quarters at Alexium is we're moving into more of a product-based company from a technology company. So that means we had to address the supply chain to make sure it was robust. And as I just said, it stood up to these trade standoffs recently, but also that we are able to readily make the products at scale. So we've been working on our manufacturing. And as a reminder to those that have been with us a long time and as an introduction to our new friends here, we use contract manufacturing. So having supply partners that can make our products and then supply partners that are ready to scale is critical for us. So we've been readying the organization for that type of growth and to make a lot more volume of the items that are in our pipeline that are imminent. A few of the products that are core to the business are microencapsulated PCM, that's our AlexiCool and BioCool products. In short, those are coatings for textiles and foam that provide cooling and furniture and bedding. In long range, we'll develop further products there and move those into apparel and other applications, possibly electronics and packaging as well. But for now, we're focused mostly in the market of bedding where we have the best relationships. In short, the change on the products that we've made over the last 12 months, we've integrated to make our old microcapsules and our paraffinic products. We've always made our bio-based products, but we were purchasing capsules in our paraffinic products. We now manufacture those and have vertically integrated our manufacturing. That has allowed us to make higher solid formulations, which have opened up foam markets. In short, the foam market segment of the bedding space is much larger for PCM usage than the textile space. So you're going to hear announcements over the rest of the year for in and on phone applications that are significant growth for the company despite a soft market. The other is we made a plus derivative of our PCM, BioCool Plus. In short, that's an enhanced formula that has exponentially higher cooling capacity and retention time for the product. So it sets that product apart from other PCMs in the market. Moving into our FR space. We have 3 products in that space, AlexiShield, AlexiGuard and AlexiFlam. AlexiShield is our most recent product we developed over the last 16 months. And we developed that to be ahead of proposed bans and since some of those bans have passed state legislation in the United States in the state of New York, the proposed ban in California. We developed AlexiShield as an advanced form of our AlexiGuard, our original coating that basically ban anything that's been banned -- excuse me, free of anything that's been banned and free of anything that's proposed for bans. We think some of the bans will be relaxed under this administration which could slow down demand across the states and potential federal bans in the United States. But there are other countries, mainly Europe and Australia, where these materials had already been banned. So we have FR coatings ready for those markets. So AlexiShield is that product. And it's positioned for furniture and textiles and going after other home furnishings like curtains and also hospital applications. AlexiGuard is the traditional form of that, that does contain some of the materials that are being proposed. But in other continents, some of them are not proposed, but it's a great textile FR coating and a softener. So it has a dual purpose, and we still have active projects and sales in that space. And then lastly, AlexiFlam is our wash durable coating for textiles for military space and for workwear, industrial workwear that's flame resistant and wash durable out to 100 cycles. And you've heard a lot about our military in the past. AlexiFlam is the product that's in that channel the FR NYCOs with the U.S. military. The Alexium pillow is a prototype where we rolled out our DelCool technology and our Alexium textile with PCM and coatings to the market. We originally started that as a prototype to just demonstrate the technology and get customers interested so that they might include it in the pillows they manufacture and brand and also as a lower cost, easier entry to show people how the technology works so that they can adopt it also in mattresses, which is a much larger volume. We then learned in making the prototype that we could make a pillar that was cost effective, very unique and that a lot of folks were interested in as a private label product. It's also part of our strategy to move closer to the customer and have a little more control over the customer channel and more revenue per unit. Coming at that from a little bit of a different angle, that allows us to show the technology to a customer and harvest more of the value that our technology offers in the form of the 2 products, our AlexiCool PCM and our DelCool dehumidification technology. So we've been showing that to folks that brand these types of products around the world, and we've got several parties interested in it right now. To be clear, Alexium has no intention of selling that retail at this time. It would be a wholesale scenario under a private label to brands. And again, we've had significant interest there and the active projects in our pipeline should start to materialize over the coming quarters. DelCool is our dehumidification technology that provides best-in-class cooling, but also humidity control. That's become a new interest in the bedding sector where people are interested in more than just cooling. They're interested in humidity and creating thermal comfort through dehumidification. So we've had a lot of interest there. We've had a lot of projects start over the last 12 months where we're in testing. And that's also in the Australia and New Zealand region, Europe and multiple projects in North America. Lastly, I want to give an outlook on the market. Just putting it as plain as possible, Alexium is at an inflection point. And it's the tipping point for the company. We've been in a long journey for a long time, and I know many of our investors here have been quite patient and on the long journey with us. The company is at a tipping point, and that inflection is finally readying the company for scaled growth. The unfortunate part is the market has been tough for the last 2, 3 years, especially where we're concentrated in bedding. But that too will turn. But the company is very poised to make that turn and finally deliver on all the promises of these years. So microencapsulated PCM, what does that mean? Again, historically, we were textile focused and highly concentrated with one major brand and highly concentrated in the textile part of that brand, highly concentrated in North America with one product. Since we've diversified that product, we've diversified the customers that we're working on, not only in North America but across the globe. And we've diversified into other materials and the components, mainly foam. The breakthroughs that we've made in PCM over the last 12 months have opened up a really large market opportunity for us in foam applications. And I want to point out that the foam -- the PCM usage in foam is exponentially higher than it is in textiles. And the market has moved to more foam mattresses. So naturally, it's growing in that space as well. We're on the cusp of growth there despite the conditions in the market, and it's because we're grabbing share. In the mPCM, microencapsulated phase change materials market, it's a niche market. It's ripe for consolidation right now, especially after all the build over the last several years, 2, 3 years. We're one of 5 global producers of microcapsules. There are several formulators around the world and distributors of formulations, but there are very few companies around the world, 5 likely to go down to 4 or 3, as few as 3 in the next year or 2. Alexium is well positioned to consolidate in that market and become now a dominant player in that niche space. Our products, we make them all the way from the molecular level to the microcapsules all the way to the formula. That has the company well positioned for a market recovery and to grab more share as the consolidation plays out. And that's been really due to our breakthroughs in manufacturing and the technology of our mPCM and then the additional formulas that have opened up the foam markets over the last year. For our flame retardant sector for the private piece, not the military, our market opportunities there are exponentially higher than they are in the thermal space, namely our mPCM market. And what I mean by that is the FR application for our chemistries and products, AlexiShield, AlexiGuard and AlexiFlam, those market spaces are much bigger than the bedding market, much bigger than the furniture market. Those FR applications are across several spaces that are mainly transportation and apparel. We spent several years developing FR technologies. And when I arrived at Alexium, they were all on the shelf. There were no active projects when I got here. And we spent the last 2 years really taking those off the shelf, getting them ready to go to market and then opening up new opportunities with the customers first in the bedding space and then in parallel also with the military contracts that we developed. So also the market trends around the global trade and a lot of low-cost fabrics that are FR and FR coatings, out of basically companies that were competing with America, driving low-cost options in. Those trade tensions have actually opened up new opportunities for us for domestically made products. And then also the change in regulations are in our favor. So we have tailwinds in the FR space, especially in the furniture and bedding markets. In our pipeline, we have opportunities that can multiply the size of this company over the next year to 2. So we're excited that we'll be announcing some of those closings in the coming months. Lastly, and this is the one I know is dear to many people in Australia and folks that have been on this journey with Alexium a long time, our flame retardant coatings for the military sector. Look, we've invested significant time and resources in developing this technology. We've been working in different areas of that supply chain for years. The change that happened over the last few years is we repositioned our coatings to work with proven textile manufacturers that are already in the military space that were not in the competitive space to us, but that we're looking to add FR elements to it, and they could work with us to develop a kit for the U.S. military, possibly global applications as well, to go after that large product with the U.S. military for FR apparel. The goal remains for the U.S. military to have an FR uniform all soldiers and marines that is cost-effective, lightweight, more breathable for warm weather kits, tear-resistant, and at a basically performance and cost that could be put across all listed personnel. And that remains the goal. What we're seeing with this administration is they have a pause on the defense department in the United States right now as they audit the Pentagon and the Defense Department. And then what they're signaling is a significant amount of spending to rebuild the U.S. military coffers. So we're anticipating that now. We're seeing signals from them that spending is going to be released in the second half of this calendar year in the United States. We've been in development. You've heard me talk in previous updates about development work we were doing, namely with the Army in the United States to improve the aesthetics of the fabric. We passed the pyro burn, which is the most stringent burn test in 2023, late 2023. That moved us into the improvements we needed to make on the fabric for the way the fabric feels, the softness and drape of the fabric, but also the breathability, and the last piece that's become a complicated piece for everyone that sells printed fabrics into the military is the reflectant criteria. They're using in the military and the more theaters now, they're using advanced cameras that can see heat signatures and reflects. So that's changed the print requirements for the camouflage and the patterns that are on these military fabrics. And that's created a technical challenge for everybody in that space. I'm happy to report we're very close on delivering success there with our FR coating also compliant with our heat signature and reflectance criteria. We now enter a Phase 2. Last year, we got a small grant to do the development work for the U.S. military directly. We delivered on Phase 1 attributes and improvements that they were seeking in the first phase. We're now entering Phase 2. We're waiting on the green light to submit our proposal for funding for that, which would allow us to finish up the work. And I would tell you, in the first phase, we were within 90%, 95% of hitting all the specifications for that military fabric. What does that mean? That means Alexium is well positioned when the military comes and puts out the request for proposals, which lead to contracts for the adoption. The company is better positioned than it's ever been to win business with the military. The other thing that's happening there is the military needs competition in that space. There are incumbents that have dominated that space for decades, and to have options with a company like Alexium, where we have a coating that could be applied across a multitude of different textiles and different textile suppliers to the military, has us in a very good position to finally win significant business in that space. I can't guarantee anyone how the government will make the decision, and the timelines that will play out at the mercy of our Congress and the executive branch. But all signals point to a large spend on the horizon and a rebuilding of the U.S. military coffers. So I can tell you one thing, Alexium is ready to respond. And our work over the last several quarters has positioned us for that. That also opens up workwear, which is really the larger volume space. And if you can do the FR apparel for military and get that wash-durable attribute, that positions it for wash-durable workwear for the industrial space. And that's one of the pursuits we'll be working on for the remainder of this year. So in summary, it's been a tough market. We are continuing to weather the storm. The team here remains poised to scale and close projects. We're ready in the manufacturing to deliver volume, and we have multiple opportunities in the pipeline right now to deliver that volume. So over the remainder of this year, we'll start putting out announcements to the market as we -- I heard Australia say originally paper those deals. Once we're learning, means put contracts around them. So we're looking to pay for the deals. And as soon as they're signed, we're going to announce them to the market. Also, some of the business in your region, national projects in the Australia and New Zealand region are starting to enter the late stages of testing. And we're very excited to bring the business to the Australia region and being an Australia-owned company. Hopefully, we'll make those announcements this calendar year as well. So stay tuned. We really appreciate all your support and your patience with us, as we turn this thing into a success story. And we're going to fill some questions. I'll leave a few parting words or we'll take the questions, and then you can bring [indiscernible] Simon. So let's see if we have any questions come through the panel.

Yes. We had quite a few questions come through. Some of these, I think, you've already answered in the latter part of your presentation, but we'll go through the ones that haven't been answered yet. One question was, Do you have any customer revenue yet from AlexiShield and AlexiGuard?

AlexiGuard, yes. And that's in a mattress FR barrier in a sock. It's small, and it has the opportunity for growth. That textile will be finished in Latin America, specifically Mexico. AlexiShield, we're in the late stage of a multitude of barriers. So FR socks and open with FR barriers and mattresses for AlexiShield. We expect to be announcing 2 to 3 AlexiShield closings over the next quarter, 2 quarters at the latest. So yes.

And some small trial revenue for AlexiShield as well. Another question is, it was stated previously that we would have an exclusive arrangement with customer for FR sock. Is this still current? Or is it not going ahead?

That is current, and that is the AlexiShield project I just referenced. So that is an FR sock for a large brand that uses sock to the foam mattresses. And we're in the late stages of testing there and moving to mattress burns. The ultimate test there is to wrap the bed, burn it pass the SM1633 test, I believe, to quote the standards, and that's the Mattress burn standards under the safety testing in the United States. So that's in the late stages. We're expecting positive results, and then we move into commercial discussions on adoption from there.

There were a couple of questions about concern over our cash flow with cash outflows exceeding the inflow, and the fact that in the last 4C, we reported that the calculation using that quarter's cash outflow that summated was for approximately 1.5 quarters at that rate. And what do we intend to do about that?

So we'll really address that as we move into the year-end. But I can tell you, we've received assurances on the funding much longer than that. We'll formalize that and announcement to the market soon. I don't know if you want to add to that at all.

I guess a very broad [indiscernible] at the moment, the company has received some support from the 2 largest shareholders at the present time, the shareholders remain very supportive of management is up to with the business, the progress the company has been making and at this point in time, propose to continue to support the business into the future. The company has sufficient cash on hand at the moment to meet its obligations. And as we look to grow the business over the coming months, we'll have to address whether that cash is sufficient. But at this point in time, there's no immediate funding need.

A couple of questions, I'll work a little differently, but around when do we expect to really start seeing a significant increase in sales and become cash flow positive?

So significant increase in sales is imminent. We're in contract negotiations right now for a large volume, and that would be in our mPCM space for our AlexiCool products. So we'll be making announcements in the coming months on that. That presents a significant opportunity for revenue growth. Cash flow positive is come out in our forecast in the new year, but we expect the tipping point to be sometime over the next 3 to 4 quarters at the latest. I can't pin an exact date of that, but with what we're closing right now and the way the numbers are trending and with the market not worsening any, we expect that within the year.

All the questions that have come through we have answered in the presentation.

Well, I might just wrap it up. Thank you again, everybody, for attending today's webinar. And if you're looking at this on replay, thank you for seeking it out and spending the time to listen. We at Alexium at the Board have been quietly very positive about the progress the business has been making. We'd like these things always to go faster. But unfortunately, both the combination of the market and, generally speaking, the fact that the sales cycles in this industry are quite long has led to the progress being a little slower than we would have liked on all fronts. But most importantly, directionally, we are headed in that right direction. And I believe as does Billy, that we're on the cusp of entering into some significant business arrangements with large customers. We will continue to keep people appraised of the progress in the business. And as we enter these arrangements, we will disclose them to the extent we can on the ASX. And the next major update will be likely at the time of the full year results or at the end of the second half -- at that point, we'll enter into another lengthy business update and give people hopefully a comprehensive review of the progress that's been made over the fourth quarter. Thank you again for your attention and for joining us today. If you have any questions in between now and then, I'd encourage you to reach out probably best to make those to me in the first instance. And we will, I think, set up an e-mail address that we'll put on the website where people can send some questions and reach out to us there, and I'll coordinate with Lisa, our Senior Vice President of Finance, to respond to those questions as they come in. So again, thank you for your attention, and have a great day. Thank you. Thank you, everyone.