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

Good morning, and welcome to the Alexium International Group Investor Webinar for the first half results for the financial year 2026. My name is Simon Moore, and I'll be presenting today in conjunction with the company's Chief Executive Officer, Billy Blackburn. I'm currently the Interim Chair of the company and look forward to sharing this information with you today. Just by way of background, the last 6 months has been both a tale of great successes and a few challenges for the business. On the challenges side, the end markets for the company's products remain difficult, and that has been reflected in the sales and operating performance over the first half. On the other side, there's been great success for the company with its recent acquisition of Microtek and through the continued strengthening of our management team such that they're in a position today to take advantage of the opportunities the combination of Alexium and Microtek bring. I'll move firstly into a discussion of the results and then hand off to our Chief Executive Officer, Billy Blackburn, to discuss his initial thoughts about the acquisition of Microtek, what we've found there, and then to outline a little bit of the vision for the business in the near term and where he feels the revenues in particular, and some of the combination benefits are going to play out between now and the end of the financial year. Billy, could we please move to the next page? And we're now on Page 3, just quickly to touch on the results for the first half. As alluded to earlier, the operating performance of the business over the first half was disappointing. We had anticipated a stronger recovery in end customer demand. And unfortunately, despite strong plans on behalf of many of our clients, that planning did not translate into customers, for the end products actually, buying product. We ended up with sales decreasing year-over-year. Pleasingly, the company did a good job at managing the expense side of the business over this period. And over the course of the period, we've reported an operating loss before finance costs of just under USD 1.9 million and a loss after tax and comprehensive losses of $2.17 million. That loss is widening from the prior year of almost $500,000 and we were disappointing in that particular outcome. As Billy will allude to going forward, we've started the new year strongly. The first month of January was quiet. And then it appears at the moment, both our customers and the Microtek customers are returning to business and volumes are starting to move in the right direction. I'll leave it to Billy to add a little bit more color on that. In conjunction with the acquisition of Microtek, the company successfully completed an entitlement offer. We thank shareholders for their participation in that offer. As you will have noted, the company's largest shareholders and the directors and Billy were all significant participants in the offer, taking up their rights, but also providing underwriting capacity to the company. The capital raised will be applied for working capital and the company enters this new trading period, post the acquisition of Microtek, in a position where it has very little debt on the balance sheet and with cash in the bank and really the opportunity ahead of it. And with that, I'll pass to Billy.

Thank you, Simon. So tonight, we're going to talk through the early stages post-acquisition and the outlook for the second half of the fiscal year leading out through the summer here in the States. So good evening to everybody in the United States, and good morning to all our friends in the Southern Hemisphere. Thank you for joining. So we completed the acquisition of Microtek and the microencapsulating phase change materials business. Really, we signed in December, but we formally closed in late January on the 28th. So we're really just a little bit over a month into this journey, and it's been quite positive. And I'm going to lay out tonight the outlook, but also where we are early in this, and did we get what we believe we were buying. I'm going to answer that question and -- well, let's go ahead and tell you. Yes, we did, and I believe it's actually better than we thought it would be, which is -- these things kind of go -- when you acquire something, you find out after you close what you really have. And we believe it's been a very good purchase and it's created a lot of momentum, and it's catalytic to our growth, actually going to expedite the turnaround for Alexium and good results sooner than anticipated. So what all did the acquisition add? We acquired -- it was an asset transaction, has been detailed back in the announcements in December. So we acquired the intellectual property of Microtek. And Microtek is one of the original microencapsulation businesses in the United States and really in the world. And it was born out of -- actually, the original business was doing microcapsules for paper that replaced carbon copies. So it was microencapsulated inks and paper that when we would put the pressure on it, it would transcribe to the next layer. So that was some of the early technology that was borne out in a company called National Cash Register, NCR, back in the 1960s and '70s. And then the owner of Microtek took the business into other markets from there. So there was deep intellectual property there, a number of patents. In the U.S., patents have a life cycle of about 17 years. So some had timed out, but there were a number of new patents that came with the business, and we bought that intellectual property. And some was akin to the technologies of Alexium, and some were quite unique and really broadened our technical scope. We did take a long-term lease at the Dayton, Ohio manufacturing facility, and that's instrumental to our integration backwards into manufacturing. We've been using contract manufacturing since the inception of Alexium, and this allowed us to bring manufacturing under roof. So we leased the facility, the actual building and premises, but also, as part of the asset transaction, we leased all of the equipment that we'll be operating, and we're up and running and again, over 30 days of production under belt now. We bought the customers and all the relationships there, all the key employees. Everyone that was employed at closing came over, and we bought all the active inventory of the business. So the combined business now has 16 patents. So that's Alexium and Microtek, and then we have several pending that we're working on finalizing now. It allowed us to significantly improve our microencapsulation technology, integrate our manufacturing and then overlay our formulating technologies to that manufacturing. So it was a nice step forward for Alexium in vertical integration. So the rationale behind the transaction was really -- and one of the colloquialisms we've been using here is 1 and 1 equals 3. And that's what we're really finding here. So it added a lot of strength to Alexium and the Microtek businesses to bring the 2 together. So you can see it rounds out the manufacturing for Alexium. The sales strength was brought by Alexium to Microtek. They had attrition over the years and weren't as strong in that area, and we're more of a manufacturing-centric business taking orders. The intellectual property is each piece from the 2 rounds out the puzzle. And then the financial strength is really an expedited time line to results, and we'll lay that out here later in the presentation. Another thing that it did is it consolidated the market. The mPCM, so microencapsulated phase change materials market is a niche market, especially in the furniture and bedding space. And there's really 3 key players that make microcapsules for that market in North America, and this consolidated the 3 to 2. So really 2 of the industry leaders became 1. So that reshaped that market and allowed for us to leverage that and vertically integrate to speed up our progression. So we're taking the IP to the market and also combining our formulated products on that. So really what did you get from Microtek? You got great manufacturing. You got great microcapsule technology and Alexium was a little closer to the end market, to the brands and the final manufacturers that make bedding and furniture for mPCM. So we brought that to the Microtek equation to bring formulated products that move it and integrate it further up channel to the end customer. So that's really the result and the transaction rationale and early in our transition and integration right now, it's proven to be true. So an integration update. At 1 month in, we are happy to report the transition meetings with the customers have been overwhelmingly positive. Most of the customers see this as a good move for themselves, a good move for both Microtek and Alexium, and good for the market. They know that the strength of the 2 is going to be a better result for them, better products, better service, better pricing, better leverage. So we've held introductory meetings with all customers at this point. And I'm happy to report we haven't lost any customers. Everybody remains signed up. And actually, with the market outlook turning up right now and a lot of activity starting to ramp, it was perfect timing. So we actually are growing sales on a lot of the legacy customers of Microtek now, forecasts are ramping. So we're also collaboratively working with that customer base to improve our manufacturing efficiency and quality. Microtek, like Alexium, had weathered a long storm and a drought in the bedding market, and it had taken its impact on their ability to maintain capital and keep things at tip-top shipshape. Now we're moving the capital into the business. We brought the results and extra hands and legs from our team to make a lot of improvements in the manufacturing efficiency, improvements in the quality. And that's one of the things that the customers are responding quite well to. They're already seeing that improvement. We're already circulating samples, data reports and shipping initial volumes and the feedback and the results have been quite positive for such a short window of time. In the operations area, we've identified several process improvements that we're going to implement by the end of FY '26, so our mid-summer here in the States in June. We've got some really aggressive goals, and we're already deep into them for process improvements. With what we were bringing to them, the added volume of Alexium to that plant is allowing the throughput, which gives the pounds and the dollars to make significant improvements as we move forward to ramping. So the dollars and the volume to make efficiencies are funding it, and the customers are quite tickled about that. There's techniques that improve the efficiency and lessen the operating costs and approaches that utilize our legacy contract manufacturing processes and larger capacities. to achieve immediate scale. And I'm going to lay out a little bit what it means. We're going to put a term in front of our investor base tonight that's called co-man, and that's really just a nickname for contract manufacturing. But our strategy is the deployment of our in-house manufacturing with the newly acquired Dayton facilities and our contract manufacturing partners. And the marriage of the 2 gives us some really good leverage to gain some short-term efficiencies that are really low capital. So low capital gains that result in earnings and higher revenues in the window between now and June. Also, these techniques implement immediate quality control, and that's going to reduce rework and quality issues. So we've made a few improvements to the processes by merging the best practices of both companies that are immediate quality improvements. Again, the customers are quite tickled about that. And then on the facilities and systems, after our detailed review, we're moving to a new ERP system. Not new to Microtek, but new to Alexium. We didn't want to take a third option because it would have been really starting over from scratch. So we did a parallel review of the enterprise system of Alexium side-by-side with Microtek's legacy systems. And we determined actually the Microtek system was a better fit for the manufacturing organization we're becoming. It had adequate CRM attached to it, but it had a superior accounting system and a superior manufacturing resource planning module. And that's really what took the decision to go with theirs. It also allowed us to start a new instance of that software to really take this opportunity with the merger to start a new and have a clean, more simplified approach to scale upon as we grow the business. So we're moving to their ERP system. We'll run ours in parallel this year up until our June closing, closing out FY '26. And then we'll switch over to the new ERP and keep the legacy data in the background. We thought that was the best way to derisk the transition and to give us time to try on the new system and work out all the kinks before we start FY '27 and start to pile on even more volume. And then the control systems in the plant, they were adequate and they'll be maintained going forward. All the facilities were in good working order. We'll be making some minor upgrades to small equipment over the coming weeks. And those are minor things like seals and pumps and repositioning some lines just to gain some initial efficiencies and process improvements, and we're really looking at process safety in the facility. And it was quite -- actually in good shape and a good asset that we've purchased. We're just tuning things. So it wasn't a major turnaround required there, just some tweaks to get it ready for, again, increased volumes. So we've rewritten our operations plan midyear. We came out of December into January with -- really, we had to do a whole tide change around operations with us taking on direct manufacturing under roof and staffing, and we had to adjust the strategy and the whole plan for the second half of our fiscal year to make sure we're ready and make sure we have a good plan and the right people in place for that. So we're going from a primarily outsourced production model to manufacturing-centered business. And that really means we're moving towards a goal that's probably going to be about an 80-20 split by the end of this calendar year, so by the end of December of '26. We expect to have about 80% of our chemical manufacturing. So let me be clear, it may not be by dollars, 80%, but it will be by volume. So that's our microencapsulated PCM, our formulated coatings from microencapsulated PCM and then our formulated flame-resistant products. We expect to have 80% of that production in Dayton by the end of the year and 20% in co-man contract manufacturing. And the whole point there was to improve margins, improve our control, get everything more scalable and ultimately, that culminates in long-term competitiveness. The strategy prioritized our disciplined asset utilization. And I'm going to step through that a little more detailed in the coming slides, but we're really wanting to maximize what we thought before we get into any capital requirements. We're going to have a phased capacity expansion approach and then a selective use of the contract manufacturing partners to balance risk, capital efficiency and to give us operational focus. So it's really 3 phases, maximize the efficiency of the existing assets, step one. Step 2, capacity utilization via labor utilization. So we'll add staff and shifts to get more pounds through the plant without hard assets and capital for more equipment. And then capacity -- lastly, capacity expansion via capital expenditures would be the third phase. So this operations plan, building on the 3 phases, first, we're going to maximize the efficiency of the existing assets in Dayton. So that comes with process stabilization and standardization there, maximizing yields, throughput and uptime, significant workforce training and operational discipline, and then the debottlenecking and getting rid of any non-value-added activities. So that's Phase 1 is to get what we've bought as it sits, as it operates to its maximum and safest output. And we believe short-term results really reside there, and we'll lay out the numbers around that in a moment. But no -- in this phase, no major capital investments will be made and again, just fully realizing the capacity and capabilities of the current assets. So that will play out in the rest of the fiscal year, so second half of FY '26. Phase 2 is where we're going to start to expand the throughput and capacity through labor. And so really, it's incremental manpower additions. We have 2 bullets here. We're going to transition from the current operation, which is 5 days a week, 8 hours to 5 days a week, 24 hours. That would be the ultimate goal. And then ultimately, we can move to a continuous operation that runs 24 hours a day, 7 days a week. What we didn't put in here is there's some incremental steps before that. We're likely to go to 2 shifts on 5 days a week first. And even before that, there's a baby step we're already looking at, which is a fractional shift that comes in and it's a partial staff instead of a full staff on a full shift, where they will handle the transition at the end of the day. When you run 1 shift 5 days a week for 8 hours, you spend a big portion of that shift starting up and shutting down. So first, we'll add some operators to basically round out that shift and have it ready for a running start for the next day. And then that will lay the foundation and path for us to move to a full second shift, which would be a 5-day 16 shift and then on to 24/5. And I would tell you, our forecast between now and the end of the fiscal year supports going to 2 shifts already. So that's exciting. We have a lot of opportunity and demand coming at us quickly. Some of it from the legacy efforts of Alexium and pipeline development, things are -- this is the way it always happens in life folks. Things are all happening at once, and they appear to be happening at once to Alexium now. So it's been a long battle to get to this point and things are really firing off at the same time. So as we say in the States, it's a high-class problem, and we're going to figure it out. But we have a lot of demand coming at us right now. So the focus is heavy on operations and how to get the pounds out and support the customer demand and to deliver the financial results, all of you, our loyal shareholders, deserve. So this approach is going to get us there. Ultimately, we'd like to end the year possibly at a 24/7, but at a minimum running 24 -- excuse me, 5 days at 2 shifts and demand will dictate that. And you'll have updates from us every 6 weeks and we'll report on the progress here. Same plan, we're going to stick with, and we'll tell you where we are in that phase. And then lastly, Phase 3, which I would anticipate is probably going to be into the calendar year of '27. And that's where we'll start to expand the plant through capital. And really, what we have there is we have very efficient, capable equipment, but it may be undersized for the level of demand that we want to put through it. And that's on the front end of making microcapsules. There's a lot of capacity for formulating products, and we can really put out a lot of formulated pounds, but we may, in that window, bring in some bigger vessels to the front end of the process to generate more microcapsules to formulate from. And we also dry them and make powder. So there's a lot of derivatives that come off that initial process where we may want a more robust, bigger front end to the system. But more on that later. So that's the 3 phases. We think that's a conservative approach, and it gives us time to ramp, train, learn a lot about the business, learn about how to run it, learn where all the bottlenecks and efficiencies can be made and take a conservative approach to really operational excellence and profitable operations. So the operations in practice at the Dayton facility, again, the goal is 80% of our mPCM and mPCM formulating and FR formulating. So I would call that our chemical manufacturing running in-house at Dayton by the end of this calendar year, so by the new year. And we've been visiting the site since really last fall through November, December and a few more times this year. And we've made several pilot batches during that time frame. And then throughout February, we confirm that we can operate at the required level to support the existing merged business. And again, it's ramping, so we're going to add labor to contend with the added capacity needed. So co-man, contract manufacturing, we've got an initial plan for production across both Dayton and our existing contract manufacturing partners. So we've got a good mix of what we're going to run where. But I'll caution everyone, it's only 30 days in. So we're executing against that plan right now. It's going quite well, but I would say it's too early to call it a game. And then the contract manufacturers will continue to play a key role in the merged business even once we fully ramp up Dayton, we're going to keep contract manufacturing in our strategy and in our mix. We need redundancy to Dayton. So if we were to ever have a problem there, we can shift production and keep customers in business at the other facility. Some of our large customers require that we have redundancy in 2 sites for that reason to derisk their business. So it's likely we would probably never go to 100% in one site that we would always have it diversified across a few different sites. And for now, to keep capital light, we're going to keep that for the Dayton facility split with our contract manufacturers for the near term. And then cost savings, we had some forecasted and modeled savings that we did in the pro formas in looking at the business last year. We found significant savings through bundled volumes and picking the best suppliers of the 2 businesses and going with the biggest savings and the more secure suppliers. We found 7 figures of savings in that practice. Those are now in place. We've negotiated new pricing. And you'll see those savings start to hit the bottom line in earnest in March, and that will start to ramp in the profit and loss statements and show the bottom line improvement in April and continue to improve through June. We expect those savings to be fully realized as the volumes start to hit the first maximized levels on one shift before the end of this fiscal year. So a significant improvement to the bottom line just in savings. And the initial win was really on some of our wax and wax is one of the core materials that's in the phase change. It's the phase change material that we microencapsulate and that's one of our largest raw material costs, and we found significant wax cost savings across the combined business. So that's one of the high nails. So on the outlook, customer retention and the reaction has been very positive. So the increased engagement is expected to result in improved manufacturing efficiency, and we're already seeing that early on, as I reported. And we are reaching better terms because of better volume. So that's going to be another improvement to the bottom line. We have a very strong outlook for sales right now and several short- and medium-term opportunities that are being integrated right now and ramped. So for March '26, our revenue, we're projected -- right now, it's early, and it's -- I can tell you early in the month, we're already well into this number, just in the first week is $500,000, and that's compared to the run rate at December for that quarter of $250,000 a month, which was quite anemic in a soft market. We've already seen a nice uptick. And I would tell you, it's not all related to the Microtek acquisition. We are seeing an uptick in our demand with our customers, our legacy customers of Alexium. And you're going to see the uptick of the Microtek customers too, and then the merged volumes of the 2 continue to ramp through the rest of the fiscal year. To that point, June '26, we're expecting revenues of $750,000. And a goal is to get to the run rate in a short window thereafter of $1 million a month, which is a key milestone for the business, to hit $1 million a month and sustain that thereafter. And that's really -- $1 million a month in revenue is a very healthy Alexium and a good plateau for us to get to, to fund growth going forward, profitable growth. So on the people side, the integrated management team is largely settled at this point, and we filled the key roles from players from both businesses. There was little to no redundancy in the org charts between the 2 companies. Being competitors and actually Microtek being a supplier to Alexium in the past, it was interesting to find that the -- when you merge the 2 org charts together, it was actually a lot of strength from both sides. So it resulted in a stronger organization overall. We haven't had to let anybody go. No redundancies or layoffs or reductions. And we believe the team in place right now is adequate for the short term, meaning the next few months, and we're likely to be hiring as the results start to pour in and getting the team ready to scale further. And again, we're going to add roles as the revenue dictates. So really just an eye chart there for where the revenue realization would be on a time line. So we're already active in PCM for mattresses. PCM for non-mattresses is new for us, and we're going to be forecasting that in the first half of '27. So we're starting to move into the furniture markets. And the acquisition brought a couple of adjacent markets for us to play in, and that's actually in the medical space. So medical seating, and medical cushioning for non-ambulatory people, wheelchairs and bedding, et cetera. FR for mattresses, we're active there, and we're going to continue to forecast that, and we intend to make those formulated chemistries in Dayton. FR for non-mattresses, so that would be in the military side. We'll be forecasting in first half of '27 in earnest, and we expect it to ramp in the calendar year '27. And as we've reported, we're active with the Army right now in limited user evaluations, and we've made the shortlist. We expect the bid to be coming out later in the calendar year 2026. And then non-FR PCM products, so that would be our DelCool and Eclipsys. We're going to have some announcements coming before the end of the fiscal year, but we've been awarded a few placements for those products. So stay tuned. They're coming out, and they'll be forecasted in the new budget for the new fiscal year. And then [indiscernible] the end of it for me. I would like to say, though, this is a short presentation. We're going to be right back to present to you in April. And what I would say is what we've reported here today really are markers that we're going to measure against in that April presentation. And really, our goal is to show the trend is positive, show that the momentum is building and give you a few markers that we report against in April. And the goal here is really to beat them. So we're being conservative in what we're telling you, and we expect to beat them. So Alexium has had a tough road over the years. We've got a lot of loyal investors that we owe success to. We owe it to our employees. We owe it to our Board. We owe it to ourselves. And I believe we're finally at that tipping point. We've been reporting the momentum and the change in strategy for some time. And I believe the momentum from the acquisition of Microtek has been catalytic in speeding up that progression. But I wouldn't point all of it to that acquisition being the thing that's causing the results. It's really a culmination of the last 3 to 4 years of efforts, finally getting traction and getting customer adoptions, getting the right people in place, getting the right plan in place. And then the acquisition is only additive to that and speeding up the transition to a successful manufacturing and sales organization from what was really a technology company that was outsourcing most everything. So we're deep into that transition now and results are right on our heels. So with that, I'll -- I think we're going to do a Q&A session. And Simon -- Heather is going to moderate the questions, if there are any, and then Simon will bring us to a close. So Heather, do we have any questions tonight?

No questions so far.

No questions. So that will be quick. So Mr. Chair, we'll turn it over to you to bring us home.

Thank you, Billy. And thank you, everyone, for joining the webinar. And if you're not taking this live, but taking the recording, we anticipate, as Billy flagged, being back with another webinar post our 4C filing, which occurs at the end of April. So realistically, probably in the first week or 2 of May. Our goal then will be to give a further update on where things stand on the new Alexium in terms of the progress we've made, in particular, both on the sales side and the operations side. As you can tell from Billy's tone, we have got a bit of momentum in the business, which is great to see. We've been fortunate that we've been able to welcome the Microtek people across their business into our business, and that's been a very seamless process. The combined group is functioning well, and we anticipate that will continue to improve with the passage of time, especially as we ramp up volumes in the Microtek facility, which, going back no more than about 5 or 6 years ago, was a business which was doing more than $20 million a year in sales. And I think the facility, unfortunately, has sort of shrunken in the terms of its capacity through that time and the number of people it holds, but our aspirations are very much to take the Dayton facility back to the levels that it was operating at and beyond that and at the same time, continuing to grow with our contract manufacturing partners. And with that, I'll say good night to everyone. Again, for all investors, thank you for your support and your patience as we've worked to bring Alexium along. It does feel like we're making great progress, and we look forward to giving you another update in early May. Thank you very much. Goodbye.

Thank you.