Alexium International Group Limited ($AJX)

[Audio Gap] -- quarter webinar for the Alexium International Group. This is part of a series of investor updates that the company undertook to regularly cycle at the time of the last AGM. And we are excited today to have with us -- Good morning. I'm assuming that we're just starting now. Good morning. My name is Simon Moore. I'm the Chairman of Alexium International Group, and I'd like to welcome everybody to the call today. This is the first of a series of webinars that we undertook at the time of the last AGM to regularly update shareholders and investors and interested prospective investors in the progress of Alexium International as it looks to execute on its business plan that's been developed over the course of the last couple of years. Today, we have on the phone the Chief Executive Officer of the company, Billy Blackburn; and our VP of Finance, Heather White. We are looking today to walk you through a presentation. And at the end of which, we'll respond to questions and answers. The questions and answers can be lodged during the course of the presentation via the notes function or the chat, and we will do our best to answer the questions that we're able to. Obviously, bearing in mind some of the disclosure limitations that are placed on an Australian public company. Just a quick couple of comments from me, and then I'll hand over to Billy and Heather. The first is that the March quarter is a very significant quarter for the company. We completed both the acquisition of Microtek, which strategically was very significant for the company, in particular with respect to our phase change material business. And we are now not simply a contract manufacturer, but run our own manufacturing operations. This acquisition has onboarded very well to date. And the first question in all cases, did you get what you thought you were getting when you signed the deal? And I think most importantly, the answer is a resounding yes. And Billy can touch on it in a bit more detail, but we've been very pleased with the progress we've made there. We've settled in neatly into the facility. We're working well with the former owners. And at this point in time, the volumes are ramping up there and the utilization of the facility is growing rapidly. Secondly, we also completed a capital raising, which coincided with the acquisition. And again, this was well responded to by the shareholder base and with a number of investors increasing their investment in the company. I thank them for their support. And I think they will be pleased with the progress the business is making. And we think in time that the market will reward those parties that participated. Finally, the other point I'd like to make is that historically, and this is me -- cover on behalf of the company, we haven't been good at doing what we said we're going to do. And one of the things that Billy and the team have resolved to very firmly change is that we're going to be in the game of telling people what we're going to do and then going out and doing it. And I think importantly, one of the first markers that was set post the acquisition was that we were going to have a step function up in sales and that by the month of March, we'd be tracking at $500,000 in sales per month. And I'm very pleased to report that not only have the guys achieved this, but they're just a touch under $600,000 in sales for the month of March. And I'll let Billy sort of talk to that and also to the guidance that he gave for the June sales number. We see this as a very important element of the business plan and that what we really do need to do is restore trust and confidence in the investor group. And as we grow that they too will sort of have their confidence growing with the share price. And with that, I'll hand over to Billy to run through his sections of the presentation and where appropriate, Heather, will jump in and set us straight or put more details around a particular point. Thank you, Billy.

All right. Thank you, Simon. I hope everybody is doing well. So tonight, we'll run through the third quarter results summary. That did go out in the 4Cs, so everybody would have had that. And so any deeper level of detail there can be read, but we'll make a few summary points there. I'll give an extensive trading update, and then I'll run through our strategic initiatives. And as Simon said, we're building on momentum right now. And hopefully, we showcased that in this webinar, and we'll be doing another one in the not-distant future. We'll keep the cadence up of these presentations and keep all the investors out there updated as we trend positive. So as was published in the 4C, revenue has increased over the quarter and 44% higher than the average of Q1 and Q2 average together. So we've seen an uptick in sales. And that's not just fueled by the acquisition of Microtek is we've had some recovery earlier in this calendar year, our third quarter in the market. And I'll speak to the macroeconomics and what's going on globally with the U.S. economy and the Middle East and impacts there. but also down into our small part of the world and our bedding business and other FR pursuits. Revenue has been steady with consistent orders from our legacy customers. Margin increased 2% over the first half, and that's mostly by efficiencies gained in-house from onboarding Microtek. And you'll see that increase continue to trend going forward as we make the improvements and bring more manufacturing under roof into our facility. Interest expense decreased dramatically as the majority of the shareholder loans were settled with the entitlement offer. Also, there were some timing differences related to accrued interest on the shareholder loans, and that created a little fluctuation between Q2 and Q3. We did have some cash flow neutral in the quarter in some weeks, and we expect that to continue as the sales increase and as we gain the efficiencies and increase margins. So in the trading area, I want to update, as Simon pointed out, the Microtek acquisition. Did we get the value that we believe we purchased? And as Simon said, it's a resounding yes. But I want to detail that a little further here. Throughout this quarter, not only did we complete the acquisition, we went full speed into the integration and onboarding of the Microtek team, legacy team, the processes, and we started merging processes from Alexium with those of Microtek to increase volumes and gain efficiencies and improve the bottom line. So we're well into that. So 3 months into this integration, we retained the majority of the customers. And I say majority, there were a few that didn't know what to make of it. And just to add a little color there, Microtek was primarily focused in its microcapsule -- microencapsulated phase change market in supporting formulators and compounders. And those formulators and compounders would take microcapsules from Microtek and then produce coatings and then sell those into the foam and textile components that go into the bedding market and mattresses and pillows. Alexium was actually integrated. We were making microcapsules and making our own formulas for those markets. So when we came in, we brought formulas to the dance and added that business to Microtek and they're going to continue ramping it. But some of the formulators didn't know what to make of that and didn't know if they could work with Alexium or if we would be a competitive threat in the market. We've settled most of those concerns, and we believe there's a good way to work with most of these folks that are established customers of Microtek. But not all have that level of comfort, but it didn't have a big impact in the overall business there. Particularly one customer viewed us as a competitor and stalled for a moment. They're now back at the table, and we're in negotiating right now on new prices and terms, and we expect them to come back as a steady customer in the second half of this calendar year. Beyond that, the majority of the legacy customers at Microtek have been retained. Also, Microtek came with some entries into some adjacent markets for microcapsules and phase change materials, namely in the medical space and also a few potential entries into the construction materials space. So that's been very interesting to help us pull existing technologies into adjacent markets. And we believe this acquisition will help expedite that transition. And then the largest volume customer of the Dayton plant is increasing their volumes and has requested that we studied the operation to double their legacy volumes. And that will be a key cornerstone of our growth and steady ratable revenue from this manufacturing facility in the second half of this calendar year. In the operations area for the Microtek acquisition, it's really early in the stages of the integration. I mean we're just around 90 days in taking over. And as a reminder, we took over in late January. So we signed in December and then we had a holding period to get everything in place financially and took away the entitlement and shareholder loans. and then take the reins and start manufacturing and consolidating inventories in late January. So in all intent, we really started in February. So we're really only 3 months into this. But it did meet our expectations. The capacities that we believe that were there are there. The capabilities that we assessed during due diligence have been confirmed. And we do believe the assets are going to align with what we thought would happen, and it is strengthening our business. We've already found some low-hanging fruit there in raw material that were being bought better by each company. So we've picked the lesser cost materials and coming with a better supply chain and mix to enhance margins that way. And then also, there's some capabilities from both companies that were brought to this and the capacities that actually complement the merged business. We rolled out a new operating plan in January, and that outlined a phased approach to increasing the capacity, improving efficiency and enhancing quality. And the execution of that at the Dayton facility is moving along quite well. And almost all milestones that we've set and KPIs have been met, again, early on in this phase. And then the primary microcapsule processes of both companies have now been successfully merged into a single more robust process. We've been through pilot production, and we're now ramping production of that merged process. So that really studies the base products that come from the microcapsules of both businesses. The legacy Alexium and the legacy Microtek now as one business merged is much stronger. That's a merged volume, improved quality, improved efficiency, improved performance and looks to be quite scalable. In the people area, we've retained all the employees that came over at the point of acquisition. So everybody is still on board. We're finding that there's a good talent pool there. If anything, we're going to be hiring and adding to that. They were quite -- like Alexium, quite a lean team and to meet the forecast and scale that we wish to achieve in '27 -- FY '27, there will be some hiring and probably some repositioning of that team to get some people into the right seats where they can optimize their skill set to support that scaling. We've added 3 roles and hires at the facility. We've added a plant operator, a supply chain coordinator and a logistics manager. The supply chain coordinator and logistics manager reporting to the existing supply chain manager that was at Dayton. That gentleman comes with a really steady experience and level of performance. It has been a great addition to our management team and really grows up and rounds out the Alexium team in the supply chain area, which was an area that needed to be addressed at Alexium as we grew and it brought along real good skills in purchasing in the management and the movements of all the raw materials and staging of inventories for manufacturing. So a really nice add to the team. We're currently recruiting for a QC chemist and additional plant operators, and this is for a fractional second shift to meet increased demand. Our forecast suggests in the first half of FY '27 that we're going to have to ramp production there significantly to meet that forecast. And we're also going to be adding a lot of the formulated products of Alexium to the production mix. And so we need additional hands in the plant to meet that and additional QC testing to be able to run a fractional shift. And the easiest way to explain what we're doing there and why we're not going to a full second shift is we run certain batches at the plant right now with the existing capacity, and this is without adding any capital equipment. We can outstrip the personnel and the man hours in any given day. So we're looking to add an overlapping fractional second shift. So it really means a fraction of the team to overlap the first shift so that we can expand that window of time in 1 day to complete the batch, let them round out and finish the batch, get it through QC, prepare the next batch for the following day. So when the team comes in on the first shift the next day, they can get a running start. So it's a significant gain in efficiency and a boost to the capacity just using manpower alone. And then throughout the quarter, we've continued a balanced focus on this acquisition and keeping those legacy customers has been key and then ramping up the new business is also key. So the existing customers, there's been an uptick in the volumes from those customers over the quarter. That was through increased bedding products and paired with some pent-up demand. Frankly, the end of the calendar year '25 and the holidays was as slow as we've seen it in many years. So there was a nice recovery to that throughout the quarter. And then several new projects started in the quarter will continue to ramp in Q4. So part of our uptick in sales was some new projects starting. We continue to ramp those, and they'll be additive to the revenue in Q4 and then on into FY '27. And then we're growing volumes with legacy customers by taking volume from competitors. And we're doing that through quality, through the supply chain security we provide through being integrated, through providing domestic supply to certain customers that were importing materials that are now under geopolitical pressures and tariffs. And then we sell to the end customers and brands to create pull-through for Alexium products. So Alexium is steep in technology and know-how and technical testing abilities, and we leverage that to pull our products through. And that will be no different than with what we do with the Microtek production. We'll do the same. We'll also take the microcapsule production there and add formulated products to it, which creates more market entries. In the new business area, we had 2 new mPCM foam coating placements in the quarter. Both are ramping throughout the balance of this year through December. We had 2 additional placements that are coming for foam, and those were approved in Q3. Initial orders will be in quarter 4. That remains on track. We were awarded a placement for BioCool a nonwoven material that's going to be incorporated into the quilted mattress ticking. Those orders are starting in early FY '27, and then we expect it to ramp dramatically thereafter. It's a large placement with a large brand internationally. It's an interesting material because that is actually a component now being added to beds where our PCM is part of the component that can be used in a lot of different bed types. A lot of producers are going to zip covers on foam mattresses. So this is a component in those zip covers, which gives it a very broad application across a lot of different types of mattresses and brands. The Alexiflam project with the military, FR NyCo remains on track and underway. We're in a bit of a quiet period with them while they're doing the user evaluations in Hawaii. And those are LUEs is what you'll hear, limited user evaluation. So those are RFR on fabric that was cut and sewn into the uniforms. Now the soldiers are using them in field tests. So these are wear studies. We'll get direct feedback from the listed personnel in parallel with continued lab testing with the Army in Massachusetts. After successful prototype testing, an international furniture producer is reviewing our DelCool product, which, as a reminder, is our dehumidifier textile. And they're considering it for a large placement that would start in earnest at small volumes in the first half of the next fiscal year. And then it would ramp throughout the rest of the calendar year in 2027. It would be the largest upholstery placement for one of our technologies in the history of the company. And it's big enough to drive enough revenue into this company to more than double the size of the sales. Alexicool is being tested for a high-volume upholstery placement with another international furniture producer. So that's PCM in upholstery fabric different than bedding. We're testing in this next quarter for AlexisShield FR coatings on a transportation foam that's utilized in air and rail transportation seating. So that's a new market, an existing technology into an adjacent transportation market. It's got large promise. We have a large volume opportunity for NexTek mPCM in building construction applications. And as a reminder, NexTeck mPCM is the legacy Microtek microcapsules, so microencapsulated phase change material. We've now standardized the base mPCM production of Alexium and Microtek to the branding under the legacy Microtek name, NexTek. So you'll hear that a lot going forward. They did have some entries into some construction materials markets. We are revitalizing that and have put our sales team on developing those leads. This application is designed to limit thermal impacts that cause energy demand spikes. So as a house heats and cools, levels off that thermal spike and that load on those HVA systems, it lowers the energy requirements for the building. creates a return on investment for the construction companies and the ultimate customers of these buildings and the payback is quite quick against the energy costs. So it's got some good promise there. I would flag that one. historically, microencapsulated PCM and construction materials has had one Achilles' heel, and it's been the cost of the product and the low cost of those building materials. So it's not for all types of buildings in a broad spectrum because gypsum and other materials are quite cheap and inexpensive and need to be for the cost of construction. These will be more in specialized buildings and specialized environments where the ROI justifies the additional expense. So in the summary to the trading update and a bit of a macro view, at the first half, we set a revenue target of $500 million for the month of March. As Simon said, we've met that target and beat it. We also guided the market to June coming in a few months to a revenue figure of $750 million. Since then, performance has continued to build, and we remain on track to deliver against that guidance. And I want to remind everybody, we really are, as a management team and a company at Alexium committed to changing the perception and restoring confidence in the investor base in the market that when we say we're going to do something, we're going to do it. So we're being conservative in our estimates and setting targets that we believe we can meet. And we want to continue to show steady and earnest incremental increases as we build long term for sustained profitability. So we're committed to that, and we'll continue reporting regularly against that. So how do we get these results? We had 2 new PCM placements that started in Q3 as we started, and those will continue to grow and contribute to the increased revenue. The Dayton facility has stabilized the production of NexTek 28, and that's the cake that's 78% solids, and it goes its legacy customers of that business who want us to increase the volume and steady their production. So we're on track there. That production will continue ramping in this quarter coming and then on to the first half of the fiscal year coming, and we expect to double that volume going forward. Margin gains were driven by reduced raw material costs. If you remember at the half year, we talked about synergies of the businesses and some significant savings in the raw materials that were brought to the merger, really from both companies, but Alexium brought some significant savings from some vendors and raw material suppliers that are now in place in Dayton. And those will begin to cascade through the financials and to the bottom line in the coming quarter. So you really haven't seen a lot of that improvement yet. It will gain momentum as those volumes ramp and we get those materials fully in place. We've reduced operating costs and increased volumes by driving higher fixed cost absorption. So said differently, as we increase the sales, we're holding fixed costs as best we can to have those absorb in the overall sales, and we expect that to improve the bottom line. In the world economic environment, look, it's shaky out there. Anybody turns on the news right now, these are tense times in the world. So the macro conditions, they've softened over this quarter. And with the ongoing conflict in the Middle East, a lot of pressure on energy and cost of living pressures have gone up as well, and that flows through to our end markets, especially in bedding, where those are more elective purchases and not necessary like fuel and food, mattresses really suffer when consumer confidence is low. It's been low for the last 3 years, and that continues right now. Despite that, the business is tracking well, and we still expect a strong fourth quarter into the end of the year at June 30. And coming at that from a different angle, we're in a niche market, and we're growing our share, and we're leveraging a lot of efficiencies, and we're also diversifying the business. You've heard us talk a lot about growth and diversifying our product mix, market mix, customer mix. We continue on that pursuit, and that's really at the backdrop of this, is our market strategy, customer strategy, product strategy really is to continue diversifying through pulling our products into adjacent markets. The bedding market is a feast or famine, and it's been in a long famine since early 2022. And it's due to come out of that any time now, but these global issues are stalling out some of that confidence. The money is there, the demand is there. We just got to get things on a stable footing, and you would see an increase in the market. So Alexion is well positioned to take advantage of that when it happens. Despite that, though, we will diversify the mix and continue to grow through new technologies, gaining efficiencies and entering adjacent markets. Overall, in the operations plan, we laid out a plan after the acquisition in the last webinar. It was really a 3-step, 3-pronged approach, maximize efficiency of the existing assets, expansion of capacity through labor and expansion of capacity lastly through capital expenditures. So at the half 1 update, we reported that strategy, and we essentially are transitioning from an outsourced production model to manufacturing-centric. And this was to improve margins, our control to provide scalability and then give us more competitiveness for the long term. And we also want disciplined asset utilization. And if we phase the capacity expansion and use outside partners that have advantages to the facility we've bought, we think that's a balanced mix to grow the company. We do want to continue working with contract manufacturing partners that have a different set of assets, different plant configurations than what we bought in Dayton. We want to maximize Dayton, but we also want to continue working with the manufacturing partners to scale the business. It also provides a redundancy to our manufacturing in Dayton to have partners making our products. Customers want us to have 2 sites. That buffers us from any force majeure events or anything that might happen in a plant to shut it down, gives our customers supply chain security. It also allows us to put maybe bigger processes at some of the contract manufacturers that are more simple, less risky and more scalable to their larger equipment and allows us to take advantage of the more specialized equipment that was acquired from Microtek to focus on higher-margin coatings and higher-margin, smaller volume production. So we've developed microencapsulation processes that allow for meaningful efficiency gains. So what does that mean? We've got to boost the existing capacity at Dayton, but also have a balanced mix with our contract manufacturing to meet our forecast, which has significant growth. The production mix between that and the contract manufacturers is basically being repositioned to optimize output in the near term, also giving us more control around quality and again, driving scale. We're recruiting and hiring right now and transitioning to that second shift. Again, I said a fractional second shift, and that's an incremental approach to go to a full 24/5 eventually. So we want to go from the current 8-hour, 5 days a week to the fractional shift, which is really a 12-hour overlap to a 16x5, then on to a 24x5 then ultimately, as demand meets, we will go to a 24/7. And then we're expediting the addition of a reactor to double the output of the front end of the PCM process in Dayton. So we did say we're going to pull back from capacity expansion, and that's major capacity expansion. This would be a minor capacity expansion. What we've determined early on in our personnel and capacity studies and utilization studies of Dayton is that we could add more manpower to the mix and outstrip -- there's a bottleneck in the front of the process where it's a little bit undersized. So we're going to address that with an additional reactor on the front end. It's a low capital project, small capital project. but it would balance that with that fractional second shift. It would also give us redundancy to be able to run 2 processes at the same time, which expedites the Alexium formulated coatings coming into the business in Dayton, also allows us to diversify the mix and derisk it for redundancy. So we will be putting in a little bit of equipment a little earlier than we planned, but it's incremental. It's small, and it's really just a debottlenecking effort. We are going to be running multiple mPCM variants. So we're making bio PCM. [ Ecotek ] is the new microcapsule that will be rolled out as biodegradable. And then those are going to be in parallel with the legacy product of NexTek microcapsules. So the operations in practice, we set some goals at the last update, 80% of our mPCM production, mPCM formulating and FR formulating running in-house at Dayton by the end of this calendar year, so by New Year's Eve. The status is that we are on track. We've merged the 2 mPCM process into a single process now, and we can offer more efficiency, higher quality PCM as a cake, a slurry and a dry powder. All of those can be formulated into coatings. So that's a very robust feedstock of mPCM in 3 forms that we can use in our coatings, and we can also offer to formulators and customers that make their own coatings. And we're running pilot tests right now to move certain formulated coatings and Aquasorb to the Dayton plant. Aquasorb is the coating that we make that goes into our DelCool tri-layer fabric for dehumidification. Again, we have a large placement on the horizon, and so we'll start making that formulated coating in Dayton. It will go on to our textile contract manufacturer who will make the tri-layer textile for us and then on to ultimately the brand that uses it in mattresses. In the contract manufacturing area, we want to use that for balanced production between our in-house facility and those partners to, again, reduce single-point failure risk and to gain efficiencies and capacities through repositioning specific processes, again, to leverage the immediately available strengths of each. Goal was to achieve that status is we are on schedule. We've reduced inventories at contract manufacturing sites to position them to run larger, simpler production batches at greater efficiency. We're also working down inventories to convert those to cash. We did a lot of development work over the last year, and those are now moving into commercial products and scaling. So that allows us to reduce the developmental inventories and turn them into more just-in-time supply chain management, lowering the cash demand and increasing cash efficiency. And then we have more control and lower operating expense and greater flexibility by taking this approach. And then lastly, cost savings. We wanted to optimize the supply chain and take advantage of efficiencies between the 2 merged businesses. That is on schedule. And we have selected the best price suppliers and negotiated improved pricing in the quarter. And you'll see those showing improved earnings over the following quarter and on into FY '27. So in summary, first half results, we set that revenue target of $500 million in March. We met and just beat that, guided the market to a target of $750 million for June. At this point, it looks like we're on track there. Results in the macro, the new placements, the stabilized production at Dayton and margins from leverage -- volume leveraging and process improvements, that's driving strong momentum and key customers requesting higher volumes will continue our growth. And despite the softer macro conditions in the Middle East and energy pressures, we're still tracking well, and we anticipate a strong Q4 to June 30. And strong Q4 means meeting forecast. And then operations, again, the mPCM process improvements and repositioning of production between the Dayton side and our contract manufacturers, that's on track and is delivering meaningful capacity and efficiency gains. We're adding that second reactor. That will speed up some of the gains and actually create some more security in our manufacturing. And then recruiting is underway to staff all this growth. So in summary, we're wanting to do what we say and continue giving you guys smaller sized bites of what the plan is and then update that plan as the year carries on. We want to restore investor confidence and, again, shareholder value and get the share price to where everybody needs it and get the company to sustain cash positive results. So with that, we really appreciate you all tuning in tonight. This will be on our web page. Heather is going to lead the Q&A for any questions that have come in. And then from there, we'll turn it back over to Simon to bring us home. So Heather, did we get any questions through the chat?Unverified exec

We only have one question, and it is addressed to me from Ian Davies. He says, at $600,000 a month sales last month, what is your production cost per month as before production costs were higher than sales per unit. So the answer to that is the revenue in March was $553,000 and cost of sales was $510,000. So there was a small margin. It is an improvement of where we've been and forecasts show that the margin will continue to go up over the next few months.

Okay. Thank you for that question. I believe that brings I'll hand it back -- sorry. Unverified exec

We just got one more question as you were talking -- from Richard [ Conte]. What happened to Alexium pillows and FR socks?

Pillows is still out there. We did table the effort on pillows for a while to focus on the acquisition, the FR projects, especially the FR coatings and selling the chemistries, and we do have the pillow still. We do have a few companies that are reviewing the pillow system. So just as a reminder, that was -- we were marketing an Alexium pillow that had a DelCool liner, had a zip-off cover, wash durable cover with a AlexiCool PCM on it. And then it had a couple of different cores. It could do a fiber core and a foam core. We tabled the marketing of the actual pillow to -- and we were going to do that as a pass-through as a white label to brands to be able to take it wholesale from us and then retail it from there. We tabled that effort to focus on the system. We did capitalize on those marketing efforts and showing that pillow to a lot of customers over FY '25. That led to some adoptions that are in our queue right now for DelCool and pillows and also PCM and pillows. So it was successful in getting a pull-through to some brands. We're just not selling those pillows and making the entire pillow at wholesale at this time. We may bring that off the shelf as bandwidth allows and as market opportunities afford us, but it was successful in creating demand and pull-through to those brands and those technologies. The FR socks, that's still active. As a reminder, we've passed the ASTM 1633 testing for mattress burns last year. We are back to testing 5 new mattresses with a couple of large brands right now. There'll be bed burns over this quarter and the first quarter of FY '27. So we'll be reporting the results on that as it goes. So it is still in play, Richard. It's not -- hasn't been as fast as we would like. We do have a successful sock. We do have a supply chain to make it with a textile partner in the Carolinas. It is the AlexiShield coating that pulled that sock through and allowed it to pass the test. We're still active in marketing it, and it's one of our top priorities is to get a placement for that. So stay tuned. We're still on the job there. It's a great question. Thank you.

Right. Assuming there are no more questions, Heather, we might call the webinar to a close. We thank everybody very much for their attendance and their questions and Billy and Heather for their participation today. On behalf of the Board, again, I thank the investors for their support of the recent capital raising. I hope you can get a sense for the progress the company is making at this point. We will be back with another webinar after we file the 4C for the June quarter. In the interim, we hope that there may be an announcement or 2 about progress within the general business. And if it's justified, we might provide a written business update as we go through the month of June. But stay tuned. And rest assured that the management team is working hard on executing the plan and that we are making strong progress. So with that, I'll leave everybody to their day here in Australia. And for people overseas, have a great evening. We'll speak to you soon. Thank you.

Thank you.