EcoSynthetix Inc. (ECO) Earnings Call Transcript & Summary

Good day. I'm Martin Gagel with Market Radius Research. It's Thursday, May 12, and we've got CEO, Jeffrey MacDonald, of EcoSynthetix joining us. EcoSynthetix developed safer and greener engineered biopolymers to replace formaldehyde and styrenes in numerous industries. I'm very happy to have EcoSynthetix join us. Because in the green-tech sector, investors seem predominantly focused on green and renewable energy technologies, while there are massive problems and opportunities with toxic and hazardous materials in the material space. EcoSynthetix has developed biopolymers targeting huge markets, including the building products, paper products, personal care, labels, adhesives, paints, and coatings markets. Jeff will be discussing EcoSynthetix technology and how they are targeting and planning on gaining market share in these massive markets and how this will drive the company's growth. But please remember, this is neither a recommendation, nor investment advice. We're here to learn about the company. So Jeff, thanks a lot for taking the time to talk with us. And please tell us about EcoSynthetix?

Thanks for having me, Martin. Excited to be here today, and thanks for everyone for joining us. My name is Jeffrey MacDonald. Just by way of quick introduction, I spent the majority of my career about 21 years of it in the plastics industry with a company called Husky Injection Molding Systems, one of Canada's great manufacturing success stories, managed to work in just about every corner of the company during that time. And Husky was well known for creating the technology that proliferated the plastic beverage bottling closure around the world. And I was actually responsible for that business unit for quite some time. And after being part of the executive team that took the company public and then through 2 private equity transactions, first with Onex and then with OMERS, I spent a few more years with the business doing some of the company's first M&A work. But then I am a tree hugger at heart and wanted to get back to my green roots and after realizing that I'd help populate the bottle -- the world with plastic bottles, I wanted to get back to something that was a little bit more green. And so found the founders of EcoSynthetix. We found each other and felt that there were some things there that I could help them with to turn some good ideas into a great business. They were working primarily in the paper industry, and had lots of other research projects on the go. And so our first mission, as we came together for the first time as a team was really to focus on the things that had great value propositions where great chemistry was coming together with a good business opportunity and very importantly, where there was a great customer partner that was really interested in bringing our products to market. And you'll hear that theme throughout what I go through here today. So what is it that we do? We create polymers from the field. So we started in the field, predominantly from the corn field. So the major input to our products is corn starch. And we transformed that corn starch through a proprietary process called reactive extrusion, where we're essentially taking the starch and turning it into, think about it like a plastic melt. And as that plastic melt is transitioning down our extrusion device, we're adding different chemistries to it to make it functional for what it needs to do in the applications that we're putting it into, and out the end of our process comes what you see in the middle circle there, a dry powder. So our chemistry is produced as a dry powder, which is quite different than most traditional chemistries that are often like 50% water and suffer from having to ship 50% water around the world, which is neither green or economical. We're able to ship this dry powder around the world and then customers can use water on site, sometimes even wastewater to turn that into a resin that they introduce into their processes. It's not enough as a disruptive chemical company to simply sort of send somebody a jar of chemistry and hope they're going to use it successfully in their operation. So we've had to build up a competency in engineering essentially handholding our customers and providing them with some equipment and technology solutions to help customers try our product and implement it for the first time. So we become pretty well known for our ability to help customers make change.

And Jeff, a polymer is basically -- like plastics are polymers as well, right?

Yes. Yes, think of a polymer really as a chain of molecules that come together to turn these molecules into an ingredient or a chemistry that gets used in plastics if it's oil-based molecules or in our case, it's biologically oriented materials that we turn into polymers.

All right. And the process is and the whole technology is patented. So -- but I presume as well on top of it, even if like with that patented information, there's a lot of trade secrets into the general know-how on how to -- it's a little more than like a chocolate chip cookie recipe?

Yes, you got it. So it's really a balance between patents and trade secrets, and I'd say it's probably roughly a 50-50 balance. But on the patent side, we've created a landscape of patents that really at 3 levels. So the first level is the composition of matter. So think about that as our basic biopolymer. The second level is how we produce that biopolymer, so that reactive extrusion process that I just mentioned. And then the third level is application IP. So how we use the biopolymer in a given application like a wood composite panel, and we're consistently refreshing that portfolio as we come out with, in particular, new applications for the use of the biopolymer.

Got you. And I presume some of these patents are a little older and some of them are probably new or maybe the application ones. So kind of a -- what sort of runway do you have out on your patents going forward?

Yes. So I mean in the business of innovation, you have to be refreshing all the time. And the patents that we have in place for the wood composites industry, which will be the main focus of our discussion today, the application patents for that are just a few years old. So they've got many years of life left on them. We're just now applying for some very interesting patents in a new area of the paper industry. So the paper industry is the legacy part of our business, but we're seeing some interesting opportunities to refresh our IP and go after some new applications there. So yes, there's a foundation that's a little bit older, but the new stuff is creating a nice landscape for us for the next 20 years.

Got you. And your -- the main feedstock going into your product is corn, cornstarch?

Yes, that's right.

Okay. So widely available and lots of sources for that.

So this is where the polymers go. As I just mentioned, the first market that the company developed was in the paper industry. So in paper and packaging, we create a coating for graphic papers. So think about printing and writing papers and advertising papers that may have that glossy coating on them and for packaging. So there, you can see a milk box, think about cereal boxes, things like that, that would have a coating applied to them. And in that space, we're replacing styrene-based latexes on a one-for-one basis with our all natural latex. The second market that we'll talk a little bit more about is the wood composite space, where we're replacing formaldehyde-based resins in wood panels. And then the third pillar that we've developed most recently is the personal care market, where as a starting point within that space, our polymers are being used in hair fixatives, so think about hair sprays and creams and gels and that kind of thing. The business was initially as we came together as a team focused on -- when I say focus, I do chuckle because we had 36 different product developments on the go. And it was really -- the first chore for the team was to get things down to the few things that mattered most. And we put the biggest bet on the wood composites market. So we spent about 75% of our energy and our investment dollars on developing that wood composite space over about a 5-year period, and we're beginning to see the fruits of that now. And then we put a few other small bets like in personal care on a few other things to come up with these 3 pillars of growth. And we're pretty pleased that we're actually now seeing some exciting opportunities that may be creating a fourth emerging pillar here, which I'll talk about.

Yes. When did you join EcoSynthetix?

I joined EcoSynthetix in 2014.

Okay. All right. And when EcoSynthetix went public and so forth, the initial sort of market traction was targeting the paper products industry, correct? And...

That's right. That was the first market, but I'll also say that the business was really targeting, if we can use that as a word, but really targeting everything. And it's interesting today in that there's a runway of stuff on the shelf that as we get traction in some of these markets, there are other things that we can go after to grow the business further in new directions, assuming we have some interesting partners to do that with.

Okay.

So these are the key markets that we're going after today. And what you see there is the chemistries that we're trying to replace the market size that those chemistries represent. So in the wood composite space, over 90% of the resin used in creating wood panels is formaldehyde-based and that's about a $15 billion market. In latexes, which are styrene-based for paper products, that's a $4 billion market. And in the hair fixative space, where we're getting our start in personal care, that's about a $350 million market. So large spaces where big old incumbent chemistries exist and our job is to chip away and take some share and cause eventually a revolution in each of these spaces.

And let's say, for the formaldehyde market, it's the formaldehyde market itself that's $15 billion, not the wood -- the engineered wood market that's worth $15 billion, like that's actually your market that you're targeting?

Yes, that's right. That's just for the resins, the $15 billion.

Okay.

And just a quick word on what could potentially be the new emerging growth pillar for us. So we're seeing some interesting results in. What you see on the left there just represents the graphic paper market where we've traditionally played with our coating products. And that's been a declining space with the advent of technology that's replacing a lot of the uses for paper. But there are other interesting parts of the paper industry that are growing quite nicely. Specialty packaging is an area that we're active in, in the coating space actually where we do provide a coating that helps with oil and grease resistance and things like burger apps and the fast food chains. So that's an interesting kind of niche space. But there are some other larger ones that we've been quite interested in participating in, but until recently, we didn't have a chemistry that really applied well there. Packaging, you've seen even through the pandemic, the growth in packaging that's coming to our doors and then tissue, obviously, a sustainable and growing market for years to come. What we've developed in this space is actually at the opposite end of the paper mill from the coating area that we're usually playing in. What I mean by that is when paper initially comes together, it's coming together as a mat of fibers that get laid down and then you need them to stick together to create that paper sheet. If you can make that paper sheet stronger, there's a lot of different things you can do with that. You can run the line faster. You could use cheaper input materials to form that sheet. And what we've developed is a strength aid to basically help strengthening that sheet as it comes together in each of these different segments. We've had some very exciting results in a fairly short period of time. We got our start in tissue. And within a matter of months, we actually achieved some remarkable success and signed up our first tissue mill who's been a going concern customer for us since the end of last year. We've replicated that in additional tissue mills. We've replicated it in a graphic paper mill. And we've actually had some really interesting results in a packaging board mill. So we expect some further commercial successes and announcements in this space as a result of the work that we're doing there. This opens up a really interesting growth opportunity in a space that we already know pretty well in terms of the players and the technology that's required.

So on a big scope, obviously, the graphic paper side or just the sort of writing paper side, that is a declining market, news -- like things like newsprint because of computers and so forth. But I would think specialty packaging for food and so forth, packaging for deliveries and tissue, those are all probably growing, actually probably maybe growing faster than the like GDP growth.

They are, and that is exactly what makes it exciting for us and that they're also searching for greener alternatives. So things that may traditionally be used as strength aids are sometimes chemistries that you don't want to be in the affluent from these paper plants and they're becoming more and more restricted. So in addition to providing a performance benefit here, and we're actually outperforming some of these traditional chemistries, we're actually bringing a green solution to a space that's asking for it.

All right. Okay. Thanks.

Yes. So speaking of the green advantage, really in the last 18 months to 2 years, this has become a hallmark of what we're able to offer customers in a unique way versus the incumbent chemistries we're replacing the climate footprint reduction. We will be in 2022, a climate positive company. So you hear lots of talk about companies that are trying to be less bad by 2030 in what they do and reducing their carbon footprint will actually be contributing positively in terms of taking away the carbon that our customers would normally use in creating their products. So by using our products and replacing these incumbent oil-based chemistries, our customers are reducing carbon emissions by an amount that more than -- by an amount that's more than our own carbon footprint as a company. And so that's called carbon cover. And that's what we mean by being a climate-positive company literally this year. So we're not talking about a long-term hope to be better. We are better this year. And you can see how we do that in each of our markets, we're offering a very substantial carbon footprint reduction relative to the incumbent chemistries that we're replacing. And this has become hugely important to many of our customers. I would say, in particular, in Europe, where there's a true cost of carbon being placed on things today and that cost of carbon is going up at a pretty rapid pace.

And your competitive products, are they all like hydrocarbon-based like oil-based competitors?

Yes, they're all either oil-based or derived from the natural gas chain, all of the major chemistries that we'll talk about today in terms of replacement. They all come from 1 of those 2 chains.

Okay.

So that's the E part of ESG. We've also undertaken a study through the company EcoVadis at the end of last year to measure us on our overall ESG performance. And this was at the request of one of our major customers that we get on board with this because they felt that we could have quite a positive impact on their supply chain rating within this EcoVadis rating system. So we became one of the 85,000 companies that EcoVadis rated last year, and we ended up in terms of our overall ESG score in the top 1%, and we're rated as platinum by them. So we were pleased with that, obviously, but this is something that our customer can use in their own results and in their own promotion of what they're doing to create a better future.

You mentioned sort of as ESG. And is this -- this is sort of the green part, like the S in ESG is social factors. But this is -- on the environmental...

No, actually no. So the last slide I showed with the carbon footprint reduction, that's squarely on the E part. But EcoVadis did a deep dive on us and all 3 of those pillars. So social and governance as well. And we came out with a pretty good rating across all 3, yes.

All right.

So most important to our success in these spaces alongside the performance of our biopolymers having customers, partners that are interested in that performance. And in the wood panel space, there's no more important player than IKEA. We have been working with them for several years now in the development of formaldehyde-free carbon-reducing solutions to their challenges with the wood panels that they produce. And you can see here that they've highlighted in their own sustainability reports that glue as a substantial part, 5% of their entire carbon footprint as a company, that they want to do something about and that they are doing something about. And when they talk about that bio-based glue replacement, we are the solution that they're working with. We've made significant progress with them to the extent that about midway through last year, we announced the commercialization with them and later in the year, the renewal of a substantial commitment under contract with them. So partners are super critical. We couldn't have a better one than them. As we look across the other markets that we serve and as we try to break into new markets, developing those partnerships is obviously very critical to us. We got started in the wood panel space with a company called SWISS KRONO out of Switzerland. They are the #5 player in wood panels. And they are -- whereas IKEA is the large market mover. As they develop and change things, it really becomes the industry standard. Often people refer to the IKEA standard. But given their size and their momentum, they're a little bit harder to move quickly. SWISS KRONO has a great set of values. They are quick movers and they've adopted our solution and in fact, promoted our solution and our partnership with them as part of their move toward green or safer products. So we've been working with them now for about 5 years and continue to have growing success with them. Stora Enso is a large packaging player in Europe as we implemented green coating solutions for them. Their CEO actually did an announcement with us to say that this was the future and that they were partnering with us for green coatings. I guess the only other thing that's probably important to point out on this slide is just the -- on the left side there, the fact that we're fully scaled and cost stable, I think sets us apart from a lot of clean tech plays that people might look at. There are a lot of really interesting sustainable technologies out there, clean tech technologies. A lot of them are on the bench and a lot of them are talking about the promise of getting to a fully scaled solution that could be cost competitive in the future. Our technology is fully scaled. We have the ability to grow from our existing footprint quite a bit through $100 million before we have to think about recapitalizing. We're using the assets that we have in place to produce solutions that are cost advantaged to our customers today. If we think about the graphic paper industry, it's all about cost. We're offering them cost savings today. When we do get to the point of having to recapitalize, we can basically add 50% to that existing capacity for about $10 million and have it installed within about 6 months. So very capital-light, very quick for us to move as we grow, but we have the assets in place to grow through $100 million today.

Got you. When you mentioned on your slide there, it says cost stable. Does that mean you're -- like it's a fully kind of mature product where you know exactly how to produce it? And I guess as long as you hedge your corn futures contracts appropriately, then you know what your pricing is going to be. It's not like, oh, we've got to turn some knobs and dials here to make the process work and it's got more expensive or bad batches or anything. Is that what you mean by it? Or what do you mean by cost stable?

Yes. Yes, It's really 2 things. So by virtue of it being fully scaled, we have pretty good certainty over what the cost of the product is. So that's the foundation for it. But stability on top of that really means that as we look through commodity cycles through history, corn as an input. And our use of corn as an input to our end products has been much more stable than the ups and downs that we've seen from oil-based products. And so our customers do rely on us for that kind of cost stability relative to some of the incumbent chemistries we replace.

And I presume now like with the price of oil having gone so high, that reflects directly to all the hydrocarbon-based chemicals that come out of that. If oil doubles in price, crudely speaking, those derivative products doubling price as well?

Yes. Yes. So there's usually a very closely correlated relationship. We often in our quarterly updates to the markets will show what those relationships look like on a quarter-by-quarter basis. But generally, things like formaldehyde, styrene, follow oil and gas very closely. And typically, as that happens, our value proposition is normally expanding faster than the commodity prices of corn would be sort of catching up to that. And so we generally, in a high-oil environment, have an expanding value proposition. There can be some nuances to supply and demand of certain things based on maybe the assets that they flow through. But generally, a high oil price environment is a great environment for us to be in.

How interchangeable are your products to the incumbents where, like do you trust, okay, we'll pour in 1 gallon of formaldehyde-based stuff, oh, now your stuff has gotten cheaper and will just pour in a gallon of your stuff? Is it just interchangeable? Or do you have to sort of reformulate the process and use different heat at different -- like does the process change or is it one-to-one exchangeable?

So it's one-to-one exchangeable for the incumbent chemistries that are there, but there are definitely process changes that need to be made. And that's a lot of the work that we have to put in, in order to get to a conversion of a customer. And it takes time and it takes investment of both time and money on both sides to make that happen. The interesting thing, I think, for us is that while you may get into a situation where the switching costs could be a little bit attractive this way one day and a little bit attractive that way. I think once companies have made the investment in green and promoted that investment as being the right thing to do, it's a little harder for them to go back.

Fair enough. Yes. If they're packaging and their marketing is based on that, they can't just sort of swap it out like that. But theoretically, they could do it fairly quickly like, oh, we're out of this stuff, we're going to switch over as long as they've done it before and they've tweaked their -- they know how to tweak their processes. They could do that readily.

Yes, sure. They have a recipe for the incumbent chemistry that they could switch back to, which I guess gives them a bit of an insurance policy. And the switching costs, it just becomes more costly, I think, more in a moral sense to go backwards once you've committed to being green. I think that's the point I was making. But the incumbent chemistries do have -- I mean the customers do have a recipe for those existing incumbent chemistries that they could switch back to, which gives them an insurance policy when they do switch to something that's disruptive.

Okay. Does -- and I don't want to get too much like how IKEA does its business. Does IKEA run their own particleboard factories or as they outsourced to third parties? And I presume if you're supplying IKEA, IKEA kind of tells you how and what to do things. But like how does it differ working with IKEA than a SWISS KRONO group?

So it's the same and different. So I'll flip ahead to this slide, I think it's the best one to help answer your question. But you can see both of the players we're talking about here on this chart. This is the top 15 global wood-based panel manufacturers. You can see SWISS KRONO there in the #5 position. Their line there represents about 17 production lines, wood panel production lines. And then if you look fourth from the bottom, there's IKEA. So there's the answer to your question. They produce their own panels. But they've done it in a way that they produce about 30% of their requirements in-house, and then they source the remaining requirements from the market. So they get an understanding of the technology and the cost by doing it themselves and then rely on the supply chain to sort of flex and get what they need in different markets.

So SWISS KRONO could be a supplier to IKEA already?

Yes. In fact, many of the companies on this page are suppliers to IKEA in one place or another. Yes.

Got you. So they -- I guess if IKEA would go with your chemistry and so forth, they could then push that down to their suppliers and say, hey, you have to send us your panel board using this kind of chemistry?

That's the plan from our side, and we believe that's the rollout that they have in mind as well. We've established a beachhead at the first operation. They have plans in place to now proliferate that within their own operations and then kind of exactly what you said, a translation plan to begin to share this with their other partners, their other suppliers.

Okay.

Yes. So we're talking about the problem of formaldehyde elimination and why is that a problem? As a couple of notable examples in the fairly recent history of why it's a problem, if you remember, back to Hurricane Katrina when all that temporary housing was built to house the people that have been displaced from their homes, it was built with wood panels that ended up leaching a lot of formaldehyde when they got rained on and made people sick who were in this temporary housing. It was quite a story at the time. And then I guess more recently, if you remember, the fiasco that Lumber Liquidators went through that was actually exposed on 60 minutes, where they were found to have excessive levels of formaldehyde in their products. And I think overnight, their market cap went to something like 18% of what it was the day before. So this has an impact on people's health, on people's concerns, but it also impacts the bottom line. And I think companies like IKEA simply don't want to talk about it anymore. And that's where we come in with a solution. So what happens with formaldehyde over time. It's a resin that's been around for decades because it's cheap, it works really well. But over time, those bonds that hold the formaldehyde in place break, and the formaldehyde molecules get released into the environment around the product. And that's when people can have health impacts imparted on them from the products that are around them. And so we want to be the leader in replacing formaldehyde once and for all in this $15 billion market. The market is really broken down into 3 segments: oriented strand board, which is typically used in construction applications; medium-density fiberboard, which you'd see in flooring and things like crown moldings; and then particleboard, which is typically used in furniture. So IKEA being probably the most notable example there. You'll see that fairly substantial part of the OSB segment there, which the white space represents the formaldehyde free part, has been converted already. And that started actually back in the 1980s with the introduction of a chemistry called pMDI. And that pMDI chemistry wasn't first and foremost, the formaldehyde replacement. That was kind of a side benefit that it brought at that time. But it helped the production line speed up, and it helped create a more moisture-resistant OSB panel, which is important in construction, obviously. So the makers of the chemistry pMDI were very interested then in bringing that into these other 2 larger spaces. But they faced several hurdles that have prevented them from doing that in a way where their product was able to perform with the right economics. And that's really where we come in. We actually do work together with this pMDI chemistry to kind of bring the best worlds of both chemistries together to finally go after these 2 markets and solve the formaldehyde issue once and for all. These chemistries, the pMDI chemistry is actually owned by predominantly 5 large players that control over 80% of the market. So it's companies like Dow Chemical, Huntsman, Wanhua of China, Covestro. So very big names in the chemical world. And for the most part, as we go into new accounts, they see us as an interesting partner that can help them get into some of these lucrative opportunities.

So sorry, so like somethings like DuPont make this pMDI stuff. So your...

Not DuPont, Dow.

Sorry, Dow. So yours works with pMDI. So it was actually -- that could be a bit of a catalyst for these big companies to gain market share in the non-oriented strand board market or even some more in the OSB market.

Yes, absolutely. So we help to carry their product into those spaces to give it better economics, to give it a better carbon footprint. And so yes, it should be very interesting for them to be working with us to take some market share.

So say the obvious, they don't view you as a threat. They view you as a partner and opportunity to help drive growth.

For the 2 big spaces, yes. But you saw the white space that already exists in OSB. So in that space, we are actually replacing part of what they already have today. So it's a bit of a dance. But for the most part, if we're really going to go after this $15 billion opportunity [ in sales ] formaldehyde, then we're going to work together.

On those 2 other pies looked a lot bigger than the smaller OSB pie.

They are.

All right.

So this is just an example of what one of our customers has done, SWISS KRONO, with our product. And they've used us as a green Canadian resin company in some of their marketing materials, but they've done a super job with promoting really the healthy image of this beyond particleboard as being the safest, most environmentally friendly particleboard out there. Their goal was to create a particleboard that actually admitted at the same level as a natural tree and we've actually helped them to do better than that. So our resin actually has a little bit of what we call scavenging technology in it that helps to reduce the formaldehyde emissions from their panels to below the levels that would be emitted naturally by a tree. And that's what's qualified up there in the white box in the top right corner, that's from the Fraunhofer Institute where they've measured the amount of formaldehyde emissions coming off their panels at 0.005 ppm, which is far below any of the other industry standards. So they really are at the top of the pillar. You can see the other levels of the triangle there are the standards for formaldehyde emissions that exist around the world and every 5 years or so, there's another one that gets sort of ratcheted up as being a new level of required emissions, and that's actually just happening right now in Europe. So you can see that E0.5 level has actually been put in place by Germany, which is a bit of a difficult one to do because of the open market in Europe. So Germany has this one new standard and the rest of Europe is trying to decide what to do next, but it's going to impose another level of requirement on that market in Europe, which carries a bunch of costs and obviously, new requirements with it. So we think the decision to come to us becomes easier.

Well, and I would guess like Germany is sort of the California of Europe, where if they go one route -- well, if we're going to give it to Germany, we're just going to supply everyone with it, that sort of -- they're a leader and sort of force other players?

That's what we hope. There's a bit more of a political battle going on within the industry. But yes, I think generally, Germany has established green credentials, which then others move toward over time. But with being an open market, you have these panels that are produced in one country and then ship to the rest of Europe. So it's been a little bit hard for them to sort out how they deal with that. We touched on the left side of this, and we're working with several other players on that left side in addition to SWISS KRONO and we spoke about IKEA. But on the right side is what the market represents to us in terms of opportunity. So for each one of those production lines, and I mentioned SWISS KRONO has 17 lines within their company. Each of those lines represent $0.5 million to $3 million of opportunity for us that's with what we call our legacy DuraBind product, which we initially introduced to SWISS KRONO a few years ago. We've since refreshed our product line. We've added some new technologies to it to take it into particleboard to help lines speed up. And we think that our share of wallet can be as much as $5 million per line today. So we're hesitant to bump that up in an official view like this, but we're starting to see that, that opportunity can be there with the work that we're doing with those 2 customers in particular.

Well -- and just there are 1,000 of these wood panel lines globally. So 1,000x a couple million bucks, that's a lot of market out there.

Yes. Yes. And that's what the math kind of triangulates on that $15 billion opportunity. If we take -- consider that we're a partial part of that co-binder resin with the pMDI technology. So our share of that would represent, let's say, roughly half of that were we to take it all. Yes. And I guess just briefly on the numbers, we showed pretty good growth in the last year and a little bit of growth on the gross margin side, too, as we've diversified our product line towards some of these newer, more lucrative industries where we're getting better value for our products. And then in the first quarter of this year relative to first quarter of last year, we also showed decent growth on the top line, but I think you really start to see the impact there of some of the diversification we've seen in our products. It's fair to say that in this escalating supply chain cost world that we're in today, that we've had some increased costs on our cost of goods side but we've at least offset those and pass those through pricing. But on top of that, you're seeing in our gross margin, the impact of some of the diversification to some more lucrative spaces for us. And I guess -- sorry, go ahead, Martin.

I'm getting like -- I believe you said your current facilities could generate $100 million of revenue. And right now, you're at, what, 20% of that or something like that. So I'm guessing, as you get bigger, you're going to get some economies of scale, everything else staying the same, that as you let's say, if you would double your revenues or double your production right now, that would probably positively impact your gross margin as you get those economies of scale.

Yes. It's probably less about economies of scale than when we think about going to the $100 million level, the makeup of that $100 million is much different than having 50% of $18 million in the legacy graphic paper business. So I think we see much more margin expansion opportunity from diversifying into these new spaces than economies of scale. Certainly, we should have better purchasing power and be more efficient in some ways. But I think the margin expansion is the really interesting thing.

And in the pricing of your products, it is a -- you obviously have some good value added to it. But at the same time, it's economics, you can't be priced totally out of line of what the rest -- what formaldehyde and other styrene-based products. Are you able to charge a slight premium to it or the same? Or is it more based on higher performance, so you can capture some margin on that? Or you have to lower the price because you're a new product and you've got to kind of still prove yourself? How does the pricing work for you guys?

Yes. As a general approach as a company for us, we've always said that we have to be equivalent performance and competitive on price. So you do see a lot of green technologies out there that they expect to command a premium, and they usually don't. So we just sort of faced up to that reality and said we had to be competitive. And in the market, we got started in graphic paper. They don't have capital to allocate to nice things. You either save the money or you're not doing business with them. So we've been able to have our product consistently for more than 10 years now, save money for every pound we put in to the graphic paper industry. It's a little bit different as we go into some of these newer spaces where green matters more. But even in those spaces when we're replacing formaldehyde, we have to be pretty close. And in some cases, I would say, with the performance advantages we bring, we should be at a better cost per panel for our customers, but we at least have to be pretty close on the competitive side. And the personal care market is a little bit different. There, you really are paying for green attributes in some cases. So it's a very significant trend there to move to all natural ingredients. And we represent an all-natural ingredient that replaces a really long-named chemistry, polyvinylpyrrolidone. So there, we work through a partner, which happens to be one of the largest chemical companies in the world, and I think they're in a position to at least charge as much as that expensive chemistry, if not more, for the green attributes.

I'm just thinking you've been in the paper, the graphic paper industry for quite a while now, and that's a declining industry. It's very cost conscious and probably kind of conservative. You may have got some market share, but it doesn't seem like you knock the lights out, if I may be so bold to say that in that sector. Why not? Why didn't you -- like how much market share do you have? And why didn't you get more?

So we have a very low single-digit market share of coatings in that space. And the big reason is just economics. So while we may have a marginal savings on every pound we put it into the companies that have invested in working with us. So many of them just don't have the capital and the time of people to allocate to a change project. They're worried about keeping the mill open next year. So it's tough to get in the door there even with an interesting value proposition. So the other point I should just highlight here is that we do have a pretty good war chest of cash that we are looking to put into play to help with our growth going forward. I mentioned we don't really need to recapitalize our lines in the near future as we work toward our $100 million milestone. But we're always looking for opportunities, things that we could buy that could be strategic additives to the mission that we're on in these markets that we're trying to serve. And so we'd like to put that capital to use for M&A in any investments that might help us to grow in a smart way. But in the meantime, it's been a very important backstop when companies like IKEA look to work with us over a multiyear period. They want to see that we have that staying power in the event of something not going right that we're still going to be there 5 years now. So that's been important that way, and I think it's been an important backstop to investors as well to see that, that's there to support us for the longer run. This is a long-run game, and that's probably the biggest thing that I've learned in coming from the mechanical world of plastics technology. This business takes time. And it takes runway. We feel like we've put in our time with companies like IKEA to get to the point where we finally achieved commercial success with them, and we think there's a lot of growth to be had from there. So with the technology we have, the green movement that's in place today, the partners that we've developed, we feel like we are ready to move to the next level.

When you're working with the IKEAs and the SWISS KRONO group and any big people, they're highly risk averse. If they make 1 million book shelves and then a couple of years later, they start delaminating or whatever. And then they got recalls, that's got to be their biggest nightmare. And I'm sure they've got laboratories on accelerated aging processes and so forth. But at the same time, can you just talk about that process, how you alleviate their fears and the risk? Have they -- did they put out a few thousand bookshelves a few years ago surreptitiously in the market just to see how they survive in real-world type things? Or just talk about that a bit?

Yes. So they -- and I think most in this space would never do it surreptitiously. They do it very, very carefully, and that's why -- that's the biggest reason why it's taken 6 years to work through this program with them as it is just -- it's an iterative trialing process where you're trialing things on the line to actually produce a panel that looks really good and you get to a certain level of good on a trial. And then as you said, those panels will go somewhere to be tested for longevity and life and all the performance attributes that go into the panel. And that process is extremely iterative. So you may do a trial that lasts a few days in January and the results don't come back from that trial because it is long-term testing in some cases for 6 or 8 months before you then get back on the line and make some fine-tuning to make the product better for the next time. And that's what we've been working through with some of these large companies for the past several years.

All right. And IKEA's the big -- everybody knows that name, a huge company and so forth. What would your expansion or -- well, I guess how many lines are -- can you say how many lines you're currently doing with them? And how rapid of a rollout -- or what would the kind of the rollout presuming things are successfully rolled out? What would kind of look like over how many years and so forth?

Yes. So I think it's pretty well known that -- I mean we're working on the first line with them, which the intent on all sides is to then replicate. I think it would be too much for me to go into what we may know about their rollout plans. They've -- they said they don't mind people knowing that we're working together on a really important problem to them, but they've asked that we not disclose details of plans and how things roll out. But safe to say, it's lucrative. And with the success that we've achieved now, I think they're pretty eager to begin to roll this out further in their own operations and within their supply chain.

All right. Okay. And then, of course, you are working -- I presume you're talking with of those top 15 guys or companies out there, you're talking with a bunch of others to roll it out there. I'm guessing you don't have any exclusivities or anything like that. You can't talk to anyone else.

No. We did have a head start just given the investment that SWISS KRONO had made, we gave them a bit of a head start in return for what they brought to the table, which was really time on their lines, but that's in the past now, and we're free to work with anyone.

Yes. And time on their lines, that's an expensive commitment for them and they're shutting down production where they could be making money, they've got staff there. They're -- like that's a significant commitment.

Yes, yes. And once you've been in one of these operations, yes, I'll say the first time I went into one of them and you say, "Wow, we're going to shut this down and introduce our resin here." It's a big investment and undertaking, a big risk for them. So I mean we're really lucky to have had the partners that we did that were willing to take the risk. SWISS KRONO's led by a family business that's led by people who believe in doing the right thing and put their money where their mouth is.

All right. We have several questions here from the audience. So let I'll start asking them to you. And please, anyone else with questions punch them in. If we do address it, we can just -- we'll bypass it, and let's start this off. So could you briefly discuss the abilities to secure key inputs like corn by geography? And you have 2 facilities. You've got 1, I believe, in Tennessee and then 1 in Holland where you manufacture your chemicals?

Yes, that's right. Yes, and that's -- so the first question hit on the biggest issue we're facing today. It's actually securing the raw material for our product, which we never thought was going to be an issue. But in light of the global supply chain issues, and I will say, in particular, the war in Ukraine, that's become a tougher thing in Europe. So we secure corn starch by putting contracts in place in North America. And so we're typically buying a year out in North America. And those contracts flow quite reliably and have continued to flow reliably. So we have our needs covered out until the next corn crop comes in, in North America. And in fact, we may even have a little bit of a surplus that we're able to support some additional capacity in Europe with -- which we need because we're short in Europe right now. Everyone is short in Europe right now. And we're scouring for whatever starch we can find in the short term. We have a team there next week doing exactly that. And we're already earlier than ever. We're looking to secure our 2023 requirements because it looks like it's going to be tight for a while here. So yes ...

And commodity input you buy is corn starch?

That's right.

All right. And let's say, if you were, let's say, running at your $100 million of maxing out your existing capacity, how many tons -- would you be a major corn starch buyer in the market? Or is that still like how many tons would that be using? Would you be a significant player then?

So we'd be a large player. Let's say, we're in the sort of 20 million pounds per year range right now. I mean it's a significant account to the large players, but by no means are we a large account at this point. And at the $100 million level, we'd be a more significant player, but still not the biggest of the big.

Okay. All right. Okay. Given current -- okay, another. Given current corn starch supplies by how quickly can diverse -- I think you've sort of addressed that. Expansion to the total addressable market wet end based on the first commercial account, what are the characteristics of the type of revenue, high volume versus high margin that are being derived?

So that sounds like it's specific to the wet end strength part of the paper industry, the new pillar that we're developing. Yes, so the size of the opportunity per line, what we're seeing so far, is actually pretty similar to what we would derive from a wood composite panel line just by coincidence. But yes, small -- and tissue lines tend to be on the smaller side in terms of the amount of material that they use. That would be in the sort of hundreds of thousands of dollars of opportunity. Whereas a packaging board line has really high throughput and higher use of material in that throughput. And so there, we're talking in the sort of, let's say, $5 million or so range. What I will say though is...

Sorry, just to be clear, like tissue would be a few hundred thousand dollars of annual revenue per...

Per line.

Per line and up to $5 million for the...

For the packaging board, yes. So we measure one and we can really only get that granular today because it is quite new to us. But think about tissue as in the hundreds of thousands, think about packaging board as in the single-digit millions.

Okay. How do I anticipate the current supply chain bottlenecks will transpire specifically in regards to the goal of $100 million in revenues in 3 to 5 years? I guess how are you managing your supply chain as you scale up to $100 million of revenue, any specifics?

Yes, it sounds like that's largely linked to the challenge we talked about earlier, which is securing starch. And if we had a crystal ball on what was going to happen in the global grain markets right now, I think we'd be doing other things as well as running EcoSynthetix. But I mean the only thing that we can do right now is to be absolutely diligent on all of our sources of starch. I think the good thing that we have going for us today is some of the diversification that we've managed to achieve in this wet end strength aid chemistry that I'm talking about, allows us some wiggle room in these tough times to be able to use starch from faraway places. I mean, for example, we're shipping some starch from Latin America into Europe to support some of these new markets. The most important thing to us today, and I think that this gets to the crux to the question, we're going to do everything we possibly can to secure our growth and to secure capacity, starch capacity, operating capacity for accounts like SWISS KRONO and IKEA and make sure that we can continue to grow with them. And then begin to build into some of these new spaces. So that's first and foremost, we're not going to split hairs over the cost of starch. If we can find starch, we're putting it into these growth opportunities.

Yes. And in terms of business development, now that you've got a lot more experience actually setting up a line, everyone's lines are a little different. What does it take to get new business? Like your 10th customer, your 20th customer, they won't need to be run as many tests and so forth because they see that other people are using the product and they probably have confidence. But like can you run through distributors? Or do you still have to send over your engineering team? Or at what point does it sort of just become, hey, ordered out of the catalog and you're kind of good to go?

I think that really depends on the market that we're talking about. It sounds like you're talking, Martin, mostly about the wood panel market, but let me talk about...

I mean all of the markets. I wasn't referring to a specific one.

So in wood panels and in paper, the mills are large and discrete enough and our teams are in place to support them enough that we still see that as a direct model. And I don't think we'd want to relinquish control over that. I think handholding the customer through the process with us is not only good to make things work well, but it makes it sticky as well for the longer run. Other products. So if we think about personal care, we can't hope to have the applications development team or the marketing distribution that our partner in that space has, for example. And so there, our job is really to create great ingredients to their specification. And then they're putting it through the paces of application development and taking it around the world to all these large and then small cosmetic brands to be able to use our product effectively. So it's a -- there are different models for different spaces, but I think we've built the capability in the wood and the paper space that we can leverage to our advantage in a direct relationship.

All right. Okay. And then on that, the business model -- the questioner here, says the business model relies on third-party distributors. It doesn't sound like it necessarily does. How does Eco preempt trends in industry despite a firewall in between?

Okay. I see what that's going. So that's probably most applicable to the personal care space that I just mentioned. And we are one step removed. And so we do rely on our partner to be reading those trends and translating that into things that we can develop to support those trends. And the way you manage that firewall is to have a great relationship. So just last week, we had the Global Head of Personal and Home Care for our partner, which is a multibillion dollar company, visit us in Burlington to do exactly that to just do an exchange of what are they seeing in the market? What are they seeing they need from us? And what should we expect in terms of our journey together. So it comes down to close partnerships again.

All right. And the second part to that question is, are there periodic product satisfaction KPIs in place directly with customers such as IKEA?

I guess, yes, at every level for sure, so...

Yes. You have to have performance levels, if not, you're in trouble.

Yes. And like the first gating item that can be very crude like you either make the Board stick together or if you don't. And then as you get further down the journey though, the KPIs become broader and more sophisticated. So with those large companies like our personal care partner or IKEA, they then get into like their own ESG evaluations of us. So KPIs that are focused on really all parts of the business. But yes, I mean we're gearing up to be an integral part of these large company supply chains. So expected they're going to do their due diligence and have a scorecard for you.

Yes. You did have a slide earlier this with regards to the next question here with different regulatory standards. And so any insight on tailwinds from potential building codes being modernized to address climate change and toxicity? And does Eco foresee potential opportunities for DuraBind?

Yes. So I think we're probably leveraging existing tailwinds there. So these green building standards like LEED certification, the WELL standard. Those have been out there for some time now. And I think what you see as buildings are being built that come closer and closer to the top end of those standards. And we can definitely help with that. So the emissions pieces of those are what we can influence. And by getting formaldehyde out of those spaces, we're definitely helping with that.

All right. And on to a very different topic. Regarding your NCIB, with that being initiated, your share buyback. Why has Eco gone the route of buybacks versus M&A? And if M&A is on the table, what would be the primary premise for technology, customers, add-on technology?

Yes. So I guess I'll say we take a balanced approach, but we'd love to have more balance toward buying something that really made sense, but we've been pretty disciplined in defining what makes sense for us. So it needs to be something that's generating some cash of its own. We have still lots of research projects on the shelf that we could pull off if we wanted more science experiments. So -- but if we could carry products into existing customers or find a new biopolymer or, let's say, green polymer platform that might be working alongside ours that gets into some new spaces. We're very, very interested in that and not a week goes by that we don't look at something. On the NCIB side, on the other side of the balance, we actually -- you might have seen a press release from us just in the last day or so that our NCIB has been put back in place for the next year. We've been consistent quarterly in buying back our stock. But we do it in a balanced way. We think we're buying -- we're actually buying at a level that's fairly similar to the amount we invest in R&D. And as a growth company, we think we should be putting the bulk of our capital toward growth. We'd like to put more of it into the M&A bucket, if we could, and we're trying hard to do that, but we just haven't found the right thing yet. Any idea is welcome.

All right. On that with M&A, it makes me also think of competitors. Are you seeing any competitors out there with technology that sort of solves the same problems or any competitors on your radar that are notable?

I think with the push to eliminate formaldehyde and to reduce carbon footprint, especially in the wood products space, we have seen more activity in that space just in the last few years. But most of the stuff is still on the bench. There's another more mature technology that's been put in place for the plywood industry that's actually been there for about 15 years. That basically has the green plywood industry corner, but it's -- that's resulted in a fairly small business for that company. Plywood is a much smaller space, and it's applied very differently. So the value proposition is different. But there are other technologies out there. I think the most important thing for us is we've got a great head start. So there's a lot of gray hair that's come from the 6-year journey with IKEA, for example, but we also look at that as a head start that other people would have to make up for, and we haven't been resting during that time. They haven't just been trying our first-generation product. As I mentioned earlier, we've actually put out 2 new products in the last 18 months to have pushed our value proposition further, have increased our share of wallet per line in the wood panel space. So we're not going to rest, but we're also not going to be naive and think that there aren't other things coming. They are coming. And to some degree, probably add some legitimacy to the movement toward green resins in this space. We just want to be the first and best and biggest.

All right. we are -- one final question here. Guidance, recalling from a previous call, linear growth shouldn't be expected, said that, would it be diligent for investors to expect nonlinear upward growth, I guess, parabolic, an S curve.

Yes, I think maybe I wouldn't say linear because I would like to continue to draw a line toward the upward trend, but it's a very difficult business to measure sequential quarters on. There's a lot of lumpiness in it due to our work with our customers, supply chains and getting product and long time lines to them in some cases. I mean, in the graphic paper industry, we seem to be regularly having to make up for mill closures. We want to get a base of business now. I should actually mention graphic paper just a few years ago, represented about 90% of our book of business. And today, that's down to, let's say, more closer to half and much less than we consider a gross profit that's coming from that business. So we're getting to a better foundation. But the reality is we're sometimes having to make up for the loss of a mill when one of these mills closes, and that causes some lumpiness when we're at these levels of revenue as well. But over the long run, yes, absolutely, the opportunities we have in front of us have never been better. We see that we're at an inflection point that things should start going up fairly consistently for us.

Okay. And over the coming -- or I'd say we're almost halfway into the year here. What type of news should investors be sort of keeping their eyes out for? I guess you're looking at M&A, so that could pop up at some point. New customer wins, new product launches, sort of, what do you hope to -- for investors to see over the coming 6, 9 months?

Yes. I think the most important thing to look for when we're looking for the growth to the last question is customer and partner announcements. So I would absolutely expect to see some more customer and partner announcements as we work through this year and what comes behind that is revenue that these customers have committed to. So yes, we're excited with what's in the pipeline.

When you add a new major client on board, are you always going to be able to announce that at least at the minimum, hey, we just added an anonymous packaging company, let's say, you may not be able to say who or volumes, but at least you'll sort of let us know that something just happened.

Yes. As soon as it's meaningful to us commercially and then we do that consistently, yes.

All right. Well, with that, we should wrap it up. So Jeff, thank you very much for taking the time to chat with us. And I guess any final thoughts or comments or insights before we wrap it up?

No. I think we covered it all, Martin. I appreciate everyone taking the time to listen to what we're up to and look for some more news flow coming. You hit on the right last point. It's going to be all about new customer wins. And we're pretty confident there's some really interesting stuff in the hopper for us.

Excellent. Yes. Thank you very much.

Thank you, Martin.

Cheers.

Bye.