EcoSynthetix Inc. (ECO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the EcoSynthetix 2024 Fourth Quarter and Year-End Results Conference Call. [Operator Instructions] Listeners are reminded that portion of today's discussion may contain forward-looking statements that reflect current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. For more information on EcoSynthetix risks and uncertainties related to those forward-looking statements, please refer to the company's annual information form dated February 18, 2025, which is posted on SEDAR. This morning's call is being recorded on Thursday, February 20, 2025, at 8:30 a.m. Eastern Time. I would now like to turn the call over to Mr. Jeff MacDonald, Chief Executive Officer of EcoSynthetix. Please go ahead, sir.

Good morning, and thank you all for joining us today. Yesterday afternoon, we reported our Q4 and year-end results. It was another strong quarter building upon the results we reported in Q3. Sales were up 91% to $5.4 million in Q4 from the same period last year. We saw volume demand increases across our end markets, up 82% in the quarter and 56% for the full year. We advanced each of our strategic opportunities across the pulp, wood composites, and personal care end markets. That said, while we continue to see steady progress on our most important strategic programs, we are seeing some softness in volume demand across the base business in the first month of 2025. As we've all heard or read, industrial markets are bracing for a potentially challenging economic climate. Rob will touch on how that could impact us in a moment. Keeping an eye on the potential impact of changes as the news evolves daily, but we're pushing forward with the benefit of a strong balance sheet, proven products and financially secure global customers in our key end markets. We believe we're still in the early innings of our growth trajectory. Not a straight line, we'll experience some choppiness from time to time. But Q3 and Q4 demonstrate the underlying fundamentals of the business, volume growth driving sales, consecutive quarters of positive adjusted EBITDA and positive cash from operations in 2024. As we scale, the EBITDA and cash flow continue to improve. Progress we're demonstrating across our strategic opportunities is key to building that scale. Earlier this month, we announced a new win with the first commercial line from an international pulp manufacturer. This win is an important milestone for our fiber strength offering, SurfLock, in the pulp end market. Customer has validated that their high-strength pulp grade containing our ingredient has a strong value proposition, and they now have multiple end customers making repeat purchases. The $1.1 million order we announced will secure sufficient supply for these initial end customers over the course of the year. What's given our customer the confidence to place this meaningful order with us is the consistent strength and value that their enhanced pulp using SurfLock has been able to deliver to multiple customers. Strength is the overall measure of performance, but it's what that strength delivers in measurable value to their end customers that is compelling. This can include significant increases in line speed by having a stronger paper product, the elimination of existing process aids for cost savings, reduction in energy-intensive refining and fewer line interruptions due to sheet breaks. Going commercial is an important step for them and us. It's a great starting point, but it's just the start. There is more work to be completed to make this end product successful in what is a massive potential opportunity. Most of that work is now on our customers' side, but we'll be supporting them, and it's going very well. They're investing in the marketing and customer support for this new product. It is taking a much more prominent position in how they're talking about the business. This initial line is the first win. International pulp manufacturer has other mills that supply different end customers and applications. They have conducted extended trials with our strength aids at multiple mills within their asset base, and this trialing continues in mills not yet considered commercial. Their momentum with the product launch is being noticed across the market. We're hearing from other manufacturers across the pulp and paper industry that strength aids align with their growth strategies. Packaging, pulp and tissue are the key strategic growth categories for them, and they're faced with an increasingly challenging supply of softwood fiber at higher costs. Hardwood and recycled fibers are cost-effective alternatives, but the manufacturers require help to strengthen those fibers and make them perform comparatively to higher-priced softwood fiber. Our strength aids address this performance gap in the market and the addressable market is significant from a volume perspective. We're very excited about the progress in this market. We also continue to make progress in the tissue end market. While the volumes used on an individual line are much smaller than in pulp or wood composites, together across multiple lines at one producer, they can become meaningful. For instance, we expect the first tissue manufacturer that went commercial with us to shortly go commercial with our strength aids at its fourth and final mill. They'll be using SurfLock at every one of their tissue mills at that stage. And taken together, that's a meaningful amount of volume. A little piece of a growing area of the business where we have a lot of activity with other customers, partners and prospects across different geographies. Tissue pipeline continues to build and to yield small wins step by step. On the packaging front, we've made good progress with a key account. Based on their first operating line, we have taken findings from that line and conducted reformulation work that will support additional growth on that line. Our development team and our partners have used this opportunity to fine-tune another variation of our product, which we think is going to be very helpful for performance and economics in the packaging end market. It's a case of continuous innovation. And that continuous innovation is key to our success across various end markets. Development work we've conducted with our key strategic wood composites customer that is backward integrated into an international retailer started the same way. The earliest version of the DuraBind product we were using with them was a vanilla variation of what we use today. As we learned more about the application through various trials, we added more products and variations like the tackifier and the catalyst, bringing more value and innovation to the customer. We have something that clearly works. Trials and our findings were able to evolve the product to deliver even better performance and economics and extend our lead. We continue to see progress from the key strategic wood composites manufacturer. They took a step-up in usage of our wood composites binder DuraBind in August of last year, and we saw strong volumes from them through the end of December. They continue to highlight the benefits of bio-based glues in the reduction of their carbon footprint. We continue to trial product on a second line of theirs at a different facility. We're in that facility with them on a monthly basis now to ensure everything within our control is supportive of a decision to go commercial. That line is not quite there yet, but it's close. International retailer produces approximately 1/3 of the particleboard they use from their own production assets. The other 2/3 is produced by third parties. With the support of the retailer, we've been working with some of their supply chain partners. To meet the retailer's goal of eliminating petroleum-based binders from particleboard by 2030, their supply chain partners will be required to pursue bio-based alternatives like our DuraBind offering. We've met the technical performance requirements in our trials with these mills. However, the timing of when to move to commercial status resides with the third parties and their customer. We remain confident that wood composites can be a significant growth driver for us, starting with the international retailer and expanding across their different assets as well as expanding into their supply chain partners. They have a demonstrated track record of leading the world in changes to safer and more sustainable products. On the personal care front, Dow is highly engaged. While still off a low base, their sales in 2024 were up substantially from the prior year. They are building a pipeline of prospects that they have a high degree of confidence in, and they continue to expand the range of applications beyond hair fixatives that use our all-natural polymer. We see momentum in the market, and that's why they're expanding the portfolio and investing in development and marketing. We believe personal care is a warrant to our growth strategy that will be driven primarily by pulp, wood composites, packaging and tissue. That growth strategy is starting to show through in our financials. Improved demand drove higher volumes in the back half of 2024. We're making progress across each of our key end markets as evidenced by the new win in pulp, the higher demand, the continued commitment from the international retailer and Dow building its pipeline. Still early, but momentum is building. With that, I'll turn it over to Rob to review the financials. Rob?

Thanks, Jeff, and good morning. Net sales were $5.4 million in Q4 2024, up 91% compared to the same period in 2023. Annual sales were $18.5 million, up 46% from 2023. In the quarter, higher volumes increased sales by $2.3 million or 82% and a higher average selling price increased sales by $300,000 or 9%. In the annual period, higher volumes increased sales by $7.1 million or 56%, which was partially offset by a lower average selling price, which impacted sales by $1.2 million or 9%. The lower average selling price in the annual period was primarily due to lower manufacturing costs, which were passed on to customers. Net of manufacturing depreciation, gross profit as a percentage of sales was 34.4% and 33.2% in the quarter and annual period, respectively compared to 21.9% and 28.9% in the same periods in 2023. The improvement in each period was primarily due to lower manufacturing costs. And again, average selling price was a positive contributor in the quarter and a slight drag in the annual period. Gross profit was $1.6 million in the quarter, an increase of $1.1 million from the same period in 2023. In the annual period, gross profit was $5.3 million, up 91% or $2.5 million compared to 2023. In both periods, the improvement was due to higher volumes and lower manufacturing costs. Average selling price contributed to growth in the quarter, but was a slight drag in the annual period. SG&A expenses were $1.8 million and $6.5 million in the quarter and annual period, respectively, compared to $1.3 million and $5 million in the same period in 2023. The increase in the quarterly period was primarily due to foreign exchange losses of $200,000 due to a weakening of the Canadian dollar compared to the U.S. dollar at year-end, an increase in variable-based compensation of $100,000 as well as an increase in performance-based equity compensation of $100,000. The increase in the annual period was primarily due to an increase in variable-based compensation of $400,000, an increase in performance-based equity compensation of $400,000 and $300,000 of asset relocation costs associated with the manufacturing footprint realignment project, which we completed this year. R&D expenses were $360,000 and $2 million in the quarter and annual periods, respectively, compared to $560,000 and $2.3 million in the same periods in 2023. R&D expense as a percentage of sales was 7% in the quarter and 11% during the annual period. Our R&D efforts continue to focus on further enhancing the value of our existing products and expanding our addressable opportunities. Adjusted EBITDA was positive $90,000 in the quarter, an improvement of $1.1 million from the same period in 2023. Adjusted EBITDA loss was $860,000 in the annual period, an improvement of $1.7 million compared to the same period in 2023. The improvement in each period was primarily due to higher gross profit, partially offset by higher operating expenses adjusted for non-cash items. Cash used in operating activities was $880,000 in the quarter, in line with the prior period of $980,000. Cash provided by operating activities was $1.1 million in the annual period, an improvement of $790,000 compared to 2023. As of December 31, '24, we had $32.2 million of cash and term deposits compared to $33.3 million as of December 31, 2023. During the 12 months ended December 31, we invested $2.2 million into the NCIB to purchase and retire 679,000 shares, including $500,000 in the quarter to retire 174,000 shares. We have demonstrated our ability to responsibly manage our cash reserves through multiple cycles while continuing to invest in our long-term growth strategy. I also want to take a moment to address the potential issue of U.S. and Canadian tariffs and how that could impact us. We have very limited exposure on tariffs going into the U.S. as our sales into that market are relatively low today, and our key strategic accounts in wood composites and pulp manufacture their products outside of the U.S. market. 2024, we estimated that approximately $1.6 million of revenue would have been impacted by the U.S. tariffs if they were in place during the full year fiscal year 2024. This would have created approximately $400,000 of direct tariff exposure to our business, assuming there was no ways to mitigate this. On any potential retaliatory tariffs on goods coming into Canada, we also had limited exposure in 2024. In addition, the initial list of goods published by the Canadian federal government, starch and other primary raw materials we import from the U.S. were not listed. That doesn't mean they couldn't be added at some point as it is very fluid situation, as we all know. The other aspect which is harder to quantify is how tariffs would impact our customers and indirectly their demand for our products. At this stage, we do not know if tariffs will impact their outlook if they are implemented, but we will continue to monitor the situation as it evolves. With that, I'll turn it back to Jeff for closing comments.

Thanks, Rob. It was another strong quarter in Q4, growth in volume and revenue as well as positive and improving adjusted EBITDA. We're advancing our key strategic opportunities in pulp and wood composites as well as personal care, packaging and tissue. Demand across every end market was up. We're still in the early innings. Industrial change can be slow as we've experienced. We're displacing chemistries that have been used for decades. Bio-based polymers offer a healthier and safer alternative. They support improved performance and economics in the production of pulp, support our customers' carbon footprint reduction and safer materials strategy in wood composites, and they address the growing demand for all-natural products in personal care. Our innovative polymers offer an alternative to those old conventional petroleum chemistries. We're gaining momentum in the market. Never a straight line, but we're excited about where we stand today and the progress we're making. With that, I'll ask the operator to open up the call for some questions.

[Operator Instructions] Our first question comes from the line of Brian Morrison.

It's nice to see the positive trends in Q3 continue into Q4, Jeff, in addition to the new win last week that sounds like it could just be the tip of the iceberg. So maybe we can just start there. So the $1.1 million contract seems like it could emerge into something material, yet it only -- it runs through 2025. Your client, it sounds like, is trying to fill a 2 million tonne structural gap that is like $50 million to $60 million to ECO. Granted it could take some time, but can you just reconcile the $1.1 million order to the potential of one line? Is this a base load for their current clients? And do you expect this to lead to add-on orders for this line in 2025 as greater trialing leads to heightened customer penetration?

You used the word base load, and I think that's a good word, Brian. So I think and we don't have full visibility into how our customers is thinking about everything and how it's directly going for them in the market. But I think they've been very pragmatic in placing an order with us to secure volume at a given price for what they require for the recurring customers they've established for their enhanced pulp. I believe that's what this represents. So definitely growth upside opportunity at the existing mill that's qualified as they build more customers. And I think as importantly, maybe more importantly, is that they continue to trial at additional mills within their portfolio, which, I guess, in the grand scheme of things is a little surprising to us given where we started and how we thought about this. We were thinking that it would be more of a specialization strategy that one mill may be more focused on producing this enhanced pulp. But I think the customer has learned that they're serving different markets, maybe different applications, definitely different customers from different mills, and they want to have the capability to produce the enhanced pulp from additional mills. So we continue to do that work with them, and that's also going well. So it represents growth opportunities for those other mills as well. The $50 million to $60 million to ECO that you referenced is really what would be required to support an entire -- and their mills are large by global standards, but it would be what's required to support an entire mill being converted over to enhanced pulp. We feel that that's probably going to be spread out over multiple mills going forward. But I think that 2 million tonne structural gap is what they're trying to address regardless of whether that's from one mill or multiple mills. And that's what we keep our eye on. We can't forecast or target anything better than they can. So we're following them. But that's the gap they're trying to fill, and that's what it would represent to us.

So they have 6 or so mills. How many of these have you tested upon?

We're not going to get into specifics of exactly what and where our activities are with them. That's proprietary to them, but it's multiple mills. They have 8 mills today, and we've been in a significant number of those mills so far.

And you did say this in your prepared comments, but I just want to make sure I understand it correctly. So beyond the structural gap, they're testing at other mills. Just to simplify, what you're doing is you're getting improved strength that leads to a premium product and price to current hardwood to your customer and then that dominoes to production cost savings to the end customer through line speed and energy savings. Is that correct?

Yes. Yes, that's pretty close, I would say. So this enables their customers to simply use hardwood pulp where they might not have been able to use it before and where we see that it's increasingly difficult to source softwood pulp. And if it can be sourced, it's at an increasing premium. The premium today is somewhere north of USD 200 a tonne. And so like we're not privy to exactly what our customer strategy is in terms of going to market, but they could fill that gap, let's say, at existing hardwood prices and go after share and still enjoy their fairly significant EBITDA margin on that additional pulp or they could put this in the market as a premium product somewhere between existing hardwood prices and that $200 premium softwood price and position this as a premium product in the market. But one way or the other, they're looking to fill that structural gap where softwood fiber is just becoming harder and harder and more expensive to source.

So it could go beyond just a structural gap. There could be also savings to softwood or premium product to the current hardwood and the product is improved relative to what's currently in the market.

So ultimately, one way or the other, it results in cost savings to their end customer.

I don't want to get into details, Jeff, but have you done the math to their underlying profitability at the pulp producer? And if so, do we think of this as material to them and as such a priority in terms of their near to midterm strategy?

We have. Again, those are their numbers. So we don't want to speak to their numbers, but they have substantial EBITDA margins. And if they could sell 2 million tonnes more pulp as a result of having an enhanced pulp offering, we're talking in the range of hundreds of millions of dollars of EBITDA improvement to their bottom line. So it's very meaningful for them. And I think it's why you're starting to see it emerge as a topic that's spoken about at the C level in presentation. So definitely meaningful to them.

Okay. I'll leave it there on that topic. I appreciate your details. Just in terms of -- because there's a lot of focus on this and the magnitude, are you seeing heightened interest or trialing progress with other pulp producers as well?

Yes, I would say not nearly to the same degree. And a big part of that is just because of the head start and working together we had, but definitely interest and some early activity with others in the pulp world and a much earlier developed and growing pipeline in the direct application space as well in tissue and packaging boards. So through our partners and through some direct activities at those mills, that pipeline continues to build, and we're achieving some small wins step by step there as well.

Okay. So I guess in terms of tissue and paperboard, the message is you're winning contracts, albeit small, trialing continues and potentially we could get more tissue and paperboard wins on the horizon?

Yes. That's right.

Okay. And I guess in terms of -- you've invested in your Burlington facility, and I think Europe as well. Do you have the capacity to ramp should your potential customers go full steam ahead? Or would you need to put another facility closer to the operations? Is this something you're thinking about or even discussing?

Yes, there's really 2 steps to that. So we have the capacity today to grow the business to in the $100 million range. And so that could be from virtually any mix of our products. So if any one of these accelerates, then we regularly think about what our expansion opportunities may be to serve that in the best way. And in some cases, that could be closer to starch sources. So it's probably to support a more diverse base of business. But if we had a concentrated base of business, for example, to support a large pulp opportunity, we could consider putting our next asset in there. But I think to make the line viable for us and ultimately for the customer as well, we need to see growth through 10,000 tonnes or so before that begins to be real on our radar to the point where we're beginning to map out clear investment decisions. But we're looking at those scenarios all the time.

Right. If my math is correct, 10,000 tonnes would be like $30 million to you, correct?

In the $20 million to $30 million range, yes.

Okay. Can we just turn to your major wood products company. It gets overlooked, but it sounds like it's a big opportunity, and you said you had record volumes in Q4. Do I get it correct? The second line is moving forward without issue. You expect it to go commercial this year. And if that's correct, is -- are you seeing momentum continuing in Q1?

Yes. I would say we're seeing activity momentum continuing in Q1. I think they stepped up to this new level of real volume, commercial volume in August, and that has sustained. And I think it's going to take now turning on the second line, and we're hopeful that the lines we've worked out within their supply chain also turn on. It's going to take those becoming commercial to step up to the next plateau of growth in that space.

Are you saying they're external producers when you refer to that?

Yes.

Like has the time line changed forward or back from last quarter with respect to their external producers?

So the time line, as I mentioned in the prepared remarks, is really in their hands. We've done the work in terms of technical validation. Obviously, if we get called back in to help with something that they want to achieve that's more than what we've already established, we're ready and willing to do that. But I think we've done our technical work to validate that our technology works, and it's really, I would say, more of a commercial discussion between our current customer and their supply chain partners as to when those other pieces turn on.

Okay. Just 2 more questions and then I'm done. Dow, it says that they're expanding applications and it's setting the stage for stronger growth in your release. It's small dollars, but it's massive margins. So small wins are nice, but are your conversations turning more encouraging? Could we get a breakthrough on a more notable win in 2025 in hair care or other?

Yes. I think I would say it's steadily grown more and more encouraging. And the fact they continue to invest more and more in development of new applications on their side and engaging with our team on developments of new variations of our product. And they've put a massive investment into marketing, both them and their downstream distributor partners. That to us is very encouraging. We, from time to time, get a window into their pipeline, which is growing. We know that within their organization, they're placing most of their efforts on the big customers and the big conversion opportunities. And I think we're learning more and more that those big conversion opportunities, as you can imagine, take longer if you have a large established brand on the shelf, to ensure that you're not impairing that brand in either way -- in any way while enhancing its all-natural ingredients. That's a big undertaking that has a lot of risk as well as opportunity tied to it. So those take longer. But what keeps moving forward and contributing to the growth is just the little wins that are happening step by step. I was over in Asia a week before last and actually found some product with Maize Care in it on the shelves over there from small upstart brands. And the other interesting thing we're learning about this market is that all upstart brands kind of pave the way in terms of swinging consumers over to all-natural ingredients or something that is the trend in the market. And the big brands then take note of that and either have to follow them and follow that approach or swallow them up to be able to grow using them. So I think we're seeing all of that happening with Maize Care being used by Dow in their supply of all natural ingredients.

Very good. Okay. Last question, free cash flow positive for the year, including lease liabilities. That's on $18 million of revenue. I think that's pretty impressive. The message I'm taking overall here is the concept is now a reality, the potential is significant, and you're in early days of capitalizing on this opportunity. And we know that increasing sales are going to -- should fall right to the bottom line, including no taxes and then boost free cash flow. I assume you're probably going to maintain your NCIB. But as these sales grow, could you potentially go bigger? Or would you like to invest in mills closer to future material clients or perhaps both?

Yes. So I would say I'm thinking about this differently than I was even a year ago. So in a challenging environment, cash feels to be more king, and it's great to have the backstop and the ability to do whatever we need to, to push our agenda forward. But I think more so just with unlocking some of this potential and seeing things begin to take off in the pulp market, we're thinking more and more about how we use this to help support the growth that now seems like more and more of a reality. So that comes first and foremost. The free cash flow potential is looking interesting for sure, but it's still showing up small on our bottom line today. So we're not going to make any significant changes in how we address the use of our cash in terms of the buyback in the short term here for sure. We're looking at being a blue-chip company in the future and hopefully returning cash to shareholders in the form of a dividend at some point as well. But that's all longer term. In the shorter term, we're thinking really about ensuring the security of the business and being able to use our capital to support the growth in smart ways, which could include putting some new assets in place to support some of these growth opportunities.

That's good to hear. Well, listen, I appreciate your color. Good luck. Look forward to seeing further success develop on numerous fronts.

[Operator Instructions] And ladies and gentlemen, there are no further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect. Have a good day.