Impact Coatings AB (publ) (IMPC.ST) Q2 FY2025 Earnings Call Transcript & Summary

Hi, and welcome to Impact Coatings Second Quarter Report 2025. With us to present, we have CEO, Jonas Nilsson; and CFO, Lena Aberg. [Operator Instructions] And with that, I give the word to you, Jonas.

Hi, everyone, and welcome to this presentation of the quarter 2 financial report. Here is the agenda. We will start with a brief company introduction, then highlights from Q2 and market update. Lena, who is beside me here, will go through the figures, and we will make a summary at the end before the Q&A session. Impact Coatings is a global technology leader and full-service provider of coating solutions using PVD technology. PVD stands for physical vapor deposition, a clean process of applying thin layers of coatings to enhance surface properties and prolong life span and improve product performance. We build machines for PVD coating, and we offer coating as a service. The company was founded in '97 and has since then expanded in Europe, Asia and North America. Today, we manufacture machines in Sweden. We offer coating as a service from Sweden and Shanghai. And we have sales offices in U.S., Korea, Germany, Sweden and China. We're also prepared for a coating service center in U.S. because with local presence in U.S., China and Europe, we avoid to get affected by trade wars. PVD is a horizontal technology that can be applied in many market verticals. We have chosen market verticals within 2 focus areas: energy and hydrogen on the left; and metalization solutions on the right. We focus on energy and hydrogen where we are striving for market leadership. Another way to divide the market is in the following application areas: PEM electrolyzers, mainly metal coatings on titanium, but also some catalytic coatings; PEM fuel cells, mainly ceramic coatings on stainless steel; solid oxide fuel cells and electrolyzers, SOFC/SOEC; advanced coatings of stainless steel. Waveguide antennas, metalization of plastic to get it conductive and work as an antenna. Radars, mainly radar transparent decorative coatings, that is decorative coatings that doesn't interfere with the radar. Reflectors, mainly shiny metal coatings on plastic for lead-like reflectors. And finally, decorative, which can be both coatings on plastic and on metal. Q2 highlights and market update. We start with net sales for the rolling 12 months, which amounted to SEK 90 million. It is a departure from the upward trend due to the lack of system deliveries in the first 2 quarters this year. Our long-term growth ambition remains firm, and we are actively working to broaden the revenue base and increase the stability of the business over time. We will go into this in some detail during today's presentation. Total Q2 net sales amounted to SEK 6.5 million, down from SEK 31.7 million last year. This is primarily due to the absence of coating system deliveries, a direct effect of slower customer decision-making. It's not a lack of interest. We continue to see active dialogues and strong customer interest, but we see that both a turbulent world and uncertain market conditions are affecting customers to postpone investments awaiting policy clarity or internal rules. As we enter Q3 of '25, we see positive signals in terms of policy clarifications and the hydrogen market moving towards industrialization. I will come back to this. Coating Services reached SEK 4.4 million compared to SEK 2.8 million for the same period last year. Activity picked up toward the end of the quarter particularly in China, and we now see increase in volumes. Starting in July, Chinese operating in 2 shifts. This is primarily due to significant order volumes driven by FTXT. FTXT is a great walled motor company, making fuel cell stacks. And since last year, we have a collaboration. In April, we received a letter of intent about continued volume supply of coating services through 2025. And now in the beginning of Q3, they have doubled their volume forecast for '25 to a volume corresponding to about SEK 13 million for this year. Aftermarket reached SEK 2.1 million. The financial results for the quarter reflects a challenging market environment where delays in customer investment decisions have impacted sales and cash flow. So the Q2 operating profit after financial items is minus SEK 15.8 million compared to minus SEK 3.8 million last year. Cash at the end of the quarter was SEK 30.8 million. We do have a strong focus on increasing revenues, but we have also adapted to the market situation and implemented operational and financial actions for liquidity resilience. The first half of '25 has been challenging. But with that said, we do see some light. As we have talked about before during these sessions, the sales cycles in our markets are long, and you need to get what is called qualified to get real volume orders. The way to qualification goes through repeated sampling orders. During the quarter, we received 2 of the largest sanding orders so far. This means that the customers are committed to continue evaluation and qualification, and that the customers are prepared to pay a decent amount to do that. One of those customers are in the aviation industry. We also see that the North American market starts to pick up again, and especially that our previous large American electrolyzer customer is coming back with volumes that will start to ramp up during Q3. We produced significant Coating Services volumes for this customer, especially in the first part of 2023. We also see a transit from sampling to industrialization, not only by large sampling orders, but also by discussing and signing Coating Services frame agreements such as the one that we announced on June '24 with the European PEM electrolyzer manufacturer. Since July, we are running 2 shifts in Shanghai. With the improvements we have done in our factory with more machines and automation solutions, we expect the volumes in number of coated pieces to be significantly higher this year than last year. So although we had a slow start of '25 due to uncertainties in the market, we expect the Coating Services volumes in Shanghai to be better this year than last year. That brings us to the next slide. While some markets remain cautious, strategic developments in the important geographies point to a growing momentum that supports commercial readiness. Across our key markets, we see continued momentum in hydrogen investments, each driven by different strategic priorities. In the U.S., this summer's big legislation package resulted in much better conditions for hydrogen industry than many had anticipated and much better than the original proposal in the spring. The tax credits for hydrogen and fuel cell investment from Biden's Inflation Reduction Act remained, but with new end dates. To be clear, the time windows were reduced, but the legislation now gives clear rules and customers a clear time window to act. This time window may even push them to act now. Looking at China. Although the next 5-year plan has not been decided, it seems clear that we will see a continued focus on hydrogen, shifting from consumption and mobility towards production and industrial use. This is positive for us as we are active not only in fuel cells, but also in PEM electrolyzers and emerging markets such as solid oxide fuel cells and electrolyzers. South Korea stands out with energy security as the main driver, creating a demand for reliable and proven technologies. The so-called Clean Hydrogen Energy Portfolio Standards is a South Korean state-led program that promotes clean hydrogen power generation by requiring utility companies to source a share of electricity from hydrogen-based technologies. Through long-term competitive tenders, companies can win contracts to build and operate facilities such as SOFC power plants. And the background is the fact that South Korea has very few friendly neighbors to buy power from. The EU shows strong support on paper, but policy implementations take more time than in other regions. Nevertheless, as mentioned earlier, we see hydrogen companies also in Europe increasing sampling activities and moving to industrialization, and we are well positioned to serve markets where investment decisions are moving forward. The broader trend remains clear. The hydrogen market is gradually shifting from pilots and innovation programs to commercial structure business models, a development that aligns well with our offering and strategic positioning. Hydrogen is a carrier of energy like batteries. The energy still have to come from somewhere. By using technologies like electrolyzers and fuel cells, you create the flexibility that is needed to, over time, transit to a greener society or become more energy independent. And by using the same technology but with other fuels, you can also address other challenges. So you don't have to be green to like hydrogen or to like hydrogen technology. We are very encouraged to be involved in providing technology solution for the transition to a greener society where energy comes from renewable sources. But with that said, we are also working with non-green energy applications that are purely commercially driven. In the near-term market, we see several commercially driven non-green applications of an energy-related and often with alternative fuels, not pure hydrogen. Some examples, powering data center with natural gas and SOFC during the time it takes before the location gets access to proper grid connection; distributed energy supply by natural gas and high efficiency SOFC at multiple places in the grid, instead of 1 central gas turbine with medium efficiency that requires a high-capacity grid. Powering cruise ships in a silent and more power-efficient way by use of ammonia and fuel cells. No noise food truck by PEM fuel cell power generators to substitute diesel generators. City hopper airplanes powered by low-weight hydrogen rather than kerosene to provide affordable, environmentally friendly short distance flights. Methanol-powered power banks for soldiers in the field that cannot carry a lot of heavy batteries, not a green application, but maybe you can call this a camouflage green application. And don't worry, there are also civilian users for those power banks. So the conclusion is that there are 2 trends working to our benefit. After a turbulent period, we see more political stability when it comes to hydrogen, and we also see more commercially driven applications that are more energy related. While order timing remains uncertain in the hydrogen market, we've used this period to strengthen our operational and financial position. We have built systems to forecast and secured inventory readiness to shorten lead times when customer decisions materialize. In China, we have upgraded our production capacity with improved automation and quality control, which also includes a major update of our IC2000 coating system, which allows us to scale production in a cost-efficient way. In response to higher volumes and forecasts, we have ramped up to double shift operations, but we did that after the quarter end. We maintain a strong focus on sales and market engagement to keep momentum. And finally, our technical development continues to expand with progress in SOFC/SOEC and iridium coatings, both through own development and several commercial partnerships. We are taking concrete actions to meet the current financial situation. During the quarter, we implemented and completed a cost reduction program expected to lower personnel costs in the parent company by 20%. The full effect will materialize gradually. The actions affected 10 roles, including consultants and the temporary freeze on salary adjustments. These were necessary but carefully considered actions. In China, we secured favorable local loans to support operations. This strengthens financial independence and reduces the need for capital contributions from the parent company. Last quarter, we also transitioned to a more generic stock of precious metals, improving capital efficiency and reducing cost and risk exposure. And the generic stock means that we do not have inventory that is locked to certain customers. So we don't have customer-specific inventory. All these measures strengthen our financial resilience and, at the same time, we remain humble to the current situation. And we are ready to take further steps if necessary. Now it's time for Lena to take us through the numbers before we end with a short summary and Q&A session.

Thank you. I would go through most of the rows in the income statement, and we start with the quarterly figures. As Jonas mentioned, net sales were SEK 6.5 million, a decrease compared to SEK 31.7 million in Q2 last year when we had 1 coating system included in sales. Sales from Coating Services increased to SEK 4.4 million compared to SEK 2.8 million in Q2 '24. And aftermarket sales decreased to SEK 2.1 million compared to SEK 3.2 million last year. And the decrease in aftersales was in China as well as in Sweden. Looking at capitalized work for own accounts, a decrease compared to the previous year and was SEK 1.0 million compared to SEK 5.7 million last year, where we had ongoing work on machines for our own use. Change in work in progress was SEK 6.8 million in Q2 compared to minus SEK 12.9 million Q2 last year, when we had sales of a coating system. So total revenue was SEK 14.7 million compared to SEK 24.7 million Q2 last year. Going down to gross margin. It was 48% for the quarter, which was lower than the 75% in Q2, which was mainly due to lower net sales this year. And instead, we had higher change of work in progress, but which is without margin. Going to other external costs. They were minus SEK 5.7 million compared to minus SEK 6 million Q2 last year. And the increase we have had in rental costs was compensated mainly by lower other costs such as consultant fees, lawyers and conference costs. Personnel costs were minus SEK 15.3 million compared to minus SEK 15 million last year. This includes a larger average number of full-time equivalents, 60 FTEs versus 58 for Q2 '24, but where the number of FTE at the end of the quarter was now 57 compared to 60 last year. We have some further decrease in July and August from the cost reduction program, which was implemented in Q2 as well. There was an increase in depreciations, minus SEK 1.9 million compared to minus SEK 1.4 million in Q2 last year due to the investments in own coating systems last year. In total, the quarter adds up to a net loss of minus SEK 15.8 million compared to minus SEK 3.8 million in Q2 '24. Going to the cumulative figures for the first half of '25. Total net sales were SEK 16 million compared to SEK 35.7 million first half '24 and, again, mainly due to the machine sales of SEK 25.7 million last year, while we have no coating system sales this year so far. Coating Services sales more than doubled to SEK 10.0 million compared to SEK 4.4 million the first half last year. Aftermarket sales increased as well to SEK 6.0 million compared to SEK 5.6 million in last year and with the increase in China. The total revenue was SEK 34.4 million compared to SEK 32.2 million first half of '24. Net sales were lower than last year, but with a change in work in progress of plus SEK 14.9 million compared to minus SEK 10.1 million first half of '24. If we move down to gross margin. It was 50% for the first half year compared to 67% first half '24, mainly due to lower sales so far this year. And the change work in progress, which is rather high this year is without gross margin. Other external costs were minus SEK 11.6 million compared to SEK 11.5 million first half '24. And as mentioned, that the increase in rental costs is compensated by lower other external costs, for example, consulting, lawyers and conference costs. Personnel costs were minus SEK 31.2 million compared to minus SEK 28.8 million the first half '24. The difference is mainly from the first quarter, and there have now been a shift, as I mentioned. So at the end of Q2, the number of full-time equivalents was 57 compared to 60. But some of our initiated cost saving measures in Q2 haven't yet had full impact during Q2 '25. Depreciations were minus SEK 3.7 million compared to minus SEK 3.1 million, and this was due to the investments in own coating machines last year. Currency exposure resulted in a foreign exchange loss of SEK 0.8 million compared to a SEK 1.5 million exchange gain first half '24. Interest income was close to SEK 0 compared to SEK 0.8 million last year in income. And in total, this adds up to a net loss of minus SEK 30 million for the first half of '25 compared to minus SEK 19.7 million first half 2024. We move to the balance sheet, starting with fixed assets. Intangible assets have increased in capitalized development costs, SEK 2.7 million, which is mainly development in next-generation coating sources. As for tangible fixed assets, we have some investments for installations and other fixed assets, in total, SEK 1.4 million. And part of the decreased value of tangible assets are due to currency effects, a weaker Chinese yuan. We have SEK 16.3 million defined as long-term accounts receivables. Looking at inventory. Total inventory has decreased by SEK 11 million from year-end, where raw materials decreased SEK 23 million, from SEK 94.5 million at year-end to SEK 71.1 million by the end of Q2. And this is mainly due to some noble metal inventories have been sold. Work in progress increased by SEK 12 million to SEK 20.2 million compared to SEK 7.7 million at year-end. Short-term receivables have decreased by almost SEK 28 million, mainly due to received customer payments. Outgoing cash balance was SEK 30.8 million compared to SEK 32.5 million at year-end, and we will come back to cash flow on the next page. In the row long-term liabilities, we see the long-term part of the raised loans at our subsidiary in China, and it's SEK 1.8 million. Prepayment from customers have decreased, which is partly from returns to customers, some netting with receivables and also some currency effects. Short-term liabilities decreased in accounts payables, and this was mainly in the first quarter. And then short-term liabilities have increased in Q2 due to the raised loans at our subsidiary in China. So the short-term part of the loan is SEK 18.7 million. Moving to the cash flow. We can, at the bottom, conclude that we end the quarter with a cash balance of SEK 30.8 million. But if we look at the different rows from above, the cash flow was, of course, negatively affected by the operating result for the first half of '25, minus SEK 30.1 million in operating loss after depreciation. There was a positive cash flow effect from the decreased working capital of SEK 8.3 million, mainly driven by customer payments and decrease in inventory, but then we have decreased short-term liabilities. So cash flow from operations was minus SEK 19.2 million compared to minus SEK 25.8 million in Q2 '24. Investments have been kept at a low level during the first half of '25, SEK 1.4 million intangible assets, and then we have had capitalized development cost of SEK 2.7 million. So in total, SEK 4.1 million compared to SEK 8.2 million last year. Cash flow from financing activities was plus SEK 20.5 million and reflects the loans raised by our subsidiary in China. In total, this resulted in a negative cash flow of minus SEK 2.8 million for the first half of 2025 compared to minus SEK 34 million same period '24, and a closing balance of SEK 30.8 million compared to SEK 85.7 million last year and SEK 32.5 million at the year-end. This was financial update, which means that we now move on to the summary and outlook.

So summary and outlook. Start with hydrogen market, we continue to see delayed investment decisions, especially in system sales, but our long-term confidence in the market is unchanged. We see geographical momentum in several key markets. The industrial interest is increasing, and the fundamentals for growth remain strong. Broadening from traditional view, several commercial applications not primarily driven by being green in the sales pipe. Positive market signals and strong pipeline, 2 examples are the 2 large sampling orders we received in the end of the quarter. Systems in inventory. We prepared systems in stock. We are well positioned to deliver on short notice once customer decisions are made. And with systems in stock, we mean that we have systems of all sizes ready for final configuration for short-term delivery. Strategic tech development. Key development areas are progressing well with promising test results and ongoing partnerships. Continued focus. We do have a continued strong focus on driving sales, which is the main path to profitability while maintaining cost control. So with that, we move to Q&A.

[Operator Instructions] And with that, I give the word over to our first caller with the number ending in 8-6-7-4.

This is [indiscernible] calling in from ABG, standing in for Lara Mohtadi today. So my first question is that given the global economic uncertainty and caution among your customers, how is your visibility on customer demand changed? And do you expect any system deliveries in the upcoming quarters?

In general, we do not give any forecast, but what I can say is that we still do have a strong sales pipeline. Typically, we do not lose orders, but we see that there is a delay. So customers tend to delay investment decisions. So in our sales pipeline, we don't see that any close loss, but we see some closing dates that are moving. So we are still very confident in the market, but it's a slower market.

Yes, I see. So if I may follow up. In the report, you mentioned the development of solid oxide applications where your coatings have shown good performance. Could you outline some of the commercial relevance of this, i.e., the industrial applications of the solid oxide applications?

Yes. If you look at vehicles and transportation, then you typically use PEM fuel cells because PEM fuel cells has the advantage that you can turn it off and turn it on very easily. For more stationary power, it's not that important that you can turn it off and turn it on. You can still ramp the power on solid oxide. The benefit with solid oxide is that you have higher efficiency. And if you look at, for example, small power plants to balance the grid, so instead of having a large gas-driven power plant at one place, you can place small solid oxide power plants in the grid where they are needed. And you can power those power plants either by hydrogen if you want to be green or you can power it by natural gas if you want to have as low cost as possible in the beginning. But I mean, in the end, there will be hydrogen so you can power those power plants with hydrogen that is coming from green energy.

Right. Great. And a final question, if I may. So what initiatives will it take to further reduce working capital and increase the financial sustainability in H2? Are you committing to any other measures to secure long-term liquidity in the coming quarters? Perhaps, a bit more in depth on the liquidity resilience measures.

We're looking into efficiencies and improvements in general. And of course, the best way of improving working capital is to sell machines. So we decreased the work in progress.

Now we'll move over to some written questions here. First question, how is the work with Smoltek going?

Yes. We do have a partnership with Smoltek. We have previously announced that, and it's within the area of iridium oxide. And iridium oxide, that is a strategic area for us. Smoltek, they have very interesting nonwire technology that can be combined with our technology of making dense, thin layers of iridium oxide. And if we look at quarter 2 specifically, in quarter 2, our main focus has been on improving those dense layers, i.e., improving our core technology that can be combined with Smoltek's technology.

Next year, how many staffing levels are required shifts in the coating center in China?

So we are currently running 2 shifts in China. A shift in China is typically 10 hours. So we run 2 10-hours shifts 6 days a week. So during those 20 hours, we produce fuel cell plates. The remaining 4 hours is used to change so-called targets in the machines. So we put in like -- it looks like an ice hockey puck made of metal, and that is the metal that is vaporized and put on a plate. So we have 4 hours to do that. So 20 hours production, 4 hours changing targets and then 20 hours of production 6 days a week. So it's not really 24/7, but almost.

There's talk about machine lease to Waveland, but there is no system sales revenues reported in Q1 or Q2. Why not?

The lease to Waveland is reported as Coating Services and has been since the start. So that's why you don't see any coating system sales. Is that answer to the question?

Yes.

You can see in the footnote on the first page the remaining value of that.

How many systems do you have in inventory for sale -- sales value? And do you expect to ship in Q3 or Q4?

We have 6 systems in different stages of readiness. So there is always a configuration before delivery to the customer. So we don't keep systems that are sort of 100% ready, but we keep systems in different stages of readiness. And the important message is that we are prepared to deliver. So regardless of the type of system, we are prepared to deliver. So we can keep very short delivery times.

What is the approximate value of the so-called big sample order?

A big sample order is approximately SEK 0.5 million. And SEK 0.5 million, this is a substantial commitment by the customer. You don't just spend SEK 0.5 million if you're not seriously interested in putting our coatings in production.

And thank you for the presentation. I'll give the word over to you again for some closing remarks.

So thank you for attending this presentation of the quarterly report, and I hope that we will see you again next quarter. Thank you.