Nexam Chemical Holding AB (publ) (NEXAM) Earnings Call Transcript & Summary

[Technical Difficulty] Good afternoon, and welcome again to the live transmission from Nexam Chemical in Lomma. We had some technical trouble to start off with. I hope it's better now. We will have the opportunity to put in questions in the chat forum during the transmission that will be answered afterwards in the Q&A forum. This presentation is to go through our sharpened commercial strategy and the recently announced cost savings program that we have been carrying or have started during my first 100 days as the CEO of Nexam. I started here in the end of May and are into about 100 days now. I have some history together with Nexam before, I was on the Board of Directors a couple of years. And now in the last year, I've been on and off working as a consultant as well, so I'm not totally new to the company. In many ways, this is one of really a dream assignment for me. And when we go through this presentation, I hope that you will understand why that is the case. Just to start before we get into the meat of the presentation, I would like to set this in a little bit on where we are. So try to imagine the world without plastics. It's actually a fantastic material with many advantages. All the IT telecommunication infrastructure in terms of transportation and so on, are based on this material. And the whole healthcare system that we have today and all the advanced treatment methods are all based on solutions, based on advanced plastics materials. Also safety, which is another daily important aspect that has improved a lot, thanks to plastic. Here, we have a picture of ski helmets, but it's also a very important part of for example, crash safety systems in cars and so on. So I would not like to live in the world without plastics, but -- and I believe that there is a strong drive to improve plastics. But there is another side of this, too. Plastic waste, landing in the oceans, rivers, seas, landfills and so on. It's a huge problem for the whole planet. It is almost as big as the or even bigger, some say, than the climate crisis. And there, I would like to imagine the world without plastic waste, and we want to contribute to that. Our word at Nexam is living in the future of plastics. We have a lot of keys in terms of core competencies, knowledge, patents, know-how and solutions to both improve the level of advanced plastics to take technology development in good areas further, but we also have keys to go and make a big contribution to the, so to say, downside of plastics by increasing recycling and increasing the circular use of plastics. Our business is divided into four main areas. One is called plastic for the future, which is a broad spectrum of, let's call it, high-tech plastic composite materials for special applications. We're also working a lot on electronic components, automotive components and other miniaturized elements and let's say, less advanced groundbreaking, but yet important plastic issues. And then we have the renewable energy, which is an important part of our society today and becoming increasingly so, where we play a role as very active in the especially wind energy solutions. And more and more and very determined for the long term, we're working in waste and recycling. And both the renewable energy and the recycling issues are driven by really strong global mega trends. When I started my job in the end of May, I was given a clear direction from the Board of Directors and have worked together with them, together with the management with all employees really at Nexam and developed, you could say, a new strategic platform. And the main lines of this is that to build a global business that is centered around making plastic better and more sustainable. We are determined to deliver a solid profit and growth over the years to come. And we base our, let's say, solutions around developing and producing additives that enhance performance of plastics and more circular use. And to reach a global success and business development on this, we are becoming more and more market oriented and want to have a thorough market understanding in all our market areas and combine that with the strong core competencies, patents, know-how, et cetera, that we have in the company. Here and now, this means that the action program going forward is twofold. One is an accelerated cost savings program, and the second part is a sharpened commercial strategy. The cost savings program actually started by the turn of the year with a package delivering about SEK 5 million per year of savings. It was gradually introduced during the first half of the year and the full financial impact is right now after the summer. And the second stage that we have started to implement during my first 3 months has an ambition of savings of approximately SEK 8 million per year and will be gradually introduced during the second half of this year and have full financial impact in the first quarter next year 2024. The actions are, of course, cost savings in terms of overhead cost, external services, consultants, et cetera, but also increased external financing of our fairly significant R&D organization. Another aspect of the R&D organization is that they have provided a lot of product innovation that allows us to rationalize our cost. Implications of this is, obviously, with lower overhead costs, the reduced breakeven, which makes us much more tolerant for market variations when the business is slow and the economy weak, but it also improves the cash situation, of course, both by reducing cost, but also that we do not really need to invest in our production capacities right now. We are well invested and can produce a lot of our products internally. And we have a fair amount of opportunities still to reduce our stocks. All of these or both these programs and all of the actions have been done in a careful way not to lose strength in innovation, market presence, et cetera, which are the drivers that we need to maintain to continue our growth. So that's on the savings. The commercial strategy has been sharpened up. I hear divide the market segments into four different areas based on which performance of which property of the plastics that our additives improve. One is lightweighting, where we work on making lightweight solutions, performance solutions, and the main area of application here is the PET foam market, where Nexam has been in some years now and have developed into a strong position. We also have the original make some area, high temperature, where we make additives that improve plastics and composites that are exposed to very high temperatures. There we have attained a good position that we can leverage on and continue to build. We also have the market area aesthetics, which is really what we have traditionally called the Performance Masterbatch segment, which consists of making colors and other additives to give the right looks, so to say, to plastic components and also to maintain that look over the life of the component. And this area is developing much more now in especially in relation to recycling, because as we are active in the recycling industry, we also can use the long-term knowledge from colors and use that into recycling applications as well. And recycling, as many of you know, we have been very active over the last 2 years in developing solutions. We have received several patents. And we have turned the first projects into business, but it's a long process, of course, from lab testing, a good commercial and environmental case until it is actually commercially put into place. And that's the process we're working on here. I'll go into some detail on each. Lightweighting. We have the unique capabilities, a lot of know-how that we have developed. We also have some patents in this area. And we are closely collaborating with really all players in this market segment. There are not so many and they are all global. And we have deliveries to 2/3 about of that market and missing third is about to become customers to Nexam. They are good development partners right now. And we see that this should happen in fairly short term, end of this year, early next year. All of them work not only on wind power, but also find that the, let's say, excellent property profile of PET foam can be used in other areas. So it's a lot of developments into marine, transportation and other segments. So in addition to the growth of wind energy, there is also a growth of, let's say, application areas here. High temperature. We have been active in this field for a long time since Nexam was founded back in 2009 and before that even. And we have attained a very strong market position in this field. It's a slowly growing market, you could say, with very specialized applications. And the many projects that we've had and the first commercial efforts over the last decade have developed into something quite strong right now, and we are in a really respected and unique position together with our customers in this field. We feel that the opportunity to further grow this is quite significant. And even on the short term, this and next year, we will see even more of these products adding to our sales. Mentioned before, Color masterbatch or Performance Masterbatch area -- these segments are -- we have a really strong market presence in these segments. We work with virtually all component manufacturers of plastic components in Scandinavia and in Hungary and the countries around it. And we know a lot of people out in the market. We have a very strong portfolio and a lot of know-how throughout the years. And this in combination with the recycling vector into the equation makes it a very, very interesting opportunity for the future. We are actively helping our customers to become more sustainable by combining color, other additives and our recycling portfolio to increase the amount of recycled material into, let's say, daily plastic products. And the fourth and last segment is recycling. It has a huge future potential. We mainly focus our additives into recycling to upgrade the materials to be able to make very advanced products and applications. We work with global customer portfolio throughout our agent network, and there is a very high interest from our customers here. We have released information over the last few months about recently awarded patents on modification of PE and PP. And we also have PET-related patents and knowledge. And these three plastic materials consist of much more than 50% of the global new plastic produced. So they will be in the majority of the recycled materials as well. So we cover a lot of ground, and we have had a lot of feedback from all over the world really on these solutions. But over the last year, we have had very, very many projects in this field. Some of them have reached, let's say, commercial maturity, but we still have a lot of work to do in the coming months and year and to close this and make them into business. And the addressable market on this is fantastic. It is absolutely without limits. But of course, the road to get there will be long. And you can compare it to the PET projects where we started to work making lab tests, making patents, finding potential customers discussing solution, testing alternatives and so on and then go into prototyping and so on. And these processes we're going through and the recycling as well. And you can say that difference to the PET market is that the amount of companies and customers to work with is maybe 100 fold or thousand fold. There are very, very many relevant companies to work within this field, which is both an opportunity but also a challenge for us to handle in the right way. So we're very focused right now on the ones where we feel that we have a really high value add. Coming back to here and now business outlook, how it's looking for the rest of 23 and, let's say, 2024, it looks positive. We have the low point of the disappointing second quarter this year. From that point, it is looking like we're getting into a better situation, and we see quite hopefully, on 2024. But few points on that. The cost saving program delivers a good foundation to really start on the journey towards profitable growth. Our sharpened commercial strategy helps us to, let's say, point our market and development resources in the right direction. In the area of lightweighting, we do see a very positive indication for market recovery and end of the destocking trend that was in the beginning of the year. And so we find that situation positive, both with the existing and the coming customers. In the area of high temperature, we're expecting quite good growth right now. And that's thanks to the stamina we have had over the years. We also, in high temperature, have a fair degree of externally financed R&D costs to cover long-term projects in, for example, aircraft industry, which is new. Aesthetics. We work on more innovation, more recycling. And with this, we set us apart a little bit from the competition, and we try to utilize the extensive direct market contacts we have in this. And in recycling, I mentioned a lot about it. We have our first commercial breakthroughs, a fantastic endless market, but we are now working really to convert projects to sales. In the longer term, we have an underlying megatrend in renewable energy. Wind energy over a 10-year period is predicted to grow at an average of 6%. And PET foam more than that because it also goes into new and other applications. Recycling. We have a lot of keys to the challenges that are needed for the future of that area. Our stamina and high-performance materials is starting to give positive results. And we have a strong reach into the market, both locally, very, very detailed in especially Scandinavia and Eastern Europe, but we also have a fantastic global network of really good agents that have come in with a lot of new opportunities over the last year, and that will continue to work with this. So that was the main lines on the commercial strategy and on the savings program. Just to round off. Imagine our world, we sit with a lot of keys, knowledge, core competencies, patents, and a lot of market presence. So we see that we can do a difference in the world, and we can grow Nexam to be even more successful and strong company into the future. With this, I would like to thank you for listening to me today. And I again, excuse myself for our initial disturbance of the transmission. But now we're ready to go into the questions-and-answer session.

All right. Now we're back to the Q&A session. Marcus Nyberg, our CFO, has joined me for this. He has been following the questions that have come in during the presentation. And together, we will try to answer to those questions. Welcome, Marcus.

Thank you, Ronnie. We actually got a few questions already before the presentation. So let's start off with those. I will read them, and we will answer them together. Yes. But I'll start with the first one. What is the biggest challenge in successfully commercializing and growing reactor recycling?

Okay. We have a lot of good solutions that have proven to work several times. So to bring them into commercial, the biggest challenge, I would say, is to take, let's say, very positive lab results and initial product tests and the good, let's say, business case in terms of both money and maybe carbon dioxide reduction into a production situation. There will be a lot of people who are reluctant to change anything that works and I also feel that there is a longer process than you would like to go through all the approval processes and other, let's say, systems before it is actually approved and you found the final end customer that is willing to use this. So it's both a time delay and a challenge to get people to change.

We also got some questions in Swedish. So those I would actually read in Swedish. And I guess, you will also respond to them in Swedish. [Foreign Language]

[Foreign Language]

Okay. Then back to English again. Next question is also related to PET foam. That is how certain is it that the current reduction in the PET foam additive sales is not caused by manufacturers using other technologies or products?

Yes. Well, we follow our biggest customers, obviously, very close and have a good contact with them. And we have over this last couple of years, we haven't lost any of the specialized master batches that they use. But there is always obviously a risk that we could lose to someone else, so to say, or that we -- and even more, say, an opportunity that we could gain more market by coming with a new solution when there are new products coming out and new recipes coming out. It pushes us to maintain our, let's say, technologically advanced position and cost-efficient position that we have. But no, it is much more of a lower PET foam production volumes than losing products.

And the next area, we also -- you mentioned about insourcing about production. So what percentage or rough percentage do you expect can be the in-source that used to be outsourced?

Yes, last year. In the beginning of this year, we were outsourcing some of the production that we could have made ourselves because the approvals were not in place yet. Since more or less after the summer, all those necessary approvals are in place, and we can produce ourselves really all the products and currently, we are actually producing everything that we technically can actually producing it internally. But the outsourcing partners that we have worked with over the years, they are also a good source for us to go to if the volume should increase rapidly without having to do further internal investments.

You actually responding to the next question as well. But let's move on to the cost savings. How -- what impact will it have to the more remote markets, like the U.S. and Asian and so on. What can...

Yes, there has been some announcements before my time from Nexam about new agents or representatives around the globe. For example, U.S.A. various Asian markets and so on. During this, let's say, action program that we're having now, we have, I would say, an even tighter segment collaboration with the representatives and we're trying to really take advantage of their position. But obviously, a little bit what they orient on and their focus areas is also obviously colored about our slight reorientation in market attack.

Next question we got before was actually, I guess for me, it's about the cash flow and the credit facility. First of all, we have a credit facility of SEK 20 million. The first thing is it's really nice that we have that the banks, they believe in us. And I also believe in our future also in the long term. So do we actually -- we have made all the investments that we have talked about during the last years, but also now we're doing the cost savings. And of course, we need to focus even more on working capital. So we don't see the need for a capital raise as we see today. You talked about the new commercial strategy and we segment -- you do some different segmentation. How is that different from what it used to be right?

It's -- let's say, like this, the segmentation is very similar to how we had it before. But we have looked at our business together, and we have tried to divide it into different kind of segmentation on various logics. And we have said that since we sell additives to make plastic better by changing properties or changing performance. We have decided that we put our business areas, so to say, according to which properties that we actually change. And this makes the most sense for us. And now they are to a high extent, similar to what we had before. The second part of that is that within each of these business segments, we have taken a new direction, focusing much more market oriented and less product oriented and where we put our resources and focus. So the segmentation is similar, but it is with another logic and with much more focus, I would say.

We also got some questions in the chat, and it's still open. So if you have questions, please [indiscernible] there. In general, the questions they are very much related to figures and to be more specific. One question I will start with the ones for cost savings if it will affect cost of goods sold or overhead. And I would say both actually. We are working -- we both reducing the purchase cost. We look into -- if you can share some material or not, but also on the overhead side. So it will actually maybe be roughly 50-50 split in this. Then, of course, everyone is interested in the gross margin. What impact will it have? So now you're doing some insourcing, but also due to the cost savings. Can you say anything about it?

Yes, I think you can say more about it, Marcus. But if I start the gross margin has gradually improved over the last half year to one year, I don't remember the percentages, but high 30s in 2022 and now approaching 42, 43 and gradually going up and with the in-sourcing part, a part of our production that will obviously continue to increase. Anything to add on that, Marcus?

No. This is what we expect ourselves actually that -- it will continue to increase. Let's also see an update on the reactor recycling business. Have you any numbers related to a number of trials and so on?

Yes, we are following internally a certain number of indicators, so to say, how many active projects we have in the pipeline with the likelihood to become business within 2 years, those kind of numbers. We have not started to communicate that because we feel that the link between those indicators and actual business development is difficult for us to interpret and would then be even more difficult to someone who does not have the full visibility into our business, but we do track such numbers. And we do have very many interested customer and very many ongoing projects with the testing of material, quotations and like that. Maybe in a later presentation, we can go into more detail on the, let's say, reactive recycling pipeline.

Yes. Let's see. We can continue. Of course, everyone is interested in a little bit when you will reach breakeven and so on. We are very much in the middle of working with all the different savings, prices and so on. So we haven't really set this at a specific date. But as we mentioned in the press release, we expect that the operations will start [indiscernible] with cash within the coming months. So that is what we are communicating for the moment, at least.

And we also say in the press release that we'll have full effect of the savings program in the first quarter next year, and then we should have a significantly lower breakeven than we have today.

[Production] is starting again. Let's see another question we had relating to capacity and capacity utilization. What is the limitations today?

In terms of capacity, you can say that in Masterbatch production, we have capacity -- technical capacity installed so that we could increase the sales with 50%, 60% internally and unlimited if we use external capacities, of course, and on the, let's say, chemical side, our chemical plant in San Andres in Scotland, can increase with approximately 30% to 40% without having to go to external sources. But also there, we have, so to say, spare capacity externally. So I would say we're in a fairly good position of technical capacity, but then the actual current capacity is adopted with manpower.

Yes. And I think more or less, the last question is very much related to different financial targets and so on. For the moment, everyone knows about the situation in the world and what's happening and so on. So that's a question that will be addressed, I guess, in the future? Or do you have anything to...

No. I mean it's -- we understand and appreciate that the market would like us to set more firm financial targets on a longer-term base. And we do consider this a lot. It was a subject on the Board meeting a couple of days ago, and we want to go in that direction. But in order to make predictable and good estimation, we need a little bit more stability in the marketplace to be able to do that. But my feeling is that we are going in that direction although we're not ready for it. The financial targets we set is the short-term positive cash flow and the full savings in quarter one.

Yes. I actually think that is all of the questions that were sent to us on a chat room or in e-mail. So all right, anything to add?

No. Thank you very much for taking your time and listening to us. Sorry again for the disturbances we had in the start. I hope that you yet had an informative a good meeting. And you can always send an e-mail or a call if you want to have more answers for me or Marcus. Thank you very much.