Xeros Technology Group plc (XSG) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Xeros Technology Group plc Half Year Results Investor Presentation. [Operator Instructions] Before we begin, as usual, we would like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand over to the team from Xeros Technology Group, Klaas, good afternoon, sir.

Thank you very much for the introduction. Yes, welcome, everyone, to Xeros' interim results and trading update. First of all, I want to apologize for missing the last Investor Meet company session. That was due to personal circumstances, but I'm happy to be here again today with you all. If nothing else, what I would like you to do today is take away 3 sort of important messages. And as a former McKinsey consultant, I always like to do things in 3. The first is that it's really happening on all fronts. For many, many meetings, we've been saying it will come a date X, Y, Z, but it's very pleasing to finally be able to say that you can go into a MediaMarkt store in Germany and buy our filtration device, which is now on sale. But it's not just in filtration. It's happening on all fronts, and Neil and Alex will talk you through that in more detail. The second thing is that the largest opportunity in front of us remains domestic laundry care. And in order to sort of establish more control over our go-to-market, we're opening a second route to market. This will give us more control over the process, more control over the time lines and it will also, we think, allow us the opportunity to capture more value from this opportunity. So very excited about that. And then thirdly, I don't think I've sort of touched on this in recent times, but I would like to remind everyone how pleased we should be to have Neil and Alex lead this company at this point in time. They are doing a stellar job in difficult external circumstances and sort of, yes, I wanted to highlight that as well today. And with that, I'll hand it over to Neil.

Thank you, Klaas. I think the kind of thing you ever said to us. It's been reported as well. So thank you. And yes, thank you for intro and purposes of today, as Klaas has said, is to give us some guidance in terms of the interim results, more broadly trading update. So that's what we'll focus on. There are plenty of presentations that we've done over the last couple of years, which can give you a fuller kind of view of Xeros and what we do and what the technology is all about. So we'll take for today that the audience are primarily well versed on those. And if not, as I said, you can go either onto our website or have a look at some of the other presentations to learn a little bit more. I have to have one intro slide though, just to frame again who we are and what we do. We are a licensing business at heart, and we operate very much within sustainability. We have developed proprietary technology, which is being, as Klaas has said, is being used in 2 key industries, the apparel and the laundry issues. Our goal, which we are now very pleased to really starting to do in earnest is to drive significant savings, whether that's in the consumables that use, the amount of water, the amount of energy and obviously, as a result of that, the cost. And we're also tackling pollution as well. So whether that is the pollution caused by the use of chemicals or very specifically in the case of denim, the removal of pumice stone and obviously, in filtration, microfiber filtration, which hopefully is becoming an ever more prevalently known issue and of course, an ever more prevalent issue as well insofar as a significant level of pollution, which is unfortunately not being at all well captured. So that's who we are. I will jump straight into headlines, which hopefully you can see. And this is probably the slide that we will keep coming back to. I'll headline now as we will go into in a little bit more detail, but we have 6 key areas that we are pleased to be able to report significant progress. The first one is, as Klaas said, an additional route to market for our domestic laundry proposition. This is primarily based upon derisking the ability of our technology to come to market. It is about Xeros taking more control and it has a direct correlation to the learnings that we have developed on the external filtration device as in we have now touch wood and mastered the ability of being able to put our technology into a finished good device and have that device come to market and be of very significant interest to our target audience as well. So I'll explain a little bit more about that when we get into the domestic laundry piece, but this is a very exciting new development and phase for the business, which will really start to ramp up in the next 6 to 12 months. The second piece, staying on the domestic laundry care. We announced last year that we had entered into a product launch agreement with one of the world's largest washing machine manufacturers, company based in North America. We are pleased to be able to say that we are progressing well in that development, albeit that is not without headwinds, which are not because of Xeros or nor indeed because of them. Unfortunately, the industry is going through a little bit of sea change, which has also led us to this additional strategy, which, again, I will talk a little bit more when we come to that section. The other piece to mention is that we have always mentioned that there are others that we are in discussion with. Two more of the world's top 10, we continue to be in active tech verification phase, as we call it, which is proving out our technology on their platform. And we are progressing well with those guys. And again, we expect to convert them to similar product launch agreements anywhere in the next 6 months or so. Klaas is rather stolen our thunder with a key piece on filtration, which is we're delighted that we are now live in market with our technology on microfiber filtration with MediaMarkt. MediaMarkt are one of the most well-respected consumer electronics retailers in the world. They are the largest by number in Europe, a very professional outfit. They were our #1 target. I think I've said to people on a couple of occasions. We are absolutely delighted to have managed to see through a process with them and to actually see that product come to market. Similar to domestic laundry, that's not the end of the story when it comes to filtration. We have further distribution agreements, which we expect to be able to announce later this year. Russell Hobbs, we obviously have talked about before. They are due to be in store, which will give us our distribution for the U.K. And in addition to Russell Hobbs and MediaMarkt, we also are finalizing terms with leading retailers in the Nordics, in the U.S.A. and indeed with one of the world's largest washing machine manufacturers for more of a sort of a pan-global partnership with those guys. When it comes to Finnish, our goal very much for this year was about placements. It was about getting the technology into market and live. We set out to have a presence in the key manufacturing hubs for denim being Pakistan, Egypt, Turkey and Bangladesh. Delighted to say that, that has now been achieved. But actually, we're set to overachieve in the breadth of distribution with machinery now requested in Sri Lanka and in India and indeed 2 other manufacturing hubs as well in Pakistan. So machine placements, as the title says, exceeding plan. And we are also touch wood in the final stages of closing out our first brand agreement when it comes to denim manufacturing as well. This is a company that we've mentioned before, which we have been close to for a number of months. We have now managed to find the pieces of the jigsaw fit together, which is a manufacturer actually in Pakistan, who they, as the brand are happy with, who Yilmak are able to work with as well from a manufacturing perspective and equally Xeros are happy with as well. So we anticipate that we'll be able to make that announcement. And it won't just be an RNS announcement. Said company are very keen to also broadcast their benefits that they will receive from it. So they are talking about doing a joint PR campaign as well, which will be for consumer press as well. So those are the headlines. As I said, we'll get into a little bit more specificity when we go to each technology platform. Okay, so if we start with laundry care, I will whiz through the top line piece because, again, as I said, I'm presuming most people know. So this is effectively a hybrid machine. So we retrofit the Xeros technology into a pre-existing domestic laundry platform. So anything that you can do in your washing machine today, you will be able to do ongoing, but you will have the benefits of the Xeros technology as well. Significant global opportunity of about 100 million units, quite consolidated into about 10 large ODMs. And actually, our traditional model has been about licensing. So we have talked repeatedly about $25 per unit, which we achieved through supply of the XOrbs, which go into the machine and also a license as well that we grant and charge for the use of to be able to access our IP. The key benefit, which we talk about, yes, it's water and energy saving, but it's fabric care extension, the ability for people to be able to have their clothes look as good as they were when they first bought them for much longer. So we have done our testing, and we can double that lifetime in all cases. So in terms of where we've got to, a couple of slides on this one. So as I said, the first one is this additional strategy. So let me talk a little bit about how we go to market today with the North American guys. We are very much positioned as a provider of technology for a tech company, right? So what that means is the washing machine brand very much is the leader and the owner of the process. They define the time lines. They define the features and benefits that they want to optimize from the Xeros technology to be able to bring that to market. And they equally design in many cases, the hurdles that we want to be able to overcome, which are very much related to their own decision-making committees within their own hierarchy. It's good because it means that those businesses are able to have a fully bespoke, fully tailored offering for exactly how they think the technology will best work with consumers. But it does have its drawbacks. And those drawbacks are that from a Xeros perspective, we are the junior partner, to be honest. So we are not the ones that will make the decisions ultimately about when products will be put into market. We cannot influence these things. But we do have a limit in terms of the amount of control that we've got. Whilst we have confidence that those traditional methods will work very well, we've also proactively said it's our responsibility to ensure that the technology comes to market in the right way, but also within a timely manner as well. So as I said in the intro slide, we've taken a lot of learnings from our external filtration device. Insofar as we decided it was very important for the technology to come to market, which is hence why we went for an external device instead of waiting for legislation, which would have caused it to be integrated within washing machines. To facilitate that, we saw a high-quality manufacturing partnership, which is Donlim, Xinbao and a combination of their know-how and indeed the know-how of the Xeros' team has meant that we've been able to design 100% the device that we feel is correct and ready for market. The benefits of that is that we have now got a device, which is market-leading in terms of the capture rate that we can get on it. It's also entirely appropriate in terms of consumer usability. So the size is correct, the shape is correct. The ability to be able to multi-position that relative to the washing machine is the right thing for a consumer experience. We were able to do that because effectively, it was us, we were the customer working with a washing machine -- working with a consumer electronics manufacturer. We want to be able to replicate those benefits with this additional route to market. We will take on an extra level of control, which means that we will then be able to effectively deliver a Xeros created washing machine platform. Now when I say control, I mean control over the manufacturing know-how. We will not manufacture. We're a license -- we are an R&D business. We will seek and indeed are in the final stages of agreeing a partnership as we did do with Donlim, a partnership to be able to facilitate that. Because we will have that control, it means that we'll have a much better level of know-how in terms of when the product will definitively launch because ultimately, we are the customer in that scenario. And thirdly, as well, the know-how within our team is so high when it comes to the capabilities of the XOrbs technology that actually we are very, very confident indeed that we can facilitate an extremely high standard when it comes to the execution of the technology within a washing machine platform. How it will work is we will be the customer, if we can use that word, but probably more like an agent. So we'll be a customer of the washing machine manufacturer, which means that we're able to fully control that process. But actually, we will not be the sales and marketing customer. So similar to the filtration model, we will and indeed have already started to have initial conversations with well-placed brands who will then take that finished good product, that washing machine, which is doing all of the things that a washing machine does plus has the Xeros technology, they will be able to effectively buy that and put it straight into market. It's an extremely low level of decision-making for them to be able to say, yes, they want to be able to take the product. And yes, they want to be able to implement the technology. So the reason why we've done that, yes, is in terms of taking more control, but also it's a direct response to the fact that what we're seeing increasingly is that there are new entrants into this market, driven from Southeast Asia and indeed, the commercial team are at IFA right now, which is certainly Europe's largest consumer electronics supplier. The number of new entrants, new brands is mind-blowing. Over the last couple of years, we've never seen anything quite like it. These are companies which we could characterize as brands, consumer electronic brands. They don't manufacture anything. They are about moving very quickly, finding a disruptive new platform, a new piece of technology and breaking into new industries. So not surprisingly, the completely revolutionary innovative technology that Xeros brings on a washing machine platform is extremely, extremely interesting to these guys. So it's so that we can have an opportunity to have conversations and ultimately to be able to partner up in commercial terms with these guys as well that we've considered it's appropriate for us to be able to add, as Klaas has said, not replace, but to add to our traditional model when it comes to the domestic care platform. The thing that really excites us is not just the fact that we will have that extra level of control that we will be able to have a stronger level of confidence in terms of the launch timings on this as well. But it's also, as Klaas said earlier, the fact that because we're taking more responsibility, we have the opportunity to increase the Xeros marginality on it as well. They are indicative models as we're working through on now, but we believe that there could be at least 2, probably 3, maybe 4x as much marginality for Xeros as there is in the standard model that we've got. It's at the beginning of the process, I think it's fair to say. There is no additional capital expenditure that we need to make within this year that we haven't already accounted for. And even in terms of how this process will work as we move into 2027 and early part of 2028. There is no need for the business to be able to commit funds or costs until such times as we have cast iron guarantees from go-to-market partners that they are fully on board and indeed have paid us for elements as well. So a much bigger opportunity for us. But actually, we feel as though we have positioned it well enough so that there is minimal risk, if indeed, no risk as well. So, I don't know if you want to add anything, Alex?

Yes, I think that's right, Neil. So these are kind of modeling start off the conversations we've had with the ODM partners that we expect to be able to talk about in a bit more depth soon. These are incredibly serious industry players that produce washing machines for all the brands you've heard of and the number of brands that you haven't, as Neil said, and partnering up with them will allow us to go to, again, all the washing machine brands you've heard of and some of them you haven't to bring this to market in the most effective way in the key markets around the globe. And that allows us to increase our take to get our fair share of the margin that's on offer when these machines go to market and to do that in a way which doesn't require a huge number -- a huge amount of investment certainly from us. So yes, we're really excited about it. The ODMs are really excited about it as are the potential partners that we talked to so far.

So I think we're kind of unveiling this today, frankly, because we feel it's appropriate for investors to start to get a feel and an understanding of where we position ourselves. Expect in the forthcoming months that we'll be able to elaborate much more upon this. So we'll be able to share identities. Hopefully, we'll be able to name the sales and marketing brands that will take it to market in an early part of this journey, albeit sometimes they don't want that until right at the last minute, because they want to be able to make a big splash in the market. But we'll be able to very much educate the markets -- Investor Relations markets much more over the forthcoming period on this. Okay. As I said before, though, this is -- that's not a replacement that is as well as. So yes, I mean, I kind of mentioned it before, but we are progressing well with the North American guys. We have actually hit our first initial milestone in terms of machines to go back for further consumer insights testing that they want to be able to do and very much drilling in on it looks as though it's going to be color fade, shrinkage and maybe even a focus in on high worth garments as well, sort of cashmere so those sorts of things as well. So it's starting to feel real in terms of how this thing is going to be able to market to the consumers, which is exciting. But as we said all along, it's not just those guys that we've had in the process. We have 2 others as well, one Southeast Asia and one Europe, who we are in tech verification process with. And again, we are showing some really good, very interesting benefits using Xeros' technology. It's very much about how to position them now to fine-tune what they want to go to it. But we expect that we should be able to make further announcements about that and indeed possibly even name one of them, which will be nice as well in the forthcoming period. Okay. Alex, going to give us headline on denim.

No problem. So yes, just as a very brief reminder, what does our denim finishing technology do? Well, it's effectively the same as the laundry technology that Neil has just talked about, but on a much bigger scale. So it washes denim from its raw denim state down into finishes that the retailers want, allows the industry to get rid of pumice completely, which is really important, particularly as pumice prices have gone up again recently, which makes the economic case for our technology even more compelling, less water, less chemistry, less CO2, crucially up to 20% cheaper for the process as well. So we have a license with Yilmak, the world's leading manufacturer of garment finishing machines and Ramsons in India as well. They are seeding the market as we speak, which I'll talk about in a bit more depth. Royalty model is that we get a royalty when they sell a machine, but also we sell XOrbs to them to sell on to their partners, and we get an ongoing revenue stream as we go as the machines are used throughout their kind of 10-, 15-, maybe 20-year lifetime. So what was the plan this year? So the plan this year was to make sure that we had a representation of our technology in all of the key denim manufacturing hubs around the world. And that was to do a couple of things. One, to generate some revenue as the machines were sold, but it was also to make sure that the industry, which is quite small and quite talkative, could see the benefits of the technology at bulk scale, could see the benefits of the technology as they were being used in the factory, and we could prove it out to people who sometimes didn't believe that we could do the things that we said we could do. So we've done all that, plus a little bit more. So we've got machines in Pakistan, Turkey, Egypt, Bangladesh. And later on this year, we've got more going to Pakistan as well as some going to India and Sri Lanka. So we're really pleased with the penetration that we've got there. I think from my main takeaway when it comes to particularly the engagement we've got with Yilmak, we've moved away from this is a great technology that we're going to sell to customers to this is a great technology we're going to sell to these customers. We're now at a sales pipeline point where we can have meetings where we discuss when is that going to happen? What's the progress on these guys? How many machines do we think we will take and what's the timing on it? It's a proper sales process rather than something that's going to come in due course. So I'm really pleased to be able to review it in a bit more depth. The other side, as Neil mentioned earlier on, is that brand collaboration. That's really important for a couple of things. One, it's a validation of the technology that one of the U.K.'s leading retail garment brands likes it, sees that it has the benefits that we talk about. But it also allows us to use that as a case study when we go and approach the other retailers and garment brands around the world, which I'm really excited about the potential for the denim finishing technology to be the default for this industry. And the more we can prove that with people like the retailer that we hope to be able to talk about in due course, the quicker that will happen.

Okay. So yes, if we talk about the microfiber filtration technology. So again, just headlines are microfiber filtration, why do we need it? We know about microfibers. We know about microplastics. As I always say, most people don't realize that 35% actually come from laundry processes. It has been universally recognized as one of the most efficient ways to capture microplastics, microfibers is to add a filtration step to domestic laundry. It's as simple as that. We, as I've said before, have a proposition, which you can kind of see in the -- would be a video, as you can see in the image on the top right, which is an integrated device, which I'll talk a little bit about in the second slide. But the focus very much for the business has been on the stand-alone device, which you can see an image of on -- towards the bottom of the slide there. So where are we with that? The focus very much, as we said before, has been about finding the right levels of distribution. It's important for us to get distribution on this device because, yes, obviously, we get distribution, and we can get revenue from it, and that's obviously important to us. But it's not just about that -- we have been very confident for a number of years that we have, by far and away, the best solution full stop, best solution when it comes to price, best solution when it comes to usability and simply best use when it comes to the level of filtration as well, which has been reconfirmed by the Hohenstein Institute at 98% a (sic)[ 99% ], ours is the highest capture rate in the market. And as I'm aware, the only one that's actually been independently verified as well. By doing so, we are proving our credentials when it comes to the long game. So if I just go back to the short game for now, as I mentioned before, it's about high-quality distribution. We believe that with the likes of MediaMarkt, the likes of Russell Hobbs and these others that we've mentioned before, we are very well placed to be able to do that. We don't just want to appoint a distributor for the sake of appointed distributor. It's why sometimes it takes a little bit longer than we might do is because we're trying to find and we're trying to make sure that we have got the right distributor, the right retailer, brand or whoever it might be, that really understands the technology and wants to get behind it, because that's the most effective way that we can come up with to ensure that the product gets in the hands of consumers at the end of the day. If I can just touch briefly on the integrated filter. So a few years ago, it would have been an extremely relevant piece where we would have talked about France in particular, as having legislated. The challenge was that whilst the intent was right, which was to ensure that there was a solution in market. They hadn't properly defined what the solution actually was. So a standard had not been defined for how that filtration process should work. The good news, if you like, is that it has pushed the IEC into working to produce that standard. So we will have spoken before about Xeros is very privileged to be part of that committee, part of that working group, which is defining what that standard should be so that it can be used not just for the likes of France, but indeed across the European Union. And as I've said a number of occasions, I'm very confident having come from that washing machine industry that once it's been established for Europe, I think it's highly likely that, if not exactly the same, something extremely similar is then going to be prevalent across the world. We'll probably see something similar in North America, where indeed there are at last count, over half a dozen in different state legislative initiatives to introduce a solution for microfiber filtration to Australia and indeed other independent European nations as well. The latest word from the IEC, from our representative, our principal scientist is that 2027 is when we should see a publication of the protocol. So the protocol in and of itself will be really important because it will establish really how washing machine providers are going to have to go about providing that solution. So they're not going to be obviously asked to go from 0 to 100% overnight in 2027. We still think 2030 is probably the guidelines on that. But the point is in 2027, they'll have much greater clarity on what that standard is going to be. With that clarity, they can then start to do the necessary work. And from a Xeros' perspective, interestingly and most excitingly, start to think about who their providers are going to be for that as well. So we talk to all of the washing machine manufacturers about this topic. We've had feedback, which is that they are waiting for what the standard is going to be. I think the race will very much be back on again then about, okay, who is going to be the principal provider of technology for the industry and how much of a share are they going to be able to get. By seeding the market with our external device, by continuing our high-quality conversations with washing machine manufacturers, not just on filtration, but in our care technology as well. We have really built up a very strong reputation with that industry. We feel extremely well placed to be able to take advantage of that within the next couple of years. Okay. Numbers, Alex?

Yes. So I don't propose to run through these in a huge amount of depth. There's just a couple of bits I wanted to dwell on, particularly on the revenue side of things. Now obviously, we'd like that number to be a little bit bigger, but the thing that I would highlights from our first half revenue this year is the first time that it has had contributions in it from all 3 of the technologies. So it had some filtration revenue, some finished revenue and also some tech transfer fees from our North America partner in there as well. So it is the first time we've ever seen that. So it's a good milestone to get to. Obviously, we are working, and you've heard the updates from Neil and myself on the deepening of our distribution network and the deepening of our partnerships that we have at the moment to build that foundation and make it a little bit more significant. But yes, I'm really excited to be able to say that for the first time. We continue to keep an eye on our costs. We have costs broadly in line with where they were at this time last year, and we think that's the right thing to do. We have make sure we've kept our focus on costs where appropriate. We spent a little bit more money in the first half of this year. That's broadly due to the working capital effects of the back end of last year. It's not to do with anything more significant than that. So yes, we spend a little bit more, but that's working capital outflows. Again, don't go to give amount of detail on this slide. That gives the details of our current shareholders. We have a really interesting mix of people on the register, and we're grateful for everybody's ongoing support. So that's just what I want to touch on those slides. Is anything else?

I think that's it. [ Jake ],we hand back to you for Q&A.

[Operator Instructions] Guys, you can see that we have received a number of questions, and thank you to all of those on the call for taking the time to submit their questions. But guys, at this point, if I may just hand back to you to address those where appropriate. And if I pick up from you at the end, that would be great.

First question, we get this quite often, which is relative to the exposure to the Asian markets and our levels of comfort with IP security and insurance. I mean it's something we're very aware of, and we certainly don't take lightly. A couple of things that I think I can talk about to give you confidence in our approach. The first is that we do obviously have IP coverage. We have multiple levels of IP coverage. It's not just on one element. We have -- I can't even remember the top of my head how many portfolios we have, but there is multiple IP coverage. And obviously, it covers all of the key areas globally. So China, I guess, is the one that everybody always talks about. We do have coverage within China. The second piece is that we also have got litigation insurance as well. So yes, we're an R&D business, but actually, we can punch above our weight with that insurance, which means that anybody that would think about possibly wanting to try and steal the IP that we can absolutely pursue them and have the confidence that we can do that to quite a significant level of cost as well. So in a kind of a prosaic level, that is what we've done. I think more operationally as well, we've been very mindful about doing this. And where we have decided to work in certain countries, and again, let's say, it's China, we've made a conscious decision that we want to be able to find a high-quality partner to be able to do that. So I think we've got these questions as well when we first and talked about manufacturing the external filtration device in China. And at that time, I pointed out that part of the reason why we decided to work with Xinbao, Donlim was because, number one, they have a very high reputation globally. On a personal level, I've worked with them prior to being Xeros. By working with a partner like that, you effectively have somebody who can defend the interests of yourself, but equally of themselves within that territory. When it comes to Washing Machine 2.0, which I guess is what the question is alluding to, we are going to do exactly the same thing. So we're going to work with a high quality, at least one, possibly two. We're going to work with a very high-quality manufacturing partnership over there, and it will be very much within their interest as much as it is ours to ensure that they are able to protect that. If the concern is about whether they would then try and sort of rip us off, they are an international business with a very high level of respect. So again, you can never say never in business, but I think we've taken all of the necessary steps to make sure that we've got an appropriate approach to these things, and we've also got the necessary protections in place as well. The cash burn?