I-Tech AB

STO:ITECH

Q1-2025 Earnings Call

[Operator]

Welcome to this presentation where I-Tech walks us through the interim report from the first quarter 2025. With us today is Markus Jonsson, CEO of I-Tech.

[Markus Jonsson, executive]

So welcome to this webcast that is being broadcasted from Molndal today, where we are going to present the Q1 report for I-Tech. And I will dive straight into our development and showing you the rolling 12-month results, which continue to look very good. So, the positive momentum that we saw in the business throughout 2024 has continued into Q1 this year.

So, we come to that in the next slide here, where you can see more regarding the strong start. So net sales then were up nearly 50% and closely trailing the record quarter Q4 2024, and it amounted to approximately SEK 57 million. And then the quarter last year was SEK 38 million. So, a really solid growth there.

We also see that we have a healthy increase in the gross margin, and this was according to the predictions that we were giving also, I think, during Q4 or the later part of 2024. Which has to do then with our sort of optimization of our supply chain. EBITDA landed close to SEK 20 million, which is almost doubling or up 76% at least over last year. So very good results there.

And the same with the EBIT, which was SEK 7.7 million. Cash flow, plus SEK 26 million and then puts us at a cash balance of SEK 126 million. So continuously very strong finances there. So, EBITDA margin landed on at 35%, which was also a new record in that sense.

However, we are seeing then that we have increasing headwind in terms of currency, and that's linked to our operational currency, the U.S. dollar and sort of the appreciating value of the dollar versus Swedish krona, right? And then we see, we have negative short, medium, but also then longer-term effects on the business if this continues, right? So that is something we will see increasingly throughout the year. But overall, then we would say a very, very good and strong solid opening to 2025.

If we look at the geographical spread of sales then during Q1, you can see that Asia even increased a little bit over the full year 2024. So now it's 99% of the sales to Asia and only around 1%, I think 1.3%, 1.4% to Europe. And you can see that also the split between the countries in Asia has actually changed in Q1 compared to the full year 2024.

So, during the full year 2024, approximately half of the sales was to the Korean market. And then we have seen now a shift here in Q1 that actually Korea represents 1/3, Japan, approximately 1/3, a little bit more and then China then growing strongly in Q1, so almost 1/3 from China. So that is a recent development, right? But you can see that Asia is really -- it's cementing is dominating as a region for us, right, and for sales.

And now we come to sort of what is changing then. And definitely, I think it has been a turbulent start to the year, I would say, with the new administration in the U.S. and sort of all the executive orders, et cetera, coming out of there, right? And we definitely see this impacting sort of the outlook and really impacting trade and the shipbuilding industry. We do not see it yet impacting our business, and that's, of course, what you see in the numbers, right? But really, we do see rougher sees ahead here.

If we start with the shipping market overall, I mean, we are still in positive territory, and we are sort of 17% over a 10-year average, but we see now this is turning. And that, for instance, is seen in charter rates. So, what people have to pay essentially to get their goods on to ship, and the charter rates are falling, and that is sort of an indication then that demand is softening a little bit for trade, right?

There was a very strong growth during 2024, right? So, the seaborne trade measured in ton miles growing by nearly 6%, and that's the fastest expansion in 14 years, and the growth in volume was 2.1%. And of course, you could say the trade miles or the ton-miles growth, to some extent, is, of course, reflecting that, ships had to divert and take a longer route, during last year, et cetera. So there has been a really positive momentum that is shifting.

We see that with sort of the current policy landscape then if you look that North America will be heavily affected, at least that's from both Clarkson and from WTO that we have been sort of reading here in front before the report. So, what we see then or the predictions from these 2 institutions is that North America is expected to drop 12.6% in terms of exports and 9.6% in terms of imports during 2025. And the U.S. represents about 12% of world trade.

So, all in all, it's subtracting 1.7 percentage points from the trade growth. And turning then the overall figure to 0 or slightly negative depending on what source that you're reading here. So essentially, from a prediction of an expansion, we are now moving into a sort of moving sideways or even going down. And I think also the signals for a recession here can, of course, that means that this accelerates further.

If we look at the deliveries of new vessels, which is important to us, and we will come back to that, I think, later on in the presentation as well, that has been a healthy growth. And the projection is still that this will continue to grow in 2025 because essentially, the ships that were ordered a number of years ago, those are the ships that will be delivered this year.

We saw that the contracting of new ships also grew very much during 2024, so sort of up plus 42% in terms of deadweight funds, right? But that has really slowed or even halted in the first months of 2024 -- 2025, sorry. as a consequence of all the uncertainty that we see in the market. And of course, it has been uncertain times in terms of placing or making investment decisions and placing orders for new ships.

There's also been an array of executive orders, right, from the overall office and also then one concerning or relating to maritime shipping and U.S. trade and more specifically related to U.S. shipbuilding and sort of on penalizing, you could say, on one hand, Chinese-owned, Chinese operated and Chinese-built ships with the potential of paying port fees that are quite substantial going forward.

And of course, the longer-term idea with this is to stimulate shipbuilding in the U.S. So, U.S. today has very, very little part of the global shipbuilding. So, it's mainly, you could say, naval vessels and sort of domestic vessels that are being built in the U.S. today. But really, there is -- this is a play to stimulate it, and we see it more as a long-term play.

A potential consequence of the USTR measures could actually be or benefit the other North Asian shipbuilding countries like Korea and Japan that essentially because there is a specific penalty on Chinese-built ships, right? So, one way to avoid that is, of course, to place orders with the Korean or the Japanese shipyards in sort of waiting for the opportunity to actually build ships in the U.S.

But this is really a long-term play. And I think, I mean, the estimate is it's 3 to 6x more expensive today to build a ship in the U.S. than it is to build it in Asia, right? So, it is really a long-term play and not something that we will see affecting shipbuilding short term.

Talking about sort of the fundaments of the global fleet, I mean, the age profile and sort of this fuel transition that we are in is really expected to drive significant fleet renewal over time, right? And we see today that if you look in deadweight ton again, that about 42% of the order book now is alternative fuel capable, meaning then that you could use more sustainable fuels, although the majority of those ships are LNG powered and so liquefied natural gas, which is, of course, not a green fuel in itself, but it has a lower CO2 emission profile than classic bunker fuels.

Also, we saw a landmark meeting happening here in April in the IMO in this, what is called the METC group, where they actually then made an agreement on emission regulations more globally and also then assign the price to the emissions of CO2, which is quite positive, you could say, for the long-term energy transition. It's something that is needed to sort of level the playing field, right?

Up until now, it has really been Europe taking the lead and going ahead and implementing that, for instance, the EU ETS, but also the fuel EU maritime legislation that is coming into force this year, which is essentially mandating use of more renewable fuels going forward, right? And this is a step in that direction also for the global fleet.

So, what we see then is, I mean, significantly more volatile sort of conditions, hesitations for people to place orders and also then essentially some volatility and turmoil in terms of the established shipping routes and trade routes and also cargo being shipped. So essentially, it will definitely impact shipping going forward this year.

However, if we look at I-Tech and we come back to the SMALWORLD, we see that the foundation of our value proposition remains strong, if we bet in the long term, especially with the last comment there on the progress in the IMO regarding sustainable fuels. So, the maritime challenges, the key challenges that they are facing, including really emission reductions, right?

But also then more and more, and we saw that also from the results of this meeting, more and more regulations regarding the transfer of invasive species and thereby regulation for biofouling management. And of course, also the emissions to water, right? So, what type of coating solutions that you're using and how that affects the marine life is increasingly in focus going forward.

So, this remains really strong and sort of with an aging ship fleet and the desire to transition to more green fuels, which are more expensive, definitely having a clean hub is increasingly important. And that has also been pointed out, I think, in this road map that we talked about previously as well from the IMO. So where better biofouling management has the potential actually to help improve the efficiency and lower CO2 emissions by up to 25% from the global shipping field today.

And we see a number of initiatives in that sort of direction as well, with the energy efficiency indexes, et cetera, and the carbon intensity indexes sort of being put into play and also being developed going forward. So, a very clear path for the IMO and for global shipping so far and some good progress as well during Q1 this year. But sort of yes, the case, you could say.

And then coming into I-Tech's world then and the challenge of barnacles then why are they such a challenge? And we talked about this a long time or many times before. So, this is essentially, you could say, a recap for our new listeners then. But barnacles, they really have a big impact on drag resistance and the friction in the water for the ship, which increases fuel consumption or results in speed loss.

And barnacles, they do thrive in most marine environments. Of course, the warmer the water is, the more activity you have. And they essentially super glue themselves to the surface and are extremely difficult to remove. And essentially, when you try to remove them, you typically damage the ship's coating and essentially so much that you have to go and send the ship for repainting essentially, which means that then really the most efficient strategy is to prevent them from settling on the ships, and that's where IT comes in, right?

And we talked about it in Q4 or the year-end presentation as well, right? But what if 1/3 of the global fleet actually was using 36% more fuel than needed just for a day, what would that mean in cost and emissions? And what we presented then, I think, already in February was this slide, right, a new in docking data study that we conducted in the end of last year -- beginning of this year, where essentially, we asked Safina, a coating partner to shipowners to look at their data and they essentially give advice and suggest solutions for shipowners, what type of coating to put on the ship. They were looking into the data sort of on the conditions of over 760 ships.

And what they could see there when they came in for dry docking then, 1/3 of those ships really had completely unacceptable levels of barnacle fouling, right, more than 1/3 of the underwater area being covered in barnacles, which means then, yes, 40% or more additional fuel if you want to sail at the same speed. And what we also found in the study then was that the ships that were coated with Selektope had a significantly improved condition in terms of that. So almost no or very little barnacles in those cases.

And today, actually, then we thought of showing you some data. What does this mean for a ship owner or ship operator that your ship is fouling and that you have, for instance, barnacles growing on the ship's hub. So, I want to show you some new data then.

And first, we need to talk a little bit about vessel performance. And when we mean vessel performance is essentially you have a certain RPM on your engine and you can measure then what is the speed I get through water. And you can look at that over time. And that essentially you get a plot like this.

You can see a lot of dots sort of seemingly all over the place. And of course, there are a lot of things impacting the speed of a ship, right? The wind force, the wind direction, the waves, the wave direction, the currents and so on, right? Hence, you will get this really scatter of data points if you try to measure then what sort of engine power results in what type of speed.

And essentially, what you can see though is you see here the graph is speed loss is sort of on the negative x-axis here. So, the lower you get the more speed loss you have versus sort of your set speed. What is this ship supposed to sail at what speed with certain engine performance, right? And then you can see over time. And what you see then is essentially a linear reduction in the speed over time, right?

And that when you go into dry docking and you apply a new antifouling coating, then sort of that performance is gained back again. The ship can save faster through water and you started sort of a new round of degradation, right? And this is essentially why the ships really need a new coating and sort of have to go into docking approximately every 5 years. So, this is sort of a typical data set for a shipowner.

And I was speaking to several of performance monitoring service providers. So essentially companies that help ship owners to monitor the performance of their ships. So, they install essentially sensors and they have softwares and data models and to see how the performance of the ship and sort of the speed through water develops over time.

And sort of what they told me, looking at their data, one specific service provider, he said, yes, typically, we have a lot of tankers and bulker ships in our fleet, right? And what we see on average is for all of this data, approximately they lose 7% of the speed over the 5-year period. And of course, there is variation in this data set, right? So, you have some vessels that have premium anti-fouling coating that is really optimized for their specific route and the activity level that has close to no speed loss, right, during the 5-year period.

And there are plenty of examples of sort of catastrophic examples. I mean, he mentioned one specific year. He could see a data set of a tanker that was idling outside the coast of Mozambique for 3 weeks. And essentially after that, the speed was heavily impacted, and they sent down divers to look and they could see that both the sides and the flat bottom of the ship had 30% or more cover of barnacles and slime and algae, et cetera, right?

So essentially, that ship would have to be sent to cleaning. And most likely, at the cleaning event, they would damage the hull coating so much that they probably would have to clean it again very shortly afterwards or actually consider an early dry docking for that ship because it simply wouldn't perform.

So, I mean, this data set is, of course, covered with different examples of ships and how they perform. And then you say, okay, so what does this mean for a ship owner in terms of trying to translate the speed loss then into money. So, we prepared a little case just as a case of example.

So, the rule of thumb, they say is whatever speed loss you have, you can multiply that 3x to sort of get an estimate of the additional fuel that you need to recover that speed. So essentially, a ship that has a speed loss of 7%, if I want to sail at the same speed, I have to increase the engine power and the fuel consumption, 3x 7, so 21% actually, the fuel consumption. And of course, that would have a massive impact over 5 years.

And the nice thing here is, of course, if it's a linear effect that happens over time, you can see that, okay, what is the impact, right? So, let's say that the ship captain, he was just compensating all the time this speed loss, right, with increasing the engine power and increasing the fuel use. In the end, over this 5-year period of time here, they would have overconsumed bunker fuel for a value of USD 1.8 million, right? So quite significant, right?

The other option that he has is, of course, that, okay, I will just sail slower because it's no problem. There is congestion in the port anyway. We will have to wait when we get Rotterdam, et cetera. So, we just steam along slower. But that, of course, also has an economic impact. And that economic impact depends if you are sort of a ship owner that yourself, you're operating the ships and you are doing sort of the trade service yourself or if you are a ship owner that just charters your boat to others, right?

And typically, when you charter your boat, you have a fixed daily fee, and I assume a quite low rate here of $15,000, which is quite a low rate considering today's situation of conditions in the market, right? But anyway, then over this 5-year period, you would have lost 45 days of productive time, right? And that would have an equivalent value then of USD 670,000. So also, substantial money, right, to be saved by having a better antifouling solution.

But then you come to, okay, what is the trade-off then? What is the cost of the premium antifouling versus sort of a basic paint scheme on the ships? And that could be an example we heard is up to $200,000, right? That's the difference that, that can be. So of course, depending on the conditions of the market, are there good rates or are the bad rates, et cetera, what is the likelihood that the shipowner would put on a high-performing coating, right? It is always a balance. And you could say, is there enough money around to spend on service? Or do I have to save on that as well.

So, things that actually impact the shipowners' decision of taking a premium coating or not. And just to reiterate what we've said in the past as well, right, we do see an increased number of shipowners choosing premium anti-fouling coating. That has really grown its share in recent years. And we expect that to continue as well because essentially, the saving is really positive to do that.

And that leads me to the market outlook then. So, we in I-Tech, our solution then is used both for new builds and for dry dockings, right? And we estimate then with sort of the 10% increase, there will be around 2,000 new vessels being put on the market this year. And the dry dockings, they simply follow, you could say, a regular scheme. They have to come in at least every 60 months.

However, of course, there is some wiggle room here. And typically, what you see with the shipowners now is that times are uncertain, the charter rates are dropping, et cetera, then the shipowners are trying to postpone the dry docking as long as possible, to maximize the value that they can get because they know that the charter rates will go down, right? So, let's wait and see, right, and not go in for a service event right now.

Yes. I mean, reflecting, you could say our sales both for new ships or vessels and for dry dockings, then China is dominating. But for new ships, then Japan and Korea are quite sizable markets as well, and that's something we talked about in the past. And the opportunity then for Selektope and for good antifouling technologies, we estimate to be around USD 300 million to USD 500 million overall. So that is sort of the market that we're tapping into.

So yes, for the newcomers, our solution is Selektope then, which is a substance called medomedine that comes out of pharma. It is used as a sedative in veterinary and human medicine today. And it has the opposite effect on barnacles. It actually makes them temporarily hyperactive so that they cannot settle on the ship's hull. But it doesn't kill or harm the barnacles. It's a temporary and nonlethal effect.

It enables coating companies to make more innovative, you could say better performing coating that has a lower also environmental footprint. And it is commercially proven now used in 6 out of the 9 largest paint companies. We hope to see #7 coming during this year. And it is applied to what we estimate a little bit more than 3,000 chips so far.

So, we believe we have a very scalable business with plenty of additional potential. I mean, 3,000 ships out of a global fleet of 110,000 ships, there is definitely room to grow. Our model is outside asset-light. We have outsourced the production, and we are looking into continuously optimizing, you could say, our supply chain and production setup. So that is also what we are reaping the benefits of now in the gross margin.

We are essentially a knowledge company. So, we're based on intellectual property, formulation know-how and sort of knowing the customers. And we have a really unique technology with Selektope. There is no direct competition today. But of course, other anti-fouling solutions are available in the market.

We also cannot avoid this topic. I mean, to most of you listening in, you are aware of our reregistration process and the challenges that we have faced here in the European Union, and we have continuously talked about that. What we know has happened now is that the standing committee on biocided products have had this meeting in March with the first discussion, you could say, with the member states regarding all that support that we got during the public consultation.

So essentially, all stakeholders were able to submit their comments, et cetera, to EPA's proposal and also describe sort of how they use Selektope and why if they believe it should stay on the market, et cetera, right? And we did, as we have reported earlier, received quite a lot of input in this, which we are very happy about. So, thank you if you also took part in that. That's really important now.

But we expect this discussion, you could say, regarding the input and the way forward to continue now also in the June meeting going forward and that the situation will become more clear towards the end of the year and what is it actually that the European Commission is suggesting sort of to give Selektope renewed approval or another decision, right?

What we also can say is that since the current approval of Selektope will end in June this year, we expect now that the standing committee on Biocide products will announce that there is a temporary extension of the current approval. That is sort of a standard procedure that is done in all these cases because typically they drag out in time, and they are not able to finalize their assessments in time. So, they extend the current approval.

So of course, we will not lose our license to operate in Europe in the middle of this year because they haven't decided. So that's something we are expecting now to happen in the coming months. So that on the European situation, I think we are arriving then sort of at the outlook.

And I think what I want to say here today that we really see increased uncertainty and market turbulence that is affecting the sentiment in the industry. So, people are avoiding taking decisions, whether that is to place orders for new ships or doing service events, et cetera. And the market is sort of reorientating itself in terms of global trade, right?

And of course, the last word is not said here, but definitely, it has an impact on our market. And we haven't seen much of it in the numbers in Q1, but we just want to flag that this volatility that we keep on talking about that we have volatility in our sales over each quarter, right? The likelihood of that volatility has increased a lot under the current conditions.

And also, we see then, of course, the currency headwinds really weighing in on us during this year, right, because the U.S. dollars, as I wrote in the report, it has depreciated with approximately 10% during the first quarter. And let's see what happens then. I mean and we haven't seen the effect of that in our numbers yet, right? So really flagging for a worsening macro environment, right? And it's really interesting how quickly this changes, right? When we presented in February, the signals still overall looked all positive, right? And now that picture is really completely different. So, it just tells you a little bit of the volatility in the world that we're living in, right?

Of course, besides that, we are looking forward to new customer product launches. As I was mentioning then we did announce in the beginning of the year another customer coming on board, and we expect them to launch products as well during this year. And also, as we talked about here a number of times, we have business development activities that really have accelerated. And we, of course, look forward and would like to present more details on this during the year, but there is very good progress and momentum on some very interesting new growth opportunities for the company. So more on that to come.

And of course, we continue to work with the operational improvements, and we hope to be able to present sort of more on that during the year. And then you can see the effect also in the gross margins. And also, you could say now the advocacy regarding regulations and renewed approvals is becoming, you could say, more or less running business, right? So we have sort of signalled during last year that we have taken on higher costs for that. And I mean we see that continuing for the good part of this year, right? Essentially the costs that we have associated with advocacy and new renewal of approvals, et cetera. So that is what's ahead.

All right. That was actually the presentation, Fredrik. And now I'm eagerly awaiting and happy to receive your questions.

[Operator]

Thank you for this presentation, Markus.

We have received some questions here for you.

[Unknown Analyst]

Could you provide any additional detail on what percentage of total net sales CMP and PPG accounted for during this quarter?

[Markus Jonsson, executive]

Yes. I mean we have talked about you could say, a diversifying customer base, right? I mean if you come from sort of like 2023, CMP was representing 80% of sales essentially, right? And what we saw during 2024 was really a diversification, right? Other customers really increasing the penetration and the use of Selektope, right? And we ended the year essentially with CMP then representing 66% of sales during 2024. So, we could say a good solid progress on diversification.

That trend is still there, and we see actually the same result this year that CMP now in Q1 represents about 66% of the net sales, meaning then that PPG is, you could say, in that increasing pool of customers that represents 33% of the net sales. I don't have the exact numbers now, unfortunately, for PPT, but they are coming from a low base, right? But we see them being quite successful and really increasing their sales dramatically. So, I think we stay tuned on that to see how that develops during this year. But essentially stable then you could say, CMB 66%.

[Unknown Analyst]

I noticed that some major companies have been in the customer portfolio for several years, but still represent only a small portion of total sales. Should we expect these to scale up over time? Or how should we think about this?

[Markus Jonsson, executive]

That is definitely our ambition and what we, of course, try to convince these customers of, right? You're absolutely right that some customers, they are using our products, Selektope in some niche products, that are solving specific challenges, for instance, and have had, you could say, yes, sort of a stable business for these products, right? Our challenge is to convince them then to use them also in the mainstream products, sort of the higher-volume products, right? And that is ongoing.

And of course, the challenges can be related to technical and essentially, they will have to reformulate and implement new technologies. And that could actually be beyond only using Selektope, right, because our product is highly efficient on, for instance barnacles. But of course, you need a protection that covers sort of all the different biofouling challenges. And if you go in and make changes in the product, right, it typically takes customers some time to do this but we are working very actively on that. And really, it's our target that they will also grow their sales going -- sorry, their purchases of Selektope going forward.

[Unknown Analyst]

Why is it easier to initiate sales for newbuilds compared to dry docking? What is the current share of each segment?

[Markus Jonsson, executive]

Yes. It's a very good question, right? And sort of the success of Selektope really started in the newbuild segment because essentially, you can see the effect very, very quickly. So, the bottleneck of new shipbuilding is the dry dock. So, what the works are doing, they are sort of hurrying to put the ship together so we can hold water. And they put it out in the dock instead sort of outside the dry dock in the water and then we complete the ship there.

And at that time, the ship is lying still in the water for between 6 to 12 or even 18 months if it's a very complex ship. And during that time, of course, the ship is sitting still in the dock. It's warm water, it's summertime. It's a perfect sort of condition for various fouling to settle on the ship, right? And when the ship is ready, it actually has to pass the sea trial. So, they take the ship out to sea and they sail it, they rush the engine, they test it and so on. And it has to sail at a certain speed because that's what the shipbuilder has promised to the customer. And of course, if you have a lot of fouling under the ship's hull, it will not pass these tests.

And historically, what they had to do was to bring the ships up in the dry dock again and blast them and put a new layer of paint. But what they can do with Selektope, then is essentially they can skip that, so they can have the ship in the water and use specific outfitting paints they have sort of with a very strong good protection against fouling. And then the ship is ready and can be delivered when it's finished.

So, it is a huge saving, and that's easy to see the value of Selektope. For sort of the 5-year period, you can hear already there, right? It takes 5 years to see the effect of a product, right? And so that's why it takes longer in dry docking. Commercial sales for Selektope started in 2014. So, we are essentially now only 2 dry docking cycles down the road from when we were put on to the market, right? But of course, dry docking is 10x bigger than the new build, right? So that is the segment where we need to increase the penetration.

And hence, the data that I was showing now regarding the effect of Selektope over a 5-year cycle, right? It is very important to us, right? Because it clearly shows there is a lot of savings to use Selektope also over sort of the full 5-year period, not only when you are building chip in the dock.

[Unknown Analyst]

And do you expect the optimized production to balance out negative currency movements on gross margin in the coming quarters? Or should we expect a somewhat decreasing gross margin?

[Markus Jonsson, executive]

Yes. Sorry, Fred. I think I forgot to answer a question also the split between new build and dry docking. That was part of the earlier question.

[Unknown Analyst]

Yes, it was.

[Markus Jonsson, executive]

Yes, sorry. So yes, historically, we have said we had about 60-40, right, 60% new build, 40% for dry dock with our internal target to really grow the dry-docking business. And for instance, the PPG product that we talked about is one such product, right, that is really targeting both new build but definitely dry-docking business, right? So, it's an important product for us.

However, when we analyze the numbers, we said we had very good growth in 2024 and specifically in the Korean market, where there is a lot of new build. So, I would say it's still 60-40 or even for the full year 2024, it could actually be a little bit higher even for new build. So, we are still analyzing the numbers on that. So, it is you could say, our growth, our untapped market is in the dry-docking segment, and that's where we are working, you could say, both technically and directly with the customers. And sorry, could you repeat, Fredrik, the question on the gross margin, just so I get it right.

[Unknown Analyst]

Yes, of course. Do you expect the optimized production to balance out negative currency movements on gross margin in the coming quarters? Or should we expect a somewhat decreasing gross margin?

[Markus Jonsson, executive]

Because of the currency, you mean?

[Unknown Analyst]

Yes.

[Markus Jonsson, executive]

Well, no, I wouldn't say we will see a decrease in gross margin because of the currency as such. I mean the gross margin, I mean, our operational currency is U.S. dollars, right? So we both buy, you could say, product and sell in U.S. dollars. So that does not affect it per se, you could say. So I think we would see percentage-wise that we can continue to improve the gross margin.

[Unknown Analyst]

Next question. You talk about a slowdown in shipping orders and generally weaker shipping industry with rates down, et cetera. How and when would you expect this to impact I-Tech? Presumably, it won't impact 2025 much, but could it impact you during 2026?

[Markus Jonsson, executive]

Well, as I said, the likelihood that we see volatility in our business as well has increased dramatically. So, it goes really quickly in today's world, how things are changing. So, I would say that this year, it's become less certain where we will end this year, right? And I would say this volatility already impacts the shipping business, right? And of course, we are upstream of that. So, I mean, already today, there is impact. So, we definitely will see it, I would say, this year, right? But we don't know exactly how it will pan out. So, I would say already this year, we should expect to see the effects of the ongoing transformation on the global order.

[Unknown Analyst]

Yes. Can you give us an update on how much of your business was represented by C&P in the first quarter?

[Markus Jonsson, executive]

Yes, 66%. I think that was the first question as well. So, they sort of maintain a stable share in Q1 as well.

[Unknown Analyst]

Can you give us an update on how your business with PPG is developing? Is it growing strongly, but are you -- you are only present in one product, I believe?

[Markus Jonsson, executive]

Well, the fact is that this product that PPG introduced and launched during last year is their new flagship product, right? So, it goes both for new build and for the dry-docking segment. They apply, you could say, a little bit differently depending on if it is a dry dock or a new build event, right? But it is really a flagship product. So, it is the product to be in for PPG. So, it's quite important for us. And I think we also wrote that in the report, sales with PPG is up like 300% if you compare to Q1 last year. And of course, you could say that they basically launched the product during Q1 last year, right? So of course, it's up from a low base.

[Unknown Analyst]

Do you think they may include Selektope in more products?

[Markus Jonsson, executive]

Yes, we certainly hope so. And if there will be additional products going forward, yes.

[Unknown Analyst]

What's your base case on the gross margin going forward on the back of the currency movement headwind? Are we looking at closer to 50%?

[Markus Jonsson, executive]

No, I mean, we don't give a certain number estimate here going forward. I think the target is to continue to improve the gross margin per se.

[Unknown Analyst]

We have even more questions here. You did not specify the regulatory costs for this quarter in the report. But judging by the higher external costs, both quarter-on-quarter and year-on-year, it seems they are higher than in previous quarters. Should we assume, this elevated level will continue until a decision is made in the regulatory process?

[Markus Jonsson, executive]

Yes. We shouldn't expect them to go down in sort of this year, no, exactly. We expect it to continue to be on a high level, like you say, right now in the Q1 level approximately. And that is due to all the activities that is being done and linked to reregistration.

[Unknown Analyst]

Asia accounted for 98% of your sales this quarter, and China was the fastest-growing market. What is your view on the potential for growth in the Chinese market future?

[Markus Jonsson, executive]

Well, I think it's a massive opportunity to grow in China. I would say, also with CMP, the existing customer, right, and also new customers. So, it's such an important market. However, I think we talked about this earlier as well. The conditions in China are very different from Korea when it comes to new build, right?

Most of the Chinese shipyards are in river deltas. So, they do not have the same problem with barnacles during new build or construction of ships that you have in Korea and China. So, you could say that the fundaments of the business that sort of that started for Selektope in Korea and Japan does not exist in China. Of course, the dry-docking value proposition is still very strong, right? And that's where the growth opportunity comes in China.

I want to say also on the external costs as well, Fredrik, sort of yes, I mean, we see sort of stable costs, I would say, on the regulatory affairs. I think we also see an increased cost, and that is also linked to our business development activities. We see that we are, of course, increasing our resources here and sort of our efforts on business development. And that's another source of additional costs, right, for us going forward. So, it's not only the regulatory associated costs that is making the base for the growth of the external costs.

[Unknown Analyst]

The new product launches you mentioned, are these primarily for the dry-docking market or new build market?

[Markus Jonsson, executive]

If we speak about this new user, the Asian coatings company, we cannot say yet. We do not exactly know the proposition of those products, right? So we know they are in the making, but we don't know the details. Hopefully, both.

[Unknown Analyst]

Could you elaborate a little bit more on the expected currency effect coming quarters? Should we expect that the effect to hit more in the coming quarters? Or do you have adopted a hedge strategy, for instance, for handling these effects?

[Markus Jonsson, executive]

No, I think we should expect increased effects going forward. We don't have a specific hedging strategy. And of course, it depends on where the currency will go from here or the exchange rate essentially, right? But we haven't seen really the negative impact to that extent yet in Q1. I think we will see more of it sort of in the coming quarters of the year. And then depending on how this develops, right, it could be even more sort of pronounced effects.

[Unknown Analyst]

Can you elaborate a little bit on your customers' buying pattern? Are they building inventories in these market conditions? Or is the top line predominantly driven by higher volume demand from end users?

[Markus Jonsson, executive]

Yes, I would say predominantly the demand, right? So, everybody wants to avoid building any type of stock, I would say in the market conditions that we are in now, right? But our customers do need a minimum stock level to actually operate the business because it is not as predictable with the dry-docking business as it is for new build, right? A dry-docking event, simply a ship owner can decide from yes, 1 week to another, right, let's do this ship, right? Let's see what is available, right?

And of course, to be able to catch such a spot business in the dry-docking segment, you need to have some basic level of inventory, right, if you are a paint company, right? And you need that in many places because you don't exactly know where your customers will come in, right? So yes, it's basically demand. That's the answer.

[Unknown Analyst]

Okay. you have a strong cash position. Where is that being allocated in the near future?

[Markus Jonsson, executive]

Yes. Well, we have a dividend payment that is proposed now by the Board to the annual meeting. That is one thing. And then we will see. I mean we need to have a strong cash position, I would say, to really secure the ongoing business, but also then to selectively invest in some of the business development activities that we have here. And of course, we are counting on sort of the cash position to help us with that, right, going forward.

[Unknown Analyst]

How many of your 6 suppliers have included your products in their broader product lines compared to niche?

[Markus Jonsson, executive]

How many of the 6 active customers have included them in broader sort of in more than niche products?

[Unknown Analyst]

Yes.

[Markus Jonsson, executive]

That's a good question. I would expect 3 to 4 of them, but that was something I would need to check. But yes, at least half, I would say.

[Unknown Analyst]

One last question here for you, Markus. Can you just develop a little bit on the macroeconomic effects on new build sales relative to repainting at the moment?

[Markus Jonsson, executive]

Yes. No, and good again that we reiterated it. So, we don't see sort of the turbulence today affecting the new build short term, right? Because the ships that are being completed and painted now during 2025, they were ordered several years ago. And sort of the order books for the shipyards in Korea and Japan and I would say, basically in China as well are full, right? They have a lot of work in the coming 3 to 4 years.

Of course, you could say if there is a severe downturn, people may start to try to get out of the orders of the ships that they have ordered, right? But then we are sort of into really negative territory. So, we haven't seen any effect whatsoever so far of the turbulence, you could say, on the new build, but except that sort of the order intake for new ships have been really sort of hesitant in the first quarter, right?

So, the filling up of the pipeline, you could say, 4 or 5 years down the road, that is what is being affected right now for new builds and as I said, with the service event, that can be affected day-to-day, right? So, if the rates for charter rates are falling, then the owner can decide to try to postpone because there is some wiggle room, right? You can wait 6 months with dry docking your ships. So, let's do some additional runs while the business is sticker, right?

But also, we see that if there is a downturn and a softer demand, that's typically also when the ship owners do service events, right? Because then there is time, you're not losing that much money. So it can also be eventually a positive drive on the service and the dry docking business, right? So I think the problem is that it's very difficult to say right now because there are many different signals sort of pointing in opposite directions.

[Unknown Analyst]

Is your cautious comments regarding the outlook based on actual observations so far in this quarter or the current quarter among customers or just a very general cautionary comment?

[Markus Jonsson, executive]

It's a strong general cautionary comment and sort of, of course, speaking to the customers, yes.

[Unknown Analyst]

Have you noted any expansion towards retrofit repainting in your customers' product offering?

[Markus Jonsson, executive]

Sorry, Fred, could you repeat that one? I'm not sure I got you.

[Unknown Analyst]

Yes. Have you noted any expansion towards retrofit repainting area in your customers' product offerings?

[Markus Jonsson, executive]

More products, you mean, in that area? Yes, I would say we saw that trend during 2024. We hope that to continue. That we see more and more products that are targeting the dry docking or the service segment, right? So that was a trend that was happening or was positive during the whole last year and which we hope will continue also in this year, right, that we will have more products than targeting the dry-docking segment.

[Unknown Analyst]

And that was every question we got in for today's presentation, Markus. Any last words for the audience?

[Markus Jonsson, executive]

No. I mean thank you very much for listening in and for bringing forward such good questions. Yes, I hope I did my best to reply to them, and thank you for the interest and confidence in I-Tech and see you in another meeting going forward, right? So, thanks for today.