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Yes, this news is worrying, and a disaster for the share price, but it sounds as if the deal was terminated from Itaconix's side.
If John Shaw was only concerned with the share price, he could have signed a new deal, kept the revenue numbers up, wouldn't have to deal with the fallout, and he could have kept looking for higher margin deals with new customers elsewhere.
(This post is for long-term investors. If you're a short-term trader then tough luck, you got screwed)
So why would the CEO terminate a deal with a customer which represents 33% of the company's revenue?
We only have supposition at this point, and your views will be coloured to a significant extent by how much the share price has fallen (which is likely all driven by PI sentiment), but I think tend to believe John when he talks about taking a short-term hit for greater growth later on.
It might delay breakeven/profit projections by a year, but if it means that ITX will generate greater margins in 12 months' time then it will be worth it.
If ITX are to grow as we all hope, they will be constrained by production capacity, and it will require more money to extend capacity. By losing a significant lower margin customer, that frees up capacity for higher margins, thus increasing profitability and delaying the need to invest capital into production facilities.
What it comes down to is whether you trust John and the board to be acting in the company's best interests. Ignore the short-term hit to the share price (again, based purely on PI sentiment), and consider whether this was a smart decision for the longer-term running of the company.
One more thought: if the share price hadn't dropped, how would that change your perception of the RNS? Given that the share price drop is all PIs selling, the drop becomes a self-fulfilling prophecy.
Hi
Canaccord Genuity has published a new research note on:
Itaconix plc.
Does anyone have access and can advise of the content?
ATB
AJP
What JS hasn’t explained in yesterday’s interview is what this ‘lost’ customer does now. Do they go back to non-ecofriendly detergent tablets, or is there an alternative out there, which ITX is unaware of.
JS needs to calm down the market.
Thanks Nick - glad I’m not the only with major concerns about today’s news. The share price is currently holding up around £2 in the hope that the upcoming trading update delivers some good news but the numbers won’t change in 3 weeks time so we will then drift down for several more months.
Surfie - “Ramptastic” - brilliant word I like it. Yes I have always been very positive about Itaconix because it all sounds great in theory doesn’t it?! But reality has been one sucker punch after another. Every single time we think the worst is behind us we get hit by more bad news. Sorry I’ve lost my faith in the company but I do hope it succeeds.
I agree with Smart, I'm in Itaconix for the long term and think they have great potential. But anyone who thinks this is positive is - in my opinion - basing that view more on emotion than facts. Losing the biggest customer and 30% of revenues is a major step backwards. Drop in share price seems pretty reasonable unfortunately, could get worse before it gets better given it undermines growth plans and the perceived stickiness of revenues. Let's hope other products and revenue streams work out but there's no guarantee of that. I'll remain invested but definitely not the long-term "banker" I once thought it was.
Bought back in today as that crazy bid-ask spread tightened up. Would be one of the larger trades of the day, but I don't see it on the ITX Share Trades page here. I guess it'll show up as a late report, er, later. 212.5p
The prices are definitely much better (more liquidity) once the US wakes up, some of the market makers must be US based I reckon.
Turnover is vanity, profit is sanity!
WOW... Smart, I always thought of you as Mr. Ramptastic. Your current posting is worrying.
The proactive investors youtube video was comforting. It sounded like it was John who terminated the co-dependent relationship and did so from a position of strength. ".[We know what] the value of our ingredient is" "Major opportunities developed in N.AMerica detergent market" "..but also developed a significant dependent on each other". Any speculation who the client was? Nouryon? If it was a supplier into detergent brands perhap those brands come to us now?
Hi Thordon
So good to hear from you, we have missed your input and we were all very concerned for you, so sorry to hear about your dad, my thought are with you and your family at this time, take care.
AJP
Just to add checked all the major suppliers and advertising still active , my view on this when operating in america it has been common practice to offer a new product with a discount and ITX did mention this years ago to support advertising and new product.
However in america its common to bash your supplier and at this point the agreement on gentleman terms has failed.
This has set us back , but what's the point in producing goods that in the end the margins are too thin.
ITX must be in a great position to refuse supplying or this may be a game of poker, which ever we will find out soon once there levels of ITX ingredient's get low and going back to fossil fuel.
Still checking no news on the majors in Europe yet.
My dads got terminal cancer so not been posting much , worked as a steeplejack at power stations probably where picked up the cancer. Hence going green is only option for all.
Just a point it will cost more money to changed labels & packaging then any increase from ITX.
Thanks Elsol. I’ve just watched the short video where JS described “significant short term revenue loss’. I won’t be buying any more Itaconix until I am clear on the ramifications of today’s announcement and until the share price settles.
What worries me most is that this came out of nowhere so it’s hard to have confidence in this company getting to $100m
Dear SI - see my note earlier - re: portfolio considerations and scarce plant capacity profit maximisation - I really don't think this is as bad as you first may believe. If you have sold some stock I would buy it back and given Johns Proactive Interview late today!
Hi AJP
In the December 2023 trading update they forecast revenue of “$9.5m or more for FY2024”.
Today have revised this figure down to between $6.0 and 6.5m.
So the loss of business is worth between $3m and $3.5m which equates to 31% to 37% of their total business. This has to be their largest customer unless you think they have another customer accounting for more than a third of their total business.
In any company that level of lost revenue would significantly increase overhead costs.
I’m really not overreacting when I say this is a disaster. They have lost at least 12 months worth of revenue growth in today’s announcement.
Hi Smart
So you know who the customer is, what their expenditure is withI TX and what margin we are dealing at with them, if this is that case can you please advise the board or are we maybe overreacting somewhat?
I know it is frustrating but sometimes these hard decisions have to be made.
ATB
AJP
Troajan - thanks for the link. Good interview and explains it all.
Well done MMs today for mugging all those who live in fear!!
My view is we don't have all the jigsaw pieces of this decision as yet and the circumstances will be much clearer at the date of the end of year announcement (mid April) together with the important wider pipeline outlook perspectives we know are coming.
Like you all my heart sank a little this morning when hearing the news. However, after more thought I believe there is a very good and sensible business reason for ITX to turn away these weakly profitable or marginally loss making revenues due to future limited manufacturing capacity (ie. our critical profit limiting resource maybe coming as early as 2025). Plant capacity is our current scare resource in the next 12 to 18 months before we can commission a duplicate facility in Europe and transfer all that is needed and train new staff. Based on my knowledge of business economics you always profit maximise based on your product portfolio and the principal limited resource constraint. For us it's our physical plant capacity and to a certain degree plant operator workforce yet to be hired. So if I am right, this unusual decision is linked heavily to other portfolio contract constraints that means its perfect sense to turn away some 'skimmed milk' today for better tasting 'double cream' during later 2024 or early 2025. If we maintained status quo supply we may find ourselves turning away or significantly delaying a much better profit generation contract. From this decision there is alot going on behind the scenes in my opinion that never gets public viewing. If there are more mgt. sounds made about the European facility in the next few weeks, I believe I am correct and the SP will rebound accordingly. As for the quantum of the SP drop. Its currently non intuitive given the value of each major diversification channel incl. Superabsorbants, paints and leather which must each represent a minimum of say USD10m of risk adjusted value given commercial/ technical progress to date. My thinking these should represent approx 50% of the ITX enterprise value right now after deducting the free cash of say USD 6m (working capital / capex adjusted excess). So work out the numbers as they don't stack up at the moment. Once more news flows I think we will get the bigger picture context. Plant constraint could be the key missing decision perspective. (but as ever DYOR).
Thanks Troajan
As has kind of been alluded to on this BB, the markets had to be made aware of the situation, but by what John is saying the relationship with this client if far from over (watch this space as they say).
Onwards and upwards with better profitable clients, going forward.
An opportunity to bag a few more at a still very cheap price, even if it is to put in the bottom drawer?
ATB
AJP
DB that’s all good and well to cut out small unprofitable customers but this is their largest customer. Significantly Lower revenue means much higher overheads as a proportion of the business. This is a massive cut in expected revenue for 2024 and sets the company back at least 1 year. The share price will now drift down over the coming weeks and months.
Not surprise
Too bad Smart. I understand the frustration. I recall when I took up a SME MD job, one f the first things I did - as profitability wasn’t good - was look at profitability by customer. Busy fools was an apt descriptor and for those clients, their refusal to accept price increases was GOOD for us. We said cheerio and focussed on stuff that made money. Non profitable growth is a recipe for disaster - glad we’re not doing that, it would seem. I suspect this client has kept their previous formulations on the back burner, but it would surprise me if they returned to the negotiating table. JS, however, really might not be bothered given that his factory, logistics, admin, customer services, sales, finance can focus on the other higher margin (hopefully) stuff coming down the line.
The formulation in/out comment will have been made with the knowledge of this (so far) failed negotiation, and I think it was more about managing our awareness and reaction. I expect a win:win compromise to be reached here because business doesn’t tolerate immature reactions .
Qd - I took a slightly different view on this morning’s drop in SP.
MMS saw the RNS and took a chance that it was a negative . They had no idea what price to set at the opening, but were short of stock from pre-Easter. So that tried it on with a ridiculous price of 177p to sell.
Someone (a non-believer IMHO) took the bait and sold and that set the sentiment for the rest of the morning.
Time will tell, if my judgement is anywhere near correct
GLA
Probably because news which materially affects the company has to be notified to the market without delay. It’s a legal requirement, to prevent insider trading etc.
I presume the FY results are not quite ready yet, or more likely John will add some meat to the bones of the situation when he releases that and hopefully allays fears