NanoXplore Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

There are 6 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the First Quarter 2024 NanoXplore Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sophie Rosignol.

Operator

Please go ahead. Good morning, everyone, and welcome to NanoXplore First Quarter Conference Call. Today, I'm here with Sorge Nasarpour, our President and CEO and Perro Azevedo, our CFO. We will start with our prepared remarks and then a Q and A. Please note that our discussion will include estimates and other forward looking information, which our actual results may differ from in the future.

Operator

We invite you to review the cautionary language and yesterday's earnings release and in our MD and A regarding the various factors, assumptions and risks that could cause our actual results to differ. With that, let me turn it over to Suhush.

Speaker 1

Merci, Sophie. Hello, everyone, and thank you all for joining our call today. We will first start with a review of economy and the impact on our business. I will then expand on our capital allocation plan, and I will end my remarks with an update on Volta Xplore. After almost 2 years of volatility and interest rate increases by central banks, we are seeing a reduction in economic activities and in consumer spending.

Speaker 1

Even though this reduction in economic activity helps reduce inflation, it will certainly hamper growth in the next few quarters. As it relates to our business, our first I'm very pleased with the performance of the NanoXplore team as we have been able to significantly improve our gross margin to almost 20% compared to the last year's Q1, which was around 12%. Our focus on higher positively contribute to our financial performance. We also maintained our healthy balance sheet with almost $40,000,000 of liquidity. Now let's talk about our capital allocation plans related to our 5 year strategy.

Speaker 1

As we go through the next few quarters of economic Our strategy is to maintain a healthy balance sheet while preparing for the next phase of growth that could potentially start by mid-twenty 24. As disclosed previously in our 5 year strategy plan, We're focused on 3 areas of growth, Graphene enhanced composite light weighting business, Graphene and Anode Material in the 15,000 metric ton per year production plant and VoltaXplore battery plant. In our lightweighting business, our graphene solution is gaining momentum and more customers are interested in our composite products. Graphene brings several benefits to composite products, improving the surface quality by reducing blisters and surface imperfections and enhancing the rigidity of the composites, which enables light weighting. This technical improvement translates into higher gross margin for our products, well over the industry standard and set NanoXplore apart from traditional composite parts supplier.

Speaker 1

Furthermore, the industry is adopting these solutions. Last month, we announced new contracts representing $24,000,000 per year of business at maturity and we're working on a couple of similar contracts. Our exposure to this market has been mostly in heavy commercial vehicles and we are looking to expand to passenger vehicle space. Having said that, we are selective on the businesses that we quote on and are discussing with customers to contribute to the capital investment. Regarding our graphene and anode material 16,000 metric ton per year production facility, Our commercial activities on the anode side are accelerating following the recent announcement of graphite export control from China.

Speaker 1

The anode market is heavily dominated by China and North American supply is very limited. We are currently testing our anode materials and discussing commercial partnership with a few OEM and their battery production partners. And following the announcement, these discussions accelerated. As previously disclosed in our 5 year strategy plan, this facility requires nearly $120,000,000 of investment, which is almost 70% of our total investment until 2027. Therefore, our final investment decision is conditional to offtake contracts from these OEMs as it enables us to finance this facility through dedicated credit facility along with government subsidies and investment tax Credit.

Speaker 1

This 16,000 metric ton per year facility will produce around 8,000 metric ton per year of anode material and 8,000 metric ton per year of our pure graphene power. Within the last few years, we have been actively working to

Speaker 2

We are able to produce

Speaker 1

graphene through a dry production process. Dry production process compared to our water based graphene production process has several benefits. 1st, it has a much higher output than production speed, meaning that CapEx per ton is significantly lower. 2nd, as there is no water or solvent used in the process, the footprint is significantly smaller. 3rd, which is extremely important, our cost of production is significantly lower, enabling us to match Carbon Black selling price.

Speaker 1

We anticipate producing 8,000 metric ton per year of dry processed graphene in this facility and will expand from there. This is a very important milestone for NanoXplore and Graphene market as a whole, as we can now target almost all carbon black applications and provide an all encompassing cost effective and sustainable alternatives to the Carbon Black customers. We will provide more details on our proprietary dry processing of graphene and our technology in a separate press release. When it comes to commercial activities related to our existing graphene production outside of Transportation segment, Our team continues to work hand in hand with all our existing and potential clients to establish the best strategy for incorporating graphene to their products. Testing and validation processor are continuing with several customers in our target markets.

Speaker 1

For instance, drilling fluid is continuing to show promise as Graphene has several benefits such as improved lubricity. Our customers are doing field trials now and we will report to market on the results. Related to the foam, we're actively working on several foam chemistries such as XPS, PIR and PU, mainly to improve insulating properties and achieve better flame retardants. Graphene is a sustainable replacement for other conventional additives that has been utilized in this market and also offers a better performance. Even though commercial sales are still small, we're expecting to see steady sales growth in the next few quarters.

Speaker 1

Switching gears to Volta Xplore, following successful commissioning of the retooling process to 20 1,700 We are now producing high performance power and energy batteries. In one side of the spectrum, we have produced power cells with a large concentration of our silicon additives or SiC in the anode and with over 1,000 cycle of stability. In other side of the spectrum, we have produced energy cells with outstanding lifetime and stability for almost 50 years of daily use. Our power cells are highly fit for high power and demanding applications such as power tools, sports vehicles and aeronautics, and our long cycle life energy cells are highly fit for good storage and peak shaving applications. VoltaXplore is continuing to make I have to congratulate VoltaXplore team for their achievements.

Speaker 1

Now moving to VoltaXplore financing, We're progressing very well and are getting very close to the conclusion of $500,000,000 financing to build Voltas to gigawatt hour battery Gigafactory. Our financing package has 3 components: government support, debt and equity. We currently have visibility on government Important debt portion of the financing is around 75% of the total financing and are working on the completion of the remaining equity portion. Related to the construction, we have selected our land and agreed with the construction company to construct our building. We anticipate beginning the construction in the Q2 of 2024 and receiving production equipment by Q4 of 2025, commissioning and the start of production will be in 2026.

Speaker 1

With that, I will now give the floor to Petro, who will discuss the financials and our outlook.

Speaker 3

Good morning, everyone. Today, I will begin with a review of our Q1 financial results, followed by an update on financing for our 5 year strategic plan and conclude with some commentary about our fiscal year 2024. Total revenues in Q1 grew 6% versus Q1 2023 to $28,900,000 The increase in revenue was mainly due to a positive product mix, including graphene enhanced products and positive foreign exchange impact resulting from a stronger U. S. Dollar.

Speaker 3

Despite this increase, the growth was lower than we expected due to lower tooling revenues, which will fluctuate from time to time, as well as due to a reduction in customer orders during the summer as they reduced their production cadence. Although the revenue growth during the quarter was modest, gross margins, excluding depreciation and amortization, nearly doubled, expanding from $3,100,000 to $5,700,000 Gross margin as a percentage of sales were 19.5%, an improvement of 800 basis points year over year and was driven by improved productivity resulting in part from manufacturing of This year over year margin improvement has been a trend over the last five quarters and we are pleased that it is continuing. Our adjusted EBITDA was negative $448,000 and was comprised of positive $200,000 in the Advanced Materials, Plastics and Composite Products segment, a significant improvement versus negative $2,000,000 last year and $680,000 negative in the battery cells segment, which encompass the Volt Explorer initiative. Since Volta Xplore was a shared cost with Martinrea last year and excluded from EBITDA, there is no direct EBITDA comparable to our previous With regards to our balance sheet, we ended the quarter with $29,000,000 in cash and cash equivalent.

Speaker 3

This was $1,000,000 lower than it should have been due to a technical delay in payments from one of our customers, which was resolved in October. Our cash along with the $10,500,000 of unused space on our lines of credit resulted in a total liquidity of 39,500,000 The decrease in cash during the quarter was in part due to an investment of $3,000,000 in CapEx related to the FMC strategic initiative and other general maintenance. Moving now to the financing of our 5 year strategic plan. As a reminder, this does not cover the battery Gigafactory initiative, which is being done separately and through different financing. Since our update in mid September, we have continued discussions with our current and potential lenders and now have received 3 separate credit facility offers.

Speaker 3

Each of the three offers provides NanoXplore with over $40,000,000 of credit, which will easily cover the full investment requirements for the SMC initiative and at interest rates comparable to what we currently pay on our variable rate debt. The terms of the offers also provide additional amounts to expands the credit facility further once offtake agreements for the annual materials are concluded and which would be used by the lenders to support the expansion. We expect to complete this process shortly. Turning now to our fiscal year 2024. As Soroush mentioned, we are now seeing the impact of higher interest rates on the economy and causing our growth rate to soften.

Speaker 3

Although our customers indicate strong order books, We are cautious about the coming quarters and expect a more modest growth during our fiscal year 2024. Based on the visibility we have to date, our guidance for the full year of 2024 is $130,000,000 With that, I will pass it back to Sophie.

Operator

Operator, we can now open the lines for questions. Thank you. And our first question comes from Rupert Merer of National Bank.

Speaker 2

Hi, good morning gentlemen.

Speaker 1

Good morning. Good morning, Rupert.

Speaker 2

Suresh, you started by talking about the support you're getting for gross margins with the product mix that you have and some of your higher end products. What's the range of margins you see in your product mix and what do you think is the potential for margins in the business in the long run?

Speaker 1

I would say closer to 20 to high 20%, like 25% range. So that's when you have a mix of graphene and composite products. On the Pure Grafting, the margin goes north of 40%. So depending on the product mix, but it's close to 25%, I would say.

Speaker 2

Okay. So still more upside from where we are today. And if I can dive into the $24,000,000 annual sales contract that you announced fairly recently. Can you talk about The cadence of that contract, when it's expected to really start to kick in? And the timing of The tooling revenue $10,000,000 when would you anticipate receiving that?

Speaker 1

Yes, Rodrigo. If I

Speaker 3

may, Robert, basically the projects like this always start with tooling revenues. So you'll start seeing revenues from tooling in the May, June, July timeframe. So Q4, Q1 of next year. And then as the tooling is completed and production starts, you'll start seeing into 2025 into 2026 the impact of these new contracts with the full annual impact probably only in the 2026 fiscal year.

Speaker 2

Great. And with programs like that, I imagine you're adding new programs, you have some programs Rolling off as well. How much of your revenue is typically tied to programs like this, which may have set durations?

Speaker 3

It's hard to quantify that way, but I would say that the majority of our sales right now probably around continues to grow and graphene enhanced products continue to grow into other sectors, you will see that proportion to drop And the graphene amounts to grow. So that proportion that's tied to contracts and programs will drop as we grow other parts of the business.

Speaker 2

All right, very good. I'll leave it there and I'll get back in the queue. Thank you.

Operator

Thank And our next question comes from Ahmed Shaf of Beacon Securities.

Speaker 4

Hi, Suresh and team. Just a quick one for me. You mentioned on the 16,000 tonne anode Graphene facility. There is potential for CapEx savings, if I'm understood correctly, from the DRi process. Are you able to give us any color on that?

Speaker 4

Or is it not going to be that material?

Speaker 1

Well, the CapEx saving is already included in the $120,000,000 that we mentioned on the 5 years plan. So the CapEx savings that we have discussed and compared is versus our water based production process that we have today in our headquarter on the Graphene production. So in terms of quantum, I will wait to give a number out as we're Finishing our engineering studies, but it's quite significant in terms of the drop of CapEx. We're seeing more than 50% drop in the CapEx reduction.

Speaker 4

Got it. That's very helpful. So much appreciate it. I'll jump back in the queue.

Operator

Thank you. One moment for our next question. And we have a follow-up question from Rupert Merer of National Bank.

Speaker 2

Hi, good morning. Wondering if I could talk to you a little about the battery materials Market, you mentioned you're in discussions with some battery producers who are looking for alternative sources of anode material. Are you providing representative materials to potential customers today for testing? And maybe you can give us some color on What type of material is most of interest for them? I imagine they're probably not looking for the high performance materials, but maybe more of the through longer life materials.

Speaker 2

Anyway, any color you can give on your developments with potential customers?

Speaker 1

Yes. So on the palladium material space on the nano side, we have A product called CSP, diffuse coated spherical purified graphite that is coming out of the 16,000 tons facility, that's one product. We also have a product to the graphene enhanced anode material, which is that's the second product. We also have conductive additives, graphene based conductive additives, which is about 2% of both anode and cathodes used by Conductive Carbon Black and that's what is also coming out of that plant. So The testing that the OEMs are doing and their validated partners are doing are mostly on the traditional CSPG which is a very similar type structure to the typical Yes, which is so they're testing both this product.

Speaker 1

The sales process is very different for the conductive grade. So we're just at this time, the focus is really on those active annulus materials. And technically, what we saw was Following the announcement of exports control, a graphite export control out of China and as China is technically supplying North of 90% of the anode material in the world, customers are looking to bring the supply of the anode to close them and have and supply through North America, and that's a good position for us to be. At the same time, the natural graphite based anode materials are always used in combination with the synthetic Graphite based endos material. So there is normally a ratio of 30% natural, 70% synthetic.

Speaker 1

So our type products are a portion of the annulant materials that So that's the part of the market that we are active and the customers are testing those type of products.

Speaker 2

And you mentioned that you're in discussions with lenders and the capacity of the facilities could expand if you get some offtakes from materials. How Soon, do you think you could see offtakes? And will you be in a position to announced offtakes in the coming quarters. So what's the outlook there? How quickly do you think your customers could be in a position to move forward and commit to some of this material?

Speaker 1

Well, the commitment we are looking is stronger than a simple top line contract, and that's why it's taking a little bit longer. We want to make sure that, That off day contract enabled us to raise the debt required for the to the credit facility. So we need a little bit stronger type Commitment from the customers. That will make the process a little bit slower. Having said that, A lot of the products coming out of that plant can be more of a commodity anodes based material that's actually being sold today out there.

Speaker 1

Those type of product can be sold through distribution groups as well. But we need that large bankable supply contract, So we can find assets through the credit facilities. Now in terms of timing, I would say that in the next couple of quarters, we should We cannot even start the construction before 2024 as we want to use the investment tax credits of the Canadian government. So we're looking at sometimes next year to have that in hand before allocating capital. And we will not start investing money on this before having that.

Speaker 2

So I imagine the support of the ITC is going to be important for you and for your potential Customers on the material. How much visibility do you have on the availability of the ITC? Are there any more Hoops that you're going to need to jump through to access that support? Or do you have pretty good visibility on being able to get access from those funds?

Speaker 1

It's an investment tax Credit, so we have very good visibility on that capital. As far as we know, it does not require Any sort of prior approval of some sort. This is the investment tax credit. So I would say Next year

Speaker 3

and they have to start in 2024.

Speaker 1

Yes, it's starting 2024. So we have pretty good Confidence that we will receive those investment tax credits.

Speaker 2

So the rule seem fairly clear and really no hurdles to accessing the sport?

Speaker 1

At this point, no, there is no head.

Speaker 2

Excellent. Thanks again.

Operator

Thank you. One moment for our next question. And our next question comes from Matthew Keay of B. Riley Securities.

Speaker 5

Good morning, gentlemen, and thank you for taking my question. You mentioned that the dry processing method has the potential to significantly lower costs. I was wondering if you could maybe quantify that a little bit more and how significant of a cost reduction are we talking about with this new method? Thanks.

Speaker 1

So again, some of those key numbers will be released at the end of our engineering. But At this point, we are seeing sub-two dollars per kilo production cost, and we still think that we can go further down in terms of production cost. So the target of selling Close to carbon black pricing like a $3 per kilo is very achievable.

Speaker 5

That's great to hear. And just one more quick one for me. Kind of on the $24,000,000 in new business contracts, could you maybe provide some additional details on what end markets exactly contributed to that new business?

Speaker 1

Yes. So it is with 2 customers, 1 in heavy commercial vehicle and the other is in construction equipment supplier. Both of them are in composite light weighting

Speaker 2

Thanks, Matt.

Operator

Thank you. One moment for our next question. And we have a follow-up from Ahmed Shaath of Beacon Securities.

Speaker 4

Hey, Suraj. Just a quick follow-up, maybe I Discussed this before, but on the government side of the funding for Volta Xplore, what form of financing are we should we expect there?

Speaker 1

So that one is a bit harder to comment as Governments, they happen to release it themselves. But technically, on similar cases, governments are looking at equity Grants and Forgivable Locks.

Speaker 4

That's very helpful. Thanks for that, Suraj.

Operator

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Sophie Rosnejo for closing remarks.

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Earnings Conference Call
NanoXplore Q1 2024
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