Earnings Transcript for IAALF - Q2 Fiscal Year 2024

Jim Sims: Good day, everyone. And welcome to this IBC Advanced Alloys Webcast and Conference Call on the company’s Financial Results for the Quarter Ended December 31, 2023. I’m Jim Sims, Director of Investor and Public Relations at IBC. Before we begin our webcast today, just a few reminders. Slides from today’s presentation and the audio of this call are being broadcast live over the web and we are recording this webcast. A replay of this webcast will be available later today on the IBC Advanced Alloys website. After our formal presentation, the company will take questions from webcast participants. During today’s presentation, we will be making forward-looking statements and viewers are cautioned not to place undue reliance on such forward-looking information and statements. Additional information identifying risks and uncertainties is contained in IBC’s public filings that are available on sedar.com and on our company website again at ibcadvancedalloys.com. Joining us today is Mark Smith, who is CEO and Board Chairman of IBC; along with Toni Wendel, who is our Chief Financial Officer. Mark, let me ask you to begin our presentation.

Mark Smith: Thank you, Jim. Let me start out with just a refresher on who we are. As many of you know, we manufacture copper and beryllium-aluminum alloys for customers in the commercial and defense sectors. These include companies in semiconductor manufacturing, aerospace, automotive, marine defense, electronics, industrial equipment, oil and gas and others. With approximately 80 employees, we’re headquartered in Franklin, Indiana. We operate two production plants, one in Indiana and one in Massachusetts. In addition to casting, forging, heat treating and fabrication of many different copper and beryllium alloys, we also provide customers with a full range of tolling and engineering consulting services. This slide shows the relative revenue generation by each of our divisions led by Copper Alloys, which contributes approximately 77% of the consolidated revenue and EMC contributing about 23%. Both operating divisions did a really fantastic job to close out 2023 on a high note as we swung to profitability in the quarter on higher sales and stronger gross margins. This has provided us with good additional momentum as we start 2024. On a consolidated basis, net income was $712,000 or $0.01 per share, as compared to $394,000, or basically zero cents per share in the prior year period. We booked sales of $10 million, which was up 34.1% quarter-on-quarter. Year-to-date, our sales were $16.7 million, which was an improvement of 25%. Adjusted EBITDA of $1.9 million in the quarter was nearly triple from the previous period, and year-to-date, our adjusted EBITDA swung to a positive $2.0 million. We generated $1.5 million in operating income, which is a sharp rise from $203,000 in the prior year quarter. Gross profit and gross margins improved in both divisions, largely due to higher sales revenue as compared to the prior year periods, resulting in fixed costs, forming a lower proportion of our sales. The copper division earned net income of $663,000 on sales of $7 million, which was higher by 24.1% quarter-over-quarter. Higher sales were driven largely by customers in the defense and power generation sectors. Revenue and adjusted EBITDA continue to strengthen this year over the prior year. Gross profit was positively impacted by improved material yield. The Engineered Materials division was profitable with net income of $563,000. That reversed a loss of $813,000 from the prior year period. Sales increased in the quarter and year-to-date, largely due to more favorable product pricing in the defense markets. The division is continuing its efforts to improve yields and is seeing better results every day. Gross margin improved from the comparable prior year periods, mostly due to higher sales in defense markets and improved yields on certain products and the reversal of the onerous contracts expense accrual as goods were shipped against those related purchase orders. As we noted in our filings and in our news release from earlier this week, IBC is continuing to explore strategic options with potential partners, investors and others regarding the Engineered Materials division and its Wilmington, Massachusetts facility. These options include, but are not limited to, pursuit of additional contracts, joint ventures, restructuring, sale of assets, sale of the division or closure of the division, and other possibilities. IBC will update the market as this effort progresses. Finally, let me reiterate a few of the longer term macro growth trends that are continuing to drive demand for our products. Defense applications are increasingly looking for lighter weight alloys and other chemistries that help them accomplish specific missions with greater effectiveness and less environmental impacts. Production of such specialty alloy products is our specialty at IBC. As markets for electric vehicles and hybrid vehicles expand around the world, all forecasts see significantly higher demand for copper and copper alloys. That’s very bullish for IBC’s Copper Alloys division. Our Copper Alloys division is producing specialty alloys for several advanced energy and defense applications. While we cannot disclose much about these applications at this point for competitive reasons. We are pretty excited about the future growth in these markets. Now with that, Toni and I would be happy to take any questions from our audience.

A - Jim Sims: Thanks, Mark. Let’s take some questions now, as Mark suggests, from the audience. For those that are participating on the webcast, you can type in your question in the chat thread, and for those participating and listening on the phone you might want to pose your questions to me via email, jim.sims, S-I-M-S, @ibcadvancedalloys.com or you can text me at 303-503-6203. We’ll try to get to everyone’s question in the time we have today. If not, we’ll get back to you offline with an answer to your question. Our first question comes from John. The question is, has the first quarter of 2024, a calendar first quarter, to-date continued the favorable fourth quarter calendar 2023 results or has there been a drop-off? And I’ll parenthetically say, John, I’m sorry we can’t get into too much detail about what we’re doing in the first quarter, but Mark, you want to provide a little bit of allowable color on that?

Mark Smith: Yes. We’d love to actually, and hopefully, with the webcast everybody can see that I’m actually smiling, because we actually, on a forward-looking basis, and remember those forward-looking cautionary statements we had at the front end of this presentation, I think, both the first quarter and the second quarter of calendar year 2024 look to remain strong at IBC in both divisions. So we’re pretty excited. The momentum is there. Our employees are just really excited and energetic about what’s happening right now and it’s a very positive mood overall.

Jim Sims: Thanks, Mark. Here’s another question. It’s a little similar, but the results for the EMC division, our beryllium-aluminum alloy division were very heartening. Do you see this trend continuing for EMC?

Mark Smith: Absolutely do. We have a contract in place that we publicly announced in the, I think, third quarter of calendar year 2023. That contract continues. The pricing in that contract is very strong. It’s what we should have had for some time. So EMC is going to continue to perform well. The yields are improving as we pass every day. I think we’re really hitting our stride in EMC right now. So, yes, I do see that continuing.

Jim Sims: Thanks, Mark. Here’s a question. Of the options you’re looking at regarding what they mean is EMC, is a sale of that division your preferred option or are there other options that you’re investigating?

Mark Smith: Well, we’re looking at a lot of options. As I noted in my presentation just a few minutes ago, a sale is certainly one option, but there are multiple options. The issue that has to be addressed is that, about the end of June 2024, EMC will not have any official contracts. They’ll still be doing or have the capability of doing minor work for different companies, but we don’t have any large contracts within the group. So, looking for additional contracts is certainly a high priority for us as well, looking at a sale of the division, looking at some additional toll work, looking at sale of assets. But we want to make sure that we’re doing and making the best decisions for our shareholders, given the situation right now, and we do understand what that situation is and we’re keeping our eyes wide open. But we are also going to make sure that we address this issue, because it is an issue that the company needs to address sometime before mid-year.

Jim Sims: Okay. How does -- how do markets for Copper Alloys look? How do you see the future growth potential of the Copper Alloys division?

Mark Smith: It’s an exciting place to be right now, to put it simply. Copper is an area that we’ve invested some very good money into and we have an unbelievable group of people at Copper Group in Franklin, Indiana, that just continue to perform day in and day out. We can’t thank them enough for their dedication. But the markets for copper are growing and we’re seeing this, we’re seeing the demand pick up. I think it’s safe to say that we want to invest additional money into the copper division. As you invest and improve one piece of the operation in copper, you figure out where you need to put more money just to keep that flow of products going through the facility. But some simple things that we look at to get pretty excited about copper, you take a look at the EV world, which again, we mentioned kind of very generally in the comments just a moment ago, but in the EV world, there is a significant amount of additional copper that goes into an EV vehicle rather than the internal combustion engine. And as we ramp up the sales of electric vehicles and that may not be occurring as fast as the automobile manufacturers would like, but it is occurring, and it certainly is occurring in China right now, we are going to see the demand for our products in the copper division continue to grow. So it’s really going to be a matter of, we’ve got to keep investing in that business and we’ve got to keep our people working as hard and committed as they are right now, which is pretty easy. It’s a nice family situation out of copper.

Jim Sims: Definitely is. Here’s a follow-on question, Toni, feel free to chime in on this as well. If you dispose in whatever way of the EM division, can IBC move to sustain profitability with the copper division alone?

Mark Smith: Toni, do you want to start?

Toni Wendel: I can start and then I’m sure you’ll have a lot to fill in. I believe the answer to that is, yes. Of course, the closure cost and all will entertain, depending on what option we come up finally and go with for the future of the EM division. But copper has done exactly what they told us they were going to do when we talked about the consolidation and the building expansion. So we see no end in sight for that anytime soon. So their orders continue to be strong, their new customers continue to grow and their gross margins continue to improve.

Mark Smith: Yeah. I can’t add much more to that. Copper has carried their weight and done exactly what they told us they would do for some time now. They’ve carried the company for quite some time. So I have very little doubt in my mind that copper is going to continue on that track and continue to support what IBC needs.

Jim Sims: Thanks to both. Here’s the last question I have that’s come in so far, and that is, is there a strategic relationship ongoing between IBC and NioCorp?

Mark Smith: I think it’s an interesting way to phrase the question, asking if there is a strategic relationship. I think by definition there probably is because I’m the CEO of both companies. But what we have between the companies in an official capacity is a technology development agreement and that’s largely trying to take advantage of the unbelievable expertise that both our copper and our EMC division have in the area of metallurgy, as NioCorp is trying to learn more and more about scandium aluminum alloys and we are utilizing the years and years and years of experience that the IBC engineers have in both copper and EMC, and that technology development effort will continue. We’re getting good value out of that, I think, on both sides. So that part will continue for sure.

Jim Sims: All right. Here’s another question that came in. The U.S. appears ready to move forward to start building ships again and submarines, I’ll add. Do your products go into naval vessels and how do you see that market going forward?

Mark Smith: Yeah. On the opening slide, there was a beautiful picture of a Columbia submarine and some of our material is in that submarine. So the answer is very simple. Yes, our Copper Alloy products are used in the Navy and I see that just continuing. And a lot of that’s because they do need these specific formulas or recipes of alloys, which provide very specific functions to the ships or the submarines. It -- as a general rule, provides a lighter weight for the ultimate ship or submarine and it also provides very good corrosion resistance. And so I see that area as a potential growth area for us. We’re in it right now, but I think we can do more in that area. So that is a very exciting area for us.

Jim Sims: Definitely. Here’s a question that came in a little late, Mark, and you kind of addressed it, but I’ll pose it. It was put a little differently. So if you haven’t already, can you provide more detail on material costs for energy -- for EMC? Do you believe there’s room for additional improvement relative to Q2 results -- fiscal Q2 results?

Mark Smith: First of all, my nature and my culture of the way I operate a business is, there is always room for improvement and our job is to find it. So let me start out by saying that, but I think in terms of cost of materials, to a large extent, those are pretty well set for the first half of 2024, because those are contracts that have already been entered into and we have agreed prices for those. Where we can see even better results than what we saw in the fourth quarter of 2023 would be as we continue to increase our yield. That’s the sweet spot for us and that’s where we can pick up a heck of a lot of advantages for the company financially is addressing that yield issue. We’ve got people working on the yield issue and all the variables associated with it every single day of the week and we’re seeing very significant improvements in that regard. So I think as our yield continues to improve, we can expect for marginally better results out of EMC.

Jim Sims: Yeah. And I’ll put this question forward, Mark, although, I don’t know how much you can get into it, but it was posed. So please elaborate on the lack of contracts post June 30, 2024.

Mark Smith: Yeah. I can’t -- I probably can’t talk much about that other than we had very good success renegotiating a lot of contracts for EMC in 2023, all resulting in higher prices for our product and that was an absolute requirement, because as people could see by the financial performance of the division, the revenue just was not sufficient. So we have renegotiated a lot of those contracts. They are way better pricing than what they were before, but we don’t have a good view as to what our ability to secure additional contracts will be. So we’re working on that every single day. We’re looking for new opportunities. We’re testing existing opportunities. We’ll see where all that lands, but I guess, we certainly learned the lesson the hard way. You need to make sure you get the right prices for your products and that’s what we’re very focused on at this point. If we get new contracts, they’re going to be at the right price.

Jim Sims: Okay. Thanks, Toni and Mark. That concludes our webcast and our questions. Again, for those who, if you post questions, I didn’t see them, I see them all in front of me. We will get back to you as best we can with answers to those. A recording of this webcast will be available on our website at ibcadvancedalloys.com in a few hours. Thank you all for joining us. We look forward to talking to you all soon. Take care.

Mark Smith: Thank you.