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Earnings Transcript for NNXPF - Q1 Fiscal Year 2024

Operator: Good day, and thank you for standing by. Welcome to the First Quarter 2024 NanoXplore Earnings Conference Call. [Operator Instructions]Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sophie Rossignol. Please go ahead.
Sophie Rossignol: Good morning, everyone, and welcome to NanoXplore First Quarter Conference Call. Today, I'm here with Soroush Nazarpour, our President and CEO; and Pedro Azevedo, our CFO. We will start with our prepared remarks and then a Q&A. Please note that our discussion will include estimates and other forward-looking information which our actual results may differ from in the future. We invite you to review the cautionary language in yesterday's earnings release and in our MD&A regarding the various factors, assumptions and risks that could cause our actual results to differ. With that, let me turn it over to Soroush.
Soroush Nazarpour: Hello, everyone, and thank you all for joining our call today. We will first start with a review of the economy and the impacts on our business. I will then expand on our capital allocation plan, and I will end my remarks with an update on VoltaXplore. 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. Even though this reduction in economic activity helps [indiscernible] inflation, it will certainly hamper growth in the next few quarters. As it relates to our business, our first quarter is historically slower because of our customer plants being shut down during the summer. Against that backdrop, I'm very pleased with the performance of NanoXplore's team, as we have been able to significantly improve our gross margin to almost 20%, compared to the last year's first quarter which was around 12%. Our focus on higher-margin products such as graphene and graphene-enhanced products, together with operational improvement, continues to positively contribute to our financial performance. We also maintained our healthy balance sheet, with almost CAD 40 million of liquidity. Now let's talk about our capital allocation plans related to our 5-year strategy. As we go through the next few quarters of economic uncertainties, our strategy is to maintain a healthy balance sheet while preparing for the next phase of growth that could potentially start by mid-2024.As disclosed previously in our 5-year strategic plan, we are focused on 3 areas of growth
Pedro Azevedo: 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 CAD 28.9 million. 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. 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 reduce their production cadence. Although the revenue growth during the quarter was modest, gross margins, excluding depreciation and amortization, nearly doubled, expanding from CAD 3.1 million to CAD 5.7 million. 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 cost benefits of producing graphene-enhanced products, higher-margin product mix and better cost controls. This year-over-year margin improvement has been a trend over the last 5 quarters, and we are pleased that it is continuing. Our adjusted EBITDA was negative CAD 448,000 and was comprised of positive CAD 200,000 in the Advanced Materials, Plastics and Composite Products segment, a significant improvement versus negative CAD 2 million last year, and CAD 680,000 negative in the Battery Cells segment, which encompasses the VoltaXplore initiative. Since VoltaXplore was a shared cost with Martinrea last year and excluded from EBITDA, there is no direct EBITDA comparable to our previous year's numbers. With regards to our balance sheet, we ended the quarter with CAD 29 million in cash and cash equivalents. This was CAD 1 million 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 CAD 10.5 million of unused space on our lines of credit, resulted in a total liquidity of CAD 39.5 million. The decrease in cash during the quarter was in part due to an investment of CAD 3 million in CapEx related to the SMC strategic initiatives 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. Each of the 3 offers provides NanoXplore with over CAD 40 million 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 expand the credit facility further once offtake agreements for the anode 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 impacts of higher interest rates on the economy and causing our growth rate to soften. 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 today, our guidance for the full year of 2024 is CAD 130 million. With that, I will pass it back to Sophie.
Sophie Rossignol: Operator, we can now open the lines for questions.
Operator: [Operator Instructions] And our first question comes from Rupert Merer, of National Bank.
Rupert Merer: Soroush, 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?
Soroush Nazarpour: I would say closer to 20%, to high 20%, like 25% range. So that's when you have a mix of graphene in the composite products. On the pure graphene, the margin goes north of 40%. So it depends on the product mix, but it's close to 25%, I would say.
Rupert Merer: Okay. So still more upside from where we are today. And if I can dive into the CAD 24 million 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, CAD 10 million, when would you anticipate receiving that?
Soroush Nazarpour: I'll pass to Pedro.
Pedro Azevedo: If I may, Rupert, basically, projects like this always start with tooling revenues. So you'll start seeing revenues from tooling in the May/June/July time frame. 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.
Rupert Merer: 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?
Pedro Azevedo: It's hard to quantify it that way, but I would say that the majority of our sales right now, probably around 60% or 70%, are derived from long-term programs like what we just announced. However, as graphene continues to grow and graphene-enhanced products continue to grow into other sectors, you will see that proportion to drop and the graphene amount to grow. So the proportion of that type of contracts and programs will drop as we grow other parts of the business.
Operator: [Operator Instructions] And our next question comes from Ahmad Shaath, of Beacon Securities.
Ahmad Shaath: Soroush and team, just a quick one for me. You mentioned on the 16,000-ton anode graphene facility that there is potential for CapEx savings, if I understood this correctly, from the dryer process. Are you able to give us any color on that? Or is it not going to be that material?
Soroush Nazarpour: Well, the CapEx saving is already included in the CAD 120 million that we mentioned on the 5 years plan. So the CapEx saving that we have discussed and compared is versus our water-based production process that we have today in our [ headquarters ] on the graphene production. So in terms of quantum, I will wait to give a number out as we're finishing our engineering study, but it's quite significant in terms of the drop of CapEx. So we're seeing more than 50% drop in the CapEx reduction.
Operator: And we have a follow-up question from Rupert Merer, of National Bank.
Rupert Merer: 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 sort of longer-life materials. Anyway, any color you can give on your developments with potential customers.
Soroush Nazarpour: So on the battery materials space on the anode side, we have a product called [indiscernible] that is coming out of the 16,000-ton 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 anodes and cathodes used by a conductive [indiscernible]. That's what is also coming out of that plant. The testing that the OEMs are doing and their battery partners are doing are mostly on the traditional CSPG anode material and also the graphene-enhanced anode material, which is a very similar type structure to the typical CSPG. So they're testing both these products. The sales path is very different for the conductive grade. So we're just, at this time, the focus is really on those active anode materials.And secondly, what we saw was following the announcement of export 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 close to them and have and supply it 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 anode material. So there is normally a ratio of 30% natural, 70% synthetic. So our type products are a portion of the anode materials that consumers and their battery suppliers are actually purchasing today. So that's the part of the market that we are active, and the customers are testing those type of products.
Rupert Merer: 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 announce offtakes in the coming quarters? 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?
Soroush Nazarpour: Well, the commitment we are looking is stronger than a simple supply contract, and that's why it's taking a little bit longer. We want to make sure that offtake contract enables us to raise the debt required through 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 anode-based material that's actually being sold today out there. Those type of products can be sold through distribution book as well. But we need that large bankable supply contract so we can finance it through the credit facilities. Now in terms of timing, I would say that in the next couple of quarters we should have it. 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 some time next year to have that in hand before allocating capital. And we will not start to invest money in this before having that offtake [indiscernible].
Rupert Merer: 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?
Soroush Nazarpour: 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 an investment tax credit. So I would say...
Pedro Azevedo: It's next year, and they have to start in 2024.
Soroush Nazarpour: Yes, it's to start in 2024. So we have definitely pretty good confidence that we will receive those investment tax credits.
Rupert Merer: So the rules seem fairly clear and really no hurdles to accessing at this point.
Soroush Nazarpour: At this point, no, there's no hurdles.
Operator: And our next question comes from Matthew Key, of B. Riley Securities.
Matthew Key: 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?
Soroush Nazarpour: So again, some of those key numbers will be released at the end of our engineering. But at this point, we are seeing sub-CAD 2 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 at CAD 3 per kilo, is very achievable.
Matthew Key: That's great to hear. And just one more quick one for me. Kind of on the CAD 24 million in new business contracts, could you maybe provide some additional details on what end markets exactly contributed to that new business?
Soroush Nazarpour: So it is with two customers
Operator: And we have a follow-up from Ahmad Shaath, of Beacon Securities.
Ahmad Shaath: Soroush, just a quick follow-up [indiscernible]. On the government side of the funding for VoltaXplore, what form of financing should we expect there?
Soroush Nazarpour: So that one is a bit harder to comment, as governments [indiscernible]. But technically, on similar cases, governments are looking at equity grants and forgivable loans.
Operator: Thank you. I'm showing no further questions at this time. I would now like to turn it back to Sophie Rossignol for closing remarks.
Sophie Rossignol: We would like to thank everyone for attending this call, and we wish everyone a great day.
Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.