NanoXplore Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
September 12, 2023

There are 6 speakers on the call.

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to NanoXplore 4th Quarter 2023 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 note that today's conference is being recorded.

Operator

I will now hand the conference over to your speaker host for today, Sophie Rosignol. Please go ahead.

Speaker 1

Good morning, everyone, and welcome to NanoXplore's 4th quarter year end conference call. Today, I'm here with Thomas Nasacour, our President and CEO and Pedro 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. We invite you to review the Cautionary language in 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.

Speaker 1

With that, let me turn it over to Subosh.

Speaker 2

Merci Sophists. Hello, everyone, and thank you all for joining our call today. We will first Start with a review of the economy and the impact on our business. I will then expand our recent Business and Commercial Development, I will end my remarks with an update on Ultra Xplore. After a year of volatility and interest rate hikes by central banks, the economy has proven Pricing leaders, high labor markets, high commodity prices and the delayed impact of rising interest rates have all helped to sustain growth.

Speaker 2

While this has set the stage for a period of relative economy calm during the remainder of this year, Some signs of slowing growth are emerging on some parts of the economy. Despite these economic uncertainties, Our business is growing and our customer forecast remains strong as evidenced by our reported financials. Our total revenue increased by 18% from the same quarter last year, increasing from $28,000,000 to $33,000,000 which is a record quarterly revenue. Also, we closed the year with $123,000,000 of revenue, which is 33% higher than last year and and also record annual revenue. Our gross margin expanded during this quarter again And reached 21%, resulting in a 4th positive adjusted EBITDA in the last 5 quarters.

Speaker 2

In terms of operation, we are performing very well, and I believe this trend will continue in the current fiscal year. We also maintained our healthy balance sheet with more than $36,000,000 of cash on hand. The strength of our current business along with our healthy balance sheet will help us execute on our growth strategy as disclosed in our 5 year strategy plan. Now let's talk about our recent business and commercial development related to our 5 year strategy plan. Our anode material pilot line is now up and running And we have fully tested our anode active material products.

Speaker 2

According to Benchmark Minerals, The United States battery capacity pipeline to 2,031 now sits at near 1.2 terawatt hour, which requires around 360,000 tons of active material annually. We are planning to produce 8,000 tons per year of anode active material from our upcoming 16,000 tonne per year anode and graphene production facility. Even though this facility will supply only a small fraction of North American meat, this is an important milestone for NanoXplore as paves the way for future expansion in this market. Forents are working on the engineering of this facility and are in discussion with We have also shipped samples out to partners and customers for testing and validation. Even though Wolfe Xplore will be a customer of this facility, we are in discussion with OEMs and their value production partners to allocate the rest of the capacity.

Speaker 2

When it comes to the financing of this 300,000 square feet plant, we'll benefit from federal and provincial Investment tax credit and offtake agreements enable us to secure the credit facility. Hence, our investment decision is on securing such an update contract during the next few months. We're very excited to enter the battery material market, A market where the supply is limited and mainly the case in Asia. We have seen several public announcements of new battery projects In Canada also, which will bring a lot of new opportunities for NanoXplore. Adding to that, Our Badawi Research and Laboratory located in the vicinity of NanoXplore's headquarters is now fully operational.

Speaker 2

This laboratory is key for our performance additive products and will allow NanoXplore to remain at the forefront of research and development Another aspect of our 5 year plan is our investment in advanced composites products, where we have raised graphene performance in light weighting of transportation. We recently acquired a press Support recently awarded programs from large commercial vehicle OEMs, which will be detailed to our shareholders shortly. We're also receiving strong interest from passenger vehicle OEMs for our sheet molding compound products We are currently evaluating potential opportunities to capitalize on. Sports car and electric cars are looking to reduce weight This is a very good sign for us and for the graphene market as a whole, As the transportation industry is becoming one of the largest early adopters of graphene, both for batteries and composite light weight. Moving to the key developments that happened during this quarter with our graphene related activities.

Speaker 2

Overall, we are satisfied with our graphene commercialization Testing and validation processes are continuing at an increasing pace in our focused market and sales From existing customers increasing each quarter, a clear demonstration that the added value coming from incorporation of graphene are being accepted by our customers. For instance, in the plastic and recycled plastic market, the presence of additives Containing graphene can increase several profits, including stiffness, impact resistance, Thermal and electrical conductivity and resistance to degradation. Graphene enhanced plastics such as nylon and polyethylene are selling better to external customers and the commercial work is advancing on the 2nd plastics side with a few customers We'll be purchasing graphene and we're expecting to add more. We're also continuing with the drilling fluid, Drilling Flu is an important opportunity for us as it requires large volumes of graphene in powder form. We are developing our solution with a few global oil and gas companies, one of which is one of the largest in the world.

Speaker 2

If our solution enters the market, we can expect several tons of graphene to be consumed for every drilling well. As a reminder, graphene enhances lubricity and lowers the coefficient of friction, which leads to process efficiency, Increasing drilling speed and lowering downtime. Searching to foam, it was proven that graphene increases thermal insulation by more than 10%, improved plant retardancy and provides a more sustainable solution. We are in discussions with several reputable chemical companies during different stages of validation of our graphene. Results have been consistently promising, and we're confident that we will win business in the insulation foam market.

Speaker 2

For instance, our discussion with a well known chemical company is progressing and we're waiting for official dates for product rollouts. We're also in product validation steps with another leader in the small market. We're expecting this development to continue in the next year. Another market of interest for us is the concrete market. We are seeing success mainly in the specialty concrete market at this time.

Speaker 2

We anticipate sales volume to increase further following modification of the related ASTM certification to include Graphene. Having said that, larger and more tangible graphene sales volume will come from commodity concrete markets. It's an extremely cost sensitive market and even though we are the lowest cost supplier of the graphene in the world, performance improvement and cost reduction coming from Grafting is not yet sufficient for adoption. In other words, for us to enter this market and maintain our target gross margin, We have to produce graphene at lower costs, which will be the case only after commissioning of our 16,000 ton per year We're wrapping an out of material production facility. Switching gears to VoataiXplore.

Speaker 2

A lot of progress has been made during the last quarter. We signed a deal with a well known heavy commercial vehicle OEM for supply of lithium ion battery cells And I'm happy that this is done now. Adding to that, we recently announced the appointment of Nicolas Vio As the new Director of Automation and Construction of OtaXplore, Nikola was previously working as Senior Manager of Cell Control Engineering at Tesla and was involved in building Tesla's lithophatics. The appointment of Nicola together with the conclusion of our first commercial deal Consistent with the use of the risk associated with the construction of Moltex for the company. Moreover, The recruiting process at Volta Xplore pilot plant to move from 18,650 to 20 1,700 cell format is now complete and the first cells have been produced.

Speaker 2

As a reminder, Walter Escobedo Factory will only produce 21,700 cells. Finally, we are progressing well on the financing of That will be the most beneficial to our shareholders and the future of our business. We are targeting to conclude the financing this year and start the construction during 2024. With that, I will now give the floor to Pedro, who will discuss the financial and our outlook.

Speaker 3

Good morning, everyone. Today, I will begin with a review of our Q4 financial results followed by some commentary about our full year performance and conclude with an update on financing for our 5 year plan. Before discussing the results, as you may have seen in the press release, NanoXplore is now reporting financial results in 2 segments Advanced Materials, Plastics and Composite Products segment and the Battery Sales segment. This was necessary so that the financial performance of the Volt Explorer Initiative and the historic NanoXplore Graphene Business We measured independently for our shareholders to see and because this is how we manage these 2 main product groups of NanoXplore. Now jumping to our Q4 performance.

Speaker 3

Total revenues in Q4 grew 18% versus Q4 2022 to $33,300,000 The increase in revenue continues to be driven by a positive product mix, including graphene enhanced products, Higher volume, mainly in the transportation products and positive foreign exchange impact. These items were partially offset by lower tooling revenues. If we exclude our lower tooling, which can fluctuate from quarter to quarter as customers launch new programs, our total revenues grew 21%. Q4 gross margin excluding depreciation and amortization was $6,800,000 an increase of $2,400,000 compared to last year. This represented a gross margin percentage of sales of 21%, an improvement of 400 basis points year over year and was driven by improved productivity, resulting in part to manufacturing cost benefits of producing graphene enhanced products, higher margin product mix and better cost controls.

Speaker 3

Our adjusted EBITDA was positive $526,000 which in itself is another record adjusted EBITDA for NanoXplore, But this amount includes negative $604,000 related to the Volta Xplore initiative, which in the past has been excluded from adjusted EBITDA and now comprises the totality of the battery cell segment. If we only look at Advanced Materials Plastics and Composite Products segment, we achieved a $1,100,000 adjusted EBITDA, which is a gain of $1,000,000 versus last year and also a record level for NanoXplore. This is our 3rd quarter in a row and our 4th in the last 5 quarters of positive and increasing Adjusted EBITDA was a direct result of our higher gross margins, but partly offset by higher SG and A. In Q4, the Battery South segment's adjusted EBITDA loss, which as I mentioned is exclusively the Evolto Explore initiative was in line with expectations and represents the current operating costs of both Explore as we work to secure offtake agreements and secure with full financing for

Speaker 2

the project. With regards to

Speaker 3

our balance sheet, we ended the year with $36,200,000 in cash and cash equivalents and $10,300,000 of the available space on our line of credit for

Speaker 2

a total liquidity of $46,500,000

Speaker 3

In addition, for our Q3 in a row, we generated positive operating cash flows. Despite now consolidating both the Explorer's operations, which has negative $450,000 of operating cash flows. Our overall operating cash flows came in at a positive $1,700,000 Our total bank debt now stands at $9,400,000 and was comprised of $7,900,000 of long term and $1,500,000 short term debt. Turning now to the full year 2023 notable achievements. During our 2023 fiscal year, we grew total revenues by 31% from $94,000,000 to $124,000,000 We improved gross margins as a percentage of sales from 10.2% in 2022 to 17.3% in 2023.

Speaker 3

We improved adjusted EBITDA from negative $9,200,000 in 2022 to nearly breakeven this year at minus 240,000 if we exclude the battery sales segments to be comparable. In addition to the significant improvements to the P and L, We also lowered our working capital by nearly $4,000,000 despite growing revenues by $30,000,000 as well as completed the acquisition of XG Sciences, which was an important acquisition for our battery and material initiative. In addition to the achievements in our financial performance, During the year, we converted one of our OEMs clients to fully graphene enhanced parts, increased our overall volume of graphene enhanced products, Put in place a pilot manufacturing facility for Nano's material initiative, made significant progress in making the Volta Xplore Gigafactory a reality and have begun investments in the FMC Material Initiative. 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.

Speaker 3

As mentioned during the Q3 investors call, we are in discussions with our current and potential new lenders on an increased credit facility and the discussions are progressing well. We remain confident to finalize an expansion of the current credit level facility before the current year end. Given the confidence we have in this achieved that's being achieved, we have already placed POs for long lead time equipment and began the engineering work for the construction work needed in our Newton's New York, North Carolina facility, both related to the SMC expansion strategic initiative. We currently expect the SMC initiative to be producing returns before calendar year end 2024. In closing, I'm very pleased with our financial performance and our various achievements during the 2023 fiscal year.

Speaker 3

I will use this stage to thank all the employees of NanoXplore in each of our operating companies for their hard work and for having helped us achieve these results in this past year. I would also wish to thank our shareholders for their confidence in NanoXplore. We expect during our 2024 fiscal year to see the continued adoption by our customers of graphene and graphene enhanced product, Continued improvements in our financial results and have made great progress on the initiatives from our 5 year strategic plan. With that, I will pass it back to Sophie.

Speaker 1

Merci, Pedro. Operator, we can now open the line for questions.

Operator

Please standby while we compile the Q and A roster. And our first question coming from the line of Michael Glenn with Raymond James. Your line is open.

Speaker 4

Hey, good morning. Suraj, just circling back to the commercial agreement with Volta Xplore. Can you just discuss like was this a customer that was Using some of the output from the pilot facility, were they working with the 18,650 or 21,700 cells? And can you speak to how Like the testing that they were doing, how rigorous it was and maybe describe some of the steps and process that were undertaken prior to reaching this offtake agreement.

Operator

Speakers, you are still on mute. Please unmute.

Speaker 2

Hello?

Speaker 3

Hello.

Operator

We can hear you now. Go ahead, speakers.

Speaker 2

Michael, can you hear me now right?

Speaker 4

I can hear you, Suraj. Did you hear my question?

Speaker 2

Yes, yes. Just repeating the question so everyone can follow. Question was the 18,650 and 20 1700 and the testing that has been done by the clients on those type of products. So first, initially, the Volta Xplore plant was doing 650 now is converted to 21700. So the validation is done on 18,650, but the conversion of 18,600 21700 is well known in the market.

Speaker 2

So normally, 21700 are seeing about 50% improved Numbers in terms of capacity and everything. So right now, the testing is happening on 20 1,700, but all the Testing that's needed for the customer was done in 18,650.

Speaker 4

Okay. And can you just Is there any way to describe this sort of testing that they're working through or talk speak to some of the results that they've seen from the battery from the testing that they're doing?

Speaker 2

Well, customers, they always have a specs for the batteries that they need. So the specs that we received, we matched the performance of the batteries with those. So It's not the other way around. It's not like we have a 13 batteries and they take it and because we're not the only supplier of the battery for them. So It's the job of the battery suppliers to match the required spec of the customer with their product.

Speaker 4

Okay. And Then if we circle back to the Battery Day from the early 2022, April of 2022, I'm just wondering, is there any updates as to how we should think about CapEx, top line, gross margin? Is there any changes with respect to your initial expectations for the size of the plant, the 2 gigawatts? Is that still part of the plan?

Speaker 2

Yes. The plan is still to be lower than our. In terms of top line, the pricing model for us It's a material cost plus a lump sum, and the lump sum covers production cost and gross margin and gross profit. So there is some level of fluctuation on the top line depending on the variation of the raw material prices, But the gross margin is very stable. So we went in the Battery Day, we assumed general numbers and very flat Numbers in terms of price per kilowatt hour that fluctuates a little bit on the top line, but Very similar in terms of the bottom line.

Speaker 2

It doesn't really change much. So You can correlate the same numbers that has been said in the battery day with this contract that also announced.

Speaker 4

Okay. And that was the 25% gross margin that was outlined during that day?

Speaker 2

Yes.

Speaker 4

Okay. Thanks. I'll get back in queue.

Operator

Thank you. And our next question coming from the line of Rupert Merer with National Bank. Your line is

Speaker 5

Hi, good morning everyone.

Speaker 2

Good morning, Rupert.

Speaker 5

Following up on the battery plant, what are the hurdles to Closing financing and if you're closing this year, what are the remaining milestones that we should be looking out for?

Speaker 2

We're just not going to comment too much about the financing and what's happening at this stage. I can tell you that when you're building any plants, you want to make sure that you derisk the construction by having Experts and skillful employees, so we hired Nicolas to derisk that. And also you want to make sure that your output is allocated to the customers and that's what we announced as well. So these 2 were the main two requirements for us to look at the next step. At this point, I don't see any specific carryout in the process.

Speaker 2

Having said that, we want to make sure that the financing package, When it comes to the cost of capital, it's the best that we can get in the market in these things. So we're trying to optimize more than I'm more than just doing this.

Speaker 5

Okay. Thank you. And you had some Comments on the fact that your graphene production was increasing. Can you give us some color on how much Graphene you're producing today, your 4,000 ton plant and where is it going? If you can give maybe a little color on Which customers or which customer groups you're selling to?

Speaker 5

How much is in powder form versus the finished products? And any changes quarter over quarter?

Speaker 2

Yes. So when we look at the target markets, still transportation is The main target market for us and still graphene enhanced Master batch pellet and also graphene enhanced mud or SMC materials are the main customers or main formats of the graphene that's being sold. So the graphene powder direct sales are still low, And we are mixing it with different type of medium. And so these two four factors are still the best sellers And transportation is still the main segment for the graphene sales. Having said that

Speaker 3

Currently, Gretchen. Yes, current Gretchen.

Speaker 2

Having said that, we're seeing growth in both agriculture and industrial and construction that's happening right now.

Speaker 5

Any chance you can give us some color on how much of your capacity you're utilizing today?

Speaker 2

We're not Commenting as before about the volumes produced, sold and anything about that in for the 4,000 ton But as I said before, we're expecting that we get out of the remaining capacity and we'll be fully allocated very soon.

Speaker 5

All right. Thank you. And then maybe just one final follow-up there. On the drilling fluids, looking at that market, You mentioned that drilling market will use a few tons and I missed what the reference point was, if it was A timeframe or an application, maybe you could just repeat the timing and opportunity for drilling fluids, please?

Speaker 2

Well, It's a couple of tons, 2 tons every drilling well. That's what we mentioned. So you can imagine In North America, I think it's about 30,000 to 40,000 wells are being drilled every year. So you can just correlate the numbers and get To potential addressable market to the addressable market on that. But it's few tons every drilling well that we mentioned.

Speaker 5

And the timing on that market, what would be the hurdles to moving forward with commercialization there?

Speaker 2

We're still in these three markets, Foam, concrete and drilling fluid is more of the market that we're working to expand. It's hard to say when or how much. What we're working now, we are towards the end of the validation step with 1 large oil and gas company. And again, this type of new products, it's not just getting the product done. We have to roll it out and we have to see how the market is responding to those products.

Speaker 2

And If their customers are happy with what they're seeing, the volume can grow. So it's difficult to put a number around the future growth on that market.

Speaker 5

Okay. Thank you. I'll get back in the queue.

Operator

Thank you. And I see we have a follow-up question from Michael Glynn with Raymond James, your line is open.

Speaker 4

Okay. Soroush, on the Anode material, this was the 8,000 tons per year of anode material. Can you just remind us how the graphene fits into the anode material? And what the benefits of the graphene using the graphene in the anode material are?

Speaker 2

Yes. So the way we are looking at the anode material production, there is a traditional way of turning graphite to spherical graphite And converting it and putting a coating around it and make it a material called CSBG or coated spherical purified graphite. And there is a way also that we have developed, which is from the path of converting graphite first to graphene And then wrapping the grafting particles together to make around particles. So this facility is addressing anode materials From both angles, producing anode material from the traditional routes and also producing that From the path of graphene, in reality, anode production, we call it either top down or bottom up method. Bottom up method is a graphene path and Optumas is the graphite path that you go through micronization and discretization and you produce CSPGM typical So this facility will produce both material.

Speaker 4

Okay. And is there any Between the both materials, the advantages For the bottom up approach over the traditional approach, can you describe those just for me?

Speaker 2

Yes, because it's the source of the graphene at the bottom up approach, You have a slight increase in terms of capacity or let's say energy density that the battery will experience. And also you have a little bit better charging speed that comes from the conductivity of the gravity. So there is a slight improvement

Speaker 4

Okay. And just to circle back to the drilling fluids, I'm just Trying to remember exactly, like the primary advantages from using the graphene in the drilling flute application, what can you describe that Again, I might have missed it.

Speaker 2

Yes. So we look at adding graphene to 2 types of drilling fluids. 1 is the geothermal drilling fluid and one is the normal. So in the geothermal fluid, which is a much smaller market, this improves the depth of the drilling that you can achieve. So that's good for deeper well application.

Speaker 2

And on the normal drilling fluid, it's pretty much a lubricating additive. So it can Reduce the friction and improve the lifetime of your drilling bits and also reduce the downtime of the drilling.

Speaker 4

Okay. Okay. Thank you.

Operator

Thank you. And next follow-up question coming from the line of Rupert Merer. Your line is open.

Speaker 5

Hello again. Just following up on some of the Questions from Michael. So if we look at your battery materials, you have the ability to produce a range of The different specs for those battery materials, can you talk about where you're going to hone in on your initial 1 gigawatt hour customer? I imagine you're not going to be throwing in too much silicon into the mix there given the life requirements for that target market. But Can you just talk about what that first battery will look like and maybe how much Graphene it might use and how it might compare to competing technologies?

Speaker 2

All right. So on our battery material, we have different Products coming out. 1, of course, is the conductive additive products, which is Some sort of a conductive carbon black replacement by the graphene, that's once set of product. There's graphene enhanced silicon compounds, And there is also anode active material, which is the anode material produced either through a traditional way or through this through the graphene Right. So these are the type of products that we are focusing on the Validity Materials side.

Speaker 2

Now looking at VoltaXplore, when we're looking at the transportation, we have a tendency to limit the amount of silicon that we put in the battery. So when it comes to application with really long cycle life, Like transportation or it's called energy sales, we're looking at maximum 3% to 4% of silicon Additives in the annals, we're looking at normally 2% of graphene as conductive material In both anode and cathode side of it, and we're also looking at the typical the anode active materials, about 95% of the anode of the battery is coming from those active materials, which you put them together, Well, I think close to, I would say, 500 tons of the graphene will be used in That's valid, but again, it's I have to get back to you with the exact numbers.

Speaker 5

That was helpful. Thank you. And you mentioned with your 16,000 ton plant that Your investment decision was going to depend on the outcome of certain contracts. I'm wondering if you can give us some color on that and any initial feedback

Speaker 2

Yes. So they're testing a couple of these Potential customers are testing this material. The sales cycle is much faster in their first battery market has a strong pool. Valery Materials Supply Limited and Valery Producers are all looking for mass material. So have a strong pool there that helps the sales cycle.

Speaker 2

And second, even though we produce from different path, The final product is pretty clear in terms of the spec that this should have. So the spec of the anode material is coming from the customer to us. And we try to adjust our supply to the specs that came from the customer. So Again, this is a lot more clear. When we look at the graphene sales, the graphene doesn't exist in different customer product.

Speaker 2

We go Much longer sales cycle with them and validation takes time. We have standards that we have to pass. When it comes to battery material, it's not like that. So In that dynamic, we should be able to secure contracts for our material before really deciding to put $120,000,000 or so on the battery material and graphene facility. So Our focus is to secure the contracts first before we decide on allocating capital.

Speaker 5

Okay. Do you have any sense of what the timing on that could look like? How long the process is for material validation?

Speaker 2

Well, we're hoping to conclude something in the next couple of months, but I think we're a little bit more flexible when it comes to the balloting material, We cannot start producing or spending capital on those programs before having 2024 started Because of the ITC program, so there is some flexibility that we have until that time. But I would say in the next Few months, we should have this secured and move to the construction step.

Speaker 5

Okay. Thank you. And then just one final one for me. With the FMC plant, you gave us some color on how that is ramping up and how you're looking For financing solutions, what does the ramp up look like for that plant? I believe you're adding 5 presses at £2,000,000 each.

Speaker 5

Does this come on gradually? Or is it really a step change

Speaker 3

Well, with the so it's Pedro. So the lead times are about a year And the focus right now is about buying some of the equipment. Yes, some of the presses are going to be reordered. There's other equipment that are going to be needing to be ordered. But right now the focus is on the construction, the build out of our current facility in Newton, North Carolina to be ready to accept those equipment.

Speaker 3

So right now, the focus over the next 6 months is really The physical establishment, the construction of the facility, so that it's able to receive the equipment in about About 9 months now.

Speaker 5

And is the market there, the customer demand there so that when you install these plants that you So you have step change in volume or is there more of a gradual ramp up in production from that plant?

Speaker 3

It will definitely be a gradual ramp up, The customers are there. We already have orders for 2026, 2025 and 2026 that we see additional volumes that are needed. So we're putting in place the capacity for

Speaker 5

that. All right. Very good. I'll leave it there. Thank you.

Operator

Thank you. And I see no further questions in the Q and A Q at this time. I'll turn the call back over to

Speaker 1

We would like to thank everyone for attending this call and wish everyone a great day. Thank you.

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NanoXplore Q4 2023
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