NanoXplore Q2 2024 Earnings Call Transcript

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February 14, 2024

There are 10 speakers on the call.

Operator

Good morning, everyone, and thank you for joining us today. Before we begin, I'd like to remind you that today's remarks, including management outlook and answers to questions, contain forward looking statements. These forward looking statements represent an expectation as of today, February 14, 2024, and accordingly are subject to change. Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties. Actual results may differ materially, and listeners are cautioned not to place undue reliance on these forward looking statements.

Operator

A description of the risk factors that may affect future results is contained in NanoX4's annual information form available on our corporate website and in our filings with the Canadian Securities Administrators on SEDAR. On the call with me this morning are Solouss Desapault, NanoXplore Founder and Chief Executive Officer and Pedro Azevedo, Our Chief Financial Officer, after remarks from Solus and Pedro, will open the call to questions from financial analysts. Let me now turn the call over to Solus.

Speaker 1

Thank you, PY, and good morning. I will first start with the review of the economy as it relates to our business. I will then expand on our capital allocation plans and will end my remarks with an update on Volta Xplore. As the central banks are deciding on the timing of the interest rate cuts, we're seeing increased activities with our customers. Our customers' forecasts are strong and growing.

Speaker 1

The North American economy continues to show resilience and is giving confidence to our customers. Against that backdrop, I'm very pleased with the performance of the NanoXplore team. We continue to perform at a high level. Our balance sheet is strong and we're executing on our capital allocation priorities. We delivered good results overall in the Q2 and made excellent progress in our graphene enhanced composites products.

Speaker 1

We announced new program awards and expansion of existing programs with more than $30,000,000 in annual incremental revenues. Demand is very strong for our graphene enhanced composite products, and customers are open to covering the related capital requirements and supporting us financially to increase our production capacity. According to ID TechX Graphene Market Report, composites are currently the largest segment of the graphene market and will continue to be nearly half of global graphene market in the next 10 years. Our graphene enhanced composites products are currently sold under the commercial name Graphene Black SMC. It provides up to 15% weight reduction versus conventional SMC at neutral cost to the OEMs through down gauging, which enables the use of less materials per part.

Speaker 1

Moreover, Graphene Black SMC improves moisture resistance of the SMC molded components, which leads to less surface blistering after painting and less quality defects as a result. These improvements are so significant that the impact is visible on our gross margin and have been recognized for our customers. Furthermore, these graphene enhanced SMC solutions improve mechanical rigidity, accelerate molding process and increase flame retardancy. All these improvements enable applications in lithium ion battery enclosure business, which are of great interest to NanoXplorer. Now related to graphene sales activities outside of composite market, Our sales team have been quite active.

Speaker 1

We have started supplying graphene to 5 new customers, 3 of which are in coding market, 1 in adhesive market and another in the fabric market. This showed the great potential of our graphene products to enter multiple markets outside of what has been announced before, such as foam, concrete, drilling fluid and recycled plastics. In these markets, we continue our work with customers and go through validation steps 1 by 1. For instance, The validation process related to our graphene enhanced products for insulation foam has continued very positively with 1 of the largest Sales in recycled plastic market is continuing and we're expecting volumes to grow with new customers. All in all, we are seeing progress on multiple markets and our graphene is performing well in trials.

Speaker 1

Even though validation and certification process of a new material takes years and is a difficult endeavor, we are maintaining our financial discipline and successfully navigated uncertainties of the last year. Now looking forward and as economic uncertainties are improving, Our customers and partners are getting their confidence back to introduce new products and along with them, we're continuing our R and D and customer validation trials. Now moving on to our 5 year strategic plan. We have advanced further in the implementation of our plans, particularly related to capital requirements. I'm pleased to announce that the total capital requirement for our 5 year plan is reduced by 15% to $140,000,000 to $150,000,000 from originally announced $170,000,000 mainly due to optimization of engineering work and equipment cost reductions as well as customer investments on the manufacturing equipment.

Speaker 1

To finance that, we are finalizing our new credit facility in the next few weeks and in the final discussion with the federal and provincial governments. These discussions started early last year and we are anticipating a conclusion shortly as we have received positive feedbacks from both levels of the government This should cover almost all of our capital requirements for our 5 year plan and should remove uncertainties for our shareholders. Volta export financing is also continuing with the due diligence of our lead investor and continuation of the paperwork for government support. Even though it has been a long process to secure the financing of all these projects, I'm quite pleased that we are reaching the end of it and can start construction of these is next quarter. With that, I'll now turn the call over to Pedro, who will provide details about our financial performance.

Speaker 2

Good morning, everyone. Today, I will begin with a review of our Q2 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 Q2 were 6% lower than Q2 2023 at $29,100,000 The decrease in revenue was directly attributable 2 main items. First, a 6 week strike at 1 of our customer customers impacted us by approximately $3,000,000 2nd, tooling revenues were $700,000 lower, which was purely a timing effect that will be recovered in the second half of the year. If it were not for these two impacts, total revenues would have increased compared to last year resulting from higher volume, including the demand for Graphene Enhanced Composite Products.

Speaker 2

With regards to gross margins, although total revenues during the quarter decreased, Gross margins were the same as last year at $5,500,000 This was due to gross margins as a percentage of sales increasing from 17.8% to 19.4% year over year and was driven by improved productivity resulting in part from the manufacturing cost benefits of producing graphene enhanced products, higher margin product mix and various manufacturing efficiency improvements put in place over the last year. This year over year margin improvement has been a trend for the last 6 quarters and we are pleased that it is continuing. Adjusted EBITDA was just shy of breakeven at negative $92,000 and was comprised of positive $416,000 in the Advanced Materials, Plastics and Composite Products segments, an improvement of $300,000 versus last year, despite lower sales and $509,000 negative in the battery cell segment, which encompasses the Since Volta Explore was shared cost was a shared cost with Martinrea last year And excluded from EBITDA, there is no direct EBITDA comparable to our previous year's numbers. If the quarter had not been impacted by the strike, Adjusted EBITDA in the Advanced Materials, Plastics and Composites segment would have been over $1,200,000 Looking at our year to date numbers.

Speaker 2

While sales were approximately $1,000,000 below last year, mainly due to the 2 discussed impacts in the most recent quarter, Our year to date adjusted EBITDA, excluding Volta Explorer initiative, was positive $590,000 and is $2,400,000 better than last year, largely due to the impact of higher graphene enhanced product sales mix and manufacturing improvements. With regards to our balance sheet, we ended the quarter with 20 $7,600,000 in cash and cash equivalent, a reduction of only $1,400,000 during the quarter. Operating cash in net inflows of $2,400,000 and were offset by $3,800,000 of financing and investing outflows, which included the final tranche repayment of $1,000,000 for the acquisition of Cannac Compounders. Our cash along with the $10,300,000 of unused based on our lines of credit resulted in total liquidity of $37,900,000 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 2

Over the last two quarters, we have been in discussions with various lenders, including our current lenders. At the end of the quarter, we have received we had received offers from 3 lenders. After negotiating terms, we selected the preferred lender and secured a committed term sheet from them. As a result of the progress made thus far, We expect to put in place the new credit facility in the coming weeks. Once in place, the new credit facility will provide an important financial support toward our 5 year strategic plan.

Speaker 2

Turning now to our fiscal year 2024. Despite the headwinds during the first half of the year, We remain confident the second half revenues will be stronger than our first half and stronger than last year's second half. With the recently announced awards, New customer tooling will be required for the new programs before production begins. In addition, the program expansion also recently announced benefiting our St. Clotilde plant will also generate tooling revenues and higher sales volumes than those recognized last year.

Speaker 2

Gross margins in the second half should be 100 to 150 basis points higher than the first half due to higher volumes, but be limited to this level due to the higher tooling revenues, which were sold at lower gross margins. Based on the visibility we have today, our guidance for full year full fiscal year 2024 remains at $130,000,000 With that, I will pass it back to Pierre Yves.

Operator

Thank you, Pedro. Operator, we can now open the lines for questions.

Speaker 3

And our first question today comes from James McGarrigle of RBC Capital Markets.

Speaker 4

Hey, good morning guys.

Speaker 5

Good morning. Good morning.

Speaker 4

So I have a question on the outlook for our Voltix for specifically. We've been hearing a number of electric vehicle battery manufacturers tapping the brakes on expansion. Most recently Panasonic decided not to build an EV battery factory in Oklahoma. And I guess from your perspective, are you seeing anything from either a demand or even potentially a cost perspective that has changed recently That could impact some of the long term profitability assumptions for the build out for Vault to explore?

Speaker 1

Not for us. The fact is we are in voltage export, the target market is not purely EV batteries. We are looking at customers and applications for power cell and also for long cycle life batteries for energy storage and grid storage, peak shaving applications. So Technically, the bulk of the market of the EVs of the batteries are in EVs in the middle part of the volume forecast. And then the battery that we are working in the markets we are playing at are in the power cells, let's say, military applications and power tools plus the grid storage and peak shaving.

Speaker 1

These two part of the market that Volta is playing at mostly, they are not seeing impact similar to the EV market.

Speaker 4

I appreciate the color. And coming back to NanoXplore on the long term capacity expansion, you gave some cadence surrounding the total CapEx, But can you give an update on how you see that CapEx spend evolving in particular in the next two quarters and then into fiscal 2025 and into fiscal 2026. Hey guys, were you able to hear my question?

Speaker 3

Please remain on the line. Your conference will begin shortly. Again.

Operator

Yes. Yes, we're back.

Speaker 4

Hey, it's James here. Were you able to hear my follow-up question there?

Speaker 1

Can you repeat that question please?

Speaker 4

Yes. So I was just asking on the long term capacity expansion with regards to NanoXplore. You provided an update on the total CapEx spend, but can you just give us an update on how you see that CapEx evolving during the remainder of the year, potentially in the next two quarters and then into fiscal 2025 And it's fiscal 2026 just so we can see how the cash flow will evolve over the next number of quarters.

Speaker 5

So in the next two quarters at least or even before the end of this calendar year, The CapEx that is going to be spent is mainly going to be on the SMC and we're waiting for the final credit facility to be in place. So that in the next few weeks. So before the end of the fiscal year, I expect maybe $5,000,000 possibly up to 7 of additional CapEx that relates to that, if everything goes well. And for the end of the year, the calendar year, there could be another $5,000,000 out again. So, 5, let's say, 55 in the next two quarters and then two quarters after that.

Speaker 4

And then into fiscal 2025 and 2016, would that just be kind of an even split for the remaining amount?

Speaker 5

Yes, it'll probably be about $3,000,000 to $5,000,000 every two quarters after that.

Speaker 4

Okay. And then on the loans for the new CapEx, are you able to provide any color on interest rates Or anything you'd call out that's attractive regarding the terms of those loans?

Speaker 5

I can't go into specifics As we haven't finalized the agreements, but the interest rates on the committed term sheet that we've received are very similar to what we have today. So it's based on the prime plus basis points depending on debt to EBITDA ratios and they're very much in line with what we paid today. We wouldn't expect anything to explode in terms of interest costs or anything of that nature.

Speaker 4

Okay. Thank you very much. I'll turn the line over.

Speaker 3

Yes. Thank you. One moment for our next question. And our next question comes from Rupert Merer of National Bank.

Speaker 6

Hi, good morning everyone.

Speaker 1

Hi, Rupert.

Speaker 5

Good morning.

Speaker 6

I'd like to focus in on a Couple of the materials in your 5 year plan. If I could start with the SMC business, your original plan you were looking at £12,000,000 per year, Revenue potential of $80,000,000 Have the goalposts on that part of the plan changed at all? And if you can give us a little more color about how this business develops. You have some long term contracts. By the time You are ready to commercialize this business.

Speaker 6

What level of contracting would you anticipate?

Speaker 1

So just for me to understand, you're asking the question on the SMC part or you're asking for the On SMC, yes.

Speaker 5

Just on SMC. Okay. SMC, we expect in the once everything is in place, it will probably drive between $10,000,000 $15,000,000 a year of additional revenues depending on the adoption of the graphene enhanced materials. This will grow over time and our ability also to sell SMC materials to 3rd parties will also be an additional amount. Our financial models internal financial models do expect for there to be a strong third party market for us to sell material into.

Speaker 6

So that's So

Speaker 1

Rupert, just to clarify that when we talk about SMC, there's SMC Materials And there is SMC that parts, right? So I think Pedro's answer was just on the SMC material. I

Operator

see.

Speaker 6

Okay. So the original plan was annual revenue potential of about $80,000,000 Is that still consistent with the potential for this business? And how much of it do you think you will contract? We have seen Some contracts already that you've announced $24,000,000 per year, I believe. What percentage of the business will be contracted?

Speaker 1

In this business, historically, most of it is contracted. Like we pretty much all of the programs we have today, they are contracted. And the contracts will continue for Many years. 10, 15 years in many cases. And then there is new contracts and also expansion of the existing programs.

Speaker 1

So All in all, we still have, I think, I would say, more than half of the new capacity that coming allocated. But we adjust the CapEx investments following the contract awards. So we're not just putting capacity in place and then going out and get customer for it. We get in that part of the market demand we get the contracts and then accordingly we're putting CapEx for it.

Speaker 5

And about 60% to 65% of our business today is contracted, leaving up another part that is more dependent on customer purchases on a monthly basis. But an important part of our total revenue is contracted and will go up and down based on the and will go up and down based on the cadence of our customers manufacturing.

Speaker 6

Great. Thank you. And then on the SIG pilot line, you have 100 tonnes per year of capacity and you've given some more on the relative performance of the material. I'm wondering if you can give us some color on the reception you're getting from the industry for this product? And maybe talk a little about who you're targeting?

Speaker 6

Is it the same as Volt Spohr, are you focusing on non EV batteries here or is this material more open to the broad market?

Speaker 1

So it's not just Volta. We are discussing the product is in the hands of a couple of battery makers now and they are testing that. The target of this pilot facility was to get the product and do the validation with the battery matrix. Now In general, silicon additives are not really used for EVs, maybe at a very low concentration in the anode. The focus of silicon is to increase the capacity and energy density of batteries.

Speaker 1

So it gives much higher application, much more applications in military, in power tools, in drones and those type of markets.

Speaker 6

Can you give us any color on the reception that you're getting for the product from the market?

Speaker 1

Look, as we Closing the press release, we are getting 11 50 watt hour per liter. This is one of the highest number recorded in the volumetric energy density. The balloting makers are confirming as well these data. So there is interest to partner up with us on that material.

Speaker 6

And then just finally then, I imagine like the SMC Business, you'll let orders lead before you invest in the CapEx to grow capacity?

Speaker 1

100%. All right.

Speaker 6

I'll leave it there. Thank you.

Speaker 3

Thank you. One moment for our next question. And our next question comes from Michael Flynn of Raymond James.

Speaker 7

Hey, good morning. Good morning, Mike. Just wanted to circle back to the CapEx Question. So, Pedro, if you indicated that $5,000,000 to $7,000,000 before the end of this fiscal year And then an additional $5,000,000 And then you talked about $3,000,000 to $5,000,000 every 2 quarters post. I'm just trying to like What's the gap there?

Speaker 7

I mean, we're because the plan is $150,000,000 Like when does the bulk of the $150,000,000 go out?

Speaker 5

So, okay. So to be clear, my comments were based specifically on the SMC investment. So I'm only talking about that $30,000,000 part that relates to SMC. The related CapEx for the Anode Materials investment will be at a later time. It will be based on expectations of when the financing is fully in place, when we have of when the financing is fully in place, when we have off take agreements.

Speaker 5

So it will be dependent on that. So I can't give you a specific timeline other than Once that occurs, we will come back to the market and let everybody know that we are starting this process. So right now, I would say it would be at least into 2025 before the investments would start.

Speaker 7

Okay. Okay. So that the bulk of that number is dependent on the Vault Explorer Package side whenever that gets to the

Speaker 1

No, no, no, no, no. It's voltage floor is only a market where the capacity for the anode material is going to go there. The rest of the capacity will go to the other customers. So that's the uptick we're talking outside of Vodafone. Okay.

Speaker 7

And then, Suresh, as we think about how the NanoXplore business is evolving And you make more of these investments into SMC. Should we think about this business evolving into predominantly a parts supplier for the mobility industry over time?

Speaker 1

Not at all. If you look at our 5 year plan, you see Out of, let's say, dollars 140,000,000, dollars 150,000,000 investment, 2 third of it is outside of transportation. So That's not at all evolving into an auto parts supply.

Speaker 7

Okay. And then can you The SMC business wins that you're recording right now, are the customers paying a premium for these parts over and above what was supplied to them on a legacy basis?

Speaker 5

I wouldn't say that they're paying a significant amount more. They are paying more for the parts, yes, but they're also getting a better benefit in terms of the materials and the quality of the materials that they're receiving. So there's an acceptance by the customer that they're getting a better product and they're paying

Speaker 2

a little bit more for it.

Speaker 7

Okay. And then one more for me. I think and you can correct me if I'm wrong When I heard this, there was a comment when you talked about the Volta Explore financing update. I think, Sarush, you mentioned something about discussions with your lead investor or a lead investor. Is that what I understood?

Speaker 1

Due diligence with the lead investor.

Speaker 7

Okay. And that's not the lead investor That's not your current lead investor, that's somebody else?

Speaker 1

No, Volta it's somebody else. Volta Explore, lead investor, It's the investment is done outside of Landau Floor, so it's totally different group.

Speaker 7

Okay. Thank you.

Speaker 3

Thank you. One moment for our next question. And our next question comes from Mac Whale of CSI.

Speaker 8

Hi. Hi, Mike. Questions have been asked, but I thought I'd follow-up with just a broader question on The market for the high power outside of EVs, those batteries, do they tend to have a higher margin? Like can you When you compare that, say, to the EV space, I'm just wondering, as we fine tune our models, what we should be thinking about in terms of the sort of revenue per kilowatt hour or margin that you can get from that?

Speaker 1

Yes. So, well, first, our sales model is a raw material cost plus a lump sum. So it's a full transfer of the raw material, which are about the 80% of the cost of production of the cell. Our lump sum covers the production cost plus the gross profit. So looking at power cells, They're normally in terms of gross profit are about 10% to 15% higher on a per kilowatt hour basis.

Speaker 8

Okay. That's helpful. Thanks. And from a there are technical reasons why you're looking at that market. Obviously, there's commercial reasons as well.

Speaker 8

If we see these delays as we spoke earlier in the call about the delays on the OEM side for rolling out capacity. Is that an opportunity that you could go after if you saw particular contracts or opportunities? Or do you just not want to be in that market for some of these issues around margin?

Speaker 1

Yes. We even started, we didn't want it to be in the EV market, in the direct EV market. For that, you need not a 2 gigawatt hour battery, you need a 50 gigawatt hour battery It's very competitive market. Raw material cost is becoming 95% of the cost of production, just not enough margin for us to play. So from the beginning, We went after higher margin type batteries at the lower gigawatt hour, eco factory, which you can actually absorb higher gross profit from them, but also there is less competition in that part of the market.

Speaker 1

If you look at the grid storage, even if you look at Tesla's financial, you see that grid storage part and residential values are Even though they're not the highest selling part of their business, but the margins are just much better than the rest of the business. So We're looking at that high end, high margin part of the battery business, which requires much lower production volumes.

Speaker 8

That's great. Thanks. Thanks, Suraj.

Speaker 1

Thanks.

Speaker 3

Thank you. One moment for our next question. And our next question comes from Amit Chath of Beacon Securities.

Speaker 9

Good morning, guys. I guess most of my questions have been asked and answered. But maybe on the cost on the R and D side, there is noticeable downtick quarter over quarter. Is that by should we expect that line to stabilize at around $1,000,000 or not much take away there and historical trends are better?

Speaker 1

I would say the R and D team came under budget, So the budget was a bit higher. It's not designed to be lower. It just happened to that the cost coming lower. I think the team are team is being more optimized and efficient in terms of the investment. And At this point, it's slightly lower.

Speaker 1

We anticipate that as we grow into the SMC market into drilling fluid market, into the concrete market. Some of these markets that are more newer for us like drilling and concrete require a little bit more of R and D dollars and SMC, which is more mature, requires less of R and D dollars. So I think there is in general, we will see R and D expenses staying at this level for a little bit for a couple of years. But we will see how the graphene market as a whole evolves, and we're okay to increase our R and D expenditure if needed.

Speaker 5

It's been a targeted approach. We've really nailed down in terms of what we wanted to be focused on and that allowed us to reduce the R and D spend. But as Sarush said, as we kind of move on into other areas of interest to us, the R and D may increase in the future, but not for the next year.

Speaker 9

That's really helpful. Thanks guys. I'll jump back in the queue.

Speaker 3

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

Operator

Thank you, operator. We'd like to thank everyone for participating in this call and we wish everyone a great day. Thank you.

Speaker 3

This concludes today's conference call.

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