Hims & Hers Health Q3 2024 Earnings Call Transcript

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May 15, 2024

There are 8 speakers on the call.

Operator

Good morning, everyone, and thank you for joining this discussion of NanoXplore's financial and operating results for Q3 of fiscal 2024. The press release reporting these results was published yesterday after market closed and can also be found on our website along with our financial statement and MD and A. These documents are also available on SEDAR Plus. Before we begin, I'd like to remind you that today's remarks, including management's outlook and answer to questions, contain forward looking statements. These forward looking statements represent our expectations as of today, May 15, 2024, and accordingly are subject to change.

Operator

Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties. Actual results may differ materially unless they are cautioned not to place undue reliance on these forward looking statements. A description of the risk factors that may affect future results is contained in the Annual Explorer annual information form available on our corporate website and in our filings with the Canadian Securities Administrator on SEDAR Plus. On the call with me this morning, we have Sebastien Zapot, NanoXport's Founder and Chief Executive Officer and Pedro Azevedo, our Chief Financial Officer. After a remark from Sebastien, Pedro will open the call to questions from financial analysts.

Operator

Let me now turn the call over to Sohu.

Speaker 1

Thank you, PY, and good morning to everyone joining us on the call. We'll first start with the review of the economy and the impact on our business. I will then expand on our VoltaXplore. As the central banks, mainly Canada and Europe are making progress towards interest rate cuts, the previously mentioned increased activities with our customers are continuing, especially in transportation market. Our customers' forecasts are robust and demand remains strong.

Speaker 1

The North American economy continues to show resilience, which is giving confidence to our customers. Furthermore, industry headwinds from the supply shortages, inflationary cost pressures and tight label markets continue to improve and are impacting positively on our business. In this environment, we achieved record results in the Q3 with revenues and adjusted EBITDA in the Advanced Materials segment of around $34,000,000 $1,300,000 respectively. Steps taken to improve our efficiency are bearing fruits with gross margin at an all time high of around 21%. These results demonstrate the strength of our business model, our expanding market share and the value creation of our vertically integrated model.

Speaker 1

I'm very pleased with the performance of NanoXplore's team. We continue to perform at a high level, and we're executing on our capital allocation priorities. We foresee this momentum continuing into Q4 and the next fiscal year. Now turning to our operations for our graphene enhanced composites products, demand continues to be very strong and our current capacity is almost fully utilized. We have made investments in the new equipment and will continue to invest more as a part of our 5 year strategic plan.

Speaker 1

A large part of these investments will be in the United States and are supported by booked contracts with existing and new customers. In regards to our direct graphene sales activities, validation and testing are ongoing with new customers, while we continue to supply existing ones. Drilling fluid, foam and battery material market continue to show promise, especially following our recent announcement related to financing of our graphene and anode material facility. We are continuing discussions with an offtake partner for our upcoming facility and have already signed a letter of intent with the construction company to build our facility. In fact, we had underestimated the demand for our balloting material and one of our potential customers has asked if we could accelerate our expansion and move the build out timeframe forward.

Speaker 1

The increase in demand for battery material is a result of the Inflation Reduction Act and the need for battery supply chain market participants to be compliant. Again, we want to remind investors and analysts that we are executing this expansion without issuing equity. Turning to Volta Xplore and as discussed before, we have a potential strategic investor presently in its due diligence process. Given the slowdown in the EV space, we believe having a strategic investor is essential for Volta XCOR's success. This strategic investor will bring resources, know how and end market diversification to the project.

Speaker 1

With that in mind and given the growth we see with NanoXplore, we believe that it's more prudent to only start the Volta Xploegl factory project if and when we close a deal with this partner. In the meantime, we are continuing the validation of our graphene enhanced batteries along with developing more advanced production methods such as tablet designs and further developing new generations of our graphene enhanced silicon additives. Taking this approach, even though it pushes out the start of production, ensures long term success and reduces risks related to the market uncertainty. With that, I'll now turn the call over to Pedro, who will provide details about our financial performance. Pedro?

Speaker 2

Good morning, everyone. Today, I will begin with a review of our Q3 financial results followed by an update on financing for our 5 year plan and conclude with some commentary on near term CapEx spending and outlook for fiscal year 2024. Total revenues in Q3 were 7% higher than Q3 2023 at $33,900,000 which was a record for NanoXplore. The increase in revenue was directly attributable to progress billings on new tooling being manufactured for 3 different customers. Tooling revenues will continue to be higher than normal for the next two quarters due to the previously announced expansion of an existing program and the launch of 2 new programs.

Speaker 2

Once the tooling for these programs are completed, part revenues will increase as the additional capacity and the new programs come online. With regard to gross margins, gross margins as a percentage of sales increased by 2 60 basis points from 18.3 percent to 20.9 percent year over year driven by improved productivity resulting in part from 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 over the last 7 quarters and we are pleased that it is continuing. As a reminder to our shareholders and analysts, as the proportion of sales of graphene powder or graphene enhanced materials increase, gross margins as a percentage of sales will also increase. Adjusted EBITDA was $574,000 and was comprised of $1,260,000 in the Advanced Materials, Plastics and Composite Products segment, a record achievement and improvement of nearly $800,000 versus last year and negative $688,000 in the battery cell segment, which encompasses the Volt Explorer initiative.

Speaker 2

Since Volt Explorer was a shared cost with Martinrea until the end of Q3 2023 and largely excluded from EBITDA, therefore no comparable in Q3 2023. Looking at our year to date numbers, while sales were lower than expected in the first half of the fiscal year, Q3 was fairly strong and in line with expectations. For the 1st 9 months of fiscal 2024, we are now 2% above the same period of the prior year. While sales are now higher than last year, the noteworthy performance in our year to date results has been in gross margins and EBITDA. Gross margins as a percentage of sales have increased from 16.1% to 20.1%, leading to an increase of $4,000,000 of margins and EBITDA in Advanced Materials, Plastics and Composite Products segment has increased from minus $1,400,000 last year to positive $1,900,000 year to date this year.

Speaker 2

With regard to our balance sheet and cash flows, we ended the quarter with $29,800,000 in cash and cash equivalent, an increase of $2,200,000 during the quarter. Cash flow from operating activities was positive $4,600,000 mainly due to advanced payments from customers on tooling contracts and continued close management of accounts receivable and inventory levels. Cash flows from financing activities were negative $1,100,000 resulting mainly from repayment of lease liabilities and also included 2 offsetting items. During the quarter, stock options nearing expiry were exercised. This generated $1,200,000 of cash, which was used to repay an outstanding loan that was coming due during the quarter.

Speaker 2

Finally, cash flows from investing activities were negative $1,200,000 mainly related to capital expenditures. Our cash along with the $10,300,000 of unused space on our credit lines resulted in total liquidity of $48,100,000 at March 31. 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. As was recently announced, we completed an agreement with the Royal Bank of Canada in April to provide NanoXplore with a significant increase in our borrowing capacity versus the old credit facility with the National Bank.

Speaker 2

The new credit facility will provide the financial support to fully finance the graphene enhanced FMC light weighting expansion and in conjunction with the anticipated but not yet finalized government support for the anode material initiative will finance will fully finance the capital needs of our 5 year strategic plan. Turning now to our near term CapEx spending and the outlook for fiscal year 2024. With regard to CapEx spending, we expect to spend $3,000,000 to $5,000,000 in each of the next four quarters as we increase the spending of the Graphene Enhanced SMC initiative of the 5 year strategic plan. This amount will be updated once the government's support for the Nanode Material Initiative is finalized and the Anode Material Plant moves forward. Despite the headwinds, during the first half of the year, Q3 delivered solid results and we are confident Q4 will continue this momentum with strong revenues and associated margins.

Speaker 2

Based on the visibility we have today, our total revenue guidance for the full year fiscal 2024 remains at $130,000,000 In conclusion, we are on track to deliver a record Q4 and start 2025 with good momentum. With that, I will pass back to Pierre Yves.

Operator

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

Speaker 3

Thank And our first question comes from Amar Azat of Bachelors Partners.

Speaker 4

Good morning. Thanks for taking my questions and congrats on a very strong quarter. The sales growth was very solid and you're confirming guidance, so it looks like Q4 will even be stronger. What I want to focus on is the gross margin. Like Pedro, you're saying that the sales mix includes lower margin tooling, yet you're at record gross margins.

Speaker 4

So I just wonder how do gross margins look like without the tooling components? Can you maybe help us like maybe give us a range as tooling comes off, how that impacts the margin?

Speaker 5

So in a particular case, the tools that we have right now that are being made and the work that we're doing in the expansion are actually producing margins that are close to what we normally have in parts. So abnormally this quarter and upcoming quarters, the tooling margins will actually be very close to parts margin. So there's no real mix effect in this quarter as we have seen in the past. In past quarters, we do have lower margins on tools. But in this case, in this quarter and upcoming quarters, the margins are going to be very close.

Speaker 5

Just to disconnect a little bit the two parts. If you exclude tooling, we still are in the 21%, 22% range. That's the goal that we're achieving right now. We intend to increase that over time as graphene enhanced materials continues to proportionately be higher and so on. So right now I would answer your question by saying, right now for the quarter it's about 21%, 22% for parts and about 21% to 20% on tooling.

Speaker 4

Fantastic. That's great color. Then I'm not sure how much you are willing to share, but could you provide us the sense of or maybe I missed it, how much of the Q3 growth was from tooling revenues and what should we be expecting for Q4? The reason being, I just wonder if this tapers off, does like the revenues from parts like take over more than takes over like whatever you're losing from tooling or like what you're delivering now in terms sales is a new plateau that we could sort of like grow from?

Speaker 5

So in the quarter, tooling revenue was about $3,000,000 and it will probably be close to $4,000,000 next quarter. We traditionally have annually, we traditionally have around $2,000,000 to $4,000,000 depending on the years and launching of new programs. This year it will be close to 8,000,000 dollars But what you have to understand is that tooling revenues are a precursor to the parts revenues. So when tooling ends, part revenue starts kicking in and kind of replaces the revenue. So in the quarter, while the volumes generally of our products haven't increased that much, there is an increase, but it's not that big.

Speaker 5

That's because we do have programs with our customers and those customers are buying

Speaker 4

very

Speaker 5

distant volumes and they are growing, but on a slower basis. There is one customer that we spoke about in the last quarter that is expanding and we are currently expanding our facility to allow for that expansion to actually take place. They're actually hoping that we finish our work sooner so that they can be buying and increase their cadence faster. But that's not the case right now until the end of the year. So I would say to you just in summary is that parts revenue will kick in to replace the tooling that will drop off, But at least for the next two quarters and possibly until the end of the calendar year, until the end of this year, we are going to be producing tooling revenues that will eventually turn into parts revenues.

Speaker 4

Fantastic. And the question was like it more than offsets the drop you're going to get from the

Speaker 5

That's right.

Speaker 4

From tooling. Yes. There might be a

Speaker 5

timing effect. But generally speaking, that's exactly right. That's why tooling is important to

Speaker 2

us because it's just a

Speaker 5

precursor to coming online with new parts.

Speaker 4

No, I fully understand that. It's good for you to come out with the new credit facility and to confirm that no equity is needed for your 5 year plan. I think it alleviates a lot of the risk, I guess. But like on the $80,000,000 non dilutive government financing, I think the wording you guys used is you're finalizing it. Just wondering if you can give us a sense of where you guys stand and when can we hear something?

Speaker 1

Yes. So we received the support letters, but we have to go through the full proposal steps. These support letters are commitments for the government. Having said that, we have to legally, we have to wait for their announcement at the end of full proposal. So it's going to be a couple of quarters till we get to that stage.

Speaker 1

And normally, the way these programs are these are a refund of incurred expenses. So as we invest on the CapEx in the next 2 years, we're seeing a refund of those investments through the programs like investment tax credit, but also direct programs that governments are providing for this valid material projects.

Speaker 4

Okay. But the support letters that you guys have are for the full €80,000,000 dollars that you guys were talking about?

Speaker 1

Yes.

Speaker 4

Okay. That's fantastic. Okay. So, Sarush, like your prepared remarks sounded, I want to say like very optimistic about like anode materials and you spoke to, I'm not sure if it's a customer or a potential customer asking if you could bring production forward. So my first question, like is that already signed takeoff agreement?

Speaker 4

And if it's not, can you maybe give us an update on how advanced you guys are in securing?

Speaker 1

Yes. So we are so we have I mean the whole market of the anode material itself, which is a couple of products. These are active anode materials plus graphene enhanced conductive additives plus graphene enhanced silicon additives, these three products together, we're seeing quite a lot of interest from the battery makers. Again, the supply chain and the fact that there's a tendency to French ore, especially on the annuit material where majority of this is being produced in east of the world. And also following the IRA announcement, there's quite a lot of interest to buy from North America.

Speaker 1

And on the supply side, this doesn't exist today. So what we are hearing from the customers, they want fast to get this product faster is because their OEM customers want to get the IRA credit faster, right? So we are looking into all this request. At this point, I would say we have a very strong visibility of the customers for that facility. We don't have yet a signed off the contract, but we're working towards that off the contract at this stage.

Speaker 4

Okay. It seems like you're positive enough to sort of speak to it. So I'm assuming this is close. Then maybe like when you first announced the 5 year plan, you're saying, okay, we're going to take like graphene production from 4,000 to 20,000 so that incremental 16,000, not all of it was allocated to battery materials. And it seems like the demand side and the lack of supply is driving a lot of potential growth.

Speaker 4

So is there potential for you guys to allocate the whole 16,000 tons of graphene production towards like the battery materials?

Speaker 1

So there is a portion of the anode material and there is a portion of the, we call it, low cost or industrial graphene that we're going to have in that facility. Now the battery grade products, they have much higher purity than industrial grade, right? So there is a there is capital requirement if you want to expand 100% of the graphene production for the balloting material. I think at this stage, we have a decent portion of that to be allocated to Badadi market, but we are open to put more purification system in place when we get clarity and contracts for Holland. So but at this stage, I think the graphene industrial grade graphene is also needed for a couple of customers that's coming out in the pipeline.

Speaker 4

Okay. Then maybe one last one and I'll pass the line. I don't think the language in your MD and A changed on the lead times. Like I think it's 12 or 8 to 16 months that you guys were speaking about. And you've got a potential customer asking you to bring production forward.

Speaker 4

Well, are you able to bring production forward? Or how should we think about timelines?

Speaker 1

So while the construction of the physical building will probably take about a year And some of the equipments on the added material side will require close to 12 months of lead time. So there are ways we can do to order a bit faster those long lead time items. So we can probably save a couple of months, but more than that, it looks unrealistic.

Speaker 4

Okay. Well, it's a good problem to have. Congrats again on the quarter. I'll pass the line.

Speaker 3

Thank you. One moment for our next question. Our next question comes from Rupert Merer of National Bank. Your line is open.

Speaker 6

Hi, good morning, everyone.

Speaker 1

Good morning, Rupert.

Speaker 6

Sarush, you mentioned that with Volta Explorer, you would wait for a strategic investor before you move forward. So I'm wondering if you can give us a little more color on that process. If you have a short list of investors you're talking to. And what are you looking for in a partner? Who would be the ideal partner?

Speaker 1

Yes. So within the, let's say, last couple of quarters, we all see that EV demand is under pressure. So if you remember, our facility was supposed to be half of the capacity for non transportation related application, but there is still an optics side on the transportation side. So the way we're seeing is going forward, we need to diversify the customer base to make sure that the risk associated to this customer and then also all the OEMs in the EV market, we look at the diversification of the customers and at the part that can help us to get there is certainly a validity maker. So that's what we are looking at.

Speaker 1

We are in advanced discussion and due diligence discussion with one particular one, but we really would like to have that secured before getting to the next step of bolt to export.

Speaker 6

All right, great. And then on the benefits of graphene for batteries, you've demonstrated some improvements. Would you say that those benefits are generally accepted by the industry today? And as part of that, where can you take those improvements? And where are you looking at improving performance?

Speaker 6

And is it best to do those next steps of improving performance with a partner?

Speaker 1

So looking at well, 2 parts are pretty clear. 1 is on the conductive additive side with the graphene. That's a product that is being sold as conductive carbon black. Normally, about 2% of cathode materials, they have that. So we have performance benefit and cost benefit versus that product.

Speaker 1

So the 2 together, the testing that the customers do is they check out conductivity of the product and they look at your business. So they're not looking at the graph in any particular material at this point. They're looking at any sort of additive that can give them the conductivity that they need. So this product, I would say, will gain market share. The dynamic of the market on the conductive additive also, the same as the anode material, There is it's undersupplied in a sense.

Speaker 1

When we look at silicon type additives and graphene enhanced silicon, that's more of a high performance niche product. So it's a lot of 1 by 1 customer validation needs to be done in those type of products. Silicon is not used in a large concentration today. So I would say that that's more of a co development. There's a couple of companies out there that are trying to achieve high silicon content batteries, their names.

Speaker 1

And we are along with them trying to get that product into the hand of users and buyers of the battery.

Speaker 3

And our next question comes from Michael Glen of Raymond James.

Speaker 7

Hey, good morning. Explorer, the strategic investor that you are referencing is, I think before you had indicated that you were in a process, you were going to be submitting some due diligence papers to them. I think the timeline was something like the end of April. Is that the same strategic investor that you're still in discussions with? I'm just trying to get an update, get some sense as to, is it the same person or is it moved on to somebody else?

Speaker 1

No, it's the same. It's the

Speaker 5

same person? And then this one might be what's that?

Speaker 1

It's the same company.

Speaker 5

Same company? And then this

Speaker 7

one might be tough for you to answer, but like how do we answer the question as to okay, like what how should we think about timing on this now? I'm just trying to make sure everybody is consistent and everybody is answering the question sort of the same way as to how we think about timing of this finalization?

Speaker 1

Hard for me to tell you the timing. They are advanced. They have been through many round of questions back and forth, but it's just hard for me to tell you how long it's going to take. We don't control the strategic timeline. That's the best I can say at this point.

Speaker 7

Okay. And just one more on Volta. There's been a fair amount of news in Quebec about power supply, some capacity constraints facing Hydro Quebec. Is power can you talk about the power requirements of Volta Explore? And is that an area that has been secured?

Speaker 7

Is the power needs for Volt Explorer?

Speaker 1

Yes. So on the nano side, we are looking at close to 10 megawatt hour. And on the Volta side, we're looking at 20 megawatts. So our application is already in Hydro Quebec for, I think, more than a year for a total of 30 megawatt hour of power. Of course, the final allocation requires us to go forward with those projects.

Speaker 1

But look, the power is limited, but supported projects will get the power that they need.

Speaker 7

Okay. And then just on the CapEx that you're talking about, how does the CapEx split between the U. S. And Canada exactly?

Speaker 5

Are you talking about the non Volta CapEx that I brought up?

Speaker 7

Yes. Yes, I'm talking about the non Volta CapEx. The reference you made to the over the next four quarters, how does that split between U. S. And Canada?

Speaker 5

So the investments in Canada are going to be probably around $3,000,000 before the end of the calendar year. So let's say $1,000,000 in each of the 3 quarters. The larger part will be in the U. S. As we invest in the SMC initiative, light weighting initiative with presses and other equipment.

Speaker 5

And that will be the balance. So probably about give or take $2,000,000 to $4,000,000 in the U. S. Over the next 3 to 4 quarters.

Speaker 4

Okay.

Speaker 7

Okay. I just want to make sure that I so $3,000,000 to $5,000,000 so near term CapEx $3,000,000 to $5,000,000 in each of the next four quarters. About $1,000,000 is in Canada and then the rest will be in the U. S. Then?

Speaker 4

Correct.

Speaker 7

Okay. This is

Speaker 5

for the investments. Michael, just to correct, this is mainly for the investments. There's other CapEx that are more for keeping the lights on type of thing. And those will be done in that location that they're required some since we're proportionate more in Canada. You might have more activity beyond 3,000,000 to 5,000,000 dollars or it's going to be part of the 3,000,000 to 5,000,000 that will be in Canada versus the U.

Speaker 5

S. But largely the numbers that I gave you is generally correct.

Speaker 7

Okay. Thank you for taking the questions.

Speaker 2

Thanks, Michael.

Speaker 3

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

Operator

Thank you, operator. We would like to thank everyone for participating in this call, and

Speaker 1

we wish everyone a great day. Thank you very much.

Speaker 3

This concludes today's conference call. Thank you for participating, and you may now disconnect.

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