Nanophase Techs Corp

Thank you for standing by and welcome to today's program entitled Nanophases First Quarter 2024 Financial Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1-1 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 1-1 again. The words believes, expects, anticipates, plans, forecasts, and similar expressions are intended to identify forward-looking statements. Statements contained in this news release that are not historical facts are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements reflect the company's current beliefs, and a number of important factors that could cause actual results for future periods to differ materially from those expressed in these news releases. These important factors include, without limitation, a decision of the customer to cancel a purchase order or supply agreement, demand for and acceptance of the company's personal care ingredients, advanced materials, and formulated products. changes in development and distribution relationships, the impact of competitive products and technologies, possible disruption in commercial activities occasioned by public health issues, terrorist activities, and armed conflict, and other risks indicated in the company's filings with the Securities and Exchange Commission. Nanophase undertakes no obligation to update or revise these forward-looking statements to reflect new or new events, and or uncertainties. I'd now like to hand the call over to Jeff Jankowski, President and CEO.

Thank you, Jonathan. Good morning to all those listening live, and thank you to those following up online after the fact. We're looking forward to discussing first quarter 2024 results, our performance to KPIs, which will play a huge role in ensuring our success, and our outlook for the balance of 2024. Kevin Keratin, our Chief Operating Officer, is joining me on the call today. We have some prepared comments and will be available for some Q&A afterwards. We'll continue to focus on our future, which we believe to be a bright and lucrative one, reviewing the things we've done to position ourselves for this, as well as covering Q1 2024 results. We had lots of news during the first four months of 2024, which, while not operational in nature, we certainly expect to contribute to our success going forward. We closed two equity financings in Q1, which were critical for us to keep growing and supporting both our expanded working capital requirements and some modest capital projects needed to support additional Celestin's volume. None of us wanted to have to walk away from profitable growth, which had been a steady pressure in 2023. Now we're able to continue to add good business with improved throughput while also reducing our cost per unit through automation. We're focusing primarily on enhancing profitability via gross margins this year, but the growth keeps coming and we want to capture it. Given the nature of the Celestin's business, success leads to growth within existing customers as sales grow and as they launch new product lines. Success with these customers also results in more opportunities for new business. Other brands don't want to be left behind as we all work to satisfy demand in this relatively newly defined market, A market we believe Celescence has been instrumental in creating and energizing for prestige cosmetics offering natural, minerals-based skin protection. Another key milestone achieved just two weeks ago was the successful settlement of our litigation with BASF. As I mentioned, our respective commercial teams have maintained a positive relationship through the entire process, and we're looking forward to our full focus being available to running our API business with BASF and our solescence business. The added management bandwidth, with that added management bandwidth, we'll be able to apply to our nanophase and solescence businesses will allow us to increase our focus and accelerate progress in the strengthening of our enterprise and increasing its value. Now, let's walk through the numbers. Unless identified otherwise, all numbers will be stated in approximate terms. We had good results in Q1. generating a 36% gross margin on $9.9 million in total revenue compared to a 23% gross margin over the same period in 2023. We also generated almost a million in net profit in Q1 of this year compared to a $1.2 million net loss in Q1 of 2023, more than a $2 million swing. Our margins were driven largely by a favorable Q1 product mix and a continuation of the gains we've seen in improved production efficiencies. We'll need a few more quarters under our belts to better understand all of the factors contributing to this, as we've yet to develop enough history to allow for more accurate future predictions. Generally, the 35% to 40% gross margin range follows our 2024 plan. R&D expenses were down about 10% year over year, while SG&A expenses were down 28%, or almost $600,000. about two-thirds or 400,000 of the decrease in SG&A related to a reduction in legal fees for the recently settled litigation. Our Q4 2023 reorganization also contributed to these savings, which we expect to continue through 2024. Last time, we addressed some of the changes we're implementing in manufacturing that we expect to deliver improved results and increased capacity in 2024. In a few minutes, Kevin's going to address our operating KPI performance, some of which will be enhanced by these investments. They will require a total of approximately $2 million in capital to implement, and we expect them to pay for themselves within 15 to 30 months from commissioning. We broke these out into three projects. First, we're building out our own microbial testing lab. This will allow us quicker turnaround times on required testing of every batch we make as well as reducing outside testing costs significantly. We expect to save approximately $300,000 per year at current volumes and have this project paid off in just over a year. Second, we're transitioning our wet processing lines to our Bolingbrook facility. This will result in at least $400,000 per year in savings and pay for itself in 30 months or less. Critically, in addition to hard dollar savings per unit, This will help us to increase throughput, helping us to support greater demand while increasing customer satisfaction. Lastly, we're further expanding our filling and assembly operation in Bolingbrook, adding more automation and allowing for increased volumes to be produced in less time than it takes today. We expect this project to pay for itself in about two years in terms of hard cash savings. It will also create more opportunities for greater sales growth and enhance profits. Combined, once these projects are completed this year, we should be able to support about $100 million in Celestin's finished products with what we've put in place. This will represent a solid, stable base from which to more than double the size of our existing business within our current footprint. Celestin's products made up over $8 million, or 82% of our Q1 2024 sales, versus $5 million, or 53% of Q1 2023 sales. The demand is here. Now, I'll invite Kevin Keratin, our Chief Operating Officer, to share his thoughts on our progress to KPIs and the approach we're taking through 2024. Kevin? Kevin Keratin Thanks, Jess.

As usual, I'd like to begin by thanking our teammates who every day demonstrate that we are indeed best in industry at what we do, and our investors who continue to trust our leadership as we take the next steps on this journey. I would also like to thank the families of our teammates, as we ask a lot of our team, and we would not be able to do what we do without the energy and support of our loved ones. Last month, we introduced three key performance indicators that we will reference throughout this year to provide guidance on our performance. These KPIs are inventory availability, throughput, and on time, in full, or ODIF. As we noted last month, when combined with our financial analysis, these KPIs help give us a clear assessment on how we are performing and line of sight to the actions we need to take to continue to move our company on the never-ending path toward operational excellence. As a result, we refer to these as operating KPIs. In addition to operating KPIs, our company also has growth KPIs. These KPIs are important indicators on how we are performing relative to our growth goals, and therefore how we are trending toward increasing our overall enterprise value. While currently providing strong indicators for growth, it is premature to talk much about these at this point in the year, except to say we will introduce and discuss them in greater detail during our Q2 conference call. So let's get started on reviewing our operating KPIs. We will begin with inventory availability, which last month I described as being a measurement both of the amount of materials we have on hand and the timing on when we receive those materials. During Q1, we were able to finish the work that we had started in late Q4 to bring our inventory availability to over 95%. This milestone means that we have effectively addressed virtually all materials availability issues that have been the primary drag on our performance during the second half of 2023. I would like to commend our purchasing team as well as our R&D team on their collaborative effort to bring us to this point. Through working tirelessly together to identify and qualify alternative suppliers and producers of key raw materials, These teams brought us through several tight spots to reach this current milestone. Further good news is that over the past month, we have sustained this performance in maintaining inventory availability at or above the 95% level, and we are confident in our ability going forward to continue this solid performance. To further augment our position, our team is also working hard on implementing our vendor development and management programs. which includes, amongst other elements, bringing in additional qualified sources from around the world for key materials to minimize our out-of-stock risk and reliance on single source suppliers where it's possible. This work has already yielded some small but still impactful improvements in purchase price for these materials, due both to volume growth and getting the alternative sourcing. While we still have many miles ahead of us, we are pleased with the progress we have made and confident in the professional management that is being executed to continue to move us toward best-in-class performance in this area. Our next KPI is throughput. Last month, I described this KPI as measuring how we perform relative to leveraging our assets to produce the goods we sell. More simply, throughput is a measure of exactly that. the output from our company as measured by the units of finished goods and the dollars of shipments we yield every week. During Q1, as inventory availability improved, it enabled us to improve our throughput, which, while lagging the improvement in inventory availability, increased each month during the quarter. More specifically, throughput measures progressed from 50% of target in January to over 90% of target in March, yielding a Q1 average of around 76%. To provide a little more context on this performance, consider that due to the strength of the improvement in throughput during the quarter, March alone represented 40% of our total production and revenue for Q1. An additional strong indicator of further improvement in throughput was seen in our upstream production of bulk for the finished goods we produced. At the bulk production level, we are meeting 100% of plan requirements or 100% of throughput by the end of March. We still have some bottlenecks in fully realizing the benefits of some of our investments on the secondary packaging area and are hard at work in rectifying these issues. It will be important for us to address these issues so that we can achieve Q2 throughput requirements, which for guidance are greater than 30% higher than Q1. Finally, turning our attention toward OTIF, there will be no surprise for the manufacturing folks online that OTIF lagged when throughput lagged. Remember, again, that we define on time in full, or also referring to OTIF or OTIF, as a percentage of orders shipped consistent with the dates we've agreed upon with our brand partners. Relative to our standard, we were less than 50% of our ODIF target. Our company goal remains to significantly approve ODIF into greater than 90% by the end of Q2. A very large and stretched goal for us, I might add. But we are confident that as we execute Q2, we will be on target with this objective through improving the throughput performance. Finally, as we noted in our last call, our company is fully able to handle hard better. It's foundational to the journey and the massive change we have made to our company over the past few months, let alone the past few years. Through continued focus on the measures and the development of our teams and teammates, we have solidly regained our footing. Our challenge remains to continue to raise our expectations to embrace these significant opportunities ahead and raise our performance at the same time over the coming months so we turn them into profitable growth. Back to you, Jess.