Neo Performance Materials

Ladies and gentlemen, thank you for standing by, and welcome to the NEO Performance Materials Q3 2020 earnings announcement. 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 time, you will need to press star, then 1 on your telephone. If you require any further assistance, please press star 0 for operator assistance. I would now like to hand the conference over to your first speaker today. Ali Madavi, please go ahead.

Thank you, Operator, and good morning, everyone. Just a reminder, today's call is being recorded, and a replay will be available starting tomorrow in the Investor Center of our website located at neomaterials.com. I'm joined this morning by NEO's President and CEO, Konstantin Karianopoulos, and Raheem Suleiman, NEO's Chief Financial Officer, who will then provide additional details regarding the company's third quarter performance. Then we will open the call to questions from analysts only. Please note that some of the information you will hear during today's presentation and discussion will consist on forward-looking statements, including, without limitation, those regarding revenue, EBITDA, and adjusted EBITDA, product volumes, gross margin, other income and expense measures, ROC, cash returns, and future business outlook. Actual results or trends could differ materially from those discussed today. For more information, please refer to the risk factors discussed in NEO's most recent financial filings, which were filed on CDAR earlier today and are also available on our website. NEO assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. Financial amounts presented today will be in U.S. dollars. Non-IFRS financial measures will be used during this conference call. Further information regarding NEO's use of non-IFRS measures is available in NEO's 3Q 2020 earnings press release, which is also available on CDAR and on our website at neomaterials.com. Let me now turn the call over to Konstantin for opening remarks. Konstantin.

Thanks, Ali, and good morning, everybody. I hope everybody's safe. It's a pleasure to update our shareholders, investors, and employees around the world on our progress over the third quarter. With the health and safety of our employees top of mind during the pandemic, our business in the third quarter performed better than we expected as we're coming out of the second quarter, generating about $78 million of sales during that third quarter. We started growing again and returned to a better level of profitability and free cash flow generation. Our global operations experienced no major disruptions. and we saw customers start rebuilding inventory levels at a modest pace while their businesses improved. Macroeconomic trends over the past few weeks, as well as updates we are receiving from customers in our key end markets, are pointing in a sound direction. Our order books are rebuilding, and there are signs that customer demand is getting back on a path towards historical normal levels in most of our end markets. While the trajectory of the pandemic is impossible to predict, we and our customers were able to regain our footing in the third quarter. It is too early to claim that we have fully turned the corner, but the latter part of the third quarter felt like the worst was behind us. We're not out of the woods yet and COVID, of course, will have the final word on that. Excuse me. But at least for now, we're seeing signs of recovery, gaining momentum in several downstream sectors. Most of our customers are also saying that they both hope and believe that the worst is behind them. I'm proud of the new team's performance in managing this global challenge, particularly in terms of our employees' health and safety. We have experienced very few infections across our facilities. In fact, we have no reports of infections in any of our facilities in Asia. As I reported to you in the last quarter, we have full implementation of all measures at all of our facilities. In recent weeks, we've seen a slight uptick of infections in North American and European plants. Fortunately, none of these cases has resulted in serious health complications. I'm also very pleased with the fact that we have been able to avoid the layoffs and severe restructuring that have plagued much of the industrial sector. That's a testament to the dedication and professionalism of our more than 1,800 employees around the world. Over the past four months, I've spent a lot of time, virtually of course, with our individual business units. In normal times, that would have meant a lot of us living on airplanes and out of suitcases for weeks on end. While it is frustrating to not see our employees and interact with our customers in person, I'm pleased to report that our teams have been hard at work before and during the pandemic to grow Neo's business. In fact, in-person customer meetings have started again for our sales managers in Japan, Korea, China, Singapore, and Thailand. Small victories, but given how the world looked one or two quarters ago, we'll happily take it. Our teams have now completed our divisional and corporate strategic planning efforts. It is clear to me that we have the ability to protect and grow our core business while also planting key seeds of innovation that should take root in the coming quarters and years. Our strong financial position and operational flexibility also allow us to evaluate options and opportunities for strategic growth. As we finalize these plans, we will be continuously reassessing how to accelerate each of these efforts while utilizing our competitive advantages and unique global footprint to more quickly grow Neo in the near term. One of the key drivers of long-term growth for NIO, as well as the global economy, is the accelerating trend towards technologies that are sustainable and climate friendly. It is our view that these trends will only intensify as the world emerges from the COVID pandemic. Consumers and governments increasingly want lighter weight, more energy efficient mobility, and reduced greenhouse gas emissions. Each of our three business units, MagniQuench, chemicals and oxides, and rare metals, has core product, technology, and applications portfolios that will contribute to addressing each of these societal goals. We will continue to reinvest in next-generation technologies and customize advanced materials in partnership with our key customers. A prime example of this is our success in growing our magnetic materials and magnets portfolio, into growing segments like water and oil pumps within the automotive and household space. Electric and motor design engineers continue to look to drive efficiencies across the automotive platform for all drivetrain alternatives. The high quality and performance of the products, the consistency, and technical service offered by our MagnaQuinch group is essential to grow our share in automotive pump motor markets. This application offers substantial growth opportunities for MagnaQuest. That is because these pumps are used in all drivetrain applications, from cleaner and more efficient gas and diesel internal combustion engines to electrified hybrids and full battery and alternative fuel vehicles. There are different emerging trends within each of those drivetrain platforms, but all of them are looking for higher levels of performance. that is precisely MagnaClench's technological and market sweet spot. Our applications team has scored important wins in further diversifying our magnetics business into a greater level of penetration of key consumer markets. Not only is the case with automotive, where lighter for autonomous driving and cooling pumps and valves for electric vehicle batteries are some of the latest examples that come to mind, but also into consumer applications, such as the PS5 controllers, the new PS5 controllers, robot vacuum cleaners, stick vacuums, and hair dryers, and I could go on. At the same time, in our chemicals and oxides business, we're seeing some very interesting developments in a new generation of product lines with existing applications in broad health and safety markets. As we look to grow our core business, There is a continuous effort at improving our operations efficiency at our plant, expanding capacity and capabilities as necessary, automating where possible, and incorporating industry-leading sustainability practices across the board. I'm also encouraged to see more business leaders widening their gaze to the strategic importance and economic opportunities of technologies that enable more sustainable and environmentally preferred outcomes. We find that the more we emphasize sustainability at our core operations, the more momentum we build at both the operational and commercial level. NEO's success in leading sustainability efforts runs deep in our organization. We design advanced and highly engineered materials that help enable the technologies that curb growing greenhouse gas emissions and their impact on the environment. Said in another way, NEO's strong focus on the sustainability imperative provides us with tremendous defensive and offensive strengths. We will continue to build upon our legacy of strong environmental safeguards and we'll work to develop reporting efforts in the coming years of particular interest to our customers and shareholders. As the world continues to adapt to the global pandemic environment and preparing for life and return to growth post-COVID, An emerging element has been the emphasis of localized supply chains. A diversified geographic portfolio has always been a key strength of NIO's customer service offering, and it is becoming more important than ever. As we always evaluate options to grow our business, we also continue to diversify our supply chains, both upstream and downstream. Today, NIO is the only producer of rare earths and related value-added materials in Europe with our plant in Estonia. We're also the only company in our industry with full supply chain capabilities for rare earth specialties and magnetic materials inside and outside of China. We expect a good part of demand in the near to midterm to be driven by consumer and regulatory developments in both China, Asia, as well as Europe. We are ideally and uniquely positioned to capitalize on these opportunities as they unfold. NEO is in the value-added business with reliable raw material supplies, suppliers, and multiple continents. We value our upstream partners while we always look to diversify our raw material supply to give greater flexibility to our plans and ensure reliability of our customer supply chains. Doing so increases trust and confidence with our customers that they can depend on NIO's advanced performance molecules to arrive quickly and consistently in any region of the world. Beyond our core business, we continue to invest in our next areas of development. Innovation has long been critical to NIO's growth. In fact, a great deal of our revenues comes from products that did not exist three to five years ago. The key to our innovation is working extremely closely with customers and prioritizing new product development through our customers' eyes and objectives. Advanced critical materials by default have long technical development lead times. It is not uncommon to introduce an idea, a product or sample, and then spend years of joint development before seeing material volumes reported in our financials. We have always been driven by the demands and service needs of our customers and will respond by developing and producing what they need, where they need it. It is how we have built NIO into the robust, resilient, and profitable company that it is today, and that's how we will grow the company in the foreseeable future. In closing, it is good to be growing again from the lows of the second quarter, and in particular, June as well as July. That progress is encouraging. More important, we believe that we have built an organization that is positioned to grow organically and, in addition, capitalize on opportunities that we see in the coming global economic recovery. I'm optimistic about the company's growth prospects. Global mega trends focused on increased sustainability, lower fuel consumption, reduced environmental footprint, and enhanced energy efficiency all point to substantial opportunities for NEO. After all, we make the molecular building block for many of the technologies that help achieve these goals. Few organizations have the talent, knowledge, global infrastructure, and key commercial relationships to be as well positioned as NEO to capitalize on these trends. With that, let me turn the call over to Rahim for the financial review of the quarter.

Thanks, Constantine, and good morning, everyone. Our third quarter results indicated an inflection point upward with improvements across most of our major markets. While every industry that we sell into is battling with the pandemic's effects, we noticed a marked improvement related to the auto industry. Inventory pipelines began to be restocked, and a general sense of cautious optimism has taken over as factory assembly lines restart with new COVID operating protocols around the world. In lockstep, NIO's operations have been accelerating production and shipping increasing amounts of volume to our customers. These early signs are encouraging, yet we are well aware that COVID infection rates have never been higher in parts of Europe and North America, and it is still too early to call a bottom. We remain cautious and prudent in terms of our operations, and we have a balanced view of encouragement and pragmatism as we approach year end. During the third quarter, We reported a consolidated 77.9 million in revenue compared to 102.6 million in the prior year period. We reported net income of 0.4 million or one cent per share. Our adjusted net income was 1.3 million or three cents per share. And we reported adjusted EBITDA of 5.7 million compared to 12.8 million in the prior year period and up from the 1.2 million we reported for Q2 of 2020. As the global economy continues to manage through the impacts of the COVID pandemic, there is no surprise in the continued decrease in our financials year over year. However, it is important to note that quarterly sequential improvement in both volumes and revenues and improvement in our profitability. As we engage with our key customers and enter into the fourth quarter, we are cautiously optimistic that these trends will continue, driven by relative strength in the automotive sector. Of course, we must caution that any near-term strength is subject to extraordinary volatile environment, as no one can predict the future path of COVID. But we believe that our core product portfolios remain essential to the success of our customers. Our commercial and business development teams are working hard to ensure that NIO's products continue to grow over the long term, irrespective of the outlook of the pandemic. We saw some recovered strength in automotive in both Magnet Clinch and C&O and increased magnet sales into the consumer electronics end market and generally saw some strength in a number of our products from C&O that relate to industrial activity generally. Some of our end markets, however, remain more adversely impacted, particularly with our rare metal super alloys for the aerospace industry. Discussion with our largest customers indicate a protracted weakness as commercial airlines continue to push out orders for new aircraft These trends reverberate up the value chain and we generally expect a mild outlook for superalloy volumes through most of 2021. Again, any type of forecast at this point is difficult at best. We remain appropriately capitalized to encounter further disruption and we are very proud of all of our team's efforts to adhere to our continued evolution of new health and safety protocols. while remaining productive and maintaining the highest standards of efficiency, quality and delivery for our customers. I, too, am proud of our team's agility in navigating a very volatile demand environment this year. In two of the most challenging quarters of recent memory, we have consistently generated positive operating cash flow and have continued to progress in new business development opportunities. We have seen a wide variety of cost savings activities executed by all areas in the organization. These have included shift changes, managing production downtime, different work environments, reducing discretionary expenditures, while still maintaining focus on customer deliveries and future growth initiatives. Shifting to a detailed review of each business unit, let's start with Magniquench. The first half of the quarter remained inconsistent from a market demand perspective, with generally weak patterns in most regions globally. As a supplier within China, We expected that we would see an immediate impact related to the decreased volumes as the pandemic began. As customer pull began to return within China, it was then offset by inconsistent demand patterns for key manufacturing sites in Europe and North America. The macro environment, particularly for automotive platforms, began to stabilize as we exited the quarter, and we saw improved shipment volumes that have thus held into the fourth quarter. We saw somewhat varied performance across multiple end markets and platforms. Some are indicating fundamental strength, others are focused now on supply chain refill activities, and a few others still appear a little weak. With our magnet strategy, we have performed exceptionally well during the quarter. As a recent entrant into the compression molded magnet space, we are pleased to see continued growth in the sales of magnets driven by computer-based box fans. These magnets are placed in laptops, tablets, and server racks and remain a key launching point for our growing capacity. We continue our readiness to also sell magnets into the automotive end markets and would anticipate seeing this growth shortly with programs that have already been awarded. We are very pleased with the integration of our magnet business of our choose-out facility, which we acquired in August of 2019. In the first year of consolidated operations, we implemented substantial capacity expansion to meet increasing demand. The combined expertise across both the bonded magnetic powder and compression molded magnet teams is yielding great insights. While the magnet business is still a very small piece of MagnetQuench's product portfolio, its strategic importance continues to shine brightly. We look forward to further growing magnet volumes. for our key customers. Let's turn to our chemicals and oxide business unit. The auto catalyst business continued to perform well in the third quarter and continued to outperform the automotive industry in general. We are encouraged by this pace of sales volumes, although a portion of it was tied to restocking inventory levels in certain supply chains. Sales into the automotive space were most robust in China, followed by an increasingly positive trend in other jurisdictions like India, South America and Western Europe. Our rare earth separation business remain mixed with some areas demonstrating strength while other areas still struggling to regain its footing. There are some bright spots such as sales within Europe stabilizing for certain key products, yet spot sales remain relatively muted in line with some of the general macroeconomic conditions. We did see some uptick for some of the rare earth pricing, primarily in neodymium, potentially a result in the growth of magnetics and potentially as a result of supply concerns. These two trends clearly contrast to the prior year where we saw large spot sales and a rapid increase in rare earth prices generally, both really impacting the third quarter of 2019. Within water treatment, our business development teams have been re-accelerating momentum to sales within key municipal wastewater treatment plants, as emerging regulations in the southeastern portion of the U.S. encourage further reductions of phosphorus in wastewater discharge. We are noticing a trend of successful commercialization in larger water treatment plant sizes, and we are doing some key potential customer trials as we approach year end. Lastly, in rare metals, difficult demand trends in the second quarter endured as expected, with market demand for high temperature superalloys remaining very light. As a result, quoted spot prices have also lagged, although we do not believe there's a fundamental shift in pricing. As you know, our rare metals business is largely tied to aerospace and market, and in the supply of various superalloys. As we've already discussed, this continues to be a difficult market in the short term. However, we continue to believe that NIO is well positioned here from an overall competitive perspective. We are also growing these same metals into additional end markets and customers other than aerospace. In the past year, we have been successful in bringing on new customers that will eventually provide a better balance toward end markets. A portion of our rare metals business already provides products that are not super alloys for aerospace. These end markets include medical imaging, energy efficient lighting, and wireless technologies. We also participate in the recycling of materials. These other end markets and efforts are smaller today relative to our aerospace end market, but remain a potential growth opportunity for NEO. They also provide further diversification within the rare metals business unit. One of the key attributes of NEO from a financial perspective is the health of our cash position and our ability to generate cash. Despite the headwinds related to the global pandemic, Through the first nine months of 2020, we had generated $11 million of operating cash flow. We invested $6.2 million in property, plant, and equipment. We maintained our dividend in the quarter, returning $8.4 million in the first nine months of the year. And we also repurchased $2 million in shares through the first nine months. We finished the quarter with a cash balance of $74.6 million with essentially no debt. As we begin to return to signs of normalcy in many of our key end markets, we are focused on prudently growing each of our businesses. We anticipate that near-term cycles will continue to be irregular, yet it's encouraging to see signs of life within the automotive space, and we are looking to continue to build momentum across new product development portfolios. As a well-capitalized business with minimal debt, we will continue to seek paths to accelerate growth across our portfolio and to improve the return of capital employed in each of our businesses. Let's now proceed to open up the call for questions.

At this time, ladies and gentlemen, if you would like to ask a question, please go ahead and press star then the number one on your telephone keypad. Again, that's star then one to ask a question. Your first question today comes from the line of Yuri Link with Canaccord Genuity. Please proceed with your question.

Good morning, guys. Morning, Yuri. Morning. Constantine, I just wanted to square some of the comments on particularly the auto industry. You know, the C&O segment seemed to benefit from a recovery there. But the sequential recovery in MagniQuint really lagged and just wondering was that auto part of the business slower to come on or it didn't benefit from the same inventory movements or just any color you can give on the rather muted recovery in MagniQuint?

Thanks, Yuri. I guess at a high level, clearly there were It was the latter in your question. It was clearly some inventory movements, refilling of pipelines in the CNO business as opposed to Magnet Clutch that led to part of that performance in the third quarter. We also got some new business and gained market share in that space. new platforms and the like. So overall, we saw consistent trends between Magniquench and C&O at Automotive, slightly different, as I said, pipeline behavior between the two businesses. At the same time, Magniquench is a bit more exposed to Japanese and in European supply chains who tend to run relatively consistent inventories. So we didn't see a major realignment or adjustment of inventories in that space. Rahim, if you have any additional color.

Yeah, I think your point is valid. I think it's always tough to compartmentalize things within a quarter. But if I were to try to do that a little bit, what I would suggest is that there was a There's also an underlying trend in magnitude, quite honestly, a very difficult July and somewhat difficult August. And we really saw the rebound in automotive volumes kicking in in September. So we feel pretty good about what we're seeing when we just break it down in that level of detail.

And the rebound in auto, did that continue post-quarter and any changes? Any early thoughts on how the fourth quarter is shaping up?

Well, as both Rahim and I mentioned, we like what we see. Those trends we saw in sort of August and September are continuing. So, so far, so good. So, yeah, the same patterns that we saw exiting Q3 have changed. continued into into q4 so we're you know we're pretty optimistic with what we see but again we need to color that with a bit of caution but you know knock on wood it seems as as I said in both Rahim said it it seems that the worst behind us Rahim called it you know two tough quarters the the only time I can remember quarters that were this challenging were fourth quarter of 08, first quarter of 09, and some of us, the older ones, remember what happened back then. This was sort of almost similar, not quite, but almost similar type of performance and behavior. And it's gratifying to see that we continue to make money and generate cash during very, very difficult conditions. but not to belabor the point, Yuri, but we have exited Q3 and into Q4 at those run rates, so we're fairly happy with what we see. Again, we're not comparing this year to last year or the year before, but the fact that things seem to be getting better and better compared to June and July, I think it's gratifying.

Okay, that's fair. Thanks for the call, guys. I'll turn it over. Thanks, Jerry.

Your next question comes from the line of Frederick Bastien with Raymond James. Please proceed with your question.

Good morning, guys. Question is for Konstantin. You've now been in the CEO seat for a few months. I was wondering if you could just break down the time you're spending on sort of M&A opportunities versus operation, and where are you spending most of your time?

Well, the last three weeks were, well, thanks for the question, Frederic, and I appreciate the concern for my work patterns. I am spending quite a bit of time, actually. The first little while, I needed to get my feet wet again, and I spent quite a bit of time on the phone and video Zoom calls and so on, which was an adjustment for everybody. So the last little while have always been spent with our business units around the world We recently had our strategic reevaluation process that I sort of superficially referred to in my comments. That involved all three business units, the senior and middle management groups. We had a number of calls, as well as our, normally at this time of year, we have our planning meetings for all three business units. As we look to the future, we evaluate the past, and we put together our strategic priorities. So all of those, you know, typically to accommodate time zones in Asia, North America, and Europe, we start very early in the morning, and we finish kind of mid-morning. So the last few weeks have been spent on that effort alone. On M&A, we have a number of options on our – radar screen. I have been spending indeed quite a bit of time, clearly not as much time as I've been spending on the business unit and strategic discussions internally, but we have some paperwork out there, NDAs, LOIs and the like. So I'm hoping that during the quarter, perhaps into next quarter, we'll have something to talk about, but it's way too early. But clearly, my priority, especially getting into the chair in July and looking at the numbers in July, even though they weren't as bad as they could have been, getting back into this and that sort of environment was challenging. So I needed to figure out what was happening and why. So the bulk of my time to be truthful has been spent on the businesses, understanding what's going on, perhaps even pushing our development folks a bit harder than I had done in the past. But it's primarily looking after the core business and not neglecting M&A opportunities, which, as I said, continue to progress.

Okay. Thanks for that color. I didn't mean to throw you off there, but I'm just curious on the M&A front. You know, in the past, I guess, decade, you've been gradually growing the rare metals business with some tuck-in acquisitions and investments. And more recently, we saw the acquisition of Magnet Facility making business, which I guess showed that you're still seeing, you know, tremendous amount of growth in the magnet business. So I was wondering when you look at, you know, in the future when you'll be looking at opportunities, I mean, can we conceivably expect you to be active in all three segments with respect to M&A?

Yeah, that's a fair statement. I think when, you know, judging from the comments, that both Rahim and I made, as well as the numbers. You know, you clearly see that the rare metals business is very challenged with its exposure to aerospace. So clearly our focus there is to diversify away from aerospace, not neglect aerospace, because eventually aerospace will come back, but also look at opportunities beyond the aerospace segment. We do have a few options in that space. As far as the magnets are concerned, to tell you the truth, that has not taken historically an awful lot of time from the executive group. We have a very competent management group within MagnetQuench that identified and executed on the acquisition and the integration here in in Toronto especially since we haven't been able to travel for a while, we're just keeping an eye on it and helping in any way we can. But that relatively small acquisition was handled by and large by the management team. And we're very pleased with the way it turned out and we're happy with what we're seeing. We are encouraging the Magnet Grinch group to continue to identify opportunities to grow the magnet business as well as our powders business. But this has been a very good model and a very good precedent to build on. So I would expect that the next few opportunities could be in both Related to both the comment that I made about supply chain realignment, we see an awful lot of interest in Europe by European customers who really want to feel a lot more secure in their supply chains, which we believe gives a great opportunity to our SILMED facility, both in rare earths as well as rare metals. and perhaps that could be coupled with MagnaQuench capabilities in Europe in the future. So, some of the initiatives involve all three business units, others are selective, and they're geared towards helping with our raw material supply security, as well as identifying opportunities to grow aggressively. With all three business units, We really have a, we feel that we have a pretty good grasp on strengths and weaknesses, and we're trying to cover the weaknesses and capitalize on the strengths. You know, really no magic there. So it's all really predictable.

Awesome. Okay. Thanks for the call, Constantine.

Thanks, Frederick.

Our next question comes from the line of Mac Whale with Cormac Securities. Please proceed with your question.

Hi, good morning. Just a question on, I'm not sure if you want to get granular on the entry of the quarter to the exit in terms of volumes, because you might be able to maybe make an exception this quarter, because I think when you look at what's happening, it's important to get an idea of what's happening in Q4 because of what we have to do for modeling in 2021. So, for instance, on MagnaQuench, is it a case where you sort of entered the quarter at, say, 300 tons a month and you exited at 400? I mean, is it that big of a difference between the beginning and end of the quarter?

So, Mark, I would say that it is certainly a big difference for Magnum Quench in particular of where we entered the quarter and where we exited the quarter. Where I think we're more cautious on for that perspective is where we exited the quarter could be a portion of that. And as we said, it was strong coming into Q4 as well. But fortunately, that could be refilling of the supply chain. So I think at this point, certainly there was a big difference between July and September.

Okay. No, I understand that. Does that then, with that same rationale, like when we look at Q2 for MagnaQuench, it would have been exactly the opposite, probably coming in at 400 and leaving at 300. And is it maybe just the case that what's happening is really, that sort of recovery is just being masked by timing because C&O might just be sort of shifted a month or two, but sort of experiencing the same thing, notwithstanding the restocking. Is that what you've been experiencing? Maybe just a lag difference as opposed to a degree in improvements?

Yeah, I would say generally yes, but I mean, I would even caution that we don't actually have to compare and contrast between MagnetQuench and C&O. We could do a compare and contrast within MagnetQuench or even within C&O where certain products that are going to certain jurisdictions ramped up a lot faster than others. So, you know, even within MagnetQuench, there were products that ramped up much quicker and other products that are still kind of on the slower side of the ramp curve. In C&O, there were, you know, certain elements that were still popular and selling well in July and August. So honestly, I think it is, I think we're absolutely confident that the current volumes are very supportive of seeing the type of recovery that we're talking about. But I am just a little bit more cautious about reading too much into specific applications. Both of those businesses are about 50% automotive. Both of those businesses are very, very global. with end markets all over the world, but they do have kind of different weighting to different regions, and I think different regions are also growing faster. So the non-automotive stuff is also recovering. Automotive stuff is recovering, and different regions are recovering at different speeds. I think that's what we're generally seeing is the differences between MagnaQuench and CETL.

Okay, that's helpful. Within MagnaQuench, you have sort of different parts of the business behaving differently. Going into the lockdowns, I would say that our magnet business, especially the plant in Chuzo, didn't really feel an effect. Now, keep in mind that it's a relatively very small part of the overall business. But if you look at the magnets that that plant makes, They're very small magnets, primarily for electronic applications, so it wasn't exposed to some of the larger industrial automotive trends. And one would argue that electronics, as more people were working from home, benefited slightly from, ironically rather, from the pandemic. So the small magnets that go into fan motors for laptops and tablets and the like, that was a very strong business for that plant. Now, it's not going to move the needle overall, but we announced that we're expanding that business and we're expanding it again. And that's primarily driven by electronic gaming, the PS5 controller that I mentioned. But these are all very, very small magnets but it's a nice little business that is growing, and we plan to continue to grow it aggressively. Automotive, between Magniquence and C&O, as Rahim said, those two segments behave slightly differently, different parts of the supply chain and different parts of the automobile. It was encouraging, though, at Magniquence to see the continuing growth success we have with both EV and internal combustion engine drivetrains. And that, I expect, will continue as the business unfolds over the next few quarters.

Okay. That's helpful. On the lag that we typically see, when I'm looking at pricing, it looks sort of to, on a per ton basis, is sort of stabilized in magna quenching, maybe up a bit in chemicals and oxide, but when you look at this effect of pass-through, where are we on that process this year? Do we need to make any adjustment given what's happened in terms of volumes, or should we start to see a reversal, or is it just sort of status quo from here on out?

Yeah, I mean, I think if I look back over, you kind of have to look back probably six months to get a sense of where lead lag is. And for that, you'll see most of the rare earth portions of the business anyway being stable. The exception is neodymium, which is actually important in both CNO and in MagnaQuench. I would say in the kind of the last quarter here, it's probably a little bit of a headwind for MagnaQuench and a little bit of a tailwind for CNO. So as a company, they're almost offsetting each other. So overall, though, these are not huge lead lag numbers that we would have talked about in the past. So I'd suggest that even though that one element is up in price substantially, we haven't seen huge lead lag impacts.

Okay. And then just lastly, Constantine, when you're looking at some of the M&A opportunities, what are, just generally speaking, what are the product lines or maybe material lines that you're most excited in terms of the opportunities? Could you classify them as businesses you're already in and you're adding technologies or is it more new materials that you want to add perhaps to the same customer base? Can you sort of contrast where the focus might be?

Yeah. It might be a little too early to get to granular, Mac, but we're looking at things that, as I said earlier, that could start fixing or helping some of our weaknesses, whether they are supply chain related or looking at folks who have a larger presence in markets that we have a small presence in. And again, I don't like speaking in code, but you know, I really am limited by what I can say. And as I said, also other opportunities that are presenting themselves are more supply chain, regional, the change into regional supply chains and resilient, robust supply chains at the local level are presenting some opportunities. I don't think when you look at our business at the opportunities we're looking at on our radar screen, we would be looking to get into something that either we don't know how to do or product lines that we're not already in. I mean, I think we're getting all a little too old in the tooth to be learning new tricks. So we'd like to continue to hone what we do well in addressing some of our strategic weaknesses in the process. So I wouldn't expect to see anything that is far from what we do day-to-day right now.

Okay, great. Thanks, guys.

Thanks, man.

Our next question comes from the line of Steve Arthur with RBC Capital Markets. Please proceed with your question.

Yes, thank you, and good morning. Just a couple of quick follow-ups here. First, on the Magnet Banking operations, And further expansion was announced in the summer. Just curious of the status of that. Is that complete now? And is there any way to characterize the capacity level of that business that you could support at this stage?

So thanks, Steve. It's Raheem here. So it is complete in that the majority of the capital has been spent to support it. But honestly, complete is an awkward word because we just continue to grow and we continue to see more demand through that. So the first phase of completing that was there was two sets of capacity expansions that we did for magnets. One was in Tianjin, our main magnet facility in China, to prepare, I would say, for additional magnet programs that are automotive customer-based originally. So that capacity is ready, and we're starting to supply of those programs. And the second type of expansion that we were doing was in the facility that we acquired, the small plant in Chuzhou. So we've continued to add expansion and capacity there. And I think we're going to continue to be adding capacity there as demand really requires us to continue to grow. So I don't think there's huge dollars to come. I think they're substantially ready, but it'll be continual expansion. In the TJ1, it was much more of a larger upfront cost to put the initial infrastructure in place that will grow into a lot of that capacity. In Chuzhou, we're going to continue to expand over time.

And I guess just on that demand side.

Stephen, one more comment. Because of, again, what Rahim said, Tianjin is mostly focused on larger, complex automotive-type magnets, whether that's for pumps that I talked about or seats. different, you know, some under the hood, some in the passenger cabin. And the lag between committing and actually making shipments is quite a bit different from the electronic application focus that the other plant in Chuzhou has. So after we build capacity expansion in Tianjin for automotive, we have to go through qualification, reviews, the works with our customers. Because some of these programs are relatively new, whereby in Chuzo, we're just adding capacity to go after existing business, and given how quick the electronic supply chains respond in the manufacturing, environment in Asia, the time lag is a lot shorter. So the effect of that was the first expansion we did in Chuzo sold out again, so we had to add to it. But this is fairly straightforward. It doesn't take an awful lot of time and effort and investment to just keep adding presses that do the same thing that the other magnet presses have been doing for years. So it's a bit of an easier expansion and a faster response time in terms of seeing the effects at the operating level.

Okay, that makes sense. That makes sense. I guess just on the demand side, there's lots of magnet makers out there and some of them are already your customers. I guess as you're winning this new business, in particular in automotive, how How are you differentiating there? How are you positioning the manufacturing business to pursue and win these orders?

That's a tough question, and it'll take a long chat to articulate how we do it. Again, it's a slightly differentiated strategy between electronics and automotive. In automotive, we're very much pulled by what our customers ask, and they tend to be largely European component motor and system manufacturers with plants in Europe and plants in Asia. In that case, we respond to what they say and we go after, because it's automotive, typically newer programs. So if we win new businesses, It's not as threatening to our existing customer base. And at the same time, we do have a pretty sticky business with our existing customers, even though in some aspects it could be seen as we are competing with them. We try not to take business on price. We don't like to commoditize the space And very often we get programs that a lot of other suppliers cannot get because they don't have the performance characteristics or the quality characteristics in their magnets. And this is absolutely critical in automotive. On the other side with the electronics, I mean, CHUSO had been a very consistent um, well-regarded supplier into the, you know, the, the thin fan motor market. And we continue to build on that. So I guess the, the short answer to the question is that we try to be very selective what we go after. We, uh, and, um, I think we're so far so good and we do see opportunities to, to continue to, to grow that business, um, handsomely without necessarily stepping on too many toes. It's a bit of a fine line, no question about it.

Understood. Okay, good perspective. Thank you.

And your next question comes from the line of Scott Frumson with CIBC. Please proceed with your question.

Thank you, and good morning, gentlemen. Just a couple of follow-up questions on MagnetQuench. Following up on Steve's questions, he actually asked most of what I was going to ask. But with your magnet-making capabilities, are you seeing any additional joint development requests from major customers? I'm thinking automotive.

Yeah, that's always the case, Scott, especially because these, as I said earlier... By the way, it sounds like you and Stephen have compared notes and... We have not, but we've been thinking a long time. I'm sure I was. So, yeah, in automotive, it's a very long term, and it's a long runway. I don't want to start dropping names, but if you look at the magnets we're making in Tianjin... And we've been trying to get into that for over three years. And it was actually two of our largest German motor customers saying, listen, we need you to do this because we're not happy with the quality and the performance of the magnets that we're getting elsewhere. And we worked with them jointly to understand what the objectives were, what we had to do, and the whole thing worked out. over, as I said, almost a three-year timeframe that we've been trying to do this. So clearly, on any new program, it's a long runway, and unless you work very closely with our customers, there's very, very low chance of success. And it's discussions. that go way beyond the sales manager to purchasing manager level. There's a very intimate contact between engineering groups, applications groups, motor design groups, and there's a continuous optimization of not only the magnet making process, but also the motor um design and manufacturing process so yeah it's uh it's a long process and that's another thing that makes us feel pretty good about getting into this activity this way where the business tends to to be stickier and and longer term and so let me go to that just add a quick comment to that you know on clearly on the automotive side where we've been long regarded as

as the powder supplier of choice. Adding the magnet expertise has been something we're working with our customers on, and they're certainly very interested in it. We have proof in a number of different areas how that's been very successful, and as Constantine said, these are longer-based programs that we're making great progress into. But the opposite is also true. The magnet customers certainly have got, on the magnet-making side, have certainly got a great appreciation now of the magnet design and motor capability that we do have, that perhaps we were not as focused on facing some of the magnet customers, some of the smaller magnet customers in the end markets that our new facility is after. we probably hadn't spent and invested as much time in magnet development from a powder perspective. So now the combination has certainly yielded a lot more discussion with customers on what we could be doing. So I would say the integration of both sets of knowledge has been valuable for both and market perspectives.

So it sounds like you're learning kind of new things you can do with your powders in terms of finished products. And is that true? And is that... Is that the basis of your sort of statement?

Slightly on new things, although I would suggest that we were probably very aware because we were already, you know, we already had a motor design group. We were already very aware on the powder side. What I think it is is actually the practical application in some areas where kind of we weren't facing the customer directly. The volumes were maybe smaller. Like the types of business that our Tujo facility faces would not have been a lot of business where we would have invested a lot of resources on changing the magnetic properties. Now we're doing much more of that type of work and customers are much more interested in it. So I think we've always had the capability, it's just now the opportunity is giving us to talk to new customers on new programs.

What may have changed in the last three, four years, Scott, is the fact that we can now put together a package that involves new powder manufacturing ways to prepare, to make a material that has different properties that marries up better with the magnet making process. So the solutions that we're bringing to the table, for example, involves motors that spin at three, four times the frequency of a jet engine and the magnet performs under very, very harsh conditions. And five years ago, that wouldn't have been possible. But in order to achieve that, we had to work both on the magnet making process, but also on the powder making process and the compounding that takes place between powder making and magnet. We continue to learn, and we continue to develop new tricks. And, you know, right now when you look at our capabilities that really differentiate ourselves from pretty well anybody out there, we can control powder making at the molecular level, and we can take that knowledge all the way to making magnets at the quality and performance level that it would be very, very difficult for others to achieve. You know, the learning process is constant. It's just that now it's applied to making powders and making magnets in addition to what was always the case before with MagnetQuench, which was just making powder and then leaving it up to other folks to make the magnets.

That's great. Thank you. That's very helpful. I'll turn it over. Thanks, Scott.

Our next question comes from the line of Mark Neville with Scotiabank. Please proceed with your question.

Good morning, guys. Maybe just a few follow-up questions at this point. The comment around September being much better than July or however it was said, is that a holistic comment or is that speaking specific to MagnaQuench?

I think it's heavily weighted to MagnaQuench.

Okay. If I could just ask the same question in a different way, is there sort of a rough quantum or order of magnitude just to sort of help us ballpark it, thinking about how Q4 might shape up?

I think that the way it was described earlier about kind of the entry point and exit point of Q2 and Q3 probably are different. are reasonable ways of thinking about it. You know, we don't give exact numbers going into the next quarter, but I would say that's good. More than 35, more than 40% of magnitude of current sales probably happened in the last month.

Got it. That's helpful. Maybe there's one more going around. Go ahead, sir.

Mark, just one of the, you know, we, yeah, I'm having a bit of a, a challenge here to to try to add granularity to to what we've we've said but you you also need to keep in mind that there's different dynamics superimposed here um we had the the whole covet thing and you know first quarter we saw china shut down And then second quarter, China came back, but Europe and the U.S. kind of shut down, Japan kind of slowed down. And this is sort of late third quarter was the first sign of things coming back to a normal trajectory. That was also impacted by the fact that in Europe in the third quarter, for example, when you look at July, July was clearly impacted by COVID, but also because in Europe, July and August are historically very slow months as folks tend to go on holidays and the Europeans take holidays, they're sort of a religion, especially in August. So August may have been impacted in addition to whatever the COVID impact and the manufacturing impact globally, it would have been impacted by plants in Europe kind of being a lot slower than normal. In September, sort of everybody's kind of back to work. So keep that in mind, because especially with magna quench, There's a seasonality through the year that, you know, I, back in my previous lives as CEO of NEO, I would always start my remarks by reminding everybody that seasonality where, because, and back then was more prevalent because MagnetQuench was selling mostly into electronics. And you look at those supply chains, you have a very strong second quarter a stronger third quarter as supply chains are running flat out ahead of Christmas to fill up the shelves in October, November. And then they go into a strong fourth quarter and they start slowing down again in December because of the holidays. Then January starts strong, drops off significantly in February because, again, supply chains slow down in Asia because of the Lunar New Year. March, the Japanese companies tend to run down inventories, and then the second quarter picks up again. So there's all kinds of, I would call, micro-seasonalities, depending on the market segment, that come into this. And now with automotive being a much bigger portion of MagnaQuench, and by the way, this is by design, you know, 10, 12 years ago, we made it a priority to penetrate automotive markets more so than we did before. That is masking that electronic seasonality. So you have, as I said, a number of dynamics superimposed, whether it's regional, whether it's supply chain, and whether it's market segment specific.

Yeah, no, I can appreciate that. That's helpful. Maybe just one last question then. Just on the cost, you know, a good job managing costs. It sounds like when you spoke to it, it sounds sort of more temporary, but just sort of curious if there was sort of any opportunity through this, in your opinion, to remove any sort of permanent costs from the business so that when we come out of the other side, maybe there's a benefit to margin. Thanks.

Well, I made some general comments about automation, efficiency, and so on. Yeah, we... Regardless of COVID, we're very focused on reducing our costs, and this has been across the board. Magnet Quencher's specific initiatives, CNO has specific initiatives, and Rare Metals focused especially around SILMET optimization and efficiency. But we... We're learning how to do things slightly differently through COVID, and to answer your question perhaps a bit more specifically, yeah, we're learning a few new tricks, and hopefully some of these gains and the lessons we're learning will carry through post-COVID, and we should see continuing optimization on production and improvement in technology. in costing on a per kilogram basis?

Yeah, Mark, maybe the only thing I'd add to that is I don't think we, I think we've been looking at cost reduction strategies in a number of locations in the world. Honestly, I don't know that they've been accelerated or changed from a fundamental perspective from COVID. I think that that's kind of minoring around the edges. I think that the cost reduction strategy is much more fundamental than that. But we still, at the same time, did take the opportunity of COVID downtime, in a sense, to actually make more, I'd say, technological gains. So I don't think that what happened coming out of COVID was terribly different from a cost structure perspective, but I do think we made significant advances in product that we're pretty excited about, as I said, as we continue to invest in the future growth profile. So having the time enabled us to run a couple of trials. Got it. Okay. Thanks, guys.

Thanks, Mark.

And there are no... And there are no further questions left in queue at this time. I turn the call back to the presenters for any closing remarks.

Thank you, operator. On behalf of the NEO team, I'd like to thank you for joining us today for an update on the third quarter. We look forward to reporting to you back again on the back of our fourth quarter year-end results. And in the interim, if you have any questions, as always, feel free to reach out and connect to myself by phone or by email. I look forward to speaking to you soon. That concludes today's call. I'll hand it back over to the operator.

This concludes today's conference call. Thank you for your participation. You may now disconnect.