Neo Performance Materials

Good day and thank you for standing by. Welcome to the NEO Performance Materials Inc. Q1 2021 earnings announcement. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to our first speaker today, Ali Madavi. Thank you. Please go ahead.

Thank you, operator, and good morning, everyone. As 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. On today's call, we have NEO's President and CEO, Konstantin Karianopoulos, Rahim Suleiman, NEO's Chief Financial Officer, will then provide additional detail regarding the company's first quarter performance. Then we will open the call up to questions from analysts only. Please note that some of the information you will hear during today's call and discussion will consist of forward-looking statements, including, without limitation, those regarding revenue, EBITDA, and adjusted EBITDA, product volumes, product pricing, other income and expense measures, 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 this morning 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 Q1 2021 earnings press release, which is available on CDAR and again on our website at neomaterials.com. Let me now turn the call over to Konstantin for opening remarks.

Thanks, Ali, and good day, everybody. I hope everyone's safe and well. We're pleased to report our first quarter results showing a very strong start to the year. NEO reported sales of $130.9 million in the quarter, adjusted net income of $15.1 million, adjusted EBITDA of $22.4 million, which more than doubled from the first quarter of last year. The momentum and trajectory that we described on our third and fourth quarter earnings calls have pretty well remained in force. The resulting aggressive product demand within our MagnaQuench and chemicals and oxides business units fueled our financial performance to record levels. Many of our production lines are operating at what is essentially full capacity. And we're carefully managing incoming order flow and production planning to ensure the reliable supply to our customers continues. In some of our key sectors, such as automotive, home appliances, consumer electronics, we anticipate this strong demand will likely remain at elevated levels for some time. NIO's growth this year is reflective of what has been reported in recent production manufacturing indices. PMI numbers out of the Eurozone have indicated the fastest pace of production growth in more than 20 years, particularly in Spain, Italy, and Germany. Of course, all economies are rising from the figurative ashes of the worst global pandemic in a century, but the growth trajectories we are seeing are clearly and nevertheless impressive. While some of this is due to our customers rebuilding inventory levels, we're also seeing new growth in new platforms and applications, as well as in the underlying base business. That's particularly true in the automotive supply chain and especially in electric vehicles. For example, magnetic powders and magnets used in electrified vehicle traction motors and battery temperature control pump motors, so very strong growth in the quarter. Likewise, our magnet sales doubled as compared to recent levels in our magnet quench unit, and it looks like we'll have to plan or start to expand our magnet production capacity again this year. These trends appear to be continuing into the second quarter. And consumer demand for durable goods remains at all-time highs, with products backordered around the world. For example, as a consumer, if you want to purchase an electric power assist bicycle, which contains rare permanent magnet technology, you'll be lucky to find a merchant willing to accept the deposit to reserve a bike to be shipped even by this time next year. Demand for the semiconductor chips integrated into products such as automobiles, appliances, automation equipment, and every conceivable electronic component or smart device is also quite intense. We follow this sector closely as NEO produces a highly engineered form of nanostructure dysprosium oxide for use in multi-layer ceramic capacitors, which are used in very large numbers and are integral to every circuit board where you normally find semiconductors. An unexpected positive effect for our business in this sector has been the increased capital investment in new semiconductor production capacity. Robotic systems are a big part of this expansion, and as a result, we have seen a significant increase in orders for magnetic products specific to the precision motors used in this application. On a more macro level, the accelerating adoption of technologies for lightweighting, increased efficiency, and reduced greenhouse gas emissions continues to be a key demand driver for many of NIO's products. NIO's dedicated team of very bright applications, R&D and product development scientists and engineers have been tirelessly developing exciting new products and applications. Many of these advanced materials result in new versions of legacy products. For example, sizable improvements have been made in the performance of cooling fan motors, which have renewed importance in both the automotive and technology sectors. Within automotive, demand continues to rise for electric motors that are a critical part of the battery thermal management system in electric vehicles. Growth of this application is becoming another key driver for our MagniClench business as the world continues to move forward with the electrification of vehicles. In fact, it's remarkable to see the dramatic shift in manufacturing that is underway now, especially in China and Europe, away from internal combustion engine vehicles to hybrid and electric vehicles. Every year, as automotive research firms announce forecasts for hybrid and EV market share, these estimates are always revised upward. For example, the estimated collective market share of hybrid, electric, and alternative fuel vehicles sold in Europe is recently estimated to be more than 60% of new sales by 2025. This is a massive shift compared to just years ago when that number was estimated to be 25%. And 25% was back then viewed as very aggressive. The acceleration into mass production of these EVs and hybrid drivetrains is a favorable outlet for NIO's more advanced and innovative products, including next-generation environmental catalyst materials to meet emerging emission standards. This builds upon NIO's traditional environmental catalyst portfolio, which just had one of its strongest quarters ever. Our chemicals and oxide units mixed oxide catalyst did very well in Q1, with volume growth across all drivetrains from gasoline to diesel to hybrid platforms. In fact, total volume growth exceeded the market growth in the automotive sector generally, as pent-up demand and inventory restocking took hold and key applications for our products outpaced the overall market growth rate. We will continue to innovate and invest in clean air and emission control products and materials technologies, particularly for hybrid platforms. We expect them to continue to serve a key role over the next 10 years on our collective path towards electrification and decarbonization. Within technology, the explosive growth of data mining and data storage requires more and more server farms, which are immensely energy intensive and require more efficient cooling. NEO's advanced magnetic materials and magnets deliver improved motor energy efficiency and better durability in these cooling systems. A reduced carbon footprint is also a welcome collateral benefit of greater energy efficiency in this application. An added benefit of the growth in server farms is that they're extending the useful life of hard disk drives, for those of you who remember that technology. Hard disk drives provide reliable, low-cost data storage, which is a good business still for MagnaQuest, and it looks like it would be around for a while so rumors of its demise appear rather premature. Similarly, higher performance magnetic powders and better magnets allow for additional lightweighting and efficiency, while at the same time delivering increased precision and accuracy in applications across the board, from sensors and actuators to smartphones, game consoles, and robotic drive systems. Typically capital investment in areas like factory automation are rather cyclical. Capital is flowing once again into automation systems for three key reasons. First, general manufacturing capacity is in relatively short supply, particularly as supply chains are being redesigned with more regional diversity and redundancies. New technologies, such as electric vehicles, are being commercialized and placed into mass production, requiring new facilities and infrastructure. Manufacturing capacity for EV batteries is being created at unprecedented levels. EV drive train systems are following closely. And third, as capital continues to be allocated to emerging technologies, the manufacturing environment is shifting to a more efficient and sustainably focused New is actively benefiting from all of these trends. Given that many pieces of our business are hitting high notes, which allow for operating efficiencies and a beneficial operating leverage, we're able to further invest across our innovation pipelines and strategic initiatives. I'm increasingly optimistic that several new product development efforts in our chemicals and oxide segment will move to commercialization over the next several quarters. These include a suite of non-toxic and environmentally friendly engineered materials that exhibit extraordinary anti-pathogen activity. Another set of rare earth-based materials coming out of our labs is a family of fire retardant powders. We expect these products to find applications in textiles, functional fabrics, and protective gear for first responders, composites for wire and cable insulation, and building materials to name a few. These product families would open a number of new markets with significant growth potential for NEO. And we have only begun to scratch the surface with these technologies. Now turning to rare metals, after a couple of negative quarters, a rare metal segment had a profitable quarter. Its core end markets of metals and alloys for the aerospace industry is starting to trend up, although recovery is expected to lag other sectors. Still, new aircraft deliveries from Airbus and Boeing are restarting after a full year of disruption. Notably, Airbus just asked its suppliers to prepare for an 18% increase in the production of its A320 family of jets during 2022. would come on top of its existing production targets for this year. On the space side of aerospace, materials innovation continues to advance the frontier with satellite, space station, and propulsion systems. In fact, and this is reflective of the quality of the rare metals and alloys we produce, our high performance metals and high performance and high purity metals are used in the production of rocket engine nozzles for the SpaceX program. We anticipate the long-term demand from airspace to be quite favorable, but our teams are also actively engaged in a drive to diversify our air metals portfolio beyond traditional aircraft engine components. We're gaining traction with tantalum and niobium, in advanced electronic applications, which are often overshadowed by airspace, but do have higher margins and can provide better returns. Last, I want to touch on the general rare earth markets, which remain highly fluid given the recent manufacturing tailwinds. We've seen commodity rare earth prices begin to soften slightly over the past few weeks, particularly for some of the heavier elements such as dysprosium and terbium. which are off their recent highs. The same holds for neodymium, a key constituent in our magnetic products. We believe this is helpful in mitigating some pending anxiety across the industry and its supply chains. We remain operationally focused on pursuing diverse sources of raw material supply, and we continue to gain traction in terms of qualifying feedstocks with new suppliers. A recently announced supply initiative with Colorado-based Energy Fuels continues to ramp up. This feedstock material, which starts as a byproduct from existing heavy mineral sands mining in the southeastern U.S., will help diversify and expand the feedstock sourcing at our SILMET facility in Estonia. This is particularly important given that SILMET is Europe's only operating commercial rare earth processing facility. and demand for particularly magnetic rare earths is expected to rise significantly in Europe as a result of electric vehicle and other environmental technology initiatives. To close, the state of NEOS operations remains strong. COVID cases in most of the regions where our people and plants are located are abating, although we remain highly vigilant against resurgence. Some level of uncertainty remains with the future trajectory of the pandemic, of course, but I believe that our global teams have managed these impacts extraordinarily well over the past year, and we're prepared to adjust our operations as needed as things unfold. I'm very proud of our teams around the world for their dedication, admirable performance, and astute judgment in the face of what has been a very challenging past 12 months. We'll continue to invest in our strategic initiatives, and we remain focused on how to best grow our business and provide strong financial performance for our shareholders. Let me now turn the call over to Rahim.

Thanks, Konstantin, and good day, everyone. The powerful volume trend within MagnaQuench in chemicals and oxides continued throughout the first three months of this year and contributed to our strongest quarterly financial performance since becoming a public company again in 2017. We saw very strong demand in our magnetic powders, our compression molded magnets, our environmental autocatalyst products, our gallium trichloride products, and several other rare earth products generally tied to magnetic applications and semiconductor markets. As a result, our product volume shift during the quarter set new records for both magnet quench and chemicals and oxides since NEO relisted as a publicly traded company. Product volumes were supported by an increasing trend in pricing for rare earth elements in the global markets. This trend led to higher average selling prices in our MagnaQuench products and many of our chemicals and oxides products. As we noted in our Q4 2020 call, global prices for magnetic elements were up some 70 to 100% over Q3 2020, before retreating some 15 to 20% in recent weeks. The combination of higher volumes, higher prices, supported by positive mixed attributes, benefits of lead lag on material cost, and the benefits of better absorption from higher volumes, all led to the stronger results achieved this quarter throughout our business. In this morning's overview of our results, I'll provide a comparison to both the prior year quarter and the recent sequential trend from the fourth quarter of 2020. Given the current state of recovery in many of our end markets, the sequential trend is likely more important to ascertain the current state of our business. It's worth noting that strong growth year over year is based upon a mixed first quarter from 2020. At that time, the adverse impact of COVID-19 was just beginning to be felt and was mostly limited to the specific geographies within China and Asia. Accordingly, our first quarter 2020 volume outcomes were mixed as the COVID epidemic transitioned into a full global pandemic. The second quarter of 2020 realized the full brunt of shutdowns and stay-at-home orders, and as such, in the second quarter of this year, as we begin to lap the worst period related to COVID, we expect to report extraordinary growth in our financials. However, our key expectations and target is to continue to grow from other historically normalized quarters. Turning to the quarterly results. On a consolidated basis, during the first quarter, we reported $130.9 million in revenue, compared to 90.7 million in the prior year period and 110.4 million during the fourth quarter of 2020. We reported net income of 7.6 million or 20 cents per diluted share. Our adjusted net income in the quarter was 15.1 million or 39 cents per diluted share. We reported adjusted EBITDA of 22.4 million, which compared to 9.6 million in the prior year period and 12.3 million in the fourth quarter of 2020. Layered on top of this fundamental strength in demand Innovation across many of our product portfolios is resonating with our customers. We believe we are continuing to gain increased market share in both magnetic and catalytic applications. This is evident in our magna quench volumes, which reported a record 1,725 metric tons during the quarter. This compares to 1,271 metric tons in the prior year period and 1,626 metric tons during the fourth quarter of 2020. We have observed many of our customers working diligently to refill their inventory pipelines as general economic activity recovers. While this strength was almost across the board, I'd highlight the continued growth in automotive pumps, hot water circulation pumps, advanced electronics and home appliances. We continue to be encouraged by the progress made in electric motors across the automotive platform, regardless of drivetrain. That said, our EV-specific product portfolio is trending in the upward direction. Traction motors and motors related to thermal management, such as active grill shutters and cooling pumps, have an important significance as electric vehicles continue to dominate the engineering bandwidth of the OEMs. I think it's worth pointing out that magnequench powder solutions that are specific to hybrid and electric motor applications have grown tremendously over the past few years even going through the COVID-riddled 2020 period. Our emerging magnet business continues to exhibit strength in electronics and has now been expanded to focus on additional automotive applications. As Constantine pointed out, our magnet business, albeit still relatively small, has more than doubled the volumes since Q1 2020, and we will continue to invest in further capacity to accommodate this continued growth that we see from a number of customers and across a number of applications. The long-term macro growth trends around electrification, lightweighting, increased use of sensors and actuators, and improved performance remain long-term tailwinds for this business. Over the short term, we expect the recent pace of inventory restocking to temper, along with the potential adverse impact of the semiconductor shortage on the automotive sector. Regardless, we are encouraged to start the year with an aggressive showing. Shifting to our chemicals and oxides business unit, revenues for C&O were 54.4 million in the first quarter, compared to 33.5 million the prior year period, and 48.4 million during the fourth quarter of 2020. The increase in revenue was driven by both improved pricing and improved volumes. Pricing across rare separations business was higher during the quarter compared to the prior year, again as the magnetic and heavy elements continued the upward progression that we have seen since the fourth quarter of 2020 and continued through most of March. This general upward trend in pricing leaves more opportunity for margin in providing rarer solutions to our customers as well as provides a lead-lag benefit in the current quarter. Within our AutoCatalyst portfolio, our new innovative products continue to gain momentum with customers and overall product volume outpaced the recovery trend in light-duty vehicle sales. While we encourage the adoption of electrified vehicles, the reality is that the next generations of emissions technology for hybrid vehicles will continue to have a significant share of the market for consumer vehicles over the next 10 years. The challenges of meeting emissions standards when a hybrid internal combustion engine is in effect idle during part of the vehicle runtime requires a much more complex catalyst emission system. We believe this is a key opportunity of growth within our catalyst portfolio, and we continue to develop innovative products to meet these needs. Many of our customers are working to rebuild inventory and safety stock amidst the challenging global supply environment. While we are carefully monitoring the semiconductor shortage and plastic to resin shortage, potentially delaying customers' orders, we have seen little impact on our orders to date. Our rare metal segment reported 16.7 million revenue during the quarter, a decrease from 20.5 million in the prior year period, and an increase from 12.1 million during the fourth quarter. A comparison to the prior year quarter here for rare metals is a little different than for magma quenching chemicals and oxides. Rare metal sells products primarily to customers outside of China and Asia, and primarily into the aerospace industry, among other end markets. When COVID began to impact China and Asia markets in Q1 2020, this was less the case for rare metals. But the impact to rare metals occurred in later quarters and, in a sense, was much deeper than magma quench and chemicals and oxides. In the first quarter of 2021, we continue to see a slower aerospace market, although there are encouraging signs of recovery, as Constantine mentioned. Our non-aerospace markets have demonstrated more recovery trends as well. including for products going into advanced electronics industries and the healthcare space. Rare metals reported adjusted EBITDA of $900,000 in line with the prior year result and an improvement from our fourth quarter results. The loss during Q4 was related to a lower of cost or market adjustment related to inventory purchases during the first half of 2020. When the full year 2021 prospects for rare metals will largely be influenced by the direction of the aerospace industry. Our commercialization efforts to identify new products and applications is beginning to yield results. Rare metals has made some key progress with expanding its customers and markets so that even for products that were traditionally focused at aerospace, those products are now being qualified with new customers that have growth exposures to non-aerospace markets. While this progress, with this progress, we continue to see a path for our rare metals business that is not adequately conveyed by the current level of financial performance. And we look forward to seeing these key initiatives having some impact in future quarters. Returning back to our consolidated results, we reported SG&A expenses of $14.1 million, an increase from $12 million from the prior year period, and a decrease from $16.1 million in the fourth quarter of 2020. There remain slightly elevated costs related to the secondary offering announced and completed during the quarter, and we incurred elevated legal defense fees in the quarter. In the first quarter, we took a charge of approximately $7 million, which is shown in the other expense line item on our income statement. This charge is our estimate of damages that could be awarded in the future because of a recent court decision in Germany to uphold a competitor's patent. which a lower court had previously invalidated. We have appealed the previous infringement ruling, which is still pending, and we intend to prosecute our appeal vigorously. The recent ruling will not have a material impact on future sales because NIO has not sold the affected products into the related markets for several years. These expenses were slightly offset by some restructuring benefits within the rare metals business. We closed the quarter with $55.6 million in cash, a decline from $72.2 million at year end. And as noted, we anticipated a substantial investment in working capital with a combined $27.4 million investment in working capital balances. As we discussed earlier, we observed a substantial increase in rare costs and prices in the quarter, and these increases impact working capital requirements, both the cost of accounts receivable and inventory. These higher inventory costs have started to work through the system and we anticipate an appropriate flow-through in the cost of goods sold over the next several months. We invested $1.6 million into maintenance and growth-related capital projects, and we also paid a dividend totaling $3.1 million during the quarter to our shareholders. Our free cash flow conversion was 92% during the quarter, and we remain confident that our cash balance and balance sheet provide ample liquidity to operate and to grow our business. With that, I'll open it up for questions.

As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question is from the line of David Ocampo from Cormac Securities. Your line is open.

Hi, David. I just wanted to zero in on your cost pass-through provisions here. Since we've heard from several other companies that they've moved to at-will pricing or even monthly pricing, just given the amount of movements that they're seeing in raw material costs and freight costs. So with that said, are you starting to see any customers pushing back against that, or are you pushing your customers to reduce the lag time that you may have in your contracts?

Let me start with that, Rahim, and I'll hand it over. David, the bulk of our business is on price adjustment formulas, whether monthly, quarterly, semi-annually, or even annually. But most of our business is on relatively short-term price adjustments. Our customers are used to it. The markets are used to it. We haven't had any significant pushback. There's always growling and so on, but we've been able to put price adjustments through, and we've done so whenever we've seen volatility, and we've been quite successful. So I expect that situation to continue. So perhaps Rahim can provide some additional color in this.

Well, I think that that covers most of the commentary, unless David wants to go anywhere else. I mean, maybe the only other thing that I'd add is kind of, you know, this has been strategically important for Magnet Quench for many years. The one difference I would say in Magnet Quench now is the magnet business, which, as you know, we acquired a small magnet business last year and that had grown that significantly. So for that business, it has been much more, as you've described it, where we are, you know, having to have more dialogue with our customers is, as the company that we bought didn't have pass-through provisions necessarily in all the parts. But our competitors are facing the same price dynamics that we are, and we've been successful that having frank discussions with customers, they understand the market. So it hasn't been an issue. But it's always something that we have to focus on, we have to be mindful of, and we always work with our customers proactively and collectively on.

That's great. And then maybe just on the inventory that you moved this quarter, I imagine it's lower cost. Is it possible to parse out what the margin improvement was from that? I'm just trying to get a sense on what the sustainability of the dollar contribution per ton is going forward.

Yeah, I hear you, David. Honestly, it's quite a difficult exercise. I think that we're all acknowledging that there's a significant benefit of pass-through, of the timing of the lead lag in the business. We don't quantify it specifically, quite honestly, because It depends on how old every piece of inventory that you had was, what particular customer in what particular region bought inventory. For example, a sale in China is actually pretty quick in terms of the turnover of raw material, whereas a sale in Germany would be coming out of inventory for several months back. We don't necessarily quantify the specific impact of lead lag, but I think that we watch the trends and we watch the general movement. We understand the flow in our business. You know, it's a healthy contributor to the quarter, but we don't have a number.

And do you have a sense on how much of that low-cost inventory is left on your books? Is it largely done in the quarter?

Price increases happened actually throughout the quarter. So, you know, even when we talk about prices that have come down, you know, in the magnetics and dysprosium and the like of, you know, 10 to 15, maybe 20% since their all-time highs, The inventory we have in our books is not necessarily purchased at the time of the all-time high. So the inventory that we have in our books is at a lower average cost than the average selling price in Q1. So therefore, we actually do expect that we would still see some lead-lag benefits at least through the first part of this quarter as we work through some kind of the average purchases in Q1 and then maybe As we get to the end of the quarter or into Q3, we probably start seeing a little bit more normalization there.

That's great. That's my two questions. I'll hand the call over. Thanks, David.

Once again, if anyone would like to ask a question, please press star 1 on your telephone. Your next question is from Mark Neville from Scotiabank. Your line is open.

Hey, good morning, guys. First off, maybe just to close the conversation on the margin, just so I understand, again, the Q2 will see some compression, but the Q3 is probably when you see a more normalized number.

Is that correct?

It is plausible whether it's absolutely correct. Yeah, I think directionally it makes sense. But, you know, if... it all depends what rare earth and therefore raw materials will do in the next couple of quarters. But I think what you expect makes sense.

Sure. I'm thinking directional because I'm not really sure what normal is anymore, I guess.

Mark, we've been notoriously unsuccessful in predicting what rare earth prices will do even in the short term. So, We don't want to stick our necks out as far as this.

Yeah, understood. I guess a couple questions just around volumes. I guess maybe just first on the semiconductor shortage. It actually doesn't sound like it's really hurt your business at all or you've seen any disruption. It actually maybe sounds like an accelerator. Am I sort of hearing that right or reading that right?

Yeah, the short-term effect appears to be almost contradictory to what – you hear what you read in the press. As I said, our factory automation segment has done really well with increased orders for those high-precision torquey motors that go into the robotic arms, mostly in Japan and in Asia, of course. But also, in almost a perverse way, the conversations we've had with our Tier 1 manufacturers customers in the automotive supply chain have suggested that the OEMs facing a semiconductor shortage would probably end up shifting the available semiconductors to higher-end luxury models where they make more margins than the entry-level sort of stripped-down models. Well, the reason why this might have a perverse effect is we sell a lot more magnets and magnetic materials and more catalysts for bigger engines in the higher end models. So almost in a bizarre way, we may end up doing better in that application. However, let me not downplay the seriousness of this. If there's a 10%, 20% slowdown across the board and automotive output, I do expect that everybody, you know, OEMs, tier 1s, tier 2s, and the entire supply chains will see that effect. But, you know, within that context, it may not turn out to be as bad for us as it could be for a lot of other people. Rahim, I don't know if you'd like to add some more color on this. Nothing to add, Hans.

Thank you. That helps. That's super helpful. Maybe, I guess, just staying on the volumes. Obviously, it's a very strong Q1. I don't think there's a ton of seasonality in your business, but again, I appreciate there was some sort of inventory rebuilding. I'm curious just to hear your thoughts on what the cadence of volumes through the year might directionally look like, just so we don't get too far ahead of ourselves here.

Sure. Let me say something about seasonality because historically, the first quarter of the year is not our best quarter. And, you know, there are two fundamental reasons. On the electronic side, you know, supply chains are digesting Christmas, so they tend to be a little slower. And more importantly, in manufacturing across the board, you have two to three weeks of a shutdown in China and to a lesser degree in the rest of Asia over the Lunar New Year. Well, that didn't happen this year. Plans by and large ran pretty well flat out through the Lunar New Year for a number of reasons. Demand driven, of course, but also I think in China, return of the workers back to their towns and villages for the Lunar New Year was discouraged. So they continued to work and they didn't take holidays because of COVID. So it was an unusual first quarter in that regard as well. So volumes, yeah, typically, at least in the electronic part of our business, As I mentioned, the first quarter is the slowest. Second quarter is better. Third quarter is the strongest as the electronic supply chains are running flat out to put smartphones and PS5s and the like on shelves for Christmas. And then fourth quarter starts to slow down, hits bottom in the first, and then it picks back up after that. So this clearly isn't what happened, but we had – a multitude of impacts because of COVID, because of automotive demand, and so on and so forth, that clearly masked all the things we would normally expect to happen in the quarter.

If I could just ask one last question, again, thanks for that. One last question just around CapEx. Look, it seems like there's growth coming from a lot of places here. I'm just curious for your thoughts around capital investments. And again, I think you mentioned sort of running at sort of full capacity. So just maybe thoughts around that. Thank you.

Sure. The one area that we flagged that is probably more likely that we will make some CapEx investment decisions this year is expanding magnet capacity. We've already expanded that business a couple of times. We're running flat out. We're seeing a very heavy order book across the board, whether it's automotive or electronics or household goods. And by the way, next time anybody's looking for a massage gun, go for the more expensive model because it's likely to have an electric motor that has one of our magnets in it. So this is really the area that hurts where we're managing our order book very carefully to match our capabilities to produce. We don't want to disappoint customers. So this is clearly an area that we will need to reevaluate our capital investment strategy there. On other issues, I mean, we see perhaps the continuing product line diversification between China versus outside of China. So we could be making some modest investments in Thailand and in SILMED in Europe to continue to diversify, as I said, our capabilities there. But, you know, other than the most pressing need, though, as I mentioned, is magna productions.

All right. Thanks a lot for taking my time.

And, you know, these are not investments in the tens of millions. I mean, we're talking about the low single digits in millions. Right. All right. Thanks again. Appreciate it. All right. Thanks, Mark.

Again, if anyone would like to ask a question, simply press star 1 on your telephone keypad. There are no further questions at this time. Ladies, oh, apologies. We have, sorry, the participant just dropped out. All right. There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you again for your participation and have a wonderful day. You may all disconnect.