Neo Performance Materials

Good morning, ladies and gentlemen, and welcome to the NIO Performance Materials, Inc. Q4 2024 Earnings Conference Call. At this time, our lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you need assistance, please press star zero for the operator. This call is being recorded on Tuesday, March 18, 2025. I would now like to turn the conference over to Irina Kuznetsova, Director of Investor Relations for NIO. Please go ahead.

Thank you, Operator, and good day, everyone. Today's call is being recorded. A replay will be available starting tomorrow in the Investor Center on our website at newmaterials.com. On today's call are Hinn Solan, now President and Chief Executive Officer, and Jonathan Batch, NEOS Chief Financial Officer. Please note that some of the information you will hear during today's presentation and discussion will consist of forward-looking statements. including, without limitation, bills regarding revenue, EBITDA, adjusted EBITDA, product volumes, product pricing, other income and expense measures, cash returns, operational changes, and future business outlook, including potential expansion plans and contracts. Actual results with trends could differ materially from those discussed today. For more information, please refer to the risk factors discussed on NEAL's most recent financial filings, which were filed on CR earlier today and also available on our website. NEAL 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 US dollars. Non-IFRS financial measures will be used during this conference call. I will now turn the call over to Rahim.

Good morning, everyone, and thanks for joining the call. Today, I'll focus on four key topics. First, our financial results, highlighting our strong even of performance, working capital improvements, and balance sheet strength. Second, our execution and accountability in 2024, demonstrating how we delivered on our commitments to streamline our business and execute major projects on time and on budget. Third, our platform for long-term growth, which has been reinforced for our industry-leading capabilities in permanent magnets, emission catalysts, and value-added metals. Then I'll turn the call over to Jonathan for a deeper dive into the numbers before closing with our 2025 outlook and then opening up the call for Q&A. Before we get started, a quick comment on the strategic review process. As we announced previously, we began a comprehensive strategic asset review across our geographic and operating footprint. to consider strategic alternatives and opportunities to maximize value for our shareholders. The strategic review process is continued under the leadership of NEO's special committee and financial advisors. In the context of the strategic review, we have continued to take steps to optimize NEO's business, including the divestment of non-core assets, executing improvements in operational performance, and progressing with major capital programs. There can be no assurance. that the strategic review process will result in any transaction or any alternative, nor any assurance as to its outcome or timing. MEO does not intend to comment further unless it determines that further disclosure is necessary or appropriate. Okay, so to begin, 2024 was an incredible year for MEO. We are pleased to report exceptional financial performance with adjusted EBITDA exceeding our guidance rate. Full-year EBITDA grew more than 70% year-over-year to $64 million, including $21 million in Q4. This growth was broad-based across our portfolio, with Magnet Fletch delivering a full-year adjusted EBITDA increase of 21%, and Rare Metals more than doubled its EBITDA over the prior year. Nearly all facilities contributed to this strong performance. And our outstanding performance in 2024 has reinforced our momentum and positioned us to continue success. In addition to EBITDA growth, we also achieved significant working capital improvements, generating $52 million in cash flow from operations. Working capital efficiencies, along with higher cost controls, strengthened our cash flow and helped fund key strategic projects, including our permanent magnet facility in Europe and our emissions control catalyst facility. To maintain strong financial flexibility, we secure debt financing to optimize our capital structure while generating sufficient cash flow from operations, including working capital improvements. Looking ahead, we see further opportunities to enhance cash flow and capital efficiency, supporting our ability to self-fund this space of growth. Future funding decisions will be guided by our capital allocation priorities and the most advantageous options available to the company and our shareholders. Our strong balance sheet remains a key pillar of our financial stability. We ended the year with $85 million in cash and ample liquidity, successfully executing our strategy to right-size leverage while securing additional debt capacity to deliver our two major building projects. This solid financial foundation positions Neo for accelerated growth as we execute our transformational projects that will define our next phase of future growth. Secondly, we are proud to note that over the past year, we have delivered on every commitment we made at the end of 2023 and more. Our focus on execution, efficiency, and strategic transformation has strengthened our business, improved our profitability, and positioned NEO for long-term growth. To give a quick overview of some of our accomplishments, we have launched our emissions catalyst control facility, re-qualified with our customers, and achieved target run rate production for the facility. We advanced our European permanent magnet plan, which is nearing completion and on track for launch this year. We streamlined our portfolio by divesting and closing non-core assets to sharpen focus on midstream and downstream magnetics and critical materials. We want important new customer programs in a competitive marketplace. We diversified our rare earth supply by securing additional contracts with sources outside of China. And again, we executed all of these things while focusing on cost controls, growing EBITDA, generating cash flows, and preparing the company for further growth opportunities. A major highlight of the year was the successful execution of two critical growth capital projects. Our new emissions control catalyst plan was completed on time and under budget and is now fully operational. This highly automated world-class manufacturing facility operating with a best-in-class cost structure not only enhances our competitive positioning but also provides significant opportunities for future growth. Meanwhile, our European permanent magnet facility remains on track, with the core building completed, 90% of the equipment installed, and commissioning well underway. We also secured a major Q1 automotive supplier award for our permanent magnets. This is an important milestone in our growth strategy and a clear validation of a strong market demand. We secured a customer commitment even before the building was completed. Beyond executing our growth initiatives, we have taken decisive steps to optimize our manufacturing footprint, simplifying our portfolio, and sharpening our focus on higher margin value-added businesses. We closed non-core operations, including the hydrometallurgical processing of niobium and tantalum, which immediately turned that portion of our rare metals business into profitability. Additionally, we completed the sale of our gallium trichloride facility in Oklahoma in December of 2024. The sale of our two Chinese separation facilities, Jammer and Zammer, continues to advance and are expected to close here in the first half of 2025, generating approximately $30 million in cash. This transaction will strengthen our balance sheet, reduce earnings volatility, improve the return on capital employed, and enhance our geographic footprint. In addition, we strengthened our supply chain through new MOUs for rare earth separation and secured multiple new customer agreements across key business segments, reinforcing our strategic positioning in critical materials. With the heavy lifting of our transformation now largely complete, we are looking ahead to the next phase, one that is centered on higher profitability, stronger cash flows, and unlocking new growth opportunities in the future. And as we look at future growth opportunities, we are proud to say that NEO has the most vertically integrated permanent magnet supply chain outside of Asia, including separation, metalmaking, and magnet manufacturing. This is a game-changing development for Western supply chains and the global critical materials independence. While China produces approximately 60% of the world's rare earth elements, it dominates over 90% of rare earth processing and magnet manufacturing. This extreme concentration leaves industries vulnerable to geopolitical headwinds and adverse developments in regional trade policy. Our European permanent magnet facility is positioned to become one of the world's most impactful rare earth projects. We are not just talking about it, we're getting it done, and we're getting it done quickly. With our long history and strong relationships in securing materials from numerous rare and upstream providers, we now have a facility that is fully built and backed by decades of operational expertise, ensuring a complete, reliable, and independent supply chain for high-performance permanent magnets that are used in electric vehicles and other advanced technologies. Our new emissions control catalyst facility is also set to become a major driver of future growth. As one of the most automated and cost efficient plants in the industry, it minimizes sustaining capex while maximizing cash flow. With tightening emission regulations globally, NIO is well positioned to grow its market share in auto catalysts for internal combustion, hybrid, and alternative fuel vehicles. In addition, NIO will expand its offerings of additional forms of specialty oxides for key target markets. NEO's recycling business remains a valuable cash flow generator with strong demand in margins in hafnium and gallium. As sustainability and supply chain security gain importance, our expertise in recycling and refining these critical metals provides a competitive advantage. We operate the only gallium recycling and upgrading facility in North America. we operate the only happy and recycling facility in europe with decades of experience relationships and technology to be able to reprocess numerous forms of recyclable feedstock with that i'd like to turn the call over to jonathan for a review on the quarter thanks for gaming good morning everyone as outlined in our press release earlier today our fourth quarter and full year 2024 results highlight neo's continued momentum across key saints

Magnet punch delivered meaningful volume growth supported by increasing demand for bonded powders, traction motor applications, and permanent magnets across both automotive and industrial markets. Chemicals and oxides continued to underperform due to weakness in the separation business and the short-term impact of relocating the emission catalyst facility. Burn metals had an outstanding year with robust demand for hafnium, niobium, and gallium, contributing to significant year-over-year growth. We reported revenue of $135 million for the quarter and $476 million for the full year, with adjusted EBITDA of $21 million and $64 million respectively, exceeding our guidance range for the year. Adjusted net income came in at $5 million for the quarter and positive $2 million for the year, translating to diluted adjusted EPS of negative $0.12 and positive $0.05 per share respectively. On a full-year basis, revenue declined 17%, largely due to declining rare earth prices, which was partially offset by higher prices and volumes in rare metals. As we've discussed before, the pass-through pricing model in many of our contracts helps stabilize profitability and substantially mitigate gearing's impact from low rare earth prices. We continue to see the benefit of this pricing mechanism in our 2024 financial performance, particularly in our MagnaQuest business. This, combined with operational improvements and tailwinds in our rare metals business, drove a 900 basis point expansion in gross margins for the year. MagnetQuest delivered strong volume growth in 2024, with sales increasing 1% in Q4 and 8% for the full year. The business grew volumes in all of its strategic growth areas, including magnets, heavy rare earth-free powders and traction motors, and bonded powder spot sales. Leveraging decades of experience, the MagnetQuest business continues to innovate and adapt its product for the fourth quarter and fiscal year 2024 reached $7 million and $26 million, up 15% and 21% respectively. Adjusted EBITDA margin expansion of 460 basis points was driven by lower input costs, higher yield, process improvements, and workforce optimization efforts. MagnetQuest remains a core pillar of NEO's growth strategy with further opportunities as we expand our footprint into permanent magnets. 2024 was also a transformational year for our C&O business. mission control catalyst facility and executed our strategy to optimize our business. The expected sale of our rare earth separation facilities, Xamr and Jammer, marks our exit from the legacy separation business in China, furthering our efforts to reduce earnings volatility, optimize working capital, and focus on high-value downstream operations. These investments are expected to be accretive or neutral to adjusted EBITDA, reinforcing our shift towards a more profitable and resilient business model. Volumes for the year were naturally impacted with the closure of Xamarin Q224 and relocation of our emission control catalyst facility. However, the segment remained operationally efficient and rare earth price stabilization helped offset some headwinds. Adjusted EBITDA for 2024 was approximately $5 million, reflecting these dynamics. With the emission control catalyst facility fully operational and most products we qualified, the team is now focused on enhancing operational efficiency and gaining the full benefit of this new highly automated facility. This is expected to translate into improved margins and reduced inventory. Demand for emission control catalysts in hybrid and alternative fuel vehicles continues to strengthen, and with our industry-leading cost structure, C&O is set to drive sustainable growth and expanded margins in 2025 and beyond. Transitioning to our rare metal segment, which delivered another exceptional year with strong performance across all facilities, particularly in our apneum recycling business. Adjusted EBITDA grew by 28 million year-over-year, driven by strong in-market demand, strategic inventory management, and effective commercial execution. While we expect some margin normalization as happy prices have stabilized, the segment's core fundamentals remain strong. With solid macro tailwaves driving the growing demand for critical materials and our operational execution, we are confident in the continued success of our rare metals business. We ended 2024 with a strong cash position of $85 million, reflecting our disciplined approach to capital management while funding major growth projects. We generated over $50 million in cash cooperation and invested approximately $60 million in our new emission control catalyst and permanent magnet facilities. With efficient and timely execution, these two large growth capital projects are nearly behind us. Most importantly, there is minimal project construction and execution risk remaining. Our mission control catalyst facility is fully capitalized assets are in operation. The facility has ran full production. Our current mega facility has received all major pieces of equipment and is currently going through the installation commissioning process. The remaining cash spend across both these projects projects is estimated at 36M, most of which will be spent through the first half of 2025. Our working capital initiatives, including inventory optimization and strategic inventory releases, contributed around 20 million in improvements, enhancing our cash flow and financial flexibility. We're focused on generating additional cash flow, and we anticipate further benefit from working capital improvements of approximately 20 million in 2025. In addition, we expect to receive approximately 30 million in proceeds from the sale of our China separation assets, which is expected to close in the first half of 2025. As we are nearing the end of the major capital cycle, we are transitioning into a phase of lower capital requirements with a modest sustaining capex of approximately $4 to $8 million per year. This positions the company well to deliver strong pre-cash flow moving forward. In 2024, we returned $12 million to new shareholders through dividends and completed our normal first issuer bid with over $2 million in share buybacks. Additionally, we drew $50 million from our EDC credit facility to support key strategic projects. Our liquidity remains strong with an undrawn 25 million EDC credit facility, an undrawn Estonian government grant of up to 10 million, and total cash position of 85 million. Despite investing approximately 100 million over the last two years in transformational projects, we maintained a low leverage ratio of 1.1 times LTI adjusted EBITDA and remain in the net cash position. With this financial flexibility and strong stewardship of our balance sheet, we look forward to continuing to execute our strategic growth initiatives in support of the business while maintaining a disciplined approach to capital allocation. Additionally, I'd like to note that NEO CNO Europe received a court ruling on an intellectual property case resulting in liability for approximately plus interest, an amount that is significantly lower than the original claim and was already accounted for in our financial statements, meaning there is no expected impact on our Q1 2025 or future earnings. The ruling is subject to appeal, but importantly, the patent in question has expired and does not affect our current products, sales, or operations. Turning back to our financial performance, our ability to maintain a strong cash position while executing on an industry where many peers face capital pressures. As Rahim noted, our disciplined approach has driven EBITDA growth, reinforcing NEO's resilience and positioning us to continue investing in long-term value creation. As we enter 2025, NEO is well positioned to sustain its momentum and deliver solid performance. We anticipate delivering 2025 adjusted EBITDA of $55 to $60 million, which is an increase to our previously communicated guidance of $53 to $58 million. This forecast reflects the impact of what we're having in crisis in 2025 and the sale of three facilities we discussed earlier. While we expect revenue to decline marginally, our diversified business model and strategic growth initiatives reinforce our confidence in the outlook. With that, I'll turn the call back to Rahim for closing remarks.

Thank you, Jonathan. Our confidence in the long-term growth and value creation is driven by our strategic expansion in magnetics and critical materials, broadening our capabilities beyond bounded powders into magnets and assemblies, and to capture new market opportunities and strengthen our position across the body. Magnifunch has long been at the forefront of magnetic materials innovation, pioneering neodymium magnet technology, and establishing a global leadership position in bonded magnetic powders. Over the years, we have expanded our expertise beyond powders, strengthening our position as a fully integrated supplier. The acquisition of SG Tech in 2023 further enhanced our European presence and advanced our capabilities in soft magnetic composites and ultra-high density magnetics. Today, we are building on this foundation with our move into sintered permanent magnets, a key next step in our growth strategy. Our excitement for the growth prospects from permanent magnets is very high, with customer sample qualifications beginning in 2025. Interest from prospective customers is enormous, and we expect to secure additional awards over the coming years. This, of course, is still phase one of our permanent magnet strategy. Over time, we will share more about phase two and phase three, as this market opportunity is measured in the billions of dollars, and Neil is a leading candidate to win significant business here. In our emissions catalyst business, we are targeting double-digit growth, driven by increased production volumes, cost efficiencies, and new customer wins. Our new state-of-the-art facility is among the most automated and cost-efficient in the industry, ensuring high cash flow conversion and strong scalability. New and existing customer interest is high, and we have numerous customer visits and new programs in the pipeline. Beyond these core growth areas, we are focused on operational efficiency and cost reduction, Manufacturing cost savings will come not only from the emissions control catalyst facility, but also from the ongoing optimization in all of our plants. In 2024, we achieved a 20% reduction in conversion costs at our largest magnet wedge plant. On the SG&A side, we are targeting a discipline reduction of approximately 10% per year in each of the next three years, further improving efficiency and profitability. And in 2025, we have placed a renewed emphasis on media engagement, investor communications, and shareholder awareness to ensure that our unique positioning and our growth trajectory are fully recognized by the market. With a strong balance sheet, a clear vision, and solid execution, we enter 2025 with confidence. We are building a business that is not only profitable today, but will continue to deliver long-term value for our shareholders. With that, Joan, I'd like to open up the call for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. If you're using a speakerphone, please lift the handset before pressing any keys. The first question comes from David Ocampo at Cormark Securities. Please go ahead.

Thanks. Good morning, everyone. Rahim, my first question is just on, this is probably my first time hearing about a Phase 3 magnet facility. Curious if that's all production that's going to come out of Narva, or are you guys thinking another location outside of Estonia?

I think phase 2 is likely to stay in Estonia because it just makes sense to leverage the capital and leverage the infrastructure in place. Frankly, in 2005 facility, we can do so much more and we would originally thought of it as a 5000 time facility and we just approached it incrementally. So, yeah, but I do think that there is a phase 3 and there's a phase 4 and it's all likely to be outside of Europe into other jurisdictions. We won't be specific as to what that means just yet. But I think that this market is enormously large and we remained extremely well positioned. It's just about finding the right timing to execute those requirements.

And I think you've spoken in the past about a steady ramp that's expected out of Estonia. Just curious what we should be modeling in for 26. Is it 10, 20, 30 percent of the capacity and then full ramp by 28 is still the target?

Well, the program that we have would actually just launch at the end of 2026. We would expect to win another program or two here during the year 2025. Some of the things that we're looking at do launch in 2026. 2026 might look like in terms of the timing of that launch. But I do think that this facility will start ramping quickly. And I think that there's really a lot of customer interest and we will be stacking programs on top of each other as we execute.

Okay. And just the incremental orders that you are expecting to receive, is that mostly just because of the ongoing tariff banter or is it just because you guys are are getting closer to the finish line here now, and you're opening up more of your order books.

Yeah, no, I don't. Sorry. I think you said, is it a result of tariffs? And I don't think it's a result of tariffs. I think it's a result of much more fundamental demand. As you know, 90% of magnets are made in China. So the European Critical Raw Materials Act, you know, that came into place in 2024. But I think even independent of kind of the European Critical Raw Materials Act or tariffs in the U.S., I think it's customer behavior. that is what we would consider to be the most indicated driver for growth. And the amount of interest we're seeing, the amount of tours we're managing, the amount of opportunities we're seeing, it's just very large and very impressive.

Okay, maybe asking it a different way, are you guys starting to see more of a premium getting reflected just because there is an uncertainty if one of these magnets will make its way out of China in a few years or will be limited in some way or another?

Yeah, look, I think business is always competitive. The automotive industry is competitive. So certainly there's dialogue around premium because competing with the overcapacity and the installed base in China is difficult. And I think customers value the integrated supply chain that exists outside of China. The size and the quantum of those premiums are things that we don't generally talk about. But look, the industry is competitive, but I think we have... significant advantage because of our experience and the trust we have with our customers and our integrated position.

Okay, that's my line of questioning. I'll hop back in the queue. Thanks, Reem.

Thank you. The next question comes from Marvin Wolf at Paradigm Capital. Please go ahead.

Hi, yeah, can you guys hear me okay? Pretty perfectly, Marvin. Hey, congratulations on a great quarter. Yeah, and it's interesting to hear all this stuff about the magnets in Europe. What I was wondering, there's a lot of banter about tariffs, but not a lot of specificity, if you will, out in the marketplace and from the main tariff component in the world. We know you don't have much exposure to tariffs, but people keep asking the question, will there be any? Because now you've got The European stuff where if parts are coming in from Europe into the US, it could be a tariff and all that. Do you think most of these tariffs in your case can be passed on and will be actually worked into the price of the product? Or do you think it'll make it tougher?

Yeah, I think that there's two factors on how we think about tariffs. And of course, sometimes our thinking has to change day to day. But nonetheless, I think fundamentally there's two factors that we think about. One is, does the U.S., in particular in this example, have an independent supply chain that would fill the gap? And two, the relative impact of tariffs, jurisdiction. So, in terms of those things, you know, the three products probably that we ship into the U.S. would be recycled hafnium. And I think the fact that it is a recycled hafnium product from Europe. that we can process in Europe. So in that universe, there's just not a domestic supply chain in that universe. And our largest competition, we think, is China. And I think that there's more tariffs affecting China than there are in Europe. Another product would be gallium. And of course, we recycle and upgrade gallium in Canada for shipments into the U.S., but also shipments into Asia and other places in the world. And obviously, the U.S. doesn't have a source of gallium, and China has put 97%. and is the dominant gallium provider in the world. So in that circumstance, if you want to grow the chip industry in the US, you're still going to need gallium. So I'm not sure that that's the tariff as a primary impact. And then the third is we do ship some catalysts into the US. And there are other catalyst players who have footprints elsewhere in the world. But you know, we ship most of our businesses on global business, we have a platform that runs in every jurisdiction of the world. So we would have to have those dialogues with customers on the impact. But I think You know, generally, the majority of the products that we ship into the U.S. are actually coming from Europe, not China. Obviously, there'll still be tariffs in Europe. But I think, again, relative tariffs and an independent U.S. supply chain would be the things that are most important to us. I think we're well positioned on both accounts.

Okay, great. That adds some color in what is a very cloudy picture right now. Yes, indeed. Thank you.

Thank you, we have no further questions. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your line.