NanoXplore Inc.

Good day and thank you for standing by. Welcome to the Q2 2023 NanoExplore earnings conference call. At this time, all participants are on the listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Martin Gagné, Director of Investor Relations.

Please go ahead. Good morning, everyone, and welcome to Nano Explore's fiscal 2023 second quarter conference call. Today, I'm here with Surush Nazarpur, our President and CEO, and Pedro Azevedo, our CFO. We will start with our prepared remarks and then a Q&A. Please note that our discussion will include estimates and other forward-looking information, which our actual results may differ from in the future. We invite you to review the cautionary language in yesterday's earnings release and in our MD&E regarding the various factors, assumptions, and risks that could cause our actual results to differ. With that, let me turn it over to Soroush.

Thank you, my friends. Good morning, everyone, and thank you for joining us today. Before we start, I would like to explain the reason for the early financial release. The last few minutes of trading on Monday afternoon, it came to our attention that a copy of our press release had become visible to some individuals with no intention on our part. In order to ensure all market participants have access to the same information at the same time, We chose to pull up the release the Tuesday morning before market opened. We followed all the regulatory protocols in learning of this information and followed IROC guidances for early release. I would like to thank all of our team members across our organization for their hard work and dedication. I'm grateful to everyone for being on this journey with us. I will start our prepared remarks with the impact of macroeconomics environment on our business, followed by a quick financial review of our second quarter. Then I'm going to expand on some of recent achievements and will report on the progress of our five-year strategy plan. I will end my remarks with some comments on Volta Explore. Let's begin with a macro overview. Despite hearing about a potential recession from economics in 2023, We believe some segments of economy can withstand a slowdown much better than the others. We currently do not see an impact from this Fed-induced economic slowdown to our business, and in fact, we are not seeing our partners slowing their graphene testing and validation process or planning to. There are two main reasons for this. First, the macroeconomic picture has limited impact on commercialization of graphene. As it is a nascent market and early adopters are generally market leaders, that can withstand the potential slowdown better. And second, heavy commercial transportation market, which represents almost half of our revenue, is recovering well and the fundamentals are improving as cheap shortage has been and supply chain challenges are abating. In fact, our main customers are increasing their production forecast. To summarize, we do not see a slowdown in our business, and we feel very good about where we're headed. Moving to our second quarter, we delivered a strong top-line growth and significant margin expansion. Total revenue grew 69% year-on-year to $31.7 million in the second quarter, which is a record level. And we delivered positive adjusted EBITDA for the second time in the last three quarters. Overall, we're quite satisfied with our graphene commercialization activities, as we see more and more successful customer trials. Our decision last year to focus on applications with higher probability of success was the right one, and we believe this will increase our return on R&D initiatives and speed up commercialization efforts. Let's just start with our transportation business. We are thrilled that one of our large commercial vehicle OEM customers approved the use of graphene to all current and potential future programs. The decision resulted from successful integration of our graphene in an existing program where our customer observed significant improvement in the quality of our composite products. Such decisions are rare in such a conservative market and will set the tone for other OEMs to follow along. This, in turn, results into more integration of our graphene in lightweight composite markets. In addition, just recently we got the approval directly from a large passenger OEM for graphene-enhanced plastics for exterior automotive applications. This well-known passenger OEM is an early adopter of graphene and has already certified our graphene and is using our graphene in its vehicles. The key benefit of adding our graphene to these applications is that it improves moisture resistance. This results into better material processability and less defective parts. This approval would have not been possible without our downstream acquisition of Canuck late in December 2021 and demonstrates our ability to expand our commercial activities with an existing client. Graphene market encountered with one-off products for a long time, and we're happy that our graphene is bringing tangible and sustainable value to our customers and enabling us to win more business with an existing platform. Moving to drilling fluid, One of our partners, which is a market leader in specialized drilling fluid applications, is showing that our graphene helped them with fluid loss mitigations and brought high thermal stability at very high temperatures, which speeds up the drilling process. Currently, they are setting us up as a vendor in the ERP system, and commercial discussion is ongoing. This vertical is especially attractive as it is a large and consumable market with significant loading potential of our graphene black powder. Just to give you some context, this vertical has a potential PAM of 256,000 tons of graphene. Turning to foam, several chemical companies that we are working with are seeing very positive performance with our graphene black solutions. We are involved in 30 technical validation programs, and we are seeing success in the majority of them. Based on these very good results, we're confident that our graphene integration will grow in this market. Graphene increases the thermal insulation properties by 10% to 15%, improves flame retardancy, and provides a more sustainable solution. We're also currently working with a well-known multinational chemical company in a late-stage trial, and results show that the combination of performance, cost, make graphene very attractive for insulation foam applications. The weather performance is driven by improved mechanical properties and enhanced weather ability. The partner will do further field trials, but based on these excellent results, we are confident that we can win this business and grow from there. Recall that this is a large market with potential time of 190,000 tons of graphene. In concrete, we're also receiving some very good outcomes. As an example, we're engaged with a major concrete manufacturer whose interest in our graphene black is high. We have been testing with this partner and saw a 20% improvement in compressive strength using their scalable formulation. Even though more work is required, these impressive results are very promising for our company. Remember, this is the largest total eligible market for graphene, equating to 6 million tons of annual consumption. Even a small market share would be significant for us. Another example is our ongoing development work with one of the market leaders in the cement additive market that achieved elevated mechanical properties after adding graphene to concrete admixture. Currently, they're moving forward with further field trials and with their own customers and championing the ASTM product certification effort. Certification process in cement markets cumbersome and long, having said that, this process can be accelerated significantly when a market leader is championing it. As we think long-term, Nanoexplore is keeping sustainability top of mind. We firmly believe that reducing the carbon footprint should be ingrained throughout the corporate sector and their respective supply chain. As we said in the past, our graphene black solution has an 80% lower carbon footprint than competing solutions, and customers are very interested in learning more. using more recycled plastics to definitely help lower GHG, but weak performance of such recycled materials hinders the vital spread use. According to a research paper from the Imperial College in London, recycling saves between 30% and 80% of carbon emissions versus virgin plastics, or equivalent to shutting down between 8 and 40 coal-fired power plants globally if all plastics were recycled. As noted before, graphene enables the usability of plastics by enhancing their rigidity and performance. As an example, we're supplying graphene to a sustainable packaging company from Latin America, and we're expecting more of such type of customers to use graphene commercially. Moving to our five-year plans, we're a conservative company, and the five-year plan we have announced is in line with this. Although early in the process, we have a strong conviction in our strategic initiatives, and the potential for our graphene consumption. Let's start with our SMC initiative. We are currently conducting our detailed engineering work and started discussion and negotiation with long lead item equipment suppliers. Despite being at this early stage, we are confident that we can optimize our capex investment related to main equipment. We are targeting September 23 for the start of procurement, which is on time according to our schedule. and the commissioning should be early calendar year 2025. We are targeting to finance this through credit facility and cash on hand. Light weighting will be a key theme for electrification of transport, and Nano Explorer is in a desirable position. Our solution can lower parts weight by up to 25%. It prevents the surface from blistering, thus creating a high quality and smooth surface finish, leading to lower paint cost. The reduction in consumed material reduces carbon emission and helps on the sustainability front. In addition to this, our SMC solution will improve key properties in battery enclosures for EVs. The overall battery-packed components are the heaviest part of the EV at around 30% of the vehicle weight. Battery enclosures are made of metal, but it is clear to us that by using composites coupled with our graphene SMC proprietary product, we can solve the weight problem for OEMs, which increases EV rates. This market is very attractive, not only because of the rapid rise in EV markets, but also because of high loading of graphene, which is around five times more than average loading in other composite applications. All in all, we're confident about the potential of our company in this growing SMC market. Moving to our graphene and battery material facility. The engineering work has started and we are looking for a suitable building to house our production lines. The facility will have a capacity of 12,000 tons per year consisting of 7,000 tons of anode battery materials and 5,000 tons of our industrial graphene products. As we said in the past, we will sell three types of battery material solutions to the energy storage market and to Volta Explorer as well. The three solutions are anode active material, and a performance additive consisting of our graphene-silicon solutions. And finally, we have our conductive additive products. We expect to commission our 100- to 200-ton-per-year graphene-silicon performance additive lines during 2023 by benefiting from XG's acquired assets and commission the rest by 2025. As noted before, we are very excited to enter into battery material markets. This market is expecting a strong pull as supply is limited and localized mainly in Asia. Since the Inflation Reduction Act was enacted last year, we have seen multiple new battery projects on the drawing table. The overall battery manufacturing capacity planned has increased from roughly 700 GWh to 1,000 GWh in North America by 2031, according to BMI, which makes the market dynamic very enticing for nanoexplored battery material solutions. As for our battery material, new R&D facility, which we announced after the XG acquisition, we're currently setting up the equipment and anticipating to have it up and running in a few weeks. The required lab equipment from XG, along with their important graph in silicon patterns, are key for our performance additive products. and more development will be undergoing in our new lab space. Switching gears to VoltaXplore. We have been working hard behind the scenes on the development side. First, we're improving and adding hours of testing, which is very important for optimizing the performance of these cells. As previously disclosed in our AGM presentation, which is in our website, the KPIs are impressive. Volta has a high energy density. It provides lower cell temperature, which results into safer batteries and are lighter in comparison to our competitors' products. As we put these lighter cells in a battery pack with thousands of them, it's going to make a difference in increasing the vehicle range and safety. Moreover, we are excited to have been selected to be a part of the Project Arrow. The unveiling of the car was very well received at the Consumer Electronics Show, in early January, and the Volta team was there to meet with interested parties. I want to reiterate that Volta Explore is a top priority for NanoExplore, and our desire to succeed has never been higher. We're confident about the prospect of Volta Explore because of the strong performance that our sales bring, along with the discussion we are having with the stakeholders and future customers. I will refrain from commenting further at this point on these discussions or on financing activities for obvious reasons. What I can say is that we are still committed to building a gigafactory in Quebec and are actively working to make this a reality. Moreover, the 2023 upcoming federal budget has the potential to be an important contributor to this project, and we hope to see programs that can compete with the Inflation Reduction Act in use. Finally, I would like to welcome Darren Hotz to the NanoExpro family as our new Vice President of Sales and Business Development for our Graphene Enhanced Composite Business and Battery Enclosure. Darren brings extensive experience in the auto sector and has worked with Tier 1 global OEMs throughout his career. With that, I will pass the line to Pedro.

Thank you, Soroush, and good morning, everyone. I will start with a review of our Q2 results. Then we'll be followed by our funding strategy regarding our five-year plan, and we'll close my remarks with our outlook for fiscal year 2023. Let's start with our Q2 results. Total revenues grew 69% to $31.7 million, but revenues from customers grew 71%. The increase in revenue was driven by higher volumes, a positive product mix including graphene-enhanced products, the acquisition of Canuck, which took place in December of 2021, a higher U.S. dollar FX rate, and price increases. These items were partially offset by lower tooling revenues. Our Q2 gross margin, excluding depreciation and amortization, was $5.6 million, an increase of $4.2 million compared to last year. As a percentage of revenue, gross margins improved by 1,000 basis points to 17.8%, and was driven by higher margin product mix, price increases, improved productivity, and better cost controls. Our adjusted EBITDA was positive $141,000, which is a gain of $3.3 million versus last year. As Soroush mentioned, this is our second quarter of positive adjusted EBITDA in the last three quarters and demonstrates our ability to achieve positive adjusted EBITDA more regularly. We expect our quarters to remain lumpy But our quarterly trailing 12-month performance, which is our preferred method of monitoring our progress, is decidedly trending favorably. The improvement in our adjusted EBITDA was largely due to higher gross margins due to the reasons I explained, partially offset by investments in SG&A related to additional headcounts, higher wages, and higher accrued variable compensations. As expected, the strengthening of the Canadian dollar during the quarter resulted in reversing part of the foreign exchange loss on hedging contracts we experienced in Q1 by $1.2 million during Q2 as the US dollar depreciated to $1.35 Canadian on December 31st from $1.38 Canadian on September 30th. As a reminder, as part of the foreign exchange hedging policy, we engage in forward contracts for up to 24 months based on expected net US dollar cash flows during the timeframe and record the monthly mark-to-market impact on the P&L. However, as mentioned during our Q4 2022 call, these variations are excluded from adjusted EBITDA as it is not deemed an operational item. With regards to our balance sheet, We end the quarter with $38.6 million of cash and cash equivalent and $10.3 million of available space on our credit line for a total liquidity of $48.9 million. This amount is just slightly lower than Q1 2023. The $4.2 million decrease in our cash position compared to Q1 is due to a repayment of $4.5 million of the line of credit and that payment of $1 million to the former Canucks shareholder as part of the terms of acquisition. During the quarter, we generated 3.3 million positive cash flow from operating activities resulting from positive adjusted EBITDA and improved working capital levels. Having a strong balance sheet as part of NanoExplorer's DNA and the heavy lifting done to lower our working capital levels allowed us to pay down our debt and solidify our balance sheet further. Our total debt stood at $10.1 million and was comprised of $8.6 million of long-term and $1.5 million of short-term debt. Moving to our five-year capital funding plan, as previously stated, our primary goal is to increase shareholder value and will structure our capital allocation accordingly. Since announcing our five-year strategic plan, the teams have begun a detailed review to identify the equipment needed, the partners we will work with, obtaining quotes and such for each of the initiatives in an effort to get a more accurate estimation of the capital required. So far, our more detailed work is confirming our early estimations remain reasonable and possibly higher than the final amount will actually be. In parallel with this work, we have entered into discussions with our existing debt financing partners to expand our existing debt structure into a more complete credit facility and plan to look at other lenders to ensure we have the lowest borrowing costs. We remain confident that government grants will provide part of the financing and the balance financed through debt. In the event equity financing is needed, it would not be until 2024 at the earliest. We will provide another update during our next quarterly call. Finally, considering our strong Q2 results and the visibility we have from our customers and partners for the second half of the fiscal year, we are raising our total revenue guidance for fiscal 2023 to a level between $115 and $120 million from the previously stated $110 million. With that, I will pass back to Saru first and finally.

Thank you, Pedro. Looking back a year ago and seeing what I see now, I'm even more excited about how our graphene commercialization efforts are progressing based on our latest accomplishment mentioned earlier. Whether we sell pellets, powders, or composite products, our graphene technology is at the core of our activities. It is the key enabler of our revenue growth because it helps boost performance and reduce carbon emissions for our customers. Finally, we do expect significant growth in the next few years as adoption accelerates. With that, I will turn it back to Maha.

Operator, we cannot open the line for questions. Thank you, sir.

As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, press star 1-1 again. Please stand by while we compile the Q&A roster. And I show our first question comes from the line of Amir Ezat from Echelon Partners. Please go ahead.

Good morning. Thanks for taking my questions. Can we start on the gross margin front? Pedro, maybe you could speak to the revenue mix in the quarter relative to last quarter. I've got you guys close to 18%. I think last quarter you were at 12%. So more detail on what's driving that would be appreciated. Sure.

A couple of things. So really last quarter, we had lower activity than we would have had normally, and that impacted our ability to absorb fixed overheads. This quarter, not only we had more volume to absorb overheads, but we also had operational efficiencies on direct labor. We're also able to pass along some price increases that were impacting us last quarter due to inflation and then price increases on materials. So the two combined, or these elements combined, helped us get to the gross margin levels that we had for the quarter as we continue to try to increase those along with the product mix coming from graphene-enhanced materials that will further increase our margins.

I'm sorry, I missed the last part. On the product mix, there's more graphene-enhanced materials as well?

Yeah. Yeah, as graphene-enhanced material sales occur, our gross margins will naturally go up. They get diluted overall because of the size of the activity and the amount of graphene materials sold during the quarter, but overall it increases the gross margin naturally.

Okay, so is it safe to assume or is that a fair statement? From here until the end of the calendar year, expectation is for increased sales of graphene, so we should expect gross margins as well to expand further. Is that a fair statement?

Yes. It's just the quantity of the expansion is going to always be somewhat limited over the next immediate quarters, but we'll be progressing over the future quarters for sure as graphene sales continues to contribute positively. Of course, I can't say what could be happening on operational efficiencies or volumes and such that could impact the gross margins, but overall it should be a positive trend, and the margins that we see right now should continue to increase, as I personally believe that the margins have room to improve.

Fantastic. Then maybe, Saroosh, in your earlier prepared remarks, you spoke to quite a few clients, I think, approving the use of graphene in some orders. Is it still fair to assume that by the end of the calendar year, your capacity constrains on your current facility?

Yeah. So, yeah, the graphene sales is growing. A lot of new customers are coming and putting the orders. Some previous ones are putting new orders and increasing their volume. Harder to say. That's the exact timeline of that, but for sure, less than 24 months we have capacity issues, and we need to have more capacity on the graph.

Turning to the five-year plan, Pedro, I think you mentioned the CAPEX plans you initially released, which were $170 million, might be actually too high. Do you have like a revised number for us, or is it like too early stage? Then on the financing package, can you give us like the broad strokes of splits between grants and debts, or is it too early as well?

Well, on the first part of your question, the amount is still too early to confirm back to the market. We're seeing positive results. I guess, valuations lower than we were originally expecting. However, it's still too early to kind of comment on that. For the second part of your question, the grants that we're expecting is still very much as what we had talked about. It's about $50 million out of the hole. The balance is going to be through debt and cash. As you can see, we still have almost $40 million of cash available, $30-some-odd million of cash in our accounts and we should be able to tap into that, along with the debt structure, a credit facility that will be put in place that should be covering that. But the grant would be about $50 million from what we can say.

Then as a reminder, like if you want $70 million CapEx plans, I believe only $100 million were fenced and loaded, right?

No, it's going to be over time in tranches. A lot of the immediate investments will be probably in the first two years, but I can't quantify exactly how much that will be because it depends on the timing of the rollout, depends on the timing of the acquisition of equipment and facilities. And we know that the last tranche of $20 million will be for the further expansion of 4,000 tons of graphene production, which will probably not take place until 2026 or 2027.

Okay, maybe one last one, and I'll pass the line. On Volta Explore, Soroush, I know you mentioned that you're not commenting on the details, but can you speak to timing? Is it like a first half of 2023 event?

Yeah, as explained in the AGM, you know, we are really engaging with the federal government, and that's the part that we need to see a package that makes sense to us. Of course... Any potential package has dependency to the federal budget, so we have to see what is going to be in the budget. Following the budget announcement, we have a better understanding of where we stand in the total CapEx financing. I think we're quite confident on the Quebec side, but also quite confident on the rest of the financing, but we need to have a clear indication of the exact quantum of the capital coming from the federal government.

Okay, great. Congrats on this strong quarter again.

Thank you. And I show our next question comes from the line of Michael Glenn from Raymond James. Please go ahead.

Hey, thanks for getting me on. Soroush, for that federal budget situation that you're describing, is there a specific amount that would be embedded somewhere in that budget that you would be able to point to to say that that's for VoltaExplorer, or is it that they will be allocating money to a fund and then VoltaExplorer would have to engage with whoever that is managing that fund to propose the project?

Well, we heard a lot of different versions. What I can say is the federal government has been quite tight-lipped about how they are setting up this program. At this point, the last we heard is there's potentially going to be a program. There has been discussions about investing on other funds, There has been discussions of investing in the Canada Growth Fund or similar type of programs, but at this point, anything we hear is not definitive until we see the budget. And that budget, we hope that has specific programs to compete against the IRA. And I think that has been something that the federal government has repeatedly said that they're trying to put programs in place to compete with them.

Okay. And as you wait for that scenario to take place, is Volt Explorer at the same time? Can you indicate whether you are engaged with strategic partners in terms of helping with some of that financing?

At this point, we're already two strategic partners started this Volta Explore. Our focus is to get the customers on the line and ready for pickup of the product when the factory is in place. Currently not really focusing on getting capital from the strategic partners. We are certainly open to look at the opportunities, but we don't want to have, let's say, an OEM to come in and limit our commercial activities with other OEMs. So mainly the key is to stay independent as long as possible with the 2 gigawatt hour. That can certainly change on the extension to 10. When we are adding 8 more gigawatt hours, that's when we look more closely to having OEM partners. But at 2 gigawatt hours, It's needed to stay as independent as possible.

Okay. And with the commercial, you talked about the commercial customer on the transportation side approving the use of graphene for future programs, and you are going to be supplying them with a graphene-enhanced product. Are you able to indicate the margin benefit Is there a premium that the customer is paying for the graphene enhanced product? And can you identify how much of there's a margin benefit between the old product and the new product?

Yeah, actually, on the first question of Amer about the gross margin, one of the things about graphene is, of course, when we sell graphene on a powder or pellet format, we have a higher gross margin on the product. But when we're selling as a graphene-enhanced composite parts, that's when you see operational improvement within our products that we are selling to the OEM. So technically, on those products, we're not getting premium, or premium is very small, but we have quite a lot of drop in terms of defects and blistering. We showed those parts in the AGM actually some of our shareholders that they participated. So the parts are experiencing a much better quality. So the reject rate drops significantly, and that's technically what graphene does in those parts when we are not changing the dimension of the mold or part dimension. So on those ones, we don't see upline growth, but we see increase of improved productivity in-house.

Okay. And just finally, do you have an update for full CapEx for the year?

We expect, excluding XG's acquisition, we expect CapEx probably to be around $3 to $4 million this year before the end of fiscal 2023.

$3 to $4 million. Okay. Thanks for taking the question.

Thank you. And I show our next question comes from the line of Rupet Mira from National Bank. Please go ahead.

Mr. Mira, your line is open. If you have your phone on mute, please unmute your line. All right, we'll move on to the next

participants in the queue, and that's from Ben Jekic from PI Financial. Please go ahead.

Yeah, good morning, guys. Congrats on the very good numbers. Pedro, just a couple of sort of eclectic questions, just on the gross margin. So is it fair to say that the positive FX was not a sort of material contributor to gross margin? Like if we were to remove an FX impact, you know, would we still be around 17% or so?

The FX impact comes from the conversion of the sales in US dollars to Canadian dollars year over year. And we wouldn't be at a large increase. but the contribution from the FX to higher FX is definitely going to the bottom line. It probably contributes maybe three percentage points, give or take. We also make purchases in U.S. dollars, which offset the impact to the bottom line, but definitely on the sales level, it definitely is beneficial to us when we have U.S. dollar at around $134, $135 or better. Right.

And I just want to understand sort of completely on the, I think two analysts have asked, so in terms of the mix, so you want, when you see higher powder and or pellet sales, that's improving the mix and improving the margin profile. You are getting some benefit from graphene-enhanced products, but it's more modest, and it's kind of the impact there comes from internal productivity. Is that a fair statement?

Yes, that's correct. When we are selling products to customers that are graphene-enhanced products that are not necessarily benefiting from the graphene capabilities but really are more about the inclusion of graphene in our materials from an operational and a quality aspect, Those benefit more us operationally than the customer in terms of pricing.

Okay. And then my last question, just on the transportation side. So if I understand, so the commercial customer, everything is progressing, lots of approvals for customers. adding graphene to future products, but you guys were mentioning, I think you used the term passenger OEM. So how close are we to the orders from that customer?

I mean, if we haven't started supplying by now, it's going to be very soon. The product is already awarded, but I'm not really sure the exact timeline of the supply, but it's going to be very soon. Normally, it's not a new program. It's a changeover in a sense, or let's say it's an improvement to the existing program, so it's going to be very fast.

Right. Perfect. Thank you so much. That's all.

Thank you. As a reminder, to ask a question, you need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. And I show our next question comes from the line of Ahmad Shah from Beacon Securities. Please go ahead.

Good morning, guys. I guess back to the gross margin front. Just to clarify, the benefit on improvement productivity where you're not really capturing price increases, this is sort of the legacy Sigma business where you're selling still components into the trucking market. Or does that also encompass whatever you're selling as a differentiated graphene-enhanced product?

So what I can say is on a large portion of the Sigma business, Currently, we have graphene. And graphene, I mean, there was a couple of plants in Quebec City and plants in Winnipeg. Pretty much in all the products of our Winnipeg facility, there is graphene already. And also a big chunk of the Quebec facility of Vigma, there is graphene in there. So what graphene provides in the part size is a lot more of an operational improvement. than going to an OEM and charging them extra. These are pretty much capped with existing long-term contracts. So the ability of us to pass through price increases, not because of material change, but because we're just going to add some graphene in there and overcharge the customer, it's harder. So we're benefiting a lot from operational improvement there in those products, which expands the gross margin. But when we look at the graphene and graphene-enhanced pellets and master batches, these are the high-margin products that go to someone else. And we expect customers of us buying graphene and graphene-enhanced pellets are benefiting from operational improvement. So when we are selling internally to the next level of supply chain, we benefit internally from that operational improvement.

Perfect. That's very helpful, Suresh. So just to confirm, you're not getting a pushback on price when you're offering or positioning a product as a graphene enhanced product. The market is appreciating the benefits and potential premium. The prices can be absorbed.

Yeah, I mean, technically, these type of contracts throughout the years, they always expect you to improve productivity, and they always ask for kickbacks. OEMs ask for that. So seeing that the company is capable of providing good product, enhances the margin internally, they always like it because it brings potential kickbacks for them in the future. At the same time, those type of products, if applied early in the process, the OEM can actually adjust the dimension of the mold and use the lightweighting side of it. So one of the things we see that right now in the SMC parts, for instance, for packaging for EVs, for battery packs, since it's early, a lot of those weight reduction is important for clients and they want to use that weight reduction. Now when you go and look at fenders in a truck, which has already been produced for 10 years, it's harder for OEMs to come and change the dye and the mold to benefit from the weight reduction. So, again, different customers, they have different requirements, and also the age, the life of the program and where you're trying to include graphene demonstrates how the OEM is using it. All in all, as you see and as we said, this market normally is resistive to change. and don't like having new type of materials in, the fact that an OEM actually approved the use of graphene in all their programs, regardless of SMC or, let's say, RTM and different type of even composite forming programs, it demonstrates that the product is working for them.

That's very helpful. I appreciate it.

And, Ahmad, just one more thing is that over time, as new programs are awarded, our ability to put graphene and have higher margins are going to be there as we're able also to pass along some savings to the customer by the lightweighting of products. So a lot of the movement by PACCAR and eventually others to move to accept graphene will allow for these gross margins to increase in the future.

No, that makes total sense. I appreciate the color on that solution, Pedro. That's all for me. I'll jump back in the queue.

Thank you. And I show our next question comes from the line of Michael Glenn from Raymond James. Please go ahead.

Hey, so just going back to the passenger customer that you're describing, is that program Are you able to indicate, is that program via Martin Rea or is there another supplier involved in that?

This is directly supplied from us to a tier one of the passenger OEM, but it's not through Martin Rea.

So this is a passenger car OEM that's doing some of its own body and stamping business?

No, it's a passenger OEM that picked up the product from us, but their tier one is not a part of that passenger OEM. They have their own tier ones performing of those exterior parts, but we are selling to their tier one and tier one selling to the passenger OEM, but the approvals is coming from the passenger OEM.

Okay, so you're selling, I see. Um, and, and that you're selling the, uh, you're selling the composite, like the, the graphene.

No compounds, no graphene enhanced compounds, recycled plastic compounds. It's, it's supplied through Canucks. So we sell with technically our graphene goes to the Canucks, uh, process there goes to the tier one from their process there and goes to the passenger.

Okay. Thank you. Thank you.

I'm sure no further questions in the queue. At this time, I'd like to turn the call back over to Martin Garnier for closing remarks.

I would like to thank everyone for attending this call, and we wish you a great day. You can now disconnect. Thank you.

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

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