NanoXplore Inc.

Good day and thank you for standing by. Welcome to the fourth quarter 2024 and year end NanoExplorer earnings conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Pierre Therese, VP of Corporate Development. Please go ahead.

Good morning, everyone, and thank you for joining this discussion of NanoExport Financial and Operating Results for the fourth quarter and year-end result of fiscal 2024. The press release reporting this result was published yesterday after market close and can also be found on our website along with our financial statement and MD&A. These documents are also available on CIGAR+. Before we begin, I'd like to remind you that today's remark, including management's outlook and answer to questions, contained forward-looking statement. These forward-looking statements represent our expectation as of today September 19, 2024, and accordingly are subject to change. Such statements are based on assumptions that may not materialize and are subject to risk and uncertainties. Actual results may differ materially unless there are cautions not to place undue reliance on these forward-looking statements. A description of the risk factor that may affect future results is contained in NanoExport's annual information forum available on our corporate website and in our filings with the Canadian Securities Administrator on CEDAR+. On the call with me this morning, we have Sorouche Nazarpour, NanoExport Chief Executive Officer, and Pedro Azevedo, our Chief Financial Officer. After remarks from Sorouche and Pedro, we'll open the call to questions from financial analysts. Let me now turn the call over to Sorouche.

Thank you, PY, and good morning to everyone joining us on the call. We will first start with the review of the economy and the impact on our business. I will then expand on our graphene sales activities, capital allocation plan, and I will end my remarks with an update on Volta Exploring. As the central banks are making progress toward interest rates cuts, some industry headwinds from supply shortages Inflationary cost pressures and tight labor markets continues to improve. This, along with increased activities for our customers, resulted in a very strong quarter with record sales of $38 million. Gross margin continued to expand and reach nearly 24%, which is a record as well. All in all, we're operating very well and I expect both sales and gross margin to continue increasing in the current year. Moreover, fourth quarter adjusted EBITDA, excluding Volta Explorer, came in at $3.3 million. Resulted in the first full year positive adjusted EBITDA of $5.2 million for the corporation. I would like to congratulate NanoExplore team for achieving this milestone. In general, we continue to perform at the high level. and we're executing on our capital allocation priorities. We foresee this momentum continuing into fiscal year 2025. In regards to our direct graphene powder and compound sales activities, Validation and testing activities are ongoing with several new customers, and during the quarter, we started supplying new customers. In fact, we are currently supplying 17 customers outside of our internal use, and our sales pipeline continues to advance. For our graphene-enhanced composite products, demand continues to be very strong, and our current capacity is almost fully utilized. During the year, we have made investments in new equipment and will continue to invest more as a part of our five-year strategy plan. A large part of these investments will be in the United States and are supported by booked contracts with existing and new customers. Turning to VoltaExplore, as mentioned in our previous quarterly call, we are in discussion with a potential strategic investor, but no progress has been made. It's our analysis that the current state of the EV and battery space is not conducive of another Gigafactory. In this environment, management has decided to postpone the Gigafactory project and focus only on the silicon graphene material, which shows promising demand and application for active anode material. We have received government grants to continue our R&D on SICK, and we are proactively reducing costs at Volta Explorer. VoltaXplore is going to be a scaled-down project until we see a much more favorable environment for ecofactors. This approach reduces risks, uncertainties, and costs while the EV, battery, and market stabilizes. Regarding our graphene and coated spherical purified graphite expansion, we are continuing discussion with potential partners and customers who received various specs of our CSPG samples. We continue to see significant demand for CSBG as current supply in North America is very limited and potential customers need to be IRA compliant by the end of 2026. We are in an administrative process of finalizing both federal and provincial government support for our graphene CSBG plant and investors should expect our final decision to be taken in the near future for the construction of our new plant near Montreal. With that, I'll now turn the call over to Pedro, who will provide details about our financial performance. Pedro?

Merci, Sourouche. Bonjour à tous. Good morning, everyone. Today, I will begin with a review of our Q4 and full-year financial results, followed by an update on financial aspects of our five-year plan, and conclude with some commentary on near-term CAPEX spending. Total revenues in Q4 were 14% higher than Q4 2023 at $38.1 million, which was a record for Nanoexplore. The increase in revenue was attributable to an increase in both product sales volumes and progress revenue recognition on new tooling being manufactured for three different customers. Tooling revenues will continue to be higher than normal into our fiscal year 2025, due to the previously announced expansion of an existing program and the launch of two new programs. Once the tooling of these programs is completed, part revenues will increase with the additional capacity and with the new program starting production. With regard to adjusted gross margin, which excludes depreciation as a percentage of sales, continued to have increased during the quarter to reach 23.6%. an increase of 270 basis points year over year and was driven by higher activity levels, improved productivity resulting in part from the manufacturing cost benefits of producing graphene enhanced products and various manufacturing efficiency improvement initiatives. This year over year margin improvement has been a trend over the last eight quarters and we are pleased that it is in continuing. As a reminder to our shareholders and analysts, As the proportion of sales of graphene powder and graphene-enhanced materials increases, gross margins as a percentage of sales will also increase. Adjusted EBITDA was $2.6 million and was comprised of $3.3 million in the advanced materials, plastics, and composite product segment, a record achievement, and a nearly three-fold improvement year-over-year offset by an $820,000 loss. in the battery cell segment, which encompasses the Volt Explore initiative versus a loss of $600,000 last year. Volt Explore expenditures during the quarter were higher than usual due to a third party and pre-engineering expenses undertaken during the quarter. In June, Revenue Quebec confirmed they would make a $1.2 million partial refund on our $1.5 million investment tax credit claim related to Volt Explore. This previously unrecorded claimed amount was recorded as a receivable and as a reduction of plant property and equipment and was subsequently received in July. The balance of the claim is being reviewed. With regards to our balance sheet and cash flows, we end the quarter with $26.5 million in cash and cash equivalent and $7.9 million in short-term and long-term debt. operating cash flows amounted to $300,000, inclusive of a negative impact of $1.2 million receivable from Revenue Quebec. Cash flows from financing activities were nil, resulting from a netting effect between lease payments and proceeds from the closing of the new RBC credit facility. Finally, cash flows from investing activities were negative $3.5 million, mainly related to capital expenditure payments and is net of a $1.2 million reduction related to the investment tax credit. Our cash, along with the unused space in our revolving credit lines, resulted in total liquidity of $36.5 million at June 30th. Looking at our full year results, while sales were lower than expected in the first half of the fiscal year, the second half was strong. and we were able to deliver the full year revenue guidance set at the end of Q1. Sales through the year were a record, $130 million, and adjusted EBITDA was $2.6 million. If you look at the segments, adjusted EBITDA in the advanced materials, plastics, and composite product segment reached $5.2 million, an improvement of $5.5 million versus fiscal year 2023. During the year, gross margins excluding depreciation increased from an average 17.3% in fiscal 2023 to an average of 21.1% in fiscal 2024, leading to an increase in $6 million in margins. Adjusted EBITDA loss in the battery cell segment was $2.6 million compared to a loss of $621,000, but the amount excludes the EBITDA loss prior to non-explore acquiring Martin Reyes' share in Volta Explore. Moving now to an update on financial aspects of our five-year strategic plan. With regard to the expansion of graphene-enhanced SMC capacity, expansion is underway in our Beauce, Quebec plant and expect the construction to be completed by the end of October. The new press and tooling are expected to be delivered by November and increased production to start by February. Our U.S. expansion, which includes both graphene-enhanced SMC as well as additional capacity for the composites business, is also underway with most of the equipment having been ordered. We are currently evaluating a few sites near Newton, North Carolina, for the new facility. With various equipment expected to be delivered during fiscal Q3 2025, we expect production to start towards the end of our fiscal 2025 year. With regard to the battery material initiative of our five-year strategic plan, as Saroosh mentioned, we continue with the administrative processes related to due diligence with both level of governments in securing support for the initiative. The process has been slow, but we are seeing the course and remain confident this financial support will be confirmed. In addition to this, we have recently been awarded a grant of up to $2.9 million over the next three years from the National Research Council's Industrial Research Assistance Program, IRAP, for the research and development of novel low-carbon footprint anode materials for the use in lithium ion batteries. This grant, while not directly related to the Anode Material Initiative, does provide financial support to our R&D work for future improvements to anode materials chemistry. Turning now to our near-term CAPEX spending. With regard to CAPEX spending, we expect to spend 3 to 5 million in each of the next three quarters as we increase the spending on our U.S. expansion initiative and graphene-enhanced SMC initiative of the five-year strategic plan. This CAPEX spending amount will be updated once the government support for the anode material initiative is finalized and the anode material plan moves forward. With that, I will pass it back to Pierre-Yves.

Thank you, Pedro. Operator, we can now open the lines for questions.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster.

And our first question comes from Amar Azad of Ventum Capital Markets.

Hi, gents. Congrats on a very strong quarter and year. Morning, Amar.

Morning.

On your sales growth, I'm wondering if you could give us a sense of what portion of the increase is related to tooling versus part sales. I just wonder how sustainable is this growth as we move into fiscal 25, especially as tooling revenues might normalize at some point. I know, Petko, you said that you still expect some tooling in 2025.

So the Q4, I would say it's about – I didn't get the numbers exactly, but it's about two-thirds that relates to tooling and about one-third relates to the part sales. So it is an important amount in the quarter that relates to tooling. But as I mentioned in the past, Amr, is that as tooling comes down, parts revenue will start going up. There's gonna possibly be a timing, but the tooling revenue does get replaced by the parts that they eventually will produce. We are seeing the growth continue into 2025, and Q1 as a seasonal aspect of our business, Q1 should be pretty good versus last year as well.

Okay, that's good color, Pedro. On the gross margins, there's a couple of moving parts. First, I can grab from the 23.6. But I wonder, with your composites business being fully utilized, how much more upside is there in margins until your expansions come online? Or do we expect a significant step up in graphene powder sales to improve margins further?

It's a good point. I think what you have to think about is that seasonality does play into this and that Q1 compared to Q1 of last year will continue the trend. Q1 will not probably reach the level of margins that we achieved in Q4 because of that seasonality and revenues are just stronger in Q4. But the growth in margins should continue. The question is whether Q4 of the end of this year versus the Q4 of 2024. will be significantly higher, and that part I just can't tell you right now. It should continue because most of the increases in margins are coming from manufacturing efficiencies and volume increases. So if the volume increases there, we do have capacity in other plants. There's parts of the business that still have capacity and will grow, but there are other parts that more are maximized. So I would say that you still will expect to see some margins increase even in Q4 of next year. Okay.

On the anode material side, so if we speak about both the CSPG and silicon, could you provide an update on, number one, the validation process with customers? And then, you know, like you spoke about finalizing the government support to their So I just wonder how should we think about timeline on scaling production?

Sure. So battery material in general, there is between two to three years of validation process from the original testing that happens with the clients all the way to the end. So we are discussing and providing samples to different battery makers and also OEMs related to those battery makers. And the testings are ongoing. Most of the time, those clients ask for, let's say, some technical changes in the product, and there's a strong back and forth happens with the supplier and the customer. So we are in different stages with different clients on that regard. And the second question...

Is like just like looking for an update on the government support and you know, which would inform the timeline.

Yeah, so right now where we are is with both provincial and federal government we have received initial support letters. So where we are is technically advanced with the due diligence process and We are also working with Hydro-Québec to get the power requirements for the plant. This is the critical part to get the power for us to really start the construction. Okay.

Maybe one last one. It seems like your language from the last conference call on Volta Explore is the same, i.e. on the macro environment, it will be on the back burner for now as you focus on your other exciting projects. But I just wonder what the, you know, like the cost increase this quarter, what specific steps are you guys taking to mitigate, I guess, like cost increases and how should we think about that for fiscal 25?

Well, so, Amar, if I may, the increases were caused by pre-engineering work that was undertaken during the quarter before any decisions to kind of slow things down. But one thing that's important to understand is that Volta is going to continue to be a business that we continue to work with or to focus on, especially with the silicon graphene element that Saroosh mentioned. And with the IROP grants coming into play, it's going to offset an important part of the cost that we have undertaken in Volta. It'll just be offset by those grants. So overall, Volta will probably cost a lot more or will impact a lot more on the financials of the business. Sorry, has a lot less impact on the business than it has in the past. The net impact will be greatly reduced because of the grant.

The $1 million a year IRAP, does that go directly against Volta's EBITDA or is it reported separately, I guess?

So we're working on that right now, but the idea is that, yes, it'll be against the Volta expenditures, and you should see the net impact in the financials of Volta when we report. Fantastic. It might be breakeven then.

Okay, gents. Thanks for the comments. Congrats again on the quarter.

Thank you. Our next question comes from James McGarrigle of RBC.

Hey, congrats on the great quarter. I appreciate you having me on.

Morning, James. Morning.

I just have a kind of a more global question on the graph and supply. I know there's some reports talking about China investing heavily in building a graphing capacity. You know, we've kind of seen this in steel where, you know, the day they invest heavily, they kind of bud the market and impact pricing. Is this something that you're concerned about or any conversations you're having with the government to potentially mitigate any risks from that Chinese investment?

Well, what I can say is if you look at the graphite mining, it mostly happens in China. When you look at the validating material on the graphite side, More than 75% of annual production is in China. So it's natural for Chinese companies to look into graphene production as well. But what we can say is production of graphene and cost associated to that is really dependent on the technology of the production. And at this point, we are by far the lowest cost producer of graphene in the world. And that can, our position, even strengthen significantly after the dry process production of graphene, which we expect it reduces the cost of production materially again. And that really puts us comparable in terms of cost and selling price to carbon black, which is a commodity material. So I would say it's difficult for... for Chinese companies to match those cost structures. It doesn't necessarily come from the scale of production. It also comes from the technology, and I think we have a very decent position and they're a leader in this market right now.

That makes a lot of sense. I appreciate the call there. And then just on the new production process for the dry graphing, you talked about some of the potential uses Can you just kind of give us an update on potential conversations you're having with customers, and specifically when we can see this process implemented on a more commercial scale?

So we have one module already, one small module already set up in the current headquarter, and it's already working for, I would say, a bit more than a month. So we already moved out of the lab and we're producing it a little bit more industrial. We're planning as well to put one industrial module, same as what's coming out of the new 16,000 ton facility in Timin, ahead of that. And that's what we're working toward and we have already allocated the capital needed for this as well. I would say it's an advancement versus what we have when we are looking at the performance of the dry process graphene. Without making it very technical, we see improvement in the surface area and the quality of the graphene, but also the structure of the cost is very beneficial. The cost is quite low. So performance to cost ratio, it actually beats our current product. And we don't find anything in the market today with that level of performance to cost ratio. So the testing is continuing. A lot of testing is happening in-house and as well with a couple of key partners. We are testing that product. Testing will continue. We're still, I would say, two years away from the industrial production. So we're kind of continuing to work with some of those companies. let's say, selected partners to validate the product. So far, we're quite impressed with the performance of the product.

And then one more for me before I turn the line over. I know you talked about, you know, you gave some color on how you expect top line and margins to evolve in this current fiscal year. But can you provide, you know, maybe a specific target? I know you've done so in the past on, you know, maybe the top line or, you know, where you expect margins to evolve just to help level set, you know, our models for EBITDA in the current fiscal year. And I appreciate it. I'll turn the line over after that.

Sure. So for the average of the year, it'll just probably expand by about 100 to 200 basis points as an average for the whole year. But that's the limitation in the immediate year.

And then, sorry, on the top line as well.

On the top line, we'll give guidance at the end of Q1. We'll take a look at how the economy is evolving, and we'll provide guidance at the end of Q1. But it should be another growth. I just can't quantify it. Thank you very much.

Thank you. And as a reminder, if you have a question, please press star 1-1. Our next question comes from McMarie Whale of CSI. Hi.

Good morning, guys. Good morning. On the Volta Explorer, with this delay on the Gigafactory, do you expect this level of OPEX to continue? It looks a little higher in the Q4, given what the year-end results were. Or was there some one-off things that you don't expect to repeat

So in Q4 there was about $200,000 to $300,000 that was extraordinary. It was related to pre-engineering work that was taking place at the time that we had engaged in, I think, Q3 of 2024. But the answer is that the costs are definitely going to be coming down. We are reducing spending. And with the grant that's been given to us by IRAP and the work that we're going to shift to do silicon graphene, the impact from Volta will be much smaller than it has in the past in the 2025 year.

Okay, okay, great. Okay, and then I'm not sure if I fully understood your comments on the margins. When you look at, with the capacity utilization, obviously the margin is improving, you saw that through the course of 2024. Are you expecting then in this first quarter to go back to the margin levels that we saw sort of Q1 of fiscal 24? Or is it basically the level you've established maybe in the middle of the year? Do we go back down to that or can you continue to increase from the Q4 level?

So because the business is seasonal, you always have to compare year over year. Q1 of 2023, we had, I think it was around 20%, give or take. So we should expand margins from that point. They won't be as high as Q4, mainly because revenues won't be as much as Q4. A lot of the benefits that we had in reaching 23.6% margins in Q4 relate to the fact that we had high volumes. The manufacturing improvements are definitely going to continue, but because the volume is going to come down in Q1 related to Q4, those margins are definitely going to be much more in line with Q1 of last year, but they will expand. And for the year, as I mentioned, for the year, The average, I think, was about 21% for the whole year. We will expand for 2025 by about 100 to 200 basis points for the average for the full year. Okay.

And then when the new capacity in the U.S. comes online, is that effectively the same level of margin, sort of contribution margin you would expect from those facilities, or is there something there that – you think you could do a little bit better, or is there a bunch of offsets in terms of perhaps some higher local costs offsetting some efficiency improvements? Can you comment on the U.S. operations?

So as you start a new facility, as we fill it, the margins will be starting to be maybe a little bit lower, specifically in that environment, but they will grow as we improve manufacturing, as the volumes increase, So I don't expect the U.S. operations to be impacting our overall margins very much negatively. It should be more or less neutral, but we do expect margins to be somewhat in line with what we see today as we start the new operations.

Great. That's all my questions. Thanks, guys.

Thank you.

Thank you. Our next question comes from Buddy Wiseman Barker of National Bank Financial.

Buddy Wiseman Barker Hi, guys. Just filling in for Rupert here. Thanks for taking my question. Most of them have been answered. Just wondering, trying to get a sense of the pace of investment related to the five-year plan, and if you guys can give a sense of what maintenance COPEX was last year and what you expect it to be next year.

We expect to be spending about $3 to $5 million in each of the next three quarters, give or take, as we continue to put the equipment, pay for the scheduled payments to our suppliers and as equipment is delivered. So for the next three quarters into calendar 2025, we should be at $3 to $5 million. For the full year, we'll probably be around $12 to $15 million for the full year. versus I think it was about 10 million last year.

Okay, thank you. And just one more. So you said earlier this year you had some labor issues. Have those resolved themselves?

Labor issues? I'm not sure what you're referring to.

Yeah, during the year there was a strike in a customer. facilities, but they all, that impacted, I think, the second reporter, a reporting court, and that thing is over.

Yeah. But that's related to the labor issues that are at our plant.

Okay. Thank you. You're welcome. And that's all the questions.

Thank you. I'm showing no further questions at this time. I'd like to turn it back to Pierre Therese for closing remarks.

Thank you very much. I would like to thank everybody for participating on this call. Have a good day, everyone.

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