Neo Performance Materials Inc.

Ladies and gentlemen, thank you for standing by and welcome to the NEO Performance Materials Q2 2020 Earnings Announcement 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 this time, you will need to press star 1 on your telephone keypad. If you require any further assistance, please press star 0. Thank you. I would now like to hand the conference over to your speaker today. Ali Madabi, you may begin.

Thank you and good morning, everyone. As a reminder, today's call is being recorded and a replay will be available starting tomorrow in the Investor Center on our website located at neomaterials.com. Joining me this morning on the call are Konstantin Karianopoulos, NEO's President and CEO, as well as Rahim Shaliman, NEO's Chief Financial Officer. who will then provide additional details regarding the company's second quarter performance. Then we will open the call to questions to analysts only. 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, those regarding revenue, EBITDA, and adjusted EBITDA, product volumes, gross margin, other income and expense measures, ROCE, cash returns, and future business outlook. Actual results or trends could differ materially from those discussed today. For more information, please refer to the risk factors discussed in NEO's most recent financial filings, which were filed on CDAR earlier today and are also available on our website. NEO assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. Financial amounts presented today will be in U.S. dollars, Non-IFRS financial measures will be used during this conference call. Further information regarding NEO's use of non-IFRS measures is available in NEO's Q2 2020 earnings press release, which is available on CDAR and on our website at neomaterials.com. Let me now turn the call over to Konstantin.

Thank you, Ali, and good morning, everyone. It's good to be speaking with all of you, our shareholders, analysts, and stakeholders around the world. These are certainly challenging times, no question about that. However, as I examine strategic opportunities on NIO's near-term horizon, I do see some very interesting and potentially exciting options for the company. It is a truism, and it has been said before, that in crisis, there is opportunity. That has always been a guiding business principle at NIO since the beginning. As many of you know, my involvement with NIO spans more than a quarter century. starting in 1994. Eight of those years, I was president, CEO, and director. And for the most recent seven years, I have served as director of NEO and its predecessor company. Since NEO's successful reemergence as a private company and then publicly traded company in 2017, I have served as board chairman. There's a powerful connection for me to this organization and to our entire team around the world. I'm proud of the fact that we have assembled some of the world's best talent here at NEO that will be critical to help grow our business. Despite the current economic environment and its challenges and uncertainty, we are extraordinarily well positioned in markets that are set to experience significant long-term growth, particularly those related to increased sustainability. In particular, the advanced industrial materials we make are key to addressing some of the world's most difficult problems, such as climate change and other environmental challenges. While the CEO job at a public company is challenging in even the best of circumstances, I will say that I've never been more excited over the past 25 years as I am today because of the strategic possibilities I see for NEO. Let me first say that NIO would not be the company we are today without Jeff Bedford's many contributions to building the organization and our robust business model. Jeff is a valued colleague and a good friend to me and to all of us at NIO. His steady hand, industry knowledge, and grounded vision over the past 20 years have prepared us to embark on our next stage of growth. I'm also pleased to report that we have appointed Claire Kennedy to replace me as a chair of the NIO board. Claire has served as a NEO director for the past three years, as well as on the previous NEO board for a couple of years before the sale to Mollicorp. A lead director for the Bank of Canada, where she chairs the Audit and Finance Committee, Claire is a seasoned corporate governance professional, an expert in international tax and transfer pricing, and holds a Bachelor of Laws degree from Queen's University. She also happens to be a professional engineer with a background in chemical engineering, and a degree in chemical engineering from the University of Toronto, something I must admit is dear and near to my heart as a fellow chemical engineer. In short, we're very fortunate to have such a formidable and experienced talent in Claire advising and leading our board. Also with regard to leadership, we recently welcomed Greg Sher as an independent director of the board. Greg is a capital markets and private equity professional with extensive experience working with companies at different stages of growth, as well as M&A. With the addition of Greg, we now have a majority independent board. Let me first address the primary topic in virtually every discussion today, COVID-19. This virus has driven one of the most disruptive global pandemics of the past 100 years. Neo felt the pressures of the pandemic at the start of the year across our Asian facilities and supply chains. Fortunately, our teams did an outstanding job at limiting impacts to the health and safety of our employees and their families. All of us have had to accept a new normal in our daily lives, but at NEO we intend to maintain vigilance against complacency in managing safe operating environments. The best way for us to ensure reliable supply of high quality products and services to our customers is to ensure that our workforce and facilities are safe. In this regard, I'd particularly like to highlight the efforts of Don Miles, NEO's Vice President of Health, Environment, Safety, and Sustainability. Don and his team have worked relentlessly and tirelessly to help lead and coordinate our efforts around the world. And those efforts have helped steer us through a challenging environment while we were able to maintain supply to all of our customers in 2020. Across our more than 1,800 employee team, We've had one COVID-19 case reported. Fortunately, our employee who contracted the virus was quickly isolated, sought appropriate treatment, and was able to recover and return back to work within a few weeks. The virus was contained to the single incident largely because of the conservative approach we take with health and safety matters across all of our facilities. Of course, the future trajectory of the pandemic is uncertain. At this point, we anticipate that demand will recover across our market sectors over the next several quarters and into 2021. One thing, however, is clear. Deterioration in our business performance over the past two quarters is purely a reflection of the macro environment. That is especially true for our magna quenching chemicals and oxides business, which has significant exposure to the automotive sector. As well, our rare metals business has significant exposure to aerospace, and that has been hit hard as well. Fortunately, as a company, we have enacted strategic plans tailored to each of our manufacturing facilities to enable us to provide reliable supply to our customers during this pandemic, while also positioning us to win new business and commercialize new products. Over the years, NIO has made substantial investments in our people, process, and technology to ensure a low-cost, nimble operating model. We have invested time and resources in collaboration with our customers, often working through development cycles that last multiple years to bring about innovation. We have no debt, and we have managed to remain cash flow positive from operations by leveraging an efficient and improving unit economic model. Those efficiencies gained over the years have resulted in a great deal of flexibility for NEO. financial flexibility, operational flexibility, strategic flexibility. All of these have been crucial to NIO's ability to currently manage through this business disruption. They provide a defense of resiliency should the pandemic endure longer than any of us hopes. They also position us to take advantage of new opportunities that are presenting themselves as we speak. Let me give you one example, albeit one that is still in an early stage effort. Our R&D teams have recently identified several inorganic materials that are expected to exhibit antiviral and antibacterial functions. Formulations of these materials have been synthesized and we're currently working with two European institutions to demonstrate feasibility. Discussions are also underway with a third institution in North America to expand testing of these materials. There is no guarantee, of course, that this will work or that it will result in a commercial product. but it demonstrates the kind of innovative thinking and molecular engineering that has helped us to produce many new and innovative products over the years that have helped our customers make the world a better place. While the near-term interruptions related to COVID are likely to continue, there have been some short-term signs of improved economic activity in recent months. Factory activity in China expanded at its fastest rate in nearly 10 years in July. The purchasing managers index in China hit its highest level in July than at any point over the last nine years. Separate surveys of South Korean and Japanese manufacturing sectors in July also shows that those nations had the best performances since February and continue to progress toward growth. Passenger vehicle sales growth has been positive in both China and South Korea in May and June. The supply chains for both North American and European automakers have been making steady progress as they return from idle shutdowns, with the majority of plants operating either at or near capacity. Factory activity overall in the U.S. also picked up speed in June and then again in July, according to manufacturing indices. These are encouraging short-term signals, but they're also concerning signs as pockets of new COVID outbreaks continue to wreak havoc in parts of the Americas. India and Europe. Many manufacturing facilities still trying to adapt to operating in a new normal are finding it difficult to maintain an efficient operating pace until the pandemic is resolved. The end result is continued lower economic output. Some of these more optimistic industry forecasts indicate that 15 to 20 million fewer automobiles will be sold to customers this calendar year. At these levels, the impact of the pandemic on consumer behavior is more severe than what was experienced in the 2009 global financial crisis. And by all indications, we're not out of the woods yet. This leaves us with two competing ideas around demand. There is heightened uncertainty and risk in the short term, whether that's viewed as the next few quarters or the next few years. But at the same time, we are confident in the so-called megatrends, The need for globally clean air, better fuel economy, and efficient regional supply chain has only accelerated. These megatrends have been developing over decades and will continue to accelerate over the coming decade. NEO manufactures advanced materials that are vital to multiple technologies used in each of these trends. As a prime example, we have seen sales of alternative fuel vehicles continue to accelerate. We believe this shift and increasing preference for electric, hybrid electric, and plug-in hybrid vehicles is an enormous opportunity for NIO over the next decade. In fact, in my view, we're rapidly reaching a tipping point in the ongoing penetration of electric vehicles versus internal combustion engine vehicles in Europe and China. For example, at this stage, there's a very strong case to be made in favor of electric vehicles in terms of the total cost of ownership compared to internal combustion. While this analysis incorporated various government incentives for electric vehicles, the fact that the EU and other regions are planning to expand those incentives presents NIO with a number of interesting strategic opportunities that our teams are now closely examining. One small aspect of that opportunity is to expand their magnetic materials production capacity, with commercial applications targeting more efficient electric motors across multiple industries, including automotive, electronics, and home appliances. For example, since we added our production capacity of MQ-1 compression molded magnets with the acquisition of a facility in Suzhou in China last year, we have been flooded with requests from all over the world for these magnets, which are predominantly used in electronics and small motor applications. That facility is now running flat out, and we expect to expand Our production capacity of magnets both in Chuzhou and in our Tianjin China plant. Strong demand for MagnetQuench products is the result of years of intense collaboration with customers to build more powerful and lighter weight precision motors using NEO's permanent magnets. It is no surprise that we have many long-lasting relationships, including customers who have been with us for the past 15 to 20 plus years. What it takes to succeed in supplying these highly demanding industries is dedication to quality, consistency, service, and ongoing product innovation. My commitment to our customers is this. We will continue to do what it takes to help you unlock innovation for your products and help build your business. As I've been thinking about NIO's core competencies and competitive advantages, it is clear that the unique assets we have assembled are not easily replicated. We have the right leadership in place to lead our businesses. We are committed to developing our people internally. We continue to attract and recruit energetic minds. And we have expanded our geographic footprint to reinforce our ability to serve our customers. Our focus on producing advanced materials that enable advances in sustainable outcomes is core to NEO's mission. Not only do the products we make advance sustainability, but we strive to manufacture them with sustainable practices in mind. Our Karat, Thailand plant has successfully completed an EcoVadis sustainability assessment on the neomagnetic material products they make. They were awarded a silver medal in that assessment, which involves a very detailed and rigorous examination. This is the second EcoVadis achievement for NEO in less than three years. Our magnet quench plant in Tianjin was also recently named the Green Factory by the Tianjin Municipal Bureau of Industry and Information Technology Association. They won this recognition by implementing advances in energy efficiency, water and waste recycling, pollution mitigation, land use, and reductions in both energy consumption and carbon emissions per unit of product manufactured. As we design the NEO of the next decade, the key focus of mine and ours collectively will be to recalibrate our strategy and to work with a number of stakeholders to ensure that we are accelerating paths for sustained growth. We will do what it takes to exceed the needs and desires of our customers. Over the coming quarters, I look forward to sharing more of our vision with our stakeholders. With that, let me turn the call over to Rahim for the quarterly business review.