Neo Performance Materials Inc.

Good day and welcome to the NEO Performance Materials 4Q 2021 Earnings and Business Update Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ali Madhavi. Please go ahead.

Thank you, Operator, and good morning, everyone. Just as a reminder, a replay of this call will be available starting tomorrow in the Investor Center on our website at neomaterials.com. I am joined this morning by NEO President and CEO, Konstantin Karianopoulos, who will provide opening remarks, and Rahim Suleiman, NEO's Chief Financial Officer, who will give a short overview of the company's fourth quarter and full-year financial results. Please note that some of the information you will hear during today's presentation and discussions will consist of forward-looking statements, including, without limitation, those regarding revenue, EBITDA, adjusted EBITDA, product volumes, product pricing, other income and expense measures, cash returns, and future business outlook, including potential expansion plans. 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 year-end earnings press release, which is available on CDAR and on our website at neomaterials.com. Let me now turn the call over to Constantine.

Thanks, Ali, and good morning, everyone. We're proud to report that NEO performed in an outstanding manner in 2021, finishing the year in a very strong position. This performance provides us with the ability to take advantage of a number of opportunities and execute on several strategic growth initiatives. In the fourth quarter, we reported sales of $153 million and adjusted net income of $16 million. or 39 cents per diluted share. We generated almost 20 million of adjusted EBITDA during the quarter, the fourth consecutive quarter of elevated profitability. On a full year basis, we reported a record $539 million in sales and adjusted net income of 55 million or $1.41 per diluted share. With nearly 82 million of adjusted EBITDA generated, this is by far the best year since the company's return to the Toronto Stock Exchange in 2017. As we envision a world where NIO helps to accelerate the adoption of a range of sustainable technologies, we focus on four growth pillars. First, protect, strengthen, and grow our core business. Second, innovate into next-generation technologies. Third, expand and diversify our geographic footprint in order to capture growing demand for our specialty rare earth products in Europe and North America. And fourth, improve our global sustainability leadership. I am pleased with the significant progress we made in 2021 on all of these fronts. In terms of financial performance, our top line grew 56% year over year. More telling, however, is a comparison of 2021 to the pre-COVID baseline of 2019, over which period our top line grew 32% on a combination of improved pricing and volume growth. To me, that tells a compelling story of growth, resilience, technological innovation, and growth potential. By improving our operational excellence across all three of our business units, we continue to become more competitive, and our industry-leading reputation for excellent customer service, coupled with our technology leadership in the markets we serve, has allowed us to continue to win new business. In another key area, our health and safety practices continue to lead the industry. I am pleased to report that our operations have exceeded our own aggressive internal goals for safety incidents, and proactive reporting. Getting these details right day in and day out helps to establish a culture of excellence. Our profitable operating model further protects and strengthens our core businesses and allow us to reinvest across the company, whether in new product development, in expanding our capacity and geographic footprint, or in formalizing our sustainability programs. NIO is uniquely positioned in the global rare earth industry to capitalize on opportunities across the rare earth supply chain. Ensuring a reliable supply of specialized materials to our customers is job number one for us. This reliability is even more important today, given the lingering macroeconomic headwinds. It's now two years since the World Health Organization declared COVID a global pandemic. Even as the northern hemisphere comes into spring temperatures and COVID test cases, COVID case rates, rather, are declining in the Western world, we know that there will be further challenges this year. 2021 was far from a normal year. Intermittent demand from automotive OEMs, driven by the semiconductor shortage which lingers into 2022, made production planning for our customers and our plants quite difficult. We're also continuing to observe global logistics problems. It is not uncommon for containers to be delayed at ports for months, placing additional strengths on the supply chain. Of course, these macro headwinds pale in comparison to the war in Ukraine. The tension in Eastern Europe is top of mind for all of us. NIO does not have significant market exposure to either Ukraine or Russia, And from a direct operations perspective, we have had no significant impact to our operations in Silame, Estonia, which processes rare earth feedstock from both Russia and the United States. But, as you would expect, we're working with our advisors to monitor developments closely, and we're in close and frequent contact with Estonian and EU government officials who continue to encourage us to maintain and expand our operations there. Our silmet plant is the only commercial producer of separated rare earths in Europe and one of only two producers of aerospace-grade tantalum and niobium in the European Union. The products we make in Estonia are vital to essential technologies on which major European, North American, and Asian manufacturers rely every day. We're driven to maintain production of these strategic materials. We also believe it is important to continue providing jobs to our Estonian employees and support their families. That helps provide stability and support to the overall Estonian economy, and the Estonian government has expressed its appreciation for our commitment. As lamentable as the tragic war in Ukraine is, our management team has successfully navigated through many geopolitical issues over the past 30 years. These conflicts are unfortunately a manifestation that diverse supply chains are essential. Over the past year, we have introduced a new source of rare earth raw material for our Estonian operations, one that originates in North America. This new supply helps to complement our historical feed source. It significantly derives the availability of rare earth supply for our European and global customers. Our partners at Energy Fuels are accelerating their current production campaign, and we expect the next shipment of raw materials from Utah to be well ahead of schedule. This will add to our existing safety raw material stocks in Estonia. As we continue to strengthen our global operations, we will continue to source alternative supplies of these critical raw materials from around the world. I have to say that I find it personally disturbing, and I'm sure all of our employees share this feeling, to be discussing the strength of our business while there's such a loss of life and tragedy in Europe at a level not seen since the Second World War. But it is also pragmatic. It highlights the need for a resilient business model in light of the risks that we all face today. A global pandemic, supply chain interruptions, profound commodity inflation, geopolitical hostility, and an accelerating climate crisis. Taken together, it is imperative that we continue to strengthen our business model by meeting our customers where they're located. We can and we will further diversify our operations and supply chains. Let me now say a few words about the major demand driver in the rare earth industry, electric vehicles. There are undercurrents of substantial optimism around the globe driven by energy transition opportunities. Recent sales of electrified and alternative fuel vehicles around the world are a key example. Adoption cycles for electric vehicles that contain news magnetic materials and magnets in their motors and sensors continue to shorten. Battery electric and plug-in hybrid vehicles represented nearly 25% of passenger vehicle sales in the European Union in the fourth quarter. An additional 20% of pure hybrid vehicles containing NIO's next-generation emission catalysts were sold. That's 45% of automotive sales across the European market are vehicles with electrified drivetrains. and that's well ahead of where consensus industry forecasts were just one year ago. Similar dynamics are playing out in the rest of the world, as China reported more than 3 million battery electric and plug-in hybrid electric vehicles sold during the year. In North America, 11% of passenger vehicles sold during the fourth quarter were electrified. While this is far below Europe's 45%, it represents a near doubling of electrification compared to the prior year. These electrified and hybrid platforms continue to provide ample opportunities for our magnetic materials. The fourth quarter saw continued strong demand for magnetic ventures products. As demand for rare earth magnet powered accessory motors for seats, trunks, automated doors, and numerous other power and sensor functions continues to grow, Magnet quench materials are sought after as the preferred option for many OEM supply chains. Simultaneously, in order to achieve greater energy efficiency, motor design and development trends continue away from brushed motors to brushless DC designs incorporating rare permanent magnets. Our R&D and motor application development teams further growing their skill sets and capabilities to more effectively capitalize on these opportunities. On the magnet side of the business, volumes continue to remain a very strong and growing part of that business. We've been able to fill our expanded magnet production capacity over the year and will be seeking to further expand to meet customer demand in multiple markets. We also seek to increased demand for larger magnet sizes, and we're developing more complex magnets to meet this demand. This innovation, combined with MagnetQuentra's consistency and quality, is helping to unlock significant growth within our magnet business. The know-how to constantly innovate and consistently manufacture these magnetic materials and magnets is an extraordinarily high technical hurdle. Leveraging magnet quench's 40-year history in magnetics positions us well as electrified vehicles continue to gain consumer acceptance. Our efforts to expand rare earth production in Europe and move into the manufacture of rare earth permanent magnets for automotive drivetrains and renewable energy systems continue to advance. We're also looking at potential expansion into other types of neomagnets and applications in Europe. It is fair to say that government leaders across Europe currently have other pressing matters on their minds. But a clear consensus for action to support NIO's plans for such expansion has developed and is supported by a growing coalition of government and industry stakeholders within the EU. We look forward to providing further updates along these lines in the quarters ahead. The recent trend for increasing rare earth and magnetic materials prices has continued through the fourth quarter and into the first quarter of 2022. Recent pricing for neodymium praseodymium oxide has approached $175 per kilogram, which is representative of the current demand environment. These higher levels are being supported in the market today with buying activity following the Chinese New Year, or better say, the Lunar New Year. Both C&O and MagnaQuench have benefited from this higher pricing environment. That said, pricing is a double-edged sword, and we have absorbed high raw material costs and overall inventory inputs, as Rahim will discuss. We have seen these types of price movements before, and we closely monitor our inventory during this period. Overall, relative to a pre-COVID baseline of 2019, MagnaQuench's product volume increased 9%. while adjusted EBITDA was 30% higher than 2019 at $48 million. On the C&O side, in Herrera's specialties portfolio, the chemicals and oxides business continued to outperform. In 2021, this business unit had the strongest product volume sold over the past five years in a very strong pricing and demand environment. Next generation products continue to lead the way across all applications. Within the rare metals unit, our group continues to make important strategic efforts to strengthen and diversify that business. With the introduction of new products over the past two years, excuse me, particularly in the electronics market, we've been able to return to a position of profitable strength, even in the absence of a strong aerospace sector. the traditional main market for our products, which has not yet fully recovered from the COVID-related slowdown. More recently, this has been aided by higher prices for tantalum, as higher value applications in the semiconductor space continue to demand that material. Over the next two years, it is anticipated that the aerospace sector will return to pre-pandemic buying patterns, and we have confidence in our business's ability to outperform. On sustainability, in each of our business, a lot of effort has gone toward our first three pillars I mentioned earlier in my comments, protecting and strengthening our core, expanding through innovation and diversifying our supply chains and global footprint. But the final common thread in all three businesses is an increased emphasis on sustainability, performance, and leadership, Nearly all of our production facilities now measure the sustainability performance through the EcoVadis methodology. Two of our magnet quench plants recently earned high marks from EcoVadis for their outstanding sustainability performance. Other NEO facilities are tracking to improve the results. That sustainability story will soon be easier to understand for all of our stakeholders as we're finalizing NEO's inaugural sustainability report. As many of you are aware, this endeavor is a comprehensive and very thorough review of a company's operations, policies, and procedures. NEO has always endeavored to do the right thing for our employees, customers, shareholders, and our communities when it comes to sustainability and environmental protection. We have led the way in many fronts, particularly with recycling and circular economic models for nearly three decades of operations in the rare earth processing industry. As we expand our sustainability practices across the board, we're now also taking advantage of new tools to effectively measure and communicate the depth and breadth of what is common to us behind the scenes. Accessing and tracking the right data, both quantitative and qualitative, is vital to establishing long-term goals and further integrating sustainability into NEO's overall operating strategy. I would also note and remind you that NEO became a signatory to the United Nations Sustainable Development Goals during 2021, and we're focused on how to improve the quality of human life, protect human rights while supporting our local communities. Last, as we think through operating trends at the start of this year, the first quarter of the year is typically seasonally slower across our businesses. With the Lunar New Year holidays across China and most Asia, while consumers and supply chains around the world digest their spending over the previous Christmas season. This year is no exception. In fact, we've seen a slightly longer slowdown this year due to the Beijing Winter Olympics. There are some conflicting signals from the automotive industry as well, as certain OEMs are still adjusting operations with the ongoing semiconductor chip shortage. That said, we're currently anticipating a general recovery across the automotive industry, as we approach the second and third quarters this year, bearing any significant global supply changes or other unforeseen impacts from events on the world stage. Global macro trends towards greater use of sustainable technologies and global decarbonization provide long-term wind behind NIO's technological sales. We look forward to helping our customers and society accelerate towards those goals. With that, I will now turn the call over to Rahim.