Neo Performance Materials Inc.

Please stand by. We're about to begin. Good day and welcome to the NEO Performance Materials third quarter 2022 earnings 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. Thank you for joining us this morning. As a reminder, a replay of this call will be available starting tomorrow in the Investor Center on our website located at neomaterials.com. Joining me this morning are NEO's President and Chief Executive Officer, Konstantin Karianopoulos, and NEO's Chief Financial Officer, Rahim Suleiman. 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 this morning and are also available on our website. NEO assumes no obligation to update any forward-looking statements or other 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 earnings press release, which is available on CDAR and on our website at neomaterials.com. I'll now turn the call over to Constantine. Thank you, Ali, and good morning, everyone.

Pleased to have the opportunity to update you today on several strategic initiatives on which NIO has made significant progress this year, as well as our quarter. While global economic sentiment appears to be pivoting downward in the near term, we are confident in our ability to effectively manage our business through every stage of the business cycle, just like we've done so many times over the past three decades. More importantly, we're building upon these strong businesses to generate significant growth in the future. Before I get into the quarterly results, let me first provide an overview and context to some of the strategic announcements we've made over the past few months. Over several years, we've been working to develop an integrated plan that builds upon NIO's legacy strengths of product quality, innovation, and customer service, ensuring our customers have visibility into the security, reliability and sustainability of a critical material is more important than ever. These qualities are essential to winning the next piece of business, but also to building long-term mutually beneficial relationships with our customers. As we pursue various avenues of growth, one thing is abundantly clear. We must expand our operating infrastructure in order to meet rapidly growing demand for the critical rare and rare metal materials that are needed by hybrid and electric vehicles, new energy storage and distribution, clean air and clean water technologies, and responsibly sourced components for consumer goods. For NIO, the global energy transition presents a once-in-a-lifetime, long-term growth opportunity. To take full advantage of this, we must be able to position ourselves and scale rapidly in three key areas. First, upstream raw material diversification. Second, expansion and modernization of existing plant and infrastructure. And third, downstream expansion of new magnets, both centered and bonded. For each of these, and through our legacy product innovation and customer service efforts, we can assemble the rarest and advanced materials infrastructure to establish the secure ESG-focused supply chains that our customers need to meet the challenges of climate change. Regarding raw material diversification, as many of you know, we've been discussing the importance of raw material diversification on these calls for a number of years. Having long-term committed suppliers and diversity of supply is paramount to the strength of any well-functioning supply chain. Our customers and their customers have made it clear that they want localized supply chains. When long-term legacy feedstocks suppliers to NEO are at or near capacity, we must encourage our suppliers to further expand their operations and to influence them to adopt stronger ESG practices It's not enough to have shovels in the ground ready to deliver material. We must build our business relationships through a prism of respect and a shared understanding of sustainably sourced materials. That includes working with partners who fully believe in the importance of our carbon neutral future. Securing offtake rights at an early stage of development provides NIO and our customers with additional optionality. It also allows NEO to help influence strategic decisions in the development of new rare earth resources. Decisions that align with our vision for sustainability and minimal impact on the environment. During the quarter, while we have continued our dialogue with a number of promising emerging producers, we recently made particular progress with three potential upstream partnerships. First, Sarfar Talk. In Greenland, the former Hudson Resources rare earth project. Yanjibana in Australia, owned and operated by current largest shareholder Hastings Technology Metals. And Copomora in Australia, a heavy rare earth ionic clay deposit owned by Australian rare earths. On surfer talk, first, during the quarter we announced that we are in the process of acquiring the exploration license and rights for the Sarfatoit rare earth deposit in Greenland from Hudson Resources. There's been renewed interest and clarity provided by the local Greenland government related to the exploration, mining, and processing of the mineral deposit. This has helped to alleviate prior concerns around potential developments of this project. Our team visited Greenland to meet with the local community to better understand its needs and what this development means to them. They also engaged further with the government to understand its willingness to support the project. The team conducted a site visit to get visibility on the available resources and was strongly encouraged by Sarfatar's development potential. While this is a long-term project that will be aligned with long-term growth for AERETH materials in Europe, we have a high level of confidence in the technical team involved, which we have assembled. due diligence efforts related to the transfer of the exploration license from Hudson Resources to New York continuing. But importantly, we believe this project can be fully supported by a renewable hydroelectric power with minimal disruption to the environment. Next, our newest major shareholder, Hastings Technology Metals, is currently developing a rare deposit in Western Australia, Ariangibana. We have been monitoring the team's progress at Yanjibana for a number of years, and this project skews very attractively towards magnetic materials. It has the potential to be a competitive producer of mixed rare earth carbonate materials for our facility. They aim to have initial rare earth offtake available in three to four years based on current timelines. We welcome Hastings as a shareholder, and we look forward to further evaluating their asset as a potential source of raw material for our plants in the future. Last, we also signed an MOU slash joint development agreement after the quarter's end with Australian Rare Earths Limited, or AR3, regarding its Copomora heavy rare earth clay deposit. AR3 and Copomora is one of four known heavy rare earth clay deposits outside of China. There's a notion in the world of magnetics that there will be enough or at least there's an expectation that there will be enough neodymium and praseodymium for anticipated adoption curves with permanent magnetic motors in things like electric vehicles and wind turbines. But the heavier earth elements that help maintain magnetic properties at high temperatures have less visibility to adequate supply. This problem will need to be addressed from multiple angles. It includes continuing to minimize the heavier earth content in magnets, as MagnetQuench and Dido have done in producing highly engineered magnetic powders and hot-default magnets for Honda's electrified drivetrain systems that contain zero heavy rare earths. It also means bringing online new heavy rare earth deposits that can be developed in an environmentally responsible manner. We see AR3 as having a high potential for success, and we look forward to developing this relationship further. The common theme around these three potential resources is that they're led by strong technical resources and advisors who have been involved in the rare earth industry for years. Substantial work remains to be done with all of them, but we will continue to explore new arrangements that can produce responsibly sourced materials with a desired ESG footprint. Each of these projects can help take a step forward in providing additional raw material optionality for our customers and build upon our current supplier arrangement. We continue to reliably purchase material for our separations plant in Estonia from our legacy supplier, Solacam's Magnesium Works, as well as from Energy Fuels in the United States. Energy Fuels continues to make substantial progress towards expanding its access to primary monazite raw materials. Last, we continue to evaluate and expand our recent supplier relationships in Southeast Asia to support growth in both Asia, and in Europe. With regards to our center magnets efforts, in addition to substantial steps regarding raw material diversification and growth across our supplier base, we announced earlier this week that we have been awarded a significant grant from Europe's Just Transition Fund, which I've talked about before, for the construction of our centered rare earth magnet manufacturing plant in Estonia. This is the culmination of terrific efforts from our senior executive team, our local team in Estonia, our MagnaQuench innovation team, and government leaders in Estonia. Each of these stakeholders sees the powerful potential of the vertically integrated rare earth manufacturing hub in Estonia to drive the transition to electric and hybrid vehicles, more offshore wind turbines, and other innovative decarbonization technologies. I want to convey my personal gratitude and thanks to Estonian's Prime Minister, Kaja Kalas, Entrepreneurship and Innovation Technology Minister, Kristian Jarvan, and all the other government officials in Estonia for their leadership in this joint investment with NIO. We look forward to further building upon this shared vision to create new jobs and economic opportunity for the citizens of Estonia and to serve as effective agents for climate resilience. Our phase one production capacity target is 2,000 tons per year of centered magnet block, which will produce around 1,500 to 1,600 tons a year of magnets, depending on size and shape. Although it's early at current market levels, we believe this phase one capacity would indicate potential incremental revenues of $135 to $160 million at current prices. This is obviously a meaningful contribution to NEO's long-term plans. And recent discussions with current and potential customers have indicated strong support for further growth beyond these phase one levels. And with the benefit of the JTF funding grant, we're accordingly developing plans for phase two and beyond. The Just Transition Fund, financial commitment from the EU and the government of Estonia further de-risks phase one of our Centered Europe project, and it adds to our confidence level. As we develop our long-range planning for phase two, it was also very encouraging to hear the President of the European Commission call on the urgency for localized rare supply chains established in her State of the European Union address on September 14th. Her announcement of the launch of the Raw Materials Act and the creation of the EU Sovereignty Fund to support projects of strategic European interest in critical raw materials creates policy tailwinds that can only fast-forward our growth efforts. In order to deliver the raw material inputs for these centered magna plans, there's an obvious connection back to increasing our localized upstream raw material relationships, but it's also essential for us to review our rare earth separations capacity and modernization. The rare earth requirements for 2,000 tons per year of cinder magnetic blocks are larger than our historic production at our silma plant in Estonia, which is currently the only commercial industrial scale rare earth separations facility operating in Europe. We anticipate that we will supply the new Sintered Magna plant with both rare earth inputs from SILMET and from other sources. But we remain in early planning stages to evaluate the timing coordination of potential expansion efforts for rare earth operations at SILMET. Of course, we'll approach this project with the same rigor and methodical approach to ensure an appropriate ROI for growth capital. But all three phases, upstream raw material diversification, expansion, modernization of our existing infrastructure, and expansion into centered permanent magnets will be a part of our long-term roadmap for growth. It is still a very exciting time for us at NEO, and we're very busy implementing these plans and assuring that we'll have the adequate human and financial capital to execute on these plans. For the capital requirements related to center magnets, we intend to fund this project through a combination of grants like the European JTF funding, as well as accessing various options in the European debt markets, as well as with cash on hand. During the quarter, we announced a $75 million project loan agreement for the modernization and relocation of our auto emissions catalyst facility in Zibo, China. We proceeded to groundbreaking on that new facility this past summer, and we're currently in process for early works construction activities. Our legacy plant remains operational in the meantime, within COVID restrictions, of course, and we intend to operate the old plant into next year's with qualified products from the new facility. We also completed a $50 million, US $50 million, bought the illiquidity offering at $15 per share during the quarter after the recent transaction announced between Oak Tree Capital and Hastings, and we decided to shore up our balance sheet. It's no surprise that the current capital market environment is tighter than it's been in recent years, and in that tight market, the Oak Tree deal opened a window for us, which provides several benefits for the company and its shareholders. which primarily the additional capital enabled us to move ahead with our centered magnet strategy prior to the completion of any potential public financing or grants like the Just Transition Fund grant. Having a clear sight on near-term capital availability allowed us to establish specific timing commitments. This is a critical step towards bringing on a new supply chain and balancing the coordination of upstream and downstream expectations. Pursuing this new capital allowed us to accelerate our plans and significantly de-risk our internal timelines. Second, NIO has historically maintained adequate flexibility through free cash flow to allow us to be opportunistic in terms of new technologies and potential acquisition opportunities. In today's market, we do see such opportunities that we're in the process of evaluating them. I expect to be updating you on these discussions in the near future. As we move forward with each of these strategic growth projects, I want to convey my own excitement over the strategy that we've outlined. It's also important to note that we have dedicated operations teams around the world to ensure that our strategic growth strategies are not getting in the way of our legacy and day-to-day operations. Let me now turn to the third quarter results. As you likely saw in our announcement and filing this morning, we reported $146.7 million in revenue during the third quarter. While we enjoyed mostly tailwinds over the past couple of years, the latest quarter was a mix of strategic tailwinds and pricing, short-term pricing volume headwinds. The P&L indicates a mixed story as the industry worked through some relatively lower market pricing conditions. as compared to the start of the year. In addition, these financial results are largely reflective of today's broader microeconomic trends. With some new challenges currently indicating potential temporary slowing consumer demand patterns across all regions, our top line sales remain strong relative to NEOS historic norms. They are, however, weighted against the complicated backdrop that more frequently points to a potentially softer demand environment. While pricing remains relatively attractive compared to pre-pandemic norms, it has been more volatile over the short term and retreated about 40% over the past six months. That volatility is placing short-term pressure on our margin levels, its higher-cost inventory, and LCM adjustments. flow through our P&L. Rahim will provide greater color in his comments on this. I will remind shareholders that this lead-lag volatility is more or less normal in our industry. And when pricing stabilizes, which appears to have started over the past six weeks, a unit economic model usually stabilizes in turn over the next several quarters. There was some positive themes in the quarter, such as decreasing shipping costs, excuse me, and strong volumes across Europe and North America. But these were overshadowed by the continuing uncertainty in the Western world. The war in Ukraine continues, and ripple effects are growing, particularly related to energy programs and their related cost impact as Europe prepares for winter. This reverberates through the food production and advanced chemical supply chains, as key processing reagents are limited in production and driven to higher prices. A couple words about COVID. Regional supply chain disruptions are unfortunately still a common occurrence, particularly in China. Just this month, we observed another more pandemic-related Just this month, we observed more pandemic-related disruptions in China, including in Zibo, where we have one of our facilities for our environmental emission control catalysts and separated rare earth products. Mandatory shutdowns or limited operating days in China continue. While this downtime usually doesn't affect our finished goods shipments in a significant way, it can impact our operating schedules, operating efficiencies, and our ability to receive raw material. While such impacts tend to be shorter today than in the previous couple of years, there are still challenges that consume resources and attention. Regarding automotive, the automotive industry, inflation has more than crept into the automotive sector. Higher-priced new vehicles are the norm, and the average-priced vehicles soared more than 30% over the past few years in North America. The used car market jumped accordingly as new cars simply weren't available. There is still less than one month's worth of available inventory on many dealer lots. Even while some of these impacts have started to ease, semiconductor chip shortages still plague the industry. Regional temporary shutdowns within China remain all too commonplace, and these inhibit the movement of critical automotive parts and assembly. When you add higher consumer interest rates to the mix, a large portion of consumers are simply getting priced out of the new car market. For the full year 2022, automotive production is anticipated to be about 80 to 82 million units, which is about 3 to 4 million units lower than last year's forecast. The industry is not expected to get back to 90 million units until 2024 at best. While automotive OEMs reduce output forecasts for internal combustion engine vehicles, clearly one of the obvious areas for growth and innovation is the fact that the industry is developing resilient critical material supply chain for electric vehicles. In the near term, as EVs continue to gain market acceptance, especially in China, throughout the first nine months of the year, Chinese consumers purchased more than 3 million pure battery electric vehicles. They're now on track to purchase more than 4.5 million of these vehicles per year. Chinese automobile tax rebate incentive program for low displacement vehicles instituted this past June has clearly had a strong impact. EV sales increased nearly 50%. since the advent of this policy, and more Chinese producers are opting for new energy vehicles, either battery-powered or plug-in hybrids, at a dramatically higher rate. These combined electrified vehicles are on pace to achieve a 20% plus penetration rate this year, three years ahead of the original 2025 policy target date. While China has taken a clear edge in EV adoption, similar dynamics are at play in Europe as battery and hybrid vehicles steadily improve market share. For the first nine months of the year, sales of EVs and plug-in hybrids achieved a 19% market share in Europe, just barely trailing China. While the Scandinavian countries continue to lead from a market penetration perspective, Germany has moved past the 25% electrified threshold. North America remains a little bit further behind, but it is growing quickly off a smaller base. as sales of EVs year-to-date have increased 70%. These trends are not new, but to support the continued growth and adoption of EV technologies, the rare earth industry needs to provide a stronger, more resilient base for electric motor manufacturers and the confidence to OEMs to continue to design in these permanent magnet motors. In other words, the industry needs orders of magnitude more extraction, refining, magnet, motor, and drivetrain production in order to meet the 2035 targets for decarbonization and electrification. In closing, the near-term business environment has a lot more uncertainty than any of us want to see now that we're going to have years into the global pandemic. That said, our operations have remained strong in the face of these past and present challenges. Our employees' dedication and resolve to do the right thing is unparalleled in the industry in my experience. A unique business model positions us very well with dual supply chains, both within and outside of China, and the strategic positioning to capitalize on the major tailwind trends. On a base of strong foundational operations, I'm both very excited and confident in our long-term growth plan. Provide us and our customers with powerful flexibility. Also have allowed us to carve out a commanding lead in product innovation, and help to ensure that we're delivering for our customers day in and day out. We look forward to keep you appraised of these developments in the coming quarters. And I'd like to turn the call over to Rahim for a detailed review of the quarter. Thanks, Konstantin.