Neo Performance Materials Inc.

Stand by, we're about to begin. Good day and welcome to the NEO Performance Materials fourth quarter 2022 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ali Mudavi. Please go ahead, sir.

Thank you, operator, and good morning, everyone. Thank you for joining us this morning. Just as a heads up, a replay of this call will be available starting tomorrow in the Investor Center of our website at neomaterials.com. Joining me this morning are Konstantin Karianopoulos, NIO's Chief Executive Officer, and Rahim Suleiman, NIO's President. 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 filing, 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. With that, I'll turn the call over to Constantine.

Thanks, Ali, and good morning, everyone. As we reported this morning, NEO generated $640 million in sales in 2022, 19% higher than the previous year. Our adjusted net income for the year was $32 million, or 74 cents per diluted share. Our full year consolidated adjusted EBITDA was $79 million. And while the record annual revenue as a reemerged public company since 2017 is a result that we feel good about, I want to acknowledge the difference between the first and the second half of the year. We're well into a period that requires careful navigations. The combination of macroeconomic conditions, strained supply chains of rapidly growing clean technologies, and volatile rare earth prices are superimposing a complex landscape on our industry and business. A set of conditions that is familiar to those of us in the industry who've been long enough to have been through it and taken advantage of it many times before. In the fourth quarter, we reported sales of $159 million and an adjusted net loss of 5.7 million, or 13 cents per diluted share. We reported the adjusted EBITDA generation of 12 million. Rahim will provide additional color on the numbers. With the benefit of three decades of experience in our industry, we entered the second half of 2022 with eyes wide open on the need to navigate cautiously the underlying raw material pricing environment. It is with this conscious and cautious navigation of market volatility and supply chain reform that NEO generated positive EBITDA in every quarter of the past five years since we reemerged as a public company in 2017. More than anything, our experience has taught us that when we work hard and stay focused on safeguarding cash flow and balance sheet integrity during market troughs, we consistently come out of these challenging conditions stronger on the other side. During this phase of the rarest market cycle, we're calibrating our tactics by reflecting on the following questions in the near term as we wait for the dust to settle. First, how the continuing chip shortage, the economic slowdown in manufacturing reopening within China, from the transition from a COVID environment is affecting end product demand. Second, how higher interest rates for inflation management are affecting large project developments throughout supply chains. And third, how lasting is the pressure from the seemingly never ending semiconductor crisis on automotive and consumer electronic supply chains. These signals of downward cyclical pressure have been acutely felt through the magnetics industry, which saw business activity down 20% to 30%, and perhaps more during the fourth quarter. As we know from experience and constant communication with our customers, during this phase of the cycle that is well underway, it is both pricing itself and the working down of inventories by customers waiting for price volatility to settle, which has a temporary impact on volumes. Regarding volumes, we have continued to evaluate the effect, as I mentioned earlier, of semiconductor chip shortages on automotive and electronics over the past two years. While there's been a modest direct impact on the number of vehicles produced and sold, there are further discrete impacts on specific platforms and the types of vehicles produced. Peeling back another layer, one of the key consequences affecting NIO's business is that the continued shortage of semiconductors has resulted in thrifting of these chips in terms of automation and other power features in passenger cars. This has led to the production of vehicles that have fewer bells and whistles, particularly in Japan, China, and Europe. That means fewer power features with motors that adjust seat positioning, lift tailgates, open doors, move mirrors, and the like. And that means reduced demand for magnets going into these motors and magnetic materials used in these magnets. The slowdown from automotive magnet demand during the fourth quarter was further exacerbated by weak demand in certain consumer products that utilized motors and magnets as a result of the lingering lack of consumer confidence, particularly as China was emerging from a restrictive pandemic environment. On the other hand, Internal combustion engines and hybrid vehicles still require catalytic materials, which partially illustrates why our chemicals and oxides business unit volumes have remained more resilient than magnet quenches over the same period, despite facing similar sector-related headwinds. That said, all of these appear to be normal aspects of the business cycle, dare I say, They serve as a healthy splash of cold water in an industry that was showing signs of dangerous overheating only a few quarters ago. The ebb and flow of neodymium and praseodymium pricing is currently in a range that we have long suggested was conducive to a healthy rare earth industry and is equivalent to the pricing we saw about this time a couple of years ago. For those of you that follow us closely, you're well aware that in a down pricing environment, news margin profile undergoes some compression as a result of carrying higher value inventory against a lower market price. The opposite, of course, occurs when prices rise. Again, this is a normal aspect of the rarest business cycle, and when pricing stabilizes, our earnings return to normal. To be clear, we're very familiar with managing through these types of short-term cyclical fluctuations. And when we take a step back to view the long-term outlook of rare earth and rare metal technologies, we believe that we're sitting at the front end of a multi-year, if not a multi-decade long secular growth trend. NEO is without equal in our capability to lead many markets in the specialty rare earth materials manufacturing space, as we capitalize on decarbonization and energy efficiency tailwinds. I cannot overemphasize the fact that news business is designed for growth in the key technologies that will advance global sustainability efforts. Last year, when we published our company's first ESG report, fascinating takeaway from that comprehensive analysis was the fact that more than 90% of our products are integral to clean air, clean water, lightweighting, and energy efficiency enabling technologies. Our products are thus critical to achieving a more carbon neutral world, whether that be through enabling a more powerful and efficient electric motor that propels an electric vehicle, a catalyst that helps improve fuel efficiency and reduce harmful emissions, or lightweighting superalloys that enable aerospace efficiencies. The world's rapidly advancing energy transition needs NEO's products. And that is not only the products that we make today, but also the innovative technologies currently being developed and rolled out by our research and development labs. These technologies will continue to support the secular growth trends over the next 10, 20, and 30 years. In addition to a unique and strong market positioning, our operating model is extraordinarily resilient. As a manufacturer that focuses on engineering value-added materials for our customers, we do not earn our operating margin and cash flow from the changing value of rock in the ground. Instead, we earn our margin when we create unique formulations for our customers with customized functional attributes through understanding the chemistry, morphology, and the associated chemical and physical characteristics of our materials. This helps to explain why we have generated consistently positive EBDA for the past five years. This does not mean we're immune, however, to a volatile environment, but we generate a much more consistent earnings profile compared to pure play extraction companies, which tend to live in a boom, bust, or feast famine cycle. That consistency allows us to invest in additional growth opportunities. During 2022, we made substantial progress laying the groundwork for growth, especially in three areas. First, raw material diversification. Second, magnetic product expansion. And third, innovation and sustainability. As we have discussed in previous calls, we established several new relationships in 2022, with prospective raw materials companies to improve the diversification, expansion, and self-sufficiency of our feedstock supply chain, in addition to establishing our presence in the upstream sector of our industry in Greenland. All of these companies that we work with are making good progress in their efforts to expand the availability of critical rare earth concentrate supplies. Neil's unique position Maintaining integrated supply chain capabilities within and outside of China offers our customers unparalleled service and optionality. Given the global supply chain challenges over the past three years, we have seen multiple customers take advantage of that flexibility as our operations evolve. During the year, we're proud to have started the process of substantially expanding our magnetic manufacturing capabilities outside of Asia, with our first centered magnet plant to be established in Europe. I'm pleased to report that we have a dedicated project management team in place, working over the past few months, and we have begun the recruitment process to expand our local employee base. We have also established joint training programs with our local rare earth teams in our global MagnaQuench-led organization. The soft infrastructure continues to be put in place, including our procurement and compliance systems. Key supplier relationships to the site have been or are being established. The permitting process continues to move according to schedule, which has been further enabled now that our design is complete. This also enables us to continue with discussions with our equipment vendors and manage our long lead procurement process. From a commercial perspective, the strength of our existing customer relationships is paramount to accelerating our success and a dedicated support from highly experienced MagnetWinch team. It's especially helpful to have trusted operational leaders that have been a part of our historic capacity expansions at our plants in Tianjin, Korat, and Chuzhou. The Estonian magnet project is a major undertaking and one where our team continues to outperform. We've been thinking through this project for quite some time, but to see the progress from conceptual idea through formal approval and now into early stage development is very satisfying. We're very appreciative as well of the opportunity to expand in Estonia and for the diligent efforts of the local community Narva, Estonia, as well as our partners and employees working hard to develop the project. Early testing and qualification of our magnets from our pilot plants is meeting with acceptance and success by our key Tier 1 drivetrain customers in Europe. We expect to break ground and start construction of the Greenfield magnet plant as soon as the Estonian weather permits. Similarly, Our modernization and relocation for our environmental emission control catalyst facility in Zeebo, China, continues on schedule. Our early works construction efforts are nearly complete with no interruption of production at our legacy operating plant. Given the Chinese New Year holiday, we had some anticipated downtime surrounding both the holiday and expectations for winter season interruptions. The construction site is humming again, and we look forward to finalizing site building foundations and structures in the first half of 2023. The key benefit of these new manufacturing facilities is a more efficient processing flow sheet and the advance of engineering perspectives. Our legacy Zebo plant started life 40 years ago, and it has undergone a lot of capacity expansions and iterations to accommodate new and innovative products. With this new facility, we get to hit the pause button, reassess what is working, and think through future-proofing these sites for a more sustainable footprint. Additionally, we continue to work on and expect to close shortly the acquisition of additional strategic assets that, when added to our portfolio, unlock product and margin synergies that are unique to NEO, further increasing our market position differentiation. As we plan for new, stronger emergence from this market in the medium and long term, allow me to make some comments on public policy tailwinds. Slowly but meaningfully, government interventions are providing attractive incentives for the establishment of rarest supply chain optionality for European and North American electric vehicle and renewable energy OEMs and Tier 1s. In addition to the direct financial and other support we have received from the government of Estonia, our team has been an active contributor to various government processes around the world, focused on developing public policies to support greater production of critical materials for the green technology transition. We welcome all the latest policy developments in Canada, the US, and especially the European Union. Two weeks ago, The EU Commission published draft legislative text for the Raw Materials Act and the Net Zero Industry Act. In fact, the Raw Materials Act specifically has distinct sections specifically about rare earth magnets, the first in our industry's history. We're also monitoring the potential establishment of the EU Sovereignty Fund, which, as we're hearing from Brussels, should be the source of funding to support these two acts. These legislative initiatives outline a very bold vision and quantify specific targets for supply chain diversification. They give special attention to domestically produced rare earth magnets for electric vehicle motors, for which NIO is a front runner with a flagship investment in Estonia and the synergies we capture from the existing separation facility in the vicinity. While the positive impact of these tailwinds is difficult to quantify with high precision before the completion of our Estonia's magnet project, we cannot ignore that the tide is rising because of all these legislative developments. The Inflation Reduction Act legislation enacted in the United States last year has proven to be a real game-changer in the electric vehicle landscape, with positive spillover effects on critical minerals beyond just battery materials, such as rare earths and rare earth magnets used in EV and other high efficiency motors. I expect that over the next few quarters, we will be evaluating the establishment of a metal alloy and magnet production facility in North America, similar to our new plant in Estonia. As we prepare to publish our 2022 ESG report, I'm encouraged that our teams are currently undertaking the heavy lifting of working through preliminary science-based targets as we evaluate the best sourcing of energy for each of our individual plants. Of course, we knew that embarking on ESG would be a long journey, and we're working diligently towards the next major step. At our existing chemicals and oxides rare earth operations facility in Estonia, we are fortunate to have a substantial portion of our energy needs coming from renewable energy resources. And as we scope the new sintered magnetic facility nearby, we are exploring meaningful solar energy options to help contribute to an even lower carbon emissions footprint. We have seen the success of installing industrial solar at our MagnaQuinch facility in Korat, Thailand. And we are currently commissioning our phase two solar installation to continue to improve the sustainability profile of our operations there. We're also in planning stages to install solar capacities at our magnet facilities in Tianjin and Chuzhou, while our magnet plant in Estonia is targeting to have 1.6 megawatts of solar power capacity. In 2022, we earned two EcoVadis gold medals for our facilities in Thailand and Estonia, and an EcoVadis silver medal for our magnet quench plant in Tianjin. And since the start of this year, a facility in Korat, Thailand, received yet another gold medal, its second in a row. We are believers in this methodology, and while the grading curve continues to get more difficult every year, we're up for the challenge. I think it's important to note that meaningful work towards ESG has many benefits across our organization. It's a new lens for us to view continuous improvement, which yields benefits beyond the traditional parameters of sustainability. We're identifying potential cost improvements, potential changes to flow sheets and personnel movements, and opportunities for cost-saving measures that may not, on a standalone basis, have passed the test. I'd like to remind shareholders that our emphasis on ESG has a direct benefit to our overall top line as well. Key customers have made it clear that in addition to NIO's innovative technologies, consistent quality, and outstanding customer service, our efforts around ESG have played a critical role in winning new product platforms. Just as some customers appreciate the flexibility of our dual supply chain strategy, others are particularly keen on the sustainable nature of core operations. As we think through the coming year, we look forward to sharing more in each of these key areas. Last, I want to echo a sentiment that discussed on this call last November. The market environment we operate in obviously continues to be a bumpy road, but our strategy is sound as it is informed both by the growth opportunity ahead in clean technologies and by the existence of not only surviving but capitalizing on rarest price swings over the past three decades. We've successfully managed through these conditions in the past, and I'm confident in NIO's position to withstand the current macroeconomic risks. The business cycle continues to be a bit fickle at times. Most of the headwinds over the past two years continue to linger, and that was prior to the tremors coming from the banking industry this past month. And while China is currently going through its reopening to the world, it came with pretty significant friction at the end of Q4 and the start of Q1. Remains to be seen whether there will be a lingering impact within the automotive sector in China as OEMs and local government stimulus programs try to drum up some demand. But China remains the leader for EV adoption despite the strict pandemic restrictions that have slowed economic growth. Overall, the majority of our business remains relatively stable through the short term. Certain areas, such as rare metals exposure to aerospace and superalloys, have performed extraordinarily well. And our exposure to continued secular growth of key megatrends bodes well for us in the long term. Before I turn the call over to Rahim, there's one final strategic perhaps initiative I'd like to touch on, which is the announcement of Rahim as NEO's new president, which became effective January 1st. Most of you are very familiar with Rahim's keen business intuition and thoughtful candor in these earning calls. He's always one of the most well-prepared, dedicated leaders across a company in our industry. Over the past six years, the board of directors and I have also been able to observe his humility and sharp business acumen, which will serve him well in this new capacity. While he continues to hold down the fort in the CFO role for now, I'm confident that he will continue to help usher in an area of operational excellence and strategic execution as we continue our momentum into 2023. Rahim, thank you for your continued contributions, and I look forward to working with you to achieve the next stage of growth at NEO. And I'll now hand the call over to you.