Neo Performance Materials Inc.

Good morning, ladies and gentlemen, and welcome to the NEO Performance Materials Q1 2023 earnings call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, May 12, 2023. I would now like to turn the conference over to Ali Madavi. 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 of our website at neomaterials.com. Joining me this morning are Konstantin Karianopoulos, NEO's Chief Executive Officer, and Rahim Suleiman, NEO's President. 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, goals 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 also available on CDAR and on our website at neomaterials.com. With that, let me turn the call over to Constantine.

Thanks, Allie. Good morning, everyone. NEO reported first quarter sales of $136 million, 18% lower than last year's first quarter, with an adjusted net loss of $9 million. Adjusted EBITDA during the quarter was about $800,000. It's been about six weeks since our last conference call to report year-end, and it's no surprise the trends that we've been signaling for the past 12 months have continued. On the rare earth pricing front, prices continue to trend downward, particularly near the end of the quarter. On the general macroeconomic demand side, there has been a continuation of various demand interruptions, which we've discussed at length in prior calls. I'll refrain from going in depth on COVID disruptions, the general economic temperament in China, the impact of Ukraine and Russia, and the tepid improvement of automotive and semiconductor supply chains. Suffice to say, both pricing measures and near-term demand factors negatively impacted pricing, margins, and volumes during the first quarter. Yet, none of these factors appear to have staying power over the long haul. In fact, we expect the opposite to be the case. We're seeing signals of price stability and volume recovery in the second half of the year, a view supported and informed by positive comments from our customers. We expect pricing and volume pressure to continue through the first half, driven by persistent and rather annoying, I might add, inventory desocking. There's no denying that our bottom line performance over the past two to three quarters has been subpar. But we believe that we're approaching a reset at the midpoint of this year with a subsequent return to more normal levels of profitability. In the current period, many legacy programs continue to experience weak demand. This has been a common thread in the entire magnetics industry across automotive platforms, consumer appliances, and advanced consumer electronics. Further, factory automation robotics demand has also slowed. Perhaps more importantly, the real estate and construction slowdown, particularly in China, has led to a serious drop in demand for a large permanent magnet application there in elevator and escalator systems. In each of these applications, slower demand has led to built-up inventory and continued a downward cycle for underlying magnetic raref pricing over the short term. Higher interest rates have put pressure on returns for new wind farms, further exacerbating a weak demand for rare earth magnets. But we are confident that this cycle will not only play out in the short term, but will return to a long-term trend of sustained growth. Again, these are familiar dynamics for us on prices and volumes. The ups and downs of the rare earth industry run through cycles that include three to four year spurts, with one to two year long run ups in price associated with a flurry of activity, including quite a bit of distraction and noise. Then we typically see one to two year restabilization period. I believe that we're nearing the end of that restabilization period. The added dynamics from the global pandemic and continued lingering effects on global supply chains have truly been unprecedented in my 30 years in this industry. But through discussions with our customers, suppliers, and government regulators, and with macro trends continuing to drive major technology and investment decisions by end customers, I have a high degree of confidence that we are approaching a new transition in that global demand cycle. The mega trend tailwinds for vehicle electrification, the electrification of everything really, and the need for more advanced solutions to clean air and clean water technologies are apparent. So, too, is the need for further carbon footprint reduction and alternative energy solutions, including renewables. The growth from all these megatrends is deceptively slow. It doesn't appear through a breakout quarter or a breakout year, but when looking back through the lens of time, those trends have already made pretty big statements. As an example, the advent of pure battery electric vehicles may not feel as though the The world is on track to achieve some auspicious targets through 2030 and 2035. Achieving more than 10% to 20% saturation of new passenger vehicle sales, even in China, doesn't feel like a huge number when you see less than one out of 10 cars on average on Chinese roads that have the green EV license plate. On the other hand, when I was walking through Shanghai last week, it felt more like Two in five were big numbers of EVs driving around Shanghai. And then that increases as you go further down the east coast of China. Over a five-year period, however, it's quite massive. Look at what we've seen with diesel automotive passenger vehicles in Europe. Just five years ago, diesel vehicles accounted for about half of all new cars sold in Europe. Last year, that number was 16%. That's nearly a 20% annualized decrease. And those drivetrains have shifted to a combination of more complex hybrid technologies and new EV technologies that both require advanced engineered performance materials from NIO. So I'll refrain from anticipating a hockey stick style growth rates to begin later this year. But I do believe that overall consumer demand, industry inventory, and global supply chain dynamics are going through a reset. In the back half of this year, we should start to see a more favorable operating environment for our rare earth and magnetic businesses. In the big picture, rare earth pricing today remains relatively attractive compared to what we saw as the norm five to 10 years ago. At today's prices, demand for rare earth and specialty materials remain at a healthy level. There is no question that prices today continue to encourage utilization of these materials. Engineers at OEMs and Tier 1 and Tier 2 suppliers are more comfortable designing these superior materials into long-term solutions for automotive, aerospace, electronic, and healthcare devices at current pricing levels. I'm proud of the fact that for the majority of customers' applications, NIO's highly engineered products are the preferred technical solutions. Where alternatives may exist to utilizing rare earths, those alternatives are associated with clear negative economic trade-offs. For example, a permanent rare earth magnet used in an automotive battery cooling pump motor will be smaller, more efficient, and weigh substantially less than a standard ferrite magnet-based alternative. Another motor battery engineering team could choose the less efficient option, but that adds weight. less efficiency. At current prices and even somewhat higher prices, rare earth magnet motors are the clear preferred alternative. While one of these motor changes may not appear to have a large impact, multiplying those inefficiencies across 60 or 100 motors in a vehicle has a demonstrable impact on the overall performance and driving range. It's a difference between launching a successful EV program or stumbling right out of the gate. Thus, having an underlying stable, healthy market to supply these critical materials, such as rare earth permanent magnets, it is essential. My view is that today's market dynamics are setting us up for the start of a long-term stable and secular growth trend. And I believe this trend will be balanced through the addition of new supply, mostly outside of China, as China has become an importer of rare earth raw materials to meet the significant increase in demand. My message for shareholders is that we have built a truly unique business and operating model within the industry. No other company has the technical know-how or successful experience designing and commercializing advanced rare earth technology solutions. And no other company has the ability to service global customers in their local geographies, given our supply chain optionality on all three major continents, as well as both inside and outside China. These structural advantages lay the groundwork to deliver on our vision to be the world's leading supplier and manufacturer of advanced rare earth technology. As we've done over the last several decades, we will continue to invest substantially in our human capital advantage and technical skill set advantage to ensure that we can power the next stages of growth. With that in mind, we're pleased to have recently announced the 90% acquisition of SG Technologies Group Limited, or SG Tech, in the UK. SG Tech has long been a customer of MagnetQuench Group for highly technical and challenging, difficult to make bonded magnetic powders and compounds. The concept of expanding into a vertical channel and moving up the value chain can be enticing, Attractiveness of SG goes well beyond the typical value chain play. Our R&D, technical and commercial teams at Magniquench have had the pleasure of jointly developing industry-leading magnets and magnetic assemblies over the past few years. Collectively, SG Tech's nearly 200 employees have some of the best permanent magnet and electric motor knowledge in the world. That has enabled SG Tech to introduce to its customers novel high-performance magnets and magnetic assemblies that simultaneously ensure the performance of the application's mission-critical requirement, the high efficiency performance of a fuel injector, while also taking costs out of the supply chain. What SG Tech has been able to accomplish is an intricate understanding of exactly how its magnets are utilized. Starting from scratch, they have consistently delivered value to their customers by improving the performance of not just their magnets, but also the performance of the end product by providing novel, complicated assemblies. SG Tech's proven track record in truly understanding both the limits of the material itself and the application. The working knowledge of the material has positioned SG to push the boundaries of what is possible compared to standard magnetic materials, whether bonded, soft magnetic composites, or otherwise. This is more important today than ever as customers are seeking next-level engineering improvements to meet market demands. That technical and innovation advantage has created very strong relationships with some of the world's largest and most well-respected brands across the automotive and consumer electronics industries. SG Tech's customers regularly involve SG Tech whenever they develop new products or upgrade their existing product portfolios to, for example, meet even more challenging efficiency standards. This has been the case with SG Tech and its automotive fuel injector business for one of the largest tier one producers in the world. This methodical, collaborative approach, their take to innovation with key customers yields results. That is why SG sought out for repeat business and new programs and new platforms. In many ways, this mirrors the success in product innovation that NIO's R&D labs have achieved over the years. Because of our history of leading technological innovation, it is self-evident that we must do more than just establishing manufacturing capabilities and capacity. As the MagniQuench business expands in Europe through our electric vehicle magnet project in Estonia, we know that our customers will demand more continued innovation in both our products and services, given the technical nature of our business. SG Tech is a perfect fit for how we want to be able to serve these customers. Aside from the technological know-how and impressive human capital, SG has made substantial investments in its specialty manufacturing facilities in the UK. That has allowed them to offer favorable proximity and supply chain efficiency to the European and North American customers. Its common value set, combined with the strategic advantages of the SG Tech business model, create a high level of confidence in the value of this business addition. With new product streams that further expand the MagnetQuench traditional product portfolio, we're establishing a foundation as a magnetic growth leader within Europe and North America. In just a few short years since MagnetQuench expanded into manufacturing bonded magnets through our operations in Tianjin and Suzhou, we have quickly grown to expand our magnet volumes by nearly fourfold. and establish a growing position within magnet manufacturing. And we have maintained our position as the world's largest manufacturer of magnetic powders. With a new combination of innovation from SG Tech, we believe we can further build upon a strong position within bonded magnets, especially in the attractive market for new energy vehicles and consumer electronics, where improved performance and consistency is an absolute necessity. NEO's largest strategy to develop and build a European rare earth industrial center of excellence is advancing on all fronts. From the upstream side, we continue to expand and diversify raw material suppliers from outside of China. We have regular shipments now arriving from North America, Europe, and Asia that can be tracked and validated to meet our demanding specifications. And we also continue the long journey to develop new resources. For the Sarfatort rare earth project located in Greenland, we recently received approval from the government of Greenland to transfer the exploration license at the project. I'd again like to thank the Greenland government for their cooperation and vision for this project. They've been transparent and they've done exactly what they told us that we're going to do. A resource investor, any investor for that matter, cannot really ask for anything more from government leaders. Our centered magnet project to be built near our Estonian facility continues on track through its design and plans to break ground in the next little while. An announcement to that effect will be issued shortly. Our plan for phase one production for capacity of 2,000 tons of centered magnetic block for 2025 remains on track, as is our intent to expand to 5,000 tons per year in response to market demand shortly after that. Each of these areas of our long-term plans to compete for growth, increased raw material diversification, expanded magnetic production to support electric vehicle growth, and investment in innovation and sustainable technology. We're well on track to execute across all three strategies. We will continue to work through the short-term business cycle challenges and will remain focused on executing our strategic growth plans. I'd now like to turn the call over to Rahim for a more detailed review of the quarter.