Neo Performance Materials Inc.

Good morning, ladies and gentlemen, and welcome to the NEO Performance Materials, Inc. 3rd Quarter 2023 Earnings Call. At this time, only internal lesson 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 0 for the operator. This call is being recorded on Friday, November 10, 2023. And I would now like to turn the conference over to Mr. Ali Madhavi, Senior Vice President, Corporate Development and Capital Markets. 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. Joining me this morning are Rahim Suleiman, NEO's Chief Executive Officer, and Jonathan Bach, NEO's Chief Financial Officer. 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, adjusted EBITDA, product volumes, product pricing, other income and expense measures, cash returns and future business outlook including potential expansion plans and contracts. 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 US 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 our website at geomaterials.com. Let me now turn the call over to Reem.

Thanks, Ali, and good morning, everyone. It's been a little more than 100 days since I've been in the role of CEO, and as you might expect, that first 100 days has been a whirlwind. I've recently slept in more hotel rooms and airplanes than in my own bed, but it has been worth it to spend quality time meeting with our employees, local leadership teams, key customers, key partners, industry colleagues, and other critical stakeholders around the world. Frankly, I've never been more excited about NIO's future with our extraordinarily talented employees, technical knowledge, a diverse manufacturing base, and a unique value proposition. These have helped to drive our decades of experience in product innovation, our loyal customer base, and our positive free cash flow generation. Yet, these have not been fully reflected in our growth opportunities or in our share price. Despite having more cash and inventory than our actual market cap, despite having 10 well-capitalized manufacturing facilities around the world, and despite offering our customers a unique parallel supply chain for rare earths, both inside and outside of China, our share price reflects a significant undervaluation of this company. Somewhere in this market dynamic, the core story of our opportunities and our capabilities is just not taking hold. I'd like to use this morning to share my thoughts on the future focus of NEO, the industry at large and the growth case of why NEO will succeed as a global leader in the rare earth magnetics industry. Jonathan will then take you through the third quarter results. In addition to our earnings release, we will be publishing an updated investor presentation outlining our vision, our opportunity and our roadmap. I won't specifically walk through that presentation today. But it provides for some context for what we see as a generational opportunity in front of this company and why NIO is best placed to capitalize on this opportunity. Which leads me to our new vision. To fast forward the clean energy transition as a global leader in rare earth magnetics and critical materials. Now maybe that doesn't sound too different from NIO's story over the past year. We're already global, we're already based in rare earths, and we are a magnetics company. But NEO has not participated in the largest and most valuable application of rare earth magnets, sintered magnets. We have built the number one specialty bonded magnet business as the absolute leader, but in a niche market with a nuance, and a nuance that is an important takeaway. The sintered rare earth magnet market is roughly 15 to 20 times larger than the bonded magnet market. And the sintered market will also continue to grow incredibly fast due to electric vehicles, wind turbines, and other energy saving applications. NEO maintains other critical material businesses that perform quite well. They are profitable, positive cash flow, sticky product categories that will remain engineered into critical applications for many years. Many of these will be part of the future of NEO and will be a source for growth, but I won't speak to those at length today as I want to spend more time defining the generational opportunity in sintered magnets and NEO's vision to be a driving force in this segment. With that in mind, let me go a little bit deeper as to why we are so excited to be talking about our rare earth magnets expansion. There's a culmination of several macro trends that set up this growth opportunity. The transition to a sustainable electrified economy that values carbon neutrality. Two, the technical development of electric motors and permanent magnets. And three, the shift to diversified and localized supply chains across global manufacturing. All three of these combine together to create a truly generational opportunity for NIO. We have to acknowledge the supply risk today for magnet manufacturing. magnetic rare earth elements are considered critical and strategic materials in just about every major jurisdiction today. But China dominates the rare earth industry and has for some time. Historically, about 90% of rare earths were mined in China. Today, there are more rare earth mines operating outside of China, including Linus, MP Materials, and Cerro Verde. There are also numerous projects in the industry pipeline, that all seek to solve for the geographical imbalance in the supply of rare earth materials in an environment where demand for rare earth magnetics is skyrocketing. But the next three phases of the supply chain, rare separation, making metals and alloys, and the ultimate prize of manufacturing rare earth magnets are absolutely dominated by China today with some 80 to 90% concentration. For magnets specifically, Roughly only 10 to 20% of magnet making capacity is located outside of China. Yet 60% of all magnets are assembled into motors, which are eventually consumed outside of China. This creates real risk. It is clear that OEMs and governments are looking to reduce the dependency on any one geographic source. And that's true of any single dominant source of supply. There is substantial investment, including by NIO today, to help accelerate the transition to a more resilient supply chain around the world. Many government bodies not only acknowledge that, but they are supporting new infrastructure through grant and loan programs, such as NIO's recognition through the European Just Transition Fund to support our current Phase 1 magnetic project in Estonia. Let's talk about RARES magnets, but just for a quick moment. Rare earth magnets are simply the most powerful and efficient magnet technology in the world. There is no better technical solution for delivering the most power, torque, or precision to a finely tuned electric motor. The end market uses of these motors is growing at a tremendous pace, tied largely to the world's energy transition movement. Rare earth magnets are used to power electric motors for offshore wind turbines, energy efficient circulation pumps, battery cooling pumps, electric bikes and scooters, and so much, much more. And of course, with the development and rapid commercialization of battery electric vehicles, the primary propulsion mechanism, usually a traction motor or an e-axle, benefits from the unique and powerful properties of raref magnets. A more efficient electric motor reduces weight to increase an EV's battery's range and prevent battery drains. We estimate that about 85% of all EVs are using rare earth magnets as the technology to drive their traction motors. This is in addition to rare earth magnetics driving other automotive electric motors used in cooling pumps, automatic sliding doors, seat motors, and so much more. The automotive and energy sectors have been talking about lithium and cobalt for more than a dozen years. What lithium and cobalt are to batteries, rare earth magnets are to electric vehicle motors. As I said, rare earth magnetics represent a generational growth opportunity. The overall rare earth magnetics market today represents approximately 200,000 metric tons of material. Five years ago, that market was about 120,000 tons, so an increase of 80,000 metric tons. According to Atomos Intelligence, that 200,000 ton market is expected to grow to more than 500,000 tons by 2035 and nearly 700,000 tons by 2040. The world requires substantial investment in new magnet making capacity in order to enable the global energy transition. Again, this creates the opportunity for NEO and the size of that opportunity is very, very large. For the 60% of demand of magnets outside of China, that number is roughly 120,000 metric tons of magnets consumed today and is expected to grow to more than 400,000 tons over the same timeframe through 2040. The end use applications for these magnets is quite diverse as we've already discussed. Let's look at just one example at the demand growth for rare earth magnets, traction motors for electric vehicles. The total universe for rare earth magnetics is much bigger than this, but this is an easy example for everyone to see. From recent estimates from the Bank of America, there will be approximately 40 million electric vehicles produced and sold every year outside of China by 2035. Those 40 million vehicles will require approximately 60,000 metric tons of magnets. At current raw material prices, 60,000 tons of EV traction motors would equate to approximately a $4 to $5 billion market opportunity. And mind you, this $5 billion market is truly a new market opportunity. This means that as NIO seeks to establish its product portfolio, we are not competing against legacy suppliers or existing infrastructure. This is not a situation of substitution or lifecycle management within a product set. This is truly net new growth. NEO's targeted phase one and phase two magnetics project in Europe is for 5,000 metric tons or less than 10% of just this one discrete market opportunity. This is just the beginning of NEO's journey. So the market opportunity is massive and it's real. And NEO's competitive strengths combined with an emphasis on focus and accountability will ensure that we succeed. Let's take a deeper look into the landscape of players so that as to know who can fill this void and take advantage of this great opportunity. And remember, we're just talking about the outside of China opportunity. We believe that existing in new Chinese companies will very likely continue to represent the majority of rare earth magnet manufacturing. Equally true though, is the world's desire to reduce dependencies on a single source for such a critical supply chain. Beyond the Chinese magnet companies, the remaining 10 to 20% of magnet companies at scale are largely located in Japan, the likes of Shinetsu, TDK, and Hitachi. NIO has worked with and supplied each of these companies for many years, and we are familiar with their expertise and competencies. They are all technical leaders, and we believe that they will take part in this future growth. But not all of it. We also believe that much of the Japanese magnetic industry has earmarked future capacity expansion to support various other Japanese industries, including consumer electronics industries and, of course, automotive. So beyond the current incumbents, the need for growth and new suppliers co-located to regional motor assemblies is crucial. But what does it take to be that leader within magnetics? Magnet manufacturing is a critical link between the world's mining and electric motors. From our perspectives, there are three essential skills required. First, you must be experienced in supplying the automotive industry with highly technical products as opposed to mining materials from the ground. Second, you must have a proven technical skill set and the know-how to manufacture rare earth magnets. And third, you must navigate the complex dynamics of the rare earth industry, including understanding upstream projects, rare separation, metal making, and ultimately manufacturing rare earth magnets. NIO has a proven track record to deliver against all three. NIO is an award-winning partner to the automotive industry. About half of our business goes into the automotive supply chain through qualifying highly engineered and technical parts. NIO has been the industry leader in bonded rare earth magnetics where we have been manufacturing magnetic powders and magnets for more than 25 years. And we have been doing so with our unique parallel supply chain, both inside and outside of China. And NEO is an industry leader across rare earths. We have been processing and separating specialty rare earths for nearly 30 years. Again, our skill sets and capabilities here are unique. The ability to separate rare earths inside as well as outside of China. and the ability to separate both light rare earths and heavy rare earths, and the footprint to manufacture magnetics both inside and outside of China. I would go as far as to say that NEO may be the only company in the world that addresses the span from rare earth separation of mined materials all the way through fully formed magnets. The technical transition for making bonded magnets to sintered magnets is not huge for NEO. The fundamental understanding of formulating rare earth magnets is the same. They rely on the same neodymium and praseodymium rare earth inputs, or the magnetic active ingredients, where NEO has decades of experience. We're proud of our expertise and technical understanding of magnets, which is underpinned by our research lab in Singapore over the past 25 years. Through innovations and customer cooperation, Magniquench helped pioneer the world's first and only heavy rare earth free magnet, to be used in traction motors for hybrid electric vehicles. We are supplying magnetic powders to Dido today, which are on several Honda vehicle platforms. Look, we'll discuss the importance of heavy rare earth magnets on another day, but the key takeaway is that NIO has a tremendous history of manufacturing rare earth magnetics. We're also adept at scaling new magnetic production. In 2019, we acquired Asia Magnetics, a leading bonded magnet manufacturer. And over the past four years, we have quadrupled the size of its magnet production. And we recently purchased SG Technologies, the leading permanent magnets company in the UK. This provides us with additional resources, a deeper understanding of magnetics, and access to even more customers. All of this is in addition to the technical expertise of SG Tech in areas like assemblies and soft magnetics. We're excited to compete and bring something different to the table. NEO's integrated and non-captive supply chain allows for immense flexibility for our customers. We can offer our customers the unique value proposition of having rare separation, metal making, magnet manufacturing, and recycling combined in a single value chain. That creates options and flexibility. Some customers may have a preference to work through the entire NEO value chain. Others may selectively utilize our expertise. We will support both. Equivalently, we have the ability to source rare earth oxides internally through our rare earth separation capabilities, but also externally through our other global partners. And we will support both. Much has been made for the need of a concrete upstream strategy. This is absolutely true if the focus of the business remains rarer separation. However, as we are focusing on rareth magnetics, our options for supply are much greater. Even today, MagnaQuench purchases only about 10% of its material supply from our internal separation units. The rest is purchased externally, and we will continue to do so. We also operate the value chain with an industry-leading sustainability and ESG practices. We have earned three gold medals from Equivatus, representing the top 5% of companies worldwide, as well as two silver medals. Our vision is to improve the world. Our products have been enabling clean air, clean water, energy-efficient solutions for years, and our manufacturing sites have led the industry in environmental and safety metrics for decades. We have just published our second annual sustainability report, and we encouraged by the momentum and recognition of our long-standing responsible practices. It's an extraordinary roadmap for growth, and NEO will be laser-focused on implementing the key strategic initiatives to achieve it. Earlier this year, we announced the launch of the first rare earth magnetic sintered plant dedicated for electric vehicles and traction motors in Europe. Our groundbreaking was in June, and it was well attended by customers, suppliers, ambassadors of various countries, and local government officials. I would encourage everyone to hear the President of the European Commission speak about the importance of the project and NEO's credibility to deliver it. The project is still in early stages, but it is on track and on budget, and we are currently sampling magnets with potential customers, and we continue to build our customer and project pipelines. We've also been very successful in attracting great talent to the project, both locally and rare earth magnetic experts. And while I can't verify this as a fact, I suspect NEO has more rare earth advanced degree technical experts across processing, metallurgy, and magnetics than any other company outside of China or maybe even Japan. There will be more details to come as we continue on our journey for growth. But some of the key areas for me personally in driving this company to the next level will include a laser focus in achieving key objectives that we lay out, an allocation of resources, all of time, energy, money, and people to key projects that improve growth, return on capital employed, and ultimately shareholder returns, and real and hard-based metrics accountability. So today, I am establishing several near-term targets and accountabilities that our team will be driving toward. In the coming three to six months, we are targeting to announce one to three MOUs with customers for rare earth magnets, one to two additional offtake agreements for the expanded supply of rare earths or magnetic oxides, and one to three changes in our manufacturing footprint and operational strategies. These will be tough to deliver in the timeframe, but we have dedicated teams in place to accomplish them, and we are going to get them done. In addition to our magnet developments, there will be a significant increase in NEO's public awareness and shareholder engagement for both existing and new shareholders. We have an amazing story to tell. We need to make sure that it's being heard. and we need to make sure that everyone sees how we are getting this done. This is all in addition to our recent announcements we made in adding Mr. Mohammed El-Mahmoud to our new executive vice president for our rare metals business unit, along with adding a new director to our board. We are continuing to build the team that will get this done. So do I believe it? Well, I'm a buyer of NEO shares today, and I have been throughout my time at NEO and particularly since being appointed as president and now CEO. And I will continue to invest in this company in our future and continue to invest more of my own personal net worth into NEO. I am the new CEO and I was formerly the CFO of NEO. I understand the numbers. I understand the opportunity and I understand that we can and we will execute this. With that, I'll now turn it over to Jonathan to talk about the quarter.