Neo Performance Materials Inc.

Good morning, ladies and gentlemen, and welcome to the NEO Performance Materials, Inc. Fourth Quarter and Full Year 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, March 15, 2024. I would now like to turn the conference over to Ali Madavi. Please go ahead.

Thank you, Operator, and good morning, everyone. Thank you for joining us this morning. Joining me this morning are Raheem Suleiman, NEO's President and 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 out of their respective dates. Financial amounts presented today will be in US dollars. Non-IFRS financial measures will be used during today's conference call. Let me now turn the call over to Rick.

Thanks, Ali, and good morning, everyone. And a special welcome to two of the newest members of our team, our new Senior Vice President of Global Human Resources, Helen Sun, and NEO's new Senior Vice President and General Counsel, Karen Murray. Helen and Karen are two integral members of our leadership team, and we are thrilled to have such immense talent, added diversity, and new energy to help drive the future path for NIO. NIO completed the full year 2023 by taking important steps forward against our technical, commercial, and strategic roadmaps. While the market environment continued to be challenging with persistent declining rare earth prices and a weak magnetic industry, our teams continue to remain focused on our future growth opportunities. For the full year, we reported $572 million in revenue and reported an adjusted net loss of $1 million, or a loss of two cents per share. We reported adjusted EBITDA for the full year of $37.2 million, which is just less than half of our reported adjusted EBITDA for the full year 2022. Jonathan will cover these dynamics in more detail. On the rare earth side of the business, we are now about two years into a downward price cycle for rare earths, a combination of increasing supply quotas in China and weaker demand dynamics generally. The long-term growth of rare earth magnetics, for automotive and EVs remains very attractive. And this is where NIO is focused on building our long-term roadmap. Yet the largest portion of magnetics demand today is for general use applications, things like appliances and air conditions, power tools, elevators, and other electronic applications. The demand for these applications has particularly slowed down within China as housing starts and consumer demands have slowed. The resulting impact on magnetic wear prices is clear. as the prices for neodymium has declined from more than $160 per kilogram at its peak in March of 2022 to a recent low last week of below $50 per kilogram. Against the backdrop of declining rare earth prices, it's not surprising to see our full year results pressured. But we know that these lower financials will not persist in our long-term economic model. NEO is not a mining company. So the absolute value of rare earth prices is less of an issue than the trend of falling prices throughout the year and the impact on lead lag. The scale of the price declines we have seen over the last 18 months simply cannot happen again in the absence of another first significant increase in rare earth prices. Before discussing our operational performance, I'd like to acknowledge and congratulate ProgressMADE in expanding rare earth supplies by some of the most significant players in our industry outside of China. Linus in Australia has progressed with the extension of its separation license in Malaysia and has continued plans of expanding its rare earths brought to market. Linus recently announced plans to have capacity of 10.5 kilotons of NDPR oxide. MP Materials in North America has begun separating magnetic oxides and announced a plan to increase its mining capacity by 50% over the next four years. Cerro Verde in Brazil has commissioned its rare earth mining project and is currently wrapping up its production volumes. And others, including Energy Fuels, Hastings, Meteoric and Aclara have all made progress in the same vein, progress toward expanding the supply of rare earth materials available outside of China. This progress is a telling indicator of the acknowledged need and growth of rare earth magnetics outside of China. These additional sources are supporting the demand for more material while NIO will continue its focus on converting these oxides into magnetics in support of the energy transition movement and the electrification of automobiles. Financially, 2023 was a disappointing year for our business and significantly underperformed compared to our expectations. There's no getting around that and there's no hiding from it. We saw rapid declines in rare earth prices and we saw low demand for our magnetic materials. This had a significant negative impact on MagnaQuench and C&O. Meanwhile, our rare metals business, although it reported a lower Q4 driven by some unusual factors, still had a near record year, repeating a record year in 2023. We don't see 2024 as a continuation of Q4 for rare metals, but rather as a continuation of the full year 2023 results. And we expect to see another record year type performance in 2024 for rare metals. That said, aside from the lower bottom line figure in 2023, there were many key accomplishments in 2023 for which we are proud, and we will impact our company in the years ahead. In magnet quench, we cut our conversion costs for making magnetic materials by about 20% from the prior year, including executing a significant reduction in headcount. We increased our magnet volumes again this year, now marking a five times increase from when we acquired the business in 2019. We broke ground on our European magnet plant with great strides on the HR technical and construction side. We did not achieve our goals for the year related to program wins as OEMs have delayed EV launch plans, but we remain extremely confident that EV launches will happen and customers will diversify away from a concentrated China supply. From a technical achievement perspective, we won the next generation of heavy rare earth free traction motors and locked in supply sources to fulfill this business from outside of China. And we executed the purchase of SG Technologies, a magnetic and assembly business in the UK, expanding our footprint and capabilities outside of China. In C&O, the team has made incredible progress on the Namco relocation, staying on budget and essentially on time. They did that with no accidents and no other safety environmental concerns. We made progress on the commercial side with new programs for emission catalysts and new nanomaterials within specialty oxides. And our water treatment business continues to grow as we had a record year of volumes in this small but growing space. In rare metals, despite poor Q4 results, we achieved another near record result in 2023. driven primarily by the team's flexibility to manage market changes, including changes in haptium prices and gallium market changes. And we announced the change in our still-met midstream business to focus more on downstream products, and I will elaborate more on this later. As a whole, we continue to have an excellent and industry-leading health and safety record. We published our second sustainability report, making strong progress toward our environmental responsibilities, and we achieved five Equivata certifications, including three gold medals. Nothing can mask the difficult financial year, and we're not trying to do so. Instead, we are engaged in working toward a stronger foundation upon which we will build our future growth. To support our future growth, we have under construction two significant capital projects, and we believe will be major contributors to future growth and earnings. First, we made great progress through Q4 last year and quarter to date at the relocation and modernization of our environmental catalyst facility, which we refer to as NAMCO. The main areas of construction and installation are now complete, and we have started commissioning and manufacturing lines for initial production. It will take some time to debug the entire system, but we are within one month of our original timeline, and we are within budget for overall costs. After customer qualifications are complete, We expect to ramp up production and we will be producing at normal commercial levels in the back half of 2024. We still have a bit of a journey to go here, but we are extremely pleased thus far with the progress and early material we have coming from our production lines. Second, our magnet facility in Europe is in the early stages of construction and purchasing equipment. While we only put shovels in the ground last August, we remain on budget and on schedule and we are comfortable with the progress made. We believe this project will be a game changer for the rare earth magnetics industry outside of China. This is proving to be even more true given that China enacted further regulations to limit the transfer of magnet making technology outside of China. Remember that NIO has been making rare earth magnets inside and outside of China for over 25 years. NIO will be able to manage through these export restrictions given our long history in our early start on this project. As many of you will recall, we also laid out a series of targeted short-term achievements on our near-term roadmap over the six-month period to May of 2024. These addressed three targeted goals. First, to secure one to three new sales agreements or MOUs with customers for critical materials and magnetics. Second, to execute one to two new supplier or offtake agreements to support our sourcing strategy. And third, to complete one to three significant improvements in our manufacturing footprint and our operational strategies. We are partly through this timeframe, but we are pleased to announce significant progress in each area. First, we're happy to update that we have been awarded a second contract for specialty magnetic powders for heavy rare earth free traction motors and automotive. We won the inaugurating platform for this technology a few years ago, and we are thrilled that this proof of concept has now evolved into the next generation of platforms and more vehicles and models. Second, related to new supply arrangements or offtake agreements, we have successfully established a new supply source agreement originating outside of China for magnetic oxides that will be used directly for our new traction motor platform. Third, we have entered into an important sales and tolling contract for a portion of our gallium sales and manufacturing capacity. This new arrangement checks the boxes for all three of our roadmap targets. One, it establishes a new sales agreement for advanced materials. Two is it establishes a new supply arrangement for NIO. And three, it marks a shift to our operating strategy within this business. We've briefly discussed China's enactment of a policy to restrict the sales of primary gallium outside of China. As a reminder, NIO's gallium recycling facility in North America is the only one of its kind that can recycle gallium materials. While this new sales arrangement is modest in terms of deal size, it's an important shift in our operating focus to substantially de-risk our operations. It reduces risk of supply, improves our sales profile, decreases lead lag, and mitigates overall volatility for this business. Finally, we address a significant change to our operating footprint by exiting the midstream hydrometallurgy portion of our tantalum and niobium business within rare metals. This was announced in a press release in December of 2023. It's an important change for our operating strategy at our Estonia Rare Metals business. In short, by not working on hydrometallurgy or chemically separating tantalum and niobium, it allows us to focus our efforts on metalmaking, which is the highest value and strongest return on assets proposition of this business. This change is quite beneficial for a number of reasons. First, it allows us to diversify our material sourcing strategy. Historically, we sourced from a single upstream provider into our midstream process. Now we have expanded our supply base to four midstream suppliers going into our downstream process. Second, we can adjust the procurement balance of niobium and tantalum. This will enable us to focus on our highest value sales opportunities from a value add perspective, rather than having to sell a fixed input of the materials that we purchase. Third, This shift also has a substantial reduction on inventory required, as the hydrometallurgical process is by definition a time-consuming process. Excess raw material will shift en route, held at the front and back ends of hydromet, to then be fed into metalmaking will go away, and we can reduce inventory by about 10 to 12 weeks. Once again, this change addresses a couple of our key initiatives, improving our sourcing strategies, as well as improving our operating strategies. For the sake of clarity, this change has no impact on our rare earth separation business, which is also located in Estonia. In summary, we have made great progress on the initiatives and targets that we laid out last quarter. We aren't celebrating quite yet, but these are ambitious targets that are creating some early momentum. And we fully expect to build upon that momentum quarter after quarter and continue to change and build our business. At a macro level, We are at the beginning edge of an inflection point in the industry, a complete supply chain of rare earth magnetics and critical materials outside of China. I'm excited about the progress we've made in 2023, and I look forward to sharing more progress in 2024. I think that we will all see that the future is much brighter, and we certainly expect double-digit adjusted EBITDA growth in 2024. With that, I'd like to turn the call over to Jonathan.