Neo Performance Materials Inc.

Good morning, ladies and gentlemen, and welcome to the NEO Performance Materials Inc. Q1 2024 Earnings Conference Call. At this time, note that all participant lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. And if at any time during this call you require immediate assistance, please press star zero for the operator. Also note that this call is being recorded on Friday, May 10, 2024. And I would like to turn the conference over to Ali Madhavi. Please go ahead, sir.

Good morning. Thank you, operator. Good morning, and thank you for joining us for NEO Performance Materials first quarter 2024 financial results conference call. On today's call, I am joined by Raheem Sulaiman, 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, operational changes, 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. NIO assumes no obligation to update any forward-looking statements or information which speak as of the respective dates. Financial amounts presented today will be in U.S. dollars. Non-IFRS financial measures will be used during this conference call. Let me now turn the call over to Rahim.

Thanks, Ali, and good morning, everyone. For a quick roadmap of today's call, I will touch on current market conditions, achievements of strategic initiatives, and then provide an update on our two major capital projects. Jonathan will then provide details on the quarterly results and financial position. So we started off the year from a position of strength as we generated $10.8 million of adjusted EBITDA, slightly ahead, but reasonably in line with our expectations. This is particularly notable in a quarter in which rare earth prices continue to decline, with lingering weakness in demand for magnetic applications, which has pressured most of the rare earth industry. Our strong result is driven by favorable performance across our value-add businesses, including the rebound of our rare metals business, as we expected. We also benefited from improved cost containment efforts, including driving operational efficiencies across magnet-clenches powder manufacturing facilities and our SILMET rare metals facility. Of course, it's important to remember that we are lapping a very challenging quarter in Q1 2023, where we experienced significant negative price volatility. And from the fourth quarter of 2023, which formed an unusually low baseline, driven by the timing issues in rare metals results. So whereas the comparable periods had significant unusual events, this period would be characterized as more in line with our expectations, but given the current softness in magnetic demand, and accounting for negative lead lag continuing to impact our separation business. At the business unit level in the quarter, each of our business units improved compared to the prior year. Magnet quench volumes are still generally lower than our expectations, maybe 10 to 15% lower than where we think the business should be operating today. But favorably, we are seeing solid volumes in our newest and growing applications, such as our heavy rare earth free traction motor and our finished magnets. However, volumes for other applications such as industrial and home appliance applications are lower related at macroeconomic headwinds, but we do expect these volumes will recover as well in due course. Within chemicals and oxides, our specialty environmental catalyst programs performed close to, but just under our targets for volume and margin contribution. We see these volumes and margins as within the reasonable range for this business and impacted more by timing within the automotive industry. However, our rare earth separations business continued to be pressured by negative lead lag due to further declining rare earth prices in the quarter. And at this point, I would say it's also adversely impacted by the absolute values of lower rare earth prices. This impact can be seen across the entire rare earth upstream and midstream industry today. And as Jonathan will detail later, our rare earth separation business produced negative gross margins in Q1 2024. which held back the even stronger results of our downstream businesses. Our rare metals business unit performed very strongly due to happening volumes in unit economics, which we anticipated and spoke about after a slower fourth quarter in 2023. At that time, we described the lower rare metals performance during Q4 23 as specific to the quarter with an annual view of rare metals being a better proxy for that business. Well, we maintain that view and are pleased to report that Rare Metals is on track after posting a very strong Q1 2024 to exceeding the prior year full year result. In addition, we have begun to see a positive impact from the Q4 2023 closing of the midstream portion of our niobium and tantalum business. It is still early days, but we are seeing improvements in gross margin, improvements in focus on operational costs, improvements in sales and margin opportunities in that business. We have not yet seen the planned inventory reductions as yet, but that is mainly due to us choosing to keep a relatively larger safety stock during this transition period. I would like to specifically recognize the work of our relatively new EVP for rare metals, Mohamed El-Mahmoud, and his team for executing this change rapidly and successfully. There are some tremendously important activities ongoing at NEO as we thoughtfully work against the key accountabilities and initiatives outlined on our Q3 call some six months ago. At that time, we detailed some ambitious short-term targets. There was a range of five to eight specific short-term goals across magnetics and critical materials, including MOUs with customers, offtake agreements for expanded supply sources and operational changes in our manufacturing footprint. In addition, we announced an additional goal to improve our public awareness and shareholder engagement. At the end of this six-month period, I am pleased to report that we delivered on eight out of the six to nine targeted goals, certainly achieving the high end of the range. And three of these targets were achieved over the past two months. First, we executed an MOU with Meteoric Resources for the supply of rare earth feedstock to our separation facility in Europe and to support rare earth for our magnet facility in Europe. Meteoric is an early stage development project targeting middle and heavy rare earth elements through its asset located in Brazil. It has the potential to deliver meaningful quantities of magnetic rare earth feedstock including dysprosium and terbium for our sintered magnet customers. This builds upon our efforts to partner with new and existing industry leaders to help accelerate diversified supply chains for critical materials. Second, we executed on the closure of our light rare earth separation facility located in Zibo, China. This is consistent with our mandate to reduce the investment in capital in low return businesses that are subject to very high levels of volatility. That business has been in direct competition with China's state-owned enterprises and other larger players, simply without the scale required to achieve an attractive return. The market for rare separations within China has dramatically shifted over the past 20 years, and maintaining a relatively small midstream asset makes less economic sense for NIO today, especially given the continuing trend for a more tightly consolidated industry. The closure of this midstream processing capability has no impact on our value-add downstream operations and reflects an important step on our commitment to strategically review each operating asset and facility on our journey to a more focused business and to have a more strategic operating footprint. In addition to rethinking our operational footprint and economic profile, We've also started a more deliberate effort to transparently communicate our business and amplify NIO's media and public affairs profile. Just last month, we hosted a large group of industry participants to our technical and innovation center located in Singapore to showcase many of the value-add technologies and application developments within NIO's MagniQuench and chemicals and oxides units. The feedback from attendees and industry analysts was overwhelmingly positive. with a general sense that NEO's set of competencies and world-class talents are a unique feature to boost NEO's midstream and downstream ambitions, and establishing NEO as a premier partner to work with for numerous upstream providers. We look forward to planning a similar event for investors and analysts potentially later this year. We're also building on our brand in the media. with numerous articles and features about NEO across several news media outlets, including a feature run by Deutsche Welle in Germany and broadcast across its international audience. We obviously fell short on one initiative, to deliver an MOU for our European-centered magnet plant. But when evaluating this shortfall, we evaluated against two considerations, execution and timing. From our perspective, We have a high level of confidence on our map for execution. We continue to work with customers on actual samples for actual magnets with real and detailed commercial dialogues. However, our timing is a little bit behind as the programs we are focused on have not been awarded as yet. There has been plenty of churn in the timing of electric vehicle announcements and deployments over the last six months, but we remain confident that electric vehicles will come to market. And we remain confident that the desire from the automotive OEMs to diversify supply risk away from one single jurisdiction where more than 90% of all rare earth magnets are produced today. This desire is also supported by the recently enacted European Critical Raw Materials Act, which requires, among other things, that 40% of the critical materials be processed within the EU for these technologies and no more than 60% be sourced from one single jurisdiction outside the EU. We remain confident in our ability to win magnet programs in Europe and in North America, and we maintain commitment to deliver a responsible ramp curve that will drive the long-term success of this facility. Similarly, when we build focus and accountability on our short-term goals, That behavior also translates into making excellent progress across our two major capital projects. First, as we reported on our last call, we began commissioning of our NAMCO catalyst facility in Q1. And to date, we have successfully tested all major production equipment and have produced customer-specific samples for our established high-volume programs. We are currently submitting production samples to customers for requalification, and we anticipate that this process will extend into the second half of 2024. We expect NAMCO to be running at production levels by the end of this year, and we expect this project to be delivered $5 million under budget. Second, our sintered magnet facility in Europe continues to progress steadily on time and on budget. We're a little more than halfway complete on the building construction and all major equipment has now been ordered. We also continue a steady recruitment effort to expand the strength of our technical team in Estonia on magnet technology. Taking a step back and looking over the last six months, we have delivered several impactful changes to our business model, which will benefit the business for years to come. We were awarded a new product platform for specialty magnetic powders used in automotive traction motors using a heavy rare earth free magnet technology. We obtained a new customer for the critical material gallium, developed a new source of supply and entered into tolling contracts to manage commodity price volatility there. We established a new supply agreement for separated magnetic rare earth oxides originating outside of China that will be used in traction motors. We executed an MOU for new light and heavy rare feedstock with meteoric resources. We exited our midstream niobium and tantalum process in SILMET. Tied to this, we expanded our supply base to numerous oxide suppliers. These changes are expected to generate improved EBITDA, less risk, less volatility, and improved return on capital employed. We discontinued operations of our light rare separation facility in China, which will also improve our return on capital profile, reduce volatility, and provide a better geographic diversity for NIO. And last, we began a new concerted brand awareness and communication effort to tell our exciting story here at NIO. With our strong start in Q1, we believe NIO is positioned to take advantage of more opportunities in 2024, and we continue to expect full-year adjusted EBITDA to grow by a double-digit percentage relative to 2023 and to see impactful improvements and growth in the years to come. Before I turn the call over to Jonathan, I want to address one additional change in that our EVP of Chemicals and Oxides, Jeff Hogan, has decided to retire at the end of Q3. For those that have had the pleasure of meeting Jeff, he has been an innovative and thoughtful leader, a great partner, and a great friend across the rare earth industry and for NEO for the past 25 years. We thank Jeff for all of his past efforts and all of his future contributions. Jeff will be working closely with his successor, Muhammad El Mahmoud, the current executive vice president of our rare metals business over the next five months. Since joining the NEO family about six months ago, Mohammed has been a force of positive new energy in driving change, bringing new perspectives, and creating accountability. Building on his multi-discipline background, Mohammed brings his global experience in automotive, in operational excellence, in innovative engineering, and in new business development to his expanded role at NEO. With that, I'd like to turn the call over to Jonathan.