Neo Performance Materials Inc.

Good morning, ladies and gentlemen, and welcome to NEO Performance Materials' second quarter 2024 earnings call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for a question. If anyone has any difficulties hearing the conference, please press star zero for operator assistance at any time. I would now like to turn the conference over to Ali Madhavi. Please go ahead.

Thank you, operator, and good morning, everyone. Thanks for joining us this morning for our second quarter 2024 financial results. Just as a reminder, a replay of this call will be available starting tomorrow in the Investor Center of our website located at neomaterials.com. Joining me this morning are Rahim 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. NEO 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. We are pleased to speak to you this morning and to share our second quarter operating results and business update. I'd like to touch on several strategic initiatives and accomplishments, and then Jonathan will take you through our quarterly results. It has been an extraordinarily busy and productive year thus far, and I'm tremendously proud of our teams and their work to build a better, stronger, and more enduring NEO. During the first half of the year, NEO generated $230 million in sales and $24 million of adjusted EBITDA. This represents a 25% decline in revenue over the first half of 2023, but driven primarily by lower rare earth prices, which have generally dropped by about 20% to 40% this year. But our adjusted EBITDA of $13 million in this quarter and $24 million year to date is a rare sighting in the rare earth industry, as most industry players have reported significant declines and losses this year due to falling and lower rare earth prices. NIO's year-to-date adjusted EBITDA is up about 20% over the prior year. As we've been saying over the past year now, NIO is focused on our downstream operations and our value-added margins. Our rare earth separation business produced losses again this quarter. However, you can see the strength of our larger downstream businesses coming through in our stronger results as our downstream businesses are significantly less impacted by rare earth prices. We will elaborate on this shortly, and I think the unique strength of the NEO business model will become more apparent to all. What is obvious is that with lower rare earth prices, NEO reports lower revenues, yet we reported improved EBITDA and improved EBITDA margins. We announced late last year that we would be conducting a business and asset review with potential changes to our operating footprint and driving focus and accountability across our organization. I'm pleased to report that we continue to make tremendous progress to simplify our operations and improve our business fundamentals. Thus far, we have discontinued operations at our light-rare separation facility in Zibo, China. We discontinued the hydrometallurgy portion of our rare metals plant for tantalum and niopium. And just this week, we announced that we have executed an agreement for the sale of our rare metals facility for gallium trichloride at Quapaw, Oklahoma. On the growth side of changes, we have almost completed commissioning our new, modernized auto emissions catalyst facility in China, and we are on schedule with building construction for our new centered magnet facility in Europe. And of course, I won't miss the chance to note the recent award of the magnet program for this new facility. I believe the first such award, actual award in Europe. As a management team, we are steadfast in taking a disciplined approach to strengthening all of our businesses. These efforts have distilled its specific targets and improvements within each of our three business units. The common lens to evaluate our strategic opportunities is to create a more focused business in the highest growth areas to reduce the volatility in our earnings and dependencies on commodity price, to improve our return on capital, and to generate strong, repeatable cash flows, all leading to investing our time and resources into the best prospects for NEO's long-term, sustainable, and high-quality growth plan. To complement these internal transformation efforts, On June 14th, NEO announced the formation of a special committee of independent directors to lead a comprehensive strategic review process to consider strategic alternatives and opportunities to maximize shareholder value. The strategic committee has retained Barclays Capital and Paradigm Capital as independent financial advisors in connection with this review. In addition, the Compensation and Human Resources Committee has retained Hugesund Consulting, an independent compensation consultant, to advise the company on compensation matters. There is no timetable for completion of the strategic review process, and NEO does not intend to comment further until it determines that such disclosure is necessary or appropriate. There can be no assurance that the strategic review process will result in any transaction or other alternative, nor any assurance as to its outcome or timing. The board and our management team are aligned and committed to exploring all opportunities to maximize shareholder value. And as a management team, we will help coordinate in the evaluation of the company's current strategy, assets, operations, and capital structure. We appreciate your understanding that we will not be taking questions in respect of the strategic review process. One other update related to our board of directors is the recent appointment of Dr. John McGarva as an independent director. We are thrilled to have John's leadership on our board and to help benefit from his decades of experience in global manufacturing companies that represent many of NEO's end markets, including companies that utilize NEO's advanced and specialty products. We also thank Yadin Rozov for his contributions to our board over the past several years, and as a valued contributor to our Audit Committee and Corporate Governance Nomination Committee. Yadin has always provided excellent counsel, provided unique perspectives drawn from his experience as a successful executive, banker, and entrepreneur. As Yadin takes on new commitments and reduces his board service accordingly, We wish him continued success. Turning back to our strategic initiatives, today we will elaborate on two new accomplishments in the quarter in addition to updates on other ongoing initiatives. First, we are pleased to report that we have won a significant automotive platform for our new centered magnet plant in Europe. This is a substantial contract that addresses one of our key commitments that we targeted for completion earlier this year. The award is for magnets, for a new electric vehicle traction motor for a major European OEM and at its peak will account for about 35% of our annual phase one capacity. The OEM program is anticipated to run from 2027 to 2033 with a peak year in 2029. And NIO anticipates revenues to start in the back half of 2026 for this program as we begin to fill the supply chain. In winning this award, we demonstrated our successes in detailed design work, demanding magnet compositions and specifications, the value of a deeply integrated supply chain, and our proven track record of customer collaboration on exacting drawings, parts, and programs. The importance of our European supply chain, quality control programs, and decades of experience for both supplying the automotive industry and manufacturing magnetic materials were critical decisions for both our T1 customer and the OEM. and we are proud to provide magnets that are fully aligned with the European Union's Critical Raw Materials Act. While much has been made of the relative slowdown in the adoption of electric vehicles, as OEMs and motor manufacturers push out potential new EV models, the ultimate need for EVs has not dramatically changed. In Europe alone, about 2.5 million EVs will be produced and sold this year. That number is expected to quadruple in 2030 to more than 10 million electric vehicles. That's nearly a 30% annualized growth rate. NEO's capacity in phase one and what we plan to build in phase two remains just a sliver of the total demand and capacity required for OEMs in Europe and North America. The market opportunity is immense, especially with the additional forces at play with the European Critical Raw Materials Act and the recent 25% tariff announced by the U.S. government on magnets made in China. These, along with the intrinsic motivation for OEMs, have both a globally diversified supply base, as well as local capabilities, means what is in front of us is truly a generational opportunity in the energy transition movement. Several other entrants have announced their desires to get into this market, along with the very small number of incumbents. This is absolutely needed, as today, over 90% of all sintered magnets are produced in China. We will continue our focus and our efforts on successfully winning specific automotive platforms where NIO's positioning as a long-term supplier of rare earth magnetics, a supplier to the automotive industry, and our deep vertical integration and global operations are all highly valued. Second, and subsequent to the end of the quarter, we announced a transaction to sell our rare metals gallium trichloride facility located in Quapaw, Oklahoma. Gallium has been part of the NEO Rare Metals product portfolio for over 10 years. And that said, as we've continued through our strategic asset review, it has become clear that the gallium trichloride products manufactured in Quapa are at a scale that makes it difficult for NEO to have the appropriate focus for growth. It is a niche business relative to the rest of NEO's portfolio. And at about $1.4 million in expected total proceeds, The sale price reflects at approximately nine times EBITDA multiple before considering NEO's unallocated costs and efforts. Kevin Reading, the founder and current general manager of the business, is purchasing NEO's stake. Kevin has always been a valued partner and a great business leader, and we are excited for Kevin and the team at Quapaw and for the continued growth opportunities for this facility as a focused entity. NEO's gallium recycling facility in Peterborough, Canada, will continue to be owned by NEO, and will continue to supply recycled gallium units to the Quapaw facility and other customers in the coming years. With our aims to simplify NEO's business globally and to focus on key portfolio assets that reflect our scale and growth ambitions, selling the Quapaw facility is the third significant change to our operating footprint over the last year. And that excludes the two large capital projects that are targeted at growth. So let's talk about those. During the second quarter, we continued commissioning our NAMCO environmental emissions catalyst facility in Zewo, China, and we have started to receive customer approvals for the requalification of specific products. Our primary focus is to complete the requalification of all products and then return to a laser focus on improving operational efficiencies. For certain products that have been successfully qualified, we have already begun testing our abilities to run at full program speeds as we prepare for the full facility ramp-up. We expect it to take a couple of more quarters to have all of our products be qualified and for us to start running at full production scale. As Jonathan will outline, at current course, we expect this major project to be completed on time and under budget. In Europe, we are on time and on budget for our new centered magnets facility. We are actually writing slightly ahead of budget on the shop floor construction and we will be able to pull forward some of our initial timelines for equipment installation as major pieces of equipment have started to arrive on site. Customer interest remains very high, and we continue to produce new samples meeting new customer specifications. We have been very successful in attracting a brilliant and experienced team, and our finances remain strong, including the support of the Just Transition Fund in Europe. Our localized vertical integration offering remains a key factor, and we benefit from the infrastructure we already have placed in Estonia. Stepping back, the market environment, particularly rare earth commodity pricing, has been difficult for the rare earth industry over the past two years, and magnetic demand remains soft in nearly all geographies. Our value added operation model differentiates NEO as a specialty manufacturer within the rare earth and magnetics industry. And we have been able to generate growing EBITDA in the face of these market conditions. This is notable when many of the largest players in the rare earth industry have reported operating losses in recent quarters. Our separations business faces a similarly challenging predicament to rare earth miners. And we continue to sustain gross margin and EBITDA losses in the current pricing environment through the first half of 2024. Our separations business must continue to solve for the largest impacts on profitability, pricing, scale, higher value products, and reduced conversion costs. There are no easy solutions for some of these issues, particularly as price is an industry-wide consideration and scale is dependent on additional sources coming online. We are deeply engaged in cost reduction programs and focusing on higher value products and mixed benefits. and we will continue to seek to improve these things and their impact on our financial results. But as you can see from this quarter and this year's result, NIO is much more than a rare separator that is tied to these constraints. NIO is a much stronger value-add downstream business, and this is what is driving our strong EBITDA results. Given that EBITDA is negative in the separation portion of our business, the value-added portion of our business is even stronger than what might first appear. And NEO will continue to focus on growing this value-added portion of our business in the quarters and years to come. Across our value-add businesses, including magnets and assemblies, emission catalysts, and specialty rare metals, we have performed generally above our expectations for the first half of this year. And with that in mind, we stated earlier this year that we expect double-digit EBITDA growth for the full year 2024 compared to 2023. And we started this year with even further declines in rare earth pricing, meaning our double digit growth rate was gonna have to fight through the headwind of further declining rare earth prices. But based on our strong results in our downstream businesses, we update and increase our expectation to achieve an EBITDA in the range of 45 to $50 million for the full year 2024. That is a growth rate of 20 to 35% over 2023. And at this point, we continue to believe that we will generate double-digit EBITDA growth percentage in 2025, assuming that rare earth prices demonstrate some stability. In May 2024, we laid out about eight short-term accountable goals. I am proud to say that with the recent Sinter Magnet Award, we have now successfully completed each and every one of those goals.