NanoXplore Inc

TSX:GRA

Earnings Call Transcript 2023-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Q1 2023 NanoXplore Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your speaker today, Mr. Martin Gagne. Please go ahead.

[Martin Gagne, executive]

[Foreign Language] Good morning, everyone, and welcome to NanoXplore's 2023 First Quarter Conference Call. Today, I'm here with Soroush Nazarpour, our President and CEO; and Pedro Azevedo, our CFO.We will start with our prepared remarks and then a Q&A. In addition, last night, we have filed our 5-year strategic plan presentation on SEDAR, and it can also be found in our Investors section under Events and Presentations at www.nanoxplore.ca. Please note that our discussion will include estimates and other forward-looking information, which our actual results may differ from in the future. I will invite you to review the cautionary language in yesterday's earnings release and in our NDA regarding the various factors, assumptions and risks that could cause our actual results to differ.With that, let me turn it over to Soroush.

[Soroush Nazarpour, executive]

Thank you, Martin, and good morning. Before we start, I would like to quickly talk about our addition to the S&P TSX Small Cap Index back in September. We are happy with the inclusion. Moreover, we are happy to announce that all the assets from XG Sciences have been transferred to us, and we have started the integration of the assets and customers of XG.Now moving to our Q1 results. Despite being in a top macro environment, we are satisfied with the performance of our business. Our revenues from customers grew 52%, and our gross margin continues to expand on a year-on-year basis based on better graphene-enhanced products. Having said that, supply chain challenges reduced our total expected revenue for this quarter and company-wide wage increase that we applied on July 1 reduced our gross margin. We anticipate to offset the negative impact of supply chain disruption and wage increase with higher graphene sales as our graphene commercialization efforts continue.As you have probably seen last night, we unveiled our 5-year strategic plan, following a long and extensive review of our operations, top-down market analysis and commercialization potential, the new strategic plan lays out a path to accelerate growth in the next 5 years. Our strategy is to narrow the scope of our funnel and focus on the highest probability of success and high-volume graphene powder applications. By doing so, we will reduce our sales cycle time and increase our return on investment.By leveraging our proven formula and to further extend our market-leading position, we're announcing a significant increase in our graphene and battery material production capacity, reaching 20,000 tons per year by 2027 from 4,000 tons currently, which represents a fivefold increase. Additionally, as part of the investment, we will invest in a 10 million pound graphene-enhanced sheet molding compound or SMC facility to capture the large and growing $3 billion SMC market, which targets light-weighting solutions. Accordingly, we plan to invest $170 million over the next 5 years. Our focus will be on battery materials, light weighting composite and specialty compounds end market. Based on these investments, we believe that we are well positioned and will actively participate in the energy transition and sustainability megatrends for the next decade.As we go forward, our 3 growth pillars will be as follows: First, NanoXplore will invest in a 12,000 ton per year graphene and battery material facility to address the growing lithium-ion battery market. The plant will be in Montreal and will also include 100 to 200 ton per year graphene silicon performance additive line. We intend to lead a 200,000 square foot building in 2023 and commission our graphene silicon performance [ first ], followed by our 12,000 tons per year graphene and battery material lines in 2025. The output of this facility will serve the battery materials market and also serve graphene needs for our third growth pillar, which is a specialty compound. Furthermore, within the next few months, we will add a dedicated R&D facility in a different location to focus on anodes for next-generation battery technology, such as solid-state batteries and sodium iron batteries.Our 3 key product offerings will be anode active material, anode performance additive using our graphene silicon solution and conductive additive for cathodes. We believe that our battery material presents prior technical performance versus current solutions and are highly cost competitive. Furthermore, our top-down analysis also gives us strong conviction in our projects. We believe that North American anode active material market will grow significantly in the next few years and will continue to be in an undersupplied situation for a long time. Demand, especially after the Inflation Reduction Act will further outstrip supply of the battery material and provide an ample opportunity for local supplier of battery materials to flourish.Moving to our second pillar. Following the successful introduction of graphene into current SMC products, NanoXplore would invest in a 10 million pound graphene SMC press facility, which represent 5 additional presses and will bring our total capacity to 12 million pounds. We intend to start construction in 2023 with an extension to our current site in Newton, North Carolina and commission it by 2025.SMC is often common material for light-weighting compounds. For major OEMs light-weighting solution is paramount as it is intended to lower the weight of vehicle. For internal combustion engines or ICE vehicles, the need to lower the weight is important to able to achieve CO2 reduction targets. And for EVs, the reduction is crucial to improve battery performance as they are generally heavier than ICE vehicles. We have seen strong OEM interest for our GrapheneBlack SMC solution as it reduces parts weight by up to 25%, lowers paint cost because of a smoother surface, it is more sustainable and reduces emission.Moving to our third pillar, specialty compounds has an effective growth potential, particularly in polyurethane and concrete applications. We're continuing our development efforts and anticipate reaching max capacity of our current graphene facilities by 2024 and start supply customers mainly in concrete market from our new 12,000 ton per year facility in 2025. Furthermore, we will add another 4,000 ton per year graphene production module to existing facility by 2026. This should bring the total production capacity to 20,000 tons per year in 2 facilities.Now I will pass the line to Pedro to discuss our CapEx in more detail and our financial performance.

[Pedro Azevedo, executive]

Thank you, Soroush, and good morning to everyone on the call. I will begin with some information related to the 5-year strategic plan, followed by some commentary on our Q1 results. As Soroush mentioned, our strategic plan will require an investment of $170 million and with most of it over the next 24 to 36 months. Successful execution of our plan has the potential to generate over $100 million in annual battery material sales, $80 million in additional annual graphene-enhanced SMC parts sales and $40 million in additional annual graphene sales with internal rate of returns above 25% across each of the 3 pillars and start producing significant profits by 2025.By investing in these 3 main areas, our goal remains as before to stimulate the adoption of graphene, which in turn will provide substantial returns for our shareholders. Our plan will be financed through a combination of cash on hand, government grants that we expect to obtain, debt issuance and equity, if needed. The breakdown will depend on the conditions at the time of financing, and we'll have the goal of achieving maximum shareholder value creation.Turning to our Q1 results. Our total revenues grew 45% to $27.2 million, but our revenues from customers actually grew 52%. The increase in revenue was driven by a combination of positive product mix, including graphene-enhanced products, the acquisition of Canuck in December 2021 and price increases were offset by lower tooling revenues. Tooling revenues will fluctuate based upon customer needs for new molds and this represented $1 million less than in Q1 2022.Our Q1 gross margin, excluding depreciation and amortization, was $3.2 million, an increase of $2.6 million compared to last year. As a percentage of sales, gross margins improved by 860 basis points to 11.6%, which was driven by a higher margin product mix, better pricing, improved productivity and better cost controls.Our adjusted EBITDA was minus $2 million, which is still an improvement of $1.8 million versus last year. This improvement was due to higher gross margins, partially offset by additional headcount, higher wages and higher accrued variable compensation. Despite the great improvement in our results year-on-year for both revenues and EBITDA, the quarter was weaker than Q4 2022. Revenues are generally weaker in Q1, but were also negatively impacted by lower tooling revenues by a temporary shutdown at one of our customers and supply chain constraints at to others, limiting their capability to take products from us. Lower revenues, along with higher manufacturing costs, higher wages and variable compensation accruals and the addition of new positions to support our growth resulted in lower EBITDA.In the quarter, the U.S. dollar strengthened significantly against most of the world's currencies, including the Canadian dollar. Between June 30 and September 30, 2022, the U.S. dollar strengthened from CAD 1.29 to CAD 1.38. As part of our foreign exchange hedging policy, we engage in forward contracts up to 24 months based on expected U.S. dollar sales during the time frame and record the monthly mark-to-market impact to the P&L. In Q1 2023, this caused a paper loss of $2.6 million due to the spike. It is important to understand that this amount does not account for future profits that would occur if the Canadian dollar remained at this rate, which would lessen this loss. In addition, since the Canadian dollar has strengthened since September 30, and if it remains at current levels or continue strengthening, an important foreign exchange gain will result in Q2.With regards to our balance sheet, we ended the quarter with $42.8 million of cash and cash equivalents and $6.3 million of available based on our credit line for a total liquidity of $49.1 million. The main decrease versus June 30 was due to the acquisition of XG Sciences assets, which reduced our cash by $3.9 million. Our total debt stood at $14.9 million and was comprised of $9 million of long-term and $5.9 million of short-term debt.Finally, considering the macroeconomic backdrop and to be conservative, we expect total revenues for fiscal year 2023 to be $110 million.With that, I will pass it back to Soroush for some final comments.

[Soroush Nazarpour, executive]

Thank you, Pedro. To summarize, I'm excited about how our graphene commercialization efforts are progressing and believe the graphene market will experience a significant growth in the next few years, and we are very well placed to benefit from this.I believe setting the market through a vertical integration, both organically and inorganically, coupled with large volume and low-cost production is a winning business model, not only for graphene companies but also for any advanced materials, and I'm glad that we're approving this business model.

[Martin Gagne, executive]

Thank you, Soroush. For the Q&A, for this time only, we will limit to one question per participant. Operator, we can now open the line for questions.

[Operator]

[Operator Instructions] Our first question will come from Amr Ezzat of Echelon Partners.

[Amr Ezzat, analyst]

[Foreign Language] I'll try to be choosy with my question. I'll ask you a 2-part question on the financing. So how much of the $170 million in capital do you need in the next year then in broad terms, like can you speak so soon about how much grants you are hoping to get from provincial and federal government?

[Soroush Nazarpour, executive]

So it's a bit early to discuss that. We're expecting potentially between $50 million to $60 million of that to come from grants, but it really depends on next year or towards the third quarter when we look at that a bit more carefully. But that's the initial expectation.

[Amr Ezzat, analyst]

If you'll just allow me a clarification, Pedro, you also said equity if needed. Is the implied message here that you guys can execute on this without equity?

[Pedro Azevedo, executive]

The short answer is yes. We're only going to look at equity if we fall short in getting the funds that we need to cover all the investments and the timing of the investments, but it will definitely be in the cards, but only really if that's needed.

[Operator]

Our next question will come from Michael Glen of Raymond James.

[Michael Glen, analyst]

So just in terms of EBITDA, you had the slightly positive EBITDA in Q4. I'm just trying to understand, is there a view at the company regarding a transition to positive EBITDA? Any outlook there? Is it a big goal to generate positive EBITDA over the -- or as you execute on this plan?

[Soroush Nazarpour, executive]

So in general, our Q1 results are always slower than the Q4, right? So we always see this trend of first quarter to be slower. That by itself will impact lower EBITDA. Having said that, the target for us is in the next couple of years to sell more graphene and more graphene enhanced products. That by itself impacts the growth of EBITDA. But we're not going to really reduce our cost, cut our R&D expenditure to get to EBITDA positive. I think that's not what we are doing here. We are focused on the growth, and we will continue focusing and investing on the initiatives to grow the sales of the graphene. In the next couple of years, especially after the strategic plan, we expect a significant growth of our EBITDA as a result of selling more graphene. That's the higher margin part of our business. So inherently, as we sell more graphene, our EBITDA grows. But we're not going to reduce expenditure to show short-term positive EBITDA. I don't think that's what our shareholders also want.

[Michael Glen, analyst]

Okay. And just to make sure I heard properly, of the $170 million, $50 million to $60 million is anticipated to come from grants?

[Pedro Azevedo, executive]

Yes.

[Operator]

Our next question will come from MacMurray Whale of Cormark Securities, Inc.

[Rupert Merer, analyst]

This is a little unconventional. It's Rupert Merer from National Bank here. I have some technical difficulties this morning, so I'm relying on the generosity of Mac here.In your prepared remarks, you highlighted that one of the goals of the strategic plans to stimulate demand for graphene-based materials. I'm just wondering how much input from customers do you have in this process? Do you have visibility on demand from your customers? Will they be ramping up capabilities in parallel as you build out your capabilities?

[Soroush Nazarpour, executive]

Yes. Definitely on the SMC parts, we have already received the interest from different OEMs for our product. On the battery material parts, at least on the first part of that, we have quite a lot better visibility on the customers and a big chunk of that. I don't want to say it's spoken for, but we have clarity of where the product is going. Of course, as we go towards the end of the 5 years, it would be less of a visibility, but we have a decent sales funnel of growing with multiple clients. So we are counting on them increasing their uptake of graphene.

[Operator]

And speakers, I'm seeing no further questions in the queue.

[Soroush Nazarpour, executive]

[Foreign Language] I would like to thank everyone for attending this call, and we wish you a great day. You can now disconnect.

[Operator]

This concludes today's conference call. Thank you all for participating. You may disconnect and have a pleasant day.