NanoXplore Inc

TSX:GRA

Earnings Call Transcript 2022-Q3

[Operator]

Good morning, ladies and gentlemen. Welcome to the NanoXplore Quarterly Earnings Conference Call. I would now like to turn the meeting over to Mr. Martin Gagné. Please go ahead, Mr. Gagné.

[Martin Gagné, executive]

[Interpreted] Good morning, everyone, and welcome to NanoXplore's first conference call. Today, I'm here with Soroush Nazarpour, our President and CEO; and Luc Veilleux, our CFO. We will start with our prepared remarks and then Q&A.

Please note that our discussion will include estimates and other forward-looking information, which our actual results may differ from in the future. We invite you to review the cautionary language in yesterday's earnings release and in our MD&A 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, my friend, and good morning, everyone. We are very happy to present our first conference call. This is an important step in NanoXplore's history and should provide investors and analysts some valuable insights into our opportunities, operations and financial performance. At the outset, I would like to thank all our team members for their dedication and the work of ethic throughout this pandemic. It has been a difficult environment for everyone.

We're the largest producer of graphene with 40% share at a lower cost, which creates a strong moat for our company. Graphene is our lifeblood and will provide more effective and better sustainable solutions in the future. Our material has very attractive attributes to improve the effectiveness of plastics and composites. It is stronger than diamond, lighter than steel while being flexible.

Moreover, it conducts electricity better than copper and has strong barrier and lubricity properties. In addition, it's a more sustainable material than carbon which is an oil-based material. Case in point, 1 ton of graphene production is equivalent to 0.4 tons of CO2 emission, while carbon black is roughly 3 tons of CO2 emission.

Our vision is to create a better tomorrow by providing innovative, sustainable products and solutions across multiple industries and applications. One of the bigger problems for the lack of graphene offtake in the past was the problem of mass production at low cost. With the help of our strong teams here at NanoXplore and several years of the engineering and testing, we were able to find a solution with our proprietary technology. R&D and innovation is our strength, and we have one of the best R&D teams out there, led by Nima Moghimian.

NanoXplore believes that the unique properties of graphene will enable numerous new products in thermoplastics, thermostats, other composite products and lithium-ion battery applications, and the market for such products should grow at a rapid pace, creating a significant market opportunity. We believe that the future is bright with a good opportunity to capture a piece of the 1.5 million ton total addressable market of replaceable carbon black. This [indiscernible] excludes lithium-ion batteries. There is no doubt that the pandemic slowed down the trajectory of graphene adoption. Testing of graphene-enhanced product was not a priority for operation team. Procurement of raw material was difficult. COVID-related plant shutdown and labor shortage were factors which slowed down in adoption.

Since graphene is a new material application, patience is required as product development, testing and finalizing deals can take 4 to 5 years with prospective customers. However, we have reasons to be optimistic about the future.

First, we believe that we are under cusp of an uptake of graphene. We will provide more color on our customer funnel to give you a perspective of where we are in our journey. Currently, roughly 25% of our active sales funnel is in the mid- to late stage, meaning that we could see activity in the next 3 years. Mid to late stage means that we are seeing graphene performance is validated in the customer [ products ]. The remaining 75% means that we're still in testing phase and take between 3 to 5 years.

Secondly, we are enthusiastic about our relationship with Solmax, the largest on geomembrane manufacturer in the world. And the blanket purchase order was just signed last week. This validates the efficacy, potential cost savings, lower scrap rates and better sustainable footprint for graphene-enhanced products. Geosynthetic is a large USD 10 billion market and growing to USD 13 billion by 2026. This would be 10s of thousands of tons of addressable market with the agricultural industry.

Thirdly, the supply agreement with molding products to produce and sell graphene-enhanced sheet molding compound FMC, once again validates the graphene efficacies are composite and [indiscernible] as it helps to reduce parts weight by up to 15% versus typical composite parts while also improving surface finish, paintability and crack resistance.

FMC without graphene is a rough surface. And by adding the graphene in the composite, it smooths the surface top, which enhance the quality of the paint coat. Graphene also acts as a physical barrier to crack propagation. Furthermore, battery packs are heavy in electric vehicles. And by using graphene-enhanced FMC, this helps reduce the weight, especially leading to an improved driving range.

Lightweight composites are important for both internal combustion engines and electric vehicles. Countries are becoming more and more stringent on carbon footprint and having lighter ICE [ vehicle ] will help reduce CO2 emissions. According to International Council on Clean Transportation, average new car CO2 emission would need to decrease by 15% by 2025 and 31% by 2030 relative to 2021 based on the European Green Deal Roadmap. Consequently, a lighter vehicle is essential, and graphene could be key to achieving this.

On the electric vehicle side, they are typically heavier than internal combustion engine and graphene-enhanced FMC should improve the range of the vehicle.

Fourthly, we are in the earlier stage of looking at the second 4,000-ton graphene black production module that we anticipate to be operational in early 2024. Finally, we are raising our revenue outlook to CAD 90 million for fiscal year 2022 from CAD 85 million previously announced on better pricing and better product mix. We're exiting the quarter with an annual run rate CAD 110 million in revenues and anticipating the adjusted EBITDA to be slightly positive in the fourth quarter. We're optimistic about potential of our company and the positive impact we will have in the future.

After several years of hard work and dedication, validating the efficacy of this product, we are seeing signs that [indiscernible] uptake the products. Due to this [ alloy state ] nature of graphene, we could business from lumpiness. However, we are confident that the long-term is story is positive and well.

With that in mind, let me turn now the call over to Luc, who will comment on our financial results.

[Luc Veilleux, executive]

Thank you, Soroush, and thank you, everyone, for attending this conference. [indiscernible] I will start by reviewing the Q3 results, and we'll finish with the financial outlook for the full year.

So let's start with the quarter-to-quarter performance. Revenues from customers grew 52% to CAD 28 million compared to Q2 2022, driven by better product mix, including graphene-enhanced products, the acquisition of Canuck in December 2021 and additional price increase.

Regarding the adjusted EBITDA. We saw a good improvement quarter-to-quarter and an EBITDA loss of CAD 2.2 million with a strong positive variance of around CAD 1 million. That variance is explained by positive product mix and sales price increase, which impacted positively the gross margin on total revenue.

Compared with the quarter of last year, revenue from customers was 59% to CAD 28 million, explained by better product mix, including graphene-enhanced product, the Canuck acquisition, new sales programs and price increase. We recorded an adjusted EBITDA loss of CAD 2.2 million in Q3 2022, which is a [ CAD 200,000 ] improvement over last year. The better product mix, including graphene-enhanced product and price increase drove a better gross margin, which was partially offset by higher administrative expense, which is mainly explained by the addition of strategic position and increase in salary and the addition of Canuck and CSP Newton plant.

Moving to the balance sheet. As of March 31, 2022, we have CAD 63 million of liquidity available, including $56 million of cash and cash equivalents. Back in February 2022, we raised [indiscernible] million in gross proceeds intended for acquisitions, partnerships and general corporate purposes.

Finally, we would like to end with the financial outlook. We are raising the revenue outlook for the financial year 2022 to CAD 90 million from CAD 85 million previously announced. Regarding the adjusted EBITDA, we anticipate being slightly positive in the fourth quarter of 2022.

Thank you. Now Martin, you can take over.

[Martin Gagné, executive]

[indiscernible] For this call, we only -- we will only answer questions from the sale-side analysts. Operator, we can now open the line for questions.

[Operator]

[Operator Instructions] The first question is from Amr Ezzat with Echelon Partners.

[Amr Ezzat, analyst]

Soroush, congrats on your inaugural call.

[Soroush Nazarpour, executive]

Thank you.

[Amr Ezzat, analyst]

My first one is on sales. I'm actually pleasantly surprised with the pace of sales from last quarter. And if I take Canuck out of the numbers, it seems like your sales grew $5 million from last quarter. Can you help us understand the dynamics there at a high level, like how much of it is increases in pricing that you guys mentioned versus growth in graphene-enhanced products?

[Soroush Nazarpour, executive]

Sure. So we are seeing, as said, about $5 million over Canuck, which is a mix of price increase and product mix, especially graphene-enhanced products. Now it's more difficult for us to separate the two from other because some of the products that were previously not including graphene, they're now including graphene. So as a whole together, we're seeing $5 million increase in the top line.

[Amr Ezzat, analyst]

Okay. So I heard especially like graphene-enhanced products, so I'll take that as a positive then maybe related to that, like you just spoke to a new module for early 2024. So are we to assume that by the end of 2023, you are capacity constrained? Or is that being built for redundancy? Then maybe you could maybe tell us like about the economics and costs associated with that module and view the inflationary pressures we're seeing.

[Soroush Nazarpour, executive]

Sure. So in terms of the new capacity, we work with the forecast that we achieved from the customers. So within the forecast that we already were receiving, we think that we are potentially out of the capacity on a run rate basis by the end of next year. And that's the basis for setting up new capacity -- a new module for 4,000 tons.

So in terms of CapEx and OpEx for the facility, it's pretty in line with -- in terms of OpEx, it's pretty in line with what we have currently. We see that the capital requirement is close to $20 million for setting up that facility. In terms of order to receive of the equipment, we're seeing a 9-month process and also we need a period of time to commission those equipment. So from the time that we start this -- to have the module ready, it should be in order of 18 months of time, we then can have everything done and in place.

[Amr Ezzat, analyst]

Okay. So you're starting -- I assume like you've got the location picked?

[Soroush Nazarpour, executive]

Yes. But at this time, we're not commenting on the location.

[Amr Ezzat, analyst]

Just another quick couple for me. Can you remind us how much graphene would a 2-gigawatt hour facility require at a minimum?

[Soroush Nazarpour, executive]

For battery application?

[Amr Ezzat, analyst]

Yes.

[Soroush Nazarpour, executive]

Yes. So it depends definitely to the formulation that the customers are taking. Some rule of thumb is like about 1,000 ton every kilowatt hour of battery. But again, that's entirely depending on the winning formulation and the amount of graphite that's going to stay in the [ app ] Because we have formulations which are 100% graphene, and we have formulation that graphene is only additive on the product. So you can pick like a midline from the 40%, 50% graphene in the add up and then you can assume that 1,000 ton of graphene consumed for every 1 gigawatt hour of battery production.

[Amr Ezzat, analyst]

So it's minimum 2. And lastly, like how is the Board thinking about capital allocation and the best use of cash on your balance sheet?

[Soroush Nazarpour, executive]

Yes. So the priority for us as a graphene company is to enhance the commercial activities and the costs coming from the graphene. The capital allocation has always priority for initiatives that bring toward sales and more profit from our graphene activity.

[Amr Ezzat, analyst]

Okay. So it's going to be invested for graphene as opposed to something on the battery side?

[Soroush Nazarpour, executive]

Yes. As we disclosed in the Battery Day, NanoXplore does not intend to participate in the upcoming financing of VoltaXplore. And VoltaXplore will finance the capital requirement for the developed facility by itself.

[Amr Ezzat, analyst]

Fantastic. Congrats on a strong quarter.

[Operator]

The next question is from Rupert Merer with National Bank.

[Rupert Merer, analyst]

So you give us a little color on your funnel, wondering if you can give a little more color. How many companies are in that funnel? And if I look at the 25% that's mid- to late stage, what are the companies look like that are in that bucket? What markets they're in? And what's the market potential you see in that late-stage pipeline?

[Soroush Nazarpour, executive]

So we have about north of 200 companies. So 25%, I'd say about 50 companies or more at a late stage. They are within many different markets, but there are common points. So we've seen quite a lot of interest and success when it comes to graphene-enhanced plastics both thermoplastic and thermoset like both master batch application and also composites. The applications for those products are in different segments. A lot of industrial applications, we're seeing interest in the pipe market. We're seeing interest in agricultural market. Transportation has been pretty strong and continue to be strong in our sales funnel.

There are some newer application as well as looking at, which are -- we're seeing success as well in our account that is at the earlier stage, but still we're seeing some success. And those are more of a pigment-type applications. Those are for paint and coating markets. But the application of graphene really varies in a lot of different markets. And the base fundamental material in them are similar thermoplastics and thermosets, but it goes to different applications.

[Rupert Merer, analyst]

Great. So you've announced a couple of new customers over the last week. If there are 50 companies that are late stage and you're looking at -- so 1 to 2 years to bring late stage to market, so should we expect a cadence of new customer announcements that are something like that, one every two weeks?

[Soroush Nazarpour, executive]

The reality is that we are, in general, not really supporting the prestige of the customers. And we're announcing only the very important customers where it does not announce every customer put the PO and starts buying products from us. But these announcements, there are reasons behind them. And they are very diverse in terms of the markets that the customer is addressing. Again, they serve the purpose of approval and showing the product is validated, is getting commercialized in those new applications, but within the same market as we are dealing with different customers in the same market, which is not going to preclude everything. But in terms of commercial interest, as I discussed, we have like 50 accounts that are in the late stage and we see activity within the 2 years' period from now.

[Rupert Merer, analyst]

Just one more follow-up on this topic. So you mentioned you won't announce [ sale ] with the customer. Does that mean that there are some customers that you're advanced with that you have today that haven't been announced?

[Soroush Nazarpour, executive]

Can you repeat the question?

[Rupert Merer, analyst]

Are there some customers that you are more further advanced with and you have contracts with that you have not announced yet, because of the reasons that you discussed?

[Soroush Nazarpour, executive]

Yes. Smaller customers with smaller accounts, we're not going to pursue them currently. It's just only the ones that are large and the one of the new markets. And they have a very good potential in terms of total addressable market. Those are types of customers we tend to pursue.

[Rupert Merer, analyst]

Okay. Very good. And then just secondly, you announced still with molding products now. It looks to me they're going to be selling there SMC to their customers. How are you going to work with them to help develop the market? I imagine they're going to have their own sales funnel that they may need some help developing.

[Soroush Nazarpour, executive]

Yes. So molding product is an existing partner of the company, and they are supplier to our business already. So that was beginning of our relationship, as we saw quite success in introducing graphene into SMC for commercial vehicle space. They are a partner for us, first, to use those products in our internal operations for those commercial vehicle markets. But they have a very decent exposure to transportation, let's say, passenger vehicle market as well to residential market. So they can actually get a proven product and expand the reach to new markets, which we are not directly active in.

[Rupert Merer, analyst]

Great. And will you support them with their market introduction plans?

[Soroush Nazarpour, executive]

For sure. I mean the product is branded as NanoXplore products and NanoXplore SMC product. And definitely, the fact is customers in various markets tend to reach out to the graphene supplier, I mean, they reach out to us and bring partners to help us to commercialize products. With some applications, it's a big supply chain [ multi ] steps, and we cannot be active in all steps. That's the time that we bring this type of partners to help us to bring the product into the end market. So yes, we will support them in marketing. It is also similar case for the Solmax we will co-market the product with them.

[Operator]

The next question is from Michael Glen with Raymond James.

[Michael Glen, analyst]

Just first on the EBITDA, the positive EBITDA in Q4 -- slightly positive EBITDA in Q4, so is this something you view as a sustainable outcome moving forward? Or should we still expect to see some quarters with negative EBITDA?

[Soroush Nazarpour, executive]

So the trend is positive for us, for sure. And as a rule of thumb, our graphene-enhanced product provide better gross margin than non-graphene products, right? So as much we move the products, the more graphene-enhanced products and as much with the graphene and graphene-enhanced [indiscernible] to the end users, that changes the product mix, expand the gross margin and, accordingly, expand -- improve the EBITDA position of the currently.

Now we -- as disclosed in my remarks, we definitely see some lumpiness going forward. But the trend for our financials is toward positive EBITDA and, hopefully, a positive cashflow in the next few quarters. Now we will provide the guidance for the year at the earnings call for the year-end, which is sometime in September. And you can get a better view of how the EBITDA is expanding, but we believe this trend will continue.

[Michael Glen, analyst]

And for the current 4,000 metric tons in place, are you able to indicate how much volume you're producing off of that module right now?

[Soroush Nazarpour, executive]

We're not disclosing the information about the graphene or any sign of our business separately.

[Michael Glen, analyst]

Okay. And for clarification, on the timing for the new module, potentially -- you say potentially out of capacity by end of next year. Are you talking calendar year-end 2023 or fiscal year-end 2023?

[Soroush Nazarpour, executive]

We're talking calendar year-end, yes.

[Michael Glen, analyst]

That's calendar year-end. Okay. And then on molding products, so if we're to think about the end market there and your largest shareholder, Martinrea, how should we think about the way you approach the automotive or passenger car market when you do have a large shareholder who's selling into that market as well? Like how do you divide over what your partner with on Martinrea versus what you'll pursue with other companies?

[Soroush Nazarpour, executive]

So we have business with the OEMs through Martinrea. We have business with the OEMs directly without Martinrea being involved. And also, we have a business, hopefully, with a passenger vehicle OEM to molding products as well. So first and foremost, Martinrea as the largest shareholder of the company really supporting the growth of the business, right? So the way we have been developing product with them has been to support the commercial success in the company for the graphene products, regardless of the type product and application. Now Martinrea is active in the new applications in the passenger vehicle side. For fuel system and break lines, we have a joint product with them. They are active in a structural metal application that really don't have any content in that sense. We also have products for -- we also have products for exteriors, which is in trucks and buses, they are more composites while passenger vehicles there are more aluminum type applications. So the -- I would say it's more complementary than competitive with them.

[Michael Glen, analyst]

Okay. And last one on my side. Can you just provide some indications as to how the outlook for Gerdau is, what Gerdau was doing with respect to graphene where their focal points are? If you could discuss how that relationship is evolving?

[Soroush Nazarpour, executive]

So we are a supplier to Gerdau. Unfortunately, we cannot disclose more about what they are doing because it's not confidential information of the customer. We know that the customer -- Gerdau is looking at applications in construction markets. And as well, they're looking at applications for internal use within the Gerdau, and we're supplier are providing products for them and continue to do so.

[Operator]

The next question is from Marvin Wolff with Paradigm Capital.

[Marvin Wolff, analyst]

Soroush, and congratulations on having your first conference call for a quarterly basis. I think it's a really great idea. A lot of my questions have been answered, but I just want a couple of clarification points.

Number one, the CapEx you talked about of 20 million for plant #2. I assume that's U.S. dollars. Is that correct?

[Soroush Nazarpour, executive]

Yes, U.S. dollars.

[Marvin Wolff, analyst]

And also, to what degree can you stretch the capacity of the current plant? I mean it's 4,000 tons nameplate, but can you stretch that 4,500? I mean you've been running it now for, what, 1.5 years, 2 years. Any color there?

[Soroush Nazarpour, executive]

Yes. We have about 25% as design already -- engineering design already included in this. So de capacity can be stretched within the same equipment to -- by another 1,000. But that's really stretching the equipment and bring extra chance of downtime for our equipment and the shutdown. So if we have also space in our facilities enough, we decide to expand the building and actually put more capacity in there as well, but that requires extra CapEx. But the same -- the existing facility that we have can really be stretched a little bit more and bring probably 25% more capacity.

[Marvin Wolff, analyst]

Okay. One other quick question. With respect to the long-lead equipment, you mentioned that's 9 months. Have you ordered any yet?

[Soroush Nazarpour, executive]

We haven't disclosed that information.

[Marvin Wolff, analyst]

Okay. I should put a spy down there and see some trucks coming in going. Congratulations again.

[Operator]

[Operator Instructions] The next question is from MacMurray Whale with Cormark Securities.

[MacMurray Whale, analyst]

Just a quick question on the guidance. Given the strength in the Q3, does the guidance imply sort of a down quarter in terms of sequential revenue in Q4? What might be the dynamic there?

[Soroush Nazarpour, executive]

Yes. But that's also -- there's a big chunk of product mix in that, right? So product mix can change the revenue or change the gross margin. That's why it may look like a slower quarter in terms of sell, but also we're guiding for expanded EBITDA, right? So again, these are product mix that makes a difference in terms of the Q4 results.

[MacMurray Whale, analyst]

Okay. So in terms of modeling that out, we should be looking at OpEx expense, which is sort of flat. So the difference is really flat sequentially? So the difference is really all gross margin?

[Soroush Nazarpour, executive]

Yes.

[MacMurray Whale, analyst]

Okay. And then just sort of related to that, I was just wondering whether you can share -- I know you don't want to go into details about volumes and that type of thing. But maybe on your cost per ton that you've talked in the past about reaching, where are you in getting there? I know you're not at 100% capacity utilization. But it would be helpful, I think, just to understand where you are in that and whether you've changed anything given sort of inflation in the industry and feedstock pricing and that type of dynamic. Can you talk a little bit about cost per ton and long-term expectation for that?

[Soroush Nazarpour, executive]

We are in line with the feasibility report that we published in 2017, if I'm not mistaken. We are still seeing at low few dollars per kilo of cost, in line with our feasibility at the full 4,000 ton run rate. So no difference in point that.

In terms of inflation, we are exposed a lot to the graphite pricing. And the variation of the graphene price really versus our selling pressure has been very marginal. So we don't see that much of price inflation in the graphite. We believe we are currently in over top 5 graphite market. Accordingly, the price variation, even though resisted, but it will be not significant for our business because a majority of the graphite is converted into graphene. So of course, there is some wage increases in the production, but again those of you that have been in our facilities see that they are very little employees are actually working inside, production is very automated, so we also don't see much of an impact there.

[MacMurray Whale, analyst]

Okay. You mentioned in the past, actually about getting people. I think in the MD&A, you talk a little bit about having to find people who are a little bit of a challenge. Is that -- has that eased? Is it -- what's the dynamics on the labor side?

[Soroush Nazarpour, executive]

It has -- it is still challenging to get labor. Of course, we have multiple location, and they are experiencing different labor market shortage. Like in our facilities more in Quebec city area, we are seeing more aggressive labor market there, which is more harder for us to get labor. It's slightly better in the Montreal area, for instance. But in general, we are seeing pretty much everywhere that there are challenges are in the labor market. The wage increase is happening and inflation is impacting the wages. But we are trying, as before, we're trying to continue looking at automation everywhere that is realistic, and we can do that to reduce that impact.

[Operator]

The next is a follow-up question from Michael Glen with Raymond James.

[Michael Glen, analyst]

Just wondering if you could give an update on Techmer. Are you able to indicate whether or not they were working towards, I recall some sort of specific application. Are they out in the market with that product yet? Or when would we expect to see that actually in the market?

[Soroush Nazarpour, executive]

Techmer is one of the -- and the customers that we work with Techmer is within our late-stage sales funnel. They are continuing their focus a lot on a few markets. The most important ones is in the consumer packaging market. And you are seeing quite a decent amount of success there.

Now converting that to tangible revenue, I think we're still a few quarters away. But the commercial activities are already started, has progressed.

[Michael Glen, analyst]

Okay. And just to come back on the on the molding products. One of the applications you talk about there is the battery enclosures. So if I'm thinking about battery enclosure, it's a multi-material, steel-aluminum, heavily-engineered item. And I'm just -- it's somewhat surprising to hear what you talk about use of graphene at a composite in that sort of structure. Is there any issues with respect to temperature in that environment that prevent composite to plastics be used in a battery enclosure?

[Soroush Nazarpour, executive]

Actually, that's the other way around like you're seeing a very noticeable trend for OEMs and both passenger car and heavy commercial moving towards composite battery packs than metal battery packs. Now of course, there would be hybrid solutions to start with, which is a mix aluminum and composite. But the trend is to make the invention of the battery pack very standard. And we get to the composite with high-volume production and low cost and also we get the wage down, which is significantly lower.

Now you mentioned about the cooling. Majority of the cooling that's needed inside the battery packs are not coming from the material selection coming from active cooling system like air ventilation inside the battery packs, okay? So that's again agnostic to the type of material use.

[Operator]

There are no further questions registered at this time. I will turn the meeting back over to Mr. Gagne.

[Martin Gagné, 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]

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.