Neo Performance Materials Inc

TSX:NEO

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Neo Performance Materials Q3 2020 Earnings Announcement. [Operator Instructions] Thank you. I would now like to hand the conference over to your first speaker today, Ali Mahdavi. Please go ahead.

[Ali Mahdavi, Capital Markets & IR Executive]

Thank you, operator, and good morning, everyone. Just a reminder, today's call is being recorded, and a replay will be available starting tomorrow in the Investor Center of our website located at neomaterials.com.I'm joined this morning by Neo's President and CEO, Constantine Karayannopoulos; and Rahim Suleman, Neo's Chief Financial Officer, who will then provide additional details regarding the company's third quarter performance. Then we will open the call to questions from analysts only.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 and adjusted EBITDA, product volumes, gross margin, other income and expense measures, ROCE, cash returns and future business outlook. 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 SEDAR 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 their respective dates. Financial amounts presented today will be in U.S. dollars. Non-IFRS financial measures will be used during this conference call. Further information regarding Neo's use of non-IFRS measures is available in Neo's 3Q 2020 earnings press release, which is available on SEDAR and on our website at neomaterials.com.Let me now turn the call over to Constantine for opening remarks. Constantine?

[Constantine E. Karayannopoulos, President, CEO & Director]

Thanks, Ali, and good morning, everybody. I hope everybody is safe. It's a pleasure to update our shareholders, investors and employees around the world on our progress over the third quarter. With the health and safety of our employees top of mind during the pandemic, our business in the third quarter performed better than we expected as we're coming out of the second quarter, generating about $78 million of sales during the third quarter. We started growing again and returned to a better level of profitability and free cash flow generation. Our global operations experienced no major disruptions and we saw customers start rebuilding inventory levels at a modest pace, while their businesses improved. Macroeconomic trends over the recent -- or the past few weeks as well as updates we are receiving from customers in our key end markets are pointing in a sound direction. Our order books are rebuilding, and there are signs that customer demand is getting back on a path towards historical normal levels in most of our end markets. While the trajectory of the pandemic is impossible to predict, we and our customers were able to regain our footing in the third quarter. It is too early to claim that we have fully turned the corner, but the latter part of the third quarter felt like the worst was behind us. We're not out of the woods yet and COVID, of course, we'll have the final word on that. But at least for now, we are seeing signs of recovery, gaining momentum in several downstream sectors. Most of our customers are also saying that they both hope and believe that the worst is behind them. I'm proud of the Neo team's performance in managing this global challenge, particularly in terms of our employees' health and safety. Generally, we have experienced very few infections across our facilities. In fact, we have no reports of infections in any of our facilities in Asia. As I reported to you in the last quarter, we have full implementation of all measures at all of our facilities. In recent weeks, we've seen a slight uptick of infections in North American and European plans. Fortunately, none of these cases has resulted in serious health complications. I'm also very pleased with the fact that we have been able to avoid the layoffs and severe restructuring that have plagued much of the industrial sector. That's a testament to the dedication and professionalism of our more than 1,800 employees around the world. Over the past 4 months, I've spent a lot of time, virtually, of course, with our individual business units. In normal times, that would have meant a lot of us living on airplanes and out of suitcases for weeks on end. While it is frustrating to not see our employees and interact with our customers in person, I'm pleased to report that our teams have been hard at work before and during the pandemic to grow Neo's business. In fact, in-person customer meetings have started again for our sales managers in Japan, Korea, China, Singapore and Thailand. Small victories. But given how the world looked 1 or 2 quarters ago, we'll happily take it. Our teams have now completed our divisional and corporate strategic planning efforts. It is clear to me that we have the ability to protect and grow our core business, while also planting key seeds of innovation that should take root in the coming quarters and years. Our strong financial position and operational flexibility also allow us to evaluate options and opportunities for strategic growth. As we finalize these plans, we will be continuously reassessing how to accelerate each of these efforts, while utilizing our competitive advantages and unique global footprint to more quickly grow Neo in the near term. One of the key drivers of long-term growth for Neo as well as the global economy is the accelerating trend towards technologies that are sustainable and climate-friendly. It is our view that these trends will only intensify as the world emerges from the COVID pandemic. Consumers and governments increasingly want lighter weight, more energy-efficient mobility and reduced greenhouse gas emissions. Each of our 3 business units, Magnequench, Chemicals & Oxides and Rare Metals -- as core product, technology and applications portfolios that will contribute to addressing each of these societal goals. We will continue to reinvest in next-generation technologies and customize advanced materials in partnership with our key customers. The prime example of this is our success in growing our magnetic materials and magnets portfolio into growing segments like water and oil pumps within the automotive and household space. Electric and motor design engineers continue to look to drive efficiencies across the automotive platform for all drivetrain alternatives. The high quality and performance of the products, the consistency and technical service offered by our Magnequench group is essential to grow our share in automotive pump motor markets. This application offers substantial growth opportunities for Magnequench. That is because these pumps are used in all drivetrain applications from cleaner and more efficient gas and diesel internal combustion engines to electrified hybrids and full battery and alternative fuel vehicles. There are different emerging trends within each of those drivetrain platforms, but all of them are looking for higher levels of performance. That is precisely Magnequench's technological and market sweet spot. Our applications team has scored important wins in further diversifying our magnetics business into a greater level of penetration of key consumer markets. Not only is the case with automotive, where lighter for autonomous driving and cooling pumps and valves for electric vehicle batteries are some of the latest examples that come to mind, but also into consumer applications, such as the PS5 controllers, the new PS5 controllers, robot vacuum cleaners, stick vacuums and hair dryers, and I could go on. At the same time, in our chemicals and oxides business, we're seeing some very interesting developments in a new generation of product lines with existing applications in broad health and safety markets. As we look to grow our core business, there is a continuous effort on improving our operations efficiency at our plants, expanding capacity and capabilities as necessary, automating where possible and incorporating industry-leading sustainability practices across the board. I'm also encouraged to see more business leaders widening their gate to the strategic importance and economic opportunities of technologies that enable more sustainable and environmentally preferred outcomes. We find that the more we emphasize sustainability at our core operations, the more momentum we build at both the operational and commercial level. Neo's success in leading sustainability efforts runs deep in our organization. We design advanced and highly engineered materials that help enable the technologies that curb growing greenhouse gas emissions and their impact on the environment. Said in another way, Neo's strong focus on the sustainability imperative provides us with tremendous defensive and offensive strengths. We will continue to build upon our legacy of strong environmental safeguards. And we'll work to develop reporting efforts in the coming years of particular interest to our customers and shareholders. As the world continues to adapt to the global pandemic environment and preparing for life and return to growth post-COVID, an emerging element has been the emphasis of localized supply chains. A diversified geographic portfolio has always been a key strength of Neo's rather customer service offering, and it is becoming more important than ever. As we always evaluate options to grow our business, we also continue to diversify our supply chains to both upstream and downstream. Today, Neo is the only producer of rare earths and related value-added materials in Europe with our plant in Estonia. We're also the only company in our industry with full supply chain capabilities for rare earth specialties and magnetic materials inside and outside of China. We expect a good part of demand in the near to midterm to be driven by consumer and regulatory developments in both China, Asia as well as Europe. We are ideally and uniquely positioned to capitalize on these opportunities as they unfold. Neo is in the value-added business with reliable raw material suppliers in multiple continents. We value our upstream partners, while we always look to diversify our raw material supply to give greater flexibility to our plants and ensure reliability of our customer supply chains. Doing so increases trust and confidence with our customers that they can depend on Neo's advanced performance molecules to arrive quickly and consistently in any region of the world. Beyond our core business, we continue to invest in our next areas of development. Innovation has long been critical to Neo's growth. In fact, a great deal of our revenues comes from products that did not exist 3 to 5 years ago. The key to our innovation is working extremely closely with customers and prioritizing new product development through our customers' eyes and objectives. Advanced critical materials by default have long technical development lead times. It is not uncommon to introduce an idea, a product or sample and then spend years of joint development before seeing material volumes reported in our financials. We have always been driven by the demands and service needs of our customers, and we'll respond by developing and producing what they need, where they need it. It is how we have built Neo into the robust, resilient and profitable company that it is today. And that's how we will grow the company in the foreseeable future. In closing, it is good to be growing again from the lows of the second quarter and in particular, June as well as July. That progress is encouraging. More important, we believe that we have built an organization that is positioned to grow organically and in addition, capitalize on opportunities that we see in the coming global economic recovery. I'm optimistic about the company's growth prospects. Global megatrends focused on increased sustainability, lower fuel consumption, reduced environmental footprint and enhanced energy efficiency, all point to substantial opportunities for Neo. After all, we made the molecular building blocks for many of the technologies that help achieve these goals. Few organizations have the talent, knowledge, global infrastructure and key commercial relationships to be as well positioned as Neo to capitalize on these trends. With that, let me turn the call over to Rahim for the financial review of the quarter.

[Rahim Suleman, Chief Financial Officer]

Thanks, Constantine, and good morning, everyone. Our third quarter results indicated an inflection point upward, with improvements across most of our major markets. While every industry that we sell into is battling with the pandemic's effects, we noticed a marked improvement related to the auto industry. Inventory pipelines began to be restocked, and a general sense of cautious optimism has taken over as factory assembly lines restart with new COVID-operating protocols around the world. In lockstep, Neo's operations have been accelerating production and shipping increasing amounts of volume to our customers. These early signs are encouraging. Yet, we are well aware that COVID infection rates have never been higher in parts of Europe and North America, and it is still too early to call a bottom. We remain cautious and prudent in terms of our operations, and we have a balanced view of encouragement and pragmatism as we approach year-end. During the third quarter, we reported a consolidated $77.9 million in revenue compared to $102.6 million in the prior year period. We reported net income of $0.4 million or $0.01 per share. Our adjusted net income was $1.3 million or $0.03 per share, and we reported adjusted EBITDA of $5.7 million compared to $12.8 million in the prior year period and up from the $1.2 million we reported for Q2 of 2020. As the global economy continues to manage through the impacts of the COVID pandemic, there is no surprise in the continued decrease in our financials year-over-year. However, it is important to note the quarterly sequential improvement in both volumes and revenues and improvement in our profitability. As we engage with our key customers and enter into the fourth quarter, we are cautiously optimistic that these trends will continue, driven by relative strength in the automotive sector. Of course, we must caution that any near-term strength is subject to extraordinary volatile environment, as no one can predict the future path of COVID. But we believe that our core product portfolios remain essential to the success of our customers. Our commercial and business development teams are working hard to ensure that Neo's products continue to grow over the long term, irrespective of the outlook of the pandemic.We saw some recovered strength in automotive in both Magnequench and C&O and increased magnet sales into the consumer electronics end market and generally saw some strength in a number of our products from C&O that relate to industrial activity, generally. Some of our end markets, however, remain more adversely impacted, particularly within our Rare Metals super alloys for the aerospace industry. Discussion with our largest customers indicate a protracted weakness, as commercial airlines continue to push out orders for new aircraft. These trends reverberate up the value chain, and we generally expect a mild outlook for super alloy volumes through most of 2021. Again, any type of forecast at this point is difficult at best. We remain appropriately capitalized to encounter further disruption, and we are very proud of all of our team's efforts to adhere to our continued evolution of new health and safety protocols, while remaining productive and maintaining the highest standards of efficiency, quality and delivery for our customers. I, too, am proud of our team's agility in navigating a very volatile demand environment this year. In 2 of the most challenging quarters of recent memory, we have consistently generated positive operating cash flow and have continued to progress in new business development opportunities. We have seen a wide variety of cost savings activities executed by all areas in the organization. These have included shift changes, managing production downtime, different work environments, reducing discretionary expenditures, while still maintaining focus on customer deliveries and future growth initiatives. Shifting to a detailed review of each business unit. Let's start with Magnequench. The first half of the quarter remained inconsistent from a market demand perspective with generally weak patterns in most regions globally. As a supplier within China, we expected that we would see an immediate impact related to the decreased volumes as the pandemic began. As customer pool began to return within China, it was then offset by inconsistent demand patterns for key manufacturing sites in Europe and North America. The macro environment, particularly for automotive platforms, began to stabilize as we exited the quarter and we saw improved shipment volumes that have thus held into the fourth quarter. We saw somewhat varied performance across multiple end markets and platforms. Some are indicating fundamental strengths, others are focusing now on supply chain refill activities and a few others still appear a little weak. With our magnet strategy, we have performed exceptionally well during the quarter. As the recent entrant into the compression molded magnet space, we are pleased to see continued growth in the sales of magnets, driven by computer-based box fans. These magnets are placed in laptops, tablets and [server rocks ] and remain a key launching point for our growing capacity. We continue our readiness to also sell magnets into the automotive end markets and would anticipate seeing this growth shortly with programs that have already been awarded. We are very pleased with the integration of our magnet business of our Chuzhou facility, which we acquired in August of 2019. In the first year of consolidated operations, we implemented substantial capacity expansion to meet increasing demand. The combined expertise across both the magnet -- the bonded magnetic powder and compression molded magnet teams is yielding great insights. While the magnet business is still a very small piece of Magnequench's product portfolio, its strategic importance continues to shine brightly. We look forward to further growing magnet volumes for our key customers. Let's turn to our Chemicals & Oxides business units. The auto catalyst business continued to perform well in the third quarter and continued to outperform the automotive industry in general. We are encouraged by this pace of sales volumes, although a portion of it was tied to restocking inventory levels in certain supply chains. Sales into the automotive space were most robust in China, followed by an increasingly positive trend in other jurisdictions like India, South America and Western Europe. Our rare earth separation business remained mixed with areas -- some areas demonstrating strength, while other areas still struggling to regain its footing. There are some bright spots, such as sales within Europe stabilizing for certain key products, yet spot sales remain relatively muted, in line with some of the general macroeconomic conditions. We did see some uptick for some of the rare earth pricing, primarily in neodymium, potentially a result in the growth of magnetics and potentially as a result of supply concerns. These 2 trends clearly contrast to the prior year where we saw large spot sales and a rapid increase in rare earth prices generally, both really impacting the third quarter of 2019. Within water treatment, our business development teams have been reaccelerating momentum to sales within key municipal wastewater treatment plants as emerging regulations in the southeastern portion of the U.S. encourage further reductions of phosphorus in wastewater discharge. We are noticing a trend of successful commercialization in larger water treatment plant sizes, and we are doing the key potential customer trials as we approach year-end. Lastly, in Rare Metals, difficult demand trends from the second quarter endured as expected, with market demand for high-temperature super alloys remaining very light. As a result, quoted spot prices have also lagged, although we not -- we do not believe there's a fundamental shift in pricing. As you know, our Rare Metals business is largely tied to aerospace end market and in the supply of various super alloys. As we've already discussed, this continues to be a difficult market in the short term. However, we continue to believe that Neo is well positioned here from an overall competitive perspective. We are also growing these same metals into additional end markets and customers other than aerospace. In the past year, we have been successful in bringing on new customers that will eventually provide a better balance toward end markets. A portion of our Rare Metals business already provides products that are not super alloys for aerospace. These end markets include medical imaging, energy-efficient lighting and wireless technologies. We also participated in the recycling of materials. These other end markets and efforts are smaller today relative to our aerospace end market but remain a potential growth opportunity for Neo. They also provide further diversification within the Rare Metals business unit. One of the key attributes of Neo from a financial perspective is the health of our cash position and our ability to generate cash. Despite the headwinds related to the global pandemic, through the first 9 months of 2020, we have generated $11 million of operating cash flow. We invested $6.2 million in property, plant and equipment. We maintained our dividend in the quarter, returning $8.4 million in the first 9 months of the year. And we also repurchased $2 million in shares through the first 9 months. We finished the quarter with a cash balance of $74.6 million with essentially no debt. As we begin to return to signs of normalcy in many of our key end markets, we are focused on prudently growing each of our businesses. We anticipate that near-term cycles will continue to be irregular. Yet it's encouraging to see signs of life within the automotive space, and we are looking to continue to build momentum across new product development portfolios. As a well-capitalized business with minimal debt, we will continue to seek paths to accelerate growth across our portfolio and to improve the return of capital employed in each of our businesses. Let's now proceed to open up the call for questions.

[Operator]

[Operator Instructions] Your first question today comes from the line of Yuri Lynk with Canaccord Genuity.

[Yuri Lynk]

Constantine, I just wanted to square some of the comments on particularly the auto industry. The C&O segment seemed to benefit from a recovery there. But the sequential recovery in Magnequench really lagged. And just wondering what -- was that auto part of the business slower to come on or didn't benefit from the same inventory movements? Or just any color you can give on the rather muted recovery in Magnequench.

[Constantine E. Karayannopoulos, President, CEO & Director]

Thanks, Yuri. I guess at a high level, clearly, there were -- it was the latter in your question. It was clearly some inventory movements, refilling the pipeline in the C&O business as opposed to Magnequench that led to part of that performance in the third quarter. We also got some new business and gained market share in that space, new platforms and the like. So overall, we saw consistent trends between Magnequench and C&O and automotive, slightly different, as I said, pipeline behavior between the 2 businesses. At the same time, Magnequench is a bit more exposed to Japanese and European supply chains, who tend to run relatively consistent inventories. So we didn't see a major realignment or adjustment of inventories in that space. Rahim, I don't know if you have any additional color.

[Rahim Suleman, Chief Financial Officer]

Yes, Yuri, I think it's always -- I think your point is valid. I think it's always tough to compartmentalize things within a quarter. But if I were to try to do that a little bit, what I would suggest is that there was -- there's also an underlying trend in Magnequench, but quite honestly a very difficult July and somewhat difficult August, and we really saw the rebound in automotive volumes kicking into September. So we're -- we feel pretty good about what we're seeing when we just break it down in that level of detail.

[Yuri Lynk]

And that the rebound in auto, like did that continue post quarter? And any early thoughts on how the fourth quarter is shaping up?

[Constantine E. Karayannopoulos, President, CEO & Director]

Well, as both Rahim and I mentioned, we like what we see, though those trends we saw in sort of August and September are continuing. So, so far, so good. So yes, the same patterns that we saw exiting Q3 have continued into Q4. So we're pretty optimistic with what we see. But again, we need to color that with a bit of caution. But knock on wood, it seems -- as I said, and both Rahim said it, it seems that the worst is behind us. Rahim called it 2 tough quarters. The only time I can remember quarters that were this challenging were fourth quarter of '08, first quarter '09, and then some of us -- the older ones, remember what happened back then. This was sort of, of almost similar, not quite, but almost similar type of performance and behavior. And it's gratifying to see that we continue to make money and generate cash during very, very difficult conditions. But not to belabor the point, Yuri, but we have exited Q3 and into Q4 at those run rates. So we're fairly happy with what we see. Again, we're not comparing this year to last year or the year before, but the fact that we seem to be -- things seem to be getting better and better compared to June and July, I think it's gratifying.

[Operator]

Your next question comes from the line of Frederic Bastien with Raymond James.

[Frederic Bastien, MD & Equity Research Analyst]

Question is for Constantine. You've now been in the CEO seat for a few months. I was wondering if you could just break down the time you're spending on sort of M&A opportunities versus operation. And what -- where are you spending most of your time?

[Constantine E. Karayannopoulos, President, CEO & Director]

Well, the last 3 weeks were -- well, thanks for the question, Frederic, and appreciate the concern for my work patterns. I am spending quite a bit of time actually -- the first little while, I needed to get my feet back in -- to get my feet wet again and I spent quite a bit of time on the phone and video, Zoom calls and so on, which was an adjustment for everybody. So the last little while have always been spent with our business units around the world. We recently had our strategic reevaluation process that I -- sort of superficially, I referred to in my comments. That involved all 3 business units, the senior and middle management groups. We had a number of calls as well as our -- normally at this time of year, we have our planning meetings for all 3 business units as we look to the future, we evaluate the past, and we put together our strategic priorities. So all of those, typically, to accommodate time zones in Asia, North America and Europe, we start very early in the morning and we finish kind of mid- morning. So my -- the last few weeks have been spent on that effort alone. On M&A, we have a number of options on our radar screens. I have been spending, indeed, quite a bit of time. Clearly, not as much time as I've been spending on the business unit and strategic discussions internally, but we have some paperwork out there, NDAs, LOIs and the like. So I'm hoping that during the quarter, perhaps into next quarter, we'll have something to talk about, but it's way too early. But clearly, my priority, especially getting into the chair in July and looking at the numbers in July that even though they weren't as bad as they could have been getting back into this in that sort of environment was challenging. So I needed to figure out what was happening and why. So the bulk of my time, to be truthful, has been spent on the businesses, understanding what's going on, perhaps even pushing our development folks a bit harder than I had done in the past. But it's primarily looking after the core business and not neglecting M&A opportunities, which, as I said, continue to progress.

[Frederic Bastien, MD & Equity Research Analyst]

Okay. I didn't mean to throw you off there, but just curious on the M&A front. In the past, I guess, decade, you've been gradually growing the Rare Metals business with some tuck-in acquisitions and investments. And more recently, we saw the acquisition of magnet facility [indiscernible] making business, which I guess showed that you're still seeing tremendous amount of growth in the magnet business. So I was wondering when you look at -- in the future when you'll be looking at opportunities, I mean can we conceivably accept you to be active in all 3 segments with respect to M&A?

[Constantine E. Karayannopoulos, President, CEO & Director]

Yes. That's a fair statement. I think judging from the comments that both Rahim and I made as well as the numbers, you clearly see that the rare metals business is very challenged with its exposure to aerospace. So clearly, our focus there is to diversify away from aerospace, not neglect aerospace because eventually, aerospace will come back, but also look at opportunities beyond the aerospace segment. We do have a few options in that space. As far as the magnets are concerned, to tell you the truth, that has not taken historically an awful lot of time from the executive group. We have a very competent management group within Magnequench that identified and executed on the acquisition and the integration here in Toronto, especially since we haven't been able to travel for a while. We're just keeping an eye on it and helping in any way we can. But that relatively small acquisition was handled by and large by the Magnequench management team. And we're very pleased with the way it turned out. And we're happy with what we're seeing. So we are encouraging the Magnequench group to continue to identify opportunities to grow the magnet business as well as our powders business. But this has been a very good model and a very good precedent to build on. So I would expect that the next few opportunities could be in both -- related to both, the comment that I made about supply chain realignment, we see an awful lot of interest in Europe by our European customers who really want to be -- to feel a lot more secure in their supply chains, which we believe gives a great opportunity to our Silmet facility, both in rare earths as well as Rare Metals. And perhaps that could be coupled with Magnequench capabilities in Europe in the future. So some of the initiatives involve all 3 business units, others are selective and they're geared towards helping with our raw material supply security as well as identifying opportunities to grow aggressively. With all 3 business units, we really have a -- we feel that we have a pretty good grasp on strengths and weaknesses, and we're trying to cover the weaknesses and capitalize on the strength, really no magic there. So it's all really predictable.

[Operator]

Your next question comes from the line of Mac Whale with Cormark Securities.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Just a question on -- I'm not sure if you want to get granular on the entry of the quarter to the exit in terms of volumes because it -- you might be able to maybe make an exception this quarter because I think when you look at what's happening, it's important to get an idea of what's happening in Q4 because of what we have to do for modeling in 2021. So for instance, on Magnequench, is it a case where you sort of entered the quarter at, say, 300 tons a month, and you exited at 400. I mean, is it that big of a difference between the beginning and end of the quarter?

[Rahim Suleman, Chief Financial Officer]

So Mac, I would say that it is certainly a big difference for Magnequench, in particular, where we entered the quarter and where we exited the quarter, where I think we're more cautious on -- from that perspective, is where we exited the quarter could be a portion of that. And as we said, it was strong coming into Q4 as well. But a portion of that could be refilling of the supply chain. So I think at this point, we're -- certainly, there was a big difference between July and September. But we're...

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

And -- okay. No, I understand that. Does that then if -- with that same rationale, like when we look at Q2 for Magnequench, it could have been -- it would have been exactly the opposite, probably coming in at 400 and leaving at 300. And is it maybe just the case that what's happening is really that sort of recovery is just being masked by timing because C&O might just be sort of shifted a month or 2 but sort of experiencing the same thing, notwithstanding the restocking. Is that what you've been experienced, maybe just a lag difference as opposed to a degree in improvement?

[Rahim Suleman, Chief Financial Officer]

Yes. I would say generally, yes, but I mean I would even caution that we don't actually have to compare and contrast between Magnequench and C&O. We could do a compare and contrast within Magnequench or even within C&O, where certain products that are going into certain jurisdictions ramped up a lot faster than others. So even within Magnequench, there were products that ramped up much quicker and other products that are still kind of on the slower side of the ramp curve. In C&O, there were certain elements that were still popular and selling well in July and August. So honestly, I think it is -- I think we're absolutely confident that the current volumes are very supportive of seeing the type of recovery that we're talking about. But I am just a little bit more cautious about reading too much into specific applications. Both of those businesses are about 50% automotive. Both of those businesses are very, very global with end markets all over the world. But they do have kind of different weighting to different regions, and I think different regions are also growing faster. So the nonautomotive stuff is also recovering. Automotive stuff is recovering and different regions are recovering at different speeds. I think that's what we're generally seeing is the difference between Magnequench and C&O.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. That's helpful.

[Constantine E. Karayannopoulos, President, CEO & Director]

And Mac, within Magnequench, you have sort of different parts of the business behaving differently. Going into the lockdowns, I would say that our magnet business, especially the plant in Chuzhou didn't really feel an effect. Now keep in mind that it's a relatively very small part of the overall business. But if you look at the magnets that that plant makes, they're very small magnets, primarily for electronic applications. So it wasn't exposed to some of the larger industrial automotive trends. And one would argue that electronics, as more people were working from home, benefited slightly from ironically rather from the pandemic. So the small magnets that go into fan motors for laptops and tablets and the like, that was a very strong business for that plant. Now it's not going to move the needle overall. But we announced that we're expanding that business, and we're expanding it again. And that's primarily driven by electronic, gaming, the PS5 controller that I mentioned. But these are all very, very small magnets, but it's a nice little business that is growing, and we plan to continue to grow it aggressively. Automotive, between Magnequench and C&O, as Rahim said, those 2 segments behave slightly differently, different parts of the supply chain and different parts of the automobile. It was encouraging, though at Magnequench to see the continuing success we have with both EV and internal combustion engine drivetrains. And that, I expect, will continue as the business unfolds over the next few quarters.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. That's helpful. On the lag that we typically see, when I'm looking at pricing looks sort of 2 on a per ton basis has sort of stabilized in Magnequench and maybe up a bit in chemicals and oxide. But when you look at this effect of pass-through, where are we on that process this year? Are we -- do we need to make any adjustment given what's happened in terms of volumes? Or should we start to see a reversal? Or is it just sort of status quo from here on out?

[Rahim Suleman, Chief Financial Officer]

Yes. I mean, I think if I look back over -- you kind of have to look back probably 6 months to get a sense of where lead lag is. And for that, you'll see most of the rare earth portions of the business anyway, being stable. The exception is neodymium, which is actually important in both C&O and in Magnequench. I would say in the kind of the last quarter here, it's probably a little bit of a headwind for Magnequench and a little bit of a tailwind for C&O. So as a company, they're almost offsetting each other. Overall, though, these are not huge lead lag numbers that we would have talked about in the past. So I'd suggest that even though that one element is up in price substantially, but we haven't seen huge lead lag impacts.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. And then just lastly, Constantine, when you're looking at some of the M&A opportunities, what are -- just generally speaking, what are the product lines or maybe material lines that you're most excited in terms of the opportunities? Is it -- could you classify them as businesses you're already in and you're adding technologies? Or is it more new materials that you want to add perhaps to the same customer base? Can you sort of contrast where the focus might be?

[Constantine E. Karayannopoulos, President, CEO & Director]

Yes. It might be a little too early to get too granular, Mac. But we're looking at things that, as I said earlier, that could start fixing or helping some of our weaknesses, whether they are supply chain-related or looking at folks who have a larger presence in markets that we have a small presence in. And again, I don't like speaking in code, but I really am limited by what I can say. And as I said, also other opportunities that are presenting themselves are more supply chain -- regional -- the change into regional supply chains and resilient, robust supply chains at the local level are presenting some opportunities. I don't think when you look at our business -- at the opportunities we're looking at on our on our radar screen, we would be looking to get into something that either we don't know how to do or product lines that we're not already in. I mean we -- I think we're getting all a little too old to be learning new tricks. So we'd like to continue to hone what we do well and addressing some of our strategic weaknesses in the process. So I wouldn't expect to see anything that is far from what we do day-to-day right now.

[Operator]

Your next question comes from the line of Steve Arthur with RBC Capital Markets.

[Steven Arthur, Analyst]

Yes. Just a couple of quick follow-ups here. First, on the [ magnet making ] operations. Further expansion was announced in the summer. I'm just curious of the status of that? Is that complete now? And is there any way to characterize the capacity level of that business that you can support at this stage?

[Rahim Suleman, Chief Financial Officer]

So, Steve. It's Rahim here. So it is complete in that the majority of the capital has been spent to support it. But honestly, complete is an awkward word because we just continue to grow, and we continue to see more demand through that. So the first phase of completing that was -- there was 2 sets of capacity expansions that we did for magnets. One was in Tianjin, our main Magnequench facility in China to prepare, I would say, for additional magnet programs that are automotive customer based originally. So that capacity is ready, and we're starting to supply of those programs. And the second types of expansions that we were doing was in the facility that we acquired the small plant in Chuzhou. So we've continued to add expansion and capacity there. And I think we're going to continue to be adding capacity there as demand really requires us to continue to grow. So I don't think there's huge dollars to come. I think they're substantially ready, but it will be continual expansion. In the TJ one, it was much more of a larger upfront cost to put the initial infrastructure in place. So we'll grow into a lot of that capacity. In Chuzhou, we're going to continue to expand over time.

[Steven Arthur, Analyst]

And I guess just on the demand side ...

[Constantine E. Karayannopoulos, President, CEO & Director]

Steve, one more -- Steven, sorry, one more comment. Because of, again, what Rahim said, Tianjin is mostly focused on larger complex automotive type magnets, whether that's for pumps that I talked about or seeds -- different -- some under the hood, some in the passenger cabin. And the lag between committing and actually making shipments is quite a bit different from the electronic application focus that the other plant in Chuzhou has. So after we build capacity expansion in Tianjin for automotive. We have to go through qualification, reviews, the works with our customers, where in -- because some of these programs are relatively new, whereby in Chuzhou, we're just adding capacity to go after existing business. And given how quick the electronic supply chains respond in the manufacturing environment in Asia, the time lag is a lot shorter. So the effect of that was the first expansion we did in Chuzhou sold out again, so we had to add to it. But this is fairly straightforward. It doesn't take an awful lot of time and effort and investment to just keep adding presses that do the same thing that the other magnet presses have been doing for years. So it's a bit of an easier expansion and a faster response time in terms of seeing the effects at the operating level.

[Steven Arthur, Analyst]

Okay. That makes sense. And I guess just on the demand side, there's lots of magnet makers out there, and some of them are already your customers. I guess as you're winning this new business, in particular, in automotive, how are you differentiating there? How are you positioning the magnet manufacturing business to pursue and win these orders?

[Constantine E. Karayannopoulos, President, CEO & Director]

That's a tough question, and it will take a long chat to articulate how we do it. In the -- again, it's a slightly differentiated strategy between electronics and automotive. In automotive, we're very much pulled by what our customers ask and they tend to be largely European component, motor and system manufacturers, wood plants in Europe and plants in Asia. In that case, they -- we respond to what they say and we go after because it's automotive, typically newer programs. So if we win new businesses, it's not sort of as threatening to our existing customer base. And at the same time, we do have a pretty sticky business with our existing customers, even though in some aspects, it could be seen as we are competing with them. We don't -- we try not to take business on price. We don't like to commoditize the space. And very often, we get programs that a lot of other suppliers cannot get because they don't have the performance characteristics or the quality characteristics in their magnets. And this is absolutely critical in automotive. On the other side, with the electronics, fan -- I mean Chuzhou had been a very consistent, well-regarded supplier into the thin fan motor market and we continue to build on that. So I guess the short answer to the question is that we try to be very selective what we go after. We -- and I think we're so far, so good. And we do see opportunities to continue to grow that business handsomely without necessarily stepping on too many toes. It's a bit of a fine line, no question about it.

[Operator]

And your next question comes from the line of Scott Fromson with CIBC.

[Scott Douglas Fromson]

Just a couple of follow-up questions on Magnequench, following up on Steve's questions. He actually asked most of what I was going to ask. But with your magnet-making capabilities, are you seeing any additional joint development request from major customers and I'm thinking automotive?

[Constantine E. Karayannopoulos, President, CEO & Director]

Yes, that's always the case, Scott, especially because these -- as I said earlier, by the way, it sounds like you and Steven have compared notes and ...

[Scott Douglas Fromson]

We have not, but...

[Constantine E. Karayannopoulos, President, CEO & Director]

I'm sure I was -- so yes, in automotive, it's a very long term. And it's a long runway. I don't want to start dropping names, but if you look at the magnets we're making in Tianjin, that we've been trying to get into that for over 3 years. And it was actually -- 2 of our largest German motor customers saying, listen, we need you to do this because we're not happy with the quality and the performance of the magnets that we're getting elsewhere. And we worked with them jointly to understand what the objectives were, what we had to do and the whole thing worked out over, as I said, almost a 3-year time frame that we've been trying to do this. So clearly, on any new program, it's a long runway. And unless you work very closely with these -- with our customers, there's very, very low chance of success. And it's discussions that go way beyond the sales manager to purchasing manager level. There's a very intimate contact between engineering groups, applications groups, motor design groups, and there's a continuous optimization of not only the magnet making process, but also the motor design and manufacturing process. So yes, it's a long process, and that's another thing that makes us feel pretty good about getting into this activity this way, where the business tends to be stickier and longer term.

[Scott Douglas Fromson]

And so that sounds like...

[Rahim Suleman, Chief Financial Officer]

I'll just add a quick comment to that. Clearly, on the automotive side, where we've been long regarded as the powder supplier of choice adding the magnet expertise has been something we're working with our customers on, and they're certainly very interested in it. We have proved in a number of different areas how that's been very successful. And as Constantine said, these are longer based programs, we'll be making great progress into. But the opposite is also true. On the magnet customers certainly have got -- on the magnet making side has certainly got a great appreciation now of the magnet design and motor capability that we do have. But perhaps we were not as focused on facing some of the magnet customers, some of the smaller magnet customers in the end markets that our new facility is after. We probably hadn't spent and invested as much time in magnet development from a powder perspective. So now the combination has certainly yielded a lot more discussion with customers on what we could be doing. So I would say the integration of both sets of knowledge has been valuable for both end market perspectives.

[Scott Douglas Fromson]

So it sounds like you're learning kind of new things you can do with your powders in terms of finished products. And is that true? And is that the basis of your sort of [indiscernible]

[Rahim Suleman, Chief Financial Officer]

Slightly on new things, although, I would suggest that we were probably very aware because we were already -- we already had a motor design group. We were already very aware on the powder side. What I think it is, it's actually the practical application in some areas where kind of we weren't facing the customer directly, the volumes were maybe smaller, like the types of business that our Chuzhou facility faces would not have been a lot of business where we would have invested a lot of resources on changing the magnetic properties. Now we're doing much more of that type of work, and customers are much more interested in it. So I think we've always had the capability. It's just now the opportunity is giving us to talk to new customers on new programs.

[Constantine E. Karayannopoulos, President, CEO & Director]

What the -- what may have changed in the last 3, 4 years, Scott, is the fact that we can now put together a package that involves new powder manufacturing ways to prepare -- to make a material that has different properties that marries up better with the magnet-making process. So the solutions that we're bringing to the table, for example, involves motors that spin at 3, 4x the frequency of a jet engine, and the magnet performs under very, very harsh conditions. And 5 years ago, that wouldn't have been possible. But in order to achieve that, we had to work both on the magnet-making process, but also on the powder-making process and the compounding that takes place between powder-making and magnet. It's -- we continue to learn, and we continue to develop new tricks. And right now, when you look at our capabilities that really differentiate ourselves from pretty well anybody out there, we can control powder-making at the molecular level. And we can take that knowledge all the way to making magnets at the quality and performance level that it would be very, very difficult for others to achieve. So this is -- the learning process is constant, just that now it's applied to making powders and making magnets in addition to what was always the case before with Magnequench, which was just making powder and then leaving it up to other folks to make the magnets.

[Operator]

Your next question comes from the line of Mark Neville with Scotiabank.

[Mark Neville, Analyst]

Maybe just a few follow-up questions at this point. Just the comment around September being much better than July or harbor was said. Is that a holistic comment or is that speaking specific to Magnequench?

[Rahim Suleman, Chief Financial Officer]

I think it's heavily weighted to Magnequench.

[Mark Neville, Analyst]

Okay. And if I could, I guess, ask the same question in a different way. Is there sort of a rough quantum or order of magnitude just to sort of help us ballpark it, thinking of how Q4 might shape up?

[Rahim Suleman, Chief Financial Officer]

I think that the way it was described earlier about kind of the entry point and exit point of Q2 and Q3, probably are reasonable ways of thinking about it. You know we don't give exact numbers going into the next quarter, but I would say that's it's good -- more than 35%, more than 40% of Magnequench's current sales probably happened in the last month.

[Mark Neville, Analyst]

Got it. That's helpful. Maybe just one more on around -- go ahead, sir.

[Constantine E. Karayannopoulos, President, CEO & Director]

Sorry, Mark. Just -- so one of -- we -- yes, I'm having a bit of a challenge here to try to add granularity to what we've said. But you also need to keep in mind that there is different dynamics superimposed here. We had the whole COVID thing and first quarter, we saw China shutdown and then second quarter, China came back, but Europe and the U.S. kind of shut down Japan kind of slowed down. And this is sort of late third quarter was the first sign of things coming back to a normal trajectory. Clearly, that was also impacted by the fact that in Europe in the third quarter, for example, when you look at July, July was clearly impacted by COVID, but also because in Europe, July and August are historically very slow months as folks tend to go on holidays, and the Europeans take holidays, their sort of a religion, especially in August. So August may have been impacted in addition to whatever the COVID impact and the manufacturing impact globally, it would have been impacted by plants in Europe going to be a lot slower than normal in September, sort of everybody is kind of back to work. So keep that in mind because -- especially with Magnequench, there's a seasonality through the year that I -- back in my previous lives as CEO of Neo, I would always start my remarks by reminding everybody that seasonality where because -- and back then was more prevalent because Magnequench was selling mostly into electronics. And you look at those supply chains, you have a very strong second quarter, a stronger third quarter as supply chains are running flat out ahead of Christmas to fill up the shelves in October, November. And then they go into a strong fourth quarter, and they start slowing down again in December because of the holidays. Then January starts strong, drops off significantly in February because, again, supply chains slowed down in Asia because of the Lunar New Year. March, the Japanese companies tend to run down inventories. And then the second quarter picks up again. So there's all kinds of, I would call, micro seasonalities depending on the market segment that come into this. And now with the automotive being a much bigger portion of Magnequench, and by the way, this is by design, 10, 12 years ago, we made it a priority to penetrate automotive markets more so than we did before, that is masking that electronic seasonality. So you have, as I said, a number of dynamics superimposed, whether it's regional, whether it's supply chain and whether it's market segment-specific.

[Mark Neville, Analyst]

Yes. No, I can appreciate that. That's helpful. Maybe just one last question then. Just on the cost, a good job managing cost. It sounds like where you spoke to it sound sort of more temporary, but just sort of curious if there -- there was sort of any opportunity through this, in your opinion, to remove any sort of permanent costs from the business, so that when we come on to the other side, maybe there's a benefit to margin?

[Constantine E. Karayannopoulos, President, CEO & Director]

Well, I made some general comments about automation, efficiency and so on. Yes, we -- regardless of COVID, we're very focused on reducing our cost. And this has been across the board, Magnequench has specific initiatives, C&O has specific initiatives and Rare Metals focused especially around Silmet optimization and efficiency. But we're learning how to do things slightly differently through COVID. And I'm -- to answer your question, perhaps a bit more specifically, yes, we're learning a few new tricks. And hopefully, some of these gains and the lessons we're learning will carry through post-COVID, and we should see continuing optimization on production and improvement in costing on a per kilogram basis.

[Rahim Suleman, Chief Financial Officer]

Yes. Mark, the only thing I'd add to that is I don't think we -- I think we've been looking at cost reduction strategies in a number of locations in the world. Honestly, I don't know that they've been accelerated or changed from a fundamental perspective from COVID. I think that, that's kind of minor and around the edges. I think that the cost reduction strategy is much more fundamental than that. But we still, at the same time, did take down -- did take the opportunity of COVID downtime in a sense to actually make more, I'd say, technological gains. So I don't think that what happened coming out of COVID was terribly different from a cost structure perspective. But I do think we made significant advances in product that we're pretty excited about, as I said, as we continue to invest in the future growth profile. So having the time enabled us to run a couple of trials.

[Operator]

And there are no further questions left in queue at this time. I turn the call back to the presenters for any closing remarks.

[Ali Mahdavi, Capital Markets & IR Executive]

Thank you, operator. On behalf of the Neo team, I'd like to thank you for joining us today for an update on the third quarter. We look forward to reporting to you back again on the back of our fourth quarter year-end results. And in the interim, if you have any questions, as always, feel free to reach out, and you can connect to myself by phone or by e-mail. And we look forward to speaking to you soon. That concludes today's call. I'll hand it back over to the operator.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect.