Neo Performance Materials Inc

TSX:NEO

Earnings Call Transcript 2018-Q4

[Operator]

Good day, my name is Jodi, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Neo Performance Materials Fourth Quarter and Full Year 2018 Results Conference Call. [Operator Instructions] Thank you. Alex Caldwell, Neo's Corporate Secretary, you may begin your conference.

[Alexander D. Caldwell, Corporate Secretary]

Thank you, operator, and good day, everyone. Today's call is being recorded. A replay will be available starting tomorrow in the Investor Center on our website located at neomaterials.com.Speaking first today will be Neo's President and CEO, Geoff Bedford. Rahim Suleman, Neo's Chief Financial Officer, will then provide additional details regarding the company's Q4 and full year financial performance. Finally, we'll open the call to questions from analysts. Please note some of the information you'll hear during today's presentation and discussion will consist of forward-looking statements, including without limitation, those regarding revenue, EBITDA, volume, gross margin, other income and expense measures and future business outlook. 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 Q4 2008 (sic )[ 2018 ] earnings press release, which is available on SEDAR and on our website at neomaterials.com. 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 information and annual information form, which were filed on SEDAR earlier today and are 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. I'll now turn the call over to Geoff Bedford for opening remarks.

[Geoffrey R. Bedford, President, CEO & Director]

Thanks, Alex, and welcome, everyone. Let me start by referencing our news release issued last night, in which Luxfer and Neo Performance Materials jointly announced that both parties have mutually agreed to terminate the previously announced arrangement transaction, under which Luxfer would acquire Neo. A copy of the termination agreement has been filed on SEDAR. As part of this agreement, Luxfer will pay all reasonable documented expenses incurred by Neo in connection with proposed transaction up to a maximum of $3.5 million. Pursuant to the terms of the transaction agreement, each of the parties has agreed that except as required by law, it will limit any comments or other disclosure relating to this said termination to what is set out in the joint press release. As such, I'm not in a position to provide further comments about the termination. However, with that, Rahim and I would like to provide a review of Neo's performance in 2018. Neo continued to show good operational and financial performance in 2018, with revenue, operating income, adjusted net income and adjusted earnings per share all higher in 2018 compared to the prior year. In addition, each of our business segments made strong progress on a number of strategic initiatives. Consolidated revenue for the year totaled $454.2 million. That was a 4.6% gain over 2017. Net income in 2018 grew to $41.1 million or $1.02 per share with adjusted net income for the year of $38.9 million or $0.97 per share, a 5.4% increase over 2017. Adjusted EBITDA in 2018 was $67.1 million, 1.2% lower than in 2017. A decline in adjusted EBITDA in the fourth quarter led to the slight decline year-over-year, but I was pleased to see Neo sustain robust levels of adjusted EBITDA in 2018 following the strong 42.5% increase in adjusted EBITDA the company delivered in 2017. The fourth quarter of 2018 presented some challenging market conditions for Neo. Revenue in the quarter of $109.4 million was normally unchanged from the fourth quarter of 2017. However, adjusted EBITDA was $13.2 million compared to $15.6 million in the fourth quarter 2017. Two macroeconomic elements impacted us in Q4 in particular. One was a slowing of the rate of growth in China's economy, the other was a general downturn in the automotive sector globally, most notably in China. While remaining one of the fastest-growing major economies in the world, China's growth rate has slowed and that was particularly reflected in the auto sector. This in turn impacted Magnequench sales volumes in the Chinese auto sector in the fourth quarter and to a lesser extent, Chemicals & Oxides sales volumes of auto catalyst products. Notwithstanding the current macro environment, China remains a strategically important region and remains on track to becoming the world's largest single market. China also represents a significant growth opportunity for Neo, with more than 1.3 billion consumers and a rapidly expanding middle-class that is driving demand higher for a wide range of end products that require our engineered material. Our strong operating presence in China to supply that market combined with 25 years of manufacturing experience in the region positions us to benefit from this trend. In particular, China continues to set ever tighter standards for pollution controls in vehicles. In an economy that produced more than 23 million passenger cars and 4.3 million commercial vehicles in 2018, this trend will clearly benefit our auto catalyst business. China is also the current market leader in the development of battery technologies and is encouraging rapid market penetration of electric vehicles, hybrid electric vehicles and other platforms in transportation markets. Those vehicle types are relying on large numbers of electric motors that are increasingly powered by rare earth magnetic materials. In our Magnequench segment, volume decreased slightly in 2018 as compared to 2017, although that follows a large volume increase of 17.4% from 2016 to 2017. The decrease in 2018 occurred in the fourth quarter, primarily driven by lower sales in the auto and hard disk drive markets. Revenue for the year was higher by 5.3% from prior year and 34.2% higher from 2016 level. In the fourth quarter 2018, revenue was down sharply from the prior year. That was largely due to lower pass-through rare earth prices combined with slightly lower volumes. Adjusted EBITDA for the year at Magnequench increased 1.6% from 2017 and was up 31.9% over 2016 levels. In Q4, adjusted EBITDA declined from 2017 level due to lower volumes as discussed and material costs pass-through impact. As Rahim will explain, Magnequench passes rare earth prices through to customers on a lag basis and this can cause fluctuations in quarterly results. In spite of the relative softness we experienced in Q4, Magnequench remains well positioned in markets that are fundamentally strong. For example, according to IHS Markit, the world market for electric motors and automotive applications was worth $30 billion in 2017 with 3.3 billion units shipped that year. The market for traction motors used in electric vehicles and hybrid electric vehicles was itself worth $3.5 billion in 2017, 6.2 million units shipped. Together, these markets are forecast to grow at a 12.6% compound annual growth rate through 2022. This is a particularly powerful trend for Neo Magnequench. Not only our Magnequench powders are used in numerous small electric motors that power various automotive systems today, but they're also helping to power higher torque traction motors systems use in several Honda platforms. We see multiple opportunities for additional long-term growth for our products, both in the traction motor space and with electric motors and automotive in general. We're also pleased to report progress made in our magnet business development efforts in 2018 with the addition of a number of magnet presses and a small coating line in Tianjin. This business is extremely important to us, and this capacity will allow us to work more closely with the magnet users to enhance our powders and compounds and improve product performance.In the Chemicals & Oxides segment, revenue, operating income and adjusted EBITDA all were higher in the fourth quarter 2018 from 2017 levels. Higher C&O sales volume and separated rare earth products in the quarter was offset by lower auto catalyst volumes due to decline in diesel demand and a general slowdown in automotive market. C&O's auto catalyst business saw continuing strong growth in 2018 for its gasoline auto catalyst products. That helped to offset a decline in the diesel catalyst market demand. While diesel markets have been negatively impacted by larger consumption trends in those models, the outlook for Neo diesel catalyst products has improved given several very important legal victories we secured in China and Germany regarding invalidation of patents claimed by competitors. The fourth quarter for C&O benefited from lower legal and other costs related to auto catalyst IP action compared to the fourth quarter 2017. We made significant progress in this area in 2018 with a number of positive rulings, including the invalidation of competitors' patent claims in China and before the European Patent Office. This momentum has continued into the first quarter of 2019. First, as we previously announced in January, Neo successfully revoked the German designation of a key patent that had been blocking the sale of our diesel emission catalyst products in Germany. Second, Neo recently invalidated 2 more patents in China, including the Chinese equivalent to the German patent that was revoked in January. These wins continue to expand and validate Neo's freedom to operate and we see long -- strong long-term growth opportunity in the global auto catalyst market. Market analysts, such as Bank of America Merrill Lynch, are similarly bullish on the future of the auto catalyst market. In a published analysis last month, AML forecasts that the global market for auto catalyst should grow an organic annual rate of 6% between 2019 and 2025. This will be driven in part by the continued efforts of regulators in China and India and elsewhere to increase their emission standards to at least match those in the U.S. and Europe. Our Rare Metals segment continues to see good performance and healthy demand in super alloy material additives, such as hafnium, tantalum, rhenium and niobium and also in our gallium-based products for mobile communication, semiconductors and LED lighting. As compared to 2017, revenue, operating income and adjusted EBITDA were all higher in 2018 for this segment. This improvement is largely due to strong results continuing at our Silmet facility with its increased volume, higher flow-through margin, continued focus on higher-margin program and continued operational improvement. So with that, let me turn the call over to Rahim for additional detail on our 2018 Q4 and full year financial performance. Rahim?

[Rahim Suleman, Chief Financial Officer]

Thanks, Geoff, and good day to everyone. On a consolidated basis and for the full year 2018, consolidated revenue was $454.2 million, which compares to $434.2 million in 2017 or an increase of 4.6%. Operating income of $42.9 million improved by $8.1 million or 23.2% from the prior year. Net income grew to $41.1 million in 2018 from $25.4 million in 2017. And adjusted net income was $38.9 million in 2018 compared to $36.9 million in 2017. As Geoff referenced, adjusted EBITDA for the year was $67.1 million, a 1.2% decrease from $67.9 million reported in 2017. Adjusted EBITDA in 2018 was adversely impacted by $4.2 million of premium freight incurred in the first half of 2018 following the implementation of the wastewater treatment system in one of our facilities. Adjusted EBITDA in the fourth quarter of 2018 was $2.4 million lower than the fourth quarter of 2017, primarily related to the impact of timing on Magnequench pass-through pricing agreements and the general slowdown in auto sales. All our key metrics, revenue, operating income, adjusted net income and adjusted EBITDA are considerably higher in 2018 compared to 2016. Some of these were as much as 20% to 40% higher. This illustrates Neo's continuing and sustained improvement in the overall business, coming out of the restructuring and following the IPO in the fourth quarter of 2017. So firstly, let's talk about Magnequench. The Magnequench segment represents 47.1% of our consolidated sales in 2018. In that business, revenue for the year increased by 5.3% from the prior year, while revenues in the fourth quarter of 2018 decreased by 20.2% from Q4 of 2017. This was primarily related to changes in rare earth pricing as these changes are passed on to our customers. Volumes during the year declined by 2.8% compared to 2017 after having increased by 17.4% from '16 to 2017. Volumes in the fourth quarter were 6% lower than the prior year, primarily attributable to the general market slowdown in the auto sector. For the year ended 2018, adjusted EBITDA was $50.5 million or 2.2% increase from 2017 and a 32.4% increase from 2016 levels. This improved performance was driven by strong operating performance, strategic purchases of other non-pass-through materials, product mix and the impact of selling prices being adjusted on a lagged basis. In the fourth quarter of 2018, adjusted EBITDA was $9.1 million, a decrease from the $14.7 million of adjusted EBITDA in the fourth quarter of 2017. This change was primarily related to the impact to delayed pass-through mechanisms of rare earth prices. As we have previously discussed, a key feature of neo strategic focus on value-added margins is to pass through rare earth prices to its customers, albeit on a lag basis. This delay in implementing selling price changes can cause fluctuations in quarterly results when rare metal prices have moved considerably. However, this pass-through mechanism is effective in protecting EBITDA in the longer term. In this particular circumstance, rare earth prices moved quickly in Q3 2017 and Q4 2017, which caused lower margins in Q3 2017 and higher margins in Q4 2017. In the Chemicals & Oxides segment, 2018 revenue totaled $161.4 million compared to $170.9 million in 2017, a decrease of 5.5%. Revenue in Q4 of 2018 was $38.2 million and that compares to $36.2 million in Q4 of '17, an increase of 5.5%. C&O represented 35.5% of consolidated revenue in 2018. Adjusted EBITDA for the year decreased to $18.5 million from $25.3 million in 2017, and adjusted EBITDA for the fourth quarter of 2018 totaled $4.6 million compared to $2.4 million in the same period of 2017. C&O saw strong continuing growth in its three-way catalyst business, which helped to offset the decline in the diesel catalyst business. Neo incurred $4.2 million of premium freight cost in 2017 -- in 2018, with the vast majority of these changes occurring in the first half of 2018. These premium freight charges were a result of the production process upgrade made at our Zibo China facility in late 2017. And C&O also had slower sales in the fourth quarter of 2018 related to a general slowdown in auto markets. Rare earth separation sales can vary in volume and mix on a quarter-to-quarter basis. In addition, volatility in rare earth pricing can have an impact on immediate margin in separation business as there is a lead-lag effect with inventory on hand. There was significant volatility in rare-earth pricing in the third quarter of 2017, and Neo was able to capture excess margins. There was less volatility in 2018. Further, slowly declining selling prices in the second half of 2018 adversely impacted margins on a short-term basis due to the impact of having higher inventory costs on hand. The market demand for rare earths remain strong, particularly in the area of our magnetics. However, customer buying patterns do vary over time, and particularly in some spot sales that we do see. After a strong 2017, we had fewer spot sales in 2018, although we do see some additional spot sales here in early 2019. In our Rare Metals segment, revenue in 2018 was $93.8 million compared to $76 million in the prior year, an increase of $17.8 million or 23.4%. Rare Metals represented 20.6% of consolidated revenue in 2018, and fourth quarter revenue was $27.3 million in 2018 compared to $19.7 million. Adjusted EBITDA was $9.8 million for the full year 2018 compared to $9.1 million in 2017, and adjusted EBITDA was $1.7 million in the fourth quarter of 2018 compared to $1.9 million in the fourth quarter of 2017. While Rare Metals segment continues to see higher performance and growth trends in tantalum, niobium and gallium-based products. In 2018, these gains were offset by customer demand in segment's hafnium-based products. However, recently, we have won additional business and customers for our hafnium products that we continue to believe that our products are well placed in this market segment. Let me provide some additional results and activities in the quarter and for the full year. For the 12 and 3 months ended December 31, '18, SG&A expenses was $49.9 million and $13.9 million, respectively compared to $63.2 million and $20.8 million in the corresponding periods last year. Lower SG&A costs relate primarily to lower legal costs associated with outstanding intellectual property disputes. 2017 SG&A costs included those associated with the initial public offering at Neo shares, while 2018 cost included similar smaller transaction costs related to the announced Luxfer acquisition transaction. R&D expense in 2018 was $16.8 million, which compares to $15.7 million in 2017. Neo continues to prioritize making strategic and appropriate investments in R&D, develop new applications for its products and to strategically position Neo to meet customers' needs for technical solutions. CapEx totaled $13.5 million for the 12 months ended December 31, 2018, which compares to $12.3 million in 2017. Majority of these capital expenditures relate to capital projects performed at Zibo, Tianjin and Silmet facilities, including strategic investments in 2018 related to magnet capabilities and the geographic diversity of our auto catalyst segment. Neo continues to have a strong financial position. As of December 31, 2018, the company had $71 million in cash and $4 million in debt after paying to shareholders dividends of $11.7 million. Prior to working capital changes this year, Neo continued to have a strong free cash flow profile and only $8.4 million cash flow in Q4 2018 and $53.5 million in 2018. The cash used in operations was $8.7 million. This was positively impacted by operating results, but negatively impacted by the increase in working capital, primarily associated with higher raw material inventory purchases, higher finished goods on hand in the auto catalyst segment and certain costs related to the completion of the initial public offering in 2017, where cash outlays took place in 2018. Neo paid $13.2 million of cash taxes in 2018 and a quarterly dividend of CAD 0.095 per common share was declared on February 28, 2019, for shareholders of record at March 20, 2019. As part of the Normal Course Issuer Bid, Neo purchased and canceled 321,222 shares with an aggregate disbursement of $3.8 million. The Normal Course Issuer Bid was automatically terminated upon the announcement of Luxfer acquisition of Neo. In short, Neo's financial position remained strong. Our global team continues to improve operational efficiencies and long-term demand trends across our businesses and our products remain very good. Geoff?

[Geoffrey R. Bedford, President, CEO & Director]

Thanks, Rahim. So in summary, in spite of a challenging marketing conditions in the fourth quarter, Neo continued to show good operational and financial performance in 2018 and each of our business segments made strong progress on a number of strategic initiatives. In Magnequench, our MQU product used in traction motors for the electric and hybrid electric motors is fully commercialized and volumes are ramping strongly. We successfully installed magnet development capacity in China, which will enable us to work more closely with our magnet users and product development and other initiatives. In C&O, we made strong progress with our efforts to defend the integrity of intellectual property in all catalyst markets as courts more to invalidate a number of competitors' patents in China and Germany. This will help us to continue to increase our volumes and market share. We completed a number of operational and other improvements in the year, most notably in our Rare Metals segment. And finally, we continued our product development effort, introducing new products across all 3 of our business segments. These efforts further strengthen Neo's position as a global leader and supply of critical functional materials essential to the performance of many applications. Our experience and ability to work with our customers and collaborative product development is core to our success. We're uniquely positioned in the right markets with the right products at the time of rapid and sustained long-term growth in the forward-facing industries we serve.

[Alexander D. Caldwell, Corporate Secretary]

With that operator, let's open the call up to questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Scott Fromson of CIBC.

[Scott Douglas Fromson]

Just wondering what you're planning on the -- how you're planning to use your capital? Your cash position that's just sitting there. Is there product development opportunities you're looking at Magnequench? I guess, the other part of the question is, how you're looking to counteract the slowness in China?

[Geoffrey R. Bedford, President, CEO & Director]

Sure. Let me start with the first one. So as far as the capital and the cash that we have on hand, I think that we continue to look at various areas. One is we will continue to invest in product development, as you know. You saw that we continue to invest in capital, and we think that we have other capital projects that we can invest in, specifically in Magnequench to help further our growth there. And obviously, things are changing quickly here, but we continue to think that there is opportunities for strategic-type acquisitions and those types of things as well, which we will continue to look at, Scott.

[Operator]

Your next question comes from the line of Stephen Harris of GMP Securities.

[Unknown]

Couple of questions. First one, on the outlook for China. We're well in to Q1. Can you give us a sense of what you're seeing in terms of customer orders on the automotive side and how that's impacting both Magnequench and the catalyst business? And then how you see that unfolding really for the balance of 2019?

[Geoffrey R. Bedford, President, CEO & Director]

Sure. So I would say that what we're seeing so far in Q1 on an overall basis for Neo is certainly an improvement over Q4. I would say that that's coming, I mean, Rahim alluded to some of the rare separation business that we're seeing and some of the Rare Metals business that we're seeing. Although, I would say that what we're seeing in the automotive sector remains slower, but overall we're seeing better performance so far in the quarter relative to Q4. I mean, I think as far as the remainder of the year, what our customers are telling us is that again, they're seeing -- what we're seeing here in Q1 about the expectation is that things will improve as we get into the second half of the year on the expectation of some of the things that are working in the macro world today.

[Unknown]

Okay. Good. And can you walk through a little bit on the mechanism for the pass-through pricing? I guess, a couple of questions. I know some of your contracts have monthly reset, some have a quarterly reset, not sure exactly what the mix of that is. And how much of this is related to fluctuations we have seen this year? Or how much of this just in relation to the year-over-year comparisons, which were quite significant -- quite volatile I guess, in Q3, Q4 of last year? So to what extent we're just normalizing those patterns? I'll just let you elaborate.

[Geoffrey R. Bedford, President, CEO & Director]

Sure. Rahim, do you want to take that one for the pass-through.

[Rahim Suleman, Chief Financial Officer]

Yes. Absolutely. Steve, your understanding is correct, I would say, about 35 to 40-ish percent of the contracts are passed through on a monthly basis, 35% to 40-ish percent could pass through on a quarterly basis and the balance some would be semiannual, some would be annual. So I think that's the general lay of the land with respect to the nature of the timing. In terms of where that impact is, I would say we've always talked about looking at margins from Magnequench on a longer-term basis, and I would say if you looked at the EBITDA per kilo margin in Q4 of 2017, that would have been a pretty high EBITDA per kilo number. It would have offset the EBITDA kilo in Q3 of 2017, although Q3 had some good volumes too. So I think that to answer your question, what do you normalize it for, I think, it's clear that Q4 2017 was a very high EBITDA, sort of that comparable -- straight comparable year-over-year is a tough benchmark for Magnequench, but I think that the current period -- is affected by volume as well. So in the current period, when we talk about slowdown in China, Q4, and I think Q3 was actually a contraction in auto China, which is not what the general forecasts we're seeing going forward, so I think the Q4 2018 was particularly tough in terms of volume. So volume does help with the margin per kilo dynamics as well. And just lastly, I'd also say we haven't talked a lot about foreign exchange and its impact, but I think that the RMB moved quite a bit in the back half of 2018 and that was a bit -- and that affected us adversely as well. The larger piece would be the Q4 '17, gross margin per kilo was a pretty high number.

[Unknown]

Okay. And so am I right -- and absolutely, you see the quoted [niobium] prices, and it looks like there were fairly flat actually in Q4 of this year. Is that correct or you experienced difference in there?

[Rahim Suleman, Chief Financial Officer]

Yes, no, I would say that they were reasonably flat. I'd say that they're reasonably flat. There was especially smaller decline for the past 6 months of '18, but certainly not very volatile.

[Unknown]

Okay. Great. And if I could have one more. I know you're limited on what you can say, but we're going to have to talk something about this when we write up the events for the last 24 hours. Would you agree with the statement broadly that sometimes the simplest explanations for events are the best?

[Geoffrey R. Bedford, President, CEO & Director]

Listen, I just don't think we are able to comment on -- if you're talking specifically about the termination agreement, then we're just unable to comment, Steve.

[Operator]

And your final question comes from the line of Mark Neville of Scotiabank.

[Vivek Sharma, Associate]

This is Vivek on for Mark. So I just had a couple of questions here. I realize that you guys cannot really comment on the deal, but I was wondering if there would be any kind of break-up fee involved in the scenario given that it's a mutually agreed termination.

[Geoffrey R. Bedford, President, CEO & Director]

Yes. So under the agreement, Luxfer will reimburse us up to USD 3.5 million of our fees -- our costs.

[Vivek Sharma, Associate]

Okay. So you guys would be assuming that I suppose. And then just one final question. It's already been discussed a little bit, but just going back to gross margin per kilo in the Magnequench business, I see that in the first 3 quarters of the year, the business was doing pretty well, above -- about $13 and then above $11 and then about $11 again. So I just wanted to ask here like, how much of the weaker performances in this quarter has been -- is being driven by pricing mechanisms and how much is everything else?

[Rahim Suleman, Chief Financial Officer]

I think as was previously asked I think that the rare earth prices have been relatively stable in the last, call it, 6 months of 2018. But you'd have seen less fluctuations driven by the pricing mechanisms in the last 6 months of 2018, but again the other factors that would also have affected it would have been the foreign exchange and the lower volumes.

[Operator]

And your next question comes from the line of Frederic Bastien of Raymond James.

[Frederic Bastien, Research Analyst]

You cited the slowdown in China as a reason for the softer Q4 results, but did the global trade war fears have any impact on the business, either on a pass basis or maybe on a prospective basis? What are your thoughts there?

[Geoffrey R. Bedford, President, CEO & Director]

So the trade discussion and the tariff et cetera, I don't -- they haven't really impacted us directly. I think as you know, the Magnequench business in the U.S. is very small market. Most of the rare earths that we bring into the U.S. come out of Europe and the rare earth actually has been excluded. So it does impact a few of our downstream products, but direct impact is not as much. But I think if your view is that, that is impacting the Chinese economy overall, then that is indirectly impacting us.

[Frederic Bastien, Research Analyst]

And what about the sort of the spat between China and Canada?

[Geoffrey R. Bedford, President, CEO & Director]

Yes, we haven't -- we really haven't seen any impact there related to that. I mean, as you know, we're on the ground there with -- running our plants with local Chinese people and managers et cetera. So we really haven't really seen any -- I'm not aware of any issues related to that.

[Frederic Bastien, Research Analyst]

All right. Rahim, any guidepost that you can point us towards with respect to your expectations for 2019?

[Rahim Suleman, Chief Financial Officer]

Well as we discussed in the past, we don't provide specific guidance on a go-forward basis. I think that the view is -- our view would be that the contraction that happened in auto in China was unusual. And I don't think that that's kind of something that continues to be forecasted going forward. The premium freight in C&O would have be unusual in 2018 and that's not something that we would continue to see going forward. We continue to see growth in the key areas that we are looking -- that we focus our business on. Geoff talked about the decrease within the diesel auto catalyst space. We don't know how that will unfold with our customers at this point, but I think it's positive outcome, but all of that still needs to be against the backdrop of -- so we don't provide specific guidance and it is an area against shorter-term rare earth pricing can move and that can have an impact, but longer term, we continue to see, I would say, positive developments within our key products. A good example of that the traction motor business that we've mentioned and talked about in the past where we've grown by, I think, greater than 50% in that business year-over-year. So where we're introducing new products where we're seeing growth are areas that we continue to be excited about.

[Operator]

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

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

[ Technical Difficulty ] exposure to the automotive space and slowdown in China, but I'm wondering if could you give us more insight into the Neo exposure? For instance, you are not overall exposed to the automakers, and I guess, I'm asking about the mix in terms of hybrids versus your diesel and gas catalysts, like you've got [indiscernible] Honda versus other automakers. Can you talk a little bit about whether your mix will help to offset?

[Geoffrey R. Bedford, President, CEO & Director]

Yes. So let me sort of try to answer that. So I think if you start in our auto catalyst business, the larger market for us is clearly outside of China there. And so when we talked about the impact on China auto, we talked about it impacting Magnequench more than C&O in the fourth quarter. But we also saw the automotive cycle slowing internationally as well as in China, but in China, it is more drastic. In the Magnequench business, for the MQU et cetera, as you said, that's very specifically tied to a program and that program is ramping very strongly for us. And then the other Magnequench business, hard to give a percentage, but the program -- but we did see a slowdown in the programs that were specifically going into China in automotive more so than sort of other areas of the world, Japan and Europe, et cetera. I don't think we're going to give sort of a breakdown by geography of that though, but definitely China was impacted more than the other markets that we serve for Magnequench.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. And so when you look at product launches, whether it's Magnequench or C&O, does -- do you have visibility on the volumes that your customers had expected and then any change in that. Do they translate that upstream so to speak and so would there be delays in the types of product launches you expect?

[Geoffrey R. Bedford, President, CEO & Director]

So at this point, we haven't heard any of our customers saying they're delaying the products that they're working on from a product development point of view or product launches. But we know that for example, a particular program of customer putting capacity thinking that was going to -- that program was going to -- be growing faster than it is right now. So that capacity was put in place, but it's not being utilized today. So I think there is evidence that our customers were sort of thinking of growth that has slowed, as we have said, but we haven't seen any program specifically that the people have said look at, we're going to slow down product development or this new program because of the automotive market as we see it today.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. And then lastly, I think first question, you were asked what you're going to do to counteract slowness in China. Like I don't think you actually answered that. And I'm wondering whether -- related to that, whether some of your competitors are actually much weaker than you so? So if they are suffering from the similar situation as you, do you actually have some competitive advantage there to take market share or to acquire some business you might not have had up to now?

[Geoffrey R. Bedford, President, CEO & Director]

So look I think relative to our competitors, when it comes to China, we're very well positioned. So from our point of view, we have a very strong position to capture what we still think is going to be growth of the Chinese economy, notwithstanding what we've seen in sort of the last 3 months. But having said that, back to -- we don't think ourselves from a geographic point of view, I mean, when we think about automotive for example, what we're trying to do is think about getting more of our products per vehicle and doing that globally. So one of the benefits of being globally diversified from a geographic point of view is that when one country slows down, other countries are speeding up, so it does give us some flexibility there. And as you know, we're putting, we have capacity inside China and outside China today for our Magnequench business, and we're adding capacity outside China for auto catalyst business. So now we think of it as a global business, we think we're very well positioned in China, and we have strong benefit there from cost and those types of things. And we think ultimately China is a great market to be in over the long term.

[Operator]

Your next question comes from the line of Scott Fromson of CIBC.

[Scott Douglas Fromson]

Just 1 follow-up question. This termination fee, is that part of the break fee or is that a separate fee or is that the -- and I assume that's the only fee that you're getting. Is it basically a non -- I don't know, a [ nonmission ] on both sides that it's mutually agreed? I do not know, if I'm making sense, but I just want to...

[Geoffrey R. Bedford, President, CEO & Director]

So the agreement is it is a mutual agreement to terminate. And as part of that agreement, we'll be reimbursed up to $3.5 million. I don't think it specifically relates to anything in particular in the agreement or along those lines, it's just out of the agreement that we initially agreed to.

[Scott Douglas Fromson]

Okay so no break fee in other words?

[Geoffrey R. Bedford, President, CEO & Director]

Correct.

[Operator]

Your next question comes from the line of Yuri Lynk of Canaccord Genuity.

[Yuri Lynk]

Geoff, can we talk a little bit about the magnet capabilities you mentioned? Just curious how your customers are reacting to that initiative?

[Geoffrey R. Bedford, President, CEO & Director]

We're certainly not -- I mean, we're not moving into the world where we're trying to compete with our customers. That is not what we're doing here. And I think what we're trying to do is address, first of all, from a product development point of view, improve our ability to work more closely with our magnet users, the ultimate sort of users. But then also look for ways that we might be able to sort of leverage some of that knowledge in markets that are new. So those are -- that's really the primary effort that we're undertaking today.

[Yuri Lynk]

So it's more kind of tied with R&D. Or are you also selling these magnets to consumers?

[Geoffrey R. Bedford, President, CEO & Director]

So as you know, right now, we're tolling some magnets in China, and we are considering bringing some of that tolling business in-house, because we think from a quality and those types of things, it's easier for us to make sure that we're meeting quality standards and it also gets us closest to customer. So that's example of how you might think about using some of that capacity. But we're very conscious about not competing with our customers, and quite frankly, what Daido does is very complicated and they're really good at it and that's not something that we think -- the best strategy for us would be partnering with them as opposed to competing with them in that.

[Yuri Lynk]

Okay. Shifting gears, wondering if you could give an early preview of the impact or not of IFRS 16, what that might do to EBITDA?

[Geoffrey R. Bedford, President, CEO & Director]

I am definitely going to let Rahim answer that question.

[Rahim Suleman, Chief Financial Officer]

I think that -- so I would say IFRS 16, you're using the numbers, I'm going to say, leases?

[Yuri Lynk]

Yes.

[Rahim Suleman, Chief Financial Officer]

Okay, good. So we have done our assessment of leases, we think that we will probably put a number in the range of $4 million to $6 million on our balance sheet both in liabilities and in assets, and given the size of that number, you can imagine that's not a huge adjustment to EBITDA. I don't have the number with me, but we're not -- the large portion of our costs is not associated with kind of operating leases or rentals or facilities. Obviously, we've facilities that we participate -- that we operate within, but it's not a significant number. The majority of equipment is all old. So I would say it's a lesser number, but I can't quantify EBITDA for 2019 right now.

[Operator]

And there are no further questions in the queue. I'll turn the call back over to Alex Caldwell.

[Alexander D. Caldwell, Corporate Secretary]

Thanks very much, operator. Thank you for your attendance today, and we look forward to reporting our first quarter in early May. Thanks.

[Geoffrey R. Bedford, President, CEO & Director]

Thanks, everyone.

[Operator]

This concludes today's conference call. You may now disconnect.