Neo Performance Materials Inc

TSX:NEO

Earnings Call Transcript 2022-Q4

[Operator]

Good day and welcome to the Neo Performance Materials Fourth Quarter 2022 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Ali Mahdavi. Please go ahead, sir.

[Ali Mahdavi, Investor Relations]

Thank you, operator, and good morning, everyone. Thank you for joining us this morning. Just as a heads up, a replay of this call will be available starting tomorrow in the Investor Center of our website at neomaterials.com.

Joining me this morning are Constantine Karayannopoulos, Neo’s Chief Executive Officer; and Rahim Suleman, Neo’s President.

Please note that some of the information you will hear during today’s presentation and discussions will consist of forward-looking statements, including, without limitation, those regarding revenue, EBITDA, adjusted EBITDA, product volumes, product pricing, other income and expense measures, cash returns and future business outlook, including potential expansion plans. 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 year end earnings press release, which is available on SEDAR and on our website at neomaterials.com.

With that, I will turn the call over to Constantine.

[Constantine Karayannopoulos, Chief Executive Officer]

Thanks, Ali and good morning, everyone. As we reported this morning, Neo generated $640 million in sales in 2022, 19% higher than the previous year. Our adjusted net income for the year was $32 million or $0.74 per diluted share. Our full year consolidated adjusted EBITDA was $79 million. And while the record annual revenue as a reemerged public company since 2017 is a result that we feel good about, I want to acknowledge the difference between the first and the second half of the year.

We are well into a period that requires careful navigation. The combination of macroeconomic conditions, strained supply chains of rapidly growing clean technologies and volatile rare earth prices are superimposing a complex landscape on our industry and business, a set of conditions that is familiar to those of us in the industry, we’ve been long enough to have been through it and taking advantage of it many times before.

In the fourth quarter, we reported sales of $159 million and an adjusted net loss of $5.7 million or $0.13 per diluted share. We reported adjusted EBITDA generation of $12 million. Rahim will provide additional color on the numbers.

With the benefit of three decades of experience in our industry, we entered the second half of 2022 with eyes wide open on the need to navigate cautiously the underlying raw material pricing environment. It is with this conscious and cautious navigation of market volatility and supply chain reform that Neo generated positive EBITDA in every quarter of the past 5 years since we reemerged as a public company in 2017.

More than anything, our experience has taught us that when we work hard and stay focused on safeguarding cash flow and balance sheet integrity during market troughs, we consistently come out of these challenging conditions stronger on the other side. During this phase of the rare earth market cycle, we’re calibrating our tactics by reflecting on the following questions in the near term as we wait for the dust to settle.

First, how the continuing chip shortage, the economic slowdown in manufacturing reopening within China from the transition from a COVID environment is affecting end product demand. Second, how higher interest rates for inflation management are affecting large project developments throughout supply chains. And third, how lasting is the pressure from the seemingly never-ending semiconductor crisis on automotive and consumer electronics supply chain.

These signals of downward cyclical pressure have been acutely felt through the magnetics industry, which saw business activity down 20% to 30% and perhaps more during the fourth quarter. As we know from experience and constant communication with our customers, during this phase of the cycle that is well underway, it is both pricing itself and the working down of inventories by customers waiting for price volatility to settle which has a temporary impact on volumes.

Regarding volumes, we have continued to evaluate the effect, as I mentioned earlier, of semiconductor chip shortages on automotive and electronics over the past 2 years. While there has been a modest direct impact on the number of vehicles produced and sold, there are further discrete impacts on specific platforms and the types of vehicles produced.

Peeling back another layer, one of the key consequences affecting Neo’s business is that the continued shortage of semiconductors has resulted in thrifting of these chips in terms of automation and other power features in passenger cars. This has led to the production of vehicles that have fewer bells and whistles, particularly in Japan, China and Europe. That means fewer power features with motors that adjust seat positioning, lift tailgates, open doors, move mirrors and the like. And that means reduced demand for magnets going into these motors and magnetic materials used in these magnets. The slowdown from automotive magna demand during the fourth quarter was further exacerbated by weak demand in certain consumer products that utilize motors and magnets as a result of the lingering lack of consumer confidence, particularly as China was emerging from a restrictive pandemic environment.

On the other hand, internal combustion engines and hybrid vehicles still require catalytic materials, which partially illustrates why our Chemicals & Oxides business unit volumes have remained more resilient than Magnequench over the same period despite facing similar sector-related headwinds. That said all of these appear to be normal aspects of the business cycle. Dare I say, they serve as a healthy splash of cold water in an industry, and we’re showing signs of dangerous overheating only a few quarters ago. The ebb and flow of neodymium and praseodymium pricing is currently in a range that we have long suggested was conducive to a healthy rare earth industry and is equivalent to the pricing we saw about this time a couple of years ago. For those of you that follow us closely, you are well aware than in a down-pricing environment, Neo’s margin profile undergoes some compression as a result of carrying higher value inventory against a lower market price. The opposite, of course, occurs when prices rise.

Again, this is a normal aspect of the rare earth’s business cycle and when pricing stabilizes, our earnings returned to normal. To be clear, we’re very familiar with managing through these types of short-term cyclical fluctuations. And when we take a step back to view the long-term outlook of rare earth and rare metal technologies, we believe that we’re sitting at the front end of a multiyear, if not a multi-decade long secular growth trend.

Neo is without equal, in our capability, to lead many markets in the specialty rare materials manufacturing space, as we capitalize on decarbonization and energy efficiency tailwinds. I cannot overemphasize the fact that Neo’s business is designed for growth in the key technologies that will advance global sustainability efforts. Last year, when we published our company’s first ESG report, fascinating takeaway from that comprehensive analysis was the fact that more than 90% of our products are integral to clean air, clean water, lightweighting and energy efficiency enabling technologies. Our products are as critical to achieving a more carbon-neutral world, whether that be through enabling a more powerful and efficient electric motor that propels an electric vehicle, a catalyst that helps improve fuel efficiency and reduce harmful emissions or lightweighting super alloys that enable aerospace efficiencies.

The world’s rapidly advancing energy transition needs Neo’s products and that is not only the products that we make today, but also the innovative technology is currently being developed and rolled out by our research and development labs. These technologies will continue to support the secular growth trends over the next 10, 20 and 30 years. In addition to a unique and strong market positioning, our operating model is extraordinarily resilient. As a manufacturer that focuses on engineering value-added materials for our customers, we do not earn our operating margin and cash flow from the changing value of rock in the ground. Instead, we earn our margin when we create unique formulations for our customers with customized functional attributes through understanding the chemistry, morphology and the associated chemical and physical characteristics of our materials. This helps to explain why we have generated consistently positive EBITDA for the past 5 years. This does not mean we’re immune, however, to a volatile environment, but we generate a much more consistent earnings profile compared to pure-play extraction companies, which tend to live in a cycle. That consistency allows us to invest in additional growth opportunities.

During 2022, we made substantial progress laying the groundwork for growth, especially in three areas: first, raw material diversification; second, magnetic product expansion; and third, innovation and sustainability. As we have discussed in previous calls, we established several new relationships in 2022 with prospective raw materials companies to improve the diversification, expansion and self-sufficiency of our feedstock supply chains, in addition to establishing our presence in the upstream sector of our industry in Greenland. All of these companies that we work with are making good progress in their efforts to expand the availability of critical rare earth concentrate supply.

Neo’s unique position in maintaining integrated supply chain capabilities within and outside of China offers our customers unparalleled service and optionality. Given the global supply chain challenges over the past 3 years, we have seen multiple customers take advantage of that flexibility as our operations evolve. During the year, we are proud to have started the process of substantially expanding our magnetic manufacturing capabilities outside of Asia with our first centered magna plan to be established in Europe.

I am pleased to report that we have a dedicated project management team in place working over the past few months, and we have begun the recruitment process to expand our local employee base. We have also established joint training programs with our local rare earth teams and our global Magnequench-led organization. The soft infrastructure continues to be put in place, including our procurement and compliance systems. Key supplier relationships to the site have been or are being established. The permitting process continues to move according to schedule, which has been further enabled now that our design is complete. This also enables us to continue with discussions with our equipment vendors and manage our long lead procurement process. From a commercial perspective, the strength of our existing customer relationships is paramount to accelerating our success and a dedicated support from highly experienced Magnequench team, especially helpful to have trusted operational leaders that have been the part of our historic capacity expansions at our plant in Tianjin, and Chuzhou.

The Estonian magna project is a major undertaking and one where our team continues to outperform. We’ve been thinking through this project for quite some time, but to see the progress from conceptual idea through formal approval and now into early stage development is very satisfying. We’re very appreciative as well of the opportunity to expand in Estonia and for the diligent efforts of the local community, Narva, Estonia as well as our partners and employees working hard to develop the project.

Early testing and qualification of our magnets from our pilot plant is meeting with acceptance and success by our key Tier 1 drivetrain customers in Europe. We expect to break ground and start construction of the greenfield magna plant as soon as the Estonian weather permits. Similarly, our modernization and relocation for our environmental emission control catalyst facility in Zibo, China, continues on schedule. Our early works construction efforts are nearly complete with no interruption of production on our legacy operating plant.

Given the Chinese New Year holiday, we had some anticipated downtime surrounding both the holiday and expectations for winter season interruptions. The construction side is humming again, and we look forward to finalizing site building foundations and structures in the first half of 2023. The key benefit of these new manufacturing facilities is a more efficient processing flow sheet and the advance of engineering perspectives. Our legacy Zibo plant started live 40 years ago, and has undergone a lot of capacity expansions and iterations to accommodate new and innovative products. With this new facility, we get to hit the pause button, reassess what is working and think through future-proofing these sites for a more sustainable footprint. Additionally, we continue to work on and expect to close shortly the acquisition of additional strategic assets that when added to our portfolio, unlock product and margin synergies that are unique to yield further increasing our market position differentiation.

As we plan for Neo’s stronger emergence from this market in the medium and long term, allow me to make some comments on public policy tailwinds. Slowly, but meaningfully, government interventions are providing attractive incentives for the establishment of rare earth supply chain optionality for European and North American electric vehicle and renewable energy OEMs and Tier 1s.

In addition to the direct financial and other support we have received from the government of Estonia, our team has been an active contributor to various government processes around the world focused on developing public policies to support greater production of critical materials for the green technology transition.

We welcome all the latest policy developments in Canada, the U.S. and especially the European Union. Two weeks ago, the EU Commission published draft legislative techs for the Raw Materials Act and the Net Zero Industry Act. In fact, the Raw Materials Act specifically has distinct sections specifically about rare earth magnets, the first in our industry’s history. We are also monitoring the potential establishment of the EU sovereignty fund, which as we are hearing from Brussels should be the source of funding to support these two acts. These legislative initiatives outline a very bold vision and quantify specific targets for supply chain diversification. They give special attention to domestically produced rare earth magnets for electric vehicle motors, for which Neo is the frontrunner with our flagship investment in Estonia and the synergies we capture from the existing separation facility in the vicinity.

While the positive impact of these tailwinds is difficult to quantify with high precision before the completion of our Estonia’s magnet project, we cannot ignore that the tide is rising because of all these legislative developments. The Inflation Reduction Act legislation enacted in the United States last year has proven to be a real game-changer in the electric vehicle landscape, with positive spillover effects on critical minerals beyond just battery materials such as rare earths and rare magnets used in EV and other high-efficiency motors. I expect that over the next few quarters, we will be evaluating the establishment of a metal alloy and magnet production facility in North America, similar to our new plant in Estonia.

As we prepare to publish our 2022 ESG report, I’m encouraged that our teams are currently undertaking the heavy lifting of working through preliminary science-based targets, as we evaluate the best sourcing of energy for each of our individual plans. Of course, we knew that embarking on ESG would be a long journey, and we’re working diligently towards the next major step.

At our existing Chemicals & Oxides rare earth operations facility in Estonia, we are fortunate to have a substantial portion of our energy needs coming from renewable energy resources. And as we scope the new centered magnetic facility nearby, we are exploring meaningful solar energy options to help contribute to an even lower carbon emissions footprint. We have seen the success of installing industrial solar at our Magnequench facility in Korat, Thailand, and we are currently commissioning our Phase 2 solar installation to continue to improve the sustainability profile of our operations there.

We’re also in planning stages to install solar capacities at our Magnet facilities in Tianjin and Chuzhou, while our Magna plant in Estonia is targeting to have 1.6 megawatts of solar power capacity. In 2022, we earned two EcoVadis gold medals for our facilities in Thailand and Estonia, and an EcoVadis silver metal for our Magnequench plant in Tianjin. And since the start of this year, a facility in Korat, Thailand, received yet another gold metal, its second in a row. We are believers in this methodology and while the grading curve continues to get more difficult every year, we’re up for the challenge.

I think it’s important to note the meaningful work towards ESG has many benefits across our organization. It’s new lens for us to view continuous improvement which yields benefits beyond the traditional parameters of sustainability. We’re identifying potential cost improvements, potential changes to flow sheets and personnel movements and opportunities for cost-saving measures that may not, on a stand-alone basis have passed the test.

I’d like to remind shareholders that our emphasis on ESG has a direct benefit to our overall top line as well. Key customers have made it clear that in addition to Neo’s innovative technologies, consistent quality and outstanding customer service, our efforts around ESG have played a critical role in winning new product platforms. Just as some customers appreciate the flexibility of our dual supply chain strategy, others are particularly keen on the sustainable nature of core operations. As we think through the coming year, we look forward to sharing more in each of these key areas.

Last, I want to echo a sentiment that discussed on this call last November. The market environment we operate in, obviously, continues to be a bumpy road. But our strategy is sound, as it is informed both by the growth opportunity ahead in clean technologies and by the existence of not only surviving by – but capitalizing on rare earth price swings over the past 3 decades. We’ve successfully managed through these conditions in the past, and I’m confident in Neo’s position to withstand the current macroeconomic risks. The business cycle continues to be a bit fickle at times. Most of the headwinds over the past 2 years continue to linger, and that was prior to the tremors coming from the banking industry this past month. And while China is currently going through its reopening to the world, it came with pretty significant friction at the end of Q4 and the start of Q1. It remains to be seen whether there will be a lingering impact within the automotive sector in China as OEMs and local government stimulus programs try to drum-up some demand.

But China remains the leader for EV adoption despite the strict pandemic restrictions that have slowed economic growth. Overall, the majority of our business remains relatively stable through the short-term. Certain areas such as rare metals exposure to aerospace and super alloys have performed extraordinarily well, and our exposure to continued secular growth of key megatrends bodes well for us in the long-term.

Before I turn the call over to Rahim, there is one final strategic, perhaps, initiative I’d like to touch on, which is the announcement of Rahim as Neo’s new President, which became effective January 1. Most of you are very familiar with Rahim’s keen business intuition and thoughtful candor in these earning calls, he is always one of the most well prepared, dedicated leaders across the company in our industry. Over the past 6 years, the Board of Directors and I have also been able to observe his humility and sharp business acumen, which will serve him well in this new capacity. While he continues to hold down the fort in the CFO role for now, I’m confident that he will continue to help usher in an area of operational excellence and strategic execution, as we continue our momentum into 2023.

Rahim, thank you for your continued contributions, and I look forward to working with you to achieve the next stage of growth at Neo. And I’ll now hand the call over to you.

[Rahim Suleman, President and Chief Financial Officer]

Thank you, Constantine. Looking back at the full year 2022, we reported record earnings in the first half of the year, while falling commodity prices contributed to lower earnings in Q3. In Q4, we saw some stabilization in real prices but we continue to work through inventory purchased earlier in the year, resulting in lower Q4 performance than we would normally expect, even at these lower rare earth price levels. The resiliency of our business model is predicated on the medium and long-term, as the value-added nature of our business is more apparent during times of stabilized pricing. That is to say when the majority of our business is focused on the value-add spread margin between the input commodity cost and the value of the functionalized materials that we create. We seek to pass through higher or lower raw material costs and focus on earning our margins based on the technology we bring in our conversion expertise. In the short-term, however, we experienced volatile rare earth material costs, and our resulting financials tend to fluctuate. Q4 was no exception.

During the fourth quarter, despite dropping earlier in the year, rare earth prices were generally still very healthy, leading to lead to strong sales pricing affecting our top line. Key magnetic pricing for neodymium and praseodymium appeared to stabilize in the $90 to $100 per kilo range by quarter end. This is quite a drop from the $160 to $180 levels that we saw in Q1 2022, but still much stronger than the $50 levels we have seen in recent previous years. We were still working through a higher cost inventory base during the quarter, creating a negative lead lag of impact in Q4.

This was a smaller adverse impact than in Q3 when prices were still falling, but nonetheless persistent. Although key magnetic rare earth commodity pricing did begin to stabilize during Q4, it was too short a period of time for trailing inventory values to catch up. These adverse impacts were felt foremost by Magnequench. There appear to be a few factors at play that culminate in a softer demand environment. The semiconductor chip shortage remains a substantial impediment within automotive, advanced and consumer electronics and factory automation applications. The nature of these chip shortages continue to have a hit-and-miss dynamic, often very platform-specific and depending on the individual OEM in the individual geographic region. As such, Magnequench has seen lower volumes across many of its applications.

Interestingly, this decline in volume also appears across both legacy and non-legacy programs, that is even for programs that we see a strong growth profile attached to newer motor technology, we still saw some declines in volumes in the quarter. We don’t believe these programs have gone away or are stabilizing, rather we think it is a customer-specific inventory management technique that held back the growth in volumes that we would otherwise expect. In light of these trends, Magnequench recently completed a second round of cost-cutting measures to right size its bonded powder business. In the near-term, we expect Magnequench volumes to remain subdued as customers work through existing inventories in a downward pricing environment.

Over the medium and long-term, we expect high-performance permanent magnetic motors continue to have the strength across all vehicles and all drivetrain types, including traction motors for electric vehicles. As an example of this is the technology pioneered by Magnequench in coordination with idle electronic systems in Honda to create permanent magnet motors that do not require heavy rare elements, namely dysprosium and terbium. We believe that this changes the game for new EV technologies that do not want to sacrifice the high performance of a rare earth permanent magnet motor.

While traction motors tend to get a lot of attention, the percolation of brushless motors technologies, particularly for use in smaller precision motors such as water and cooling pumps that help regulate the thermal temperature of an EV’s overall battery system, these are crucial to this decade’s uptake of new drivetrain technology. And Magnequench’s bonded powders are perfectly suited to these needs.

Switching to Chemicals & Oxides. Our C&O business unit remained relatively stable into the end of the year. During the fourth quarter, fewer sales of NDPR volumes occurred related to the pricing trend and related to the market weakness in China where the relaxation of the Zero COVID policy saw a much slower economic activity near the end of the year. C&O did continue to have strong spot sales for separated heavy rare earth elements, including higher commitments for specialized products that will go into 2023.

Automotive emission catalysts remained quite steady. These are less directly impacted by semiconductor chip shortages. Approximately 89% of all passenger vehicles contain a catalyst last year and more complex catalyst formulations continue to take hold, often using more of C&O’s innovative products. Auto emissions catalyst volumes for the year were consistent with the prior year, while the Q4 volumes greatly exceeded Q4 ‘21 volumes, which we believe is more specific to customer inventory management plans in Q4 2021.

During the quarter, we drew the first $25 million tranche of our loan from the EDC related to the modernization and relocation of our auto emissions catalyst plant. We are appreciative of EDC’s strategic partnership to understand our long-term road map for strategic growth initiatives, and we look forward to growing our relationship as we make progress on all of these growth plans.

Within Rare Metals, our full year revenue increased 56% to $130 million, driven by new volumes, product mix and significantly improved pricing for super alloy precursors. Adjusted EBITDA within Rare Metals set a record of $24 million for the year, which is greatly bolstered by the $12 million of adjusted EBITDA in Q4 2022. These are records for both quarterly and annual performance. Rare Metals continues to have a strong exposure to aerospace, advanced electronics and energy efficiency trends that we believe have tremendous potential. This served as a pretty significant tailwind for the business of 2022 as the rebound for orders in new aircraft have driven incremental demand for high-temperature refractory metals. In part, this has created an upward pricing pressure for certain materials that have limited supply sources.

We have experienced large increases in end market pricing for some products and primarily hafnium. The improvement that we see in this business is more than a lead lag effect from changing prices; rather, we see a much stronger demand in new volume and new customers as well as an increasing pricing environment. Our raw material costs are increasing as well. But in this business area, we use scrap and recycled material, and we are seeing much higher value spread available and have capitalized on this in 2022, driving higher volumes and higher margins.

We finished the year with $147 million in cash and cash equivalents with $47 million in bank advances and term debt instruments. This debt includes the first tranche of the $25 million received near the end of the year from the EDC, as we’ve mentioned earlier. Our finance costs are unusually high in the quarter and in the year, driven by the revaluation of the derivative put option related to the Boost and Boost minority interest. This is not related to significantly higher interest costs.

We have invested $17.4 million into capital expenditures during the year, and this includes about $7 million of CapEx spend related to the relocation project in Zibo. We have spent about $10.5 million on this relocation project so far. We expect more significant CapEx investments to ramp up starting Q2 of this year, as we continue to move that project forward as well as beginning to spend CapEx on the magnet plant in Europe. Excluding this project, our annual CapEx was about $10 million, a similar level to prior years. During the year, we put into place our $75 million debt facility with EDC, and we raised $48 million from our primary equity raise. As we work through our strategic initiatives, we are confident in our ability to fully fund and completely execute on all of these projects.

As we sit at the start of 2023, we are confident in our plans for growth across all three of our businesses. Neo has a unique blend of technical know-how, global customer service and cost competitive manufacturing base. We are positioned to take advantage of very compelling growth opportunities, and it’s an exciting time for us at Neo, and we look forward to sharing our progress with you through this year.

I’ll now turn the call over for questions.

[Operator]

Thank you. [Operator Instructions] And we will take our first question from Yuri Lynk with Canaccord Genuity.

[Yuri Lynk, Canaccord Genuity]

Good morning, guys.

[Constantine Karayannopoulos, Chief Executive Officer]

Good morning, Yuri.

[Rahim Suleman, President and Chief Financial Officer]

Good morning, Yuri.

[Yuri Lynk, Canaccord Genuity]

Rahim, congrats on the new role.

[Rahim Suleman, President and Chief Financial Officer]

Thank you very much.

[Yuri Lynk, Canaccord Genuity]

Yes. So I’ll keep you on the hot seat. My first question. I think last quarter, you had an $8 million inventory write-down and the MD&A is now talking about a $3.5 million write-down in the year. So what did you – what’s the $4.5 million gap there?

[Rahim Suleman, President and Chief Financial Officer]

Yes, we would have reversed some of that inventory write-down during Q4 as we sold the product. As you can appreciate, the accounting rules require us to recognize those losses in advance of selling the product at the end of Q3. So looks like Q3 was overly burdened by kind of the accounting rules for that. And in Q4, we saw those sales actively flow in. So the comment in the MD&A is the net number for the year.

[Yuri Lynk, Canaccord Genuity]

Okay. And your inventory position now going forward, I mean things have – well, they are moving all over the place, but how does it stand now? Is it – the write-down was sufficient enough and you anticipate more reversals or…?

[Rahim Suleman, President and Chief Financial Officer]

Yes. We would have expected to see that for sure. I mean when rare earth prices have been declining for a longer period of time, when you have three months of stability, it’s probably another two months or three months of stability and then you have worked through all your past inventory. The challenge that we always have in having these discussions is that their prices tend not to have been stable for more than three months or four months at a time in recent history. So, the statement is otherwise true except for no doubt, prices are changing again, and they are changing currently.

[Yuri Lynk, Canaccord Genuity]

Yes. Just on your outlook for 2023, I mean you are cautioning on Magnequench volumes to remain subdued. I mean a little more color on that? I mean the volumes are – I think I have to go back almost 15 years to kind of see volumes at this level on an annualized basis. So, are we expecting further weakness from here or kind of staying at these depressed levels?

[Rahim Suleman, President and Chief Financial Officer]

I think that the dynamics that we have talked about with respect to the slower economic activity in China and some of the semiconductor chips shortages, they are likely to last for a little while still, so through the first quarter and the like. But I don’t think it changes what we have talked about in terms of what we fundamentally see long-term. And I appreciate that when you have got visibility to a volume number and you are trying to decipher what it is. When we are looking at the volume number, we are bifurcating into things where we expect GDP-type growth, we expect slower type growth and we are expecting very fast type growth because we know these are new products and new technologies. It has been no doubt, a very awkward period where the things that we expect to see growing quickly have been very lumpy in their growth patterns. I think we will get through this. I think we will get through this in, call it, the next three months. But I think that we would – we do continue to still see some lumpiness in our customer demand. And unfortunately, the lumpiness has been in more of one direction than the other. But we are not seeing losses of major programs, particularly programs that are in the growth mode. We are not losing business to customers and those types of things. So, nothing that we see there is permanent. I mean surely, there is life cycle issues and changes in technology, but I think more technology changes are helping us rather than hurting us.

[Constantine Karayannopoulos, Chief Executive Officer]

Yes. Let me jump in on this, Yuri. And both Rahim and I talked about inventory adjustments. In our sense, in our estimate, those effects are having the more significant impact on volumes. And this is understandable because I think the expectation in the market is that prices for rare earths will continue to slip, especially when you look at last week’s announcements in China with increased mining and separation quotas, I think there is a strong signal by the Ministry of Industry and Information Technology in China that prices need to come down. And I think the industry is getting – the supply chains are becoming increasingly cautious on what sort of inventory they are holding. This is perhaps more important for smaller, more tightly capitalized mid sort of supply chain companies. Some of our biggest customers in Japan, for example, that have been stockpiling dysprosium for multi-layer ceramic capacitors plus a fairly new contract that we won in Korea for a similar product are not impacted because these folks have very strong balance sheets. And even a much higher price of dysprosium represents a very small percentage of the manufacturing costs. So, these types of larger companies are not affected the same way. But the smaller companies with thinner margins and weaker balance sheets really have to be very careful what sort of inventories are carrying for some of the materials that may be reducing in price. So, this is the main area that we see this effect. When you look at the bigger picture and you do sort of a macro mass balance, there isn’t a significant reduction other than what the effect of chip shortages has been, there really isn’t a reduction in what Magnequench product ends up in customers’ hands. It’s the in between as prices fluctuate that, that have the impact on volume. So, to put it in other words, the overall macro supply-demand situation continues to be positive and bullish. However, as volatility persists, up or down, I think that will impact short-term inventory positions for – throughout the supply chain.

[Yuri Lynk, Canaccord Genuity]

Okay. That makes sense. My last one is just a related issue to the volumes. I mean can you give us some examples of applications and/or end markets that are some of your more – most exciting and highest growth for Magnequench? And similarly, the markets that are lagging in any – particularly, any update on how much sales are still related to disk drives and stuff like that?

[Rahim Suleman, President and Chief Financial Officer]

Sure. So, first, I will give you examples of some of the areas where we see the highest growth and the most opportunity, right. And the first one is the same example that we talked about earlier, which is the traction motor that we have that doesn’t use any heavy rare earths in it. And I will add a second example to that, and then I will tell you the story that you would reasonably see it reflected in both. We do actually have a lot of new wins that are related to things that are like pumps that are going on electric vehicles and hybrid vehicles that I also mentioned earlier. This is where I think it’s more clear for us to see that there is a dynamic that’s happening that’s not really related to where we see long-term growth that is much more customer specific. So frankly, we saw less traction motor volume this year than we did last year. We launched a new program for a pump application, and we – probably 12 months or 18 months ago, when we saw growing volumes for the first three quarters and then we see that volumes haven’t grown or in fact, they have declined. There is nothing that’s changed in the program. There is nothing that’s changed in the growth of hybrid and electric vehicles. There is – the customer is not changing the technology away from what we have just kind of developed with them. It’s just been a slower ramp and a slower growth curve than people would have otherwise expected, and I think will still manifest itself in the fullness of time. With respect to applications that are declining, I would say it’s the same ones that we talked about before. Primarily, I would say the EPS solutions for electronic power steering as well as the HDD systems. Although I think that the HDD systems, we have seen them decline for a while, then we saw them bounce during COVID for I think, very specific COVID-related impacts. Now, we are seeing them lowered again. But I don’t think we are seeing a continuing lowering trend there. I think that the universe of HDDs, to the degree that these were supporting your laptops, that’s all but gone. To the degree that these were supporting server farms, that’s base business that we think will continue for the long run. So, I think those are examples on both sides. And quite honestly, all four examples that I gave you actually would have lower volumes year-over-year, which is just not what we would expect to see.

[Yuri Lynk, Canaccord Genuity]

Okay.

[Constantine Karayannopoulos, Chief Executive Officer]

Yuri, let me put my geek hat on and talk about some of the more esoteric applications that we are very keen on. Throughout the magnetic industry, we are very keen on DC brushless motors. They are gaining market share. They are much more energy efficient, they are smaller and they need bonded magnets made by Magnequench and others. This is a long-term sectoral trend that will continue to drive that business and the expectations by some of the large motor manufacturers, primarily in Europe, is for continuing and very interesting growth. In the EV space, Rahim talked about traction motors. There are all kinds of smaller motors in both the cabin and part of the drivetrain that we are very excited about. Rahim referred to a pump motor, that’s – one of the latest innovations is to have a central cooling water pump that sends cooling water and controls the temperature of many locations in the drivetrain, battery, motor, various other aspects of it. And that’s a very complex motor. The German OEMs have pioneered this and we think it’s becoming very widely accepted. It’s a much better, much more efficient way to cool various components inside an EV. And of course, it uses a Magnequench magnet. So, that’s specifically to Magnequench. On – you heard about rare metals, we are very keen on hafnium and other super alloys that go into aerospace, that sector is back. You will recall 1.5 years, 2 years ago, I was lamenting the slowdown that was the result of COVID. In aerospace, well, it looks like all that is back. In chemicals and oxides, we talked a lot about catalyst. And I talked a little bit about dysprosium. We are very keen on the continue – our continuing ability to provide a unique dysprosium material that our customers in Japan and Korea love, and that is a product that has significantly higher margins than the commodity dysprosium oxide. That will continue to drive C&O’s margins. And finally, what’s coming out of our R&D facilities. We just started a collaborative project with a large European manufacturer of polymers, where we are supplying them, still on a trial basis, these very unique – these unique materials that have very, very interesting smoke and fire suppressant capabilities, and we are adding that functionality to the polymers. This is still very much in development, but both our sales group, but also our R&D folks are terribly excited about these developments, and we think we are creating new applications that will drive new areas of demand in the industry overall. And I will stop there because I have been laboring on for a while.

[Yuri Lynk, Canaccord Genuity]

Thank you. Appreciate the color, Constantine. I will turn the call over.

[Constantine Karayannopoulos, Chief Executive Officer]

Thanks Yuri.

[Operator]

And there are no further questions in the queue at this time. [Operator Instructions] We will take our next question from Frédéric Bastien with Raymond James.

[Frédéric Bastien, Raymond James]

Good morning.

[Constantine Karayannopoulos, Chief Executive Officer]

Good morning Frédéric.

[Frédéric Bastien, Raymond James]

I was wondering if you could provide a bit of guidance with respect to first quarter results. I mean you are already well past, I think the quarter is going to end in a couple of days. And so if we look at the EBITDA that you generated in the fourth quarter, a lot of that you benefited from a very strong quarter from rare metals. So, all else equals, do you expect some growth in the first quarter sequentially or the opposite?

[Constantine Karayannopoulos, Chief Executive Officer]

Well, thanks, Fred. You know we don’t provide guidance. But we are, as you said, close to the end of the quarter, we have seen some of the major trends, but you will – I would hate to engage in selective disclosure by talking about the quarter on the call. So, I will be rather cagey and avoid your question, but I will turn it over to Ali and Rahim perhaps they can provide some more careful color on this.

[Ali Mahdavi, Investor Relations]

Yes. Frédéric, it’s Ali. Directionally, I am sure you track the prices that are available, NdPr, obviously, is going through some volatility. We saw prices moving up late in Q4, early in Q1, they turned down at some point in the middle of Q1. So, there is a lot of gyrations on the NdPr pricing side. So, yes, the quarter is ending soon, but we have got to net out all those movements and see where that lands. So, not being evasive, but again, not giving guidance. I think it’s too early to be able to tell you just because there has been so much movement.

[Frédéric Bastien, Raymond James]

Okay. Thanks. Appreciate it. Now with respect to growth CapEx and things like that, obviously, you have got a lot on your [Technical Difficulty]

[Constantine Karayannopoulos, Chief Executive Officer]

Did we lose Frédéric...

[Rahim Suleman, President and Chief Financial Officer]

Did we lose you?

[Operator]

And sir, you are still connected. If you would, please check your mute button. We are unable to hear you.

[Constantine Karayannopoulos, Chief Executive Officer]

Frédéric, we can’t hear you.

[Rahim Suleman, President and Chief Financial Officer]

I guess in the absence of Frédéric, completing his question, we will just make some comments on CapEx because I think that’s where he was going. So, our – what we have said is that kind of that base level of CapEx that we have been spending the last couple of years in the $8 million to $10 million range. That’s enough CapEx to support all of our existing operations including kind of growth initiatives within those operations. We put extra furnaces in place. We can – kind of we have grown our magnet business. We are probably 3x more volume in our bonded magnet manufacturing business over the last 3 years, and we can fit that type of growth within the $8 million to $10 million of CapEx that you have seen us spend normally. With respect to kind of these upcoming projects, the group is aware that we are planned for the Zibo relocation is about $75 million. That includes a contingency, so it would be somewhat a number less than that, maybe of which I have mentioned we spent $10 million. So, a good portion of that balance will get spent this year, maybe some finishing touches early next year. And then in terms of the Estonian Magnet plant that we are going to build, there will certainly be some CapEx that we are going to spend in the year 2023, but it will also be spread at over 23%, 24%, and we will continue to ramp growth in 2025. So, I don’t know, Frédéric, whether you heard that or if that was your question, but happy to give you more color if I knew exactly what you were asking.

[Frédéric Bastien, Raymond James]

Sorry, I might have been cut off or…

[Rahim Suleman, President and Chief Financial Officer]

You are a little distracted with respect to taking this call from homes and a lot of moving parts, especially being on the time, so proud [ph].

[Operator]

Do you have anything further sir?

[Ali Mahdavi, Investor Relations]

Looks like he is there or we can catch up with him later.

[Constantine Karayannopoulos, Chief Executive Officer]

We can – I think we can wrap up as there are no other questions, operator?

[Operator]

And there are no further questions.

[Ali Mahdavi, Investor Relations]

Thank you. Well, on behalf of the Neo team, thank you for joining us this morning for an update and reporting our year-end results. We look forward speaking to you again on our Q1 conference call. That concludes today’s call, and I will hand it over to the operator to close things.

[Operator]

Thank you. Once again, that does conclude today’s call. We would like to thank everyone for their participation. You may now disconnect.