Neo Performance Materials Inc. (NOPMF) CEO Constantine Karayannopoulos on Q2 2020 Results...

Neo Performance Materials Inc. (NOPMF) CEO Constantine Karayannopoulos on Q2 2020 Results – Earnings Call Transcript


Neo Performance Materials Inc. (OTCPK:NOPMF) Q2 2020 Earnings Conference Call August 10, 2020 10:00 AM ET

Company Participants

Ali Mahdavi – Capital Markets and IR

Constantine Karayannopoulos – President and CEO

Rahim Suleman – CFO

Conference Call Participants

Mark Neville – Scotiabank

Steve Arthur – RBC Capital Markets

Scott Fromson – CIBC

Mac Whale – Cormark

Frederic Bastien – Raymond James


Ladies and gentlemen, thank you for standing by and welcome to Neo Performance Materials Q2 2020 Earnings Announcement Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instruction] Thank you.

I would now like to hand the conference over to your speaker today, Ali Mahdavi. You may begin.

Ali Mahdavi

Thank you, and good morning, everyone. As a reminder, today’s call is being recorded and a replay will be available starting tomorrow in the Investor Center on our website located at Joining me this morning on the call are Constantine Karayannopoulos, Neo’s President and CEO; as well as Rahim Suleman, Neo’s Chief Financial Officer. We’ll then provide additional details regarding the company’s second quarter performance.

Then we will open the call to questions to 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 speaks 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 Q2, 2020 earnings press release which is available on SEDAR and on our website at Let me now turn the call over to Constantine.

Constantine Karayannopoulos

Thank you, Ali and good morning everyone.

It’s good to be speaking with all of you, our shareholders, analysts and stakeholders around the world. These are certainly challenging times, no question about that. However, as I examine strategic opportunities on Neo’s near-term horizon, I do see some very interesting and potentially exciting options for the company. It is a true reason and it has been said before that in crisis there is opportunity that has always been a guiding business principle at Neo since the beginning.

As many of you know my involvement with Neo spans more than a quarter century starting in 1994, eight of those years, I was President, CEO and Director. And for the most recent seven years I have served as Director of Neo and its predecessor company. Since Neo’s successful re-emergence as a private company and then publicly traded company in 2017, I have served as Board Chairman. There’s a powerful connection for me to this organization and to our entire team around the world.

I’m proud of the fact that we have assembled some of the world’s best talents here at Neo that will be critical to help grow our business. Despite the current economic environment and its challenges and uncertainty, we are extraordinarily well-positioned in markets that are set to experience significant long-term growth, particularly those related to increase sustainability. In particular, the advanced industrial materials we make are key to addressing some of the world’s most difficult problems such as climate change and other environmental challenges.

While the CEO job at a public company is challenging and even the best of circumstances I will say that I have never been more excited over the past 25 years as I’m today because of the strategic possibilities I see for Neo. Let me first say that Neo would not be the company we are today without Geoff Bedford’s many contributions to building the organization and our robust business model.

Geoff is a value colleague and a good friend to me and to all of us at Neo. His steady hand, industry knowledge and grounded vision over the past 20 years have prepared us to embark on our next stage of growth. I’m also pleased to report that we have appointed Claire Kennedy to replace me as the Chair of the Neo Board. Claire has served as a Neo Director for the past three years as well as on the previous Neo Board for a couple of years before the sale to Molycorp.

A lead Director for the Bank of Canada where she Chairs the audit and finance committee. Claire is the seasoned corporate governance professional and expert in international tax and transfer pricing and holds for Bachelor of Law’s degree from Queen’s University. She also happens to be a professional engineer with a background in chemical engineering and a degree in chemical engineering from the University of Toronto, something I must admit is dear and near to my heart, as a fellow chemical engineer.

In short, we’re very fortunate to have such a formidable and experienced talent in Claire advising and leading our Board. Also with regard to leadership, we recently welcome Greg Share as an independent Director of the Board. Greg is a capital markets and private equity professional with extensive experience working with companies at different stages of growth as well as M&A. With the addition of Greg, we now have a majority independent Board.

Let me first address the primary topic in virtually every discussion today COVID-19. This virus has driven one of the most disruptive global pandemics of the past 100 years. Neo felt the pressures of the pandemic at the start of the year across our Asian facilities and supply chains. Fortunately, our teams did an outstanding job by limiting the impacts to the health and safety of our employees and their families.

All of us have had to accept a new normal in our daily lives, but at Neo we intend to maintain vigilance against complacency in managing safe operating environment. The best way for us to ensure reliable supply of high quality products and services to our customers is to ensure that our workforce and facilities are safe. In this regard, I’d particularly like to highlight the efforts of Don Miles Neo’s Vice President of Health, Environment, Safety and Sustainability.

Don and his team have worked relentlessly and tirelessly to help lead and coordinate our efforts around the world. And those efforts have helped steer us through a challenging environment while we were able to maintain supply to all of our customers in 2020. Across our more than 1,800 employee team we’ve had one COVID-19 case reported. Fortunately, our employee who contracted the virus was quickly isolated sought appropriate treatment and was able to recover and return back to work within a few weeks.

The virus was contained to the single incident largely because of the conservative approach we take with health and safety matters across all of our facilities. Of course, the future trajectory of the pandemic is uncertain. At this point, we anticipate that demand will recover across our market sectors over the next several quarters and into 2021. One thing however is clear deterioration in our business performance over the past two quarters is purely a reflection of the macro environment.

That is especially true for our Magnequench and chemicals and oxides business which have significant exposure to the automotive sector. As well our rare metals business has significant exposure to aerospace and that has been hit hard as well. Fortunately, as a company, we have enacted strategic clients tailored to each of our manufacturing facilities to enable us to provide reliable supply to our customers during this pandemic, while also positioning us to win new business and commercialize new products.

Over the years, Neo has made substantial investments in our people, process and technology to ensure a low cost nimble operating model. We’ve invested time and resources and collaboration with our customers over – often working through development cycles the last multiple years to bring about innovation. We have no debt and we have managed to remain cash flow positive from operations by leveraging an efficient and improving unit economic model.

Those efficiencies gained over the years have resulted in a great deal of flexibility for Neo, financial flexibility, operational flexibility, strategic flexibility. All of these have been crucial to the Neo’s ability to prudently manage through this business disruption. They provide a defense and resiliency should the pandemic endure longer than any of us hoped. They also positioned us to take advantage of new opportunities that are presenting themselves as we speak.

Let me give you one example albeit one that is still in an early stage effort. Our R&D teams have recently identified several inorganic materials that are expected to exhibit anti-viral and anti-bacterial function. Formulations of these materials have been synthesized and we’re currently working with two European institutions to demonstrate feasibility. Discussions are also underway with the third institution in North America to expand testing of these materials.

There is no guarantee of course that this will work or that it will result in a commercial product, but it demonstrates the kind of innovative thinking and molecular engineered that has helped us to produce many new and innovative products over the years that have helped our customers make the world a better place. While the near-term interruptions related to COVID are likely to continue, there have been some short-term signs of improved economic activity in recent months. Factory activity in China expanded for at its fastest rate in nearly 10 years in July. The purchasing managers index in China hit its highest level in July than at any point over the last nine years.

Separate surveys of South Korean and Japanese manufacturing sectors in July of the shows that those nations had the best performance since February and continued to progress toward growth. Passenger vehicle sales growth has been positive in both China and South Korea in May June.

The supply chain for both North American and European automakers have been making steady progress as they return from idle shutdowns due to majority of plants operating either at or near capacity.

Factory activity overall in the US also picked up speed in June and then again in July according to manufacturing industries. These are encouraging short term signals but they’re also concerning signs as pockets of new COVID outbreaks continue to wreak havoc in parts of the America, India and Europe. Many manufacturing facilities still trying to adapt to operating in a new normal are finding it difficult to maintain an efficient operating space until the pandemic is resolved.

The end result is continued lower economic output. Some of these more optimistic industry forecasts indicate that 15 million to 20 million fewer automobiles will be sold to customers this calendar year.

At these levels, the impact of the pandemic on consumer behavior is more severe than what was experienced in the 2009 global financial crisis. And by all indications we’re not out of the wood yet. This leaves us with the competing ideas around the math, the reciting uncertainty and risk in the short-term whether that’s viewed as the next few quarters or the next few years.

But at the same time we are confident in the so-called megatrend that need for globally clean air, better fuel economy and efficient regional supply chain is only accelerated. These megatrends have been developing over decades and will continue to accelerate over the coming decades.

Neo manufacture’s advanced materials that are vital to multiple technologies used in each of these trends. As a prime example, we have seen sales of alternative fuel vehicles continue to accelerate. We believe the shift, an increasing preference for electric, hybrid electric and plug in hybrid vehicles is an enormous opportunity for Neo over the next decade.

In fact in my view we’re rapidly reaching a tipping point in the ongoing penetration of electric vehicles versus internal combustion, engine vehicles in Europe and China. For example, at this stage, there is – a very strong case to be made in favor of electric vehicles in terms of the total cost of ownership compared to internal combustion.

While this analysis incorporated various government incentives for electric vehicles, the fact that the EU and other regions are planning to extend those incentives presents Neo with a number of interesting strategic opportunities that are things are now closely examining.

One small aspect of that opportunity is to expand their magnetic materials production capacity with commercial applications started getting more efficient electric motors across multiple industries including automotive, electronics and home appliances. For example, since we added our production capacity at – of then Q1 compression molded magnets with the acquisition of a facility in Chuzhou, in China last year.

We have been flooded with requests from all over the world for these magnets which are predominantly used in electronics and small motor applications. That facility is now running flat out and we expect to expand our production capacity of Magnets both in Zibo in our Chuzhou plant.

Strong demand from Magnequench products is the result of years of intense collaboration with customers to build more powerful and lighter weight precision motors using Neo’s permanent magnet. It is no surprise that we have many long lasting relationships including customers who have been with us for the past 15 to 20 plus years.

While, it may – while it takes to succeed in supplying these highly demanding industries the dedication to quality consistency service and ongoing product innovation. My commitment to our customers is this. We will continue to do what it takes to help you unlock innovation for your products and help build your business.

As I’ve been thinking about Neo’s core competencies and competitive advantages it is clear that the unique assets we have assembled are not easily replicated. We have the right leadership in place to lead our businesses.

We are committed to developing our people internally. We continue to attract and we recruit energetic minds and we have expanded our geographic footprint to reinforce our ability to serve our customers. Our focus on producing advanced materials that enable advances and sustainable outcomes is core to Neo’s mission. Not only do the products we make advance sustainability but we strive to manufacture them with sustainable practices in mind.

Our [indiscernible] Thailand plant has successfully completed and coveted sustainability assessment on the Neo magnetic material products they make. They were awarded a silver medal in that assessment which involves a very detailed and rigorous examination. This is a second and coveted achievement for Neo in less than three years. Magnequench plant in Tianjin was also recently named the green factory by the Tianjin Municipal Bureau of Industry and Information Technology Association.

They won this recognition by implementing advances in energy efficiency water and waste recycling pollution mitigation land used and reductions in both energy consumption and carbon emissions per unit of product manufactured, as we design the Neo over the next decade, the key focus for the mine and ours collectively will be to recalibrate our strategy and do work with a number of stakeholders to ensure that we are accelerating path for sustained growth. We will do what it takes to exceed the needs and desires of our customers, over the coming quarters I look forward to sharing more of our vision with our stakeholders.

With that let me turn the call over to Rahim for the quarterly business review, Rahim.

Rahim Suleman

Thanks Constantine and good day everyone.

Our second quarter financial and operating results were a direct result of COVID impact on every industry that we see into, we knew that the quarter would be difficult to forecast with substantial uncertainty coming from customer orders which softened throughout the year. That said our teams maintained as best communication with customers as possible to ensure reliable stable supply, despite rolling disruptions across various supply chains and regions we were able to maintain deliveries for our customers throughout the quarter.

We also quickly implemented cost savings measures including tightening our working capital to reduce risk exposures as the magnitude of the pandemic became clear across our three business units, we reported $67.5 million in revenue compared to $101.7 million the prior year period, a net loss of $63.4 million or a loss of $1.62 per share, adjusted that loss was $5.6 million which compares to adjusted net loss was $5.6 million which compares to adjusted net income of $5.2 million in the prior year period. It was an impairment to goodwill and intangible assets driving that loss that I’ll overview in a few minutes.

We reported adjusted EBITDA of $1.2 million compared to $12 million in the prior year period. The various markets we sell into provide some helpful context for evaluating our second quarter results and expectations for the second half of 2020.

Across the global automotive sector, passenger vehicle sales for the first half of 2020 have been down by 28% compared to 2019. Within the auto catalyst product set, C&O’s product volumes performed well above that automotive benchmark while Magnequench’s volumes in automotive slightly outperformed that benchmark.

In addition, Magnequench benefited from sales and strength around personal electronics. Sales of PCs, tablets and phones have all been favorable as global consumers have shifted their daily behavior patterns by working from home, educating students from home and increasing their reliance on video conferencing such as telehealth services.

Within the aerospace sector, the near-term impact has been more severe than automotive. Airlines have pushed out or canceled many near-term orders and as a result deliveries of our high temperature materials products have been similarly soft.

As a result of these slower end markets, we selectively idled some of our manufacturing facilities to control costs and to avoid an extensive buildup of inventory. Our commercial and technical teams rushed to work from home in most geographies and we implemented rush into work crews to perform essential activities and retooling at our plants and laboratories during these downtimes.

Some comments more specific to this segment. Within Magnequench, we observed a couple of distinct trends as a first tier supplier within the Asian region, we felt the impact of COVID during the first quarter which continued into Q2 as well.

Once this first wave of impact began to ease and Asian consumer demand began to return, the pandemic then started to affect other parts of the world. While those supply chains have restarted, there continues to be inconsistent stoppages in places like Germany, Mexico and the US among others as individual customers reacted to mitigate local COVID outbreaks. We anticipate this type of inconsistent demand for the next several quarters.

The final dynamic has been in general increase in the demand for magnetics branding consumer electronics. This now supports a relatively small portion of Magnequench’s powder business but is a positive trend for our growth plans in magnet manufacturing. During the second quarter, we continued to expand our magnet manufacturing capacity and we are pleased to continue to make strategic investments to support this future growth.

We are approaching one year since the acquisition of Asia Magnets and the integration of magnet making capabilities is ahead of schedule. While new product qualifications have been slow due to COVID, we are pleased with the customer response and see tremendous pull for a Magnequench branded magnet.

Although the impact of this acquisition to our financials remains small today, the acquisition has so far been successful in growing its existing volumes as well as providing an avenue of stronger growth opportunities into the future and across numerous industries including further penetration into motors for EV and hybrid vehicles as Constantine described earlier.

Shifting toward chemicals and oxide segment, the impact of COVID certainly impacted our sales performance into all of the end markets we serve. The most critical aspect during the quarter was to ensure a stable supply to customers in each of our local geographies. We maintain – we mentioned earlier that our sales performance in the auto-catalysts segment was above the general performance of automotive.

We continue to see growth opportunities in some of our newer formulations of products including newer diesel products. However, in this quarter, we also recognized the write-down in some of our older diesel products as we believe customers will switch to newer formulations more rapidly throughout the recovery stage of automotive.

Within our rare earth separation business, it was a slower demand pull for many of the products as economic activity ground to a halt in many jurisdictions. There was also a tempered downtick in market pricing for a number of our materials. We saw fewer spot sales in the quarter partially related to reduced economic activity in general.

Our water treatment business growth momentum tapered during the first half of the year as the pandemic interrupted or delayed at the start of new customer trials at local wastewater treatment plants. Those activities have started to slowly resume, and our technical teams focus on improving quality control of upstream raw materials over this timeframe.

Finally, in Rare Metals, we saw demand get pushed out to future quarters for high temperature metals for aerospace super alloys. Despite the headwinds in aerospace, Rare Metals has continued to gain traction in both the healthcare and mobile communications spaces.

Operationally we believe we have turned a corner in working through some of our higher cost inventory for tantalum products, although we did record some extra charges relating to idling or slowing some of our facilities. Consolidated SG&A was higher in the quarter compared to recent trends due to management changes and an increase in the provision for legal contingencies, whereas R&D expenses were in line with the first quarter and down approximately 9% from the prior year period.

This quarter, we recognized a chart related to impairment. We recognize a total of $59.1 million of impairment charges against goodwill, intangibles and certain property, plant and equipment assets, the impairment charges were related to C&O rare metal segments, with no impairments related to Magnequench, this is a non-cash charge and the write downs primarily related to the non productive assets that were revalued in the application of the initial purchase price equation from when the company emerge from bankruptcy in 2016.

The significant impact of COVID on cash flows particularly near term affected the comparison of the discounted cash flows versus the carrying values that were on our balance sheet, despite the lower economic outlook, we remain confident in the earnings potential of each of our business segments maintaining flexibility with a key short term focus heading into the pandemic and we both tightened up our working capital and generated excess cash during the quarter.

Our cash balance remains very strong at $78.7 million and we generated $7.8 million of free cash flow during the first half of 2020, we continue to maintain our dividends in the quarter and returned an additional $5.5 million to NEO shareholders through the first half of the year, we repurchased a total of $1.3 million shares outstanding through the first six months of the year, when we filed the new NCIB program during the quarter, to summarize our business model remains strong, despite operating in a volatile market environment.

Should the adverse impact of the pandemic continue longer than the recent trends expect, we remain confident in our financial and operational flexibility to continue to weather the storm. That said, our primary focus is to continue to invest and to improve our global operating footprint and to focus on delivering new products for our customers and delivering an improved return on capital for our shareholders.

I’ll now turn the call back to the operator to open up for questions.

Question-and-Answer Session


[Operator Instructions] Your first question comes from Mark Neville from Scotiabank. Your line is open.

Mark Neville

First, Constantine, welcome back to the CEO Chair. I guess first question for you. You spoke about sort of general uncertainty obviously and just I’m curious to get a sense of your near-term priorities. And then when you think about the longer term, you touched on some of this?

But some of the areas of focus whether you know parts of business we have already or maybe some interest outside of that and maybe how you intend to use the balance sheet and maybe to exit from that growth? Thanks.

Constantine Karayannopoulos

Thanks Mark and clearly, the first priority was to get the quarter done on time and get through that. And I guess there is a bit of rustiness last time I did one of these was seven years, eight years ago. But more seriously, clearly in my view, we need to do three things. One is recalibrate our strategy to turn this crisis into an opportunity. We’re seeing some very interesting developments in Europe and that we have one of the most strategic assets in the industry in Estonia.

So we like how we’re positioned there specifically as it relates to green tech sustainable technologies, EVs and the like where the Europeans seem to be putting an awful lot of focus on growth and development of supply chains there. In addition, we internally at least we’re accelerating our review of a number of M&A opportunities. So I think that combined with our strategic calibration I think should position us to be in a good place over the next couple of quarters.

With – some of the M&A, some of the acquisition opportunities we’re looking at are in the advanced materials segment, materials that relate to our businesses, our customers and our product lines. And hopefully over the next little while we’ll be able to talk some more about it. In the meantime – we’re spending a lot of time and effort both at the Board level and the senior management level and with health and safety environment and sustainability making sure that we do all the right things at all of our plants.

Right around the world as well as our offices where most of our folks still continue to work from home and they will continue to do so for the foreseeable future. So I guess in a nutshell are staying safe, doing the right things and recalibrate our strategy and M&A focus to take advantages of some of the sustainability opportunities that we see in the near-term.

Mark Neville

Maybe Rahim or Constantine just like to get a sense of – give me the sales cadence through the quarter into Q3. Obviously a tough quarter appreciate – some of your markets were challenged. But maybe just sort of how things progressed through the quarter and into July again now there’s some unevenness. But just to get a sense of if we bottom’s the pace of recovery or it is linear et cetera? Thanks.

Constantine Karayannopoulos

I honestly it’s real tough to talk about the cadence within the quarter because if we look at it from a monthly perspective or a weekly perspective, what we would find is different behaviors in different regions of the world. So I think – in the second half of Q1 or really second half of March in the first beginning of April, we actually saw a lot of pull coming out of our plants in China going to other industries as people were I think concerned about extended shutdowns.

So, we saw kind of and acceleration there and then we saw a slowdown later in the month. So it really moved, I would say region-to-region and kind of products set or products set. So I can only describe the cadence as volatile in that universe. As we kind of see going into June, July and the like, I think that the volatility remains. There still is softness, but again I think that the softness obviously is to be expected.

But again there’s a regional dynamic, Europe is down for a good portion of the summer. So we’ll naturally see some slowdown there. China has constantly has talked about we’ve seen some positive things with the number of customers there. But I think our cadence of recovery is also going to be dependent upon how everyone in the supply chain has managed inventory. So I think following short-term region-to-region is a really tough.

Mark Neville

Maybe one last one for Rahim, I was just reading through the MD&A, was there a sort of a mark-to-market inventory adjustments you know and if so how large was that if that was adjusted for an EBITDA?

Rahim Suleman

There was. There was a mark-to-market adjustment. It was about a $1 million. It was not adjusted in EBITDA.


Your next question comes from Steve Arthur from RBC Capital Markets. Your line is open.

Steve Arthur

Great, thank you and yes welcome back Constantine to these calls. You’ve covered a lot of ground in your comments already but just wondering if you can elaborate on a couple of thing. Of course I understand, huge amount of variability and demand right now. I guess any sense as to whether your customer inventories have been depleted to levels that they’re comfortable with, so that your demand now will be more tied to customer need or there is still more inventory adjustment to come, what do you think?

Constantine Karayannopoulos

Thanks Steve. Well – unfortunately I don’t have a black and white answer. I loved to be able to answer yes. However, under normal conditions through the year, we see different type of inventory adjustments throughout the different geographies. So typically in the first quarter which is the fourth quarter in Japan our customers there clean up their books and reduce inventories ahead of year end.

This year in particular it was a little harder with all the shutdowns in China and Japan in the first quarter. The second quarter was a little bit different with China and Asia starting back up, but Europe and the United States going into shutdown mode. As Rahim said – the third quarter of the calendar year is typically when European plants shutdown and people hit the beaches in Europe and that is clearly generating some uncertainty around COVID transmission.

I recently had a conversation with the CEO one of our largest customers, but he’s also in as much uncertainty and everybody else is. I think we’ll wait and see wait and see. It’s week-by-week, if not day-by-day. We all see the bigger trends and we’re bullish about the future as it relates to our industry, our material the whole EV versus internal combustion engine opportunities. But for the time being it’s hugely unpredictable and things can change day-to-day.

A lot of the plants that we started supplying again may be shutting down in the next couple weeks if spikes really manifest themselves whether they’re in Europe, in the Southern hemisphere, in Asia or in the United States. So at this stage, I think pretty well our supply chains have gone through a significant adjustment of inventories. But what the next quarter or the quarter after that will hold is anybody’s guess. We remain cautiously optimistic, but cautious I think is the operating word here, Steve.

Steve Arthur

Right, that’s makes a sense.

Rahim Suleman

Steve – maybe a couple of comments about a year ago at this time, we had talked about specific inventory adjustments that we saw in our customers for specific programs. I don’t think we see that type of inventory in the system and required for an adjustment there, right. That was related to kind of China automotives slowing down in the half of 2019 which folks hadn’t seen for a while.

So we’re not seeing that kind of systemic slowdown. What we’re seeing is just the ebbs and flows of production. So I think we do know that in various parts of the world there might be inventory that are sitting at a port, but the customer hasn’t moved real quickly to clean because the customer hasn’t used it, but I wouldn’t say that it’s a broader issue like – like the issue that we had I would say in the first half of 2019.

Q – Steve Arthur

That’s makes sense. Thank you.

Constantine Karayannopoulos

Steve, let me sort of add one more point here that Rahim is absolutely correct, this slowdown started way before COVID and adjustments had already been taking place, I think in the trade war that was ignited last year had an obvious and visible effect in supply change, especially around automotive, and then COVID and that forced further supply chain adjustments and inventory reductions. So, we’re at a point that a rational observer would probably call it bottom or close to the bottom, but I don’t think anybody should in their right minds stick their necks out too far and claim that this is bottom or that it’s a v-shaped recovery.

We don’t know. We have not gone through anything like this. And some of us have been through a number of crisis and we have the scars to show for that, but this is very new and I think we’re all making it up as we go along and we’re trying to react to whatever changes as we see them. Sorry, I’m not trying to be evasive but we really don’t know.

Q – Steve Arthur

No. It’s all good color and I guess yes navigating to what you’ve dealt right now and I’m focusing on 2021 and beyond, makes sense.

Constantine Karayannopoulos

Well, all I can say for the company is what we said back in 2008-2009 as we went into that recession that our balance sheet saved Neo and saved, and really we took advantage of the crisis and we restructured the company and we emerged stronger than we were going into the crisis. I think we were probably looking at the same playbook right now and we keeping that behavior in mind and we expect that we’ll come out of this crisis stronger than going into it.

Q – Steve Arthur

One final one just on the nature the cost control measures you’ve been taking. Are these mostly short-term cuts that they kind of get you to the emergency and the downturn or are there more permanent things that you’re taking now that should have a longer-term margin implications?

Rahim Suleman

I’d say the vast majority are short-term. There are some long-term improvements to product, but I would say that those improvements are kind of the natural DNA of the business. So I would say that the short-term things that we’re talking about here are by their nature short-term. Well, they’ll continue through Q3 and maybe get deeper as we go. But they’re short-term.


Your next question comes from Scott Fromson from CIBC. Your line is open.

Scott Fromson

I’m having a few problems with my fingers on the phone. Just a question on R&D, has there been any change in spending or product focus since COVID-19 and perhaps Jeff’s departure? Is there more focus on EV, lead EV, waste water green energy?

Constantine Karayannopoulos

Yes. Rahim will start and then I’ll jump in.

Rahim Suleman

So I’ll say substantially in terms of priorities. No I think that we continue to invest in R&D as a priority. We continue to have the flexibility to do that. You do see a lower spend this quarter, but I don’t – that’s not really indicative of a change in philosophy. It is kind of private based type stuff.

Constantine mentioned kind of additional products that we’re working out as a result of COVID and I think that those are additional opportunities. But there is actually a number of products that are kind of under the R&D shelf of new formulation for advanced materials that will affect all kinds of industries that are kind of in their early stages.

So some of those products have an ebb and flow to their spend. I think that they continue to be strategic investments. But I think certainly and maybe Constantine will elaborate. There will be a continued view of what we see as the strongest end market areas, the strongest areas around sustainability, the strongest areas around growth, and where our functional materials can apply best.

Constantine Karayannopoulos

The particular – sorry go ahead

Rahim Suleman

Go ahead, Scott.

Scott Fromson

Yes, well I was just going to ask are there particular opportunities in Lead EV particularly in Europe where they are – as you said there had?

Constantine Karayannopoulos

Well, opportunities specifically on fleet versus private vehicle sales, I haven’t thought about it. However what I can tell you is again in the conversation I had recently with client CEOs they made it very clear that in Europe their fleets are going electric simply because of the lowest cost of ownership of EVs versus internal combustion.

Scott Fromson


Constantine Karayannopoulos

In terms of specific opportunities in that I doubt it. I think – when we introduce new products they tend to apply across platforms and models as opposed to the type of fleet versus the private sale.

Some of the products that we’re working on and specifically the question about R&D keep in mind that we had our largest R&D facility in Singapore closed for about three weeks according to the government directives. People are back there not in full complement, but they rotate in and out of the lab to maintain appropriate distancing.

So to the degree that people are not physically in the lab, you saw a somewhat modest reduction in spending, but the research focus continues, I mentioned some of the areas, we’re seeing some very interesting effects by certain organic compounds that I mentioned where we’re seeing some other very interesting behavior non-COVID related, but as performance would apply to the EV battery materials and then consumer materials, so that work has been accelerating, so we’re spending money in more of those areas, but the overall COVID pressures are affecting the spend.

I mean if we had access to the labs and of our partners the same way we had say a year ago, I think our spend, our R&D spend would have been at or above where you see it on our P&L.

Scott Fromson

Thanks. That’s a good detail. Just one more quick question. Relations with Chinese SOEs and government officials such as permitting and environmental relations, have those changed with increased political tensions with both the U.S. and Canada?

Constantine Karayannopoulos

Well, to be brutally honest, we haven’t really noticed. I think I don’t want to say the wrong thing, but at times when we deal with the regulators in Beijing or with the state and local government regulators, I have to say that relate – the kind of the China relationship seems to be below the radar screen, and it’s a headline in Canada, but it’s not really a headline in China. Whether that’s good or bad, I’ll claim to be agnostic where I’ll keep my own private use private. However, we were not really seeing a deterioration in our relationship with the regulators and the SOEs and so on as a result of the two Michaels and Madame Meng from Huawei in Vancouver.

Now, I’m not saying that that’s exactly how it’s going to be, but I would also say that over the last three decades that we’ve been doing this sort of thing in China, we find the regulators to tend to be very pragmatic. When issues of larger political importance come to the surface, they make their comments and then they get back to business.

So, it’s a very difficult time overall given the kind of the China relationship, given the U.S. China relationship, given COVID and given the rethinking of supply chains, there are so many issues that are bubbling to the surface and over the next few years that will have an effect on our supply chains on what we do, how we do it and where we do it. But for the time being – the short answer, Scott, is that, no we’re not seeing an awful lot of effect from the relationship deterioration.

Rahim Suleman

And maybe Scott if I can just add one comment that’s maybe Neo-centric which has to bear in mind that we’ve been in China for a very long time and the way that to bear in mind that we’ve been in China for a very long time in the way that we did in China of course with the development of our team members in China.

So the primary interface with many of the government kind of relationships, the regulators and the like in China are with our member, our Chinese team. So I think that there’s less of a dynamic that maybe some other companies that use expats in these various roles. We have long, long history with some of our Chinese team members that have elevated and are in senior positions in China.

Constantine Karayannopoulos

Yes. I’m sure when I show up in Beijing whenever we can travel, I’m going to get an earful. But the energy representative in Beijing is it’s business as usual.


Your next question comes from Mac Whale from Cormark. Your line is open.

Mac Whale

Just Constantine, quickly on a couple of things. You seem encouraged by the non-automotive demand and opportunities there. What just long term do you see this as a viable way to balance demand so from different industries so that you – could it ever be as big as the automotive, I mean how do you view the long term prospects?

Constantine Karayannopoulos

It was a time if you recall maybe a decade, decade and a half ago, when our exposure to electronics was bigger than our exposure to automotive and we made a conscious effort to expand our exposure to automotive. So it’s within the larger trends, we have some flexibility to sort of direct efforts and calibrate direction.

But I think there is no question that one that the primary driving force for the industry as a whole is sustainability Whether you translate that into EVs, whether you translate that into wastewater treatment, still catalytic converters are going strong and they will be part of the solution for automotive.

However, I don’t see us really moving away from automotive as long as you include EVs in automotive. I can see the focus – our focus on automotive and the overall industry’s dependence on automotive growth as a driver anytime soon.

So the – that will – that I expect will inform our strategic recalibration, especially around some of the European initiatives that we’re examining and contemplating. But I think it will be very difficult for automotive to become a lesser force in the growth of the rare than the magnetic and the rare metals business now.

And there are metals clearly with our tantalum and high temperature alloys that we’ve – that we produce, aerospace is a critical market. But automotive also has its – it’s influence. So again, not trying to be evasive, but I just don’t see over the next say five years, how automotive is not going to continue to be sort of the driver for – for our industry and therefore our dependence on automotive for roughly half of what we saw.

Mac Whale

Makes sense particularly with the amount of material with those applications used versus typical electronics applications. Just my second question was around choppiness with these closures like when you talk about end demand markets being really not synchronized whether it’s Europe or North America or Asia, there’s – there’s different cadence to those closures.

Would over time do you think you will move production capacity closer to the demand centers so that if there’s closures you’re sort of you’re more synchronized? Or is it an advantage to be the way you are now or a different sort of state – your supply chain not being totally aligned with your end market or is that unfair characterization?

Constantine Karayannopoulos

Well I don’t know if it’s unfair but I don’t think we have a problem with synchronicity, Mac. So we – I’ve said this before in different circles but we will be where our customers need us to be. So if and to be sort of flipping and I’d say just, if our biggest customers build the plant on the moon and tell us you need to be on the moon, well guess what we’re going to the moon. You know we exist at the pleasure of our customers. If they stop buying from us, we don’t exist.

So we want to make sure that we make their businesses as efficient as possible. Now when you look at some of our bigger customers, they’re very global. They have plans in Europe, they plans in the states, they have plans in China, they have plants in India, in South America everywhere.

So we need to be able to supply them without any interruption, so you know we are not responding to – and in the effort to recalibrate our strategy, we’re not looking at geopolitics because it could get very, very dangerous if you get caught up in that, we’re seeing – we’re listening to our customers in other words, we’re not necessarily listening to what Brussels, Tokyo and Washington DC say but we’re listening to what our customers in those regions are saying and our supply chain capabilities will unfold according to our customer requirements.

Again I don’t know if I’m being too cryptic but if a big German automotive customer say to us, if you build X, we will buy Y from you and we need you to be in I don’t know Poland, Slovakia, Estonia whatever well that’s – it’s our responsibility to respond to those requests and you know the last thing I say because this thing keeps coming up around North America with various governments trying to figure out how to respond to this and to respond to the various geopolitical pressures and supply chains you know at the end of the day demand – every policy with regard to supply chains needs to be demand pulled not supply pushed and that’s also the operating principle that, that we utilize at Neo when our customers ask us to do something we do it and we do it well.

Mac Whale

That makes sense. Thanks. The reason I ask is more on this side of the EV space when you’re dealing on the battery supply chain, you see a lot of focus on that supply chain not having a lot of Chinese exposure for a bunch of reasons that you can get into, but it sounds largely on the maybe some magnetic materials on the motor side you haven’t really seen those discussions, it’s not like – I guess there’s one of them is actually that hasn’t been created yet and you’re very much embedded into a supply chain that’s real and exist today.

Constantine Karayannopoulos

Yes. We all read the analysis that the German Automotive Industry Association has done that is raising the danger of the automotive industry in Germany being decimated because of EVs first because EVs are simpler to build, there’s fewer moving parts. And second, because of the critical component, the critical value added difficult to build components are mostly coming from China, Korea, Japan and Asia in general.

Therefore, the EU is putting some pretty large amounts of money as incentives on the table to attract battery supply chain, but we’re not in that business only peripherally let’s say at this stage. But you see Chinese battery producers CATL for example building plants in Germany. I think eventually as if we could remove trade friction, ultimately global companies throughout the supply chain are rational operators and they will respond the way I describe, they have to do what their customers need them to do. So if that means Tesla building a plant in Shanghai so be it, if it means the CATL building a battery plant in Germany, well that’s what makes sense for that business.

So I don’t want to make too much out of it, there is certainly pressures on supply chains to become much more localized, and to the degree that is possible and efficient that you will see some of that taking place over the next five years.


[Operator Instructions] Your next question comes from Frederic Bastien from Raymond James. Your line is open.

Frederic Bastien

Nice to have you back Constantine. First question, very simple perhaps for Rahim, within the chemicals and oxides segments, which business experienced the biggest sequential or year-over-year decline? Based on your comment, it would lead me to conclude it’s the separation business, but just wanted to confirm?

Rahim Suleman

Yes. That’s correct. There’s separations business as well as we have some spot buying in the previous year that didn’t occur this year. But that’s really separations business.

Frederic Bastien

Okay. And then the, the catalysts business would have held up okay?

Rahim Suleman

Yes. I mean it’s still declined, but as we said less than the automotive industry decline in generally.

Frederic Bastien

Okay. All right, Constantine, obviously conventional car manufacturers are finally seeing the light and that seem to be rushing to accelerate the rollout of EVs pretty much everywhere, but where does that leaves the hybrid model? Does that change the economics or the fundamentals around you – the hybrid model?

Constantine Karayannopoulos

Thanks Frederick. That’s a tough question. In Europe, it’s clearly still the preferred bridging technology from internal combustion to EVs but that narrative has started to change over the last few quarters simply because when you look at some of the more successful examples, you look at Tesla I mentioned about Tesla, in China Tesla within a year went from standstill to becoming a very large player in China.

And we were able to do that by taking advantage of existing supply chains in China. They’re sourcing batteries. They’re sourcing drive trains traction motors and everything because that supply chain had capacity and it was ready to do that. So I think to the degree that the Europeans are feeling more comfortable with regards to key supply chains for their EVs you will see an acceleration in adoption.

I was reading that last quarter the Nissan LEAF was the most popular vehicle period in Europe and you were able to buy it at a discount to its equivalent, which is the Nissan Qashqai or I don’t know how you pronounce that but you know what I’m talking about I assume.

So we are at a point where we’re reaching a tipping point between EVs and an internal combustion especially in Europe, which I think will force the hand of the European automotive manufacturers to accelerate the transition into EVs and that’s means that instead of taking two decades that was the original thinking to transition from internal combustion to EVs and use the hybrid – the plug and hybrid model as a bridging technology, you probably shortening that to half if not less.

There is no question though that all the European manufacturers are talking about electrified models, which includes plug in hybrids. So I think you will continue to see plug in hybrids; however, I think you also seeing the acceleration of EV the adoption you get especially in Europe.

Frederic Bastien

And from your perspective at Neo do you see this as a good thing or potentially because you do work with Honda on a lot of hybrid platforms, I was wondering if you’re comfortable that this is a great opportunity for Neo?

Constantine Karayannopoulos

Yes, well it’s always a great opportunity, if we can figure out how to make out of it and I think we will down the road to figuring it out. Honda we will continue to make its Accord and Civic Hybrid, and it’s a brilliant technology, and we’re proud to have a small hand on that.

At the same time there are other opportunities that are emerging and we’re looking to capitalize on those. So when things happen that are way beyond our control whether it’s COVID, whether it’s the trade friction or geopolitics, I think our responsibility is to figure out how we can take advantage of those crisis and make money as a result by also doing good in the process.

So I’m not concerned about what I see, I think there are and they will continue to see a lot of ways and opportunities to grow the company in that environment and you see as we go one, this is an industry that demands higher performance out of its materials. And we are in a pretty good seat.

We are in the front row and we’re looking at a lot of the things that are happening and we have the skills and capabilities to deliver materials that again that make a lot of our customers’ lives a lot easier.

Frederic Bastien

Okay. Thanks for that. Last for me, what is the single biggest lesson you’re taking away from COVID?

Constantine Karayannopoulos

Well, I think you have to be prepared. It’s a contradiction in terms I guess. They have to be prepared for the unexpected and the only way you could be prepared is to run a well-balanced conservative organization and again in ‘08-‘09, I said that the thing that saved us was our balance sheet. I think in this crisis our balance sheet is clearly one of our greatest assets.

It means the balance sheet means two things that it – we can survive pretty well whatever gets thrown at us and we have the means to take advantage of what opportunities cross our path. So the lesson is to not to overextend because you never know, which way the wind is going to blow.

I guess from what I’m saying you’ll probably deduce that whatever we do we’re not going to be betting the farm especially in a period of uncertainty, but we’ll be making some pretty meaningful interesting that’s where the odds are in our favor.

However as long as you have the right people around the world close to their customers and the financial structure of the company is more conservative than otherwise. I think the company will continue to be successful. We’ll hit some snacks here and there, but overall this is a good robust business with a great strong balance sheet. So we’ll take advantage of that.


There are no further questions at this time I’ll turn the call back over to the presenters for final remarks

Rahim Suleman

Thank you, Operator. On behalf of the Neo team, I would like to thank you for joining us today on today’s call since everyone has been so enthusiastic about Constantine being back and I’d also say welcome back Constantine. With that we look forward to reporting back to you on our third quarter conference call and that concludes today’s call. You have any questions please feel free to reach up to myself. Have a great day.

Constantine Karayannopoulos

Thanks everybody.

Rahim Suleman

Thank you.


Ladies and gentlemen this concludes today’s conference call. Thank you for participating. You may now disconnect.

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