Solesence Inc (SLSN) 2005 Q1 法說會逐字稿

Good morning, my name is Angela and I will be your conference facilitator. At this time, I would like to welcome everyone to the Nanophase Technologies First Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remark there will be a question-and-answer period. If you would like to ask a question during this time simply press “*” then the number “1” on your telephone keypad. If you would like to withdraw your question press “*” then the number ”2” on your telephone keypad. The words expect, anticipate, plan, forecast and similar expressions are intended to identify forward-looking statements. Statements contained in this news release that are not historical facts are forward-looking statements that are made pursuant to the Safe-Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements reflect the Company's current beliefs and a number of important factors could cause actual results for future periods to differ materially from those expressed in this news release. These important factors include without limitation a decision of the customer to cancel a purchase order or supply agreement, demand for and acceptance of the Company's nanocrystalline materials, changes in development and distribution relationships, the impact of competitive products and technologies, possible destruction in commercial activities, occasions by terrorist activity and armed conflict and other risks indicated in the Company's filings with the Securities and Exchange Commission. Nanophase undertakes no obligations to update or revise these forward-looking statements, to reflect new events or uncertainties. At this time, I would like to introduce Mr. Joe Cross, President and Chief Executive Officer of Nanophase Technologies. You may begin.

Thank you. Welcome to the Nanophase conference call to review the first quarter of 2005, which we believe was quite a strong quarter for the company entering the new fiscal year, and is consistent with our expectations for material revenue growth for 2005. We are pleased that you have taken the time to visit with us today. Jess Jankowski, Nanophase's Chief Financial Officer and I will be hosting the call. To begin our discussion, Jess will review the financial highlights.

Good morning. As I review the financial performance of the company for the first quarter, I'll continue to do so at a strategic level highlighting points of specific interest and significant variances. More details are included in the financials accompanying our press release of April 27. All numbers will be in approximate terms for ease of discussion. Total revenues for the first quarter of 2005 were up 320,000 compared to the first quarter 2004. This statistic by itself doesn’t really tell the whole story. Product revenue was up $460,000 to 1,526,000, the highest in the company's history. This increase was largely composed to sales of sunscreen materials along with some personal care materials for BASF. As our 10-Q will tell, the large majority of our Q1'05 revenue was from BASF. More to follow on this in the margin discussion. For the periods presented, other revenue was down a $140,000. This decrease in other revenue when compared to the first quarter of last year, related to the company recognizing the first quarterly payment of 150,000 in technology development funding from Rohm & Haas Electronic Materials in 2004. This funding from Rohm & Haas was part of a $600,000 commitment to support Nanophase’s efforts in jointly developing slurry products for current and future semiconductor technologies during 2004. Rohm & Haas's commitment to Nanophase for 2005 will ultimately be greater and be in the form of product sales. We expect to begin shipping this product in Q2 of this year. We generated a positive gross margin of a $170,000 for this quarter. About $90,000 of this was margined purely on product sales. We do this as a validation of our business plan and our financial modeling and we continue to discuss our margins have been impeded by not having enough revenue to absorb the manufacturing overhead that's required to work with the customers we have, and then the ones we expect to have. The additional product revenue this quarter showed that as volume grows and manufacturing overhead is absorbed, our solid variable margins have an appreciable impact on gross margins.

Another thing that management is optimistic about is that this positive margin was achieved with minimal revenue from the CMP business and minimal revenue from the company's customers other than BASF. As the Rohm & Haas and Altana volume begins to grow this year and next, our margins will also grow. The variable margins and the materials we sold to BASF for sunscreen, they're typically lower than those we expect from our other customers in different applications. In other words, in Q1 we achieved a positive gross margin on product sales with our least advantageous expected product mix.

Moving down to P&L, R&D expenses were relatively flat quarter-to-quarter and SG&A which was up 8%, we saw increases in auditing and fax store for related expenses and compensation offset by reductions in business insurance costs and other items. In total the Company lost 8 cents per share this quarter versus 9 cents per share for the same quarter last year. Note that depreciation amounted to about 2 cents per share or 320,000 of the Company's loss for the first quarter of 2005.

Moving to the balance sheet. Nanophase entered the first quarter with $10.2 million in cash and investments compared to about 11.6 million at the end of the 2004. Looking at cash burn, we used 1.2 million for operations and about 200,000 for capital improvement in Q1. Note that accounts receivable were $200,000 higher than a year-end. This AR change was more cyclical than anything and to [think] back favorably as the year progresses. The Company also reduced debt by a $120,000 under the quarter.

Management expects a note to BASF currently at $450,000 to be paid of no later then mid 2006. There is a possibility that this note will be cause in June but, we think it's unlikely. In any event, the payoff of this note will not have a material impact on the Company’s ability to execute its business plan. In terms of gathering future cash burn, last year Nanophase use an average of 1.2 million per quarter in operations and 175,000 for capital improvements and capitalized patterns.

Management expects 2005 operational cash burn to be lower than a 2004 heading toward a plan positive operating cash flow run rate by the end of 2006. Capitalized expenditure should be a little higher with pattern cost being the component that it's more difficult to predict. We are also proud to note that we completed our newly required annual [fax] 404 compliance audits, having some no material weakness in our internal controls. Many of our company’s with deeper pockets and more abundant resources, cannot make this claim. It is administrative matter, I'd like to discuss conference call timing relative to the closure of reporting period. It is [inaudible] practice that schedules these calls I don’t know about the third Thursday of any given month following a quarterly reporting period, a little later during the annual call. We had to extend the annual call timing this year due to resources being limited internally and externally with our service providers. Implementations were lighter than new expanded SOX 404 documentation reporting and audit requirement. This call is taking place on the fourth Thursday, largely for the same reasons. In the future, I would expect our call to remain at a similar timetable with the possibility that they could end up being later as these standard mature. We are navigating the delicate balance between avoiding adding overheads to exploit these types of things and keeping the Company’s fixed cost as low as possible to maximize your returns.

Thanks for your attention. Now I'd like to turn things back over to Joe Cross, our CEO.

Thanks Jess. My comments today will be briefer than normal, since we are aware of rather thorough discussion on the Company and expectations for 2005 on March 3. My intend is to provide an update on activities during this past quarter. Starting with the investment community. We present at the Stephen Nanotechnology Conference during April and planned to be more active in these venues during 2005. For instance we expect to present at the Nano Business Alliance Investor Forum in New York during May. We'd also note, since we are asked repeatedly, the two analyst initiated coverage of Nanophase during the first quarter, Global Crown Capital and ThinkEquity. With additional analyst have indicated to us and make short coverage but obviously we do not know where or when.

Moving to Nanophase during the first quarter, continuing the company’s momentum on a continuous improvement variable manufacturing cost reductions and variable margin growth. We again made excellent progress this quarter. we are able once again to increase reactor rates by about 7%, which has the capacity of about one additional reactor with our capital cost while reducing variable manufacturing cost. This is important and that as our volume grows the paradigm continues to improve and we will now have to add additional reactors at the same capacity levels. This reduces capital we might have to spend and minimize this further depreciation which as just noted impacts the financial numbers appreciably. As a side note we have now improved reactor rates by about 8 times since 1999 when we started this effort. We're also able to increase raw material utility by 3% again reducing variable manufacturing cost. Incorporating the subtle design change, we increased reactor productivity by about 3%, which is equivalent to adding about half a rector for no capital costs and also again reduces variable manufacturing costs. Continuing our emphasis on Six-Sigma process control, we now have all supervisors and some engineers sort of qualified as [inaudible]. Over the past four years, Nanophase has improved process controls from about One-Sigma and are approaching Six-Sigma. The improvement on nanomaterials since 1999 has been dramatic. Consistent or tented of high quality, nanomaterials had definitely been noticed by our customers and are a key competitive strength for us.

In parallel with the Six-Sigma thrust, we have been able to reduce variable manufacturing cost by about 80% over time. This translates directly an increased variable margin and improved gross margin as just noted for the first quarter. We expect to continue improvements throughout 2005. From an intellectual property perspective, we remained focused on expanding our patent of state. The company is about one patent application in the first quarter, regarding on nanoparticles coating technology for the second generation sunscreen in a received three foreign patterns. The Company still has 10 U.S. and 32 foreign patent applications pending. We also expect to file additional patent applications during 2005. Relative to revenue growth for 2005, we remained quite optimistic. We continue to believe that expected revenue growth will be driven by our market partners and Nanophase's internal business development initiatives. Some of which we expect to reach fruition during the latter part of 2005.

Reviewing some key areas. As we stated on our last conference call, we expect demand from the current sunscreen nanomaterial could grow slightly more than 25% over 2004 levels. First and second quarter order rates matches expectation and a rolling six month forecast provided by BASF appears to continue this trend and shows fairly strong demand. The second generation sunscreen has now been rolled out selected customers on a global basis. And according to BASF is being well accepted Nanophase ship the initial qualification loss for customer sampling during April. Based on information from BASF, we would expect that revenues for this product will begin ramping during late 2005 and early 2006. The new product demand is expected to add to 2006 revenues.

Your personal care products with BASF continue on active development and appear to be on track. BASF designated Nanophase a strategic partner during this last quarter based on the strength of the new product enrollment. This is a rather nice compliment and status that we are considered a strategic partner rather than vendor or supplier. We have a key meeting with BASF and [would reach often] in late May to solidify further details on new product introductions. We are quite optimistic about the future revenue potential from the new personal care products under development.

Altana Chemie continues to make considerable progress introducing the [NanoBook] a series of nanoparticle based ingredients to the various coating markets that we detailed on our last conference call. Nanophase is supporting BYK during the major European Paint Show this week and providing additional training to BYK's European and Asian sales personnel. We continue to see high a level of activity and new product development, customer interest in the U.S. where we work closely with BYK in business development and in Europe and Asia. We expect additional new [NanoBook] products introductions during the next six months and throughout 2005. We continue to believe that the partnership with Altana Chemie is a critical relationship for Nanophase with the size and breadth of the markets addressed.

Based on our recent discussions Rohm & Haas Electronic Materials seems to be gathering momentum in the CMP market is ready to upbeat about 2005 and 2006. We continue to expect a revenue from CMP will be about 25% higher than 2004. We have our quarterly business review meeting with Rohm & Hass in early May and I should be able to provide more color on this during the next conference call.

Our business development initiatives are progressing and we added several new opportunities this past quarter. We believe that the business development pipeline is more robust and active than at anytime in our history and should support our aggressive revenue growth plans for 2005 and 2006. We continue to reach closure on the opportunities that I reviewed during the last conference call and expect these to likely occur during the last -- during the second quarter. We will, of course, announce new orders and customers as they happen. This concludes our prepared remarks. We are now available for any questions you may have.

At this time, I would like to remind everyone, in order to ask a question please press "*" "1" on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Jim Lieberman with Advest.

Hi there. It's a pleasure seeing this kind of progress taking shape and I wonder, can you give some more details or picture of the coating technology with Altana is that. -- they just said did you use the word paint? Or was it was that -- or there some other applications involved?

Jim, this is Joe. We're working on several different markets with Altana. I covered those on the last conference call. I don’t have my notes in front of me.

Okay.

I would be glad to email you the notes from the last conference call where we detailed the markets and the opportunities and expect that nanoparticle related opportunities.

Okay. And similarly on the Rohm & Hass Electronics, are you able to describe what stays that is as it's already being they begun implementing at one of the major companies at this stage of the game.

Rohm & Hass secured the first customer in the last quarter of 2004 I had been led to believe they have two other customers close to production adoption they have 17 other customers in various stages of evaluation. While I am aware with the customer’s origin, I am not comfortable discussing a Rohm & Hass's customer on the conference.

But that sounds like great progress in terms of market penetration?

Rohm & Hass has made very good progress. The Generation 2 chemistry, they have in the marketplace that’s been well accepted. They have further improved the Generation 2 chemistry, with the Generation 3 chemistry, which is even being better accepted. They've also recently introduced a non-nitrogen containing slurry which apparently has been accepted very well in the market place. And that’s a technical discussion as to why that would be but they are very excited right this minute about the momentum the amount of customers that are contacting them how fast some of these evaluations are going. They are pretty optimistic right now.

Thank you very much, that’s great.

Once again ladies and gentlemen in order to ask a question please press ”*” ”1” on your telephone keypad. Your next question comes from the line of Mike Colman (phonetic) with Rug Research (phonetic).

Hey there this is Mike Colman (phonetic) from Rug's (phonetic) About the Altana products that you are bringing on is there revenue right now from Altana and how do you expect that to grow over the next couple of years and what overall percentage of revenues are you expecting to come in from the Altana deal is relative to the BASF and Rohm & Hass?

Mike I'm on to it that’s a hard question to answer. We are checking several markets with Altana and I covered all those markets on the conference call last time and I don’t have in front of me and I just don't want to misspeak. But there is a broad spectrum of products we are developing with Altana from a breaking resistance with coatings to break and resisting car for you. They are all at various stages, at European Paint Show yesterday Altana had 4000 people work through their [boost] okay and part of the feature at the Paint Show, this is the huge Paint Show with the [NanoBook] products and future [NanoBook] products and I believe frankly that they announced some new product's history depending on nanoparticles. I just don’t have the information as to exactly what they announced yet, okay. And when I do, we will just decimate the information. But we believe that that they have something like 500 tests underway with sampling in-between Europe and Asia right this minute. Less numbers are heard, there is a lot of activity in United States. We see revenues starting this year I can't tell you how appreciable it's going to be because it's really difficult to forecast business developments and we see it growing next year and we see it continuing to grow. The ingredients market takes somewhere between 18 and 36 months, probably to get in different applications but, the breadth of this marketplace is fairly staggering. I mean, like I said in my comments, I think this is a very critical relationship for Nanophase. The breadth of the markets are huge. Coatings is like a $60 billion global marketplace according to chemical market report and I've seen estimates higher. So we think this is a major long-term relationship for Nanophase.

Steve said, you expect that this is potentially at least or more significance in terms of revenue deal then even the BASF or Hass relationships?

I would expect it to be bigger than BASF yes.

Your next question comes from the line of Doug Ellison (phonetic) with UBS.

Hi Joe.

Hey, Doug.

Nice quarter. Very encouraging revenue momentum in the first quarter here is sounds like this hopefully is sustainable, the point where you can assure us that this wasn’t just a one order situation and that next 3 quarters or so are the future is going to see this sort of growth on a little more sustained basis.

Without providing guidance Doug because we don’t provide guidance I can tell you that in the last conference call we said that we expect the material revenue growth this year; we still expect material revenue growth this year. I expect the second quarter to be equal to what better than the first quarter frankly. And I expect revenue growth right now throughout the year.

It sure sounds like. You didn’t mention anybody but BASF, Altana and Rohm & Hass. You have talked in the last six months about the letter of credit. Can you identify that customer?

I’m sorry I don’t know what you mean by letter of credit?

I thought there was in the last conference call there was a new customer that had given a letter of credit or –

Oh, we have a letter of intent I'm sorry we have a letter of intent for a major application. That we expect to close that’s why on this situations we expect to close right now during the second quarter of this year. We think this a major opportunity for the Company. Its material revenue definitely and it would start this year.

And that’s a -- some of other then BASF --

That is not a current customer.

And the BASF sounds a lot more encouraging, they seem to be doing other things besides the sunscreen. That 25% increase that you are expecting for this year over last year, is that from the, entirely from the old generation sunscreen or is that 25% an estimate of revenues from the new sunscreen or.

No, the 25% growth is expected from the current sunscreen product in discussions with BASF yesterday, the supply chain and inventories are very lean right now. Okay. So there is not any inventory in the system. So we see no impact again to the numbers we've given in last two conference calls. I would say that our relationship with BASF is better now than it's ever been. BASF has restructured both on [inaudible] and in the North American region which frankly has helped us out a lot, relative to working closely with them and in communication with them. The fact that we've been designated strategic partner is very significant for us. We are not judged on price so much as we are judged on innovation. And, we have several new products under development with BASF and in fact second week of May, BASF and we are making joint sales calls for the first time in our history together with two major cosmetic companies and start discussing some of these personal care products, so our relationship with BASF is pretty good. We expect revenue growth. We think that the current product will continue to grow. They are having some success with the current product with the major Asian Cosmetic Company. We know that the new product is going to grow we got some very good feedback on Nano customer assisting and the new products we seen some clinical data for these new products that makes us to believe that these have a lot of value.

That’s really encouraging because I know BASF deal with an off lot of others, Nanotech company deals hopefully there being lot more respect for Nanophase?

We are the only Nanotech Company that’s a strategic partner of BASF; I know that for a back.

That’s really great, well thanks a lot Joe. I think that we are really moving.

Sure.

At this time you have no further questions. Mr. Cross do you have any closing remarks?

We want to thank you for this conference call, and its being a good first quarter we are hoping -- we're expecting this a good second quarter and we'll talk to you at the end of the second quarter. Thank you.

This concludes today's conference call, you may now disconnect.