Solesence Inc (SLSN) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to today's Nanophase Technologies first quarter 2009 conference call. (OPERATOR INSTRUCTIONS.) Please note this call is being recorded.

Before we begin, I would like to read the Company's Safe Harbor statement.

The words expect, anticipates, plans, forecasts 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 distribute -- pardon me, distribution relationships, the impact of competitive products and technologies, possible disruption in commercial activities occasioned by terrorist activity and armed conflict, and other risks indicated in the Company's filings with the Securities and Exchange Commission. Nanophase undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties.

I will be standing by if you should need any assistance.

It is now my pleasure to turn the conference over to Mr. Jess Jankowski. Go ahead, sir.

Thank you. Good afternoon and thank you all for your ongoing support of Nanophase. I'm going to keep this call brief as we just talked a month ago and had a full review. But looking at the logins, we have a lot of participants on this call; a lot more than we had on the year-end call.

I know that's not necessarily indicative of what the total participation will be once people get online and watch it, but we did a very detailed called about a month ago. And I would entreat all of you who weren't on that call or read the script to go to our website and look at that as well, because there's a lot more information there than I'm going to share today.

I can reiterate that we're very happy with our progress and our expectations for Nanophase remain high. In this call I'll cover first quarter results but, more importantly, I'll continue to discuss forward progress and the ways that Nanophase continues to execute on its new strategy. Focus is the key here. It's not a matter of if, but when we're able to accelerate our growth.

I continue to have an aggressive travel schedule and expect to have these calls a bit earlier once we find a CFO who will help us to best execute our strategy, and to help keep all of us focused on critical metrics. They'll also help by taking some things off my plate that, although very necessary, keep me from focusing all of my energy on building the value of our company.

Let me cover the financials in brief which will, as always, be stated in approximate terms.

Revenue for the first quarter was $1.4 million which, while down significantly, slightly exceeded our expectations. Revenue for the first quarter of 2008 was $3.1 million.

As a percentage of total revenue, gross margin was 6% for Q1 '09, down significantly from Q1 '08. This decrease is wholly a function of volume. We need more volume to absorb our fixed costs.

Our February reorganization, during which we eliminated 25% of our staffing, the majority of whom were in manufacturing, will decrease the revenue volume required to absorb our fixed manufacturing costs. As a result, we expect our margins to improve beginning in Q2.

The net loss for the quarter was $2.1 million, or $0.10 per share, compared to a net loss of $0.8 million, or $0.04 per share, for the first quarter of 2008. 38% of the 2009 loss was attributed to severance charges. This amounted to about $0.04 per share.

Regarding operating expenses and cash flows, we exited this past quarter with $11.6 million in cash and investments. We believe we have enough cash to take us safely through 2009 and to position us for a stronger 2010. We continue to take steps to operate as practically and efficiently as possible. We're looking for ways to reduce costs while continuing to execute on our plan.

With all the staffing changes we've had at Nanophase, we're taking advantage of one of those rare opportunities to critically assess our operation and eliminate spending that does not move us closer to delivering.

Our February, 2009 reorganization, in addition to the changes in senior management, will result in the annualized reduction in operating expenses of approximately $2 million, or $500,000 per quarter beginning in Q2 of 2009. In terms of cash impact, for 2009 this should result in a reduction of cash used of approximately $1 million, growing to a cash savings of $2 million in 2010 as the last of the severance obligations are satisfied.

Of course, we believe that these staffing changes will not limit our ability to execute our business plan through 2010. As I've discussed, these changes reflect both the impact of the economy on Nanophase and our migration from a partner-driven volume manufacturing model to a customer-direct model.

Let me break down the revenue composition for the current first quarter.

BASF amounted to about 50% of our sales at $760,000 and was down by about a third year-over-year. Long term, the sunscreen and personal care market should continue to grow, but probably at a single-digit pace.

Revenue from our largest architectural coatings customer amounted to about $0.25 million, or 17% of our business in Q1 of 2008, and was down significantly. Much of this is due to the impact of the economy on the housing and home improvement markets in general.

We expect continued softness here in 2009, with potential significant reductions in this volume compared to 2008 until the economy and housing improve. In the longer term, we continue to believe that exterior coatings will remain a vital driver of our growth.

As we discussed in April, given the state of the semiconductor markets, inventory accumulation and the sudden drop in demand from their customer base, we didn't sell any material to our largest CMP customer in the first quarter and expect minimal volume from them in Q2. It's still too early to tell what the second half will bring.

Given that we've recently changed our contractual relationship, so we're no longer mutually exclusive with this customer, we're beginning to explore other CMP market opportunities as part of our customer-direct model.

Clearly, for 2009 housing and semiconductor markets will continue to have an outsized impact on our top line. What we've been focused on is to actively position ourselves for the rebound of these and other markets.

All of this drives home the importance of our new strategy, to shift from a strictly partner-driven model to a direct-selling model where, while still supporting our partners, we emphasize the development of a greater diversity of customers and markets. And we are aggressively pursuing market opportunities.

Looking to late 2009, we're prepared for a rebound in sales when the economy strengthens. We should begin to see an even greater influence from our more aggressive marketing programs as our ready-to-go products and innovative applications attract new customers from a variety of industries, both through direct selling and in support of our partners.

We believe not only that our new way of going to market will make Nanophase a fundamentally different and more successful company, but also that the investments we've made in applications development and in customer outreach to get to this point are positioning us well to capitalize on those opportunities that are available now, and those that will continue to expand as the economy improves.

This new approach ensures that the customer receives their Nanophase product, having the greatest likelihood of success in any given application. We have developed, and continue to develop, ready-to-go products that will serve market needs much more directly. This should improve our prospects for accelerating growth.

Under our new model we've reached a level of applications development and market expertise in one broad market, exterior coatings, which includes paint, stains and industrial coatings, that in many cases has given us a knowledge level that exceeds that of our customers; a Nanophase first.

It is this ability to develop applications for our materials, not necessarily new materials, that will create value. Applications development is where the value comes from.

We need to reduce the number of markets we're trying to build business in, while we increase the amount of opportunities we pursue in each. We've narrowed our potential top markets down to six and we will continue our dialogue with customers and potential customers until we find the several markets where we believe we can really add immediate value.

We're utilizing an extensive process to analyze these markets, including size of opportunity, availability to Nanophase's technology and price sensitivities. While you might think that fewer markets would mean fewer opportunities, the opposite is true. I'm going to sound like a broken record when this is done.

Our new focus has led to more visits, more customer contact and more, better vetted opportunities than ever before. We continue to refine this focus to our best advantage.

This is a critical year. We have a new management team, a new sales strategy, a new ready-to-go product approach, new strategic markets, new applications and a solid balance sheet.

The level of enthusiasm and commitment to the future at Nanophase remains high. We're all aligned with our strategic vision, the goal of which is to build the value of Nanophase.

The economy's tough, but our technology, our products and, most significantly, our people bring resources and options to the table for our customers and potential customers that will better help them gain a competitive advantage in their marketplaces. This is how we'll grow.

If it's not clear by now, I'm optimistic about the future, as is our team. I appreciate your time today and I'm available for any questions that you may have.

(OPERATOR INSTRUCTIONS.) Our first question comes from Ben Dejackmo with UBS. Please go ahead.

Hi, Jess.

Hi, Ben.

How are you?

Good. How are you doing?

I'm doing well. Long term investor for you guys. I mean, it's sort of frustrating when you say that you're not seeing any pickup in demand from your architectural coatings customer. And it's pretty clear -- I guess everybody on the call knows where it's coming from. It's coming from your large do-it-yourself -- I don't know if you want me to divulge who it is.

Sure.

But it's obvious who it's coming from.

Right.

And they have said that their sales were up. And that it was actually in Q1 that their sales were up 3%. So, can you comment on -- is there something deeper that we're missing?

I actually did see that. Well, first of all, I don't know which products drove all that. We're in the exterior product and they have an interior product as well. So, I'm not sure where that's at. I'm also not aware of what their inventory level looked like rolling out of the year. So, it's hard to tell. I know that our quarter wasn't great.

That being said, architectural coatings in general we think are a pretty good area for us to follow up in. We had -- last call somebody had asked -- Jim Lieberman had asked about can you disclose that it's clear stain that goes on decks. And we talked to that customer and we can.

It's a small -- it's kind of an alpha customer. They've had excellent results. The material's called DEFY. And the name of the Company that makes it is SaverSystems. They're out there. We're seeing growth. We're not seeing growth right now with this particular customer and the other customers don't have the leverage to build that -- get that revenue growth that this one does.

Whether you use their name or not is up to you. But they have implored me to never use their name. You've got a CMP customer who everybody knows who it is, say, gee, could you guys please stop throwing our name in your -- and it partly is we're such a small part of their businesses, yet everybody is so interested in nanotechnology that they're at their annual meeting or at their quarterly calls getting calls about Nanophase. And it's -- although it's very relevant to me and this company, it's not that relevant to them as a whole.

Sure. Sure. Now, as far as other prospects, I know you say you've narrowed it down to six. And I think it's definitely something that -- I think the direction of the Company now is probably -- I've been following you guys now for five years. And it seems like it's really hitting home now more than it's ever hit. And so, I'm optimistic for the future.

Do you see anywhere where you can have -- it seems as though your -- to have a real explosion in revenues, you're going to have to hit somewhere. Do you have anything like that to get -- I know -- because I remember Joe Cross had always said we want to be onto $50 million by whatever it was, 2011. Do you see something that -- in your pipeline that could be large?

Well, we have several. I don't see us being at that level -- near that level in 2011. I would say that -- a couple of things. That's a long big question. But I mean, essentially, we have a lot of opportunities. As I mentioned before, we had 88 opportunities in 14 markets when I took over in August. We have closer to 200 now in 6 or 7 markets. And my goal is to get us to 400 opportunities, say in 3 markets, so that we really know the hit rates are going to be much higher.

Sure. Sure.

What we're doing -- the problem is it takes about as much effort to pick up a $50,000 customer as it does to pick up a $500,000 customer.

Of course.

And what we're really being careful about is, as we roll these things out, we've got some great customers. The DEFY product looks like a wonderful product. And it may very well be that they get a nice piece of the market and it stimulates the rest of the market to kind of look at this stuff and have some growth there.

This morning we had a breakdown on a couple of new markets we're looking at. And within the last I would say month and a half we've been in touch with -- we've had 30 telecoms with 25 companies. In the first quarter we probably made -- our R&D people, who don't go on every sales call, made upwards of 30 visits. And to make 30 visits in the first quarter when you're not looking at a lot of workable time, on top of probably another 30 or 40 visits here, we really have a ton of activity going.

And so, what I can't tell you is we get 10 new customers in the third quarter, are those 10 going to accumulate to $0.5 million or $5 million. There are items in the pipeline that are there. I don't see us long term, at least for the next several years, I don't see the model, the BASF model of us having a $5 million customer and multiplying that by 10 happening. Because really, BASF has hundreds of customers that make that up.

Now, I don't want 10,000 $10,000 customers. But I do see that we have to touch those customers directly and that's how the growth is going to happen. And so, we are going to be hitting a lot of singles and doubles and an occasional homerun.

As it matures and we get to the second market that gets to that level of the exterior coatings market, we'll have a lot more clarity. I mean, I'm optimistic. I mean, we're going to do well this year. We said last year -- last quarter the year's going to be down. A lot of that's external. A lot of that is because when you have three customers that drive 90% of your volume, one customer does poorly, two customers do poorly, all of a sudden you're in trouble. BASF's doing fine and they've got a core business that goes out years and that's great for us.

I still can say that, although I can't vouch for $50 million in 2011, I think that's probably stretching it, I think we're going to have good growth in 2010. I think we're going to do a lot more as we fill up the pipeline through the year. And I think the fact that we have almost a few hundred opportunities versus 80 or 90, and they're more concentrated, we have a stronger applications development group than we ever had.

We had a guy in January come back that left the Company. Didn't like the direction really and tried something else. Got excited and came back. We've beefed it up. Our likelihood of success is much, much higher.

We've just got a reorientation where we truly -- it sounds like -- the problem is from a shareholders' perspective -- and I thoroughly understand it. You've been here a long time and you've been loyal and it all sounds the same. But you know, Nanophase migrated from an R&D company to kind of a technology company to an engineering company to a manufacturing company. And what we're doing now via the direct-sell model is becoming a marketing and sales company.

And these applications are where the moneys at. I mean, this is what we're finding out, that you just can't hand somebody a multi-stage research project. You have to hand them a finished application. You have to do some testing. You have to know when you hand it to them that they're going to say -- that we can say, look, it didn't sail on testing. We compared it to your stuff and we compared it to Acme's stuff and someone else's and it's better. Now, you try it in your better lab than ours and your more advanced data and we're seeing that.

And I think that traction, it'll multiply . When it multiplies, I'm not exactly sure. And there are some external things that are probably holding that down a little bit. But the opportunities are still there. We are not short of opportunities.

Thank you.

You're welcome.

(OPERATOR INSTRUCTIONS.) Mr. Jankowski, it appears we have no further questions at this time. Do you have any further remarks?

I can just say that things are very positive. Things looked good in April. They look better in May. We've had a great month. Not enough great things to talk about from your perspective and I respect that. And we are going to try to work on being able to roll out some metrics that you can sink your teeth into a little better that will show you the progress that I see every day here.

I appreciate you hanging in there and I very much appreciate you being investors in Nanophase. Thank you.

This concludes today's teleconference. We appreciate your participation. You may disconnect at any time. Have a great day.