Solesence Inc (SLSN) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to Nanophase Technologies Second Quarter 2009 Conference Call. (Operator Instructions.) Please note this call is being recorded.

Before we begin, I would like to take a moment 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 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, President and CEO of Nanophase Technologies. Please go ahead, sir.

Good afternoon and thanks for dialing in. We continue to move forward with our new business model and are beginning to see some progress. Our expectations for Nanophase are well grounded and very high.

I understand that nothing speaks as loudly as additional revenue dollars, but given where we're at with our new approach, coupled with the 18 to 36-month time to market in most industries we sell to, I'm looking for ways to mark progress toward future revenues so that you can share our optimism.

The challenge that we grapple with is our ability to provide you with useful information about how your company is evolving without alienating existing customers or providing our competitors information. Disclosing too much can make it more difficult to expand into new markets and, especially pertinent here, this type of input can create confusion by packing too much material into a forum better suited to brevity.

I'm sure you'll begin to see our overriding theme as we continue to refine our message over the coming quarters.

Today, I'll briefly cover the financial results for the second quarter, then spend the majority of time sharing the progress we're expecting as we continue to execute in our new business model. Focus remains the key here. We are confident that it's not a matter of if, but when we're able to accelerate our growth.

As many of you know, we're deeply tied to the consumer products and housing markets. Both have taken a beating during this recession. We managed our resources responsibly by aligning our cost structure to what we saw happening in our targeted markets while continuing to meet our customer commitments and focusing on developing markets for future growth. We've been successful and we'll share more of that after the financial presentation.

Before moving on though, I'd like to add that we're beginning to see a recovery in some of our key markets, which I will also discuss later in more detail.

First, I'd like to cover the financial results for the second quarter, which as always, are stated in approximate terms. Revenue for the second quarter was $1.6 million, an improvement over the first quarter's revenue of $1.4 million. We cautioned early on that revenue would trend down as customers weathered the economy by squeezing their inventory levels and focusing on lower cost products. It now appears that much of the excess inventory has been taken out of the system and we, along with our customers, are starting to see signs of recovery.

As a percentage of total revenue, gross margin was 11% of Q2 of '09, up from 6% for Q1. Gross margin is tied to sales volume and although we've reduced our fixed costs significantly, we need more volume to fully absorb our overhead.

We attribute the improvement to our margins in the second quarter to our February reorganization which eliminated 25% of our staff, the majority in manufacturing. This move considerably reduced our fixed manufacturing costs.

The second quarter's net loss of $1.2 million, about $0.06 per share, was flat when compared to the first quarter's $2.1 million loss after backing out Q1 severance charges of $800,000.

Regarding operating expenses and cash flows, we finished this past quarter with $4.3 million in cash and cash equivalents, and an additional $5.3 million in longer term investments. We paid off more than $1 million of our debt during the first half of 2009 with the final $0.5 million payment made in July.

We're pleased to add that not only have we reduced our cash burn, but we now have a debt free balance sheet, a statement not many companies can make and we should have more than enough resources to take us safely through 2010.

With all the changes that have taken place at Nanophase, we've had an uncommon opportunity to analyze our operation and eliminate spending that doesn't directly help to build the business.

This exercise has allowed the company to perform as well, if not better, at meeting customer expectations than before.

The February '09 reorganization and last year's changes in senior management reduced annualized operating expenses by approximately $2 million or $500,000 per quarter. This reduction, along with additional cost reduction initiatives, was reflected in our current results with a reduction of more than $1 million year over year in SG&A expenses.

We remain confident that these staffing changes will not limit our ability to execute our business plans for 2010. We've seen our lean and flexible team deliver as well or better than before the cuts demonstrating the significant benefit of a lean structure and a sharpened focus.

As I've discussed, these changes reflect both the impact of the economic climate on Nanophase and our migration from a partner driven, volume manufacturing model to a customer direct model.

Let's break down the revenue composition for the current six month period. As discussed in April's conference call, given the state of the semiconductor markets and inventory accumulation, our largest CMP customer did not purchase material in the first half of 2009 and we expect minimal volume in the near term.

This type of thing has been a clear driver of our focus on developing multiple customers in each of our group of targeted market segments. It's the only way to reduce the risk associated with any particular customer or market.

Six month revenue from our largest architectural coatings customer was about $600,000, down significantly from 2008. This is partially due to the downturn in the housing and home improvement markets in general, but is also due to lower volumes being purchased by this customer. They are a very innovative company and a very important customer for Nanophase.

We continue to proactively provide them with new ideas to drive future growth, but it's our view that revenue from this customer for existing products will continue to be lower than it originally had been going forward.

We are confident, however, that our exterior coatings market will remain a strong growth driver over time. It's been our experience in exterior coatings that UV protection in transparent architectural and industrial coatings represents one of the biggest growth opportunities for Nanophase. This has been and will continue to be an area of focus, because this is where we see the greatest opportunity for building sustainable value.

Revenue from our largest customer, BSF, amounted to more than 50% of our sales for the first six months. At $1.8 million, they were down by approximately 25% year over year.

On the upside, we're seeing the climate for personal care products improve as there continues to be a strong need for inorganic, full spectrum UV absorbers.

Industry trends are also favorable, including UVA disclosure regulations, increased demand for higher SPF values, and growing demand for all natural products.

Our materials provide the best nonorganic chemical UVA absorbers currently available. These outstanding material qualities are marketable not only in personal care and exterior coatings, but also in many other potential markets. Long term, the sunscreen and personal care markets should continue to grow at a sustainable single digit pace if not better and continue to be a solid base of revenue for Nanophase.

Throughout 2009, the personal care and housing markets will clearly have an impact on our top line. Fortunately, the personal care market appears robust and may provide a near term bright spot for Nanophase. I'll have a better feel for it next quarter.

As frustrating as it is, this remains a highly variable situation. We're focused on actively positioning Nanophase for the rebound of these and other markets and we are aggressively pursuing multiple market opportunities. We believe our new way of going to market will make Nanophase a fundamentally different and more successful company, and that the investment made in applications development and customer outreach is positioning us to capitalize on those opportunities available now and those that will continue to expand as the economy improves.

This change in focus has already shown positive results as we're moving more and more opportunities to the qualification process. Some have dropped off as not sufficiently cost effective or too difficult to convert quickly, while others have presented themselves as excellent candidates for near term business. That's the strength of this model, which we feel has improved 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 paints, stains, and industrial coatings that in many cases has given us a knowledge level exceeding that of our customers.

I said this last quarter and will now harp on it, this level of understanding is a Nanophase first. It's our ability to develop applications for our material, not just develop new materials, that build enterprise value. Applications development is where the value comes from.

We need to reduce the number of our target markets and increase the amount of opportunities we pursue in each. Our resources need to be oriented this way.

Let me give you a recent and telling example of why our new approach is critical. We were fortunate enough to get some indirect feedback from a product development manager at a company we thought had never been interested in working with Nanophase in the past. He told our source that he'd eventually get around to working with the samples we sent him, but because we didn't provide him lab test data comparing his existing product to his product with our material incorporated into it compared against his competitor's product, he moved our material to the back burner saying he'd get to it in six months or so.

He pointed out that if we could give him this sort of data package on the front end, he'd fast track our materials and start working with them right away. In other words, without us shouldering more of the load, the amount of risk and effort required for him to move our products through to a commercial rollout is too high unless we take some of the early stage risk away.

His request is exactly what we are currently able to support in many of our architectural coatings applications. Typically, this efficacy work takes us six months to do, but once it's done, we can apply it to many other customers across an entire market. It's an excellent investment.

Our challenge is to focus on a few key markets with unmet needs we can address, prove that our materials make sense, then identify the specific customers we can engage to evaluate our materials and their applications. It's more time consuming than difficult and we don't have the resources to do this in a dozen markets, but we can go after a targeted group very effectively.

This investment will pay off, but it's front loaded. When we can walk in with proof that our materials work, we make our customers' decision making process much easier, and we can ensure that we have the highest likelihood of success from day one. This is why we continue to refine this focus to our best advantage.

In this critical year, we've developed a new management team that is well aligned and now complete with the recent addition of Frank Cesario, our new CFO, a new sales strategy that's starting to bear fruit, a new ready to go product approach, new strategic markets, new applications, and a solid balance sheet debt free as of July 20, 2009. The level of enthusiasm and commitment to the future at Nanophase is very strong. All of us are aligned with our strategic vision the goal of which is to build the value of Nanophase.

The economy is tough, but our technology, our products, and most significantly, our people, bring resources and options to the table for our customers and prospective customers that will better help them gain a competitive advantage in their marketplaces.

Unlike many companies, we didn't just cut costs. We challenged our model to be more efficient while maintaining extremely high quality. For those who don't know, our customer returns are virtually zero and in Q2 we hit our millionth dollar of production without a lost time accident. That speaks to a company that's focused on getting the process right. We're good at what we do and have been developing new ways to demonstrate those skills to the marketplace. This is how we'll grow.

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

(Operator Instructions.) It appears we have no questions at this time. However, I would like to give everyone another opportunity. (Operator Instructions.) It appears we have no questions at this time. Mr. Jankowski, do you have any further remarks?

Well, I'd like to thank everybody for attending the call. And we've got a beautiful day in Chicago. The White Sox are winning. That team on the other end of town seems to be doing okay. Things are going well. Everybody keep your chin up.

I'm very happy with the direction of the company and we're going to have some progress to talk about soon. But as I said, this is more of a marathon than a sprint. We are executing on the plan. Thank you very much for your time.

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