Solesence Inc (SLSN) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Nanophase First Quarter 2011 Financial Conference Call. At this time all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference call is being recorded. The words expect, anticipate, 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 would now like to introduce your host for today's conference, Mr. Jess Jankowski. Mr. Jankowski, you may begin your conference.

Good morning, everybody. Thanks for joining us today. We appreciate your participation in our first quarter financial call. We're happy to see conference call attendance continue to increase which includes the people that prefer to listen online and we encourage you to stick around for questions during the Q and A session.

We started the year with a great first quarter. Revenue increased 39% over the comparable quarter last year. During our year-end call we talked about the importance of execution. 2010 was a pivotal year for the Company and I couldn't be happier with the execution of our new direct selling focus business plan. The Company is positioned for a year of sound revenue growth and expansion into some exciting new markets. This year we have a number of important milestones that will allow us to continue our revenue growth for the near term and provide new uses for our products that we think will allow Nanophase to enter some exciting new high growth markets. For continued growth it's important that we keep the Company moving forward with cutting edge technology. The products for these target markets are a work in process and we'll keep you posted as we get closer to product validation.

We recently returned from the European Coating Show, which is the largest annual event in the industry where various additive suppliers showcased our products and their know-how before a global audience of end users. At this show we launched a new group of products for scratch resistant coatings. We surprised not only our competitors but also many in the coatings industry as they've been unaware that Nanophase has a family of products that can add significant benefits to a wide range of coatings. The importance of thin durable and highly transparent coatings with superior scratch and wear resistance may be news to many investors, but if you're in a grocery store or furniture store, an electronics store or a bookstore, almost all the things you buy are coated to preserve the packaging, extend a product's life or aim for maintaining a like new appearance. Coatings is a huge industry and one that we can capitalize on.

Before I go any further I'd like to hand things over to our CFO, Frank Cesario for an overview of our first quarter financial results. Frank?

Thanks, Jess. Good morning. This is Frank Cesario. Before I begin with an overview of our financial results for the first quarter, I'll remind you that all financial results are stated in approximate terms.

We were delighted with the 39% increase in revenue for the quarter. We reported revenue of $2.8 million versus $2.0 million for the comparable 2010 quarter. For some perspective on quarter to quarter basis, each quarter of 2010 reported more revenue than any quarter in 2009. The first quarter of 2011 reported more revenue than all but the second quarter peak of 2010. The first quarter results have positioned the Company for another growth year.

Currently as we've discussed in our year-end call and yesterday's press release we along with our competitors have a sensitive raw material issue. We use cerium oxide in products for polishing applications. Cerium is a common rare earth metal that, while abundant, can be difficult to extract. Today virtually all rare earth metals are exported from China which began imposing severe export limitations during the second half of 2010. The cost of cerium has exploded and availability is not guaranteed. While other mines have announced their intention to provide cerium it will take time for them to begin production. Currently we can secure adequate supplies of cerium but at high prices. This has affected our working capital and requires us to work closely with our customers to jointly manage this challenge. Until we can source less expensive cerium we may experience some decreased profit margins from the sale of our dispersions for polishing applications which are still a profitable business for Nanophase.

Despite the negative impact in gross margin percentage due to the rare earth situation, the improvement in first quarter revenue covered more of our fixed expenses and allowed us to report higher gross margin on a comparable quarter basis. Gross margin for the first quarter 2011 was 33% compared to the gross margin of 24% from the first quarter of 2010. Indeed gross margin dollars were roughly double what they were last year. The net loss for the quarter was $0.6 million or $0.03 a share versus a net loss of $1.1 million or $0.05 a share for the comparable quarter of 2010. This is due to higher revenue and improved profitability. With our current run rate we could break even with revenue of about $14 million per year or $3.5 million per quarter.

Despite carrying more working capital our balance sheet remains strong as we finish the quarter with $4.1 million in cash and equivalents. We reduced our cash position by $1.7 million, but $1.5 million of that $1.7 million went into working capital. We expect the cost of rare earth materials to come down eventually and we will reduce our investment in inventory. And again we are fortunate to have no debt. Due to the improvement in our polishing business, the cyclicality we usually enjoy with peak revenues in the second quarter falling off that summit on either side should be more flat in 2011. We expect better first, third and fourth quarters in 2011 compared to their comparable quarters in 2010. As for the second quarter spike from 2010, our best guess is that we'll be slightly less than that in the second quarter of 2011, but to be clear we expect our year-to-date revenue numbers to be better throughout 2011 than 2010 and that spread to increase as we move through the second half of 2011. I'd like to turn the call back to Jess.

Thanks, Frank. In late 2010 we announced our NanoArc aluminum oxide dispersions for use in UV-cured scratch resistant coatings. At the end of March we combined an advertising campaign during the launch of the products during the European coating show in Nuremberg, Germany. This show was the perfect venue for Nanophase to introduce manufacturers and potential customers to our family of NanoArc products. This launch gave us exposure to a critical mass of coatings manufacturers who were pleased and surprised that we manufacture such versatile products for the industry. I attended the show as did David Nelson, our VP of Sales and Marketing, Pat Murray, our VP of Research and Development and several other members of our team. We typically wouldn't send such a large group to an industry show, but it was important that we let the coatings industry know that Nanophase was launching a product line, our NanoArc alumina dispersions and not simply announcing the availability of solutions in a new market. The interest level in our NanoArc products was high as evidenced by a busy booth and our having to reprint additional brochures for handout during the show's first day. We have received a few hundred leads which the sales and marketing team have already begun evaluating and making followup contact. We expect to generate a number of new customers from this activity.

Our business strategy and the modified contractual arrangements we announced last fall have provided the freedom to make a product launch of this nature possible while allowing us the flexibility to maintain and strengthen our customer relationships with both partners and manufacturers. It represents the best of both worlds. It provides the advantage of working directly with excellent intermediary partners and with world class coating manufacturers who are ultimately our end users.

In yesterday's news release we briefly discussed product testing cycles and revenue leveling. When investing in a stock, we know you look at the Company's near and long term potential. So it's important to understand the cycle of our newly launched NanoArc alumina products. The chemistries in the scratch resistant marketplace are more straightforward which we expect to lead to faster application development and product acceptance. The pre-market testing cycle takes months, not years, as the bulk of the durability work we've done centers around scratch and rub testing. Unlike the timing limitations inherent with outdoor wood durability testing, where industry standards require several changes of seasons to fully determine the benefits of our UV resistant dispersions, for instance, the pre market testing of the scratch resistant coatings is relatively quick. Additionally in this market we don't expect to have the same revenue seasonality as we've had with either skin care products or exterior architectural coatings where the bulk of our business builds in Q1 and Q2 historically, then tapers off in Q3 and Q4. This new scratch resistant coatings market will provide a nice balance among our other markets in terms of time to market and seasonality.

While we highlight these applications today, scratch resistant coatings are just one component of our product strategy. 2011 will be an important year for Nanophase as a stand-alone provider of products for the broad coatings marketplace. To summarize our newer potential revenue streams, we believe our exterior architectural coatings materials will generate new customer revenue this year with a modest ramp-up in the second half of the year growing in 2012. We also expect our scratch resistant additives to generate new customer revenue in 2011 while ramping up into 2012. Our goal is also to launch more products soon, some that may generate revenue this year and ramp up in 2012, but that remains to be seen.

We'll continue to focus on a variety of benefits that differentiate our products from the competition while targeting unmet needs in our four top markets. Those are personal care, exterior architectural coatings, scratch resistant coatings and architectural windows where we're looking for consumer applications which is where we think the volume will be. It remains to be seen, but we think we'll become a momentum company. We're seeing the benefits from the launch of our direct selling strategy even in a tough economy. In parallel with our strategy execution we're working hard to broaden brand awareness among the hundreds of potential customers domestic and international. Our leverage is good and we have a pipeline that's full of solid opportunities. Of course, we plan to keep you all posted on our progress through news announcements and conference calls. I'll have some closing comments in a little bit, but I'd like our operator, Ben, to please begin the Q and A session. Ben?

(Operator Instructions) James Lieberman from Wells Fargo Advisors.

Thank you. These were very, very nice numbers. I was quite impressed and of your description of the progress you've made to date looks extremely promising. Is there any more color you can give to it? Is that pretty much the best you're comfortable with at this time? It really looks so tantalizingly exciting that I'm just wondering if I should be ready to jump or just stay at the edge of my seat.

Hi, Jim. I would stay on the edge of your seat for a little while. It is tantalizing. It's exciting. A lot of the business we've had, though, the growth that's been supporting the business, the bulk of it has been from customers we're aware of, we were engaged with and we've got a lot of new things happening. Where I'm excited is -- when we launched the coatings products, we had some alpha customers that were working through the cycle and we talk about the cycle, there's two parts. There is -- actually three parts. We do our testing. Then the customer does their testing. Then it goes to their marketing group and they talk about a launch and what we like about the new market relative to scratch resistant coatings, particularly UV-cured scratch resistant coatings, not only do the materials we have inherently perform better than a lot of the organics out there and they hold up very well to the curing process and they have excellent clarity in a lot of these applications, but also we'll get through that cycle more quickly. So our anticipation is that we'll have some things to talk about by the end of the year, potentially by Q3, probably not in Q2 going and beyond that I hate to get too far ahead of myself because as you know and you've been a very supportive shareholder over the years, as you know, the product cycle is difficult to predict and we run into those situations where the customer has a hiccup or road bump and it goes out by a quarter and everybody is disappointed.

I will say, though to, recap on what Frank said, the year looks great. The second quarter may not exceed the second quarter of last year, which was a spike, but each successive quarter looks better latter than we've had in the past which is telling us that we've got other things coming up besides the existing revenue that is so cyclical and that to me is very exciting. We just -- I was going to joke when I started just got back from New Jersey, just flew in and my arms are really tired, just got back from BSF and talked to them. We've got a new leadership team there with that customer. That's exciting. Their business -- we don't know what year over year is going to be, but it continues to look pretty solid. You're seeing some growth there relative to the all natural, 100% natural materials and we're hopeful in that regard as well. Everything is looking good.

Probably on the other side I would say and I know that you're one of the people that wants to generate ideas for us and a lot of people we have not only our investors, a lot of our customers internally, one of the things we do have to continue to do is to focus and that's why we're on those -- we look at those four key markets. There are some other things that may perk up this year relative to new products and potentially a new launch depending on customer timing, but we also are really keenly aware of not being defused in our efforts because it's just -- you're dealing with customers that have a time to market, even a short time to market; call it 12 months. Of time you make a change, every time you go back and do something you end up moving closer to square one than you do to the goal and so it's important that we continue to focus and move on.

Thank you. So I do agree and it's a comment actually that the new revenue streams is really very exciting aspect to where you're headed and I wondered regarding the scratch resistance materials or coatings, do you see that as being like one or two applications or possibly as many as like a dozen types of applications in the marketplace?

Well, I guess that depends how you would define an application. What we are seeing at a high level is that where our materials -- years ago we had some scratch resistant coating materials and they didn't really take off and we were focused largely at that point on water-based coatings and other things. Largely at the top level UV-cured coatings, so that's typically an OEM, not something you'd buy at a home improvement store but something that would be applied at a factory are where our applications will largely be limited to. But once you talk about that, you've got graphics, you've got furniture, you've got electronics coatings, you've got a lot of things that we've got in the hopper. Now, I've been around long enough, as have you, Jim, to know that until we get revenue they're irons in the fire and they're exciting, but they're not -- the rubber is not on the road yet, but we do have many applications in there. I don't know if it is a dozen, but it's certainly more than one or two under that broad umbrella of UV-cured abrasion resistant coatings and it's the kind of thing why nanos specifically work better in this format than a lot of other materials.

(Operator Instructions) Mr. Richard Wallace, a private investor.

Thank you for taking the call -- the question rather. You haven't mentioned anything about the window products, which was a big topic six months ago and I've used a Windex product that sheens really nicely and cleans my windows. You had something similar. I'm just wondering if there's any traction there.

Sure. We haven't talked about it largely because it's -- it hasn't yet generated significant revenue on the commercial side. The Windex product is very different from ours in the sense that it goes on quickly and easily and it's designed to last a relatively short period of time and that -- and the market behind that is make your windows shine, make the water sheet but not last for a period. We started our marketing there on the commercial application side looking for professional window washers and restorers to apply basically three products. We've got stain remover. We've got a pre treatment and then a finishing step that keeps the window hydrophilic, hydrophilic meaning the water sheets instead of beads like Rain-X is hydrophobic. Our stuff is hydrophilic. It requires a degree of labor to apply it.

What we've found so far and let me take another step back. That market -- the commercial window cleaning market is about $600 million of which about $30 million is materials and our goal always has been to get into the $9 billion consumer market with this product because that's really where the volume is. What we found so far in the commercial side, we did the launch a little more than a year ago, is that the stain remover is a great product. Everybody loves it. We're selling fair amounts of it, but that's a much smaller portion of that market. So when I say fair amounts of it we may not sell $100,000 of it this year. It's kind of a foot in the door product. The other products aren't moving as quickly in the professional marketplace and our goal originally was to have the professional marketplace vet the material for the consumer marketplace. That being said, we are talking to several consumer product companies trying to move that forward.

I think this is going to be a make or break rest of the year for that product. We may not -- depending on our degree of focus will depend on the degree of success we have for the balance the year and I would agree it's something -- We had a splashy launch, it hasn't met our expectations, but we also -- our expectations were that we would use the commercial market as a stepping stone to the consumer market and that's still ongoing. So I would anticipate when we do our Q2 call the results may not be in because they'll probably be in July, early August, probably by Q3 we'll have a very good indication -- the window season runs roughly with the rains this year things have started slower. I was just talking to somebody. The middle of the country is starting to clean now. Normally they would have started at the end of March. By the time we get into October the season will be largely closed and we'll have a very good handle on where we're at and I'll be better able to address it at that point.

Actually a quick followup, sorry, if I'm still on. I live in Colorado. We get a lot of pitting on our windshields due to rocks because they don't use rock salt. They use sand and cracked windshields happen all the time. Is there any of these coatings that could actually fill in where the microscopic chips are?

Our material is too small for that really. There probably are coatings out there, but our material -- to give you an indication of how -- if you were to put the hydrophilic coating on your windshield, the sheet of water that would be formed would be smaller than your windshield wipers is capable of taking off the windshield, which is why we make sure nobody does that. And we are exploring some other areas relative to things we might be able to do on that side, but that's some of the consumer business we're looking at, but in terms of filling anything or having a thickener -- that's outside of our -- really outside of our wheel house.

(Operator Instructions) Charles Federoff, also a private investor.

Good morning and very nice to see the results, very happy to see that you've moved out on a new product line and also that you continue to work on the other products that you launched last year and looks like you've got a plan. I have a couple questions more on the financial side of the house. So maybe the CFO is probably going to step up and have to answer these. First of all, 10-Q report to the SEC, when do you think you're going to get that posted?

Probably within the hour. We pushed the button this morning on the way into this call.

Excellent, thank you. Second is on SG&A. With your moving out in a different product lines, what does that look like as far as going forward as far as cost is concerned?

It actually reduced from the first quarter of '10 to the first quarter of '11 and we think we have that well contained. So I don't expect any dramatic increase in SG&A and I think we've been operating this business in a very controlled manner and I would expect that to continue.

Okay. Even though you're going to be moving into the coatings pretty heavy and what I -- what you indicated on your press release is that a big fair in Europe which I -- in Nuremberg which I'm astounded by with 20,000 companies attending is unbelievable and again the number of prospects you have would be probably significant. You don't feel sales costs and expenses are going to go out of kilter?

Let me step in there and Frank can finish up because he loves a challenge, but I would say depending on how long you've been following what we've been doing, Towards the end of '08 as a Company we probably, had less than -- we had 88 opportunities in about 14 markets and walking into '11 we probably were on the order of better than 500 opportunities mainly in 6 or 7 markets and so what we're trying to do, although the coatings work is going to present a load, is reduce the amount of things we're trying to focus on not to get defused and it comes back to how much can you actually accomplish from a Company this size.

I'm keenly aware that our next major milestone as a Company is really cash flow positive and after that looking at -- we're looking at as much low hanging fruit as we can go after. There are applications that are even more interesting to me and to the team that I think we might go after as the Company can support itself better and we show some growth, but in the middle we're kind of -- we're through an important phase in the Company's life. We're through a really bad 2009, better 2010, a better 2011 is what it's looking like and when we get there, we will have to make those decisions and it's an active discussion internally on how quickly do we expand the focus, what do we defocus on and refocus on and that's why we can say we don't expect SG&A to balloon as we're growing because we are really trying to limit our focus to a narrow group of markets.

That being said, my goal in the longer term is to get the money to come in to build up R&D which naturally builds up selling and then you get into a virtuous cycle where you're basically accelerating the growth for doing that applications development and the sales support.

Okay. Last question I have is since China seems to be a major player here and they are limiting your raw -- your critical raw material here, do you have a long term contract with them or are you buying it on the spot market or how are you doing that?

Cerium is a tough product because it is not widely used, not widely traded. So entities are often required to simply to buy it spot. With that said, we work with our customers so that they place orders with us, so we simultaneously secure the raw material. And I expect that to continue. We thus far have had availability of cerium. It's just been profoundly expensive. Fortunately we're not alone. Everyone who uses rare earth generally which go into high tech gear and specifically our relatively abundant rare earth cerium. Everyone has got the same market dynamic. Now other mines are going to be turning on as 2011 finishes into '12, into '13. So we're I think aware of all of them, but it's going to be a dynamic in the marketplace for a while and we just have to wade through it, but we are very tightly with our customers securing material as they're ready to place orders and thus far it's worked.

We also have a strong relationship. We've been using the same supplier since 2003 and we've -- although there is more than one source of the material, we've had a good relationship with that supplier. They're aware that we've been committed to them and when this started to happen in the fall, really fall of '10 is when it started to hit hard, we were getting material when there were people that just couldn't get material regardless of the price and so while we don't think we have a strong position, we think we have an equivalent position or potentially slightly better than a lot of the other people. And I would add that in the businesses we're in, there are cases where ceria is the only thing currently that technologically can solve the problems they have. So where we have a natural advantage is -- with our dispersion technology it seems that our dispersions and our capabilities are better than others. Nano is a natural play because you're allowing the customer to use a lower amount of the material to get the same efficacy as you would with a larger product. So we're in a position where I'm not thrilled with it and I'm looking forward to -- there's an Australian mine that should be online at the end of the year. Moly Corp. should be online by the end of next year. I'm looking forward to that reducing some of the demand. I am saying that our position is not dire. It's just one of those things we have to keep an eye on.

Sounds great. Great news. I appreciate you taking the call. Good luck in the future, and thank you very much.

Thank you, sir. And we have no further questions in the queue at this time. So I would like to turn the call back over to Mr. Jankowski for any closing remarks.

Thanks. Well, just to tie it up, it's a new year, but our strategy hasn't changed. We've outlined the milestones necessary to achieve our goal and that's to build sustainable shareholder value. We move into the year with confidence and an expanded family of nano enabled solutions to enhance our customers' products. Your management team expects to see continued growth throughout 2011, as we've said. I appreciate your time today. Frank and I are always available for any follow-up questions you may have. Please enjoy your day and thanks for your participation.

Ladies and gentlemen, thank you for attending today's conference. This does conclude the program and you may all disconnect. Have a great day.