Solesence Inc (SLSN) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Nanophase Technologies Corporation third quarter 2011 financial conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will begin at that time. (Operator instructions). As a reminder, this conference call is being recorded.

The words expect, anticipate, plans, 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 or 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 activities 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 her host for today's conference, Mr. Jess Jankowski, President and CEO. Sir, you may begin.

Good morning, everyone. It's Jess Jankowski. We appreciate you joining us for our third quarter financial conference call.

All companies, Nanophase included, strive to accelerate annual revenue growth. Our strategy has been to change our business plan to address markets and customers directly and, through the introduction of new products, address unmet industry needs and expand our market reach. It's beginning to pay off with significant progress in product development work with existing customers, continued revenue growth during a dreary economy and improved bottom line. We are also experiencing moderation to the cyclicality that is greatly impacted how we've managed our business over the years, although we still continue to be too dependent for my liking on the personal care demand curve.

The moderation we have seen thus far is a direct result of our market diversification, which includes product sales into nonseasonal industries such as electronics as well as segments of the coatings industry. These positive factors help to balance product demand, improve our planning, better manage our inventory and labor and help stabilize the Company so that management can focus on new growth areas.

While we introduced you to one of these areas, scratch-resistant additives, in Q1, I would like to go over that in more depth after Frank provides an overview of our third quarter financial results. I will discuss why we're giving this segment of the coatings industry a full-court press and why I am enthusiastic about our future in it. I will also touch on some of the other market development we are engaged in. Frank, would you please provide the financial update?

Thanks, Jess. Good morning, this is Frank Cesario. Before I begin with an overview of our financial results for the third quarter, please remember that all financial results are stated in approximate terms.

Revenue for the quarter increased 8% to $2.2 million. We're seeing some softening due to renewed economic concerns in the marketplace and will carefully monitor the market through the remainder of 2011 so we can execute our 2012 strategy. 2011 year-to-date revenue of $8 million is ahead of 2010's comparable revenue of $7.4 million.

As we've discussed in previous calls and press releases, we, along with our competitors, have a sensitive raw material issue. We use cerium oxide raw material in products for polishing applications. Cerium oxide is a common rare earth material that, while abundant, can be difficult to extract. Please note this is only one area of our overall business.

China has continued imposing severe export limitations on its rare earth metals and the cost of cerium oxide has exploded with availability not guaranteed. We have been able to secure adequate supplies of cerium oxide, but at very high prices. This has affected our working capital and gross margin percentage and requires us to work closely with our customers to jointly manage this challenge. Until we can source less expensive cerium oxide, we will likely continue to experience profit margins that are tighter than we have experienced historically from the sale of our dispersions for polishing applications, which, to be clear, are a profitable business for Nanophase even the existing climate.

Despite this negative impact, our gross margin for the business stayed strong during the first nine months of 2011 with a 28% gross margin, favorably comparing to the 29% gross margin posted for the first nine months of 2010. Increased revenue and incremental cost savings have helped to offset the increasingly expensive cerium oxide raw material.

The net loss for the quarter is $1 million or $0.05 per share versus a net loss of $1.6 million or $0.07 per share for the comparable quarter. On a year-to-date basis, net loss of 2011 was $2.1 million or $0.10 per share. This favorably compares to a net loss of $2.9 million or $0.13 per share posted in 2010.

I would like to point out that significant non-cash depreciation expense in excess of replacement capital spending as well as equity compensation charges constitute the majority of total net loss. Beyond working capital requirements, the business required approximately $1 million of cash to operate during the first nine months of 2011, an improvement from 2010 and a significant improvement from prior years.

With our annual run rate we could achieve cash flow breakeven with revenue below $14 million per year or $3.5 million per quarter. Despite carrying substantially more working capital, our balance sheet remains healthy as we finished the quarter with $3 million in cash and equivalents and still have no debt. We reduced our cash position from the end of 2010 by $2.5 million, but the majority of that went into working capital and we don't expect to have to make additional investments in working capital through the remainder of the year.

We expect the cost of rare earth materials to come down eventually, at which time we expect to reduce our investment in inventory. Our unencumbered balance sheet continues to provide us a good deal of flexibility in handling challenges such as this role material issue.

I would like to turn the call back to Jess.

Thanks, Frank. Last March we combined an advertising campaign with the formal launch of our NanoArc aluminum oxide at the European Coatings Show in Nuremberg, Germany. These materials address a market we broadly refer to as scratch resistance. This gave us our first opportunity to work directly with end users of our products, which we think dramatically increases our probability of success for the testing and demonstration cycle directly to commercial order flow.

This market has great potential for Nanophase and its demand for products samples is an indication of interest in the commercialization of our technology. We expect to maintain our revenue momentum in 2012. Our sales team has a pipeline of potential customers in various stages of the sales cycle.

When we create a new product, or a suite of products, in the case of scratch-resistant additives, we start by looking for large addressable markets. By attacking some of the largest markets in the coatings industry, we expect to quickly get in front of the leading manufacturers of these materials. Scratch-resistance represents a significant addressable market for Nanophase. We've launched a line of products designed to make coatings more resistant to scratches and abrasions while maintaining optical clarity. This allows features like product colors and design elements to be clearly seen through the coating. Optical clarity is extremely important benefit to the coatings industry and a benefit that is inherent in nanomaterial dispersions that are well engineered for specific applications.

We are aggressively pursuing this market because we know we can add tremendous value and at such a large, varied market means that acquiring just a small percentage should yield several million dollars in annual revenue to Nanophase and make us a leading provider to segments in this industry. Remember, almost every product manufactured, including our iPhones, Golf Digest Magazine or the burl wood trim in a Lexus has a protective coating on it.

We also continue to look for new applications where our products could provide innovative opportunities. We have completed a good deal of internal development work and have established a program within the energy industry to explore select segments of those markets where our nano-based products can address some of the many unmet needs. This is a growing industry that has invested and continues to invest millions into research and development.

At this point, no specific company has built a perfect product or achieved a leadership position in many technical areas where nano-solutions are being sought. These are typical of the markets we are pursuing, of which there are several more in various stages in the development cycle. Working directly with the product manufacturers and end users allows us to better understand their needs and tailor our products do not only meet but to exceed their expectations. More on this in a minute.

Shifting to personal care, while we may have touched on this during our second quarter conference call, it really bears repeating. The FDA released new regulations earlier this year that require sunscreen products to pass certain effectiveness tests and require manufacturers of these products to adopt new labeling. The purpose of these regulations is to make it easier for consumers to understand exactly what protection their sunscreens provide. The regulations require that all products labeled broad spectrum, a term which you are probably seeing often in the marketing of sunscreen, pass tests for both UVB, which causes sunburn, and, especially relevant to Nanophase, UVA exposure, which has been linked to skin cancer.

This is an important development for our business, as we are one of the few providers of naturally occurring metal oxide UV blockers, or so called physical sunscreen products. The target customers for our products are formulators working to enhance as SPF and other ratings of sunscreens, moisturizers and makeup. Fewer of the synthetic organics are approved for use as UVA blockers in the US, which makes meeting the new labeling regulations challenging if formulators and manufacturers rely only on the organics.

Our inorganic zinc oxide products provide protection from both UVB and UVA rays, so the new labeling requirements should be beneficial for suppliers of ingredients like zinc oxide, which, in addition to being excellent UVB blockers, are inherently UVA blocking and are already approved for this use by the FDA. This should give Nanophase a nice leg up.

While these regulatory changes have caused manufacturers to initially evaluate their labeling and formulations, we don't expect these changes to have a positive effect on revenue until early next year. We do expect to see an upward trend during 2012 as manufacturers become compliant with the FDA regulations. We like where we are positioned today. Our all-natural effective UVB blockers are ready today to meet this new demand.

Although we've focused on the scratch-resistant launch in personal care today, we have been working for some time on expanding our polishing business, exploring several applications in energy and other areas, along with a fair number of single-customer-specific projects. I recognize that the lack of commercial feedback, i.e., revenue growth from new business is frustrating to you, as it is to me. We are contending with the ups and downs of a tough economy as a company that is almost completely dependent on new product development. We also have to live within the realities of the advanced materials business development cycle, which is much longer than such cycles for commodity materials, software or other items which compete with like items for advantage. We are frequently developing new applications for materials where few existed before our entry into the market.

I have no doubt that we would have more business in a stronger economy. New product development is an area that receives less focus in times such as these. I also have no doubt that we have competitive products. We routinely outperform existing technologies in our various markets, at least incrementally.

While that tells me we know what we're doing generally, that we understand the applications, that we are in markets that make sense, that's not enough today to move product managers. Essentially, those are the frogs we are kissing to get to the right point in this market. That's why we continue to work to find and focus on applications where we offer a significant advantage over existing technology. And we are making progress on these, although the cycle has extended beyond what I originally expected.

We will do a more complete review of what we are doing during the next call, but be sure there's a lot going on here. All of us here at Nanophase will be busy over the next several months. First and foremost, continuing to meet with customers directly -- this includes potential customers at all the markets we are working in -- every aspect of business development I discussed today involves regular external customer feedback. We're also planning for and attending and/or exhibiting at several industry conferences, all targeting markets where we expect our products to have cutting-edge performance advantages. We are building momentum, and 2011 is an important year for Nanophase to establish itself as a stand-alone provider of products for the broad markets we serve and have targeted.

In parallel with our strategy execution, we're working hard to broaden general awareness of Nanophase among potential customers, domestic and international, in markets where we are active or are planning product introductions. Leveraging our market expertise has resulted in a pipeline that is full of solid opportunities. As always, we plan to keep you posted on our progress through news announcements and conference calls.

I know most of our investors listen to the webcast or review the transcript after the call. But for those on the line who have questions or comments immediately, the floor is yours. Devon, would you please begin the Q&A session?

(Operator instructions) [Charles Fedorov], private investor.

Good morning, gentlemen, and thank you for your results. Thank you for your work in going forward in new markets. The only question I have, going back to this rare earth thing -- and I think I brought it up last time -- as far as the ability to acquire a steady flow at a decent price. And given that China has now shut down, basically, its Mongolian operation, where do we stand on our rare earth supply going forward into 2012?

We are comfortable with it for now. Our understanding is that they really haven't shut down their Mongolian operation as much as created a system where if you are willing to pay for it, you can get it. We have had a long-standing relationship with several suppliers, and all the feedback we're getting is we can have as much as we want, we just have to pay for it. And essentially we are paying 12 to 14 times what we were paying for it a year ago.

So in that regard I'm not that concerned about it. Long-term, the concern would be that if the prices stay high, are there going to be applications developed that exclude cerium oxide, exclude rare earths, to avoid that? I would say a counter-weighting fact to that, though, is Lynas is still on the way to developing the Mount Weld facility, which will be purified in Malaysia. Molycorp is talking about next year beginning on rare earth and then, 2014, beginning on the types that would impact our business. And all of that is going to reduce the demand from Chinese supply.

So I agree with you that it's a concern. I agree with you that it puts some of our business at risk, just based on market dynamics, if the prices get high enough. You know, there's a risk. But I don't think the concern is of a shortage. I think it's more a concern that, is this price going to moderate?

Frank, do you have anything to add to that?

We have found the price lately has seemed to moderate. It's not exploding anymore, or at least it hasn't been the last couple of months. So all the indications we have are that supply isn't any worse than it was, say, six months ago, and the price seems to have stabilized. And a lot of what we are hearing and reading and seeing is indicating or implying with some level of strength that prices are actually expected to begin to go back down. But we are not going to get ahead of this thing. We're going to lock up our supply for firm orders and just carefully manage this in conjunction with our customers.

One thing that is happening here, though, that I do take some solace in is that it appears that in several of the applications we are involved in, particularly new business development, ceria is the only material that works. And so that's a double-edge sword. On the one hand, if it's the only thing that works, how much price can it take? On the other hand, other things don't work as well. And so then it's a matter -- it becomes incumbent on us to also become better engineers, determine ways to use lesser amounts of it. But I think it's going to be around as a raw material for some time coming forward.

Thank you.

(Operator instructions) I am showing no further questions at this time, sir.

Okay. Well, thank you. And we are fully confident that we have the know-how, products, business strategy and potential to achieve our goal. We appreciate your time today and are always available for any follow-up questions you may have. Enjoy your day and thanks for your participation.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Thank you and have a nice day.