Q1 2024 Nanophase Technologies Corp Earnings Call

Participants

Jess Jankowski; President, Chief Executive Officer, Chief Financial Officer, Director; Nanophase Technologies Corp

Kevin Cureton; Chief Operating Officer; Nanophase Technologies Corp

Ron Richards

Tony Ruben

Presentation

Operator

Thank you for standing by, and welcome to today's program entitled Nanophase's first-quarter 2024 financial conference call. (Operator Instructions) Again, words believes, expects, anticipates, plans, forecast and similar expressions are intended to identify forward-looking statements statements contained in this news release that are not historical facts.
Our 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 that could cause actual results for future periods to differ materially from those expressed in these news release.
This important factors include, without limitation, a decision of the customer to cancel purchase order or supply agreement demand for and acceptance of the companies, personal care ingredients, advanced materials and formulated products, changes in development and distribution relationships, the impact of competitive products and technologies, possible disruption in commercial activities, occasioned by public health issues, 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 or new events or uncertainties.
I'd now like to hand the call over to Jess Jankowski, President and CEO.

Jess Jankowski

Thank you, Jonathan, and good morning to all those listening live, and thank you to those following up online after the fact. We're looking forward to discussing first quarter 2024 results, our performance to KPIs, which will play a huge role in ensuring our success and our outlook for the balance of 2024.
Kevin Cureton, our Chief Operating Officer, is joining me on the call today. We have some prepared comments and will be available for some Q&A afterwards. We'll continue to focus on our future, which we believe to be a bright and lucrative one, reviewing the things we've done to position ourselves for this as well as covering Q1 2024 results.
We had lots of news during the first four months of 2024 which, while not operational in nature, we certainly expect to contribute to our success going forward. We closed two equity financings in Q1, which were critical for us to keep growing and supporting both our expanded working capital requirements and some modest capital products -- projects needed to support additional Solesence volume.
None of us wanted to have to walk away from profitable growth, which had been a steady pressure in 2023. Now we're able to continue to add good business with improved throughput while also reducing our cost per unit through automation.
We're focusing primarily on enhancing profitability via gross margins this year, but the growth keeps coming and we want to capture it. Given the nature of the Solesence business, success leads to growth within existing customers as sales grow and as they launch new product lines.
Success with these customers also results in more opportunities for new business. Other brands don't want to be left behind as we all work to satisfy demand in this relatively newly defined market a market. We believe Solesence has been instrumental in creating an energizing for prestige cosmetics offering natural minerals-based skin protection.
Another key milestone achieved just two weeks ago was the successful settlement of our litigation with BASF. As I mentioned, our respective commercial teams have maintained a positive relationship through the entire process, and we're looking forward to our full focus being available to running our API business with BASF and our Solesence business.
The added management bandwidth with that added management bandwidth will be able to apply to our Nanophase and Solesence businesses will allow us to increase our focus and accelerate progress in the strengthening of our enterprise and increasing its value.
Now let's walk through the numbers unless identified otherwise. All numbers will be stated in approximate terms, we had good results in Q1, generating a 36% gross margin or $9.9 million in total revenue compared to a 23% gross margin over the same period in 2023.
We also generated almost $1 million in net profit in Q1 of this year compared to a $1.2 million net loss in Q1 of 2023, more than a $2 million swing. Our margins were driven largely by a favorable Q1 product mix and continuation of the gains we've seen an improved production efficiencies.
We'll need a few more quarters under our belts to better understand all of the factors contributing to this as we have yet to develop enough history to allow for more accurate future predictions generally to 35% to 40% gross margin range follows our 2024 plan.
R&d expenses were down about 10% year over year, while SG&A expenses were down 28% or almost $600,000. About two-thirds or $400,000 of the decrease in SG&A related to a reduction in legal fees for the recently settled litigation. Our Q4 2023 reorganization also contributed to these savings, which we expect to continue through 2024.
Last time, we addressed some of the changes we're implementing in manufacturing that we expect to deliver improved results and increased capacity in 2024.
In a few minutes, Kevin is going to address our operating KPI performance some of which will be enhanced by these investments. It will require a total of approximately $2 million in capital to implement, and we expect them to pay for themselves within 15 to 30 months from commissioning.
We broke these out into three projects. First, we're building out our own owning microbial testing lab. This will allow us quicker turnaround times and required testing of every batch we make as well as reducing outside testing costs significantly, we expect to save approximately $300,000 per year at current volumes and have this project paid off in just over a year.
Second, we're transitioning our wet processing lines to our Bowling Brook facility. This will result in at least $400,000 per year in savings and pay for itself in 30 months or less. Critically, in addition to higher dollar savings per unit. This will help us to increase throughput, helping us to support greater demand while increasing customer satisfaction.
Lastly, we're further expanding our filling and assembly operation in Bowling Brook, adding more automation and allowing for increased volumes to be produced in less time than it takes to date, we expect this project to pay for itself in about two years in terms of hard cash savings, it will also create more opportunities for greater sales growth at enhanced profits.
Combined once these projects are completed this year, we should be able to support about $100 million in Solesence finished products with what we've put in place. This will represent a solid stable base from which to more than double the size of our existing business within our current footprint,
Solesence products made up over $8 million or 82% of our Q1 2024 sales versus $5 million or 53% of Q1 '23 sales. The demand is here now I'll invite Kevin Carrington, our Chief Operating Officer to share his thoughts on our progress to KPI.s and the approach we're taking through 2024. Kevin?

Kevin Cureton

Thanks, Jess. As usual, I'd like to begin by thanking our teammates who every day demonstrate that we are indeed best in industry at what we do and our investors who continue to trust our leadership as we take the next steps on this journey. I would also like to thank the families of our teammates as we ask a lot of our team and we would not be able to do what we do without the energy and support of our loved ones.
Last month, we introduced three key performance indicators that we will reference throughout this year to provide guidance on our performance. These KPIS., our inventory availability, throughput and on-time in-full or outage. A
s we noted last month, when combined with our financial analysis, these KPIs help give us a clear assessment on how we are performing in line of sight to the actions we need to take to continue to move our company on a never-ending path toward operational excellence.
As a result, we refer to these as operating KPIs. In addition to operating KTI.s, our company also has growth. KPIs are important indicators on how we are performing relative to our growth goals and therefore how we are trending toward increasing our overall enterprise value while currently providing strong indicators for growth, it is premature to talk much about these at this point in the year, except to say we will introduce and discuss them in greater detail during our Q2 conference call.
So let's get started on reviewing our operating KPIs. We will begin with inventory of availability, which last month I describe as being a measurement, both of the amount of materials we have on hand and the timing on when we receive those materials.
During Q1, we were able to finish the work that we have started in late Q4 to bring our inventory availability to over 95%. This milestone means that we have effectively addressed virtually all materials availability issues that had been the primary drag on our performance during the second half of 2023.
I would like to commend our purchasing team as well as our R&D team on their collaborative effort to bring us to this point through working tirelessly together to identify and qualify alternate alternative suppliers and producers of key raw materials. These teams brought us through several tight spots to reach this current milestone.
Further good news is that over the past month, we have sustained this performance and maintaining inventory availability at or above the 95% level. And we are confident in our ability going forward to continue this solid performance to further augment our position our team is also working hard on implementing our vendor development and management programs, which includes amongst other elements bringing in additional qualified sources from around the world for key materials to minimize our out-of-stock risk and reliance on single source suppliers where where it's possible.
This work has already yielded some small, but still impactful improvements in purchase price for these materials due both to volume growth and getting the alternative sourcing. While we still have many miles ahead of us, we are pleased with the progress we have made and confident in the professional management as being executed to continue to move us toward best in class performance in this area.
Our next KPIs throughputs; last month that described this KPI is measuring how we perform relative to leveraging our assets to produce the goods we sell. More simply throughput is a measure of exactly that the output from our company as measured by the units of finished goods and one of shipments we yield every week.
During Q1 as inventory availability improve, enabled us to improve our throughput, which while lagging the improvement in inventory availability increased excuse me, increased each month during the quarter. More specifically, throughput measures progress from 50% of target in January to over 90% of target in March, yielding a Q1 average of around 76%.
To provide a little more context on this performance. Consider that due to the strength, the improvement in throughput during the quarter, March alone represented 40% of our total production and revenue for Q1. An additional strong indicator of further improvement in throughput was seen in our upstream production of bulk for the finished goods, we produce.
At the broad production level, we are meeting 100% of plan requirements or 100% throughput by the end of March. We still have some bottlenecks and fully realizing the benefits of some of our investments on the secondary packaging area and are hard at work and rectifying these issues. It will be important for us to address these issues so that we can achieve Q2 throughput requirements, which for guidance are greater than 30% higher than Q1.
Finally, turning our attention toward Otis, there will be no surprise for the manufacturing folks online that Otis lag when throughput lagged. Remember again that we define on-time in-full or also referring to OTIF or Otif as a percentage of orders shipped consistent with the dates we've agreed upon with our brand partners. Relative to our standard, we were less than 50% of our own targets. Our goal our Company goal remains to significantly improve Otis into greater than 90% by the end of Q2, a very large and stretch goal for us.
I might add, but we are confident that as we execute Q2, we will be on target with this objective through improving the throughput performance.
Finally, as we noted in our last call, our company is fully able to handle hard better is foundational to the journey and the massive change we have made to our company over the past few months, let alone the past few years through continued focus on the measures and the development of our teams and teammates, we have solidly regained our footing.
Our challenge remains to continue to raise our expectations to embrace the significant opportunities ahead and raise our performance at the same time over the coming months. So we turn them into profitable growth. Back to you, Jess.

Jess Jankowski

Thanks, Kevin. As you can see, all of this reflects progress along the strategic course, we charted some years ago, we launched Solesence. We believe we put ourselves in a position to win and we intend to capitalize on that.
We have more than $40 million in shipped and confirmed sales orders through this week, and we expect more to follow. Demand has not been our issue. Our struggle to supply that demand for our Solesence products has been our biggest limiting factor over the past few years. We expect to overcome that last hurdle this year.
Now we'd like to take any questions or hear your comments on our results. While we know that most of our investors listen to the webcast or review the transcript after the live call, we're happy to invite those of you participating live on today's call to ask any questions you may have or to share your feedback afterwards, I'll offer a few closing comments. Jonathan, would you please begin the Q&A session?

Question and Answer Session

Operator

Certainly. (Operator Instructions)
Ron Richards, individual investor.

Ron Richards

While Hi, Jess. So not such a bad quarter, but I'm not sure you can answer this question, but what were the general terms of the settlement would be us?

Jess Jankowski

Hi, Ron. Well, at a high level, we have we are not stopped. We've agreed between us that we will continue to develop our Solesence business and that there won't be any sort of a violation of our agreements and that some we will work that we will be sure that we keep a supply available as mandated by the contract, and we've kind of cleaned that up to make that a little more clear as well as we've agreed as we had been to continue to work on new products for them.
And there's a specific product in the pipeline that we have. We said we would go ahead and move forward with, say in a broad sense, those things where we codified some of the things that we had been doing and we kind of suites each other's concerns about some other things in the grand scheme. I think we're going to move forward. It was a successful settlement for for both of us, and I'm certainly glad to be able to focus more of my attention. And I know Kevin can say the same on the business at this point.

Ron Richards

Were there any monetary aspects of the agreement payments?

Jess Jankowski

No, no, no, there was nothing. Nothing beyond just the agreement on those things. And we filed, I mean you can get a sense of it. If you if you felt like you were missing the experience of a root canal, you can handle it through the documents we filed and get a sense of it. But yes, there were no monetary inducements.

Ron Richards

Okay. Good. Sounds promising.

Jess Jankowski

Thank you.

Operator

Tony Ruben, Individual investor.

Tony Ruben

Good morning, gentlemen, I've been waiting a long time, David, but the great quarter, congratulations. Are they getting pretty clear that you're able to execute on the promises, so it's very exciting. So just as a follow-up to the previous caller, I did prior to get that root canal and read your documents.
But honestly, that was more than more than my mind. And Albert from your summary, it sounds like it's business as usual. It sounds like nothing negative in Nanophase's, which frankly leads me to wonder why resolve this litigation in the first place, but just wanted to confirm that was correct.
And secondly, March was pretty great or Q2 through or and 2023. So we could see that at this stage. Then your gross margins are obviously a tremendous improvement. And I think in the opening comments, you mentioned targeting 35% to 40% for full year 2024. I just wanted to confirm that and you did mention $40 million again backlog. So is that primarily to lessen or is that everything?
So those are just really my questions. But again, really, I'm very tickled with your results. Congratulations. I know there's a lot of hard work. I know there was a lot of the negativity you had to go through. Probably some of that I'm from the audience, but it's great to see that you're able to execute and again, congratulate.

Jess Jankowski

Thank you, Tony. Regarding the BASF., I need to get those numbers together. I know that the first quarter number of 2023, it was about $500,000. It was the biggest quarter of the entire experience with the litigation and in total and for last year, I think we were at around $1.6 million , but I'm not sure if that doesn't include the first quarter of the last quarter of 2022.
The suit was filed in August of '22, and we started legal fees started, as you would imagine about two minutes later. So I'll get that information together. But I mean, essentially, we're in the we're in the $1 million range for the rest of the year, actually are our controller sitting here and he's putting numbers together so while he's doing that, I would say that in terms of business as usual, yes, one specific key criticism.
Okay total for $1.3 million for 2023 was $1.3 million and for 2022 was $0.4 million . So $1.7 million in that period. So call it $800,000 in the last three quarters of 2023. And I'll get that for next time as we talk about -- I mean, I'll make sure I'm pulling that out.
Calling that out is the piece of the improvement in terms of them, whether it's a multi-modal, I would say the one thing we we were unable to deliver as quickly as BASF wanted in 2021 and parts of 2022. And that had to do with a lot of things, including the COVID response and all the other stuff that happened relative to supply chain.
Those things were part of the things that we have made some guarantees on making sure that we will not only do better, which we would want to do anyway as part of our business, but also that we will be more transparent with each other on what our inventory is, what our what their need is, et cetera, which is something that we should have done a long time ago, and I think it is bringing this whole thing to a head push that in that direction.
So that was one thing developing the new products we've always been interested and helping them build that business and grow and then codifying that probably help them internally. I don't want to comment anymore on the M&A piece, but yes, I don't think from the perspective of where we see the business going and growing, I don't think anything is going to change from where we were in 2022 and our fervent hope is that the business for APA's takes off the demand is strong there.
The the business for sunscreen for non non cosmetic demand prestige business, which is a lot of the API business we do has spend has been hit lately. So that's contributed probably to the annex over all of it. But the market in total is still growing and minerals are still the area that everybody wants to be in. So from that perspective, I see that as being solid.
And regarding your question about the margins, part of the reason I wanted that out there also is that, you know, we're still a really small company with big things that can impact the margins in a huge way. And if you notice, for instance, I know we built a fair amount of inventory in Q1 and not to bore anybody who doesn't understand cost accounting out there.
But you know, essentially if you don't consistently hold that inventory level or anything on the build when you sell it, you take a hit for the overhead absorption coming back through. And so it's I have a feeling the number's going to be fluid. But we think relative to getting through the year, that 35% to 40% range is what we've targeted and done. I think we'll be able to get there.
Barring just the biggest challenge I think has been relative to financial results, I think kind of lumpy demand. We had some issues that we've addressed in terms of getting things out the door when we can. But we also have the nature of a quickly growing business with new customers quickly growing customers, and they have their share of home of those challenges, one of their challenges that we probably discussed more in 2022 than in '23 because '23 challenges, we had our own contribution to them is that for the business that we do, that's not what we call turnkey, meaning that the customer supplies, the packaging and labels and other components there have been a lot of hold up here and there on that as well.
And some cases you've got customers that may be existing companies that are relatively new to this market in particular, so that all adds to the lumpiness of it. My greatest wish always is that our revenue grows every week and the weekly volume stays flat or grows every week which we can't always you can always have, but that's been -- I guess that's my disclaimer on whether we hit $35.1 million minimum and every quarter, but that's the range though we expect to hit and steady volume has something to do that.
With that, I'll hand it over to Kevin to discuss the your question on the $40 million backlog and where that's at.

Kevin Cureton

Thanks, Tony, for your comments and Juss trying to put it in perspective. So the number that Jeff mentioned, the $40 million plus is a mix of what we've sold, plus what is still to be sold. So it's what we would call shipped and open orders. The book backlog, you can do the math pretty quickly and come up with as of the end of the first quarter since it was roughly $10 million. That means that we were looking at 30 million plus in open orders as we entered into this quarter on that.
The one thing to make sure it's clear is those when we talk about backlog, it's a common term that's used in industry, but it is in backlog is And hey, we didn't ship all the orders. And therefore these these folks are waiting there are actually orders into Q3 and Q4 as part of that number. And the great majority of that number is for Q2, but some of the there are some significant orders for Q3 and Q4 that we've already have on hand.
And then your last question is that so lessons or is that everything is everything obsolescence is roughly 90% of the Company now in terms of revenues, so on own 80%, maybe more correctly, is what we expect for the year. So on. So it's mostly Solesence, but it does represent all of the all of the business.

Operator

(Operator Instructions) And this does conclude the question and answer session. I'd now like to hand the program back to Jess Jankowski for any further remarks.

Jess Jankowski

Thank you, Jonathan. We all really appreciate your engagement. We're building something that we expect will be profitable for all of us will make people healthier, happier and healthier, and we expect will outlast all of us on this call. We're positioned to deliver, and we're expecting a good year.
Thanks for joining us today and we look forward to our next call. In the meantime, we have a lot to do, but the pieces are falling in place and our expectations are high and I hope everyone has a solid day and can take a few minutes to enjoy the good news we've shared. Thank you, everybody.

Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.