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Edited Transcript of NEO.TO earnings conference call or presentation 12-Aug-19 2:00pm GMT

Q2 2019 Neo Performance Materials Inc Earnings Call

Aug 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Neo Performance Materials Inc earnings conference call or presentation Monday, August 12, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ali Mahdavi

Neo Performance Materials Inc. - Capital Markets & IR Executive

* Geoffrey R. Bedford

Neo Performance Materials Inc. - President, CEO & Director

* Rahim Suleman

Neo Performance Materials Inc. - Executive VP & CFO

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Conference Call Participants

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* Frederic Bastien

Raymond James Ltd., Research Division - MD & Equity Research Analyst

* Mark Neville

Scotiabank Global Banking and Markets, Research Division - Analyst

* Scott Douglas Fromson

CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst

* Stephen C.A. Harris

GMP Securities L.P., Research Division - Head of Research

* Yuri Lynk

Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst

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Presentation

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Operator [1]

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Good morning. My name is Jodi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Neo Performance Materials Inc. Second Quarter 2019 Earnings Announcement. (Operator Instructions) Thank you. Ali Mahdavi, you may begin your conference.

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Ali Mahdavi, Neo Performance Materials Inc. - Capital Markets & IR Executive [2]

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Thank you, and good morning, everyone. Today's call is being recorded. A replay will be available starting tomorrow in the Investor Center of our website located at neomaterials.com.

Speaking first today will be Neo's President and CEO, Geoff Bedford. Rahim Suleman, Neo's Chief Financial Officer, will then provide additional details regarding the company's Q2 2019 financial performance. Finally, we will open the call to questions from analysts only.

Please note that some of the information you will hear during today's presentation and discussion will consist of forward-looking statements, including without limitation those regarding revenue, EBITDA, volume, gross margin, other income and expense measures and future business outlook. Non-IFRS financial measures will be used during this conference call.

Further information regarding Neo's use of non-IFRS measures is available in Neo's Q2 2019 earnings press release, which is available on SEDAR and on our website at neomaterials.com.

Actual results or trends could differ materially from those discussed today. For more information please refer to the risk factors discussed in Neo's most recent financial filings, which were filed on SEDAR earlier today, and are also available on our website.

Neo assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. Financial amounts presented today will be in U.S. dollars.

Let me now turn the call over to Geoff Bedford for opening remarks. Geoff?

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Geoffrey R. Bedford, Neo Performance Materials Inc. - President, CEO & Director [3]

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Thanks, Ali, and welcome, everyone. During the quarter, we made progress across a number of fronts despite a challenging and uncertain macro environment. We've recently announced the acquisition of Asia Mag, an important strategic step for our Magnequench business. We made further efforts to reduce costs and to increase efficiencies across our operations globally, such as closing our Rare Metals facility in Utah and consolidating those operations in our Canadian facility.

We also continue to make progress in our efforts to reduce inventories globally. In Q2, consolidated sales volumes were up over the prior year period and are higher year-to-date. However, as expected, consolidated revenue, net income, adjusted net income and adjusted EBITDA were all lower for the quarter and in the year-to-date.

There are several factors that contributed to this and Rahim will explain those on today's call. Quarter-to-quarter volatility is a recurring part of the business landscape in which we operate, and we've been through these macro cycles before in our more than 20 years in this business. Importantly, from a strategic perspective, Neo remains extraordinarily well positioned in markets that are growing long term, markets like vehicle electrification, industrial automation, consumer electronics, energy-efficient lighting, air and water pollution control and superalloys. Much of the sales growth we are seeing in our key high-margin product line is in fact occurring in this rapidly expanding markets.

Before I discuss this further, let me hand it over to Rahim to provide details on the quarter. Rahim?

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Rahim Suleman, Neo Performance Materials Inc. - Executive VP & CFO [4]

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Thanks, Geoff. As noted, Neo saw some expected declines in revenues, margins and income in the quarterly period. We'll try to put these declines in context with current period cycles and volatility and provide some context as how these changes have impacted quarterly results versus longer-term performance.

First a quick summary of the higher-level metrics. On a consolidated basis in the quarter, volumes increased to 3,490 metric tons from 3,396 tons in the second quarter of 2018. Revenue of $101.7 million compared to $110.4 million in the prior year period. Operating income was $5.8 million, which compared to $12.3 million in Q2 of 2018.

Net income totaled $2.3 million or $0.05 per share. The adjusted net income totaled $5.2 million or $0.13 per share. That compares to adjusted net income of $12.5 million or $0.31 per share in the comparable period of 2018.

For additional context for the first 6 months of 2019, adjusted EPS works out to $0.33 per share. And on an adjusted EBITDA basis, the company netted $12 million, which compares to $17.9 million in Q2 of 2018.

It's easier to put these details in context if we go over them on a segment-by-segment basis. So let's starts with Magnequench. In the Magnequench segment, for the 3- and 6-month period ended June 2019, volumes decreased 12% and 8.7%, respectively, and revenues were down $14.8 million and $22.9 million, respectively, compared to the same periods in the prior year. It is notable that the revenue decline is actually much larger than the volume decline. So we should speak about each of these in turn.

Magnequench volumes continued to be adversely impacted by a general slowdown in economic activity in several market segments, including automotive as well as customer inventory adjustments, which we anticipated and discussed at the end of Q1. A significant amount of this volume decrease occurred in some of our legacy and longer running programs and in anticipated customer inventory adjustments. However, exclusive of these inventory adjustments, Magnequench continues to see growth related to newer products and technologies, including traction motors for hybrid and electric vehicles as well as programs that are still ramping up to full production levels. There are several new products that Magnequench has introduced over the past few years that we believe will continue to see growth and market penetration. Demand for these products is largely driven by the growth in precision and efficient motors and the increased utilization of Magnequench magnetic materials in these motors and on a per vehicle basis.

Magnequench is uniquely positioned to capitalize on the growing number of electric motors used in any of internal combustion, hybrid and electric vehicles. As we have noted before, the market for electric motors in the automotive sector was $30 billion in 2017 and is forecasted to grow at a relatively robust 12.6% compound annual growth rate through 2022.

With respect to the quarter's revenue decline and aside from volumes considerations just discussed, Magnequench revenue was also impacted by the change in material cost inputs on a year-over-year basis. As we've discussed in the past, Magnequench passes through variable input costs to its customers, albeit on a lagged basis. As these costs were lower in Q2 2019 than they were in Q2 2018, Magnequench would lower its selling prices through this flow-through mechanic and hence record less revenue.

Operating income in the 3- and 6-month periods of 2019 was $6.2 million and $15.6 million, respectively, which compares to $11.4 million and $24.8 million, respectively, in the comparable periods of 2018.

Adjusted EBITDA was $8.3 million and $19.2 million for the 3- and 6-month periods for 2019 compared to $13.4 million and $28.9 million in the corresponding periods last year. Adjusted EBITDA was affected by the lower volumes, which affected both margin and overhead absorption in this period as well as the timing impacts from Neo's input cost pass-through mechanics, which primarily impacted the 2018 comparative results period.

A rapid change in rare earth costs in the latter half of 2017 had a lagging pass-through effect, which translated into higher selling prices and higher margins in the last quarter of 2017 and into the first 6 months of 2018. Rare earth input costs and associated pass-through pricing have been relatively more stable in 2019 at least through May of 2019. This commodity pass-through mechanism protects Magnequench's margins in the longer term and it allows Magnequench to focus on value-added activities, but it does create short-term volatility.

We should also point out that the 2018 volatility generally ends in Q2 2018 and the balance of 2018 had more stable commodity pass-through impacts in both price and costs.

In the C&O segment, for the 3 months ended June 30, 2019, revenue was $38.5 million compared to $36.7 million for the corresponding period of 2018, an increase of $1.8 million. And for the 6 months, revenue was $82.1 million compared to $81.9 million for the corresponding periods in 2018, an increase of $0.3 million.

Q2 operating income was $3.7 million compared to $3.8 million in the same period of 2018, a decrease of $1 million -- $0.1 million. And operating income for the 6 months ended June 30, 2019, increased to $10.3 million from $5.9 million in the corresponding period, an increase of $4.4 million.

C&O adjusted EBITDA for the quarter was $4.9 million compared to $5.2 million in the 3 months ended June 30, 2018, a decrease of $0.3 million. And year-to-date adjusted EBITDA was $11.9 million compared to $8.7 million, an increase of $3.2 million.

Our three-way catalyst business saw incremental growth year-over-year and that came in spite of the general slowdown in automotive markets. However, this growth was offset by a decline in our diesel catalyst products due to market dynamics related to diesel, which we have discussed previously. I think at this point it would be fair to say that we have largely worked through this diesel dynamic now and we would expect to see quarter-on-quarter growth as we expect -- and we expect that the year-over-year impact will be diminished going forward.

We remain bullish on the long-term prospects of auto catalyst, given increase in customer demand and government requirements for vehicles that emit fewer emissions. Softer rare earth prices in the first half of 2019 prior to June caused a lagging impact to C&O because of the higher cost of inventory relative to current selling prices and that had a negative impact on margin in the first half of 2019.

As I mentioned, the segment was able to offset this to a degree through the timing of high-value spot sales in the quarter and the year-to-date period, which had a positive impact on operating income and EBITDA compared to the prior period. We did see an increase in rare earth prices in June 2019, and should this continue we would expect to see some benefits from this going into Q3.

In our Rare Metals segment, revenue in the quarter was $25 million compared to $21.3 million in the prior year period, an increase of $3.7 million. Year-to-date, revenue was $46.6 million compared to $44.1 million in the prior period. Operating loss for the 3 and 6 months ended June 2019 was $0.4 million and $0.2 million, respectively, a decrease of $1.5 million and $3.9 million as compared to the prior year period. The operating loss in the 3 and 6 months ended June 2019 was driven by a $1 million impairment of assets recorded from the closure of the Rare Metals' Utah facility.

In addition to this impairment, the segment also recognized restructuring and other costs of $0.8 million. A substantial portion of Utah's business has or will be transferred to the segment's operation in Peterborough, Ontario, which Geoff just mentioned, which already houses the balance of the gallium business, resulting in additional synergies and efficiencies. Neo expects to complete the transfer and closure activities in the first half of 2020 and expects to see immediate operating and financial benefits after the transfer is complete. The Utah facility was a modest-sized facility with $3.2 million in annual sales and nominal EBITDA.

Adjusted EBITDA in the quarter was $1.8 million compared to $2.5 million in the same period of 2018, a decrease of $0.7 million. And for the 6 months ended June 30, 2019, adjusted EBITDA in the segment was $3 million compared to $6.3 million, a decrease of $3.3 million. The Rare Metals segment was positively driven by increase in hafnium products sales to both new and existing customers. However, a continuing decline in pricing for tantalum-based products offset these gains given that raw material used on hand for processing was purchased at previously higher prices.

The Rare Metals segment also recorded a lower cost to market charge of $0.3 million related to the write-down of the higher value tantalum inventory that we had on hand. We also saw some market slowdown in other areas like gallium trichloride business, which were related -- which are generally related to market conditions as we believe there was excess inventory in the whole value chain. We haven't lost any share or customers in this smaller area of our business and we expect the recovery to begin later this year.

Here are some additional activities and results in the quarter to note. SG&A expense in the 3- and 6-month period ended June 30, 2019, was $11.2 million and $18.5 million, respectively, compared to $11.9 million and $25.1 million in the corresponding period last year. The lower SG&A cost on a year-to-date basis relate primarily to recovery of the costs Neo incurred in the termination of the Luxfer transaction, a recovery of the value bonuses and lower legal costs associated with outstanding intellectual property disputes.

R&D expense in the quarter was $3.8 million compared to $4.6 million in the same period last year. R&D expense was $6.4 million compared to $9 million in the 6-month period. Neo continues to prioritize making strategic and appropriate investments in R&D to develop new applications for its products and to strategically position Neo to meet customers' needs for technical solutions.

Neo capitalized expenditures of $2 million and $4.6 million for the 3- and 6-month ended 2019. These capital projects include a combination of maintenance, growth and strategic capital. Prior to working capital changes this year, Neo continued to have a strong free cash flow profile, which generated $10 million in free cash flow in Q2 of this year. Neo paid $4.3 million in cash taxes in the second quarter and $6.2 million year-to-date.

Neo continues to have a strong financial position. The company's ability to generate cash from its operations in the short and long-term remains sound. We closed Q2 with $68.6 million of net cash after paying $2.9 million in dividends to shareholders and having purchased $7.5 million for 809,157 shares under our NCIB program.

In the 6-month period of 2019, Neo returned $13 million to shareholders in the form of dividends and share buybacks, while generally maintaining our net cash position. A quarterly dividend of CAD 0.10 per share was declared on August 8, 2019, for shareholders of record at September 19, 2019, with the payment date of September 27, 2019. Our balance sheet remains strong and our financial position is further strengthened by a relatively low CapEx, low long-term commodity price exposure, an efficient global tax structure and a rapid potential scalability. All of these reinforced Neo's robust free cash flow conversion rate, which stood at 83.8% at the end of the quarter.

In short, Neo's financial position remains strong. Our global team continues to improve operational efficiencies and the long-term demand trends across all of our products remain. Geoff?

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Geoffrey R. Bedford, Neo Performance Materials Inc. - President, CEO & Director [5]

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Thanks, Rahim. As we discussed during our last call, we expected the challenging and uncertain macro environment impact our second quarter.

Our customers continue to see these challenges extending through the third quarter, and we are taking active measures to reduce costs and prioritize capital spending as we work through this cycle. One such measure, as we mentioned, is the announcement of the closure of our Utah Rare Metals facility and consolidation of that production into our existing Canadian plant. This transition is expected to be completed in the first half of 2020 and will result in approximately $300,000 in annual savings.

The single largest cause of the current uncertainty in our market is almost certainly the China-U. S. trade dispute and tariffs. Fortunately for Neo, only 5% to 6% of our consolidated sales are produced in China and sold into the U.S. The U.S. is a small market for our Magnequench business and we have moved all production serving U.S. customers to our Thailand facility.

For nonmagnetics, the majority of our U.S. sales is supplied from European facilities and we are currently commissioning additional capacity for auto catalysts business in Estonia. That will provide us with ease and further flexibility.

Notwithstanding the potential impact of this geopolitical dispute on our end-market, our global infrastructure enables us to minimize the impact of tariffs on our business. In fact, we have seen year-over-year revenue growth into the U.S. compared to 2018.

Also as I mentioned, we recently announced the signing of a definitive agreement to acquire Asia Mag based in China. Asia Mag manufactures compression molded Nd-Fe-B bonded magnets. It is a small but strategic acquisition for our magnet business, and we believe making compression molded magnets is strategic for several reasons.

First, it will help us grow and expand business within our existing customers. For a number of our customers, we are currently tolling magnet production using our Magnequench powders through several Chinese magnet producers. Controlling this magnet production will allow us to deliver better and more consistent quality, improve and expedite new program development and expand our value offering to our customers.

Second, it will enable us to address segments of the bonded magnet market where we currently are not well positioned. The majority of the bonded and powder market share we do not have today is in compression molded magnets. These programs are often small in volume or bespoke in nature. Producing magnets in-house will better position us in these markets.

And finally, having magnet making know-how internally will help our magnetic powder product development efforts and will allow us to remove a middleman between us and our ultimate customer. We initiated our plan to move into compression molded market last year by installing production capacity in our Tianjin facility and we will continue with those plans at Tianjin. The acquisition of Asia Mag will expedite those efforts and expand our production footprint.

We continue to see prospects for long-term growth across all our businesses. At the heart of what we do is material science. Our strategy is simple and long-term in its focus. Identify growth markets driven by global macro trend and produce highly engineered industrial materials for those markets that are critical to performance. We execute this strategy by focusing on 3 things: building world-class technical know-how, maintaining strong and long lasting customer relationships and development partnerships and operating across a global cost-competitive manufacturing footprint. This unique combination makes Neo extremely well positioned to serve these markets and provide unique value to customers. Our robust balance sheet and cash flow generation will enable us to look for ways to build on this strategy and to continue to return value to our shareholders through dividends and share buybacks.

As I look forward, I'm pleased with where we are headed and our prospects for future growth.

And with that, let's open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Mark Neville with Scotiabank.

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Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [2]

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You touched on the sort of volatility that you're seeing, I guess, the macro, there are still some challenges. The inventory adjustments with the customers, I'm not sure if that's worked through, there's some sort of still a little bit more to go. Again you talked about some higher-cost inventory in C&O that hurt first half a little bit. So just maybe qualitatively, just help us think about Q3 and the second half, sort of where are -- the outlook that you're thinking about? Whether it's, again, sequentially, year-over-year, however you want to talk about it, just maybe -- just some of the short-term sort of outlook?

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Geoffrey R. Bedford, Neo Performance Materials Inc. - President, CEO & Director [3]

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Sure. As we're sitting here in August, looking at the third quarter, we continue to see some of the challenges that we saw in the second quarter. We have seen some -- big picture, there has been some price movements that can help C&O, hurt Magnequench based on lead lag depending on how you look out and the timing of those things. But I think generally what we saw in the second quarter, we continue to see into the third quarter and that really is across the businesses. I think we're still working through some of the tantalum challenges in the C&O business, but the hafnium business continues to be quite strong. The Magnequench, we're seeing slower demand in China and slower demand in Germany than what we would consider our typical run rate, but we're still continuing to see a number of programs that as we look out are growing, and we see continued growth there. So I think Q3 is generally the same. I think our customers right now are thinking Q4, things are starting to look better and some of the volumes coming back, but the visibility with some of the things that are going on in the world today is a bit tricky. So that would be sort of my overall analysis of it.

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Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [4]

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Understood. That's actually helpful. Maybe if I can just move on quickly to the acquisition of Asia Mag. Just want to make sure I'm understanding this correctly. There's no -- you're moving downstream, but you're not competing with customers, you're sort of just taking out some in the middle. Is that the way to think about it?

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Geoffrey R. Bedford, Neo Performance Materials Inc. - President, CEO & Director [5]

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Yes. It is correct that we're not competing with customers to any large extent. So if you think about the -- we have 70% to 75% share of the powder business. The market share that we don't have is primarily compression molded and primarily in China. And when we think about this business, it is -- you could think about 1/3 of it is sort of these smaller volume, high-margin bespoke type businesses, which we are very interested in and trying to gain share there; 1/3 of it is very low-end business that we probably will not aggressively pursue; and then 1/3 of it's sort of in the middle. And I think that the customers that we're selling to outside of China, for example, the hot deformed magnet that Daido does for Honda, this is not competing with that in any way. Injection molded is not competing with that in any way. So there is a part of our business that we sell into the compression molded business today. Some of it we're tolling, we're actually making magnets through another supplier because the customer, the end customer wants to deal directly with us. So we do not see this as something where we're competing with our customers.

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Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [6]

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Okay. And then just maybe one last one. Just on CapEx, it seems you're running a little lower. I think you talked about some sort of deficiencies there. Just maybe a number for the year if you could?

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Rahim Suleman, Neo Performance Materials Inc. - Executive VP & CFO [7]

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Yes. I mean I think previously we talked about something in the $15 million to $18 million range as we were talking about -- as we've been talking about building these additional strategic capabilities. I think with the market slowdown, we'll probably going to come in less than that. I would say it's kind of in the $12-ish million type range. I think we're cognizant on how we want to think about capacity and those types of dynamics. Longer term, I think that Asia Mag is a part of a larger strategic process. So I think longer term our CapEx will rise with reflecting growing that strategic business, but maintenance and ordinary CapEx I think will see a drop here this year and it will remain a reasonably low number overall.

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Operator [8]

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Your next question comes from the line of Scott Fromson of CIBC.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [9]

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I guess as a follow-on to Mark's question on capital deployment, is the -- with the way you see the slowdown, is the M&A program kind of delayed or curtailed for the present? Are you still seeing opportunities? Or is the focus going to be on internal investment and returning capital to shareholders over the medium term?

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Geoffrey R. Bedford, Neo Performance Materials Inc. - President, CEO & Director [10]

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I don't think the M&A pipeline necessarily has slowed. I mean at sometimes, when we go through these down cycles or these slower cycles, opportunities present themselves, quite frankly. I mean we're fortunate, we have a very strong balance sheet. And also I think that we can continue to be buying our shares, paying dividends and doing M&A just because of the way that we generate cash. So we're still actively out there looking and pursuing ideas.

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Operator [11]

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Your next question comes from the line of Frederic Bastien of Raymond James.

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Frederic Bastien, Raymond James Ltd., Research Division - MD & Equity Research Analyst [12]

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I was wondering if you could talk about the current pricing environment for rare earth, given what's happening with the China-U. S. trade dispute.

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Rahim Suleman, Neo Performance Materials Inc. - Executive VP & CFO [13]

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Yes. I think that's a great question. And if I could tell you what was going to happen in pricing, I'd be in a really good spot. But clearly, we all know that pricing has increased quite a bit since, call it, the end of May and into June, and went up for a period of time, it bounced back for a couple of weeks, it's gone back up. So it's bouncing around, I think, at reasonably higher levels than it has been for kind of the first 6 months, but not this similar levels compared to what it was for portions of last year. I don't think prices by any means are outside the reasonable range of where they are. Prognosticating is obviously a lot more difficult to do. But I think that we're -- as we said, we're bouncing around the reasonable range. It should have some benefit to C&O because we do talk about lead lag and having inventory. So most of our -- a lot of our inventory now will be underpriced relative to markets. We should see some benefits there with some lead lag implications at Magnequench too. I don't know if that was very helpful because it's really hard just to talk about kind of the general volatility, but I would say it's within the band of what's normal, but on the high end just is kind of fast change, call it.

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Geoffrey R. Bedford, Neo Performance Materials Inc. - President, CEO & Director [14]

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And just add to that a little more color. So when we saw prices run, they were -- all the reports were writing to these prices were higher, but we weren't seeing a lot moving in the market. So I think over a longer term, market prices will settle into a more regular sort of supply/demand. So that's what makes it more difficult to sort of predict it going forward, but some of these quick spikes that we saw, people will tend to sort of step back and wait and see what prices are doing. I think we're now starting to see volumes turn at higher levels, but not at the, sort of, the peak levels that we saw some of these spikes at.

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Frederic Bastien, Raymond James Ltd., Research Division - MD & Equity Research Analyst [15]

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Yes, no, that's useful. Just I wasn't sure how volatile they had been, so that visibility -- that color is helpful. Are you still active buyers of your stock at current levels? Or alternatively, is there a level you would be more aggressive?

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Rahim Suleman, Neo Performance Materials Inc. - Executive VP & CFO [16]

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Sorry, I missed the question.

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Frederic Bastien, Raymond James Ltd., Research Division - MD & Equity Research Analyst [17]

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Are you active buyers of your stock at current levels?

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Rahim Suleman, Neo Performance Materials Inc. - Executive VP & CFO [18]

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Yes. Our NCIB program continues, and in fact we continue to be active buyers.

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Operator [19]

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Our next question comes from the line of Stephen Harris of GMP Securities.

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Stephen C.A. Harris, GMP Securities L.P., Research Division - Head of Research [20]

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I just had two quick follow-ups here. On the buyback, I mean you're quite active in the last quarter. I think what you bought back, if my math is right, worked out to be about 5% of the float. Did a number of things come together to enable you to be that active? Or is that a pace you would be comfortable continuing at?

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Rahim Suleman, Neo Performance Materials Inc. - Executive VP & CFO [21]

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Well, I guess a couple of things. One is, I'm not sure about the 5% of the float because that would sound like an annual limitation, but maybe we're saying we're on pace to something to that degree. So I guess I'm going to pause or not comment specifically on the calculation, but I will comment on -- we are very active, and -- sorry, I actually missed the second part of your question.

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Stephen C.A. Harris, GMP Securities L.P., Research Division - Head of Research [22]

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Just that you would -- if you could, you would buy back at similar pace to what you have been doing?

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Rahim Suleman, Neo Performance Materials Inc. - Executive VP & CFO [23]

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Yes, I think that, look, we continue to generate a lot of free cash. We continue to have a very healthy balance sheet with lots of free cash. As Geoff said, I think all of acquisitions, share buybacks, continued dividends and internal growth kind of are on the table for us to continue to do. As you know, we have no debt. So as opportunities present themselves that will also mean that we can kind of rightsize our balance sheet a little bit as well. But I think that the continued focus is we believe that there is an opportunity to continue to use capital effectively in buying shares back, but that's not a limiting factor for anything else we would believe we should do.

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Stephen C.A. Harris, GMP Securities L.P., Research Division - Head of Research [24]

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Okay. And I guess my second question is, just overall, there's a lot of moving parts here, but as the quarters go by, your comparisons will tend to get a little bit easier. And by the sound of it, your customers are telling you that maybe by the end of the year things start to pick up. Do you think you can see an inflection point in year-over-year EBITDA later this year or do you think that is really a first half of next year event?

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Rahim Suleman, Neo Performance Materials Inc. - Executive VP & CFO [25]

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Well, I don't think it's in Q3 because I think that the markets are still slower now than they were in Q3. But looking out to Q4, I think surely that there's an opportunity to perform better than we did last Q4. So I think from this -- from outside of Q3 I think that surely that we believe long-term growth on a year-over-year basis is on there, is what we would be expecting to see. And as I mentioned, we do expect to see some of that Magnequench volatility kind of going away, so -- I mean it's interesting that I say that because when rare earth prices have changed here in June, we'll see a 2019 dynamic of volatility, but again, I think that fundamentally, we see longer-term growth still.

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Operator [26]

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And our next question comes from the line of Yuri Lynk of Canaccord.

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Yuri Lynk, Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst [27]

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Just want to follow up on the Magnequench discussions. I mean your ASPs are down quite materially as we speak. What impact, if any, is that having on spurring demand or spurring some replacement of other materials in the value chain?

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Geoffrey R. Bedford, Neo Performance Materials Inc. - President, CEO & Director [28]

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So -- look, I think that when you look at lower prices for our products, it does allow us to compete in some of the higher-end ferrite or other types of applications. I think the sinter products we compete against are basically the same composition, so we're -- they're seeing similar dynamics. So really it's some of the ferrite replacement program. So I think it does provide opportunity, but I also will say that customers tend to think about these things over a bit longer term, but there is no question that when a program comes up to be bid on and prices are lower, it is helpful in our ability to sort of -- how people think about those programs and putting our product into that application.

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Yuri Lynk, Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst [29]

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Okay. And are you guys okay with how you've moved the selling prices over the last couple of months and quarters in response to the move in rare earth prices? I mean are you okay with the gross profit per kilogram that you've been generating the last quarter or 2?

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Geoffrey R. Bedford, Neo Performance Materials Inc. - President, CEO & Director [30]

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Well, I think the movement in prices, as we talked about, is sort of a mechanic, and we were benefiting from that movement in last year, in '18, quite frankly, just the timing on some of those things. So what's happened with pricing is really based on the mechanic that we are happy with, like we do think that over the period of time, that mechanic passes through the underlying commodity risk to our customers and that -- we then are focused on the value added. Sometimes, we win with that and sometimes, the timing works against you, but over the long term I think that it sort of levels itself out.

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Rahim Suleman, Neo Performance Materials Inc. - Executive VP & CFO [31]

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Yes. And in terms of where we are kind of presently, I think, I guess particularly to Magnequench, prices have been relatively stable -- it's a relative word, but relatively stable, but I think volumes have been low. So I think we're not -- there's no benefit. I'll say it this way. There's no benefit in our current results from lead lag pricing dynamics and there's no benefit from volume absorption. So I think that presumably you don't plan on benefits from lead lag. As we said, it's strategic for us more than anything else. I think we do benefit from volatility generally because of the way that we can kind of buy and manage the supply chain, but I think we could see more opportunity as volume increases that that should help from an absorption perspective.

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Yuri Lynk, Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst [32]

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And was the spike in rare earth prices in June, I mean was that -- has that been sustained enough that you're out actively raising selling prices in Magnequench?

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Rahim Suleman, Neo Performance Materials Inc. - Executive VP & CFO [33]

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So if you look at it in the 2 businesses, so Magnequench is, for the vast majority of the customers, rather formulaic. So those prices all did increase on July 1 and some customers will change again on August 1. The challenge for Magnequench I think going into next quarter is the computation of that lead lag is something -- is -- goes back a period of time, like the past quarter's average price, that type of dynamic. So the prices that we reset on July 1 might be a little bit lower than current market prices, just because of that dynamic. So Magnequench might feel in this upcoming quarter a little bit of compression there. At the same time, as I commented, C&O would probably see some benefit from that same dynamic.

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Yuri Lynk, Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst [34]

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Okay. I mean just overall, relative to last quarter, how do you feel about the back half of the year? It sounds like a little bit more caution in the tone, just want to make sure I'm reading that right.

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Geoffrey R. Bedford, Neo Performance Materials Inc. - President, CEO & Director [35]

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Well, I think certainly Q3, we are thinking that it will be similar to what we saw here. When we look -- we're sitting here in August, when we look at what the Magnequench volumes or auto catalyst, et cetera, we're feeling that it's going to be similar to what we saw in Q2. I think we are sort of hearing that Q4 would be an improvement from that, but again, that's sort of the general tone as we sit here today. And I think that underlying that, when we look at the overall business, we think when we look out into 2020, what's going on this quarter, we're seeing some adjustments, we're seeing some headwinds, but the programs that we're really counting on are continuing to grow, and we're continuing to see growth in our auto catalyst business and our -- and the key programs we're focused on in Magnequench. So I think that certainly for Q3, we're thinking more of the same, but as we look out in 2020, we continue to see growth in these businesses.

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Rahim Suleman, Neo Performance Materials Inc. - Executive VP & CFO [36]

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And just to add to that, Yuri, we've talked about -- we don't see SAR -- at least for our automotive part of our segment, so catalysts and probably half of Magnequench -- we don't see SAR as a benchmark. We see ourselves growing at rates much higher than SAR because of kind of fundamental architecture changes, motor changes and those types of dynamics. But in the shorter term, 3 months, 6 months, 9 months, whatever, in a shorter term you're on the programs you're on. So when SAR decreases, it doesn't matter if you're on a new program or a new vehicle, you're going to see decreases in volume there. So I think that our customers, other folks in that industry have talked about a slower back half, slower front half than they would have expected, a slower back half than they would have expected. We will probably in the shorter term feel the same dynamic because as our -- as Geoff said, we'll have some programs that continue to grow through that, but they will still be growing at a lower rate than we would have expected because if there's less vehicles that get sold that does impact it.

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Operator [37]

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There are no further questions at this time. Thank you for joining. This concludes today's conference call. You may now disconnect.

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Ali Mahdavi, Neo Performance Materials Inc. - Capital Markets & IR Executive [38]

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Thank you.