CDTi Advanced Materials Inc

OTC:CDTI

Earnings Call Transcript

[Operator]

Good day, ladies and gentlemen, and welcome to the Clean Diesel Technologies Inc. First Quarter 2018 Financial Results Conference Call. [Operator Instructions]. As a reminder, today's conference is being recorded. I would now like to turn the call over to Moriah Shilton from LHA Investor Relations. You may begin.

[Moriah Shilton, Investor Relations]

Thank you, Mark. Good afternoon, and thank you for joining us today. By now, you should have a copy of our results press release, which crossed the wire this afternoon following the close of the market. A copy of the press release, along with other company information may be found on the Investor page of the company's website at www.cdti.com. If you would like to be added to the distribution list or if you would like any additional information about CDTi, you may call LHA at 415-433-3777. Speaking on the call today from CDTi are Matthew Beale, Chief Executive Officer; and Tracy Kern, Chief Financial Officer.

Before I turn the call over to Matthew, I want to emphasize that some of the information you will hear during management's discussion today will consist of forward-looking statements that are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed in today's results press release, in the comments made during this conference call and in the risk factor section of the company's Form 10-K and other reports and filings with the Securities and Exchange Commission. Management does not undertake any obligation to update any forward-looking statements.

Now I would like to turn the call over to Matthew Beale. Matthew?

[Matthew Beale, President, CEO & Director]

Thank you, Moriah. Good afternoon, ladies and gentlemen, and thank you for joining us today. Following completion of our strategic repositioning in 2017, CDTi has made important strides towards achieving its aims of sustainable long-term profitability and growth in its advanced materials business. While Tracy will discuss our first quarter financial results in greater detail, the benefit of our focus on higher-margin businesses, as well as the reduction in operating expenses and working capital is very evident.

An important objective in CDTi's repositioning as an advanced materials company was to achieve scalability for its technology. The $21 billion global catalyst industry underpins the production of approximately $8 trillion in end products or roughly 10% of global GDP. CDTi's novel patented functional materials have applications in roughly 50% of the global catalyst market.

Leveraging significant technology and know-how derived as an emission catalyst manufacturer, CDTi's initial vertical for commercialization is advanced materials has been the vehicle exhaust emissions market. CDTi's catalyst materials can be integrated seamlessly with the existing automotive catalyst supply chain and production process. This is a key factor enabling mass adoption of our technology that is delivered in the form of functional powders.

Our materials significantly reduce the cost of exhaust catalyst by reducing the amount of expensive platinum group metals, or PGMs, needed to achieve emissions requirements. PGMs are often 50% of the total catalyst cost. With some $240 million vehicles produced globally in 2017 across passenger car, motorcycle and commercial vehicles, this represents $1 billion addressable market for CDTi's materials. China and India alone account for some 30% of the market opportunity, and as we will discuss in a moment, have begun to deliver critically important initial traction for CDTi's technology.

Our strategy in the initial automotive vertical is based on 2 commercial pathways. The first is automotive vehicle application programs, pursued in partnership with catalyst manufacturers and vehicle OEMs. The second is fundamental next-generation catalyst development programs with global OEMs and other institutional partners.

Our vehicle applications efforts to date have been focused on OEM programs in China and India, with additional aftermarket catalyst materials initiatives in North America and Europe. Initial geographic prioritization is driven by several factors, including the market sizing we just mentioned. China and India alone represented an addressable market for CDTi's materials approaching $300 million.

In addition, these markets have well-developed automotive ecosystems, with a significant presence of domestic catalyst manufacturers and vehicle OEMs competing with their global counterparts. Our ability to equip domestic manufacturers with the technology needed to challenge the global catalyst producers is driving our initial commercial traction in these markets.

Following two years of technology validation and business development, CDTi's commercial achievements to date include the following, we made our initial shipment of catalyst materials to a Chinese catalyst manufacturer in late 2017; we achieved our first production launch in China on a FOTON medium-duty truck with a QuanChai engine in April of this year; and we developed a commercial pipeline, representing initial annual revenue opportunities of $13 million from an available wallet of approximately $65 million annually.

We are currently involved in validation in over 20 commercial opportunities across more than 10 OEMs, either directly or indirectly, through catalyst manufacturers. As these points highlight, we have made progress in positioning our technology for adoption in domestic automotive markets in China and India.

As we are engaged with the large cross-section of the Chinese and Indian automotive markets, each additional certification and production launch will drive confidence in our technology among automotive OEMs, just as China and India transition to highly demanding new emissions regulations in 2019 and 2020, respectively. These technically demanding new standards require significantly higher levels of PGM to meet emissions requirements, greatly increasing the value proposition of PGM reduction our catalyst materials can deliver.

We mentioned the presence of a highly advanced domestic automotive ecosystem as being a key factor in our prioritization of the Chinese and Indian markets. Our ability to maximize penetration of this combined $300 million potential market opportunity for our catalyst materials requires that CDTi equip itself to serve customers and deliver product locally.

We expect to complete arrangements for the local manufacturer of our catalyst materials in China and India by the end of 2018. Our success in doing so will equip us to convert pipeline opportunities to translate into significant product volumes in 2019 and 2020, with the introduction of China VI and India via VI emission standards, respectively. The achievement of this milestone would create the foundation for exponential growth from this initial thrust of our commercialization efforts.

The second commercial path we are pursuing involves fundamental next-generation catalyst development with OEMs and other institutional partners. While longer term in nature, these initiatives have transformative implications for adoption of CDTi's technology as we've involve its inclusion of the catalyst design level, resulting in deployment across vehicle platforms globally.

We currently have three major development programs underway. And as mentioned in the press release, we expect to have our technology selected by one such program by the end of the year. In addition to the advanced CNG catalyst program with the University of Houston we announced recently, our counterparties in these projects include a top global passenger car OEM and a leading global commercial vehicle OEM.

The third and final commercial focus for CDTi is in verticals outside of the automotive exhaust market. In particular, we perceive important applications of our Spinel technology in the emerging fuel cell and advanced battery markets. We expect to complete a development partnership in this area before the end of 2018. Overall, we are excited about CDTi's potential growth trajectory as a catalyst materials provider. This is based on the following considerations and expectations for 2018 and beyond, volatile PGM cost and challenging new emission standards make CDTi's catalyst materials highly relevant in the growing global footprint market. With initial customer shipments and production launches, we believe that CDTi is now a year away from a meaningful commercial ramp in the vehicle applications market.

Local manufacturing capabilities in China and India should accelerate our traction among key OEMs and drive penetration of this $300 million addressable market. Longer-term development programs will continue to mature during the balance of 2018 and provide visibility into future revenue streams that would multiply CDTi's business. The opportunity to deploy our technology in verticals outside of the automotive exhaust market will also begin to take shape in the coming months. We look forward to reporting our progress as these milestones are achieved during the balance of the year and beyond.

And with that, I'd like to turn the call over to Tracy for a review of our financials.

[Tracy Kern, CFO & Corporate Secretary]

Thank you, Matthew. For the first quarter, as compared to the same period in 2017, total revenue was $4.9 million compared to $8.2 million. Coated catalyst revenue was $2.7 million compared to $4.7 million. The first quarter 2018 is the last quarter in which CDTi would generate revenue from shipments to Honda.

Emissions control systems revenue was $1.8 million compared to $3.3 million. Technology and advanced materials revenue was $0.4 million compared to $0.2 million. Gross margin was 35% compared to 17%, primarily due to product mix which reflected the 2017 sale of our DuraFit product line and final shipments to Honda. Total operating expenses in the first quarter of 2018 were $2.2 million compared to $3.8 million in the first quarter of 2017 due to decreases in sales and support staff resulting from the sale of our DuraFit product line and the completion of our Honda production.

Net loss was $0.3 million or $0.02 per share compared to a net loss of $3.1 million or $0.20 per share in the first quarter of 2017. Cash at March 31, 2018, was $2.1 million compared to $2.8 million at December 31, 2017. In terms of guidance, we expect 2018 revenue of approximately $12 million. With the implementation of local production capabilities in China and India, we believe that a growing pipeline of customers will begin to generate material revenue beginning in 2018 and accelerating into 2019. In addition, as Matthew stated earlier, we expect that our materials technology will be selected by at least one global OEM for inclusion in next-generation exhaust systems, and we will have establish at least one partnership for deployment of our Spinel technology in fuel cell and advanced battery applications during the year.

We would now like to open the call for questions. Mark?

[Matthew Beale, President, CEO & Director]

Thank you, Mark, and thank you, everyone, for joining us today. We look forward to reporting our progress towards meaningful commercial traction in our exciting advanced materials business in the coming months. Thank you, everyone, for joining us. Bye, bye.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.