CDTi Advanced Materials Inc
OTC:CDTI
CDTi Advanced Materials Inc
OTC:CDTI
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Earnings Call Transcript
Earnings Call Recording
Other Earnings Calls
Good day, ladies and gentlemen, and welcome to the CDTi Advanced Materials, Inc. Fourth Quarter 2017 Financial Results Conference Call. [Operator Instructions] And as a reminder, this conference call is being recorded.
I would now like to introduce your host for today's conference, Ms. Moriah Shilton of LHA. Ma'am, you may begin.
Thank you, Sandra. Good afternoon, and thanks everyone 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 Web site 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 Advanced Materials, 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 Factors section of are company's Form 10-K and other reports and filings with the Securities and Exchange Commission. Management does not take any obligation to update any forward-looking statements.
Now I would like to turn the call over to Matthew Beale. Matthew?
Good afternoon everyone, and thank you for joining us. In 2017, we completed the realignment of our business to support our advanced materials and specialty coating business. CDTi enters 2018 with a dramatically reduced fixed cost base and a technology provider model that is highly scalable, streamlines our infrastructure, supports higher margins, and improves profitability. To reflect our transformation in March, we changed our corporate name to CDTi Advanced Materials, Inc. With the sale of our OEM replacement business in late 2017, the CDTi business perimeter has changed significantly. We are a far smaller and more focused technology provider with admittedly lower starting revenues but exponentially greater growth and margin potential as we focus on the high value-add elements of catalyst solutions.
Our initial vertical as a technology provider is the automotive catalyst market. We see $1 billion market opportunity in this segment alone based on an industry-wide PGM spend of some $10 billion annually. As a provider of low PGM catalyst solutions the commercial outlook for our unique technology is supported by a highly favorable macro environment, beginning with the dramatic upward movement in commodity prices for key cost inputs, including palladium and rhodium. Led by China, India, and the U.S. the regulatory environment including increasingly strict emission standards is also a significant driver for penetration of our technology in these markets.
Our technology provides a solution to the increased use of PGMs, that conventional catalyst formulations require to achieve emission standards. Our technology has important applications outside of the traditional automotive catalyst market as well. In particular, we are pursuing opportunities to develop partnerships and alliances in the fuel cell market, the development of which is necessary to any meaningful global proliferation of electric vehicles. However, near-term revenue growth and cash generation will come from the automotive catalyst market, and deploying our advanced materials technology successfully in key markets such as China and India.
As mentioned in our financial guidance reflecting CDTi's new perimeter. We continue to provide specialty emissions products in traditional markets that will support our growth efforts in advanced materials. These specialty applications include retrofit oil and gas, mining and materials handling, and are expected to contribute $8 million to $10 million in revenue during 2018. Also as mentioned in our financial guidance, we expect that our advanced materials business will continue to gain traction and visibility during the second part of 2018, and early 2019. This business is beginning to take shape, and we expect a number of financial and non-financial milestones to define our progress in the coming months.
The advanced materials business includes two primary areas of activity for CDTi with different revenue profiles. One area is the application of our technology for specific vehicle platforms. These initiatives are applications engineering intensive and require very close collaboration with manufacturing and coding partners. While initial development and validation work requires investment, a significant portion of that investment was undertaken during 2017. It also allows for visible multi-year revenue streams on vehicle platforms. The other area of activity for CDTi is our fundamental research initiatives undertaken with industry and institutional partners.
Different from the application-specific activities we just described, these projects are aimed at the fundamental design level and have the opportunity to change basic catalyst architecture. While revenue visibility is clearly longer term in this area, the potential for CDTi is enormous. In terms of nearer term revenue trajectory we are currently developing vehicle level solutions for motorcycles, passenger cars and commercial vehicles. Our initial focus, as mentioned, is on China and India as these regions offer the most immediate revenue opportunities for our advanced materials technology. Together with our partners we have developed exciting revenue pipelines in each of these markets.
The pipeline of automotive applications in China and India has grown significantly over the last 12 months and positions CDTi to be a technology provider for China VI and BS VI vehicles in China and India respectively. While these vehicle platforms will grow primarily in 2019 and beyond, we have also developed solutions for customer applications with near-term revenue implications in the motorcycle and commercial vehicle segments. In China, we are currently in durability testing for two high-volume motorcycle platforms that would represent over one million vehicles a year. We are also in durability testing for motorcycle platforms in India that offer similar volume potential.
In the commercial vehicle segment, we shipped our first ton [ph] of powder into China at the end of 2017, and are currently awaiting OEM vehicle certification that can be leveraged to pursue multiple light duty commercial vehicle platforms. To fully convert on the opportunity set represented by China and India however, CDTi will need to secure local product manufacturing in these markets. There are a variety of reasons for this, including product cost reduction and margin enhancement, and the ability to serve technically demanding customers with local resources. Simply put, success with OEMs in China and India, of the scale we aspire to, requires a robust local product delivery capability.
Now during the later part of 2017 and into 2018, we have made significant progress in developing partnerships that will allow CDTi's projects to be manufactured locally in China and India. By the end of 2018 we expect to have completed operating arrangements that align our interests with local manufacturing partners in both of these markets. Doing so will vastly increase our ability to gain widespread market adoption of our technology. We will keep you posted of our progress in this regard in the coming months.
Switching to our fundamental research initiatives, which as discussed a moment ago, are broader in scope and have implications for fundamental product architecture. We continue to make progress in our development project with a major global OEM that by deploying our Spinel technology could change the way three-way catalysts are designed for passenger cars. We've also just recently begun a development program with an institutional partner regarding catalyst design for CNG-powered engines. More details of this exciting opportunity will follow in coming weeks. Our goal in 2018 is to make continued progress in the execution of our near and longer-term projects for deployment of our low PGM catalyst technology. We will continue to provide updates as critical milestones are achieved in both vehicle applications and fundamental research initiatives.
Now, I'd like to turn the call over to Tracy for a review of our financials.
Thank you, Matthew. For the fourth quarter of 2017 as compared to the same period in 2016, revenue was $4.9 million compared to $8.6 million. The decrease in revenue was driven by the wind-down of our catalyst coating operations with Honda, the sale of our DuraFit product line in the third quarter of 2017, and the maturation of our retrofit market.
Gross margin was 21% compared to 11%. 2016 included $1.1 million of inventory write-offs related to the implementation of CDTi's strategy to outsource the company's manufacturing. 2017 margin continued to be impacted by significant overhead costs that we anticipate will be lower in 2018 as we finish aligning our facilities to our current business model as a provider of enabling technology to the emissions catalyst market.
Total operating expenses were $2.4 million, compared to $9.3 million in the fourth quarter of 2016. 2016 included a $4.7 million write-off of goodwill. SG&A decreased $1.4 million due to decreased headcount and reductions in professional and consulting fees. The $686,000 of severance costs in 2016 related to the closure of our Canadian facility. Operating loss was $1.4 million compared to $8.3 million in the same period last year. Net loss was $1.4 million or $0.09 per share compared to a loss of $7.6 million or $0.69 per share. For the full-year 2017, as compared to 2016, total revenue was $28.4 million compared to $36.8 million for 2016. Gross margin was 21% compared to 22% for 2016. Total operating expenses for 2017 were $11.8 million compared to $23.7 million in 2016, which included $2.6 million in severance and other charges relating to CDTi's corporate restructuring, as well as the goodwill impairment of $4.7 million.
Net loss for 2017 was $5.3 million or $0.34 per share compared to the net loss of $23.5 million or $3.84 per share in 2016. Turning to the balance sheet, at December 31, 2017, we reported cash of $2.8 million compared to $3.3 million at September 30, 2017, and $7.8 million at December 31, 2016. As of the close of the third quarter of 2017, CDTi is completely debt free. In terms of guidance, we expect to generate $10 million in revenue from our traditional coating and emissions control businesses. We anticipate our powder-to-coat sales to begin to gain traction later in 2018 as our current customer programs in India and China prepare for production in 2019. Gross margin is expected to range between 20% to 30% as the company continues to exit its manufacturing operations in its pursuit for its long-term 40% gross margin target.
The cost control resulting from the impact of business realignment and fixed cost reduction will enable us to keep our operating expenses at approximately $8 million for the year. With that, I will turn the call back over to Matthew.
Thank you, Tracy. In summary, we entered into the year with a dramatically reduced fixed cost base in a technology provider model that is highly scalable, streamlines our infrastructure, supports higher margins, and improves profitability. We're supported by revenue from our baseline business as we build long-term highly profitable revenue streams in our emerging advanced materials business. As 2018 progresses we will continue to report on our achievement in important customer and operating milestones in support of both our vehicle applications business and fundamental catalyst design initiatives with more sweeping implications.
With that, we'd like to open the call for questions.
[Operator Instructions] Our first question comes from the line of Matt Koranda with ROTH Capital Partners. Your line is now open.
Hey guys, good afternoon.
Good afternoon.
The gross margins in Q4, I just wanted to see if you guys could give a little bit more color on sort of the mix of revenue that you saw. And was that the most impactful item to gross margins. Because I was under the impression that sort of the underlying powder revenues were coming from a place of better margins, but was there some sort of low or kind of final no-margin sales in the coated catalyst division that you could call out here?
Yes, it's primarily the - it's the wind-down of the Honda business we had. We continued to have some of our emission control -- for a partial period, we had some of our emission control systems revenue as well at a lower margin. But I think the biggest impact, and you can see the downtick in revenue, is of course the overhead absorption which is what's really driving margins at kind of a gross profit margin level, a fully allocated overhead type of cost metric, it's driving it down. And we'll continue to manage those costs out as the year progresses. It's just there's a lag between getting cost out of our manufacturing overhead and what the mix and manufacturing requirements are, that's really the primary factor.
Okay, got it. And I want to cover a couple of pipeline opportunities in the advanced materials business if I could here. So in China, could you just give an update on the status of the Kailong powder shipments? I think you guys said on the last call, December or January. And it sounded like on the prepared remarks that you alluded to a ton of powder shipment going into China. Was that what it was for, and could you just give us an update on the status there?
Correct. Our first shipments were interestingly in the diesel market, and that's -- Kailong is an important partner of ours as we pursue the commercial vehicle segment there. We talked also in the prepared remarks about a vehicle certification. We would expect that to continue to ramp or to grow that particular path to market through that partner. So it's obviously a very promising development situation for us right now at least in the commercial vehicle segment.
Okay. But in the commercial vehicle segment, is that through durability testing or is that durability testing still ongoing…?
Yes, we have the engine certification, and now in addition we need the vehicle certification. The great thing is that with the engine certification you still need to have the vehicle certification which is largely -- it's the engine certification which is the more difficult one to achieve, the other one is more of bureaucratic process. The important thing there is that we can really leverage that cert [Ph] on the engine side – [indiscernible] an engine that's used in other vehicle applications. So that's an important win for us. And really the first sort of bragging rights that we have or that ability to being on a production vehicle on a commercial vehicle in China. So it's a very important milestone for us.
Okay, got it. And remind us the revenue opportunity that would be associated with the total -- sort of all the programs that are associated with that.
Specifically in the commercial vehicle space or -- I think broadly we've talked about – we’re targeting -- for the time being, we're targeting about two million vehicles a year with our pipeline. The diesel numbers are a lot lower in the sense that you just don't have the same sort of volumes that you have in an automotive, in a passenger car market that is 24 million vehicles a year. The commercial vehicle numbers are about four million a year. The per unit revenue number though is higher than the passenger car and obviously more than the motorcycle market.
Okay. I'm just trying to get a baseline here because I think in the last couple of calls, at least last call you guys mentioned there were three programs associated with Kailong that would essentially put you on your way toward roughly a million dollars in powder revenue in China. Is that still the case?
Absolutely, that continues to be the case, and those are the metrics that we had laid out as -- and I think we talked about it in the last call as it relates to that commercial vehicle segment and that partnership and the path to market as we see it, that the next important milestone that will give us a lot more concrete visibility there and certainty of revenue is getting this vehicle cert.
Okay. And you didn't do an update on timing of when you expect the cert -- the vehicle cert?
It really could be any time now. I think all of the -- we think it's a matter of weeks rather than months here.
Got it. Okay, maybe I'll -- just in the interest of time I'll move it on to questions around your outlook. Can I just clarify something, I think in the release I think it had a $10 million number for the revenue expectations for the core business in 2018, and then I think in your prepared remarks, Matt; you said $8 million to $10 million. Which one should we be using?
Yes, I know. It's that's what we expect from the business. There will be a little bit of Honda in the first quarter. That's likely that'll weigh it down. That's the only reason that I provided that sort of -- the indication. But the total for the calendar year will be -- it'll be that $10 million number. That's our expectation.
Okay, so use the $10 million as the official number.
Yes.
The $8 million to $10 million was -- sorry what did you say the $8 million, because if you had incremental Honda it shouldn't be higher than the $10 million?
No, it's just in terms of the -- there are some puts and calls in there also with some licensing things that we have, but $10 million is the right number to use.
Okay, got it. And then, I guess, how much Honda is in that $10 million? Is there anything incremental from Honda or is that potentially just we should be stripping Honda completely out?
It's going to be a small -- it'll be a fraction of what it is for the -- that it has been traditionally. It was already well down, and that's again something that impacted -- you asked the question about gross profit margins, but in the fourth quarter it certainly was down materially it'll be -- it's going to be -- I don't have absolute final numbers here, but it'll be a fraction of what it was in the fourth quarter in the first quarter. It's not going to be a huge contributor.
Okay. Can you give us an idea of the split between coated catalyst and ECS just in terms of how to split up that $10 million for 2018?
Yes, I would expect it's really almost all of it is going to come from ECS. There'll be some portion -- a minor portion, but it's going to be 90% is going to come from the emissions catalyst, the emissions control systems with the way the revenue grouping as we reported.
Okay, got it. And then I guess you alluded to being able to provide more additional information regarding sort of the technology in advanced materials revenue at a later date. I guess the question that I had was, I guess, it suggests maybe there are some binary things in the pipeline that may be coming through. Could you just give us a little bit of additional clarity on sort of why wait to provide that additional guidance?
Yes, it's around -- we've got -- there are some binary things in terms of certifications and test results and OEM selections that are coming. And I think it important as we talk about the advanced materials and we develop the -- set the right expectations for how the business is going to ramp and how it's going to grow, we want to be as granular as we can. I think that the kind of Kailong type of information is where we want to be at. But we want to -- I think there's enough happening here that by the time we get to the first quarter I think we'll be able to provide a better and more specific type of an indication on how the business is evolving, what's '19, what will be annualized opportunities by the end of '18, what's kind of calendar revenue, and how we see the ramp happening.
Okay, got it. So I guess fair to say, Q1 is kind of the date that you guys are going to be comfortable sharing more data on that?
Yeah, we'll have a lot -- we'll have a number of additional data points that will allow us to speak, provide more color and just greater sense of what those commercial milestones specifically will be with some of our partnerships as we get into the second and third quarters.
Okay, got it. And the $8 million in OpEx number that you guys gave, how much should we sort of be allocating towards R&D versus SG&A?
I think the traditional mix will continue to hold. SG&A was higher than -- it was higher than I think in the quarter -- in the fourth quarter was higher, we're targeting a number that's substantially lower than that. Obviously we're coming in -- we ended about $2 million. We'd expect the R&D to be probably 750-800 of that number, something like that.
Okay. Okay, got it. And then I guess, just lastly on sort of the outlook, I guess if I do the math and take $10 million in revenue at midpoint of your gross margins less $8 million in OpEx assuming all that's cash, which I mean maybe not all of that is, I get to a loss of $5.5 million maybe back the non-cash items that I can at least see from the outside, which is roughly $500,000 of D&A. Obviously you guys are set-up to get some incremental advance materials revenue at a higher margin. So that should pass a loss a little bit, but even with some credit, I'm still kind of getting somewhere down in maybe a loss of $3 million to $5 million or so. What's the strategy for the balance sheet, and how do we show up cash and make sure we're able to make the investments needed in the business, could you give us some sense for that?
Sure. And I think you -- obviously the way that we talked about the $10 million from kind of the base businesses that we have, you know, on top of that, we're going to be layering in the -- obviously what we expect from the powder business for the rest of the year, and it will be at higher margins that are traditional business and will help if that becomes an important part of the mix will help us get closer to that target gross profit margin.
I think our cash and the resources, I think you're about right with kind of some of the non-cash numbers that sounds accurate; burn is clearly down if you kind of look at how the numbers have pulled together, but the math as you laid out and the algebra is that in the sense of coming to kind of an accounting breakeven, we've -- the burn is down but if we were -- if we would need an additional north of $5 million to be on an accounting, certainly north of $5 million more than that probably north -- closer to $8 million for us to be breakeven on an accounting basis at sort of an operating income level, that's clear.
I think as we get into the next quarter, and we'll discuss this on the call as we have greater visibility for what the investments have been and what the requirements are going to be to support the ramp of the Advanced Materials business you will have a -- it will be a far -- kind of a clear indication of what the needs are going to be.
Okay. Lastly, you mentioned I think in both the release and the prepared remarks, but you talked about a local manufacturing strategy that's needed in China and India. So, could you clarify, I mean, is that powder manufacturing in those localities? What exactly are you going to be manufacturing there? How do you protect the IP? And then, what are the -- what's essentially the rough cut in terms of capital expenditures that's needed to develop that?
Right. So, we are talking about powder, and that is -- we need to be in those markets and close to our customers. There's a variety of reasons. One is the kind of the economics of how powders are manufactured, and as we look at manufacturing locally, we can take a lot of cost out as well. We're currently outsourcing entirely our powder and some of our engineering materials. There's plenty of opportunity there to take cost out of the product and increase margins. It's just very important particularly in the OEM and this vehicle-specific application that we're pursuing in one side of the business to have that local manufacturing capability.
Is there a lot of labor in powder manufacturing? I mean, what enables the cost savings, or is that just shipment -- shipping and freight, I mean what's the real advantage?
It's primarily the processing cost and it's -- there is some labor involved, but it's more -- you know, there's energy and other things as calcining and mixing. And it's a fairly automated process, but remember right now we are in essence having third parties do that for us, and there is lot of cost in -- fundamentally there's quite a bit of cost in an outsourcing model that at least locally therefore some of that we would be able to take out locally.
Okay. And then I don't think we touched on -- sorry if I missed it, but just sort of capital needs for the development of those facilities?
And again, the partnerships we are pursuing with partners that have -- obviously have a manufacturing capability that's relevant or analogous, and that there's not a significant amount of incremental CapEx, if you will, that's required, that have some linkage with the automotive business. We're getting close on these things will get them in little more detail. We wouldn't expect a lot of CapEx. Again, what we really bring to the table is technology and product and customers and pipeline. And I think with these manufacturing opportunities do ensure that we can deliver on the one hand, which is the biggest issue with a lot of our local OEM customers, even in the geopolitical environment it's a bit of a challenge right now. But we will have partners that largely will be contributing product and technology and our partners the kind of the local infrastructure and manufacturing, and that's really the way that discussions are going.
Okay. So just to sum it up, essentially there wouldn't be much if any incremental capital outlay for you guys for this -- you're leveraging the physical footprint and equipment of your partners and you're providing the technology?
Yes. Our partners are willing to invest in this product line. They see growth and opportunity here as well. So, this is not total manufacturing. And that's -- we're looking at here, you know, that kind of ties into your other question about how you project IP, the way you project IP is by aligning interests with your partner.
Right, okay, got it. I will jump back in queue. Thanks guys.
Thanks.
Thank you. And that does conclude today's Q&A session. And I would like to turn the call back over to Mr. Matthew Beale for any closing remarks.
Okay. Thank you again everyone for joining us today. We look forward to keeping you all updated on our progress. Goodbye.
Ladies and gentlemen, thank you for participating in today's conference. This does concludes the program, and you may all disconnect. Everyone have a great day.