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Good morning. My name is Tiffany, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Neo Performance Materials 2018 Third Quarter's Earning Call. [Operator Instructions] Thank you. Ali Mahdavi, you may begin your conference.
Thank you, and good day, everyone. Today's call is being recorded, and a replay will be available starting tomorrow in the Investor Center of our website located at neomaterials.com. Speaking first today will be Neo President and CEO, Geoff Bedford; Neo CFO, Rahim Suleman, will then provide additional details of our Q3 and year-to-date 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 and other income and expenses 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 Q3 2018 earnings press release, which is available on SEDAR and on our website, again, 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 quarterly reports, 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 turn the call over to Geoff Bedford for opening remarks. Geoff?
Thanks, Ali, and welcome, everyone. Let me first summarize our consolidated results for Q3 and year-to-date 2018 and provide some commentary. Neo generated $114.2 million in the quarter, which was a slight decline of 1.9% from Q3 of 2017. Net income was $8.8 million or $0.22 per share. Adjusted net income totaled $8.7 million or $0.22 per share, and adjusted EBITDA of $16.7 million was essentially flat to Q3 2017. For the first 9 months of 2018, revenue was $344.8 million, a 6.2% increase over the same period in 2017. Net income totaled $36.8 million or $0.92 per share compared to $27.1 million or $0.67 per share in the comparable period of 2017. Adjusted net income totaled $31.4 million or $0.78 per share compared to $32.1 million or $0.79 per share in the same period of 2017. Adjusted EBITDA increased 3% to $53.9 million from $52.3 million in the comparable period of 2017. Our balance sheet remains very strong, and we closed the quarter with cash and cash equivalents of $69.3 million. We paid a total of $8.9 million in dividends to shareholders in the 9 months ended September 30, 2018. Through the first 9 months of 2018, we saw year-over-year earnings growth in both our Magnequench and Rare Metals segments. For our Chemicals & Oxides segment, we saw a return to prior year run rate levels and an end to expedited freight costs in our auto catalyst business. However, our third quarter earnings were negatively impacted by lower volumes and margins in this segment's rare earth separation business as compared to the prior year and the first half of 2018. Notwithstanding the weaker performance in our separation business, in this past quarter, we continued to see growing demand for our products, driven by the multiple macro trends that we have discussed many times: vehicle electrification; the global adoption of increasingly stringent air and water emission standards; consumer demand for lighter, smaller and smarter electronic devices; growth in automation; increased utilization of superalloys; and rising demand for more environmentally friendly, energy efficient and sustainable technologies. There is one common thread that runs through each and every one of these trends, that is the growing need for the kind of functional rare earth and rare metal materials that Neo produces and is exceptionally well positioned to provide. You can see this illustrated particularly well with the magnetic products produced by our Magnequench segment. Magnequench is a global leader in the production of magnetic powders for bonded and hot deformed magnets. It continues to capitalize on demand growth, driven by, among other things, vehicle electrification and increased utilization of more efficient motors. Magnequench magnetic powders are integral to the increasing number of smaller electric motors that go into virtually in all modern automobiles today, whether those are used in fuel pumps, power steering systems folding mirrors, trunk door lifters and many other areas of the vehicle. Not only are more vehicle models utilizing these smaller and more efficient electric motors, but their intensity of use per vehicle is also growing. In fact, we see increasing content per vehicle as a very large growth driver for our magnetic materials going forward.In nonautomotive markets, growth continues to be driven by consumer demand for more powerful and energy-efficient products and by government regulations that are mandating greater energy efficiency. One example is the market for electronic expansion valves used in high-efficiency air conditioners. This technology leverages the magnetic strength and the moldability of our Neo powders to ensure a very small motor that controls the flow of the refrigerant in the air-conditioning unit. The precise control is crucial to allowing the unit to operate only when required for cooling. That translates directly into improved energy efficiency, reduced power consumption and lower energy cost for consumers. China is a leader in pursuing stricter energy consumption requirements on air-conditioning units, and this market has been a rapidly growing one for Magnequench. Another example that I had mentioned before is the large market for water circulation pumps used in home heating, particularly in Europe. Magnequench powders enable these systems to meet increasingly stringent EU regulations related to energy efficiency and greenhouse gas emissions. The high quality and reliability of our magnetic powders have enabled us to become the market leader for such application. These trends helped to drive increases in year-over-year revenue, operating income, EBITDA and adjusted EBITDA for Magnequench in both the quarter and year-to-date. We were particularly pleased to see year-over-year growth in adjusted EBITDA of 23.9% and 19.3%, respectively, in the quarter and year-to-date period. This is reflective both of strong secular growth in multiple global markets for these materials as well as strong operational performance in our Magnequench business. We continue to work closely with our customers to develop new and higher-performing materials to improve the efficiency and performance of their products.In our Rare Metals segment, volume and revenue increased by 46% and 33%, respectively, in the third quarter of 2018 as compared to Q3 of 2017. This was driven largely by the segment's higher production capacity in our Silmet facility and because of higher product pricing. Year-to-date, Rare Metals succeeded in increasing volume, revenue, operating income, EBITDA and adjusted EBITDA as compared to the first 9 months of 2017. In particular, we are seeing higher performance in growth trends in the tantalum, niobium and gallium sectors, although this was offset somewhat by lower customer demand for our hafnium-based products. In our Chemicals & Oxides segment, auto catalyst performance returned to prior year run rate levels in the quarter. While market demand is lower for our diesel emission catalyst products, that has been offset by continuing sales growth of our gasoline catalyst products. Overall, the global emission catalyst market is forecast to grow at a 5% to 10% compound annual growth rate for light- and heavy-duty vehicles combined between now and 2025. The premium freight costs we are incurring for auto catalyst as a result of the process upgrades at our Zibo production plant, which totaled $4.2 million in 2018, are now behind us. And finally, recent court decisions regarding auto catalyst intellectual property disputes have been positive for the company. Those decisions have reinforced our freedom to operate in rapidly growing emerging markets for these materials, most notably China. We continue to see growth opportunities in that very large auto catalyst market. The rare earth separation side of our Chemicals & Oxides unit was down compared to Q3 of 2017. A rare earth price spike in Q3 of 2017 resulted in a very strong quarter in that prior period. However, our separation business was also impacted this quarter by lower sales into higher-margin geographies and by lower volumes in general. This part of our business tends to be more spot purchase based, and volumes and margin will fluctuate quarter-to-quarter. However, we have seen no fundamental change in the outlook for this business. We remain committed to our long-term strategy to developing the most advanced magnetic auto catalyst and other rare earth and rare metal-based functional materials. We're also proud of the fact that many of our functional materials help our customers' products deliver increased energy efficiency, improved environmental performance and greater sustainability. Those benefits are very important to our customers as they are to Neo. Looking ahead, the global growth outlook for these materials is strong. With the combination of our deep customer relationships, product development capabilities, cost-competitive manufacturing and global reach, Neo is uniquely positioned to capitalize on this future growth. And with that, let me turn the call over to Rahim for additional detail on our Q3 and year-to-date financial performance. Rahim?
Thanks, Geoff, and good day to everyone. Our Magnequench segment continue to see growth in many of its end market applications, including the traction motors for hybrid and electric vehicles, micro motors for vehicles, factory automation, appliances and other motor applications. In both the 3- and 9-month periods of 2018, Magnequench drove increases in revenue, operating income, EBITDA and adjusted EBITDA as compared to the corresponding periods of 2017. Volumes were marginally down in the quarter and year-to-date related to specific end markets, including lower-end products sold to domestic Chinese applications. Revenue in the quarter for this segment was $54.5 million, a 0.9% increase over Q3 2017. Year-to-date, revenue was up by 15.8% from the prior year, largely due to increased selling price from higher rare earth input costs, which, as we have discussed in the past, are subject to material pass-through provisions. As Geoff noted, adjusted EBITDA for Magnequench for the quarter was $12.5 million, a 23.9% improvement from the same period in 2017. And year-to-date, adjusted EBITDA was $41.4 million, a 19.3% improvement from the same period in 2017. This was primarily due to the continuing demand growth in downstream markets, strong operating performance, strategic purchases of materials and the impact of selling prices being adjusted on a lagged basis. In short, Magnequench's core business continues to show strong growth and margin trends. This underscores that the value-add nature of these highly-engineered products are in growing demand by our customers.In the C&O segment, revenue for the quarter was $41.4 million compared to $50.2 million for the prior year quarter, a decrease of 17.7%. Volume was 1,985 tonnes, down from 2,265 tonnes in the same period 2017, a decrease of 12.4%. And adjusted EBITDA for the quarter was $5.2 million compared to $8.3 million in the prior year, a decrease of 36.8%. For the 9 months ended September 30, 2018, C&O revenue was $123.2 million compared to $134.7 million for the corresponding period in 2017, a decrease of 8.5%. Volume during the period was 5,768 tonnes compared to 6,733 tonnes in the corresponding 9-month period, a decrease of 14.3%. And adjusted EBITDA was $13.9 million compared to $22.9 million in the prior year period, a decrease of 39.3%. Auto catalyst production and profitability showed strong improvement in the third quarter compared to earlier in the year. And our premium freight charges ended in the second quarter of the year, as Geoff mentioned. On a year-to-date basis, volumes in our auto catalyst business are largely unchanged from the prior year. In 2016 and '17, we benefited from strong growth in the diesel catalyst volumes, and we were overweight in that production compared to gasoline and hybrid catalyst products. However, as market trends shifted in the past year away from diesel and towards gasoline and hybrid vehicles, our diesel catalyst volumes slowed by about 20% compared to the prior year, while our gasoline or three-way catalyst volumes grew at a relatively rapid clip. This shift means that our overall market weighting is now more in line with market trends, and this should enable us to have further overall growth in this business going forward. Notwithstanding the $4.2 million of premium freight incurred earlier in 2018, our overall margins in this segment remain healthy and steady. In the rare earth separation business, overall profits this year declined from the previous year, primarily in this third quarter. As Geoff mentioned, rare earth prices rose dramatically in Q3 2017, and this enabled us to capture additional margin opportunities. In 2018, rare earth market pricing has generally been steadier and did not provide for additional margin capture in the current period. Q3 '18 did see lower volumes and margins than even earlier this year.As we have previously discussed, it's difficult to look at trends in rare earth separation on a quarter-to-quarter basis rather than over the longer term. This is due to the nature and timing of production campaign runs, product mix changes, spot purchasing pattern changes by our customers. Overall, the rare earth separation business remains an important and profitable business for us. In short, C&O's financial results in 2018 do not compare favorably to 2017. But our auto catalyst business remains a key engine for growth, particularly with three-way auto catalyst products, which generate strong margins. Premium freight charges appear to be behind us, and we see some very positive developments in the second half of 2018 and going forward.In our Rare Metals segment, revenue for the quarter was $22.4 million compared to $16.8 million in the prior year quarter, an increase of 33.2%. Volume increased to 149 tonnes compared to 102 tonnes in the same period of 2017, an increase of 46.1%. Adjusted EBITDA was $1.8 million compared to $2 million in the 3 months ended September 30, 2018, a decrease of 10.6%. For the 9 months ended, revenue in the segment was $66.5 million compared to $56.3 million in the prior year period, an increase of 18.1%. Volume was 423 tonnes compared to 324 tonnes in the same period of 2017, an increase of 30.6%. And adjusted EBITDA in the period was $8.1 million compared to $7.2 million in the same period of 2017, an increase of 12.3%. Our Rare Metals segment continues to benefit from the additional capacity brought online in our Silmet plant, and we have seen some strong growth there. The segment's focus on product innovation continues to yield returns. For example, a unique and innovative hafnium-based product we developed with a customer drove strong volumes and very attractive margins for several years until the customers' purchasing pattern shifted with other competitors entering the space. This underscores why Neo continues to emphasize ongoing product innovation in partnership with our customers, and why are we focus on the development of higher-margin, higher value-add products through our positive developments regarding innovative and engineered products in our pipeline today, and we look forward to advancing those efforts into products that our customers need. On a consolidated basis, let me note the following additional results and activities in the quarter and year-to-date. SG&A expense was $11 million and $36 million, respectively, for the 3- and 9-months ended September 2018, and that compares to $15.3 million and $42.4 million in the corresponding periods in the prior year. Lower SG&A costs relate primarily to lower legal costs associated with outstanding intellectual property challenges, and lower SG&A costs generally given that 2016 restructuring follow-on efforts were completed in earlier 2017. And also the fact that certain SG&A costs were project-based, and may be higher or lower in any given period.For the quarter, R&D expense was $4.2 million, consistent with the 3 months ended September 30, 2017. For the 9-month period, R&D was $13.2 million compared to $11.4 million in the corresponding period of 2017, an increase of $1.8 million. Neo continues to prioritize making strategic and appropriate investments in R&D to develop these new applications for its products and to strategically position Neo to meet customers' needs for technical solutions. Certain R&D costs are project-based and may be higher or lower in any given period.CapEx was $2.5 million and $8.8 million for the 3- and 9-month periods September 2018, respectively, compared to $3.2 million and $7.5 million in the comparable periods of 2017. The majority of these capital expenditures relate to capital projects performed at the Zibo, Tianjin and Silmet facilities. These capital projects included a combination of maintenance capital, growth capital and strategic capital. Cash taxes paid in the quarter were $4 million with $10 million paid year-to-date. As Geoff noted, we closed the quarter with $69.3 million in cash on hand after paying a $2.9 million dividend to our shareholders. And year-to-date, Neo has paid $8.9 million in dividends to its shareholders. We have approximately $27.1 million available under credit facilities with nominal accounts (sic) [ amounts ] drawn. Prior to working capital changes in this year, Neo continues to have a strong free cash flow profile, generating $14.2 million in cash flow in Q3 of '18 and $45.1 million in the 9 months ended September 30, 2018. Our working capital has increased significantly in 2018, which has affected our cash balances, some of which is permanent and some of which is due to timing. Volumes were generally higher, primarily in Rare Metals where the inventory cycle is longer and the costs of inventory are higher. These costs will generally be passed into our selling prices in the future. Our auto catalyst supply chain has now been refilled. And in addition, the company purchased and transferred additional inventory into the U.S. in advance of any potential tariff issues. And finally, our accounts payable is lower due to the cash cost being paid out associated with our IPO in December of 2017. Despite this 2018 increase in working capital, our view to our cash flow profile remains consistent. Over the longer term, we generate a significant amount of cash through operations, with lower sustainable working capital growth rates and low CapEx profile and an efficient cash taxes. Our quarterly dividend of CAD 0.095 per common share was declared on November 13, 2018 for shareholders of record at December 20, 2018. As part of our ongoing normal-course issuer bid, Neo purchased and canceled 146,869 shares with an aggregate disbursement of $1.9 million. Our financial position remains strong. Neo's global team continues to improve operational efficiencies across all 3 business segments, and demand across our product suite remains very good.Ali?
With that, operator, let's open the call for questions, please.
[Operator Instructions] Your first question comes from the line of Mark Neville from Scotiabank.
Maybe just, first, on the Chemicals & Oxides and the volumes. Just want to make sure I'm understanding, all that -- so all the declines are due to the separation business, is that right? The auto catalyst is flat?
Yes. Compared to Q3 last year, yes.
Yes, okay. And then on the -- maybe in the separation, you talked about the timing of the production campaign. Does that actually have an impact sort of on the sales? I mean, I guess, I'm just thinking maybe you have inventory you can sell. So I'm not sure sort of what exactly, if that's impacting, or what exactly happened?
So it does impact the sales. But you're right, I mean, we certainly have inventory to sell. Making sure you have the right inventory, it's easier when you're running than when you're campaigning. But I would say that the campaign effect was part of it, but not the bulk of it. It had more to do with just the timing of when customers are needing these products and sort of the geographies of where we're selling them.
Okay. On the auto catalyst, you mentioned that you were overweight diesel, but I don't think -- I think now you're more aligned with industry. I'm just curious, being overweight to diesel, is that just more of a function sort of the programs you're selling into or the actual formulation of your product, or your actual product itself?
So it really was driven by the customers. So we're -- as we've talked about, we're selling and qualified with all the Big Four and working with them on various programs. And there was a couple of diesel programs that we were working with on a particular customer. They were good volume programs for us, and they got impacted as we saw the diesel demand globally coming off.
Okay. So the expansion you're doing at Zibo was sort of agnostic to whether it goes into diesel or gasoline? Or is it -- or is the actual product geared towards for one market?
The capacity can be -- is agnostic. So I mean, the product we make is specific for a particular application, but we can make both diesel in 3-way through all of our lines that we own. That we have today.
Okay. Maybe just last one on the working cap. Rahim did touch on it, but I'm just trying to -- just gauge how much of this is volumes versus maybe higher prices for rare earths or rare metals? And just on the volume, how much of it is maybe lower sales on auto catalyst or just rebuilding in auto catalyst versus some more strategic investment? Just trying to get a gauge for sort of if any of this comes back.
Well, certainly some of it, we believe, does come back. If I were to kind of rank them in terms of the largest increases of working capital, I would say filling the auto catalyst pipeline is probably the largest increase in the working capital. And then second would be the additional material that we have in the Rare Metals business that -- and we think we have a lot of material in the Rare Metals business, and we think some of that will come back in a relatively short period of time. I don't know if that means 30, 60 or 90 days, but I certainly -- it's a shorter time frame for that to turn and return to more normalized levels. And then there's, of course, the inventory that we put into the U.S., which I would say in normal course, that would come back. But I would say we're also thoughtful about our customers' strategies as well and how they are looking to manage their businesses with respect to continued discussion of tariffs in the U.S. So we'll be responsive and supporting our customers in that environment.
Your next question comes from the line of Yuri Lynk with Canaccord Genuity.
Just want to follow up on some of Mark's question on C&O. Will we see -- and just thinking about the fourth quarter, will we see a recovery in the separation business, or is -- because it looks like we're lapping some -- a pretty easy comp in terms of volumes last year, so just trying to get my expectations for this quarter.
Yes. I mean, I think from our perspective, we would expect to see improvement in the fourth quarter. But keeping in mind that we thought that Q3 of last year was a very, very strong quarter for rare earth separation. The rare earth -- as we talked about, the rare earth separation business is a little more spot based, Yuri. So -- and typically, we -- when prices are moving, rare earth prices are moving, that's typically when we see that we're able to capture more margin because we're typically able to be thinking about how we buy low and sell high. So when we see prices moving, that's when we do well. So a lot of the answer of where we'll see separation comes back to what rare earth prices are going to do, and then how we can manage our way through that.
Okay. And will we see the capacity expansion at Zibo? Does that -- do those volumes come online in the fourth quarter as well?
No. Likely not in the fourth quarter. We -- I mean, we have capacity at Zibo in place that we can be growing. So we don't need that line for the fourth quarter. So we're not expecting to see volume out of that line in the fourth quarter. So we do expect to see the auto catalyst business continue to grow, but we're not constrained in capacity in terms of that particular line. We can continue to grow on existing product lines.
And we'll see that start-up some time in '19?
Yes, although I'll add some color to that. I think that -- so the short answer is that, that's our expectation. But we also are -- as you know, we're adding capacity -- auto catalyst capacity in our European facility as well. And I would say that our thinking on rare earth producing product is evolving. We think that there is strategic benefit to our customers; our customers are thinking there is, if we have more volume being produced in Europe as opposed to China. So I will say that we're putting more focus and looking at that production capacity in a bigger way than we were this time last year.
And then what's driving that? Is that patents? Is it trade flow?
It's not patents as much as it's just the global geopolitical environment today, and people think that being supplied out of multiple locations is a positive thing.
Okay. I just want to double check, there's been -- there's some news out of Volvo catalytic converter recall. Any impact from that?
We haven't seen any impact from that.
Your next question comes from the line of Scott Fromson with CIBC.
Just a question on what you're seeing on the ground in China. Are you seeing any change in tone of discussion, so this particularly in respect to the trade war that's ongoing, and any government policy response?
We have not. We were in China 3 weeks ago. We met with MIIT and asked them questions around that, and there wasn't any indication that they're looking to be changing their policies at this time to us. But we are seeing -- we are hearing that they're thinking about changing VAT in a way for some of the products that are being affected and coming into the U.S. and providing sort of rebates to those. But that has not been fully -- we don't -- that hasn't been fully published, and it's really just being talked about at this time.
Okay. And could you -- you've talked about the changes in the working capital and your cash position. Can you talk about the acquisition pipeline? Or are you more likely to put capital into your own existing plant?
I think all of the above. I mean, we continue to look for acquisitions. We think there's opportunities for us to expand our business through acquisitions. But we also are investing in our current capacity, in our existing businesses as well. So our balance sheet, as you know, we're still -- we have a very strong balance sheet and no debt. So we think that we -- when good opportunities come along, whether it's investing in our own business or looking at acquisitions, we have the ability to execute on both.
And we are continuing to invest in our business every day. I mean, our CapEx profile is low, but that's a function, I think, of having the adequate bricks and mortar in place, being in China with the specially designed equipment that kind of we have, enables us to really cost effectively continue to add capital. So we are continuing to invest internally, and I think acquisitions remains an additional opportunity on top of that.
Okay. That's great. Just one more quick one, kind of more on a housekeeping level. SG&A expenses, you spoke about them being down due to lower legal costs and some efficiencies. But they seem to be a little bit higher at the operating segment level. Is that indicative of allocation changes or something else? Or am I just modeling incorrectly?
I would say that there are certainly not any allocation changes. And I can't think of significant variability that's happening at the segment level beyond the IP legal costs are in the C&O segment. They're not at corporate segment. They're in the C&O segment. Beyond that, there isn't anything in particular that's moving there.
Your next question comes from the line of Stephen Harris with GMP Securities.
Just a follow-up to a couple of the other points that have been raised. On the cash position, do you think by the end of Q4 you'll get back to being flat with next year or just trying to get a sense of the magnitude of some of these permanent investments. Do you think you can be down year-over-year on your cash position?
I mean, I'm not going to give you a cash position forecast, where we're going to be at the end of the year. But what I will say is, I mean, I would say, fundamentally the profile doesn't change. When we generate the EBITDA, we're not seeing a significant change in our CapEx profile. We're not seeing a significant change in our cash tax profile. I think we will see some not continued increases in working capital. And whether that's a 3-month comment or whether that's a longer term comment, I think that they apply in both circumstances. We're not seeing working capital increases the way that they have increased in 2018. The caveat to kind of the immediate what happens kind of in the shorter period of time is, as I said, we're still thinking through, again potential tariff dynamics and how we want to think through that. And inventory planning for us does sometimes have campaign opportunities or opportunities to buy. So we're hesitant to talk about very short term type outcomes, but I don't think any of these types of statements change our longer term profile of any opportunity. I think that it's important, though, to differentiate that. In our view, the 2018 behavior is not the long-term sustainable behavior of working capital. We think it will normalize, and certainly grow at much, much smaller rates than what we saw this year.
Great. And if we can turn to the -- maybe go into a little more detail on the M&A side. Can you talk a little bit about how all of the changing dynamics out there are affecting your thinking on M&A? You mentioned suppliers interested in the sources for materials that are not necessarily from China on the auto catalyst side. Is that affecting your thinking about whether or not -- where you might look to make an acquisition? And in general, all of the sort of increased gloom and doom out there about the outlook in China and general economic outlook, is it -- is that having any impact on overall acquisition prices? And you've commented the things that you wanted to buy would be mostly too expensive, but are you seeing any change in that? Or are things starting to look like they're priced more fairly?
So I would say, specifically around China, no question, we've seen some of the values in the markets coming down, which would -- you would think be reflected in what an acquisition would look like. Then back to, are we thinking about the world differently given what's going on from the tariffs, et cetera? I think the answer is no. I mean, long term, we're thinking about these things in a very long-term nature. We, on the one hand, we're fairly concentrated in China, so diversification globally would be positive. But the flip side of that is we're very well skilled and equipped to go and do an acquisition in China, that maybe we can take advantage of some of those skills. So it's really, Steve, it's more about the target and where we see the opportunity for that business long term is how we're thinking about it.
Okay. But so it's fair to say that prices in China are down, but you're not necessarily seeing that worldwide?
Yes. I mean, I think that's a difficult question to answer, it depends on, specifically on the asset. But certainly, the markets we've seen coming off in China, and I think prices -- we've seen that in value in China, yes.
Your next question comes from the line of Frederic Bastien with Raymond James.
Dyson announced its intention to start producing electric vehicles in Singapore. Can you comment on this initiative by a key client of yours? And also the potential for Neo to participate in these efforts?
Yes. So I don't -- we can't comment specifically on anything that we're working on with -- on a product development basis with customers. But you're right, I mean, Dyson, we have a relationship with them. I think that from my point of view, it's more telling about just where the markets are thinking and where they're heading. And as you know, for us, the electric vehicle and the traction motor, we own a unique product that doesn't require heavy rare earths that we thought -- that Honda thought was strategic. And we see no reason why other makers of these types of motors wouldn't have the same view. So we'll be out there in the market for all producers demonstrating our product and our product's ability, and we think we have a very good product there.
And I'll just add to that, that again, without speaking individually about individual customer efforts, I would say that there's -- in terms of the -- there is the traditional OEMs that we have a good line of sight in some -- in opportunities and development work with. But then there's the nontraditional, as you mentioned, Dyson, I would say that there's other nontraditional ones as well that we have relationships with and that we do business with. So the opportunity is quite broad in terms of continuing the motor development in a number of areas.
Okay. And building on that, can you comment on, I guess, the growth of your MQ3 powder in the traction motor specifically? I recall you providing some sort of metric year-over-year. I think your sales had increased to $10 million in 2017 from $3 million through 2016. Is the trajectory of your sales growth in that particular side of the business similar this year as you experienced last year?
Yes. I mean, we don't comment specifically or often I guess on specific end markets. But I would say, certainly, in that end market, we grew significantly. We're not growing 330% again this year, obviously. But in terms of quantum, absolutely. In terms of outlook, in terms of where we see that business and that opportunity with platforms that we are on, I mean, all this is, of course, as many platform-specific subject to customer take rate, but we feel pretty good about the platforms that we're on, and we certainly are seeing really strong growth there that certainly sounds like the numbers that you talked about.
Okay, cool. Switching gears to a whole different end market, water treatment and water circulation. They appear to be 2 areas of great potential for Neo, and you've obviously got some traction there. Would you mind quantifying your current exposure to these end markets and where you see this exposure going to in the next 5 years or so?
Sure. I mean, I think that for water treatment, our exposure there still is small. We would still quantify that as we're still working through the product development. We're selling to customers roughly a dozen today. But we see, again, that is an opportunity for us as we look out sort of 3 years. Our view is that, that has a lot of potential for growth, kind of similar to what we are thinking about in the AGV world. There's lots of volume growth ability there into that water treatment product. But as of today, it's a relatively small product for us.
And what about your pumps, water circulation and all that?
Water circulation pumps, I mean, we are the market leader there, so we have very high market share. So it's more a question of the circulation pumps and where they're mandated. So Europe, there's a lot of regulation there. We're seeing a lot of volume selling into Europe today. There's talk about similar types of regulation moving in to Asia and China. If something like that were to happen, you would see that would be a significant growth opportunity for us. But for that one, because of where we have market share today, that really is more about seeing other markets taking up that technology.
[Operator Instructions] Your next question comes from the line of Mac Whale with Cormark Securities.
Just when you -- one of the things you talk about a lot about your business is being so close to your customer, and I'm wondering on the C&O side of things whether we're seeing a bit of a downside to that? Did you -- could you take us through what ability do you have to pivot when you might disagree on the volumes or the outlook for a particular segment, whether you can in mid-sort-of-course, be able to adjust and find more or different buyers for the material you're making? I'm referring basically to the diesel side of things. Clearly, that's something we all saw sort of coming. But I'm wondering whether -- if you're so embedded with your customer, you just can't pivot and you have to kind of go along with what you've decided to pursue. Or can you take us through what you're thinking about in terms of that particular business and what might be happening structurally in there?
Yes. Absolutely. So I think, again, my view is that it's always better to be as close to the customer as possible. As we talked about, there's sort of the Big Four that we're selling to today. And I think it's kind of a short-term, long-term question. When you're in the short term, we're qualified on a program and that's what we're selling into. And if that program does well or doesn't do well, we will -- our volumes will move accordingly. But longer term, we have the -- that requires a qualification effort. So we certainly have the ability. I mean, we've seen our diesel falling off in the last year and our three-way catalyst picking up, and that's because we have the ability to qualify other products and do other applications with the same customers. So I think on a short-term basis you're on the platforms you're on. But as we look out into next year and following years on to that, we have lots of flexibility to be thinking about where we want to be qualifying our products. It's going to be in the same 4 customers, generally. But we are trying to make sure that we're across various technologies and platforms to try to mitigate being too concentrated in one particular area.
But I think it's worth bearing in mind that we have posted well-above market growth rates for -- going back 3 to 5 years. We've been growing this business at a really, really [ high-clip ] level. And that includes both three-way and diesel. In the last kind of 2 years, diesel has really moved for us. That's how we became, as we said, market overweight. But I don't think that, that should be interpreted to dismiss the importance of three-way for us and our growth rates in three-way as well. So I think when you look at the overall growth rates of the catalyst business, both sides have been really high. Diesel, particularly high. Diesel is changing the dynamic there. But I would say that our three-way is still above-market growth rates.
Okay. And then on the three-way, what's your view on the need to continue to innovate in that space is pretty strong because of the shift to hybrids? Is that something that you see as actually accelerating, say, versus last year or 2 years? Could you be able to tell that from what your customers are asking you to work on?
So we certainly see the continued product development effort in three-way and diesel, quite frankly. And that's regulation-driven as much as anything else, and then the technology around the engines themselves. You said hybrids typically have a smaller engine that runs hotter. So I think from our perspective, we continue to see our customers spending time and effort and working with us on qualifying new and improved technologies as we look out over the next mid-term, long term, frankly, from our point of view.
And Mac, I think it's absolutely fair to say that we're having specific conversations with customers about the specific dynamics of what the next generation of hybrids would look like and what changes in the formulations would be necessary to support that. So I would say there is a very close dynamic with customers on product development with ideas going back and forward on what happens in the continued evolution. So we're currently not in a position where we're going to be, call it, receivers of the impact of technology change. We're, I would say, on the front end of our discussions with customers on that.
Okay. Just turning to Magnequench. We saw in the spring a lot of opportunity to continue to get more the value-added processing from you guys bringing in-house some of the downstream processing. How is that progressing? Is it as you expected? Is there anything that's maybe accelerating or not as you would -- as you sort of thought back in spring?
Generally, I think it would be as expected. So -- and there's 2 aspects to that. One is sort of the work that we're doing internally ourselves, and I would say that's come on exactly as we would -- sort of planned and hoped. And then the other is the demand from the customer side, and I think -- sort of qualifications those types of things, and I think there might have been a few delays in that, so we might be pushed out a bit. But generally, it's as we would normally expect and moving in the right direction for sure.
Okay. And then on the traction motor, or on it, sort of EV exposure, if you were to get a second customer, how does your capacity utilization look? I mean, just take us through what that would look like in terms of where your capacity to deliver on? Because those are big -- they can be big and lumpy sort of chunks of business, which are nice to have. But I'm just trying to get an idea of where your utilization is.
I would say the production process is different than some of our other powders. But I would say we certainly have the capacity or the ability to expand capacity cost effectively to continue to support customer growth in both our facilities. We have the 2 Magnequench manufacturing facilities, both will have the technical expertise, the footprint and the capability to continue to grow. We don't build a lot of white elephants within our capital plan, like we don't build a lot of kind of product-specific lines. So we are able to utilize similar equipment, but just with, call it, changes in the process specifications that are going through that piece of equipment. And then there are some other kind of ancillary pieces that are different program to program or powder to powder, but I wouldn't say that that's a major change in the way that we would approach it. So certainly, we are capable to grow in a very effective way from a CapEx perspective to support that volume growth.
[Operator Instructions]
Great. Thank you, everyone, for joining the call. We look forward to talking to you next quarter.
This concludes today's conference call. You may now disconnect.