IBC Advanced Alloys Corp. (OTCQB:IAALF) Q4 2022 Results Conference Call November 1, 2022 6:30 PM ET
Company Participants
Jim Sims – Director of Investor and Public Relations
Mark Smith – CEO and Chairman
Jim Sims
Good day everyone. Let’s get started. Welcome to this IBC Advanced Alloys Webcast and Conference Call on the Company’s financial results for the Quarter and Year Ended June 30, 2022. I’m Jim Sims, Director of Investor and Public Relations at IBC.
And before we begin our webcast, just a few reminders. Slides from today’s presentation and the audio of this call are being broadcast live over the Web. Recording of this broadcast is being made and a replay will be available on the IBC Web site tomorrow at www.ibcadvancedalloys.com. After our formal presentation, the company will take questions from webcast participants, and you can direct those to me in the meeting chat tool. So let’s get started. During today’s presentation, we will be making forward-looking statements, and viewers are cautioned not to place undue reliance on such forward-looking information and statements. Additional information identifying the risks and uncertainties is contained in IBC’s public filings available on sedar.com and on our company Web site at ibcadvancedalloys.com.
Joining us today is Mark Smith, CEO and Chairman of the Board IBC. Mark, thank you for joining us and take off, it’s your show.
Mark Smith
Thanks, Jim and welcome, everybody. For those of you that maybe new to the IBC story, we manufacture copper and beryllium aluminum alloys for customers into commercial and defense sectors. These include companies in semiconductor manufacturing, aerospace, automotive, marine, defense, electronics, industrial equipment, oil and gas and others. With 80 employees, we are headquartered in Franklin, Indiana. We operate two plants, one in Indiana and one in Massachusetts. In addition to the casting, forging, heat treating and fabrication of many different copper and beryllium alloys, we also provide customers with a full range of tolling and engineering consulting services. IBC has two operating divisions; the engineered materials business produces high performance beryllium aluminum alloys for both defense and commercial customers; our copper alloys division makes a wide range of specialty copper alloys, also for both defense and commercial companies. Revenue was just about evenly split between the two divisions with copper slightly leading at 51% of total revenue and engineered materials comprising 49%.
We released our fiscal year 2022 results last Friday, as I’m sure many of you saw. In general IBC showed continued progress in several key areas. 2022 consolidated sales were up 23.4% over 2021. Engineered materials sales rose by very substantial 53.7% year-over-year and copper alloy sales rose by 3.7%. 2022 sales marked the fourth year in a row of revenue growth for IBC. It also was the fourth straight year of higher revenue and EBITDA for the engineered materials division, and it was the third straight year of profitability for that division. The copper alloys division saw it’s gross profit and gross margin improve in 2022 for the fourth straight year. Consolidated IBC gross profit and gross margin also rose in 2022 over the prior year. Our consolidated adjusted EBITDA jumped by 82.4% in 2022 over the prior year and IBC continued to narrow its consolidated loss in 2022 as compared to the previous three years.
Looking at each division’s results. Engineered materials continued it’s generally strong upward trend over the past four years in revenue, adjusted EBITDA, gross profit and net income. In the fourth quarter of 2022, sales declined to $2.8 million from $3.2 million in the prior year period. This was largely due to a softening in the cyclical demand for chip making equipment and by a decline in yields, which the EMC division is working hard to address. These factors also contributed to a drop in the division’s gross margin for 2022 from 2021’s gross margin. Gross margin for engineered materials this past year was still improved over fiscal years 2019 and 2020, and I look forward to seeing that continue to improve. In our copper alloys division, as many of you know, we completed in 2020 a two year effort to consolidate three facilities down to one, as well as to expand our facility in Franklin, Indiana into a larger, more efficient and vertically integrated foundry. In the past, we did alloy casting at relatively inefficient plants in Missouri and Pennsylvania, and we had to ship those materials to our Franklin plant for forging, heat treating and fabrication of finished products. We now do all of that in Franklin.
In spite of the temporary halt of production at the two plants for the consolidation, copper alloys was still able to increase sales in 2022 year-over-year. Increased costs related to the facility consolidation and expansion impacted adjusted EBITDA, which was not a surprise, but I see revenue trending very much in the right direction now and we’re fully operational at our fully expanded facility. While it is not shown here, I would note that copper alloys sales were adversely affected in the fiscal fourth quarter by raw material supply issues. This reduced adjusted EBITDA for the quarter over the prior year period. However, given the very strong demand we’re seeing across our copper alloy products today, I think it’s safe to say that had raw materials been available in the division in the fourth quarter, our sales and earnings performance would have been significantly stronger. As I mentioned, our new integrated foundry facility in Franklin is operational and is ramping up production. In addition to an expanded production capacity, we expect to see lead times improve significantly, which supports higher sales. We also should see a reduction in our variable costs due to better labor utilization and increased efficiencies.
Looking ahead, we continue to make very good progress on our three primary strategic growth initiatives at IBC. Number one, as I noted, we have successfully completed the facility consolidation and expansion of our integrated copper alloys facility in Franklin, Indiana. Number two, our goal of increasing efficiencies, reducing OpEx and expanding gross margins on a consolidated basis are all moving in the right direction. Finally, we are in development of several new products in both our copper alloys and engineered materials divisions, particularly in the engineered materials division. And on that point, our engineered materials division just inked a supply deal with a large defense contractor L3Harris. We have begun our work for them in designing and manufacturing innovative new components made from beryllium, aluminum alloy that will go on a classified defense platform. We also announced today a $2.9 million purchase order from a new defense sector customer on the copper alloy side. Again, we worked closely with this customer to engineer solutions for a very demanding application using our specialized copper alloys. And finally, we’re currently producing copper alloy products for customers in the fusion energy space. I see a lot of potential for that business to grow in the future.
Our customer Lockheed Martin recently sent us a congratulatory poster marking the delivery of the 1,000th Electro Optical Targeting System known as EOTS for the F-35. I had the pleasure seeing that poster last week when I was in Wellington. We make two crucial components of that system, which essentially shield the sensitive optical and targeting equipment from the tremendous electromagnetic noise and physical vibration that the F-35 experiences at operational speeds. Our parts help the F-35 target threats farther and more accurately than any fighter in the world. This milestone aside, I’m proud to report that IBC has actually delivered beryllium aluminum components for more than 1,300 EOTS systems to date. We are proud to help Lockheed meet its production targets as well as those of the US Department of Defense. Finally, let me make a few notes concerning the longer term macro growth trends that we are seeing continue to drive demand for our products. For both copper alloys and engineered materials, the global expansion of 5G networks and the Internet of Things is increasing demand for materials across all of our product lines. Growth in the electronic sector is also driving greater demand for both copper and beryllium alloy products. Defense systems are continually looking for lighter weight, high modulus materials for long range optical sensors, that is certainly our manufacturing specialty at IBC. As markets for electric vehicles expand around the world, we expect to see much more intensive use of copper. That is bullish for IBC. And the growing use of micro satellites and other space applications presents large opportunities for our engineered materials division.
Now with that, I’m happy to take questions from our audience.
Question-and-Answer Session
A – Jim Sims
Thanks, Mark. For those of you that who want to ask a question, you can do so in the chat function you have on your screen. Alternatively, please feel free to text me any messages that you’d like. My text is — my phone number is (303)503-6203. And we’ll give our audience a minute or two to see if anybody has any questions. Mark, we have no questions from the audience. Well, actually, we just got one. Please review the status of scandium in the future?
Mark Smith
IBC has a joint development agreement with NioCorp to take a look at and review various new types of applications with scandium and aluminum. There’s not been a lot of work in that particular area, because the EMC Group has been exceptionally busy trying to meet their production demands. And so we have priority ties that but we haven’t forgotten about scandium. And as we appointed Ben Rampulla, our new Chief Technology Officer, I did make sure that that was on Ben’s list of things to make sure that when he gets a chance, he takes a look at. So we’re interested in it. We do see a lot of new and fun applications utilizing scandium and aluminum. So we hope to find the time and the resources necessary to research that here in the near future.
Jim Sims
Another question is this, a congratulations on the two contract wins. Can you talk about how they will impact revenue in the next 12 months?
Mark Smith
The one press release that we had did not indicate what the contract amount was, and that’s because it’s confidential number. So I will not be able to talk about that in any detail. The other one is a very large contract and it’s about $2.9 million, that’s going to be within the next calendar year, at the end of this year 2022 and all of 2023, so that will have an immediate impact on our revenue. And the other contract will actually have a very significant impact as well, we just can’t talk about the amounts.
Jim Sims
Thank you, Mark. That is one of the frustrating aspects of our business for defense sector customers, we are restricted in great detail on talking much about these contracts and we do release what we’re able to. Mark another question is, can you provide more detail about the negative margin in engineered materials segment, what are your long term margin expectations for EM?
Mark Smith
Let me start with the long term yield expectations for engineered materials first. We have a goal in the division of having an 80% yield or higher going forward, and we really stumbled here for the last quarter trying to figure out what has happened to our procedures. But we got to a team of people, the most senior people in our entire organization, including from copper, we did a review of every single activity associated with the beryllium-aluminum pouring, the mold process, the entire system was looked at. And we’ve come up with multiple recommendations and multiple changes as a result of that. And we’re trying to really solidify these procedures, so that they are adhered to from start to finish. And we’re already seeing some significant improvements in the yields, probably north of 60% already. But these are complicated parts that we make in the aluminum beryllium division, the molding process itself, or the building of the mold itself is quite complicated. And you have to really follow each and every procedure precisely or you could have issues with the yield. So I think that we’re pretty happy with the direction that we’re headed right now. We should see those yields continuing to climb as we get into the latter part of 2022 though.
Jim Sims
Okay, here’s another question. What is it looking like as far as creating components with 3D application printing, can this be done in IBC?
Mark Smith
It absolutely can be. And it is something that we’ve got Ben Rampulla, our CTO, looking at and studying. It does require some different forms of the metal that make up the parts, it’s in a powder form rather than a chunky form that you melt. So there are some changes to this. But I think there are tremendous applications that are going to be available. And we want to be part of that new technology as it’s being developed. And that would apply for both the aluminum-beryllium and potentially the aluminum-scandium as well.
Jim Sims
Okay, thanks Mark. Here’s another question that we really can’t answer, but I’ll pause at it anyway. When do you believe you can achieve sustainable cash flow profitability?
Mark Smith
I think that it’s going to be relatively soon actually, which is why I’ve continued to invest more money into the company. Our copper division right now is really starting to hit on all cylinders as they continue to ramp up the new foundry, new and expanded foundry that we put into place for them. And the demand for those materials is probably as high if not higher than I’ve certainly seen in my time at IBC and I think probably as high as Mark Wolma and Rajeev have seen since they’ve been at IBC. So it’s very encouraging to see that. And the ability to actually produce these copper alloys on site and in the United States is a huge, huge win for us, and we’re seeing that through the orders that are coming in for our materials. The backlog on our copper division is as big as it’s been since I’ve been with the company. And our goal now is to continue to ramp up production at our foundry so that we can continue to deal with that backlog and keep our customers happy.
Jim Sims
There’s another question, Mark. Were either of the contract wins competitive takeaways?
Mark Smith
Every situation that we’re in is a competitive situation. There aren’t many people that do what we do, but there is more than us. And so there are alternatives out there. I think that we excel in certain areas, namely customer service and in our ability to provide technical services for our customers. I think that is becoming more and more recognized. Rajeev, just does a fabulous job of helping customers really determine what type of alloy they need for their particular application. He helps them with the engineering of the part. And this has really turned into selling point for us and we want to continue to capitalize on that. Because our people are really the best in the world in this business and we need to make sure that we advertise that. So I think you will see this continuing to grow, because of the customer service and engineering services that we provide to our customers.
Jim Sims
Okay. Here’s another question, Mark. Any issues with labor, transportation or materials costs?
Mark Smith
We’re experiencing inflation like everybody else is. We had our issues in the fourth quarter of fiscal year 2022 getting raw materials and getting some of the bought materials into the Franklin facility. So yes, we have had logistics issues. We have had transportation issues. We have inflation issues, but we are managing through all of that. And I think that again, we are very focused on continuing to lower our OpEx, increase our margins and continue to show these upward trends in all the right categories. In terms of labor, we are actually doing very well in that category. We have had some retirements and we have had some people that decided to leave the IBC family. But we are able to find replacements for all of those people and we are able to find fairly well trained and experienced people to come in and take these slots. And we are finding that because of the family atmosphere that we really strive for in the company that we are a preferred employer and that helps a lot as well. So again, I can’t complement our employees enough, they work hard every single day, they know what we are trying to achieve, they are aligned with our priorities and things are really starting to come together. I really am pleased with this copper division consolidation project that we undertook. We knew it was going to be positive for the company. It was very difficult for us to afford that, but we we did it and it’s now ramping up. And I’m very, very excited for the whole world to see what that division is going to start looking like here in the near future.
Jim Sims
Can you provide some color on how Q1 went? And I’ll note parenthetically that the answer is, we are very, very limited in what we can say about Q1. So maybe a little color Mark.
Mark Smith
We’re very limited obviously on what we can say. But suffice it to say that it was certainly one of copper’s better quarters that it’s had in a long time and EMC is starting to come back from its yield issues very strongly as well. So I continue to have very high hopes about what this company is going to look like in the next few years. I think we have got the foundation set now where copper has a lot of the tools that it needs to grow its business and really become the business it could be. EMC is no longer an R&D outfit, it is truly a manufacturing center for beryllium-aluminum alloys, and we just need to execute. And it’s all about executing and it has to happen day in, day out. So we are focused and I’m very encouraged about where we are going.
Jim Sims
Mark, here’s a question. Are there any material sourcing issues, such as copper out of China or beryllium?
Mark Smith
We have not had any of those issues. Our beryllium supplier continues to service really impeccably, and they are pleasure to do business with. Copper we can get from multiple sources around the world in multiple sites just within the United States. So those types of raw materials we’re not struggling with. But we do place orders for certain alloys where the customer demand is higher than what we can produce on site. And we do have troubles getting some of the copper alloy materials in from Japan or in from Germany. And it’s where I think our new foundry is going to give us the luxury assuming we ramped up as fast as possible here to overcome some of those logistics and supply issues that we’ve seen in Japan and in Germany.
Jim Sims
We have one more question. When do you anticipate having the open house for the expansion in Franklin?
Mark Smith
We keep talking about that, and I’m smiling as I talked about this, because we really want to have one. We’ve really wanted to stay focused on getting the commissioning done, getting the ramp up done, getting materials out to our customers to certify that it meets their requirements. And I think we’re getting pretty close to the point where we’re comfortable with our operations out there and now we can start focusing on opening things up and showing the world what it is we have and what we can do, because it’s very impressive.
Jim Sims
And I can add, we’re all anxious to be able to do that. We want to make sure we can do it in a safe way, that is not — that doesn’t hurt production. So it’s a bit of a balancing act. That is what we’ve got for questions. If there are any others that you didn’t get a chance to answer or that I didn’t get or I didn’t see, please send those to me at jim.sims@ibcadvancedalloys.com. I’ll be happy to get back to you. Thank you all for joining us today. I hope this was informative and we look forward to seeing and talking with you on our next call. Thanks much and have a great day. Bye-bye.
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