FIRST QUARTER 2009 CONFERENCE CALL
Jess Jankowski, President & CEO
Good afternoon and thank you for your ongoing support of Nanophase. I’m going to keep this call brief as we just talked a month ago and had a full review. I can reiterate that we’re very happy with our progress, and our expectations for Nanophase remain high. In this call, I’ll cover first quarter results, but more importantly, I’ll continue to discuss forward progress and the ways that Nanophase continues to execute on its new strategy. Focus is the key here. It’s not a matter of “if,” but “when” we are able to accelerate our growth.
I continue to have an aggressive travel schedule, and expect to have these calls a bit earlier once we find a CFO, who will help us to best execute our strategy, and to help keep all of us focused on critical metrics. They’ll also help by taking some things off of my plate that, although very necessary; keep me from focusing all of my energy on building the value of OUR Company.
Let me cover the financials in brief, which will, as always, be stated in approximate terms. Revenue for the first quarter was $1.4 million, which, while down significantly, slightly exceeded our expectations. Revenue for the first quarter of 2008 was $3.1 million. As a percentage of total revenue, gross margin was 6% for Q109, down significantly from Q108. This decrease is wholly a function of volume. We need more volume to absorb our fixed costs. Our February reorganization, during which we eliminated 25% of our staffing, the majority of whom were in manufacturing, will decrease the revenue volume required to absorb our fixed manufacturing costs. As a result, we expect our margins to improve, beginning in Q2.
The net loss for the quarter was $2.1 million, or $0.10 per share, compared to a net loss of $0.8 million, or $0.04 per share, for the first quarter of 2008. Thirty-eight percent of the 2009 loss was attributed to severance charges. This amounted to about $0.04 per share.
Regarding operating expenses and cash flows, we exited this past quarter with $11.6 million in cash and investments. We believe we have enough cash to take us safely through 2009, and to position us for a stronger 2010. We continue to take steps to operate as practically and efficiently as possible. We’re looking for ways to reduce costs, while continuing to execute on our plan. With all of the staffing changes we’ve had at Nanophase, we’re taking advantage of one of those rare opportunities, to critically assess our operation, and eliminate spending that does not move us closer to delivering. Our February 2009 reorganization, in addition to the changes in senior management, will result in the annualized reduction in operating expenses of approximately $2 million, or $500K per quarter, beginning in Q2 of 2009. In terms of cash impact, for 2009, this should result in a reduction of cash used of approximately $1million, growing to a cash savings of $2 million in 2010, as the last of the severance obligations are satisfied. Of course, we believe that these staffing changes will not limit our ability to execute our business plan through 2010. As I’ve discussed, these changes reflect both the impact of the economy on Nanophase, and our migration from a partner-driven - volume manufacturing model, to a customer direct model.
Let me break down the revenue composition for the current first quarter.
BASF amounted to about 50% of our sales, at $760K, and was down by about a third year over year. Long-term, the sunscreen and personal care markets should continue to grow, but probably at a single digit pace.
Revenue from our largest architectural coatings customer amounted to about a quarter-million dollars, or 17% of our business in Q1 of 2009, and was down significantly. Much of this is due to the impact of the economy on the housing and home improvement markets in general. We expect continued softness here in 2009, with potential significant reductions in this volume until the economy and housing improve. In the longer term, we continue to believe exterior coatings will remain a vital driver of our growth.
As we discussed in April, given the state of the semiconductor markets, inventory accumulation, and the sudden drop in demand from their customer base, we did not sell any material to our largest CMP customer in the first quarter, and expect minimal volume from them in Q2. It’s still too early to tell what the second half will bring. Given that we’ve recently changed our contractual relationship, so we’re no longer mutually exclusive with this customer, we’re beginning to explore other CMP market opportunities as part of our customer direct model.
Clearly, for 2009, housing and the semiconductor markets will continue to have an outsized impact on our top line. What we’ve been focused on is to actively position ourselves for the rebound of these and other markets. All of this drives home the importance of our new strategy to shift from a strictly partner-driven model, to a direct selling model, where, while still supporting our partners, we emphasize the development of a greater diversity of customers and markets, and we are aggressively pursuing market opportunities.
Looking to late 2009, we’re prepared for a rebound in sales when the economy strengthens. We should begin to see an even greater influence from our more aggressive marketing programs, as our ready-to-go products, and innovative applications, attract new customers from a variety of industries, both through direct-selling and in support of our partners. We believe, not only that our new way of going to market will make Nanophase a fundamentally different and more successful company, but also that the investments we’ve made, in applications development and in customer outreach, to get us to this point, are positioning us well to capitalize on those opportunities that are available now, and those that will continue to expand as the economy improves.
This new approach ensures that the customer receives the Nanophase product having the greatest likelihood of success in any given application. We have developed, and continue to develop, ready-to-go products that will serve market needs much more directly. This should improve our prospects for accelerating growth. Under our new model, we’ve reached a level of applications development and market expertise in one broad market, exterior coatings (which includes paints, stains and industrial coatings), that, in many cases, has given us a knowledge level that exceeds that of our customers. A Nanophase first. It is this ability to develop applications for our materials, not necessarily new materials, that will create value. Applications development is where the value comes from.
We need to reduce the number of markets we’re trying to build business in, while we increase the amount of opportunities we pursue in each. We’ve narrowed our potential top markets down to six, and we will continue our dialog with customers and potential customers until we find the several markets where we believe we can really add immediate value. We’re utilizing an extensive process to analyze these markets, including; size of opportunity, availability to Nanophase’s technology, and price sensitivities. While you might think that fewer markets would mean fewer opportunities, the opposite is true. Our new focus, has led to more visits, more customer contact, and more, better vetted opportunities, than ever before. We continue to refine this focus to our best advantage.
This is a critical year. We have:
- A new management team
- A new sales strategy
- A new ready-to-go product approach
- New strategic markets
- New applications
- And a solid balance sheet
The level of enthusiasm and commitment to the future at Nanophase remains high. We’re all aligned with our strategic vision, the goal of which is to build the value of Nanophase. The economy is tough, but our technology, our products, and most significantly, our people, bring resources and options to the table for our customers, and potential customers, that will better help them gain a competitive advantage in their marketplaces. This is how we’ll grow.
If it’s not clear by now, I’m optimistic about our future, as is our team.
I appreciate your time today, and I’m available for any questions that you may have.