2016 SECOND QUARTER CONFERENCE CALL
Jess Jankowski, President & CEO
Thank you, Ronya and good morning everybody! I appreciate you all being here, and I also appreciate your flexibility with the timing. Many of us attended CosmoProf 2016 last week, one of the biggest shows geared toward cosmetic professionals in North America. This was the cause of the atypical gap between the press release and this call. We'll discuss this show further in a few minutes but, given this timing, I didn't want to withhold our results an extra week to accommodate our travel schedules.
We're happy that you're able to join us to discuss our second quarter 2016 financial results and business updates. Frank Cesario, our CFO, has joined me again today. During this call, we'll be talking about some new products, an update on our strategic approach to new business development, our existing business, and, of course, 2016 2nd quarter results. We had a strong Q2, driven to a great extent by growth in our existing Personal Care business, and through sales within our Diversified Technologies customer base.
The second quarter of 2016 represented an exciting milestone in that Nanophase had more than $450K in GAAP profitability. We also had about $300K in positive adj. EBITDA for the first six months of 2016, more than a $500K improvement over the same period in 2016. We're still focused on new business development as our main metric, but by managing our business effectively, we're working hard to apply our business development resources to maximize their impact, while generating as many dollars of margin as we can as we focus on building new business.
One of our key strategic initiatives is to narrow our business development focus to two key markets, while continuing to deliver world class materials, and continuing to support our existing customers, many of whom are in less strategic, but nonetheless lucrative markets. This strategy can be very well supported by the gainsharing approach we discussed in greater detail last quarter.
I plan on covering all of these things in greater depth after Frank provides a short overview our our financial results. With that, I'd like to introduce our CFO, Frank Cesario!
Frank Cesario, CFO
Thanks Jess. Good morning, this is Frank Cesario. Before I begin today's overview of our financial results for the second quarter of 2016, please remember that all financial results are stated in approximate terms.
Revenue for the second quarter of 2016 was $3.7 million, vs. $2.9 million in 2015. As we announced, we posted our first net profit for the quarter, at $0.5 million, or $0.01 per share. The net loss for the comparable quarter in 2015 was $0.1 million, or $0.00 per share.
For the first six months of 2016, revenue was $5.9 million, vs. $5.2 million during 2015. Our net loss for the six-month period was $0.1 million in 2016, or $0.00 per share, compared to $0.7 million, or $0.02 per share, in 2015.
We ended the second quarter of 2016 with a $1.4 million cash position and nothing drwan on our working capital credit line.
Jess Jankowski, President & CEO
So far so good for 2016 in the fiscal sense. We continue to expect this year to show overall growth, in both revenue and margins. Two thousand sixteen should exceed 2015 in revenue, although second half 2016 volume will be lower than first half volume. The bulk of our markets, particularly when dollar-weighted, are seasonal. Q3 will come in lower than Q2 did, and Q4 will most likely be lower yet. We'll have a much better handle on full year 2016 revenue as we close Q3. Regardless of the effect of cyclicality on our second half, I expect 2016 revenue, and margins, to exceed 2015's. Due to our conservative approach to budgeting, we are seeing nice pickups in cash flow and earnings as volumes increase. Nanophase has recorded a series of record earnings quarters over the past year, and we expect to see that trend continue.
As I mentioned earlier, we're focusing our business development resources on two main areas:
- Personal Care: &
- Solar Control
For this call, I'll focus mainly on our approach to new business development in Personal Care.
Our Personal Care focus is now composed of three types of products:
- Zinc Oxide & Titanium Dioxide (or TiO2) Powders;
- Zinc Oxide & TiO2 Dispersions; &
- For the future, development of fully-formulated skin care products to be sold on a "white label" basis.
Let me break these three areas down for you:
Most of you are probably quite familiar with our zinc oxide powders business. We've been selling coated and uncoated zinc oxide as a mainstay of our business since shortly after we became a public company. As a matter of fact, our zinc oxide products are well-known and appreciated throughout the industry. We're currently testing the market to see if we can expand our reach to include TiO2 powders. Both of these materials are best classified as active ingredients, to be sold to another manufacturer, for incorporation in to their final skin care and sunscreen products. Most of our growth in powders can be enabled by our new C-3 coating technology, but it'll always be limited to companies that have a high degree of minerals dispersion and formulation expertise.
Largely due to the relative newness of nano- and non-nano minerals in near-transparent products, we've found that many companies in the Personal Care markets haven't developed these formulating and processing capabilities over the preceding years. As many of you know, Nanophase has been working on industrial dispersions since the early 2000s. Essentially, dispersions refer to products, inorganic particles in our case, in a liquid format designed to enable easier inclusion in to finished products. It became apparent to us that the lack of high quality, easy-formulating dispersions of mineral, or inorganic, sunsreen active ingredients for the Personal Care markets was limiting our growth. Dispersions represents our second broad category of Personal Care products. For the past seven or eight years we've been working on building more effective zinc oxide and TiO2 dispersions in order to address these formulating issues. It really wasn't until the advent, and then more complete development, of our new C-3 coating technology over the past two years, that we were able to see a clear path forward. Today, our dispersions are better than ever.
As we discussed last quarter, in April, through our recently filed supply agreement, we officially launched two TiO2-based dispersions at the inCosmetics show in Paris. Dispersions allow us to move further up the value chain, while increasing our understanding of our customers, and the markets they serve. Beginning with TiO2, which will also ultimately expand to include zinc oxide, the goal of our line of dispersions is to enable the creation of finished products that are highly transparent, protect the user from UVA and UVB, protect the user and other beneficial ingredients in the product from free radicals, and deliver an exceptional skin feel.
I've mentioned before, that we have invested in our formulation capability at Nanophase. Initially, we're working on a series of what are referred to in the industry as "model formulations". These are mock-ups of finished products that allow our potential dispersion customers to see how well our materials can perform at the consumer level. We've also developed a stronger data-and consumer claim-support capability. Once these customers become interested in trying our dispersions, our formulators can then also help them be more successful when incorporating our dispersions in to their proprietary final products. In the end, we expect these new capabilities to help our customers move more quickly toward adoption. This was a big step for Nanophase that represents a major shift in the way we approach Personal care. Now, in addition to building our market knowledge in terms of consumer wants and needs, we're working more closely inside the finished products development cycle to better understand ways to improve them! As we connected the dots, the development of fully-formulated, White Label finished products, is the natural progression for Nanophase. In building our formulations capability, building claims test data, and working to optimize performance in finished products in support of our Dispersions line, we've created a roadmap for ourselves to develop our own finished products! Why no capitalize on it?
By the way, when I say "white label" products, I'm referring to an approved finished product that incorporates a marketing company's desired claims and performance. Nanophase will complete the entire development and production cycle, delivering a product in our customer's packaging. The customer will then be responsible for marketing, promoting and selling the product. To their retail customers, it will look like it's completely their own product design. This is a common practice in Personal care, and one with which we have a good deal of internal experience at Nanophase. We're working in the early stages here, but development of while label products, when completed, not only brings us several steps up the value chain, but also enhances our degree of visibility, and control, over our business development.
I mentioned that several of us were traveling last week. We did a good bit of exploring, market testing, and even some sampling at CosmoProf 2016. Our target audiences there were generally skin care product marketing companies. Aside from those that we approached with our product concepts, we also spent several days verifying current market trends, spreading the word about our products more broadly, and exploring potential new Personal care applications for Nanophase products. Several of us also reacquainted ourselves with prior industry contacts that operate more on the finished goods side of things than on the ingredients side, where we had been spending the bulk of our business development time in the past.
In terms of our growth outlook with respect to these three areas of Personal Care:
- The Powders business will remain our largest business for some time. Historically, this has been a $5-7M business, and we expect modest growth where over the years;
- We expect that the Dispersions business will grow the most rapidly in gross dollars over the next few years. We should see more sampling volumes in Q4, with more to follow in 2017. I no longer think this will represent six-figure sampling and ramp-up revenue in Q4. The various downstream customers for these products will spend 12-24 months doing required testing and scale-up. Some are at various stages in the earlier part of this cycle. We do expect six-figure revenues in 2017, with the potential for Dispersions to grow to be a seven-figure business. Over the next 4-5 years, while we expect good growth, we don't expect Dispersions to grow to become as significant, in revenue terms, as our Powders business;
- Lastly, the White Label finished products business is brand-new to Nanophase and difficult to predict at this point. It'll be composed of smaller customers, and may offer us the greatest opportunities for growth as it develops. At this admittedly embryonic state, the earliest that I expect revenue from commercialized products is in Q2-Q3 of 2017, with volumes not becoming significant until sometime after that.
Given our knowledge of various personal care markets, along with the historical success, and broad acceptance of our materials in some of those markets, we can see our Personal Care business, in total, having the potential to double over the next 4-5 years. There are still many things to be developed and perfected, but we feel good about our opportunities in Personal Care. Regardless of our lack of clear visibility to growth, for the foreseeable future, things look great for inorganics, or minerals-based sunscreens, and skin care products. This is a great space for us to be in, and we have a solid value proposition.
In terms of our Solar Control business, things are still moving forward in a few different areas. By the end of Q3, we expect to know more about where we'll be by year-end, and going in to 2017, in terms of further potential commercialization. We've sold small commercial quantities of a new material in this area, and have done a good bit of sampling. I plan to cover this in greater depth in a future call.
Outside of Personal Care and Solar Control, we still have other opportunities, for profitable volume, and growth, that I expect to materialize this year and next. Please be clear that we are only limiting the focus of our new business development activities to the two key markets we've been discussing. We continue to serve other markets with high quality products that perform well, and generate nice margins. In this respect, we are functioning much more like a typical seller of high-end specialty products to these industries, than we are as a new product developer. We remain in regular contact with all of these customers, and we're taking advantage of our strong manufacturing capabilities to deliver.
What we are not doing, is devoting our internal new product development, new market development, and new business development resources more broadly, to markets outside of Personal Care and Solar Control. By drawing this line within our business, we hope to accelerate our growth in our two most promising strategic areas by applying a higher degree of focus.
I think of serving our existing volume businesses and markets as being critical, but more tactical in nature than I do Personal Care and Solar Control. We have more upside potential with these two markets, and a clearer vision of how they may unfold.
Going forward, I'm confident that we'll continue to set new financial performance milestones. Revenue growth, cash generation, and new business growth are our top priorities.
Although most of our investors either listen to the webcast, or review the transcript after the live call, we'd like to invite those participating in today's call to ask any questions you may have, or to share your comments.
Ronya, would you please begin the Q&A session?
Thank you, Ronya.
I'm looking forward to talking to all of you again in a few months. Nanophase is making good progress, and I'm excited about our outlook! Thank you for joining us for today's call.