2016 FOURTH QUARTER CONFERENCE CALL
Jess Jankowski, President & CEO
Thank you, Katherine and good morning to all. I appreciate everyone being here and those listening after the fact online.
We're happy that you're able to join us to discuss our fourth quarter 2016 financial results and business updates. Frank Cesario, our CFO, has joined me again today.
Twenty sixteen was a year of firsts for Nanophase:
- An eleven-month period of positive adjusted EBITDA, was a first,
- And the 2nd quarter of 2016 was our first quarter of GAAP profitability in Company history,
- We formed Solésence, our new, and first ever, subsidiary, to capitalize on our C-3 patents,
- We completed the development of our first three products in our fully formulated line,
- In building consumer claims, another first, outside testing/verification data has exceeded our expectations,
- And we began sampling our fully formulated finished products at several shows and with several more target White Label customers.
During this call, we'll be giving an update on our strategic approach to new business development, our existing business and, of course, 2016 results. Our 2016 total revenue was up by about half a million dollars from 2015. The increase was driven by strength from our Personal Care active ingredients business, offset by a small decline in our coatings business, and a decline in business from our Diversified Products Portfolio that we believe is timing related.
We also did an excellent job in managing cash and expenses, while investing in the development of our suite of fully formulated skin care products. As we noted in the press release, our added investment in building this product line was the only thing that stood between us and another improvement in the bottom line to go along with the top line. We think it's a worthy investment, but we didn't make it lightly.
Let's have Frank provide a quick overview of financial results, then I'll follow with more discussion of the execution of our strategy and our business development. Frank?
Frank Cesario, CFO
Thanks Jess. Good morning everyone. I'm Frank Cesario, CFO of Nanophase and I'm pleased to be with you all today. Before I get into the numbers, please remember that all financial results are stated in approximate terms.
Our fourth quarter revenue was $2.4 million in 2016, compared to $2.3 million in 2015. As Jess mentioned, our spending in launching our new suite of products was up, which increased the net loss from $0.3 million, or $0.01 per share in 2015, to $0.7 million, or $0.02 per share in 2016.
For the year, 2016 saw revenue increase to $10.8 million, up from $10.3 million during 2015. We ran positive Adjusted EBITDA, or essentially cash flow from operations, through November 2016 on a year to date basis, with investment in our new product lines resulting in a full year negative value that we disclose in the press release. Our bottom line of $1.3 million loss, or $0.04 per share, was similar to the 2015 loss of $1.2 million, also $0.04 per share, despite the added investment in product rollout.
We ended 2016 with about $1.8 million in cash and cash equivalents and no debt.
Jess Jankowski, President & CEO
As we expected walking into last year, 2016 revenue exceeded 2015's. We expect this trend to accelerate in 2017. While I don't expect significant revenue from the White Label Personal care business this year, I do expect to see some well-identified, and credible, scale-up revenue coming in during the last half of 2017, a harbinger of 2018 commercial product launches.
At a high level, our forward business development strategy hinges on two broad areas:
- Personal Care, which is mainly Skin Care in our case; &
- Solar Control
Personal Care has a lot more moving parts, so I'll start with a brief overview.
We understand this market better than any other, having sold into it for the better portion of twenty years, but often with our "nose against the glass", wishing we had more influence on the final formulated product. Now, we see a competitive advantage for our products that we believe can generate significant real value.
Generally, consumers are taking a more holistic view of their skin care, tying together health, wellness, diet and lifestyles as they choose products. Things that are perceived as "All-Natural" or "Naturally-Derived", as well as products with fewer and fewer ingredients, are gaining traction. Prior to our C3 technology, we enjoyed advantages due to our products being minerals-based, now we expect to enjoy even more advantages through the application of C3, with the potential to open up new markets for our products. Key industry sources agree that inorganics, or minerals-based skin care products, are expected to become an outsized part of the market's growth over the coming years.
It's worth mentioning that much of our existing ingredient volume and almost all of our planned C3-based growth, will be used in the "Skincare" market, versus the "Suncare" market. Traditionally, "Suncare" was geared toward sunscreens worn at the beach. As these markets mature, and consumers become more aware of the damage caused by the sun, there has been a shift to including sun protection in skincare products. These were frequently referred to generically as "daily wear" products in the past, but the market for what we offer is broadening beyond that definition.
The good news for us is that the Skincare Market has been growing, and is expected to continue to grow, at a rate 50% higher than the Suncare Market.
As many of you have heard me say: We are in a good spot.
Our Personal care focus is composed of three types of products:
- Zinc Oxide & Titanium Dioxide (or TiO2) in Powder form, our "Actives" business;
- Zinc Oxide & TiO2 Dispersions, that's in a liquid format, essentially our "intermediates" business &
- The area where we are most focused, in terms of resources and development, our Fully-formulated skin care products to be sold to "brands" on a "white label" basis.
In our powders business, or in the industry, what we refer to as our "Actives Business", we continue to sell a significant amount of zinc oxide. In these cases, downstream customers are usually buying our powders, then incorporating them in to some form of dispersions, then incorporating their dispersions in to a fully formulated finished product. This active ingredient volume has been the mainstay of our business, but has its limitations, chief of which is the lack of customer and user intimacy experienced by Nanophase.
We usually sell through a market partner, who then sells to downstream manufacturers of intermediates and/or fully formulated skin care products. In this context, dispersions refer to minerals-based Actives, in a liquid format designed to enable easier inclusion in to finished products. This is also how synthetically-derived actives are often delivered.
We believe that a general lack of industry expertise in this area leads to another major growth limitation, poor aesthetic performance in final formulation. This can be a result of poorly made dispersions after the actives have left Nanophase. We saw this as an opportunity, as we sought to expand our Personal Care business. This is why Dispersions became our next target.
Due to nano- and non-nano minerals in near-transparent products becoming more popular with consumers in recent years, we've seen that many companies in the Personal Care markets, haven't yet developed formulating and processing capabilities for minerals, or at least have not yet developed them to the extent that they have with chemical UV absorbers, which many have worked with almost exclusively over decades.
It became apparent to us that the lack of high quality, easy-formulating dispersions of mineral, or inorganic, sunscreen actives for the Personal Care markets was limiting our growth. So, how to sell more powders if the market was saturated, or unsatisfied with the mineral-based offerings? That's the question. Given that we had been working on industrial dispersions since the early 2000s, we felt that we were in a good position to capitalize on trends toward mineral UV absorbers in skin care.
Dispersions represents our second broad category of Personal care products. It really wasn't until the advent, and then more complete development, of our C-3 coating technology over the past few years, that we were able to see a clear path forward. In April of 2016, we officially launched two TiO2-based dispersions. As "Intermediates", Dispersions allow us to move further up the value chain, while, to a degree, increasing our understanding of our customers and the markets they serve.
This is where we expect some of the novel properties within our C3 technology to bring new advantages to the Personal Care market.
C3 enables the following consumer claims, which we can support with external as well as internal validation. Our C3 Technology enables:
- Superior reduction in UV-induced free radical formation
- It "Quenches" reactive oxygen species, that lead to the appearance of UV-induced premature aging
- It offers balanced UV protection, through enhanced performance versus other mineral products, and finally
- It delivers a light and silky texture, leaving the skin looking soft and feeling natural
This part of our Personal Care business, while offering a smaller group of target customers, and accompanied by necessarily longer lead times, may reflect our highest growth in products sales volume over the next few years. We are still awaiting broader adoption of our TiO2 dispersions, but expect to sell low-to-mid-six figure quantities in the near term. Our Dispersions business, while we expect it to generate revenue on its own, also represents a necessary step in our evolution.
Finally, fully formulated "White Label" products are our next type of product within the Personal Care area. As many of you know, we have been investing in our formulating capability at Nanophase, beginning in 2015 and 2016, coinciding with the advent of our C-3 technology. We found that it was difficult to sell our Intermediates to new customers without showing them the specific benefits that C3 technology could bring to their final products. We've also developed a stronger data and consumer claim support capability, another key strength in positioning our technology to our customers. Initially, this started with us creating a group of "model formulations", designed to give our Dispersions buyers an idea of how their consumer products might perform with our C3 technology enabling them. This was a big step for Nanophase and it represented a major shift in the way we approached 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 continued to evaluate the available markets, the development of fully-formulated, White Label, finished products, was another stage in our natural progression.
In building our formulations capability, building consumer claims test support, and working to optimize performance in finished products in the development of our Dispersions line, we created a roadmap for ourselves to develop our own finished products. We felt that there was no better time for us to capitalize on this.
C3-enabled finish products opened up broad-based applications, both in terms of markets, and in terms of bringing multiple features to our product solutions. This is part of the growing differentiation between "Sun Care" and "Skin Care".
Our target customers for our White Label products are generally skin care product marketing companies, or "Brands". By the way, when we use the term "White Label" products, this refers to an approved finished product that incorporates a "Brand's" (or marketing company's) desired claims and performance. Nanophase will complete the entire development and production cycle for a given Brand, delivering a product in their desired packaging. The customer, or Brand, will then be responsible for marketing, promoting and selling the product. White Label products differ from the Private Label products that most of you will be familiar with. The key takeaway is that White Label products offer differentiation from products that are already in the market, allowing Brands to earn a premium. This is where we want to play. Most Private Label products are typically designed to mimic other products at a lower price point. "White Labeling" is a common practice in Personal Care, and one with which Nanophase has a good deal of applicable internal experience.
We're working in the early-to-middle stages, in terms of building our full line here, but development of White Label products not only advances us several steps along the value chain, but also enhances our degree of visibility and control over our business development. In terms of enhancing our control, White Label products, once we are fully up and running, will usually enjoy faster times to market than other Nanophase products in the Personal Care space. The reason Nanophase is expending so much time and resources in developing this technology, is that I believe and we believe that C3 is the single most exciting technology that Nanophase has developed in years.
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. This is a great space for us to be in, we have a solid value proposition and we can be a differentiator, which matters most to our customers.
In terms of our energy business, we've now developed and sold several solutions in the Solar Control area. This refers to applications which improve energy conservation (think of the window films used on vehicles and buildings). It may be easier for you to think of this business as using our technology to keep heat from the outside, on the outside and keeping things cooler on the inside.
The Solar Control business is still unfolding as we are working with several customers in several product formats. We've had sales to two different companies, both of which are still in the trial stage. We expect to see growing sales volume this year, which will represent scale up and/or test marketing, with more significant volumes in 2018.
Outside of Personal Care and Solar Control, we still have other new opportunities, with potential for profitable volume and growth. Some of these should commercialize in 2017, but we have less control here. These opportunities represent "irons in the fire", some of which will materialize in the form of good new business for Nanophase. While we are limiting our strategic new business development activities to the two key markets we've been discussing, we are continuing to serve other markets, with unique products, that perform well and generate nice margins. In this respect, for these markets, we are functioning much more like a typical seller of high-end specialty products, than we are as a new product developer. We have growth opportunities within our existing customer portfolio as well, but they are more or less dependent on development work that we don't control.
I think of serving our existing volume businesses and markets as being critical, but less technology-product-and business-development-centered, than I do Personal Care and Solar Control. We have more upside potential with these two markets, and a clearer vision of how to get there, which drives our willingness to continue to invest in them.
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 the largest group 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.
Katherine, would you please begin the Q&A session?
Thank you, Katherine. And thanks to all the people listening to this call live and on the web. We are well-positioned for new, technology-driven growth in 2017 and I look forward to my next opportunity to discuss our business with you. I hope you enjoy the rest of your day.