IBC Advanced Alloys Corp. (OTCQB:IAALF)
Corporate Update Conference Call
June 23, 2016, 10:00 AM ET
Jim Sims - Director, Investor and Public Relations
Duncan Heinz - President and CEO
Good day everyone and welcome to this update from IBC Advanced Alloys, the mission-critical materials company. My name is Jim Sims and I am IBC’s Director of Investor and Public Relations. With me today is IBC’s President and Chief Executive Officer, Major General Duncan Heinz. Before we get started on our webcast today, just a couple of housekeeping matters. The slides from our presentation today and the audio of this call are being broadcast live on the web and that recording will be made as well, and so that will be available on IBC’s website, starting later today for you to review.
All participants in our call today are now in listen-only mode. After we complete our presentation, we’ll take questions. And for those of you on the webinar, you can ask your questions using your questions pane, simply typing your question and click send or for those of you participating on the phone, please feel free to email me your questions at firstname.lastname@example.org or you can text me your questions at 303-503-6203, that number again is 303-503-6203. Now, a number of you’ve already sent in your questions over the past week, we’ll try to get to as many of those as we can. If we don’t get your question on our live call today, we will get back to you with response via email.
Alright, with that, let’s launch our program this morning. General Heinz, it’s all yours.
Thank you, Jim. Good morning everyone. We certainly have had some exciting events here at IBC over the last few months, and I’d like to update you on those events as well as outline our go-forward plan at IBC.
First, let me note that we are making forward-looking statements today. Forward-looking statements inherently involve known and unknown risks and uncertainties, which could cause actual results to vary considerably from these statements. Please read this full legal disclaimer and understand these risks before making any investment decisions.
There are five key points I’d like to make today. And if you take nothing away from this presentation, please understand these five points.
First, since Q2, we have been seeing an acceleration in our activity in our sales pipeline, with sales enquiries, quotes, and orders all rising in both divisions; EMC and in Copper. This has been particularly true since the announcement of IBC’s corporate restructuring and the private placement. Let me talk to one of those very specifically.
As you may have seen in the news and media, we have announced yesterday that we have a new joint development with BAE Systems. They are a major aerospace and defense contractor. We are going to be producing for them the prototype beryllium-aluminum alloy products for fit-form-function evaluation, for a very unique aerospace application. They are following what we call the traditional format of crawl, walk, run. The first contract is obviously about fit, form, and function for particular applications. So, we will deliver a number of parts for that evaluation. Very quickly after that, we move into low-rate production, where we are evaluated for our ability to deliver on time and for quality, and then very quickly after that at the end into full rate production. I’m particularly excited about this application because it falls in the heart of our casting process ability, and it was unique in our evaluation for the number of potential parts you can produce over a number of years.
Second, the results of our very successful capital raise have allowed us to begin to address our production needs. There are two-fold very important outcomes of this. The first is that it completely eliminates any concerns, both vendors and I believe investors should have about capital liquidity of the company. More importantly, it allows us to address production capacity. We are now all about growing, improving yields, increasing the top line, as well as our gross margins, how do we cut cost, how do we improve rates, how do we increase sales.
Third, IBC’s ability to manufacture high-performance products with difficult to alloy materials is unique, and it is one of our unique competitive advantages. It is not just about producing the alloys; it’s about equipment, the knowhow, and the processes to be able to do so. One such product is in fact the beryllium‐aluminum casting parts. This provides us a unique competitive advantage, because these are casted parts, which are produced faster and more economically than our competiton who typically produces the parts from [indiscernible]. That same expertise in being able to produce difficult alloys is going to allow us to develop a new generation of advanced alloys including ultra-high performance alloys that incorporate transition metals such as scandium.
So, let’s first look at a high level summary of our company. Originally launched in 2007, IBC has emerged as a leading supplier of advanced alloys such as beryllium‐aluminum and special copper alloys to a wide variety of companies, including several fortune 500 companies. These transformational products increase strength, reduce weight, lessen vibration, increase thermal conductivity, reduce the expansion or contraction during extreme temperature fluctuations, and generally improve the performance across a broad range of applications. These powerful properties are highly sought by many different industries, particularly those wishing to reduce weight or improve fuel efficiency so that they can reduce emissions and increase productivity. We are proud to serve a broad range of industrial sectors, including the defense; aerospace; space; automotive; oil and gas; electronics; and manufacturing.
The diversity of this downstream market is also a significant derisker for IBC. Also, we are 72 employees strong and operate in four U.S. locations. Our people are passionate about developing, manufacturing, and distributing advanced alloys from their raw form to their semi-finished and finished products.
Here you can see our capital structure, which includes a number of outstanding shares, our market capitalization, which is just over C$20.9 million as of market close yesterday, our one year price range of our stock under TSX Venture Exchange, our three-month trailing average volume, and the relative percentage of share ownership by both insiders and others.
We released our third quarter fiscal results on May 31st, and these are available via SEDAR. Here are few noteworthy highlights. Total revenues were up 43% sequentially and up 6% over comparable period of 2015. The quarterly loss was down 49% from the comparative period in 2015 and down 83% from the previous quarter, which was not great. Engineered Materials posted a record quarter with $1.85 million. I do want to note and remind folks as well as NDA that this one was rather unique. We will repeat that number again, but it’s going to take us a few quarters to get there again. Copper division saw sales sequentially after a very weak Q2, but we have seen higher demand for copper based products including semi-finished and finished products. And our cost cutting efforts to reduce our SG&A expenses in the third quarter have now achieved the 23% reduction year-over-year.
Here are few of our measure customers. As you can see, these are global leaders in their space and they span a wide variety of industry sectors. We have results on our corporate restructuring. We have restructured our leadership focus here to be more focused on U.S. operations, on U.S. sales, and on markets. In addition to taking over as the President and CEO of IBC, I continue to serve on the Board of Directors as I have since May of 2011. We have two great new Board members, would significantly strengthen our strategic planning and execution, Mark Smith and Geoff Hampson. Our two highly experienced leaders for each division continue to stay with us, Chris Huskamp and Mark Wolma, continue to lead those divisions.
As a result of the highly successful capital raise, we are now working to expand our production capital in both divisions. These major equipment upgrades will allow us to address critical key points in sums of production; where are those points that would help us increase yield, decrease outsourcing, increase sales of existing lines, and start the important work to bring on new materials on line for the next phase of our growth.
The capital -- the investments capital raise has allowed us to significantly expand and broaden our investor base. Currently we are owned by 26% in Canada, 39% in the United States and 34% overseas in Europe. This has clearly renewed enthusiasm and excitement about IBC. And I believe judging by the market and share price reaction over the last 60 days, the market is positively responding to this restructure.
Finally, we are continuing to streamline and consolidate operations with an eye toward maximizing efficiencies and reducing overhead wherever we can. We are focused like a laser on improving, both the top and the bottom line.
I want to spend a minute talking about my own personal leadership philosophy. Over my career in the military and again in business, I have learned that leadership matters. And if you want to understand my leadership style go read Jim Collins’ book “Good to Great”. I am a Jim Collins philosophy. [Ph] So, I want to talk about a couple of the key points in that, first Levels 5 Leadership. We have two great Level 5 Presidents, who are personally humble, they are fanatical about the professional will and they are workmanlike diligence, they are true plow horses and not show horses and their ambition is the ambition for the company, not for themselves.
We as a company are focused on the people first. We get the right people on the bus and then we worry about, what position they sit in. I have talked one on one with 90% of the employees in this company. And I will tell you they are great people, who are passionate about delivering great products.
The third is confronting the brutal realities but never losing hope in the potential for greatness. The brutal reality is that our low cash and liquidity was affecting operations; we have solved that now. The brutal fact is that we cannot continue as a going concern with negative cash flow. We’re addressing that. We are creating a culture where the truth can be hurt brutally by everyone. When we do investigations, we do it without blink so that we’ll learn from our mistakes and can move forward. That allows us to build the Hedgehog strategy. That strategy is the intersection of our passion, what can we be best in the world at, and what drives our economic engine.
We have that strategy now in both EMC and in the Copper division. In EMC, we’re focused all on how do we expand and achieve profitability, because the orders are there. In Copper, we are focused on how do I build the top line, but do so with products that give us better gross margins. That’s the Hedgehog strategy that we’re putting in place.
With that strategy we develop and have the Flywheel philosophy, that philosophy is simple that it means this effort isn’t one giant push; it’s a thousand little pushes. That means everybody pushing in the same direction; that means aligning the entire company to the goals that we want to achieve. And if anybody is pushing in the opposite direction, we take him off the bus. The cultural discipline then forms from that, so that we get fanatical adherence to the Hedgehog strategy. The most important part about that culture of discipline is that sometime it forces you to ask the question, what should you stop doing in order to have time to do the other things better.
Finally, technology is just an accelerator; it’s not the means by which you grow the business. We are going to improve our technology and financial reporting; we’re going to improve our automation across our manufacturing lines but these are simply enablers to accelerate our Hedgehog strategy. That’s my philosophy.
With that as I have mentioned, here is our great team. They are wonderful leaders that care about the business first. And I’m very proud to have them on our team. We recently added two highly regarded international business leaders to the IBC board, Mark Smith and Geoff Hampson. Mark is the current President and CEO of NioCorp Developments, Ltd as well as the CEO of Largo Resources. Both of these companies are producers or prospective producers of critical and strategic metals that are predominantly used by in high performance alloys. Mark has decades of the experience in the upstream strategic materials production industry. He also understands how to construct vertically integrated material supply chain and how to maximize margin capture along those supply chains. He is a great addition to our board.
Geoff Hampson has long experience in advanced materials, technology, mining and related fields. He also has tremendous business acumen. He is market savvy. He understands what drives companies. He understands how to push them to execute strategic plans. And I welcome his input as a professional businessman.
The next three slides are going to give you the stock performance over the 90-day, the one-year and the three-year periods. IBC has developed innovative technologies and products that provide us with several powerful competitive advantages in the marketplace.
First, we own the intellectual properties and have the knowhow to precision cast beryllium‐aluminum alloys which complex high performance shapes. That casting ability will extend to other new super alloys. This is allowing us to meet customers’ needs faster and less expensively than traditional methods. We spent four years qualifying the material and our production processes for beryllium‐aluminum products for a lot of these markets.
I will tell you that that took longer and was harder than we first thought. But, now having completed that qualification, we’re positioned to potentially expand our business with Lockheed and other aerospace manufacturing companies such as the announcement here with BAE. We maintain multiple upstream sources for our raw materials including beryllium, and this helps derisk our supply chains. Finally, as I have said, we have a world-class workforce, highly skilled that excels in high performance alloy production, manufacturing and distribution. Our team is second to none in what it does.
So, let’s talk about our go-forward plans. I’m particularly passionate about IBC’s ability to supply high performance parts to the F-35 program. In my military service, I was honored to service the former program executive officer for the F-35 program. I want to see this platform be the most cost effective it can for our men and women in uniforms. And by the way, one of those is now my son, Captain Derek Heinz, currently an F-18 pilot and now recently selected to fly F-35. Getting our beryllium‐aluminum gimbal housing parts for the F-35 was difficult, and it did take longer. But the important part of that is that now having fully qualified that material, we now have processes and specifications written and in place so that any engineer in any one of the major aerospace companies can now look up the specification and understand the design characteristic to be able to incorporate in current and future design.
We’re now negotiating the next contract with Lockheed Martin. We’re performing on LRIPs 7 & 8, 9 & 10 and in negotiation for the LRIP 11 lot contract for the aircraft. What does this mean? Quite simply what it means is, is that as the program itself continues to finish out in low-rate production, it will soon begin the transition to full-rate production that is expected to begin in lot 13. And in full-rate production, the company will have the authority to then begin negotiating multi-year contracts. We’re already seeing requests for materials in advanced lead times on a multiyear basis. Additionally, EMC has signed a four-year exclusive contract, which we announced in 2015, with a global precision automation manufacturer that produces the equipment that’s used to fabricate and assemble semiconductor and electronic components.
Why this is important because it demonstrates the breadth of the usage of our material. So, imagine a manufacturing company that once would be able to increase the rate of manufacturing but needs to be able to control tolerance. Beryllium‐aluminum is a wonderful material specifically for that purpose, because it allows you to operate at higher operating speeds with lower vibrations. It is such a competitive advantage that these companies ask us not to name them, specifically because they don’t want their competitors to know that this is part of their strategic advantage. So, we remain focused on the capital improvements to increase rates, yields and reduce costs. We continue also to focus on development of breakthrough new metals that will allow additional expansion to markets.
The Copper division has gone through some tough times here over the last 24 months, particularly with the fallout in the commodities markets and in the oil and gas exploration. I believe though that if you look at copper pricing, you can see now that we’ve been through the bottom in both of these markets. What are the indicators to them? Copper prices have declined from $3.50 in 2014 to a low of a $1.96 in January of this year. And we now see it close yesterday of 2016 with a range of about $2.06 to $2.31. More importantly, we’re seeing again orders expanding. Rig counts on the oil and gas are now showing inventory stabilizing. Rig counts are increasing. And we’re also seeing a supply relative to inventories of oil actually stabilize to go down. So, the markets are coming back and that’s a very important part.
Along with the capital expansion was again the brutal reality we needed to go through to look at what’s been going on in copper. And what was interesting for me was to see that the orders were still there. In the 2014 to 2015, we were just losing them. And so, we did the hard detail to understand why. Now, 40% of the orders we lost were based on price. And I’m not going to go compete on the price. But 60% of them were orders that I couldn’t meet the fulfillment date because I didn’t have inventory or I couldn’t meet the material specification. These are areas we can address and are addressing. So, part of the capital expansion for copper is going to improve the inventory, so we can make these fulfillment bases, because these companies don’t want to carry the inventory and are willing to pay the price for you to do the same. They want their product on time. We are also having additional processing equipment, so we can do more work in-house, which will increase our gross margin yields. Finally, we are updating the heat treatment capabilities of equipments, so we can meet new specifications for existing metals and new metals to be able to address the whole new market sector. With that, I’m very excited about the ability of copper to grow.
On Monday, we announced that we have entered into the joint development agreement with NioCorp Development Ltd to investigate and develop applications for scandium containing alloys for multiple downstream markets. As I have mentioned, IBC has significant in-house expertise when it comes to scandium containing alloys. Our President, Chris Huskamp is a total inventor on two patents that are currently available and in processing right now for scandium containing alloys. This is a very promising area of growth. It will allow us to investigate multiple clean-tech and transportation markets, including the solid oxide fuel sales, vehicles in commercial aviation.
NioCorp is working to establish a reliable and secure scandium supply here in the United States. The joint development initiative between our companies positions IBC to develop a whole new class of advanced products made here in the United States from these super alloys. I’m excited about the potential these alloys bring to significantly reduce the weight of commercial airliners and surface transportation systems. That will help to reduce fuel consumption and reduce air emissions. As you can see, these advanced alloys can make and significant and near-term contribution to addressing the challenges of climate change and reducing our reliance on fossil fuels.
In summary, manufacturers and governments want stronger, lighter, more effective, and more fuel efficient systems, particularly in our defense platforms, as well as in our commercial. And IBC is well-positioned to deliver these values with our proprietary castings and alloys. Equipment upgrades are being made now and are designed to improve our production rates, our yields, decrease our outsourcing, increase our sales of existing products, and start the important work to bring on line new materials for the next phase of our growth. Our precision casting ability with beryllium‐aluminum alloys and our ability to manufacture high‐performance products with dissimilar and difficult alloys is a key market differentiators. Finally, IBC is positioned to harness this in‐house expertise to develop those new alloys for a wide range of new markets.
A - Jim Sims
Thank you, General. And now, let’s turn to some questions. For those of you on the webinar, feel free to pose your questions via your questions panel on your webinar control panel or you can just simply email me your questions at email@example.com. A number of questions have come via email over the past week. So, let’s start with some of the most frequently asked questions.
General, here is one. Can you give us more color on the contract with BAE that you just announced, and do you anticipate that this could lead to significant new business for IBC?
Under the terms of the contracts, I can’t give you the specifics. But again, let me talk about the process of crawl, walk, run. Craw says that they are going through the initial fit-form-function that’s different than the full qualifications because we have completed those. So, they know the strength of material, vibratory characteristics of it. What they want to know is, will that piece work in their particular application. Now, within IBC and particularly EMC, part of the really important groundwork was that we went through 58 potential programs that are going to use beryllium‐aluminum to pick the ones that were in the sweet spot part of our casting process that were easily castable, that were easy to make, that would have high yields and the potential for significant parts orders in the future. This is one such product, and so again, I am very excited about the potential of this product.
General, here’s another question. We’ve had a lot of versions of this question. When do you anticipate completing work on the equipment upgrades and the production capacity expansion, which you mentioned in your presentation? And what is this expansion designed to accomplish?
Jim, we’ve laid it out in two tranches, the first is things that we will accomplish in less than a six months period and the second that will take six to 12 months. Preponderance of those are in the first tranche. They are specifically designed to address our constrains in places where we need to have improvement in terms of yields and capacity. ROIs on several of those products range from as early as seven weeks to as late as 18 months in terms of return on initial investments, but they are all designed to get us right [ph] or to bring us to new products.
All right, here is a question. What is the status of IBC’s contract with Lockheed Martin for the F-35 program, and do you see this business growing larger in the future?
I do. So, as I mentioned, we have two contracts currently that deliver products for lots 7 & 8, 9 & 10, and we are currently in negotiation for lot 11. Lot 11 numbers will approximate the two lots that were done in lot 9 & 10. After that if you just simply look at the government program in terms of both U.S. and partner nations, you will see an expanding number of aircraft for procurement before going into full rate production in lots. The run is going to be for decades. Lockheed Martin are still producing F-16s before military shares for an airplane that started in the 1980s.
And here is a follow-on question from that same investor, General. How much of the company’s future planned sales and revenue do you see tied to the F‐35 Fighter Jet program?
Well, first of all, Lockheed is a very important champion to us. So, we view them as an important customer, and we’re going to continue to work hard to deliver this, because they took on the difficult role of being the champion. In this industry, nobody wants to be first, but everybody wants to be second. Our champion who is first is Lockheed Martin. We have BAE Systems and two other aerospace companies that I can’t mention that are in the door taking to us now about [indiscernible]. So, relative to Lockheed Martin, we’re going to continue to grow our base, and we’re going to continue to service them as an important customer. They won’t be our only customer. Additionally, we’re going to expand out of aerospace. As we mentioned, we have the precision manufacturing business. But if you look at the potential of this material, you can see where it could be used in high-end Formula One and NASCAR, and high end sports equipment and then as you grow rates in those divisions, you move down into cost points that makes it attractive to mainstream commercial aviation and mainstream automotive, and that’s what gets me excited about it.
General, here is another question from a different investor. When does IBC anticipate achieving cash flow positive operations?
We’ll absolutely be cash flow positive and EBITDA in FY17. And it’s my job to try to accelerate that to bring it in as quickly as possible in the fiscal year that begins July 1st.
Okay. And another question; what do you see as the biggest hurdle to IBC’s success and financial turnaround?
I’ll give you two that are important. We still have a very vulnerable economic situation here in this country. But that said, as I mentioned, even on the copper side, what if that orders were declining, just that we weren’t wining as much of them. So, that was our focus. Beyond that, it’s all about growth and how do you grow smart. So, I worry about labor force, I worry about being able to get the right people on the bus and being able to continue to do that, and I worry about disruptions in our manufacturing capabilities.
General, I’ve got three questions coming on the webinar; they’re all pretty much the same regarding the MOU agreement with NioCorp that IBC announced early this week on scandium alloys. What are IBC’s plans with this initiative and what if anything does this signal in terms of the future of these companies, certainly IBC?
Let’s talk about what the MOU is going to accomplish. We actually have two different tasks. The first is to take a look at markets and products to understand what are the marketplaces, the uses and the individual products that would be using scandium containing alloys such as alumina. But we also believe that there could be variations of those chemistries that will allow for unique new IP to be developed. The second task is for us to actually do the hard engineering work to understand what are the processes and run a few lots of manufacturing to show the produceability of these individual parts. So, essentially what I continue to say is climb the pump [ph] for the market place for U.S. availability of scandium producing products in the future. I’m not going to speculate, we have to two great companies here in terms of what the future of those could be. Mark and I both agree in terms of the importance of a vertically integrated look and strategy that doesn’t necessary mean that the two companies done good job, [ph] what it does mean is we are tied to the hip in terms of our futures.
And here is a follow-on question, General, just came in, will the investments in scandium be a drag on IBC’s profitability?
I don’t believe so. We have great metallurgies in this company and great expertise. So, it’s about making sure we focus on the operations and deliver on the promises we make to customers today, while continuing to look at the new markets and the new potential to develop. It’s all about expansion.
General, we get a lot of bruise into this question, both today and in the past week and it’s along these lines. Is IBC moving its corporate headquarters from Canada to the U.S., what does this mean for the future of the company? And a follow-on question, does this mean that investors can anticipate a move possibly to a U.S. exchange at some point beyond the OTC where shares are not great?
So, first regarding Vancouver, we are closing the office that we have in Vancouver and we’re going to transition the functions of the CEO and CFO here to the facility in Franklin and in the United States. We need to reduce operating costs. And I’m very focused on how we do that so that we make efficiencies and get to profitability faster. Our investor base, as I mentioned earlier is 39% America, here in the United States. So, we’re going to improve the CUSIP to make the trading of the U.S. version IAALF, here in the United States easier to both domicile and trade here in the United States. At the point that our membership here in the United States approaches or exceeds 50%, we have to look at what is the alternative that needs to be addressed. And one of those alternatives will be a U.S. list.
Here’s a follow-on question, just came in. Are there plans to expand outside the F-35 program and deliver parts to Lockheed Martin for other applications?
We announced earlier the initial work to go on in the Sniper project. I will tell you that we’ve put that on hold, not because it’s not important but because we wanted to be laser focused on delivery of the gimbal housing units. We want to make sure that we can deliver on that. And as we look at where those Sniper fit and the stacking of relative parts, I will tell you that we will get to it; it’s an important product but we see other opportunities that are more attractive.
Okay, General that’s exhausted our time and that’s a good wrap to questions. We want to thank everyone for joining us on our webcast and investor call today. We’re going to be posting the critical form of the slide deck on our website later today. You’ll be able to download that and print it. There will also be a recording, recording was made at this presentation and you’ll be able to replay that probably starting later today once we get the file. So, thank you all for joining us today. Thanks for your support. We look forward to talking to you soon. Have a great day.