NanoXplore Inc. (GRA) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Q2 2023 NanoXplore Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to Martin Gagné, Director of Investor Relations. Please go ahead.

[Foreign Language] Good morning, everyone, and welcome to NanoXplore's Fiscal 2023 Second Quarter Conference Call. Today, I'm here with Soroush Nazarpour, our President and CEO; and Pedro Azevedo, our CFO. We will start with our prepared remarks and then a Q&A. Please note that our discussion will include estimates and other forward-looking information, which our actual results may differ from in the future. We invite you to review the cautionary language in yesterday's earnings release and in our MD&A regarding the various factors, assumptions and risks that could cause our actual results to differ. With that, let me turn it over to Soroush.

Thank you, Martin. Good morning, everyone, and thank you for joining us today. Before we start, I would like to explain the reason for the early financial release. In the last few minutes of trading on Monday afternoon, it came to our attention that a copy of our press release has become visible to some individuals with no intention on our part. In order to ensure all market participants have access to the same information at the same time, we chose to put up the release on Tuesday morning before market opened. We followed all the regulatory protocols since learning of this information and followed IRAP guidances for early release. I would like to thank all of our team members across our organization for their hard work and dedication. I'm grateful to everyone for being on this journey with us. I will start our prepared remarks with the impact of macroeconomics environment on our business, followed by a quick financial review of our second quarter. Then I'm going to expand on some of recent achievements, and we'll report on the progress of our 5-year strategic plan. I will end my remarks with some comments on VoltaXplore. Let's begin with the macro overview. Despite hearing about a potential recession from economists in 2023, we believe some segments of economy can withstand a slowdown much better than the others. We currently do not see an impact from this Fed-induced economic slowdown to our business. And in fact, we are not seeing our partners slowing their graphene testing and validation process or planning to. There are 2 main reasons for this. First, the macroeconomic picture has a limited impact on commercialization of graphene as it is a nascent market and early adopters are generally market leaders that can withstand the potential slowdown better. And second, heavy commercial transportation market, which represents almost half of our revenue, is recovering well. And the fundamentals are improving as chip shortage has been then supply chain challenges are abated. In fact, our main customers are increasing their production forecast. To summarize, we do not see a slowdown in our business, and we feel very good about where we're headed. Moving to our second quarter, we delivered strong top line growth and significant margin expansion. Total revenue grew 69% year-on-year to $31.7 million in the second quarter, which is a record level. And we delivered positive adjusted EBITDA for the second time in the last 3 quarters. Overall, we are quite satisfied with our graphene commercialization activities as we see more and more successful customer trials. Our decision last year to focus on applications with higher probability of success was the right one, and we believe this will increase our return on R&D initiatives and a speed of commercialization efforts. Let's just start with our transportation business. We are thrilled that one of our large commercial vehicle OEM customers approved the use of graphene to all current and potential future programs. The decision resulted from successful integration of our graphene in an existing program where our customer observed significant improvement in the quality of our composite products. Such decisions are rare in such a conservative market and will set the tone for other OEMs to follow along. This, in turn, results into more integration of our graphene in lightweight composite markets. In addition, just recently, we got the approval directly from a large passenger OEM for graphene-enhanced plastics for exterior automotive applications. This well-known passenger OEM is an early adopter of graphene and has already certified our graphene and using our graphene in vehicles. The key benefit of adding our graphene to these applications is that it improves moisture resistance. This results into better material process stability and less defective parts. This approval would have not been possible without our downstream acquisition of Canuck late in December 2021 and demonstrates our ability to expand our commercial activities with an existing client. Graphene market encountered with one-off products for a long time. And we're happy that our graphene is bringing tangible and sustainable value to our customers and enabling us to bring more business within existing platforms. Moving to drilling fluids. One of our partners, which is a market leader in the specialized drilling fluid applications, is showing that our graphene helped them with fluid loss mitigations and brought high thermal stability at very high temperatures, which speeds up the drilling process. Currently, they are setting us up as a vendor in their ERP system, and commercial discussion is on board. This vertical is especially attractive as it is large and considerable market with significant loading potential of our GrapheneBlack powder. Just to give you some context, this vertical has a potential TAM of 256,000 tons of graphene. Turning to foam, several chemical companies that we are working with are seeing very positive performance with our GrapheneBlack solutions. We are involved in 30 technical validation programs, and we are seeing success in majority of them. Based on these very good results, we are confident that our graphene integration will grow in this market. Graphene increases the thermal insulation properties by 10% to 15%, improves flame retardancy and provides a more sustainable solution. We're also currently working with a well-known multinational chemical company in a late-stage trial. And results show that the combination of performance cost make graphene very attractive for insulation foam applications. The better performance is driven by improved mechanical properties and enhanced [ leverability ]. The partner will do further field trials. But based on these excellent results, we are confident that we can win this business and grow from there. Recall that this is a large market with potential TAM of 190,000 tons of graphene. In concrete, we're also receiving some very good outcomes. As an example, we're engaged with a major concrete manufacturer whose interest in our GrapheneBlack is high. We have been testing with this partner and saw a 20% improvement in compressive strength using their scalable formulation. Even though more work is required, these impressive results are very promising for our company. Remember, this is the largest total addressable market for graphene, equating to 6 million tons of annual consumption. Even a small market share will be significant for us. Another example is our ongoing development work with one of the market leaders in the cement additive market that achieved elevated mechanical properties after adding graphene to concrete admixture. Currently, they are moving forward with further field trials and with their own customers and championing the ASTM product certification effort. Certification process in cement market is cumbersome and long. Having said that, this process can be accelerated significantly when the market leader is championing it. As we think long term, NanoXplore is keeping sustainability top of mind. We firmly believe that reducing the carbon footprint should be ingrained throughout the corporate sector and the respective supply chain. As we said in the past, our GrapheneBlack solution has an 80% lower carbon footprint than competing solution, and customers are very interested in learning more. Using more recycled plastics could definitely help lower GHG, but weak performance of such recycled materials hinders the wider spread use. According to a research paper from the Imperial College in London, recycling sales between 30% and 80% of carbon emission versus virgin plastics or equivalent to shutting down between 8 and 40 coal-fired power plants globally if all plastics were recycled. As noted before, graphene enables reusability of plastics by enhancing the rigidity and performance. As an example, we are supplying graphene to a sustainable packaging company from Latin America, and we're expecting more of such type of customers to use graphene commercially. Moving to our 5-years plan. We are a conservative company, and the 5-year plan we have announced is in line with this. Although early in the process, we have a strong conviction in our strategic initiatives and the potential for a graphene consumption. Let's start with our SMC initiative. We are currently conducting our detailed engineering work and started discussion and negotiation with long lead item equipment suppliers. Despite being at this early stage, we are confident that we can optimize our CapEx investment related to main equipment. We are targeting September '23 for the start of procurement, which is on time according to our schedule, and the commissioning should be early calendar year 2025. We are targeting to finance this through credit facility and cash on hand. Light-weighting will be a key theme for electrification of transport, and NanoXplore is in a desirable position. Our solution can lower parts' weight by up to 25%. It prevents the surface from blistering, thus creating a high-quality and smooth-surface finish, leading to lower paint costs. Moreover, the reduction in consumer material reduces carbon emission and helps on the sustainability front. In addition to this, our SMC solution will improve key properties in battery enclosures for EVs. The overall battery pack components are the heaviest part of the EV at around 30% of the vehicle weight. Battery enclosures are made of metal, but it's clear to us that by using composites, coupled with our graphene SMC proprietary product, we can solve the weight problem for OEMs, which increases EV rates. This market is very attractive not only because of the rapid rise in EV market, but also because of high loading of graphene is around 5x more than average loading in other composite applications. All in all, we are confident about the potential of our company in this growing SMC market. Moving to our graphene and battery material facility. The engineering work has started, and we are looking for a suitable building to house our production [ lives ]. This facility will have a capacity of 12,000 tons per year, consisting of 7,000 tons of pilot battery materials and 5,000 tons of our industrial graphene products. As we said in the past, we will sell 3 types of battery material solution to the energy storage market and to VoltaXplore as well. The 3 solutions are anode active material; anode performance additive consisting of our graphene physical solutions; and finally, we have our conductive additives product. We expect to commission our 100 to 200 ton per year graphene silicon performance additive lines during 2023 by benefiting from XG's acquired assets and commission the rest by 2025. As noted before, we are very excited to enter into battery material market. This market is expecting a strong pull as supply is limited and localized mainly in Asia. Since the Inflation Reduction Act was enacted last year, we have seen multiple new battery projects on the drawing table. The overall battery manufacturing capacity plant has increased from roughly 700 gigawatt hour to 1,000 gigawatt hour in North America by 2031, according to BMI, which makes the market dynamic very enticing for NanoXplore battery material solutions. As for our battery material new R&D facility, which we announced after the XG acquisition, we're currently setting up the equipment and anticipating to have it up and running in a few weeks. The required lab equipment from XG, along with the important graphene silicon patents, are key for our performance additive products. And more development will be undergoing in our new lab space. Switching gears to VoltaXplore. We have been working hard behind the scenes on the development side. First, we are improving and adding hours of testing. It is very important for optimizing the performance of this cell. As previously disclosed in our AGM presentation, which is on our website, the KPIs are impressive. Volta has a high-energy density. It provides lower cell temperature, which results into safer batteries and are lighter in comparison to our competitors' product. As we put this lighter cell in a battery pack with thousands of them, it's going to make a difference in increasing the vehicle range and safety. Moreover, we are excited to have been selected to be a part of the Project Arrow. The unveiling of the car was very well received at the Consumer Electronics Show in early January, and the Volta team was there to meet with interested parties. I want to reiterate that VoltaXplore is a top priority for NanoXplore, and our desire to succeed has never been higher. We are confident about the prospect of VoltaXplore because of the strong performance that our cells bring, along with the discussion we are having with the stakeholders and future customers. I will refrain from commenting further at this point on these discussions or on financing activities for obvious reasons. What I can say is that we are still committed to building a gigafactory in Québec, and we're actively working to make this a reality. Moreover, the 2023 upcoming federal budget has the potential to be an important contributor to this project, and we hope to see programs that can compete with the Inflation Reduction Act in the U.S. Finally, I would like to welcome Darrin Hotts to the NanoXplore family as our new Vice President of Sales and Business Development for our graphene-enhanced composite business and battery enclosure. Darrin brings extensive experience in the auto sector and has worked with Tier 1 global OEMs throughout his career. With that, I will pass the line to Pedro.

Thank you, Soroush, and good morning, everyone. I will start with a review of our Q2 results then will be followed by our funding strategy regarding our 5-year plan, and we'll close my remarks with our outlook for fiscal year 2023. Let's start with our Q2 results. Total revenues grew 69% to $31.7 million, while revenues from customers grew 71%. The increases -- the increase in revenue was driven by higher volumes; a positive product mix, including graphene-enhanced products; the acquisition of Canuck, which took place in December of 2021; a higher U.S. dollar FX rate; and price increases. These items were partially offset by lower tooling revenues. Our Q2 gross margin, excluding depreciation and amortization, was $5.6 million, an increase of $4.2 million compared to last year. As a percentage of revenue, gross margins improved by 1,000 basis points to 17.8% and was driven by higher margin product mix, price increases, improved productivity and better cost controls. Our adjusted EBITDA was positive $141,000, which is a gain of $3.3 million versus last year. As Soroush mentioned, this is our second quarter of positive adjusted EBITDA in the last 3 quarters and demonstrates our ability to achieve positive adjusted EBITDA more regularly. We expect our quarters to remain lumpy, but our quarterly trailing 12-month performance, which is our preferred method of monitoring our progress, is decidedly trending favorably. The improvement in our adjusted EBITDA was largely due to higher gross margins due to the reasons I explained, partially offset by investments in SG&A related to additional headcount, higher wages and higher accrued variable compensation. As expected, the strengthening of the Canadian dollar during the quarter resulted in reversing part of the foreign exchange loss on hedging contracts we experienced in Q1 by $1.2 million during Q2 as the U.S. dollar depreciated to CAD 1.35 on December 31 from CAD 1.38 on September 30. As a reminder, as part of the foreign exchange hedging policy, we engage in forward contracts for up to 24 months based on expected net U.S. dollar cash flows during the time frame and record the monthly mark-to-market impact on the P&L. However, as mentioned during our Q4 2022 call, these variations are excluded from adjusted EBITDA as it is not deemed an operational item. With regards to our balance sheet, we ended the quarter with $38.6 million of cash and cash equivalents and $10.3 million of available space on our credit line for a total liquidity of $48.9 million. This amount is just slightly lower than Q1 2023. The $4.2 million decrease in our cash position compared to Q1 is due to a repayment of $4.5 million of the line of credit and a payment of $1 million to our former -- to the former Canuck shareholder as part of the terms of acquisition. During the quarter, we generated $3.3 million positive cash flow from operating activities resulting from positive adjusted EBITDA and improved working capital levels. Having a strong balance sheet is part of NanoXplore's DNA, and the heavy-lifting done to lower our working capital levels allowed us to pay down our debt and solidify our balance sheet further. Our total debt stood at $10.1 million and was comprised of $8.6 million of long-term and $1.5 million of short-term debt. Moving to our 5-year capital funding plan. As previously stated, our primary goal is to increase shareholder value, and we'll structure our capital allocation accordingly. Since announcing our 5-year strategic plan, the teams have begun a detailed review to identify the equipment needed, the partners we will work with, obtaining quotes and such for each of the initiatives in an effort to get a more accurate estimation of the capital required. So far, our more detailed work is confirming our early estimations remain reasonable and possibly higher than the final amount will actually be. In parallel with this work, we have entered into discussions with our existing debt financing partners to expand our existing debt structure into a more complete credit facility and plan to look at other lenders to ensure we have the lowest borrowing costs. We remain confident that government grants will provide part of the financing and the balance financed through debt. In the event equity financing is needed, it would not be until 2024 at the earliest. We will provide another update during our next quarterly call. Finally, considering our strong Q2 results and the visibility we have from our customers and partners for the second half of the fiscal year, we are raising our total revenue guidance for fiscal 2023 to a level between $115 million and $120 million from the previously stated $110 million. With that, I will pass back to Soroush for some final comments.

Thank you, Pedro. Looking back a year ago and seeing what I see now, I'm even more excited about how our graphene commercialization efforts are progressing based on our latest accomplishments mentioned earlier. Whether we sell pellets, powders or composite products, our graphene technology is at the core of our activities. This is the key enabler of our revenue growth because it helps boost performance and reduce carbon emission for our customers. Finally, we do expect significant growth in the next few years as adoption accelerates. With that, I will turn it back to Martin.

Merci, Soroush. Operator, we can now open the line for questions.

[Operator Instructions] And I show our first question comes from the line of Amr Ezzat from Echelon Partners.

Can we start on the gross margin front? Pedro, maybe you could speak to the revenue mix in the quarter relative to last quarter. I've got you guys close to 18%. And I think last quarter, you were at 12%. So more detail on what's driving that would be appreciated.

Sure. A couple of things. So really, last quarter, we had lower activity than we would have had normally, and that impacted our ability to absorb fixed overheads. This quarter, not only we had more volume to absorb overheads, but we also had operational efficiencies on direct labor. We're also able to pass along some price increases that were impacting us last quarter due to inflation and then price increases on materials. So the 2 combined or these elements combined helped us get to the gross margin levels that we had for the quarter. As we continue to try to increase those along with the product mix coming from graphene-enhanced materials, that will further increase our margins.

I'm sorry, I missed the last part. On the product mix, there's more graphene-enhanced materials as well?

Yes. Yes, as graphene-enhanced material sales occur, our gross margins will naturally go up. They get diluted overall because of the size of the activity and the amount of graphene materials sold during the quarter. But overall, it's going to increase. It increases the gross margin naturally.

Okay. So is it safe to assume or is that a fair statement from here until like the end of the calendar year expectation is for increased sales of graphene, so we should expect gross margins as well to expand further? Is that a fair statement?

Yes. It's just the quantity of the expansion is going to always be somewhat limited over the next immediate quarters, but will be progressing over the future quarters for sure as graphene sales continue to contribute positively. Of course, I can't say what could be happening on operational efficiencies or volumes and such that could impact the gross margins. But overall, it should be a positive trend. And the margins that we see right now should continue to increase as I personally believe that the margins have room to be improved.

Fantastic. And then maybe, Soroush, like in your earlier prepared remarks, you spoke to quite a few clients, I think, like approving the use of graphene in some orders. Is it still fair to assume that by the end of the calendar year, you're capacity constrained on your current facility?

Yes. So yes, the graphene sales is growing. A lot of new customers are coming and putting the orders. Some previous ones are putting new orders and increasing their volume. Harder to say the exact time line of that. But for sure, less than 24 months, we have capacity, and we need to have more capacity on the graphene side.

Okay. Turning to the 5-year plan. Pedro, I think you mentioned the CapEx plans you initially released, which were $170 million, might be actually too high. Do you have like a revised number for us? Or is it like too early stage? Then on the financing package, can you give us like the broad strokes of split between grants and debt? Or is it too early as well?

Well, on the first part of your question, the amount is still too early to confirm back to the market. We're seeing positive values. I guess valuation is lower than we were originally expecting. However, it's still too early to kind of comment on that. For the second part of your question, the grants that we're expecting is still very much as what we had talked about. It's about $50 million out of the whole. The balance is going to be through debt and cash. As you can see, we still have almost $40 million of cash available, $30-some-odd million of cash in our accounts. And we should be able to tap into that along with the debt structure credit facility that will be put in place that should be covering that. But the grant would be about $50 million from what we can say.

Then as a reminder, like of the $170 million CapEx plans, I believe only $100 million were front-end loaded, right?

No, it's going to be over time in tranches. A lot of the immediate investments will be probably in the first 2 years, but I can't quantify exactly how much that will be because it depends on the timing of the rollout, depends on the timing of the acquisition of equipment and facilities. But -- and we know that the last tranche of $20 million will be for the further expansion of [ 40,000 ] tons of graphene production, which will probably not going to take place until 2026 or '27.

Okay. Maybe one last one and I'll pass the line. On VoltaXplore solution, I know you mentioned that you're not commenting on the details. But can you speak to timing? Is it like a first half of 2023 event?

Yes. As explained in the AGM, we are really engaging with the federal government, and that's the part that we need to see a package that makes sense to us. Of course, any potential package has dependency to the federal budget. So we have to see what is going to be in the budget. Following the budget announcement, we have a better understanding of where we stand in the total CapEx financing. I think we're quite confident -- we're confident on the Québec side, but also quite confident on the rest of the financing. But we need to have a clear indication of the exact quantum of the capital coming from the federal government.

Okay. Great. Congrats on the strong quarter again. I'll pass the line.

And I show our next question comes from the line of Michael Glen from Raymond James.

Soroush, for that federal budget situation that you're describing, like is there a specific amount that is -- that would be embedded somewhere in that budget that would be -- you'll be able to point to, to say that that's for VoltaXplore? Or is it that they will be allocating money to a fund and then VoltaXplore would have to engage with whoever that is managing that fund to propose the project?

Well, we heard a lot of different versions. What I can say is the federal government has been quite tight-lipped about how they are setting up this program. At this point, the last we heard is there's potentially going to be a program. There has been discussions about investing on other funds. There has been discussions of investing in the Canada Growth Fund or similar type of programs. But at this point, anything we hear is not definitive until we see the budget. And that budget, we hope that has specific programs to compete against the IRA. And I think that has been something that the federal government has repeatedly said that they're trying to put programs in place of [indiscernible].

Okay. And as you wait for that scenario to take place, like what is the -- is VoltaXplore at the same time, can you indicate whether you are engaged with the strategic partners in terms of helping with some of that financing?

At this point, we're already -- 2 strategic partners started this VoltaXplore. Our focus is to get customers on the line and ready for pickup of the product when the factory is in place. Currently not really focusing on getting capital from the strategic partners. We are certainly open to look at the opportunities, but we don't want to have, let's say, an OEM to come in and limit our commercial activities with other OEMs. So mainly the key is to stay independent as long as possible with a 2 gigawatt hour. That can certainly change on the extension to 10 when we are adding 8 more gigawatt hour. That's when we look more closely to having OEM partners. But at 2 gigawatt, it's needed to stay as independent as possible.

Okay. And with the commercial -- you talked about the commercial customer and the transportation side approving the use of graphene for future programs and you are going to be supplying them with a graphene-enhanced product. Are you able to indicate the margin benefit? Is there a premium that the customer is paying for the graphene-enhanced product? And can you identify how much of there's a margin benefit between the old product and the new product?

Yes. Actually, on the first question of Amr about the gross margin, one of the things about graphene is, of course, when we sell graphene on a powder or pellet format, we have a higher gross margin on the product. But when we're selling the graphene and has composite parts, that's when you see operational improvement within our products that we are selling to the OEM. So technically on those products, we're not getting premium or premium is very small. But we have quite a lot of drop in terms of defects and blistering. We showed those parts in the AGM actually to some of our shareholders that they participated. So the parts are experiencing a much better quality. So the reject rate dropped significantly, and that's technically what graphene does in those parts when we're not changing the dimension of the mold or part dimension. So on those ones, we don't see top line growth, but we see increase of -- improved productivity in-house.

Okay. And just finally, do you have an update for full CapEx for the year?

We expect -- excluding XG acquisition, we expect CapEx probably to be around $3 million to $4 million this year, before the end of fiscal 2023.

$3 million to $4 million, okay.

And I show our next question comes from the line of Rupert Merer from National Bank. [Operator Instructions] We'll move on to the next participant in the queue, and that's from Ben Jekic from PI Financial.

Congrats on very good numbers. Pedro, just a couple of sort of eclectic questions. Just on the gross margin, so is it fair to say that the positive FX was not a sort of material contributor to gross margin? Like if we were to remove an FX impact, would we still be around 17% or so?

The FX impact comes from the conversion of the sales in U.S. dollars to Canadian dollars year-over-year. And we wouldn't be at a large increase. But the contribution from the FX, the higher FX is definitely going to the bottom line. It probably contributes maybe 3 percentage points, give or take. We also make purchases in U.S. dollars, which offset the impact to the bottom line. But definitely on the sales level, it definitely is beneficial to us when we have U.S. dollar at around 1.34, 1.35 or better.

Right. And I just want to understand sort of completely on the -- I think 2 analysts have asked. So in terms of the mix, so you want -- when you see higher powder and/or pellet sales, that's improving the mix and improving the margin profile. You are getting some benefit from graphene-enhanced products, but it's more modest. And it's -- kind of the impact there comes from internal productivity. Is that a fair statement?

Yes, that's correct. When we can't -- when we are selling products to customers that are graphene-enhanced products that are not necessarily benefiting from the graphene capabilities, but really are more about the inclusion of graphene in our materials from an operational and a quality aspect, those benefit more us operationally than the customer in terms of pricing.

Okay. And then my last question, just on the transportation side. So if I understand, so the commercial customer, everything is progressing, lots of approvals for adding graphene to future products. But you guys were mentioning, I think you used the term passenger OEM. So are there -- how close are we to the orders from that customer?

I mean if we are -- if we haven't started supplying by now, it's going to be very soon. The product is already awarded, but I'm not really sure exact time line of the work, but it's -- of the supply, but it's going to be very soon. Normally, it's not a new program. It's a changeover in a sense or, let's say, it's an improvement to an existing program. So it's going to be very fast.

[Operator Instructions] And I show our next question comes from the line of Ahmad Shaath from Beacon Securities.

I guess back to the gross margin one. Just to clarify, the benefit on improvement productivity where you're not really capturing price increases, this is sort of the legacy Sigma business where you're selling steel components into the trucking market. Or does that also encompass whatever you're selling as a differentiated graphene-enhanced product?

So what I can say is on a large portion of the Sigma business, currently, we have graphene. And graphene, I mean, there was a couple of plants in Québec City and plants in Winnipeg. Pretty much all the products of our Winnipeg facility, there is graphene already. And also a big chunk of the Québec facility of Sigma, there's graphene in there. So what graphene provides in the parts side is a lot more of an operational improvement than going to the OEM and charging them extra. These are pretty much capped with the existing long-term contracts. So the ability of us to pass through price increases, not because of material change, but because we're just going to add some graphene in there and overcharge the customer, it's harder. So we're benefiting a lot from operational improvement there in those products, which expands the gross margin. But when we look at the graphene and graphene-enhanced pellets and masterbatches, well, these are the high margin -- these are high-margin products. That goes to someone else. And we expect the customers of us buying graphene and graphene-enhanced pellets are benefiting from operational improvement. So when we are selling to our -- like internally to the next level of supply chain, we benefit internally from that operational improvement.

Perfect. That's very helpful, Soroush. So just to confirm, you're not getting a pushback on price when you're operating or positioning a product as a graphene-enhanced product. The market is appreciating the benefits and potential premium, the prices can be absorbed?

Yes. I mean, technically, these type of contracts throughout the year is they always expect it to improve productivity, and they always ask for kickbacks. The OEMs ask for that. So seeing that the company is capable of providing good product, enhances the margin internally, they always like it because it brings potential kickbacks for them in the future. At the same time, those type of products, if applied early in the process, the OEM can actually adjust the dimension of the mold and use the light-weighting side of it. So one of the things we see that right now in the SMC parts, for instance, for packaging, for EVs, for battery packs, since it's early, a lot of those weight reduction is important for clients, and they want to use that weight reduction. Now when you go and look at the fenders in a truck, which has already been produced for 10 years, it's harder for OEMs to come and change the die and the mold to benefit from the weight reduction. So again, different customers, they have different requirements and also the age, the life of the program and where you're trying to include graphene demonstrate that how the OEM is using it. All in all, as you see and as we said, this market normally is resistive to change and don't like having new type of materials in. The fact that the -- an OEM actually approved the use of graphene in all their programs, regardless of SMC or, let's say, RTM and different type of even composite forming programs, it demonstrated the product is working for them.

That's really helpful. I appreciate it. Yes?

And Ahmad, just one more thing is that over time, as the new programs are awarded, our ability to put graphene and have higher margins are going to be there as we're able also to pass along some savings to the customer by the light-weighting of products. So a lot of the movement by PACCAR and eventually others to move to accept graphene will allow for these gross margins to increase in the future...

No, that makes total sense. I appreciate the color on that solution, Pedro. That's all for me. I'll jump back in the queue.

And I show our next question comes from the line of Michael Glen from Raymond James.

So just going back to the passenger customer that you're describing, is that program -- are you able to indicate -- is that program via Martinrea? Or is there another supplier involved in that?

This is directly supplied from us to a Tier 1 of the passenger OEM, but it's not through Martinrea.

So this is a passenger car OEM that's doing its own -- some of its own bodywork, body and staffing business?

No, it's a passenger OEM that's picked up the product from us, but their Tier 1 is not a part of that passenger OEM. They have their own Tier 1 performing of those exterior parts. So we are selling to their Tier 1, and Tier 1 sell it to the passenger OEM. But the approval is coming from the passenger OEM.

Okay. Okay, so you sell -- I see. And that you're selling the composite, like the graphene...

No, compounds, graphene-enhanced compounds, recycled plastic compounds. It's supplied through Canuck. So we sell -- well, technically, our graphene goes to the Canuck process, there goes to the Tier 1 from their process there and goes to the passenger OEM.

I'm showing no further questions in the queue. At this time, I would like to turn the call back over to Martin Gagné for closing remarks.

[Foreign Language] I would like to thank everyone for attending this call, and we wish you a great day. You can now disconnect. Thank you.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.