NanoXplore Inc. ($GRA)

Good day, and thank you for standing by. Welcome to the Third Quarter 2026 NanoXplore Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Liam Turner, General Counsel and Corporate Secretary. Please go ahead, sir.

[Foreign Language] Good morning, everyone, and thank you for joining this discussion of NanoXplore's financial and operating results for the third quarter of fiscal 2026. The press release reporting these results was published yesterday after market close and can also be found on our website, along with our financial statements and MD&A. These documents are also available on SEDAR+. Before we begin, I'd like to remind you that today's remarks, including management's outlook and answers to questions, contains forward-looking statements. These forward-looking statements represent our expectations as of today, May 14, 2026, and accordingly, are subject to change. Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties. Actual results may differ materially, and listeners are cautioned not to place undue reliance on these forward-looking statements. A description of the risk factors that may affect future results is contained in NanoXplore's annual information form, which is available on our corporate website and in our filings with the Canadian Securities Administrators on SEDAR+. On the call with me this morning, we have Rocco Marinaccio, our Chief Executive Officer; and Pedro Azevedo, our Chief Financial Officer. After remarks from Rocco and Pedro, we'll open the call to questions from financial analysts. Let me now turn the call over to Rocco.

[Foreign Language] I'm Rocco Maranaco, President and CEO of NanoXplore, and I'm pleased to have you with us today to discuss our fiscal third quarter 2026 results. Let me start with the key financial metrics. We delivered $32.3 million in revenue, adjusted gross margin of 22.9% and adjusted EBITDA of $1.2 million. These are sequential improvements over Q2 2026 and year-over-year increases across all three metrics on a normalized basis, excluding onetime items from the prior year. The trajectory is clear, and we are executing. The momentum we established in the first half of this year is continuing. Revenues, gross margins and adjusted EBITDA all moved higher this quarter, driven by steady volumes from the Club Car launch in Statesville, continued recovery in our transportation business and Tribograf sales, our lubricant product, which are in line with our expectations. I'll now update you on each of the four priorities I outlined in my recent shareholder address. Number one, execute with discipline and deliver on our commitments. We said Q1 was the trough. The past two quarters have proven this as we have delivered sequential performance improvements on the key business metrics. Over the medium term, we believe this momentum will accelerate, driven by the graphene and graphene enhanced solutions growth impact. On our dry graphene manufacturing process, we committed to have it up and running by early April, and we delivered. The equipment is powered on, mechanically running and the team is executing a disciplined scale-up in line with our robust manufacturing protocols. We expect to begin qualifying commercial material in Q4, positioning us to fulfill customer orders from this new platform in fiscal 2027. This is not a future promise. This technology is now in operation and progressing through scale-up. Number two, expand into new markets and applications. NanoXplore has the largest graphene production capacity in the world, the highest purity, the most competitive pricing and now multiple product grades to serve multiple industries. That combination is unmatched. Our recently announced xGnP D500-HP product is the clearest example of how graphene is a disruptive technology. At 99.8% purity with a surface area of 500 meter square per gram verified at commercial production volumes, D500-HP is purpose-built for the conductive carbon additives market, a $3-plus billion space currently dominated by carbon black and carbon nanotubes across applications, including lithium-ion battery electrodes, electrostatic discharge safe plastics and conductive coatings. D500-HP matches the connectivity of incumbent products, is price competitive and delivers double the flexible strength and stiffness. The result, customers no longer need to trade strength for connectivity. D500-HP will be priced competitively with conductive carbon blacks, giving customers graphene level performance without a graphene level premium. This is not an emerging opportunity. Competing in large carbon markets is now a reality for NanoXplore. Number three, convert our growing pipeline into sustained revenue and cash flow. This is where our capital investments are beginning to pay off in a tangible way. We have previously announced $50 million in business wins for our solutions business. Of that, $15 million has been successfully launched in Statesville with Club Card on time and on plan. The remaining $35 million will ramp over the next 18 months as part deliveries start in line with customer forecast. These are contracted revenues with clear time lines. For the first time in our company's history, we have clear line of sight to free cash flow generation. As these programs ramp and revenues are recognized, the financial profile of this company changes materially, that inflection point is now within reach. On Tribograf, our partnership with Chevron Phillips Chemical continues to advance. We are progressing through new end-user customer lab and field trials, actively co-promoting the product with a growing list of major customers across multiple geographies. The product is performing as intended, validated by customers moving from lab to field trials. By lowering the coefficient of friction and increasing lubricity, Tribograf is creating tremendous value for the end user by reducing drilling times up to 20%. This is a clear-cut example of our innovation created massive breakthroughs in industries that have been stagnant for many years. Number four, drive shareholder value. We are back in our conviction with action. Our leadership team and Board have made meaningful insider share purchases in recent months. We are shareholders too, and we are aligned with you on outcomes. With new product grades like D500-HP opening adjacent billion-dollar markets and contracted revenues ramping up in our solutions business, we believe the market has yet to fully reflect the value being built at NanoXplore. We will continue to communicate openly and regularly with the investment community as that value is realized. To summarize, we are executing on our commitments, expanding our addressable markets, converting our pipeline into revenue and investing in shareholder value with both capital and conviction. The story of NanoXplore is one of compounding progress, and Q3 is another step forward. With that, I'll turn it over to Pedro to walk you through our financial results.

[Foreign Language] Good morning, everyone. Today, I will begin with a review of our Q3 financial results, followed by an update on financial aspects of our expansion initiatives and conclude with some commentary on near-term CapEx spending and revenue guidance for fiscal year 2026. Total revenues in Q3 were 6% higher than Q3 last year at $32.3 million. This increase was mainly due to the new revenue streams from the Club Card program, shipments on the CPChem contract as well as higher tooling revenues. However, these were partly offset by lower revenues from government grants, which were higher than usual last year and by lower revenues from our two largest customers whose volumes are improving, but were still lower versus last year. Nevertheless, since Q1, our revenues have increased by nearly 40%. Adjusted gross margins, which exclude depreciation as a percentage of sales was 22.9%, an increase of 50 basis points versus 22.4% last year. We are pleased with the -- by the increase in gross margin, but it was limited due to higher mix of tooling revenues, which have lower margins. As volumes continue to recover and sales of powder increase, we expect margins to continue to expand in the coming quarters. Adjusted EBITDA was $1.2 million, a decrease of $240,000 versus last year. Last year's adjusted EBITDA included $550,000 of grant revenues that was a onetime benefit. If we remove this impact, Q3 2026 adjusted EBITDA would have been $350,000 higher than last year. Looking at the segments. Adjusted EBITDA was $1.25 million in the Advanced Materials, Plastics and Composite Products segment, a decrease of $80,000 versus last year and a loss of $60,000 in the Battery Cells and Materials segment, a decrease of $160,000 versus last year. Regarding our balance sheet and cash flows. We ended the quarter with $24.4 million in cash and cash equivalent and $16.8 million in short-term and long-term debt. Our cash, along with unused space in our revolving credit lines, resulted in a total liquidity of $34.4 million as of March 31. Operating cash flows were negative $3.5 million, mainly resulting from an increase in working capital, largely due to higher sales and payments to supplier on tooling projects. Cash flows from financing activities were positive $900,000, resulting from equipment financing, offset by debt and lease repayments. Finally, cash flows from investing activities were negative $3.2 million, mainly due to capital expenditure payments. At the end of March, the company had spent a cumulative cash amount of $2 million on capital expenditures for projects in progress that will be financed in Q4. Lastly, given the U.S. Supreme Court decision in February on IEEPA tariffs, we expect to receive between USD 500,000 and USD 700,000 in IEEPA tariff refunds in the coming months. These tariffs were paid on imported equipment installed in Statesville, North Carolina. Moving now to an update on financial aspects of our expansion initiatives. As a reminder, originally, our focus was in three main areas: anode materials, dry process graphene and graphene-enhanced SMC and composite materials expansion. As explained during the last quarter's analyst call, we decided not to pursue the CSPG anode materials initiative and to continue on with the other two initiatives. Regarding dry process graphene, the first module of what we expect to be several production modules has been installed, and we are now in the process of scaling up the production line. Regarding the graphene-enhanced materials initiative, the equipment is operational in Statesville, North Carolina, and we are in final stages of scaling up the equipment in Beauce, Quebec. As such, we expect by the end of our fiscal year 2026 to have the equipment installed and operational to generate new revenue streams during fiscal year 2027. Turning now to our near-term CapEx spending and fiscal year 2026 guidance. CapEx spending during the quarter was $3.2 million and was slightly lower than the anticipated $4 million to $5 million. This was due to timing as some of these expenses took place in early April. We expect to spend $2 million to $3 million during Q4 to complete the graphene-enhanced materials and dry process graphene line initiatives. Once these two projects are completed, we expect CapEx to greatly reduce and represent less than about $1 million per quarter, excluding the -- excluding new initiatives. Regarding our fiscal year 2026 guidance, we remain confident with our previous guidance that revenues for the full fiscal year will be between $115 million and $120 million.

Thank you, Pedro. Operator, we may now open the call for questions.

[Operator Instructions] We're going to take our first question and it comes from the line of James McGarragle from RBC Capital Markets.

So I just wanted to ask, we saw some pretty positive demand commentary from Volvo and PACCAR. Can you just kind of quantify the volume uplift that you're expecting from these customers into F Q4 and how sensitive your guidance range is to any softening in the heavy truck production rates?

Yes. So we saw a lower demand of that volume into Q1, right? Since then, it's been progressively increasing, and we see that demand continuing between now and the end of the calendar year. So volumes are still going in the right direction in the industry, and we're going to benefit from that coming up.

And then in terms of your gross margins, I guess they came in a little bit softer than I would have expected just given the stronger top line. You kind of highlighted the lower tooling revenues and volumes, but how should we be thinking about normalized group or gross margins run rate kind of into Q4 and then into fiscal '27 as some of these new programs ramp up?

James, it's Pedro. So in terms of margins, the margins were a little bit softer than probably we would have liked. We agree with you. And it really comes from the fact that we are ramping up some of the operations in both. As the volumes are increasing, we have to rehire some people, and there's been some, let's call it, slight inefficiencies in the overhead that may have caused more limited benefit of the gross margin increases. So that's -- I would say that's a timely aspect. When it comes to the question more into the future quarters, we expect the margins for Q4 to probably be about in line with what we saw now with some increases, probably another 50 basis points, let's say, into Q4. And into Q1 and then forward, I think that you're going to continue to see that adjusted margin continue to grow as the new revenues continue to come in online. These new revenues that Rocco has talked about that we've talked about for the last little while, this is not necessarily a ramp-up. This is much more of a start-up. A lot of these projects are going to be starting and they're going to be incremental revenues with limited additional overheads. So again, so over the next three quarters, you should expect the margins to continue to increase at least 50 basis points into Q4 and then progressively a little bit higher into Q1 and two.

Now we take our next question. And the question comes from the line of Michael Glen from Raymond James.

Pedro, just on what you described just now in terms of gross margin, is that 50 basis points? Is that sequential from Q3 gross margin?

Yes, that's correct. We expect Q4 margins to be slightly better again than Q3.

Okay. And then just on -- I'm just wondering if you could dig into CPChem a little bit more for us. So what are you seeing in terms of where the product is having its most effective application? Are there specific types of drilling? Are there specific regions? I'm just curious what you're able to speak to on that.

Yes. Michael, CPChem. So again, the value we're adding is incremental. It's massive, right? We're decreasing coefficient of friction, increasing lubricity, reducing drilling time by 20%, right? But you're right, it's specific applications for horizontal drilling in really tough environments, right? So it's a premium-based product. You're not going to put this in an area such as the Permian where it's soft to drill through, right? Areas in North Dakota, the Colorado Rockies in the U.S., Western part of Canada, see similar terrain in South America. right? So they're in Australia, for example, these are all applications in areas where the product is being tested and trialed now, have not had any negative feedback from anyone tested, right? Everyone going from lab scale into field, they confirm the results time and time again, right? So some of the projects CPChem is working on right now, some of these things are -- you're quoting. It's almost like you're quoting for a program that launches in six months to a year, right? People are specking in the right type of lubricant for drilling application that launches in six months from now, right? So we're working at all different ends of spectrum. We have converted customers that are in the process of drilling today. I mean there are commercial customers buying Tribograf into NanoSlide and using NanoSlide today. And then CPChem is really focused on some high-volume applications that would launch towards the end of this year and into calendar year 2027.

Okay. And is the product -- is it -- just to clarify, is this an off-the-shelf type product or it needs to be -- or the formulation needs to be adjusted for individual drilling applications, customers or regions?

Off the shelf. Off the shelf. So a lot of the formulation work that two years that we work with them was developing a formulation. So that's done. I mean any work that Nano has done any work that -- CPChem has done has done in the lab is all done. It's an off-the-shelf product. You go buy it today, it's a drop-in replacement to the competitive lubricants that are in the marketplace today.

Okay. And then in terms of how your supply agreement works, would you expect the quarterly contribution to be -- it would be like a lumpy quarterly contribution potentially? Or you would expect something smoother?

Hard to answer. I mean, right now, you -- we have a couple of commercial customers and then a lot of other ones trialing at different phases, right? As more of these customers start to commercialize, right, that ramp trajectory starts to increase quicker, right? If you get big -- there's a lot of big players in this space, which are trialing the product today. One of those hit and convert their fleet quick, then that ramp happens much, much quicker, right? There's four blenders being used today across North America, which means that we can hit geographical regions quick. There was a process to get these people -- these blenders turned on. So we're ready to ramp and CPChem is actively marketing. So...

I think what I could add here is that what we're probably going to see is a stepping aspect. Over time, as some of these bigger customers hit, you get a big jump at that time and then you get stability and then another jump at another point and so on. That's what we think is likely to happen over time.

Okay. And this is -- this should be accretive to gross margin on the volumes grow?

Absolutely. Something to keep in mind always is that we have a large business that's on the solutions side, and that represents a large part of our business today proportionately. So a lot of these Tribograf sales will still be a subset of the whole, but they have significant impact on the benefits of the gross margin. And as I've said time and time again is that as gross margins -- excuse me, as Tribograf and other graphene sales pick up, it contributes gross margins in a very strong way. You'll see it less likely -- less visibly on the revenue line, but it contributes to the EBITDA much more proportionately.

[Operator Instructions] Speakers there are no further questions for today. I would now like to hand the conference over to the management team for any closing remarks.

Thank you very much, everyone, and have a great day.

This concludes today's conference call. Thank you for participating. You may now all disconnect. Have a nice day.