Senior management discussed these opportunities and
the fourth quarter outlook in the company's third quarter conference call, held
October 26.
"We were very pleased with our third quarter revenue and margin performance,"
said Joseph Cross, president and CEO of Nanophase. "As we noted in our third
quarter news release, third quarter revenue was well ahead of plan because of
accelerated orders from a key customer using our nanocrystalline zinc oxide
product."
Cross offered some additional observations about the quarter and the company's
future: "As we discussed last quarter, the entire Nanophase team remains tightly
focused on meeting its business plan goals and objectives for 2000 and
positioning business for 2001." Specifically, he said, the company has been and
is concentrating on five major areas:
1. Tripling revenue from 1999 in 2000 and achieving a positive gross
margin on products during Q3.
2. Increasing the technology base and intellectual property estate by
developing new nano processes and establishing patents and trademarks
3. Reducing manufacturing cost by increasing productivity, output rates,
and yields while reducing direct and indirect costs throughout the
supply chain
4. Increasing manufacturing capability to introduce new products to
address current and targeted market opportunities
5. And, consistent with our strategy of keeping a dynamic, rolling 12
month vision, positioning business for 2001
"In each area, the third quarter was very positive, as revenue growth was 270%
year-over-year and surpassed our internal quarterly goal toward tripling revenue
this year," said Cross. "Considering the first nine months of 2000, the
company's revenues were 200% above the same period last year and 2.2 times all
of 1999 revenue. In fact, revenue for the third quarter alone almost equals
revenue for all of 1999.
"The company continues to make major progress on reducing manufacturing cost. We
have successfully reduced the cost on one product by over 30% and are completing
steps on another which have yielded a 23% cost reduction exiting September. Our
goal is to achieve the 30%-plus cost reduction on or about mid-November for this
major product.
"Through a combination of revenue growth, vigorous manufacturing and supply
chain cost reductions, and balancing product mix, the company made its goal and
commitment to its shareholders by achieving the first positive gross margin in
the company's history. We view this as the first major financial step in
reaching our cash flow breakeven and profitability goals during 2001.
"The company is committed to its strategy of multiple revenue growth
year-to-year, and revenue from an increasing variety of products. We are seeing
volume growth from currently developed products, and are staging our near- and
long-term opportunities to develop a steady stream of products and applications
ready for the market."
Product, Application Pipeline Continues to Grow
Dr. Donald Freed, vice president of business development, discussed the
company's strategy for staging its marketed and pipeline applications:
"Opportunities for nanomaterials will mature at different rates, and there are
substantial opportunities in the near term -- those with a not too demanding
level of technical complexity. There are truly difficult problems in
nanotechnology, such as those falling into the realm of human genetics or
biotechnology. So we are successfully pursuing a staged approach to developing
products for our customers."
He noted that building sales of sunscreen products for which Nanophase provides
a nanoparticle zinc oxide that meets the strict technical and regulatory
requirements for sunscreen active ingredients, is an attractive near-term growth
vehicle for the company. Even though Nanophase considers the technology to be
relative modest in complexity, Freed said that "a very substantial effort by a
dedicated team was required to develop the supply chain and to manufacture,
package and ship the quantities required."
Another near-term sales growth opportunity pointed out by management is products
for the flooring industry. Nanophase has translated the technology used to make
transparent sunscreens into transparent, abrasion-resistant products designed to
improve scratch resistance while maintaining high gloss, and estimates that the
potential opportunities for Nanophase in this market alone is at least $25
million. Nanophase is currently supplying and working with three large customers
in this area.
"These are examples of focusing our business," explained Freed. "The products
that we supply for sunscreens and flooring are products that we make today and
the opportunities meet our 12-18 month time-to-market needs. But the products we
supply are not just "raw" nanoparticles from the PVS reactor, but are further
processed -- for example, with a surface engineered so that they are compatible
with the end-use application."
Freed explained that this staged approach to developing applications enables the
company to build product-related revenues while also expanding its foundations
for developing more complicated applications. For example, the company has
developed additional coating and dispersion technologies and processes, which it
is now using as a springboard to attack more difficult applications. Such
applications might require developing a new nanoparticle material or process,
which may require an 18 to 30 month horizon.
Entering New Frontiers of Nanotechnology
The additional technologies that Nanophase have developed in current
applications are serving as the stepping stones for addressing the next
generation of even more technically challenging applications. For example,
management believes that Nanophase has a competitive edge in nanoparticle-based
functional coatings for use in automotive, architectural, electronics and solar
energy control markets.
"We think the opportunity for our product is substantial -- potentially at least
$50 million by our estimates," said Freed. "These coatings protect against
abrasion and wear, and the harmful effects of static electricity or sunlight.
The technical requirements are more severe than for sunscreens or flooring. For
example, developing a Class A scratchproof finish for cars involves very strict
criteria, so these applications probably will take a little longer to fulfill,
but we can build on what we've learned so far. We're working with a number of
large companies to develop and introduce these kinds of coatings to various
markets."
Freed pointed out Nanophase's initial success working with the United States
Navy to develop and test thermal spray coatings. Freed said that such coatings
have so far proven highly effective in resisting corrosion and reducing wear in
exposed moving parts. In addition to applying this protection to Naval parts,
thermal coatings appear to have significant application potential in marine,
aircraft, and industrial equipment.
"This is an exciting market opportunity for Nanophase which we estimate to be in
the range of $25 million," explained Freed. "We're developing a strong
technology base in the manufacture of nanoparticulate-based thermal spray
materials, and in addition to supplying materials for the Navy, we've begun
several programs with industrial companies. Our materials are being evaluated in
such diverse applications as improving wear resistance in the plastics molding
industry, and in protective coatings for gas turbine and aircraft engines.."
Nanophase is also making progress in another key area of focus, catalysts.. The
company's engineered cerium dioxide product is already used in automotive
catalysts. Additional opportunities offer the potential to generate $60 million
in revenues to Nanophase from this market segment. The company is developing
additional environmental catalyst applications with several customers for its
nanocrystalline ceria and iron oxides.
Revenue Mix Continues to Expand
Dan Bilicki, vice president of sales and marketing, told conference call
participants that the company not only well exceeded its third quarter goals for
revenue growth, but continued to increase the percentage of revenue coming from
product sales to over 92% of total revenues, which was a 25% sequential quarter
increase.
"Nanophase's focus remains on driving revenue in attractive market segments that
meet our time to market criteria of 12 to 18 months," said Bilicki. "Health
Care, Transparent Coatings, Catalysts, and Ceramics, including thermal spray
applications, are the key areas where we continue to deploy our resources.. I
would like to provide an update on our progress in these key market segments.
"In the health care market, Nanophase made two key announcements during the
third quarter. The first announcement was an exclusive long-term contract with
BASF Corporation for zinc oxide material for human sunscreen applications on a
global basis. During the past year Nanophase has provided hundreds of metric
tones of coated zinc oxide, meeting USP specifications, all made under FDA
mandated Good Manufacturing Practices. The supply chain issues and associated
infrastructure changes, demanded by this business, were effectively managed,
resulting in Nanophase meeting BASF's requirements this year.
"The second announcement stated that BASF Corporation has agreed to provide
funding to Nanophase to install its proprietary coating system for zinc oxide.
This arrangement also extended the current contract until June 2004. Nanophase
is scheduled to have the coating system operational in June of 2001. Nanophase
has developed a solid working relationship with BASF's cosmetic chemicals group
and we are utilizing the relationship to actively explore other potential
opportunities within BASF, a diversified $30 billion global corporation."
Third quarter 2000 product sales to the health care market were 8.3% ahead of
second quarter. Bilicki said fourth quarter product sales are expected to be
essentially in line with third quarter as customer inventory build has been
completed. Product sales of zinc oxide to BASF in 2001 are expected to exceed
2000 by approximately 55%, based on the customer's current forecast.
Catalysts Grew 800%, Coatings Outlook Promising in 2001
Third quarter product sales to the catalysts market exceeded second quarter by
800%. The sales of cerium dioxide were generated by demand for catalytic
converters to be installed on new model year cars. Nanophase cerium dioxide is
being utilized by one auto manufacturer on a single platform. Q4 product sales
are expected to fall off significantly as demand has been front loaded and the
annual purchase order volumes have been essentially achieved. Sales of cerium
dioxide into environmental catalyst applications for 2001 are forecasted by
Nanophase's customers to exceed 2000 by three-fold.
Third quarter product sales to the ceramic market, including thermal spray
applications, rebounded from a slow second quarter. Forty eight percent of third
quarter product sales were to U.S. Navy-approved contractors to be used to
thermal spray critical parts for Navy ships and submarines. The remaining sales
were from ceramic membrane applications. Nanophase has provided samples of
thermal spray material to a number of major U.S. companies, which are currently
evaluating the performance of nano-engineered particles in thermal spray
applications.
Product sales in third quarter for coating application remained essentially the
same as second quarter, but the company anticipates potentially rapid growth in
anti-abrasion transparent coatings for the flooring and other industries during
2001. Currently, a number of initiatives are underway in transparent abrasion
resistant coatings that are expected to result in product sales in 2001.
Financial Outlook
The company discussed ongoing efforts to drive cost-effective manufacturing, and
to expand manufacturing capabilities to keep pace with demand. Management noted
that during the third quarter, Nanophase was able to reap some of the benefits
of ongoing efforts to reduce manufacturing costs.
"We expect to see continued reductions in costs of manufacturing during the
fourth quarter," said Jess Jankowski, corporate controller and acting CFO..
"This
exercise is not complete and we plan to continue to focus on cost reductions and
gains in efficiency throughout next year and into the foreseeable future.
"In keeping with the company's internal plans, and the commitment we made to our
shareholders, we attained a positive gross margin for the third quarter of 2000.
We view this as an important milestone. This number is lower than we initially
anticipated due to shifts in shipping schedules and additional costs relating to
our stepping-up production to meet short-term and unscheduled increases in
customer demand. We fully expect that gross margin will increase as we continue
to execute our manufacturing and engineering plans. Regarding the balance of
2000 revenue, we are comfortable that we will meet our goal of roundly tripling
total revenue to hit at least $4.2 million dollars this year.
"Our cost of revenue as a percentage of total revenue has come down by
approximately 18% between the second and third quarters of this year and we
expect this trend to continue. Keep in mind that our gross margin is not only
dependent upon volume, but also on specific product mix. We were delighted to
respond, and the net effect of our higher-than-expected third quarter revenue
growth is that we expect revenues in fourth quarter to be comparable to third
quarter, and we'll focus on rebuilding inventories to meet contractual
obligations for product."
Jankowski noted that inventory and accounts payable has risen since December 31,
1999, which is largely a function of increased production to meet increased
demand for the company's products. "We intend to continue to build finished
goods and work in progress during the last quarter of 2000 to accommodate the
reconfiguration of our existing manufacturing facility, as well as installations
at our new facility. This will help to position Nanophase for planned 2001
volumes," concluded Jankowski.
Technology On-Target, More Patent Protection
Cross concluded: "In the technology area, first, we continue to make solid
progress on the two new nano processes, which we have code named Audrey and
Mira. We expect to begin running pilot production trials on the former by
Thanksgiving. The second project, Mira, continues to demonstrate considerable
promise at a small-scale level and will receive increased effort late in the
fourth quarter and into the first quarter of 2001. Secondly, the European patent
office has agreed to issue a patent covering Nanophase's process, equipment, and
materials. Patents have now been issued in Germany, France, Great Britain,
Australia, Japan and the US.
"The company will remain focused on exactly the same five major areas I outlined
earlier. At the end of September, we had agreements and customer commitments
totaling approximately $7 million for 2001. We have several business development
opportunities to finalize during the final quarter of 2000, and through the
first quarter of 2001, that we anticipate will positively impact total revenue
for the year. We expect to be in a position to provide further guidance on the
2001 revenue forecast by January."
Klingt eigentlich recht gut.
www.bell-labs.com/project/feature/archives/dna/
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