Neo Performance Materials Inc. (NEO) Earnings Call Transcript

2026 earnings conference call. Following the presentation, we will conduct a question and answer session. [Operator Instructions] This call is being recorded. 2026. For opening remarks and introductions, let me turn the call over to Mr. [ Jim Fitzpatrick ], SVP of Investor Relations and Communications for NEO. Jim, please go ahead.

Thank you, Operator, and good day, everyone. Today's call is being recorded. A replay will be available starting tomorrow in the Investor Center on our website at neomaterials.com. Our call will be accompanied by a live webcast presentation. If you're joining us online, the slides will advance automatically as we progress through the discussion. You can also download a copy of the presentation from our website to follow along or reference afterward. On today's call are Rahim Suleman, NEO's President and Chief Executive Officer, and [ Jonathan Batch ], NEO's Executive Vice President and Chief Financial Officer. Before we begin, I want to remind listeners that some of the information discussed today will include forward-looking statements within the meaning of applicable securities laws. These statements reflect current expectations, but involve risks and uncertainties that may cause actual results to differ materially. We refer you to our filings on SEDAR and the investor section of our website for discussion of these risks. Financial figures are presented in U.S. dollars unless otherwise stated, and we will reference certain non-IFRS financial measures. Reconciliations are available in our financial statements and the MD&A. I'll now turn the call over to Rahim Suleman, President and CEO of NEO.

Good morning, everyone, and starting from slide 3. Coming off a strong first quarter, NEO delivered yet another record-breaking quarter in Q2, marked by strong operational performance, continued execution on our strategic priorities, and financial results that once again exceeded expectations. Adjusted EBITDA was $57 million, which is a new all-time quarterly high for the company, representing an increase of over 200% from the second quarter of 2025. To date, our adjusted EBITDA is $93 million, up 158% compared to the first half of 2025. Exceptional performance reflects continued strength in volumes across all of our segments, strong improvements in our conversion costs, and a sustained favorable pricing environment. Magnequench delivered its strongest quarterly adjusted EBITDA in 4 years, driven by a 35% year-over-year increase in bonded magnet shipments. Chemicals and Oxides also had a very strong quarter, delivering a 56% year-over-year increase in adjusted EBITDA, driven by strong performance in our Emission Catalysts business. And Rare Metals had a record performance, delivering $45 million of adjusted EBITDA in the quarter, driven by healthy volumes and a sustained strong pricing environment. Looking at the second half of the year, we are seeing continued end market strength in both pricing and volumes. Across all of our business units, we have increased contracted volumes through the remainder of 2026 and for some businesses into 2027, along with securing more inventory, particularly for hafnium, gallium, and tantalum. In early July, we increased our full-year adjusted EBITDA guidance to $140 million to $150 million. Today, we reaffirm the top end of this range with potential for us to exceed this. This would represent approximately double our full-year 2025 adjusted EBITDA. Moving to slide 4. Turning now from our near-term outlook to our mid-term growth strategy, specifically two areas of investment for NEO: our European magnet operation, and our bonded magnet business. To help fund this growth, in May, we successfully completed a $115 million Canadian Treasury offering, a financing that reflects both the strength of investor confidence in NEO's strategy and the growth opportunities in front of us. This capital is largely earmarked for equipment for Phase 1B of our European permanent magnet facility, as well as for the expansion of our bonded magnet business. These investments position NEO to meet the accelerating demand that we are seeing across the rare earth permanent magnets. And we intend to deploy this capital with the same discipline and strategic focus that has been our hallmark to date. Now, let's look at each of these in turn, starting with our European permanent magnet facility. Moving to slide 5. As you know, our European permanent magnet platform represents one of the first large-scale integrated rare earth magnet supply chains outside of China, supporting Europe's automotive, industrial, robotics, and clean energy segments. Combined with our European rare earth separation capabilities, we have the most vertically integrated platform in Europe, and that positions NEO to capture long-term growth in permanent magnet demand. As we promised, we built this facility in under 2 years on time and on budget. We have won multiple program awards from three different Tier 1 motor manufacturers, including for traction motors. We have delivered qualifying samples to our customers for these programs made from this production equipment in Europe. And we continue to be on track to meet our commitment of launching 2 to 3 customer programs into commercial production by the end of this year. We also continue to advance our Phase 1B expansion activities, which are expected to increase production capacity in Europe from 2,000 tons to 5,000 tons. These activities include advanced equipment purchasing, supply chain planning, detailed designing of the facility, as well as a layout for construction. And as I've shared on previous updates, our longer-term roadmap for magnet production targets 20,000 tons annually through continued global expansion. We anticipate that this amounts to approximately 10% to 15% of the projected rare earth permanent magnet market outside of China. Moving to slide 6. Now, while we have been focused recently on the future growth of our sintered magnet business, our bonded magnet business is sometimes overlooked. And it's an important existing business for NEO, as well as an area of growth. The universe of rare earth magnets encompasses both bonded magnets and sintered magnets. Most of the new magnet projects you hear about today, including our project in Europe, are for sintered magnets, as it is the lion's share of the existing market for rare earth magnets. But bonded rare earth magnets are important too, and are growing just as fast, if not even faster. The two types of rare earth magnets share the same underlying principles, the same concepts in physics, much of the same material composition, and the same goal of stronger magnets that drive more powerful and more energy-efficient micromotors. The core technologies are generally the same, the end markets are the same, the customers are the same. And importantly, the concerns around concentration risk are the same. China manufactures approximately 95% of the world's bonded magnetic powders and manufactures about 80% of the world's bonded magnets. Although bonded magnets tend to be less powerful than sintered magnets, they also do not use Dy and Tb, heavy rare earths that are difficult to obtain outside of China. There is clearly growth in both types of rare earth permanent magnets. And as part of our long-standing leadership in rare earth magnetics, NEO has decades of experience in bonded powders and magnetics, including our factories in Thailand, the U.K., and in China. We have about 8,000 tons of installed bonded magnetic capacity, and we are the largest producer of bonded magnetic powders in the world. NEO produces the magnetic powder for the only heavy rare earth-free traction motor magnet in the world for Honda. We also shipped over 10 million bonded magnets for AI data centers last year. Moving to slide 7. More broadly, NEO's magnetics platform, spanning both bonded and sintered magnets, serves several large and growing end markets. With industrial and automotive applications, decades of proven performance in bonded magnets, and deep customer relationships, NEO is an established and trusted supplier for rare earth magnets. In addition to the established areas for rare earth magnetic demand, there are several faster-growing markets driving additional demand. These include the electrification of vehicles, wind farms, robotics, drones, and AI data centers. These applications rely on both bonded and sintered magnets, positioning NEO's full magnetics platform to benefit as these markets continue to scale. In fact, some of these drivers may create higher growth rates in bonded than sintered magnets. Let's spend a minute just talking about two of these markets, humanoid robots and consumer and commercial drones. I would note that these market forecasts reflect only humanoid robots and a segment of drones, not the full growing market for robotics and air mobility in general. Moving to slide 8. The first is humanoid robotics, where movement is enabled by electric motors and sensors located throughout the machine's joints and subsystems. The largest, highest torque joints often use sintered magnets, and bonded magnets play a key role in the precision encoders, position sensors, and small actuators that give the robot smooth, accurate, and responsive movement. Although estimates can vary widely, a single humanoid robot can contain between 3 kilograms and 7 kilograms of rare earth magnets. The market for humanoid robots is expected to grow dramatically over the next 10 years, with industry analysts suggesting over 52,000 metric tons of permanent magnets required. And while the current market share for bonded magnets is about 8% of the total permanent magnet market, some designs within humanoid robots may call for closer to 15% bonded magnets. Moving to slide 9. The second segment is the drone segment, where lightweight, high-torque, energy-efficient motors depend on magnets to deliver longer flight times and more stable control. Again, both sintered and bonded magnets will be required here. Sintered magnets generally are supporting propulsion, and bonded magnets are supporting thermal stability and sensing. A single drone can contain up to 60 grams of rare earth magnets, and the segmented magnet market for consumer and commercial drones is projected to be approximately 21,000 metric tons by 2035. Again, while drone designs call for predominantly sintered magnets, bonded magnets are also growing with increased volume and increased share. Stepping back, I think these trends bode very well for NEO in sintered magnets, in bonded magnets, and in our rare earth separation business. I expect to see further developments and growth opportunities in both sintered and bonded magnets in the coming quarters, and of course, in expanding our separation capabilities following our announcement earlier this year of the launch of our small-scale commercial production of heavy rare earths in Europe. With that, I will turn the call over to [ Jonathan Batch ] to walk through the financial results in more detail.

Thank you, and good morning, everyone. Moving to slide 11, as Rahim highlighted, NEO followed a strong Q1 with an exceptional second quarter. Revenue was $206 million, a nearly 80% increase from the second quarter of last year. We had another all-time high for adjusted EBITDA at $57 million, a 200% increase year-over-year. Adjusted earnings per share was $0.55 compared to $0.21 per share in the same quarter of last year. This performance reflects healthy underlying demand and sustained strength in pricing across all of our business segments. Taking a closer look at each of our segments. Magnequench revenue increased 28% year-over-year to $64.3 million, driven by a 35% increase in bonded magnet shipments, with higher rare earth prices also contributing to growth. Demand remained healthy across a number of applications, including automotive, industrial automation, and advanced computing infrastructure. While bonded powder volumes declined 14% year-over-year, they remain modestly higher year-to-date. The quarter's variance primarily reflects timing of customer orders rather than any change in underlying demand, as customer volumes, margins, and overall business fundamentals remain strong. Adjusted EBITDA for the quarter was $10.5 million, an improvement of almost 40% year-over-year, representing the segment's strongest quarterly EBITDA in over 4 years. These results reflect a combination of strong volumes and sustained strength in rare earth prices. Volumes, margins, and business fundamentals remain strong, and the business continues to see encouraging demand signals from customers seeking security of supply and geographic diversification. Moving to slide 13, Chemicals and Oxides also delivered a very strong quarter. Revenue was $37.4 million, a 27% increase year-over-year. Adjusted EBITDA was $8.5 million, up 56% from the second quarter of last year. These results reflect solid performance in Emission Catalysts, higher volumes, and favorable rare earth pricing. Emission Catalysts volumes were up 7% year-over-year, reflecting continued solid commercial execution supported by improved cost performance. Our water treatment business advanced the development of a new process enhancement technology with initial units deployed to customers and commercial adoption expected to build in the coming quarters. NEO remains well positioned for long-term growth, anchored by Silmet, one of the few non-captive separation facilities in the world, equipped with advanced laboratory capabilities and our newly commissioned heavy rare earth separation line. Moving to slide 14, our Rare Metals segment delivered record performance in the quarter with revenue of $106 million, up almost 200% from prior year, and adjusted EBITDA of $44 million, up over 300% from prior year. This exceptional performance was driven by strong volumes amid tight global supply, as well as sustained elevated pricing. This strength reflects increasing emphasis on supply chain resilience and secure access to critical materials across end markets, including aerospace, industrial gas turbines, and semiconductors. Hafnium volumes increased almost 40% year-over-year, while pricing held at record levels. As Rahim highlighted earlier, the business has secured additional contracted volumes through the rest of 2026 and into 2027, improving forward visibility. We're also seeing continued strong demand and pricing for gallium and tantalum amid tightening global supply driven by a combination of regulatory and structural demand factors. Moving to slide 15, on the balance sheet, we ended the quarter with $96 million in cash and $157 million in total debt, giving us the flexibility to keep funding growth while managing risk prudently. Inventory levels increased in the quarter, largely through deliberate strategic hafnium scrap purchases, as well as the ramp of our European sintered magnet business. As Rahim mentioned, in July, we increased our full-year 2026 adjusted EBITDA guidance to $140 million to $150 million, up from prior range of $100 million to $110 million. This increase reflects strong operating performance through the first half of the year, healthy demand across our business, as well as sustained higher-than-expected pricing. It also reflects the benefit of securing hafnium, gallium, and tantalum inventory alongside increased contracted volumes, giving us greater demand visibility with additional opportunities in spot sales. As a result, we expect performance to be at the high end of our guidance range. The combination of stronger earnings, increased visibility, and a healthy financial position allows us to fund our highest priority investments while maintaining a disciplined approach to capital allocation. With that, I'll turn the call back to Rahim for closing remarks.

Thank you, Jonathan. In summary, this was an exceptional quarter for NEO. Another all-time high for adjusted EBITDA with strong growth in revenue and earnings per share. It reflects sustained demand across all three of our segments, disciplined execution, and a resilient pricing environment. Looking ahead, I'm confident in our raised guidance and our ability to land at the high end or potentially above the range. We continue to invest in the capacity and capabilities that position NEO to meet the accelerating demand we're seeing across permanent magnets and critical materials. We remain excited about our growth projects and expect to provide updates on these projects in the near future. We have the assets, the experience, the customer relationships, and the balance sheet to capture this growth, and we remain focused on executing with the same discipline that's gotten us here. Thank you all for joining us this morning, and I'll now turn the call back to the operator for Q&A.

Thank you. Ladies and gentlemen, we'll now begin the question and answer session. [Operator Instructions] And your first question comes from [ Daniel Harriman ] from [ Snowden Company ]. Please go ahead.

Obviously you're guiding now to the high end of that range, which roughly implies, you know, $57 million across the back half of the year compared to $57 million in the second quarter alone. Can you just give a little bit more detail on what assumptions are driving that shape and where would you say that conservatism sits right now? And then just curious about hafnium contracts in the 2027 and how that forward book developing relative to normal year at this point. And is that business being written right now at prices consistent with where we are today? Thanks so much and congratulations again.

Hey Dan, thanks for the question. So the first on our guidance range, so I just emphasize obviously the first half was really strong and that strength was across all of our segments. When you look to the second half, we see that strength continuing, but I think we've been intentionally measured in our approach to our hafnium outlook. So we do have contracted hafnium for the second half, but we've assumed minimal spot sales in the second half. And so the potential to outperform would come from spot sales. Obviously, the first half was really strong on spot sales. We see a lot of spot sales in the second half that would give us the potential to outperform. When you look at next year, we have started to book contracts for 2027. That contract volume, as you said, is at accretive and beneficial prices. Obviously, prices are really high right now. So when we look at our long-term contracts, we do look to lock them in at these beneficial and accretive prices. So we are doing that today. I won't give you an exact percentage of how much coverage we have for next year, but I would say we're tracking pretty well in line with historical levels of contracted volumes entering a new year.

And your next question comes from Nick Boychuk from ATB Capital Markets. Please go ahead.

Appreciate the color that you shared on the bonded outlook related to both humanoid robots and also drones. Curious, when you're looking at that bonded capacity that you have right now in place, both geographically and size, how comfortable are you with that mix? And when you mentioned that you were making some investments from that treasury offering into bonded, any comments on that, on where those dollars are going or how it's going to be spent would be helpful.

Yes, great questions on both fronts. I think what we wanted to get across here is when we talk about permanent magnets as a general industry and growth in permanent magnets, we obviously continue to be very excited about the growth in our sintered magnet business. And I think we're going to continue to see progress and expansion in that area. But our bonded business just gets overlooked in that universe, right? We already have $240 million of LTM revenue driven primarily by the bonded. We have significant positive EBITDA driven by our bonded business, all of that kind of at market conditions. We compete with competitors around the world, and we win business on a competitive basis. Our cost structure is very good, and we're very disciplined in how we operate that business. But at the same time, there is a significant amount of growth opportunity. We talk about the concentration in sintered magnets. We don't talk a lot about the concentration in bonded magnets. That same concentration risk exists. And NEO is the only company that has bonded magnetic powder capability at scale outside of China. So we offer the geographic diversity that customers are looking for. So we've been talking about the various elements of where that business will grow and the strength of that business. And we continue to be very confident in the growth curves of that business. I think we'll give more details on exact growth plans later and how we see that kind of unwinding, say, in the next quarter or so. But today, really, we wanted to just reinforce the size of the market, the importance of the market, and that it's the same growth trends and kind of confirming that, look, our bonded business remains strong. The growth in the quarter is strong. Our financial growth is often, let's say, overshadowed by the pricing dynamic in our Rare Metals business. But we really wanted to talk about that there is strength in the other fundamental businesses as well, and we think other long-term growth opportunities in those businesses.

Okay, that makes a lot of sense. Thanks, Rahim. And on the sintered opportunity switching to Europe, there were a couple of interesting reports this week about Chinese automotive manufacturers taking over capacity for existing European players and how the shift of that whole supply chain is becoming a little bit more Southeast Asian focused just as European firms struggle. If you have any commentary around what you're seeing from your existing automotive partners as it relates to Phase 1A, as well as how you're thinking about Phase 1B, in the context of that shift that's seemingly happening towards more Chinese influence.

Well, I think what we're seeing there is a couple of things. We're seeing that the Chinese export control restrictions are getting more and more difficult, and that has led to a number of potential projects from Chinese suppliers to be delayed or to be pulled, quite frankly, in Europe. For us, in the range of the fact that Europe is currently importing 25,000 tons of magnets and it needs a global and diverse and resilient supply chain, it just means that the Chinese competitors that were going to set up shop in Europe look like they're not going to set up shop in Europe at present following Chinese regulation. But it means that the market is still open for us. We think that the market will continue to be dominated by Chinese suppliers, but we do think that there is a requirement for localized supply everywhere and a resilient supply chain everywhere. So frankly, these developments are positive things. But it's actually, to be perfectly honest, not all that impactful because we already have demand that we can't actually meet with our capacity. So we keep moving forward, adding capacity, adding technology, adding products. And we just continue to have customers waiting for us to deliver more and more magnets. So the opportunity from a growth standpoint just continues to be extremely strong, and we continue to execute the way that we have outlined that we would execute. So none of this is different than what we had laid out originally. We had talked about we would deliver magnets in 2026, commercial magnets on real programs, including traction motor programs, and we continue to believe that that will be the case. So we haven't moved our timelines, and we continue to see the market being exceptionally strong.

Excellent, thank you, sir. Last for me, just Jonathan, coming back to the rare metal pricing dynamic. I just want to make sure I understand a little bit of the dynamic that's still kind of baked into H2 '26 when you commented that there's no spot pricing assumptions that you have baked in. I'm curious why that's the case, if that's an identical dynamic of customers have indicated to you that they have now restocked their inventory, or if that's just conservatism on your part?

Yes. The comment was minimal spot sales in the second half. We do have contracted volumes for the second half, and those would be at beneficial pricing. But we had a really strong first half, obviously, and we had a lot of spot sales in the first half. Customers haven't indicated to us that they're not buying at spot in the second half. But just given the strength of the first half, given we have line of sight to certain volumes in the second half, we took what I would say is a moderate or conservative approach in how we viewed spot sales in the second half. I would make one more comment, which is, this stuff shifts quarter to quarter, but it's not like real demand destruction. If we don't see spot sales in a given quarter, it's just indicative of likely the coming quarters will be stronger because this is really just about demand shifting, not about demand being lost in any given quarter.

Yes, and I'll add to that as a comment to just be open and honest about it. I think we saw more spot sales in June than we would have originally anticipated. So when we gave the guide in early July, we had a view of what the spot sales were looking like. And then I think we saw just more demand in June. And then we're thoughtful that some of that demand we would have otherwise had planned for July. So it might just be shifting through the quarters. Either way, I mean, we're still talking about projecting our EBITDA to be double growth from the prior year. I think that the markets are strong. So it's just a universe of, do we measure ourselves year by year, quarter by quarter, month by month, or day by day, right? And you'll get fluctuations. So it's not necessarily always linear, but the market is strong. There's nothing that indicates that the market doesn't continue to be strong. Factors continue to be really positive for us.

Thank you. And your next question comes from [ Max Erroll ] from BMO Capital Market. Please go ahead.