IBC Advanced Alloys Corp.

Jim Sims – Director-Investor and Public Relations Duncan Heinz – President, Chief Executive Officer and Director

Good day everyone and welcome to today’s Webcast and Conference Call with IBC Advanced Alloys. I am Jim Sims, Director of Investor and Public Relations with IBC.

Joining us today is Major General Duncan Heinz, United States Marine Corp Retired. General Heinz serves as President, CEO and Director of IBC.

Before we begin our webcast, just a few reminders. The slides from today’s presentation and the audio of this call are being broadcast live on the web.

A recording of the broadcast is being made and a replay will be made available on the IBC’s website following the broadcast. Also a PDF, printable version of the presentation used in this webcast will also be made available as a downloadable handout.

After the formal presentation, you'll be able to ask questions of the company using the questions pane on your computer screen or your smart device by simply type in your question and click send. Those of you who are connected via a listen-only conference phone line can pose your questions by e-mailing those to me at jim.sims@ ibcadvancedalloys.com.

You can also text those to me at 303-503-6203. We may not be able to get to everyone's questions during our one hour webcast, but we will try to get back to everyone with answers as appropriate after the webcast.

So with that, let's get started. We will be making forward-looking statements in this presentation today.

Readers are cautioned not to put undue reliance on such forward-looking information and statements please review our legal disclaimer here and other risk factors that we list in our quarterly and annual statements and other risk factors that we list in our quarterly and annual statements. Now, let me hand things over to IBC’s President and CEO, Major General Duncan Heinz.

General?

Thanks, Jim, and good morning to you. Welcome and good morning to our investors in the United States and Canada, good afternoon to our investors in Europe and overseas and a hearty welcome to our suppliers, customers, employees and competitors, who are online and listening.

Let me apologize upfront that I have a cough due to allergies today and so if there – if I cough in your ear or clear my throat, I apologize, and if there is a significant pause it’s because I've tried to mute the phone to get through a cough. So with that let's get started.

Our mission is to leave the specialty alloys business by providing precision-cast and purpose effective solutions tailored to our customer specifications while providing positive work environment for our employees and value to our shareholders. With that I want to update you on four key points in today’s presentation.

First, the capital improvements are indeed complete and they are making a difference. Number two, we are continuing to make great progress towards profitability and I hope I can show you through the numbers and through the progress in this quarter that trend to profitability.

We had our challenges, but we are overcoming them. On a short term basis, we are focused on execution and on meeting that profitability in Q3 or the first calendar quarter of next year.

Longer-term I want to update you on our strategies to continue to build shareholder value. With that let's look at the capital upgrades.

Next slide. The solution and annealing furnace along with the quench tank are indeed completed in terms of installation and qualification at our Franklin facility.

These have helped dramatically improve repeatability and product consistency through improvement in the heat treated properties from batch to batch. We simply get a better grain structure now.

That has qualified us to meet new product specifications. And with that those more stringent specifications we are now seeing new orders from both current and new customers.

I'm going to EMC. The vacuum induction melting furnace has completed installation in the facility in Wilmington.

It has demonstrated our ability to increase capacity by 25% over the same timeframe. We intentionally incorporated a lot of automation into that and a lot of real-time data processing, two important parts of that.

The data now has reduced unplanned maintenance by over 80%. It has reduced our alliance on our highly skilled operators that that the operator to operator consistency now is much better because it's not relying on that one really good melter.

And finally, it has helped us through the data collection to continue to tighten the variations that increase our yields. Additionally, at EMC in addition to those automation and in-process monitoring upgrades, we've had a digital radiography, which now allows us to reduce our cost structure over the traditional film-based system to reduce the materials that we have to buy to process that and to increase our throughput in order to meet both current and future throughput requirements for our aerospace components.

We've added an automated tumble blaster, which now allows us to take all of our remelt and use that in an automated fashion to meet our demand for material flow for the furnace. We upgraded our coordinate measuring machine, which now is able to do the dimensional analysis on our parts, a process we used to send out to a subcontractor.

So we now see improvement in both costs and in cycle time. We've added automated parts washing stations, which both increase throughput and provide a health and safety enhancement for our employees.

And finally, we've added an induction coupled plasma machine for chemistry, again another process we used to send out to a subcontractor. So we see immediate saving and cycle time reduction.

The simple summary is that the capital improvements are in place now and are making a difference. Next slide, Jim.

Thank you. So going to point to on our continuing progress towards profitability.

I want you to take away three key points. EMC our Engineered Materials division has made the transition to rate based manufacturing.

And this has resulted in positive EBITDA now and near or positive operating income. EMC is no longer a cash drain it used to be on this Company.

Point number two, we have reduced corporate costs. They are less than half, what they were a year ago.

And we continue to focus on cost reduction at the corporate level and in each of the divisions. Point number three.

Despite a tough July copper is trending back to profitability. They are doing a great job of reducing costs, eliminating the low margin products and are now at a good point to be able to push sales revenues back up with increased profitability.

So let's go into the data, to specifically look at all of these. I'll start with the key points that were made in the press release.

At a consolidated basis, we had a 36% increase in sales on a year-over-year basis. We saw positive gross margins of 9% compared to minus 15% on a year ago basis and zero gross margins overall in FY 2016.

Operating loss narrowed to $0.02 a share from a minus $0.07 in the preceding quarter and a minus $0.05 on a year ago basis. As I alluded, we did have some significant personnel issues in Q1 that we had to overcome.

And as a result of that, that has delayed our goal of meeting profitability, which we will now say we've got a – we are targeting in Q3. And I’ll show you why I believe that.

But we continue to work hard at that, let me explain the personnel issues. We had a combination of real life crises injuries and resignations, which literally took four of my seven employees in a key department out for a extended period of time.

That all happened in a two week period. We did the only thing we could do, take care of the employees and their families, shift personnel where we could regarding skill set, go immediately out to hire new folks to be able to help us fill that gap and just as important close the breach as best we can.

I equate this to the Colonel of the regiment who knowing that there's been a breach picks up his rifle and runs to the front line to help close that breach that's what Mark Wolma our President of the Franklin facility in Copper div. He has spent an extended amount of time on the floor working with our employees to help work out the backlog.

This speaks highly of the culture that we are doing in our Company. Next slide.

Copper was able to increase sales by 7% on a year-over-year basis but it is a 8% decline sequentially. Again that decline is due to the labor shortages and some equipment downtime that we had in the Franklin facility.

Gross margins, so have swung to a positive 8% from a minus 2%. Average selling price is now up by 10% operating losses are cut by 46%.

And our cost of sales, now have declined by 3.6%. While after order bookings on a year-over-year basis are up by 15% and they're down by 16% and again this is part of the seasonality that we see.

But more importantly as I ended up delaying my ability to deliver orders that we had in July those pushed in the following months and we were forced to decline orders or to give customers a much longer fulfillment date. And that resulted in the decreased bookings.

Same thing happened with backlog on a sequential basis, we declined by 20% and on a year-over-year basis we declined by 10%. Let's talk about EMC.

At EMC the sales revenue are up by an astounding 142% on a year-over-year basis and 36% sequentially. Gross profits have now swung on a year-over-year basis to 175,000 from a loss of 481,000.

Our margins have shift to a positive 12% from the negative 70 on a year ago and 13 in the preceding quarters. And we have cut operating losses by 90% year-over-year and 84% sequentially.

Again EMC is no longer the cash drain. They are now focused on manufacturing and meeting customer commitments.

EBITDA is positive and we are now consistently delivering products to our customers. Let's look to our customers.

Let's look at the numbers more clearly again. I want to look at the quarter-over-quarter.

So when you first look at the slide you go I'm not seeing the trend. So let me try to talk to it more specifically.

There is the seasonality that occurs to it. And because of that we see it on the quarter-over-quarter comparisons.

So starting with Q2 of 2016 to 2017, we see a $300,000 increase in revenues and a net loss reduction of over $900,000. In the following Q3 though the comparison is not as clear, and the reason is because we had an anomaly in Q3 of 2016 where we’ve literally had revenue recognition for two quarters worth of deliveries because of the machining.

We should never have been doing that machining cost. While it provided very little contribution margin, it had good revenues, but again very little contribution margin and significant downside risk.

So we've eliminated that. And that makes a comparison more significant in terms of where the revenue should have been lower in Q2 of 2016, compared to where it is in the Q3 of 2017.

Next slide. In Q4, what we have is the significant decrease in Q4 of 2017 primarily again due to the Hoolahan awards, $1.38 million of that booking of the award was in that quarter.

So again on a year-over-year basis we see profit loss reduce. Finally, comparing the current quarter we're just completing to the last year, over a $1 million increase in revenue, 36% under the same basis, along with over a $1 million reduction in the loss.

This perspective is important as I try to show you in the next slide. If you look at the seasonality, which is shown relative to the green line across the four quarters, that's the slope that we achieved in 2017, but we start from of basis in Q1 of 2018 with over a $1 million more revenue in a much significantly closed loss ratio.

If you extend that line out to the performance in Q2, Q3 and Q4, you see why we remain focused on execution and profitability. And that it is achievable in this timeframe.

More importantly, not clear by the line is we are intending to increase the slope of that line to give us greater value back to the customers. Let's go one level deeper.

I'm going to take it down to the monthly performance data of each division and talk about what happened. First EMC, August and September clearly profitable, clearly now demonstrated.

We finished up the certifications for our aerospace components in July, that was longer than we anticipated it would take, but once completed EMC is now delivering. You see positive EBITDA and you see in the last two months profitability and we intend to be very close to or breakeven in the following months.

On the copper side, we started with a tremendously good book going into July. But because of the personnel issues we were unable to deliver on that.

And that resulted in a not so good month. We’ve continued to work that backlog off in August, September and indeed in October and have nearly closed all that gap.

As a result of that though we saw a need to change our commitments and our promises to customers, which delayed some of the orders we now see in Q2. So the forecast I'm providing is based on that.

I want to also remind the listeners that September, the minus $150,000 you see there in operating loss, included $130,000 which was a write-down for bad debt. We had a customer who simply rejected his delivery because it was late.

Since then though that customer has agreed to take half of the order at full price and if the performance of those goods are indeed good, he will take the remaining portion of the order at full price. Those directly relate to the top line in the current quarter.

On the next slide, you can see the corporate expenses are relatively under control and half of what we have been doing in the previous years. Key portions that the share-based compensation is noncash items that the compensation we pay to our directors and to some of our employees in lieu of cash.

So we have reduced corporate expenses by half. Finally, on a consolidated basis, we see the terrible July.

We see recovery happening in August. Again remembering that September included the $130,000 of bad debt, we would have positive EBITDA in that one and been very close again in September.

Let's talk about the next quarter's now. So our near-term focus over the next six months is execution, how do we deliver to our customers, they have been loyal to us, they are coming back.

We need to be able to commit to make our commitments. So with that, I'm going to provide, how did we do in October.

The unaudited October results are presented in this slide. Copper was profitable with EBITDA of 84,000, EMC had positive EBITDA and although the sales number was slightly down it is because in October, we are beginning prototype melts, which are non-revenue generating but intended to increase yield and to be able to meet new customer tests.

At the corporate level again expenses are controlled so on a consolidated basis we were very close to profitability in October with positive EBITDA. So how does the rest of the quarter look?

I expect EMC to continue the trend that it is established, with EBITDA remaining positive for the quarter in a range of 20,000 to 100,000 and the net profit being profitable at 20,000 down to a potential of minus 80. The copper division will finish EBITDA neutral to very slightly negative based on the current.

Although we had positive EBITDA in October, we still have some challenges relative to backlog and I'm concerned about timing issues at the end of December. So EBITDA will be in the range of minus 100 to zero, with net profit loss of a minus 185 to minus 85.

Corporate costs will again remain low, EBITDA to minus 160 to 110 with net loss of minus 180 to 130 so on a consolidated basis we expect EBITDA to be very close to neutral down to a minus 240 and overall loss to be in the range of minus 440 to minus 210. Again closing the gap in this quarter as we continue to push sales up at the copper division.

So in Q3, we are hitting the accelerator now for sales for fiscal Q3. We know that at EMC for instance, we have approximately five shipments left under the current contract with our aerospace provider that will take the all the way through deliveries in Q3.

Additionally we shipped here about results a bit we have made for the next contract. We also expect copper sales to grow, we are seeing some of that now but it will grow at a slower rate than EMC.

And finally, the company will turn a profit in Q3 based on our current projections. Additionally, we continue to work with customers to improve yields.

At the EMC division, we were able to make changes to a current design to improve those yields and we expect those deliveries to start in Q3. We are seeing demand pick up for the electronic manufacturing division.

This one sounds almost counterintuitive because Christmas season is coming up now for delivery of those components but remember we're talking about the manufacturing of those goods. So the machines that have to manufacture those start their intensive cycle in our next quarter in Q3 for delivery of components that then start to be assembled and matched for next Christmas.

Finally, we've put into place an employee incentive plan. This incentive plan rewards quarter-over-quarter profitability.

We want to make every single employee of this company a shareholder. And we want them to be incentivized to help us grow, this incentive plan does that.

So what are the risks? First let me start with the assumptions.

In Q2 you’ve already seen the October results and I have 95% of the orders necessary to deliver on those numbers. In Q3 EMC still has 100% of those orders and the copper number is based on backlog such historical projections that we have seen in the past, plus our probability weighted new business initiatives and prototypes already in progress.

But I want to continue as I have done in the past to make sure I've given you a balanced perspective. So our risks.

They include a normal business competitive environment. In addition to that, we could have challenged on material availability, we have seen some spot markets problems in terms of materials, but we have so far been able to go to second sources to fill those.

Timing in Q2 is also a concern for me relative to revenue recognition. We could end up with product ready to deliver for revenue recognition, but we may have customers who are simply not available to be able to do those inspections.

We can also have again more equipment breakdowns or labor issues. And of course there are the litigation issues, we've outlined those specifically in the MD&A and we will commit to continue to do so.

Cash flow. We've looked at the cash flow balance.

We have a positive differential right now between receivables and payables. But our continuing ability to produce or to purchase inventory to meet future commitments relies on our ability to collect on those current debts.

And finally our bank BMO could call the loan. Now let me just simply say here that they remain a great partner and continuing to help us.

So I'm not saying that's going to happen, it is simply a probability. Let me talk now about the long-term focus.

Again, I'm going to apologize upfront for having to be restrained and somewhat vague in this part of the discussion. As again, I'm sure our competitors are listening.

Let me reiterate our mission. Lead the specialty alloyed industry by providing precision, cost and purpose affective material solutions tailored to our customers specifications.

Are there opportunities to combine the capabilities of both divisions? The answer is an emphatic, yes.

So we continue to work on our business strategies and plans that bring together our expertise in specialty metal product sales, in our foundry operations, in castings, forging and machining, and our highly specialized engineering support to our customer. In the copper division our focus is on how do we specialize to expand while keeping our nimbleness.

Let's grow our sales and engineering support to help our customers, truly understand the product that we can provide on those services and expand our ability to make final products. I talked about the electronics sector.

We are producing now four first articles for OEMs in both the electronics as well as other business sectors. And we see a potential that those could represent significant revenue expansion in the next 12 months to 24 months.

We are also increasing our coal work to provide better labor and better distribution of costs at our facilities for founders. And finally, we're working to expand our copper beryllium products.

At EMC, we're getting up on rig now, but the next thing is to increase the breath beyond our barrel cast, near-net castings. I want to increase our breath in investment casting capabilities and materials.

I want to start developing different beryllium aluminum offerings, and I want as we continue to focus to make sure we're staying ahead of technology specifically things like 3D printing, and how can we integrate those into our core processes to increase efficiencies. At both divisions we're going to leverage our sales and engineering assets across both divisions so we can provide that quality support to our customer.

And we are looking at vertical integration into more finished parts through additional special alloy machining capabilities. On the joint venture fronts I've talked about NioCorp and scandium.

Through our partnership with NioCorp, we have received sufficient amount of scandium trioxide now to proceed with the initial tests melts to validate our processes. We continue both Mark and I to get updates from the team and I remain optimistic and excited about this part of our business.

On the acquisition front, consolidation of foundries is a priority to reduce the cost structure or to find ways to utilize those facilities better. We are planning towards the next doubling of EMC’s revenues and we continue to look at opportunities of vertical integration in special alloys machining whether that’s capabilities with individual machines or that is other businesses to perform those that we might acquire.

I hope you are as excited I am about the long-term potential to lead the specialty alloys business. With that, let see if there is any questions.

Thanks General. Questions are coming in.

For those of you who are on the webcast you can post your questions again in the questions text box where you can send those to me. Several have come in General, so let me just take these as they come in.

First question is, you mentioned several potential roadblocks to profitability in Q3, what do you see as the biggest of these.

So I talked about the risk factors, I don’t think there is any single one that jumps out as biggest. We are executing and it’s really about timing.

So I think the books are coming, the profits are comings and it’s now up to us to execute.

Okay. Here is one, what do you see for the future of scandium alloys and are you looking at 3D printing technologies.

Well, to the latter the answer is yes and we always look at that. But I’m not going to speak to a specific to that material alloy.

What I’m simply going to say at this time is, we understand the market and the market is there. So I want to be able to reach into the marketplace to find those early adopters to make sure we’ve got the processes, so we can be one of the lead contenders in this space.

Okay. Here’s a question.

How reline is IBC on the F-35 program and your sales there will foreign sales of that system be important to IBC down the road.

Well, anytime the Lockheed Martin is able to sell more aeroplanes that goodness for us. We remain one of the suppliers for parts to Lockheed Martin, so they want to preserve the competitive environment and I respect that.

Having said that, I know that the quantities are going to increase as the budget increase and additional overseas purchases will occur. And you can look into the budget plans for the department of defense to see the actual quantities.

But in the five year plan, there is a steady increase of purchase of F-35 as well as first purchases for Britain and other countries.

Okay. Here’s a question about really knowledge of General.

What do see as the prospects for commercial application of beryllium alloys, do you see more growth on the defense side of that business or on the commercial side?

Defense is an early adopter, and we work hard with that. But I think as we move to mainstream, as we start to drive down price point and be able to meet rates, we will see more commercial products come online.

We will first come in the form of manufacturing. Why manufacturing?

Simply because when I can show that through the use of our material I can increase rate with better tolerances i.e., I’m able to meet a higher specification and a higher rate that’s one of the beauties of our material. And at that point cost becomes less of issue form because they get a distinct advantage in manufacturing.

So we’ve seen manufacturers want to be able to do that. Past that I see opportunities in high-end automotive and high-end sports.

Again, it won’t be mainstream to start but there are great opportunities in high-end sound, in high-end sports and high-end automotive where our material can make a difference in performance.

Okay, General here’s a question, what about the product that you were developing with BAE, at BAE Systems where is that now?

It is still in test and we’re waiting to hear the results of their funding relative to how much allocated – funding has been authorized by Congress.

Okay. Another just came in, the company announced previously it’s work for a computer chip, I mean, computer chip manufacturing, equipment manufacturing company what is the status of the work with that customer and is there more than one customer in that sector.

That is an exclusive arrangement we have with that customer but it doesn’t mean that I can’t do like work just not specific to that type of application. So for exclusivity, it was a minimum order contract of 4,000 parts, we will deliver over 9,700 close to 10,000 parts on this year.

And as I mentioned, I continue to see the rate of those expanding. So if you take a look at the number of Apple’s, the number of iPhone’s and the number of memory chips being used this is a manufacturer that does a lot of effort.

Okay. I’ve got one more question, so far General, is there a problem in process with scandium alloy test and why have the results of those test not yet been released as previously promised.

There is no problem with the scandium process, we are continuing to validate that and we will make an announcement when appropriate. Understand, appropriate means, we don’t want to tip up too early what our strategy is.

But I do want to update you as we make progress.

Okay. General that’s the last of the questions we have.

So with that we’ll close at our webcast today. For those of you who perhaps joined late or may have questions that if you’d like to post to the company following our webcast just email those to me at [email protected] we’ll do our best to get back to you with the answers as we can.

Today’s webcast was recorded and a recording replay of webcast will be made available on the IBC website later this day. Thank you all for joining us today, we look forward to seeing you soon.

Have a great day everybody.