Nanophase, a US-listed zinc oxide producer, and competitor to ANO released their earnings for Q4/full year 2018 a few days ago.
The full transcript of their earnings call is available here:
http://nanophase.com/investors-section/investors/conference-call-information/2018-q1-4/I will highlight a few areas which are interesting to ANO shareholders.
First, some context: Nanophase produce Zinc Oxide, and have a supply agreement with BASF for some of their range in the Z-Cote brand. Nanophase also have a white label OEM business (similar to ANO's ZinXation range that is just starting out) which they call Solesence ($1.3m USD revenue currently). ANO has yet to really get started on its white label business, so plenty of revenue to come from that.
Nanophase's 2018 total revenue was $14.2 million USD ($20m AUD). They remain unprofitable. The most recent loss in the quarter alone was a whopping $1.1mil USD.
The overall summary is, Nanophase have highlighted that zinc oxide for personal care is in high demand, there is currently a worldwide shortage and market demand is expected to keep growing at a rate of 300% over next 5 yrs.
Nanophase received some short term benefit in sales increases with industry tail winds, however superior competitors (such as ANO), have now increased their ability to supply and this is now hurting Nanophase. They are in trouble, to the point where they expect their accounts to be qualified by their auditors due to not having sufficient liquidity to fund current operations until the end of the year.
Back in July 2018, ANO put out a "Marketing Presentation" where they put the attack directly on Z-Cote in the following slides. To me, the signs of the Z-Cote customers (such as Neutrogena as alluded to in that presentation) are showing signs now of having re-formulated and moving across to ZinClear thanks to its lower costs and superior product performance. The reality of Nanophase's sales suffering as as result are real evidence of this. I expect more pain inflicted by ANO to come - not just with Nanophase, but our other main competitors.
Here's a few quotes I've picked out from the transcript that are rather interesting and indicate we are taking business away from them now that we've sorted out capacity issues:
"We talk a lot about the advantages of minerals-based sun- and skin- protection, versus chemicals-based alternatives. The markets we serve are seeing more and more demand for our mineral products, and the demand keeps going up."----"There has been a worldwide shortage of zinc oxide and titanium dioxide, most noticeably to us beginning in late Q1 of 2018. The shortage is demand-driven, and we are in a position to increase capacity to meet new demand."----"In 2018, the increased volume for Nanophase was rapid and temporary, exacerbated by other producers reaching their capacity limits before we did. Global capacity will surely expand, but industry sources have been predicting a 300% increase in demand for zinc oxide, our primary mineral product, over the next five years."-----"In more good news, last month, the Food and Drug Administration announced the 1st new proposal on sunscreen ingredient safety, in decades. Our feeling is that this will potentially further increase demand for our ingredients and finished products. The proposal is out for comment and will probably be modified somewhat before it becomes law, but the FDA’s initial approach was quite surprising. Of the 16 active ingredients currently listed on what the FDA calls the “Monograph,” for use in human sunscreens in the United States, they have concluded that two are unsafe for humans. The FDA then classified 12 more of the 16 actives in a group saying that “there is not enough data” to determine if they are safe for human use. Combined, those fourteen active ingredients represent all the ingredients currently allowed in the monograph that we refer to as “chemicals-based sunscreens.” That’s fourteen out of the sixteen. Zinc oxide and titanium dioxide, the two remaining options in the current monograph, are the only two that the FDA has deemed to be safe for human use.I don’t know where this will end up, but it’s a good thing for minerals, and it’s also a different criticism than we’ve been seeing recently of several chemicals-based sunscreens.The FDA is responsible for human safety. But chemicals-based actives have been subject to scrutiny and regulation in other areas as well. You may recall that over the past few years, some of the most common chemical sunscreens have been banned due to their environmental impacts.Australia, Palau, Hawaii, and the Florida Keys have banned these chemicals due to the fact that they contribute to coral reef damage. They have not found this to be the case for the two mineral products."-----"Regarding the outlook for our Personal Care Ingredients business, we expect dollar volume to be down by up to a third in 2019.Our internal planning is for a $3M reduction in revenue in this year, compared to 2018.This is due to a combination of events, none of which we believe are indicative of market weakness.There was a panic in Q1 of 2018, when many suppliers simply ran out of zinc oxide.We scaled-up quickly to meet as much of the demand as we could, reaching peak production in Q3.It turns out that there were some “spot-buys” and some inventory building that we have been told not to expect to be repeated in 2019.The inventory build-up appears to have been throughout the supply chain, but was not identified early enough to avoid some of the expenses we incurred.Additionally, we think other manufacturers ramped-up production later in the year and absorbed some of the demand, and there may have been some amount of customer reformulation. "
