5N Plus Q1 2024 Earnings Call Transcript

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May 7, 2024

There are 7 speakers on the call.

Operator

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the 5N Plus Inc. First Quarter 2024 Results Conference Call. At this time, note that all participant lines are in a listen only mode. After the speakers' presentation, there will be a question and answer session.

Operator

I now would like to turn the conference over to your speaker today, Richard Perron, Chief Financial Officer. Please go ahead, sir.

Speaker 1

Good morning, everyone, and thank you for joining us for our Q1 2024 results conference call and webcast. We'll begin with a short presentation, followed by a question period with financial analysts. Joining me this morning is Gerald Jacques, our President and CEO. We issued our financial results yesterday and posted a short presentation on the Investors section of our website. I would like to draw your attention to Slide 2 of this presentation.

Speaker 1

Information in this presentation and remarks made by the speakers today will contain statements about expected future events and financial results that are forward looking and therefore subject to risks and uncertainties. A detailed description of the risk factors that may affect future results is contained in our management's discussion and analysis of 2023, dated February 27, 2024, 2024, available on our website and in our public filings. In the analysis of our quarterly results, you will note that we use and discuss certain non IFRS measures, which definitions may differ from those used by other companies.

Speaker 2

For further information, please refer to our management discussion analysis. I would now turn the conference over to Gerard. Welcome everyone. Yesterday, we announced our results for our Q1 of 2024. On the back of a strong 2023 performance, Q1 results reflect an equally strong start to 2024.

Speaker 2

Sustained demand in space solar power applications and terrestrial renewable energy continue to drive growth and profitability in specialty semiconductors. While a favorable product mix generated increased EBITDA and strong gross margins in Performance Materials despite lower revenue. Combined, we were able to deliver on all our key metrics with consolidated revenue up 18% and adjusted EBITDA up 33% over Q1 2023, as well as a gross margin above 30% and a solid backlog. In Specialty Semiconductors, in the Q1, we secured a record $135,000,000 in contracts during a single quarter for Azul. These multi year contracts are primarily for deliveries beyond 2025, which is beneficial for our long term visibility and demonstrates both the demand for our space solar power applications and Azure unique position as a trusted supplier.

Speaker 2

We expect further contracts to be signed in the near term, namely on the terrestrial renewable energy side. In North America, the clean energy transition is happening and is being supported by the Inflation Reduction Act, putting us in a favorable position. We also recently announced a U. S. Department of Defense grant for $14,400,000 This will go towards supporting our production facility in St.

Speaker 2

Georges, Utah for the manufacture of germanium substrates used in solar cells for defense and commercial satellites. Covering a 4 year term, the grant is subject to certain conditions and the achievement of preset milestones. In addition, we issued a press release regarding the validation of our GaN on silica patent portfolio. These patents are key to the development of novel vertical GaN on silica power device for applications in high performance electronics, EV and AI server applications that would take power switching technology to the next level. We are actively in discussion and evaluating various opportunities and scenarios under which we can capitalize on this portfolio, which will fast track go to market for companies operating in these end markets.

Speaker 2

Finally, on the terrestrial renewable energy side, our customer Regent, an Australian solar and storage company announced in April that they raised additional funds to expand manufacturing and support offshore opportunities. Azul manufactures the solar cells that are critical components of regent, long duration energy storage solutions, and so we are very optimistic about the continued growth potential for projects with this valued customer. In Performance Materials, while revenue in Q1 decreased, adjusted EBITDA increased by 10% and adjusted gross margin came in at 35.3% compared to 29.8% in the same quarter last year. As we have said before, growth in this segment is expected to come largely from Health and Pharma. On that front, subsequent to quarter end, Microbiome, a clinical stage pharmaceutical company in which we have an equity stake, published Phase Ib results for its bismuth based active pharmaceutical ingredient or API, Previbismain, which is currently under development.

Speaker 2

As the future manufacturer of this API, we are encouraged by the progress they have made. We view this as a 2 to 5 year growth opportunity. Reflecting our confidence in MicroBion, in Q1, we increased our equity stake for an amount of $1,000,000 bringing our total investment in MicroBion to date to $4,000,000 Looking at our operations, our capacity expansion plans remain on track. This year, we expect to complete our previously announced capacity expansion plans for terrestrial renewable energy applications in Montreal and for space solar applications at Azur in Germany. In addition, and as previously discussed, we anticipate that our previously extended recycling and refining operations in Montreal to be at capacity this year as we secure additional complex feeds and secondary market streams for the recovery of critical materials.

Speaker 2

Our continued focus on the right priorities and end market, clear strategy and solid execution are generating predictable, sustainable and profitable growth. Only 1 quarter into the year, our results validate our outlook and put us well on track to meet our financial objectives for fiscal year 2024. This is supported by high demand in specialty semiconductors, particularly in terrestrial renewable energy and space solar power, where we are already seeing new and renewed contracts and improved product mix in Performance Materials. We are also confident in our attractive organic growth opportunities over the medium to long term. Richard, over to you for a review of our financial results in more detail.

Speaker 1

Thank you, Jarvin, and good morning, everyone. We are very encouraged that as expected, our success in 2023 is carrying over into 2024. We're seeing new contracts being signed, grow from our customer and expect key contracts renewal to continue into 2024. We're also executing well from an operational standpoint to keep up with demand. To that end, we are confident in our strategy and our ability to deliver through 202420 25 in line with our previously disclosed guidance and with potential upside down the road.

Speaker 1

Turning first our consolidated results for the Q1 of 2024. Revenue was up 18% over last year, driven by strong growth in specialty semiconductors, more than compensating lower revenue in Performance Materials. We maintain a strong adjusted gross margin of 30.9% compared to 29.8% in Q1 of last year. As we noted on our last call, we believe these to be sustainable consolidated gross margin levels with potential upside over the short to medium term, assuming continued revenue growth, favorable product mix and further optimization of our operations. Adjusted EBITDA was 11 $7,000,000 an increase of $2,900,000 or 33% compared to $8,800,000 in the Q1 of last year, representing an adjusted EBITDA margin over revenue of more than 18%.

Speaker 1

On a segmented basis, revenue for Specialty Semiconductors was 40 $5,200,000 compared to $32,700,000 in Q1 last year. Adjusted gross margin in Q1 was 29.2% compared to 31%. Decline in margins reflects our less favorable beginning of the year inventory position expressed on a dollar per unit compared to last year, which is expected to normalize going into Q2. Adjusted EBITDA was $9,600,000 in the Q1, an increase of 32%. In Performance Materials, revenue was $19,900,000 compared to $22,500,000 last year.

Speaker 1

The decline is largely due to lower business sales volume. However, with the favorable product mix and inventory position, adjusted gross margin came in at 35,300,000 percent and adjusted EBITDA was $4,900,000 an increase of 10% over the same quarter last year. Looking at our backlog, on March 31, 2024, it represented 288 days of annualized revenue, which was 4 days lower than the previous quarter and 18 lower than March 31 last year. This finally reflects the timing of signing and or renewal of contracts for both segments and the quality realization of long term contracts on the performance materials. Net debt came in at $83,900,000 compared to $73,800,000 last year.

Speaker 1

This reflects anticipated increases in working capital in H1 and plant capital expenditures under specialty semiconductors. Our net debt to EBITDA ratio remained stable at 1 point 8 times as of March this year, well within our comfort level. In March 24, we reduced our subordinated term loan with Nevesmart Quebec replacing it with a $15,000,000 term loan. The new loan has similar terms to the previous loan. In Q1, we also received cash, 2 additional new interest free loans, which are dependent on upon eligible capital expenditures, one from Investecma Quebec and the other one from Canada Economic Development for Quebec regions.

Speaker 1

Finally, turning to our guidance. While we are only 1 quarter into the year, we are off to a strong start. We are proud from of our unique position as the leading global supplier of ultra high purity semiconductor compounds outside China, trusted by key customers with which we have long term partnerships. Our results for the Q1 are proof positive of the success of our customer excellence program and overall strategy for growth focused on high growth markets and value added products. All of this gives us confidence in our previously disclosed guidance of adjusted EBITDA ranging between $45,000,000 to $50,000,000 for this year and between $50,000,000 $55,000,000 for next year.

Speaker 1

Our objective, like last year, is to set the bar high and push ourselves to meet or exceed our objectives as we continue to leverage our competitive advantages and strong demand in our key sectors. That concludes our formal remarks. I will now turn the call back over to the operator for the Q and A session.

Operator

Thank you. And your first question will be from David Ocampo at Cormark Securities. Please go ahead.

Speaker 3

Thanks. Good morning, gentlemen.

Speaker 2

Good morning.

Speaker 3

I guess for the $135,000,000 of contract awards that you guys announced for Zohr, do you guys need additional capacity to support that? Or is it simply just replacing some of the older contracts that roll off, so no incremental capacity needed? The

Speaker 1

contracts that we've 'twenty six and 'twenty 7, for which by the end of this year we'll have the capacity to supply. Obviously, any additional orders and we expect orders to come, for those we may have to increase capacity in time and all of that is on the review at the moment.

Speaker 3

Okay. Can you talk about your ability to expand your German facility? I recall you guys mentioning that you may have an extra floor of unused capacity. Is that okay?

Speaker 1

Yes. We have essentially the space within our own walls today. So we have a our plant that takes care of those products in Germany, it's on a multi floor building and we have 1 full floor empty ready to receive equipment in house required to increase capacity.

Speaker 3

Okay. And then on the $14,400,000 grant from the Department of Defense, I think you guys briefly touched on this in the past about a potential U. S. Expansion of Azure. Does this grant give you the confidence to spend more capital in the U.

Speaker 3

S. To build a facility that's similar to your German facility?

Speaker 1

The grant is essentially very specific at supporting our U. S. Operations around operations described as crystal growth and substrate manufacturing. It has some specific conditions around what we're doing in the U. S.

Speaker 1

And that's what we're doing in Germany. In Germany, we have other grants and other incentives to support those operations specifically.

Speaker 3

Okay. Got it. And then just lastly here, just on the new contract with First Solar. On the last conference call, you guys talked about potentially signing a new deal in the coming months. Is that still the case?

Speaker 3

Or how should we be thinking about timing as we move through the year?

Speaker 2

Well, the negotiation are progressing as per management expectations. And I think we're in the middle of it.

Speaker 3

Okay. That's helpful. That's it for me. Thanks guys.

Speaker 1

Thanks.

Operator

Thank you. Next question will be from Rupert Merer at National Bank Financial. Please go ahead.

Speaker 4

Hi, good morning.

Speaker 2

Good morning, Rupert.

Speaker 4

Just to follow-up on the $135,000,000 in new contracts, can you give us some color on the orders? How many customers was that, for example? And how many months of production is that roughly at your current capacity?

Speaker 1

It's about 4 or 5 customers. And remember, we're Azur's business is about selling projects, so the same customer may come back with more than one project. But what we signed in Q1, it's 4 or 5 customers.

Speaker 4

And you mentioned that you could look at expanding your capacity if more orders came in. Do you believe that the bookings could continue at an elevated rate even if not at $135,000,000 a quarter?

Speaker 1

I have in mind, we're currently in the middle of a fairly important capacity expansion at Azure for which we expect to commission and ramp up our equipment towards the end of the summer. Okay. So and the orders we have on hand are for those years 'twenty six for the most part, for the years 'twenty six and 'twenty seven, okay. They're still not fulfilling up all of those years with the new capacity. But since we're very early in time and the demand continues to be very high and we're bidding on different projects, I mean, we're going to fill up those years.

Speaker 1

But at that new capacity and if it exceeds the current capacity at that point, we'll sort of capacity because we have the space.

Speaker 4

Okay, very good. Your PP and E was a little higher in the quarter, about $9,000,000 I believe. Can you talk about where you invested this quarter? And remind us how much of that CapEx could be rebated from your customer? Okay.

Speaker 1

Exactly. So the figure that you're presenting comes out of our cash flow from the statutory financial statements. So the figure there excludes any cash contribution or reimbursement by our key partners. I would say about a third, it's a bit less than $3,000,000 that was covered by our clients here out of those PPEs, okay? And the net coming out of it, for the most part, is actually from Azure as part of that current expansions that we're undergoing.

Speaker 4

Can you remind us how much CapEx you expect to have this year? And then maybe the timing of the receipt of the contribution from your customer?

Speaker 1

This is happening as we're completing milestones and we'll be completing those milestones throughout the year. So we don't know exactly on a per quarter basis, okay. We have an idea where the year will end. But from a net cash out perspective, on CapEx, it should flirt with something around $13,000,000 $14,000,000 on a net cash out basis. But the figure that we presented on our financials will be higher because of what we just

Speaker 4

described. I'll get back in the queue. Thank you. Good.

Operator

Thank you. Next question will be from Frederic Tremblay at Desjardins. Please go ahead.

Speaker 5

Thank you. Good morning.

Speaker 4

Good morning. I just wanted

Speaker 5

to come back on the Azure capacity expansion or potential for an expansion. I appreciate the detail on one floor being empty at the moment. If we put it on a, let's say, percentage basis, like what could this potentially represent in terms of capacity increase? Is that one floor? Is that like 10% capacity increase, 25%?

Speaker 5

Can you maybe provide some numbers around that potentially?

Speaker 2

Well, we have different scenarios in mind depending of exactly the type of solar cells we would be producing, but we could easily increase the capacity by more than 50%.

Speaker 5

Okay. That's great. Maybe switching gears to Performance Materials, great results on the profitability front. Just curious on the lower bismuth sales though, are volumes down like for a structural reason or was there some one time or timing related factor in the quarter?

Speaker 2

It's linked to our commercial excellence program. I think we are really we're moving from productors to marketers and we want to make sure that we're always extracting more the best value out of every single deal. Then we're not really focused on volume, we're focused on value And from time to time, it means that, yes, we could have we can sell less a little bit less, but with better margin. And this is why we're targeting all these products related to Salma.

Speaker 5

Okay. Yes, that makes sense. And then I guess moving back to as there are more on the contract execution and margin basis. I think you had previously mentioned that around mid-twenty 24 is when you would sort of be done cycling through the lower margin contracts that were signed by the prior owners. Is that still the case?

Speaker 5

Or is there other dynamics there in terms of contract execution and margin outlook further?

Speaker 6

It's

Speaker 1

realizing the older contracts versus the new contracts, not something with the fixed point in time because those are projects delivered throughout the year, but it will happen. It will represent a certain percentage of the full year sales. It's not like starting Q3, those are new sales and new margins. It's all happening a little bit every quarter, but unequally from 1 quarter to another.

Speaker 5

Okay, perfect. Thanks for taking the questions and congrats on a great quarter.

Speaker 1

Thanks. Thanks.

Operator

Thank you. Next will be Michael Glen at Raymond James. Please go ahead.

Speaker 6

Hey, good morning. Can you just talk a little bit about the Montreal plant ramp with the business with First Solar and how everything's aligning with the First Solar capacity expansion?

Speaker 2

Well, we're progressing quite well. We had 2 steps. I think the first step is now almost completed. The second step, which will be we need to qualify the products, it will start at the end of Q2. Then what we're doing, we will be producing a certain quantity that will be tested into the 1st solar facility and then qualified.

Speaker 2

And then things are progressing according to plan. We got our team from Germany who will arrive over the weekend and complete the startup.

Speaker 6

And can you just remind us how much when Montreal is completely ramped, how much that increases your capacity for the material?

Speaker 1

I would need to redo the math, but it will at least be double what it was at the beginning of 2023.

Speaker 6

Okay. And then on the sourcing strategy, specifically what where you sit with your tellurium sourcing. Can you talk about how that has been evolving more recently? Have you been able to secure additional supplies of tellurium?

Speaker 2

Well, what we call project Saint Laurent, what we know our capacity to recuperate the tellurium, for the first time since the construction to a year and a half ago, it will be at full capacity with the contracts we this capacity is now operating almost at full capacity.

Speaker 1

So, the learn either from a complex either from complex feeds and or commercial grade metals, like we have a very large inventory that explains the use of cash for net working capital. So that has been like we have a lot secured already. Plus, as Javed just mentioned, we're working on a bunch of new feeds and we're very busy at recycling and refining complex feeds. Okay.

Speaker 6

And I'm just going to ask one more. On the DoD agreements, you sort of started down this road, gervais, but maybe can you just speak to like how exactly does the IP work with what the products that are being developed or being researched? Who owns the IP and how do you use the IP in future years?

Speaker 1

The IP essentially remains the property of the company. Yes.

Speaker 5

Okay.

Speaker 6

And commercialization of that, like when do you think you would be able to commercialize any of the new products that would come out of that?

Speaker 1

The grant is for a combination of things, current products improvement, improvement to the processes, upgrade of the equipment and new products per se. So it's a combination of all of them. So we're improving what we're doing today plus developing new products. Okay. So short term, a lot of the money will be used to improving processes, renewing equipment and house and mid to long term new products.

Speaker 2

Yes.

Speaker 6

Okay. Thank you.

Operator

Thank you. And at this time, Mr. Perron, we have no other questions. Please proceed.

Speaker 1

Okay. Well, we'd like to thank everyone for joining us this morning, and we wish you all a good day. Thank you.

Operator

Thank you, sir. Merci. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines.

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5N Plus Q1 2024
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