5N Plus Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 7 speakers on the call.

Operator

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the 5N Plus Second Quarter 2023 Results Conference Call. And I 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 Q3 2023 Financial 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 Jean Jacques, our President and CEO. We issued our financial results yesterday and posted a short presentation on the Investors section of our website. Participants 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 are about expected future events and financial results that are forward looking and therefore subject to risks and uncertainties.

Speaker 2

Participants are in the range of $1,000,000,000.

Speaker 1

A detailed description of the risk factors that may affect future results is contained in our management's discussion and analysis of 2022, dated February 21, 2023, participants are available on our website in our public filings. In the analysis of our quarterly results, you will note that we use and discuss certain non IFRS measures, I would now turn the conference over to

Speaker 3

for the 3 months ended June 30, 2023. Specifically, the 5N Plus team achieved our strongest quarterly and year to date adjusted EBITDA and gross margin performance in nearly a decade. This remarkable performance on 2 KPIs truly represents the fruits of our labors Over the past several years, including the effective execution of our strategy to improve our product mix, while targeting critical Our performance also reflects the success of our commercial excellence program implemented We are committed to maintaining this path going forward. To that end, we remain on track Looking now at our performance by segment. In Performance Materials, our intention Beyond the near term impact on year over year revenue comps, the segment is now generating Strong earnings and margins with adjusted EBITDA increasing 12% in Q2 and 31% year to date.

Speaker 3

Another proof point to our strategy of focusing on an improved product mix comprised of more value added and higher margin products. Specialty Semiconductors delivered another excellent quarter of strong revenue and adjusted EBITDA growth In the context of unprecedented customer demand, namely from Azure and the space solar power market And from terrestrial renewable energy. This strong demand is reflected in the segment's backlog, Which once again stood at the maximum 365 days at period end. As like last quarter, The effective backlog in fact surpasses the next 12 months because of our confirmed long term contracts. As the only viable global supplier of ultra high purity specialized semiconductor We continue to be uniquely positioned to support current and future clients First Solar's recent announcement in the renewable energy space illustrates The strong demand in key market ends.

Speaker 3

In the context of unprecedented demand in several key end markets And given our market leadership position, we have a very active pipeline of future business opportunities, Our commercial excellence program continues to guide us, In particular, our pillars of innovation drives our value added product development approach As I mentioned in our last call, We have begun the process of increasing Azure's output capacity by 30% by the end of 2024. Participants are also increasing production capacity for renewable energy applications by 35% in 2023 From a critical metal sourcing and recovery perspective, another key competitive advantage for 5N Plus, We are also in the advanced stages of securing additional complex feeds and secondary streams for the recovery of critical minerals. This is following the recent expansion of recycling and refining capacity at our Montreal plant participants we are making to further leverage our closed loop metals management, Looking ahead, we expect demand to remain strong in our end markets, Especially in terrestrial renewable energy and space solar power under our Specialty Semiconductor segment And in Health and Pharmaceuticals in our Performance Materials segment. We remain focused In addition, we will maintain our focus on developing long term Value added partnerships with customers operating in high growth markets.

Speaker 3

Our strong financial results year to date participants are a testament to our strategy and market leadership, and we are motivated and excited for what's to come. Richard, over to you to provide further details on our financial results before we take questions from analysts.

Speaker 2

Participants are now open.

Speaker 1

Thank you, Jean Van. Good morning, everyone. So as Jean Van Orud, we are extremely pleased with our results for this quarter As we see our strategic initiatives paying off, including our adjusted product mix to address high demand markets, such as base and renewable energy. In our commitment to that strategy, we are making investments to increase capacity at Azure in renewable energy and recycling, refining To meet that demand in our clients' growth. We're also pleased that these efforts are getting more attention internationally as we see our investor base expand in the U.

Speaker 1

S, In Europe and in Australia. So now looking first at revenue, gross margin and adjusted EBITDA. Revenue in Q2 of 2023 was $59,100,000 an 18% decrease compared to Q2 of last year. Similar to Q1 of this year, the year over year revenue decrease primarily reflects as anticipated our exit from the low margin extractive and catalytic segments and related operations in H2 of last year. That strategic exit has enabled us to realize significant for the quarter adjusted gross margin was 32.9% compared to 22.4% participants are in the range of $1,000,000 for year to date of last year.

Speaker 1

We are very pleased with the gross margin performance, our strongest in nearly a decade supported by our commercial excellence program participants and latest footprint optimization. We are now entering a new phase of margin expansion supported by internal initiatives to improve productivity And the completion of our capacity expansion with aggressive targets to our troops. The same puts and takes have also enabled us to generate our projects are the strongest adjusted EBITDA for the quarter year to date. Adjusted EBITDA reached $10,800,000 in Q2 of this year, Representing a 26% increase over Q2 of last year. Under Specialty Semiconductors, it increased by $1,700,000 or 27% participants are expected to be $700,000 or 12 percent on the performance materials.

Speaker 1

Adjusted EBITDA year to date was $19,600,000 representing a 38 percent year over year increase and positioning us well not only achieving our annual guidance, but also potentially achieve the ARN of the previously disclosed targets range between $35,000,000 $40,000,000 for the full fiscal year. Looking at EBITDA, it reached $17,500,000 compared purchased $6,700,000 in Q2 of last year. The important year over year increase is mainly explained by $9,000,000 in income received from the previous shareholder of Azure as per stipulations of the share purchase agreement. This post transaction adjustment, It goes without saying, in no way reflects Cesar's performance post acquisition, with which we continue to be extremely pleased As evidenced by the significant contracts we have secured to Rezo. Now turning to backlog.

Speaker 1

The backlog at quarter end presented 289 days of annualized revenue, a slight decrease of 7 days or 6% over the backlog of Q1. Participants The backlog for Specialty Semiconductors represented 3 65 days of annualized revenue at a similar level as the backlog of the previous quarter. Participants are expressed in days and while the estimated number of days based on annualized revenue cannot exceed 2 65 days per hour definition, the effective backlog under Specialty Semiconductors actually surpasses the next 12 months due to confirmed long term contracts in Renewable Energy The backlog for Performance Materials represented 113 days of annualized revenue, a decrease of 40 days or 26 percent compared to the backlog of the previous quarter, mainly due to the quarterly realization of yearly contracts. The key contracts under the segment participants now presenting an improved product mix continue to be mainly renewed in the 4th Q1 of the year. This also explained the slight decrease in the consolidated backlog.

Speaker 1

Participants are Turning to items of note under expenses. In Q2 of this year, we recorded litigation and restructuring income of $8,800,000 which represents restructuring costs of $400,000 in Q2 of last year following the settlement of a contract by mutual agreement. In Q2 of this year, we recorded an impairment on non current assets Finally, we also recorded a loss of $1,100,000 in Q2 on the disposal of equipment following a change in technical requirements. We dispose of this equipment in a non monetary transaction with the supplier in exchange for credit on future equipment purchases. Carbon liquidity.

Speaker 1

In Q2 of this year, cash generated from operating activities was $11,400,000 compared to $5,100,000 in Q2 of last Year to date, cash generated amounted to $7,600,000 compared to $200,000 last year. The increase year to date is mainly due to the net difference from higher activities amounted to $4,500,000 compared to $2,800,000 in Q2 of last year. The increase mainly Explained by the increase in additions to private plant and equipment, on a year to date basis, cash used amounted to $1,600,000 compared to $6,800,000 last year. The decrease is mainly explained by the proceeds on settlement of an index deposit agreement amended during Q1 of this year, Resulting in a cash and a receipt of cash of $6,500,000 which was partially mitigated by our additions to property, plant and equipment in year to date of 2023. In Q2 of 2023, cash used and financing activities amounted to $8,200,000 compared to cash generated from financing activities of $8,800,000 last Finally looking at debt, total debt stood at $113,500,000 at quarter end compared to 121 participants are participating in the process.

Speaker 1

In conclusion, our Q2 2023 year to date 2023 results reflect strong demand for our market and for our target end participants are improved product mix and the effectiveness of our commercial excellence program, our ability to deliver some of our best PPI performances in nearly a decade truly to strength not only our continued momentum, but also the strategic importance of the crucial position we occupy In the supply chains of so many essential industries, industries in need of our expertise and ability to produce ultra high purity engineered materials. As the global leader of ultra high purity specialty semiconductor materials outside of China and as a leader in critical metal recovery, we are well positioned better than ever before to benefit from strong demand in critical and high growth industry sectors This concludes our formal remarks. I will now turn the call back over the operator for the questions period with our financial analysts.

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session.

Speaker 2

The

Speaker 4

Yes. So when I think about your 2023 guidance, you now expect to come in at the top end, but I believe prior commentary from the previous two calls was your expectation was that H2 would be stronger than H1 just given how your contracts are laid out. Is that still the case? Or were there higher margin items that were delivered in Q2 that may have inflated the Q2 number by a little bit?

Speaker 1

Yes, exactly. So what we see is the following. Q2 came up a bit better than anticipated. So it's less likely than H2 will be materially better than H1. But again, in terms of guidance for the year, we're going to complete a superb year as we just mentioned in the higher end of the bracket.

Speaker 4

Got it. And I guess if I look at the margin profile, at least in Performance Materials, I think the EBITDA margin came close to 27%. So obviously a very strong quarter there, but was there any one time elements in there? Just trying to factor in kind of what we should expect on a go forward basis?

Speaker 1

No. Under both segments, there's nothing special that happened in Q2 on a year to date basis that Other than a better product mix, so nothing out of the extraordinary breeder segment.

Speaker 4

Okay. That makes sense. And then you guys brought it up on the call, but just Thinking beyond your guidance, I mean, we've seen First Solar announced a 5th facility, which is on top of Alabama that ramps up in 2025. So I guess two questions here. Are you saving your discussions with First Solar until the end of your contract?

Speaker 4

And then 2, how should we think about the potential volume left from this additional facility?

Speaker 1

Participants Obviously, we're in touch with First Solar on a regular basis. But in terms of official announcements of volume to come past the current contract, it's a bit early to declare anything. But as you can imagine, participants are going to be playing an important role in their growth forward.

Speaker 3

And as you can imagine, there is a lead time between The announcement and then the construction and then Yes,

Speaker 1

it will ramp up.

Speaker 3

And the ramp up, then we The process of the announcement is now done, then we can start to work altogether to translate that into numbers at some point.

Speaker 4

Okay. That's it for me. Thanks a lot gentlemen.

Speaker 2

Thanks.

Operator

Thank you. Your next question comes Ramrupa Meurer with National Bank. Please go ahead.

Speaker 5

Hi, good morning. I'd like to take another stab at participants are in the range of $1,000,000,000 in the range of $1,000,000,000 in the range of for Q2 that you might be above the guidance range. So are you you think you are you Being conservative here, is there any chance you go over the high end of the guidance? Do you think that's an opportunity? Or should we just be looking at you coming in, say, a little bit below the top end?

Speaker 1

We're not going to hold anything. So, we're going to do our best to beat it. But currently, what we see is that the range is still a valid guidance for the year. And again, we anticipate we're going to complete the superb year for 5N Plus.

Speaker 5

So you're saying there's a chance you could be higher?

Speaker 1

You know it's not a perfect sign of business.

Speaker 5

Okay. If I can ask about a material supply, you are expanding your access Coming from China, how does that impact your business? Are you seeing any impacts from this yet? And how does that change your strategy going forward, if at all?

Speaker 3

Well, the recent announcement made by China was referring to gallium and germanium. And we source 95% of our germanium outside of China, then no impact for us.

Speaker 5

Okay. Very good. I'll get back in the queue. Thank you.

Operator

Thank you. Your next question comes from Frederic Tremblay with Desjardins. Please go ahead.

Speaker 2

Thank you. Good morning. Good morning.

Speaker 1

Good morning.

Speaker 2

I Wanted to ask first maybe on the Performance Materials segment, specifically on their growth profile excluding the impact of the divestiture. Particularly sort of masked the growth in that segment currently. Anything you can give us in terms of color of in terms of

Speaker 1

participants Okay. At a high level, by default, the business that we exited last Because we're leaving behind quarters that were worse last year, okay? And then more specifically to the products that are participants are part of Performance Materials today. Obviously, the growth potential is not at all at the level of what we have under specialty semiconductors, but that being said, we hold very high percentage of market share and our products are growing, Okay. By default, but not at all to the percentage that you should expect to see under Specialty Semiconductors forward.

Speaker 2

Thank you. That's helpful. And then on the Azure, we obviously see news From First Solar, which is encouraging for the terrestrial products, on the space side, obviously, you're increasing capacity there for Sure. Is there anything that you can point to in terms of your expectations in terms of backlog or the flows and The overall demand environment that you're seeing this year and even beyond maybe next year.

Speaker 1

As you know, we have more way more than 1 year of contracts under our backlog, Well, as per our definition, we're disclosing the next 12 months. We continue to bid on a large number of projects. So that market continues to be extremely active and we see it to continue to be very active for the next coming years, Especially in terms of number of satellites, the whole industry is expected to launch.

Speaker 3

Yes. I was just looking at the stat this morning. There Currently, you have 3,327 satellites in operation. And by 2,030, there is they expected that to be multiplied by 10. Then There's a lot of satellites to be launched in the next 6 to 7 years and the market is simply booming.

Speaker 3

Then what we're doing at Azure is trying to grow the capacity in a sustainable manner, not only participants are going to answer a short term demand, but to do it in a sustainable manner for the next decade. Then the first step of growing the production by 30% by the end of 2024 will be I think will benefit to this industry. We're trying to do it in an orderly manner. We are currently in discussion for 2025 with most of our customers. Then that it is a very interesting situation to be in.

Speaker 2

Great. And maybe last one for me. Obviously, it seems like you're very busy with current operations, but maybe if you have any comments potential acquisitions, is that something that you're considering at the moment or you're sort of laser focused on the current opportunities that we have internal?

Speaker 1

Our family, obviously, busy, increasing capacity, as we mentioned, both for our recycling, refining operations And on both terrestrial renewable energy and space, but we're also looking at different other M and A opportunities, opportunities are more along the lines of helping us from a vertical integration perspective or improving our supply chain.

Speaker 2

That's great. Thanks and congrats on a great quarter.

Speaker 5

Thanks. Thank you.

Operator

Thank you. Your next question comes from Michael Glynn with Raymond James. Please go ahead.

Speaker 6

Hey, just I want to circle back On to Azure, are you able to give an indication like how much Azure is up year over year on a sales basis like percentage wise?

Speaker 2

Participants

Speaker 1

on a sales basis, they're not much different than last year, but they're much better from a margin perspective. And the sales the additional sales will mainly come in 2024 from 2 items, Extra capacity and better margins as well.

Speaker 6

Okay. And the margin improvement, what's the what are the drivers on the margin improvement at Azure primarily?

Speaker 1

The product, I know

Speaker 6

you were doing some SKU rationalization. I think you're focused on that. But is it all Is it selling price or just any thoughts?

Speaker 1

Currently, a combination As you just mentioned, product mix within the mix of Azure.

Speaker 3

And we've been doing a lot of co development with our customers making sure that we can focus on value added. The goal is simple. It's producing energy out of space. Then Every time you're bringing efficiency, you make the satellite business more efficient and I think from a business standpoint for our customer more viable. Then everything that we can do to increase the efficiency of the satellite by bringing more power on the square feet or square inches Metrics, I think that's the end of the name of the game.

Speaker 3

And I think Azure is leading the parade with where there's only 3 companies doing that Outside of China and Azu is the leader. Then we're developing new technology, increasing the efficiency of the current one And looking at specifically the need of our customers, I think it's exactly at the art of our commercial strategy.

Speaker 6

Okay. And then within semiconductor, like outside of The Azure business and the First Solar business, I know that there's what you have left over is kind of a hodgepodge of different products and How does that and that includes the medical imaging as well, like how did that perform in the quarter?

Speaker 1

Participants In the case of medical imaging, that continues to be an opportunity for the next 3 to 5 years. So it contributes, But it's not out of everything that we do, it's a very small percentage. Anything we're going to gain there in the future is going to be definitely incremental to the current performance.

Speaker 6

And then some of the other Infrared, how is that performing?

Speaker 1

Infrared, this is a This is a high margin those are high margin products in small markets and we continue to have fairly high market share,

Speaker 3

And what we see as well is, at Azur, Azur, they were mainly focused or Entirely focused on space, solar, energy, but now there's also the terrestrial market that is also Increasing, using CPV technology. Then that's something for Azure that is definitely new and something that is growing.

Speaker 6

Okay. And then on the cash flow statement, for the line property, plant and equipment, What number would you think that will come in at for the full year, additions to property, plant and equipment?

Speaker 1

We're going to have most of our terrestrial renewable energy The expansion happening in the second half of this year, so it's going to be at least at the similar level and of H for Q1 may be slightly over, but not materially over, Q1.

Speaker 6

Okay. And then just final one for me. When you look at your Primary commodity mix where prices are, so thinking about business, tellurium, Maybe even germanium, when you're thinking of all of these together, all of these commodities, like how do you And pricing in the market like is there an impact from commodity prices through the back half of the year? Like how do we think about that?

Speaker 1

In the case of Azur's products, the metal content of those solar cells that we sell represent a very small percentage of the product we sell, very large portion of what we sell are value added is all about value added.

Speaker 6

And then Telerium and Business.

Speaker 1

You were specific to Azurria here, is that it?

Speaker 6

No, no, no, no. It's specifically like as a whole, like if I'm thinking about commodities.

Speaker 1

It varies from one product to another. By default, our bismuth products has higher metal content than our specialty semiconductor products, so there's no short answer as a whole. It varies from one product to another. But by default, as we've been mentioning, we've changed our product mix participants are on a consolidated basis with a lot more weight under Specialty Semiconductors. And then within each segment, we have also improved the product mix And varies a lot from one product to another under specialty semiconductor.

Speaker 1

So there's not a short answer to all that, but it has reduced substantially From what it was years ago.

Speaker 6

Okay. Okay. Thanks for taking the questions.

Speaker 3

Thanks.

Operator

Thank you. Your follow-up question comes from Rupert Merer. Please go ahead.

Speaker 5

Hi. Looking at the inventory levels, it ticked a little bit higher here with Higher activity levels, where do you see inventory shake out? I see there's a good percentage of that is in finished goods. Does it go much higher from here? And do we read into anything on this higher number that maybe it is forecasting higher activity levels?

Speaker 1

On the growth and expansion that we're going to see in the second half of this year and 2024. So we're getting geared for 2024 as well.

Speaker 5

Okay. So would it should we expect it to go a little bit higher from here?

Speaker 1

It could go a little bit higher, but you technically what you have there versus the previous quarter or year end It's already a pretty decent increase to deal with the growth coming next year.

Speaker 5

Okay, very good. And then just finally, for taking

Speaker 1

a question. You talked a little

Speaker 5

about medical imaging. Any updates on the high power semiconductor markets and how you're thinking about entering those markets in the future?

Speaker 1

Participants As we mentioned last time, we're looking at potentially entering that market in a different way because all of our assets are extremely occupied with the space industry now. So we're in different we're in negotiations and looking at different other options to commercialize that technology, Which may not mean that we're going to be manufacturing short term, wideband gap materials, but could be partnering up Thank you all for joining us this morning and have a good day.

Speaker 3

Yes. Thank you very much.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your line.

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Key Takeaways

  • 5N Plus reported its strongest quarterly and YTD adjusted EBITDA (US$10.8 M) and gross margin (32.9%) in nearly a decade, driven by an improved product mix and its commercial excellence program.
  • In Performance Materials, adjusted EBITDA rose 12% in Q2 and 31% YTD after exiting low-margin extractive operations, reflecting a shift toward higher-margin value-added products.
  • Specialty Semiconductors saw record revenue and adjusted EBITDA growth amid unprecedented demand from Azure, space solar power and terrestrial renewable energy, with backlog at a 365-day maximum backed by long-term contracts.
  • The company is expanding capacity—boosting Azure output by 30% by end-2024, increasing renewable energy production capacity by 35% in 2023, and enhancing Montreal recycling/refining for critical metal recovery.
  • Operating cash flow more than doubled to US$11.4 M in Q2, net debt fell to US$113.5 M, and full-year adjusted EBITDA guidance remains at the top end of the US$35–40 M range despite a stronger H1.
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Earnings Conference Call
5N Plus Q2 2023
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