5N Plus Inc

TSX:VNP

Earnings Call Transcript 2022-Q2

[Operator]

[Foreign Language] Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the 5N Plus Inc. Second Quarter 2020 Results Conference Call. [Operator Instructions]

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

[Richard Perron, executive]

Thank you. [Foreign Language] Good morning, everyone, and thank you for joining our second quarter ended June 30, 2022 financial results conference call. We'll begin with an overview of our business performance, strategies and the review of our financial results, after which we'll begin the question period. Joining me this morning is Gervais Jacques, our President and Chief Executive Officer. We issued yesterday our financial statements, and we have posted a short presentation on the investors section of our website. I'd like to draw your attention to Slide 2 of the presentation. 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 discussion of the risk factors that may affect future results is contained in our management discussion and analysis of 2021 dated February 22, 2022, available on our website and our public filings. [Audio Gap] companies. For further information, please refer to our management discussion and analysis.

I'd like to turn the conference to Gervais for the discussion on the business and quarter results. Gervais?

[Gervais Jacques, executive]

Thank you, Richard, and welcome, everyone. Yesterday, we released strong second quarter results with a 50% increase in revenues and with our new and higher-value-added products boosting our adjusted EBITDA. This is despite operating in a challenging environment. Our revenue and earnings growth year-over-year demonstrates the adaptability of our business and that we are focusing on the right end markets across both segments. Our results also show that our past investments and ongoing commercial initiatives are bearing fruit in the context of high inflation and complex global market dynamics.

In addition to our strong financial performance, we also forged ahead of many other fronts during the quarter in support of our long-term business and growth strategy. In May, we announced that we secured a partnership with global mining group Rio Tinto to refine the tellurium to be produced at its Kennecott copper operation in Utah. This partnership is a strong validation and recognition of 5N Plus Western World advantage and unique expertise in the transformation of mining by-products into advanced and critical materials. The tellurium will be refined in Montreal and primarily used for the manufacturing of thin-film PV models serving the renewable energy market. It will also be used to manufacture ultra-high-purity semiconductor substrates in St. George, Utah to support the homeland security and medical imaging sectors. Our intention is to continue to pursue such strategic partnerships for both the sourcing and refining of critical minerals in North America, which will be to the benefit of many critical industries we serve.

Last quarter, we confirmed that we had reactivated our strategic review process to ensure that we focus on business that deliver improved margins and that are less affected by commoditization. Also in May, we announced the intention of our subsidiary in Belgium to halt production and proceed with the closure of our Tilly manufacturing facility, which produces lead-based products and nitrate chemicals. This clearly defined process, as per the applicable Belgian labor laws, is advancing as expected, and we will keep the market informed of its progress. Once completed, we expect to shed negative earnings, release working capital and improve cash flows.

We continue to review our full portfolio to ensure the compatibility of our product offering with our long-term growth strategy. As such, the strategic review process is still ongoing. We also continue to actively promote our commercial excellence program, focused on a segmented approach through commercial partnering. The implementation of our commercial go-to-market strategies continue to progress and are expected to gain momentum through to year-end.

To support and spearhead our commercial efforts, I am very pleased to welcome seasoned sales and marketing executive Roland Dubois to the newly created position of Chief Commercial Officer. I believe this to be a highly strategic role for 5N Plus at this stage of our growth and an important area of focus. Bringing deep commercial expertise, relevant industry experience and a proven track record of success, Roland is the ideal candidate to lead our commercial activities. As a member of the management team, he will not only ensure the continued execution of our recently implemented commercial excellence program. He will also bring our go-to-market strategies and all our commercial activities to the next level in support of our growth objectives.

On the project front, we continue to move forward with our St. Laurent project in Montreal to enhance our development and manufacturing capabilities around tellurium for the renewable energy market. While we did experience some delays related to contractor and equipment availability during the quarter, we are nonetheless satisfied with our progress. We now expect the project to be completed and commissioned by the end of Q3 2022.

Looking ahead, and as previously discussed, we are seeing significant demand for solar cells for space applications in Europe and in North America. With AZUR now well in the fold, we are uniquely and very well positioned to capitalize on this and further grow our TAM in this critical end market. We are, of course, approaching business opportunities in the solar space segment with discipline in terms of partners and project selection, given the longer time horizon of space programs, to strategically position ourselves over the midterm. In general, we believe the company is entering a unique period to support the world's clean energy transition and various other technological advancement in critical end markets where we bring unique and relevant expertise.

To capture this demand, we are evaluating strategic capital investments within our existing facilities. The objective is to effectively increase our production capacity for semiconductor compounds, in particular, to address rapidly increasing demand in mainly the renewable energy, solar space and medical imaging market, each of which are expected to sustain well-above-double-digit growth rates over the coming years. We will continue to pursue our growth and business strategy with discipline, focusing on value-added markets and value-creating client partnership, while strategically investing in our business to expand our total addressable market.

I will now hand over to Richard to discuss our results in more detail before we take questions from the analysts. Richard, over to you.

[Richard Perron, executive]

Again, good morning, everyone. So we are extremely happy to be with you this morning reporting a super quarter for the company with revenue and adjusted EBITDA well above last quarter and the same quarter last year. And this despite many geopolitical and economic challenges faced as well by many others. As mentioned in previous communications, mindful of current geopolitical uneasiness and inflation impact on our businesses, we continue to believe that these can be transformed into unique mid-term opportunities and strategic partnerships, in particular, on the renewable energy, solar, space and medical imaging markets to sustain, as just mentioned by Gervais, well-above-double-digit growth rates over the coming years, with the company advantageously position.

During this second quarter, the significant raising in adjusted EBITDA growth over last year and previous quarter was supported by our demand for specialized semiconductors and realized benefits from targeted commercial initiatives introduced to mitigate the impact of inflation on selected products and markets. Supported by dynamic pricing adjustments and other commercial initiatives, segment Performance Materials delivered an outstanding performance well above the previous quarter, further supported by capital investment, completed last year, to improve the competitiveness of our operations for pharma and app products, the completion of these investments critical in time of high inflation.

During the quarter, the company continued to selectively position its business development, emphasizing our value-added products in strategic sectors and markets like those requiring specialized semiconductors, and leveraged its recognized expertise in the transformation of mining and metallurgical by-products into high-purity critical minerals for critical and promising end markets. We continue to believe that 5N Plus is ideally positioned to not only navigate its path to the current environment, but most importantly, emerge stronger, uniquely positioned in relevant markets and more competitive.

So now starting with the coverage of revenue and gross margin, as well as adjusted EBITDA. Revenue in Q2 2022 increased by 52%, reaching $72.4 million compared to $47.7 million for the same period last year, supported by higher demand in specialty semiconductors as well as pharmaceutical and health performance metrics. Not accounting for the contribution from the recently acquired AZUR, revenue increased by more than 20% compared to Q2 of 2021. Adjusted gross margin in Q2 was favorably impacted by volume, reaching $16.2 million compared to $11.8 million in Q2 of last year. On a year-to-date basis, the adjusted gross margin was favorably impacted by volume, reaching $30.3 million compared to $23.5 million on a year-to-date basis for 2021. Adjusted EBITDA in Q2 reached $8.6 million compared to $6.3 million in the same period last year. Adjusted EBITDA increased by $3.1 million under Specialty Semiconductors and $0.4 million under Performance Materials, despite the impact of inflation and supply challenges.

Now looking at the annualized backlog, the backlog on June 30 represented 140 days of annualized revenue, a decrease of 56 days over the backlog of last quarter. The net difference in backlog is largely attributable to the timing of negotiations for long-term contracts, the quarterly realization of long-term contracts under negotiation for renewal in the coming quarters, and our commercial go-to-market strategy to effectively mitigate the impact of inflation. Important to add, AZUR has a backlog that extends beyond 12 months, not fully represented in the figures due to our definition.

Quickly going through the expenses. Depreciation and amortization expenses in Q2 and year-to-date 2022 amounted to $4.9 million and $9.7 million respectively, compared to $2.6 million and $5.2 million last year, the increase mainly explained by the increase in property, plant and equipment, tangible assets and right-of-use assets following the acquisition of AZUR in Q4 of last year. SG&A expenses in Q2 and year-to-date were $7.4 million and $14.9 million respectively, compared to $5.2 million and $10.1 million for the same period of 2021. The increase is also mainly explained by the acquisition of AZUR in Q4, as well as general inflation impacting various expenses and progressing easing of restrictions related to COVID-19.

In Q1 of 2022, the company recorded a non-cash impairment charge on non-current assets of $5.4 million included in the Specialty Semiconductor segment to reflect the assessment of the current value of intangible assets impacted by the Russia/Ukraine conflict. We have earned since then new businesses to replace the Russian business, well above past revenue average for Russian clients. Share-based compensation expense in Q2 amounted to $1 million compared to a recovery of $0.3 million in Q2 of last year, reflecting the scheduled vesting of long-term incentive plans and changes in the company's share price.

In Q2, the company recorded litigation and restructuring costs of $0.4 million following the settlement of a contract by mutual agreement. Financial expense in Q2 of this year amounted to $1.8 million compared to $1.2 million in the same quarter of last year, the negative impact mainly due to the interest on long-term debt and imputed interest, which is higher following the acquisition of AZUR. Income tax expense in Q2 and year-to-date were $2.6 million and $2.1 million respectively, compared to $0.7 million and $2.4 million for the same period of 2021. Similar to other quarters, both periods were impacted by deferred tax assets applicable only in certain jurisdictions.

Covering liquidity, in Q2 of this year cash generated by operating activities amounted to $5.1 million compared to cash used in operating activities of $3.1 million in Q2 of last year. In Q2 of this year, cash used in investing activities totaled $2.8 million compared to $1.3 million last year, and cash generated by financing activities amounted to $8.8 million compared to cash used in financial activities of $0.1 million in Q2 of last year. The increase of $8.8 million is mainly explained by the new drawdown of $10 million from the credit facility in Q2, reduced by expenses of $0.5 million following the renewal of its credit facility and an increase in lease payments.

Now looking at gross and net debt, the debt stood at $126 million on June 30 compared to $116 million at the end of last year, following a drawdown from the credit facility in Q2 to support net working capital. However, net debt after considering cash and cash equivalents is at a similar level to Q1 of 2022 at $89.6 million on June.

Before we conclude the financial review, I'd like to say that we are maintaining our previously communicated guidance, but we expect to reach the upper range of it. So we'll now be taking questions from analysts.

[Operator]

Thank you. [Operator Instructions] [Foreign Language] Your first question is from David Ocampo at Cormark.

[David Ocampo, analyst]

I wanted to zero in a little bit on the uptick that you guys saw in Performance Materials on the margin front. You guys called out the pricing schemes that you're implementing for that dynamic pricing. And if you take a look at the contracts that you guys have in place, is there still more work to do there, or are largely all your contracts now moved over to the dynamic pricing?

[Richard Perron, executive]

By default under that segment, many of the contracts -- and we've been mentioning it over time -- are occurring in Q4 and Q1. But for some contracts, we've been delaying the renewal and working more on a spot basis, so there's still more opportunity, but a good portion of it is already addressed for 2022.

[David Ocampo, analyst]

And, Richard, what's the typical lag on the dynamic pricing? Is it one month, a quarter lag? What does that look like?

[Richard Perron, executive]

We have -- I mean, if you look at the product portfolio on the Performance Materials, I mean, we have numerous products, and they all have their own behavior depending on the client and the sector. So it varies widely from one product to another, but it's not instantaneous, obviously, as -- well, you saw it in Q1. Our results were not at all at the level that we've been able to achieve in Q2. So that's -- I guess, on an overall basis, I guess it could be a quarter.

[David Ocampo, analyst]

That makes sense. And on the Russian sales from AZUR that got delayed in Q1, is there any expectation that that eventually gets shipped out this year? Just curious at how bespoke that product is -- if it could potentially be repurposed and sold to another customer?

[Richard Perron, executive]

The whole Russian business is -- we really don't have any control over it. I mean, it's all about sanctions. So, I mean, we have to see what comes next with this conflict, so it's very hard to say. But again, as I mentioned in my statement, we have replaced that business by new businesses that were not there in the past and are coming from -- I'm going to use the term 'friendly jurisdictions'.

[David Ocampo, analyst]

And is that inventory still on your balance sheet, then?

[Richard Perron, executive]

No, we've been able to turn most of it.

[David Ocampo, analyst]

Okay. That's good. And then, Gervais, you called out the double-digit growth in renewable, solar and medical imaging devices. How quickly does that flow through your results? Is that double-digit growth -- can that be experienced in '23, or is that more a longer-dated story?

[Gervais Jacques, executive]

Well, we will see some impact even at the back end of 2022, and then you will see largely the impact in 2023 and after 2024 as well. This is currently the type of contract that we're negotiating, and we're quite optimistic on that.

[Operator]

Thank you. Next question will be from Rupert Merer at National Bank.

[Rupert Merer, analyst]

On Slide 4, Richard, where you show the revenue walk from Q2 last year to this year, if I look at that $9.4 million increase in the 5N Plus revenues, how much of that is volume driven and how much of that came from price?

[Richard Perron, executive]

I would say it's not far from -- probably 2/3 volume, 1/3 pricing?

[Rupert Merer, analyst]

Okay. Great. And when you talk about double-digit growth going forward, I imagine that is volume you're talking about, or is there some price support for that growth too?

[Richard Perron, executive]

No, our comment refers to volume -- more business. So we're likely to also announce, in the upcoming quarters, investments to expand.

[Rupert Merer, analyst]

All right. Very good. And we had this discussion in previous quarters about the impact tellurium prices were having on your sales through the solar industry. We've seen tellurium prices roll over a bit now, and you've got some new supplies coming in. Is that problem largely behind you? Are those sales sort of back on track?

[Richard Perron, executive]

Sales are independent of where the selling price lands ultimately. So I'm just -- I'm not sure I...

[Rupert Merer, analyst]

Alright. Sorry. I was under the understanding you were potentially looking to delay some sales to the solar market because of the level of tellurium prices.

[Richard Perron, executive]

No, no, no. We need -- I mean, as you can -- you see it from our statements and you just need to read it in the news. I mean, the whole world is going to a transition to clean energy, and solar power is a big portion of it, so no.

[Gervais Jacques, executive]

Yes. I think, with the current geopolitics, what we're seeing is a higher demand for solar energy, and we're well positioned to benefit from this growth. And this is part of the plan now to make sure that we're capturing the growth.

[Richard Perron, executive]

What we've mentioned in previous quarters is one of our key contracts was -- I'm going to use the term 'backloaded', and we're at the end of it [indiscernible]. And then, going forward, we expect this sector to continue to grow.

[Rupert Merer, analyst]

Okay. Very good. And then just finally, on the backlog, you've given us a little color on what drove the drop in the backlog. Where do you see that going in the next few quarters? Will it rebound to historical levels fairly quickly, or do you...

[Richard Perron, executive]

What is...

[Rupert Merer, analyst]

[indiscernible] the near term?

[Richard Perron, executive]

What is happening this quarter is similar to similar quarters every second and third year, okay? Based on our definition, what we're presenting there is the next 12 months. So, as the contract comes to an end, every quarter we're depleting that backlog by realizing the sales, okay? And then the contract gets renewed, then the backlog gets refilled, so it will definitely rebound. It's just a question of time. It goes beyond the yearly contracts. It's both a combination of long-term and yearly contracts.

[Gervais Jacques, executive]

And some of it is also related to our commercial strategy to make sure that we are applying the dynamic pricing adjustment. Then I think the large portion will come back, and we will keep some flexibility to make sure that we can apply the dynamic pricing.

[Richard Perron, executive]

And just to add, the AZUR business that we acquired -- I mean, this is all about space programs, and it goes beyond 12 months. So we definitely have more in our backlogs, but they don't fulfill our definition for reporting purposes at this point in time.

[Operator]

Next question will be from Michael Glen at Raymond James.

[Michael Glen, analyst]

So, just on AZUR, when you bought the business, I think you described some of the revenue generation in the business could be lumpy depending on timing of shipments. So, like, when we sort of back into -- or when you look at the $15.3 million of revenue contribution coming out of AZUR this quarter, just give some thoughts on consistency of that type of revenue generation on a quarterly basis.

[Richard Perron, executive]

As we've mentioned in previous communications, AZUR, on average, is a business that generates about $60 million or so of sales. So if you look at the quarter, I guess the quarter will be more on a quarterly average, but it doesn't work like this for AZUR because of the nature of their business. So we continue to maintain the comment that it can be lumpy from one quarter to another while, the full year, the visibility is much better.

[Michael Glen, analyst]

And then 2H -- maybe just correct me if I'm wrong, but 2H at AZUR, I think, generally is better than first half because of some seasonality aspect in the business. Is there something to think about there?

[Richard Perron, executive]

Historically, the second half has always been better than the first half. And for 2022, because -- I'm going to refer to 'the Russian event' -- it's going to be more true, because 1 was a bad quarter in part due to the Russian conflict. That impacted AZUR.

[Michael Glen, analyst]

Okay. So, in general, you think you're tracking -- do you think you're tracking better than $60 million of sales contribution from AZUR this year?

[Richard Perron, executive]

Let's say it's within the range.

[Michael Glen, analyst]

That's what's in the range? Okay.

[Richard Perron, executive]

And then you need to account for another variable. AZUR is extremely strong in Europe, while doing -- continues to do much better year-over-year in North America. So part of their sales are denominated in euro, okay? So that may have an influence from an absolute dollar perspective presented. But in terms of volume and general business, everything that we've mentioned remains valid.

[Michael Glen, analyst]

And then the comment you've been able to earn new business to replace that lost from the Russian customers -- can you just -- is that Europe business, or is that elsewhere in the world?

[Richard Perron, executive]

At this point in time, I would say 2/3 is North America and 1/3 is European for that comment.

[Gervais Jacques, executive]

And the demand for space solar cells is really high. I think that's something we're -- I think the Russian event was unfortunate, but the timing of it, I think, was great because we are -- we have multiple opportunities.

[Richard Perron, executive]

And also, in the background of it, you see American players partnering with European players to do bigger projects. We have a combination of that that we participate into.

[Michael Glen, analyst]

And is that -- is there military and defense spending underlying that? Are you able to say?

[Richard Perron, executive]

No, we're unable to say. We -- our belief is most of it is commercial.

[Michael Glen, analyst]

Okay. And finally, in terms of -- when you reported 1Q, you talked about the energy price situation in Europe and belief that was an impact on the Performance Materials margin. So, looking at what's happening with energy price -- and I know that you're going to shut down that -- eventually shut down that Tilly Belgium facility. But when we look at energy price in Europe and think about impact in the back half of the year, is that a pressure point for the EBITDA profile in Performance Materials?

[Richard Perron, executive]

It is, but it's more important for our Belgium plant and the German plants that we have, okay, in terms of energy consumption and else. So much -- I mean, it impacts German companies in the [indiscernible] units, but to a much smaller extent than our Belgium plant today. So -- and we expect that to continue. And we don't consume that -- I mean, we use energy, but we don't consume of it that much. What we use, though, are chemicals that are made out of that energy and/or natural gas, not to mention.

[Operator]

Next question will be from Nick Agostino at Laurentian Bank.

[Nick Agostino, analyst]

I was just wondering, just to get some color from you guys. I think, when you talked about in the renewable energy space, you talked about your existing contracts, specifically on the First Solar side, as being back-end loaded, and I'm assuming we're obviously moving into that period. At the same time, last week, we saw the U.S. hopefully pass through or at least come to some sort of a U.S. climate agreement, which the market views is going to be positive for First Solar. I'm just wondering if you can provide any color in terms of how you guys see that specific volume climate agreement -- what sort of indirect benefit it might have on you guys and maybe how you see your current relationship with First Solar, what sort of volume growth you might anticipate off of that climate agreement announcement from last week?

[Richard Perron, executive]

At this point in time, I mean, we cannot pronounce ourselves as to the actual volume growth that we're going to see. But that volume growth is going to be, to some extent, limited by production capacity, so investments will have to come into play and realize itself into sales. But it's definitely extremely good for First Solar and ourselves.

[Nick Agostino, analyst]

Okay. And then obviously you've already announced that you're going to be closing down the Belgian plant, just from an overall plant production. But I was just wondering, any color you guys can provide or update when it comes to exiting non-core assets -- so, specific verticals -- something that was being pursued in the past and then I think paused, and I think, Gervais, is something that you recently reintroduced the idea of maybe exiting some of the more metals-heavy sectors or verticals. Is that something you're still pursuing? Have you identified any assets that you plan to exit? Or is that something that you just continue to review?

[Gervais Jacques, executive]

Well, I think we're -- at this point in time, it's really Tilly. We're still looking at that type of market where we're highly exposed on metals. We want to focus on value added. We want to focus on teaming with customers, developing new products, and I think we want to move away from commoditization. I think that's the main topic of 5N. And we have completed -- we're completing the first step with the process of Tilly, and then we're going to continue to move forward. I think, big move like Tilly -- I think that Tilly was probably the big one. Now what we're going to do is a smaller adjustment. And we're quite confident with the -- with Climate Change Bill, with all the things that are currently happening, the energy crisis in Europe, globally. I think we are in the right market segments, and we want to grow, and we will grow.

[Richard Perron, executive]

And just to add, the commissioning of Project St. Laurent later this year is the completion of a similar exercise, which is the relocation of our South Asian primary refining operations -- Malaysia and [indiscernible] -- into Montreal.

[Nick Agostino, analyst]

Yes. Okay. Thank you for that. And then my last question is just relating to OneWeb, who was a prior client of yours before they announced bankruptcy on their part. Obviously, they're back into -- I guess, back in business, but last week, I think there was an announcement that they were going to be merging with Eutelsat. And I'm just wondering, do you have a renewed relationship with OneWeb? And if so, how does that merger with -- proposed merger with Eutelsat, how do you guys see that potentially playing out -- benefiting you guys? I assume that there is a relationship there.

[Gervais Jacques, executive]

I think it's definitely something that we're working on. I think it's quite positive to see all these constellation project moving ahead. Now this recent announcement that they are working together -- I think we were having relationship with both, good relationship with both, and now the fact that they're working together, it's a good indication for us.

[Richard Perron, executive]

Yes. Just to add, on the solar opportunity, just a reminder, there's only 3 players outside China that does solar cells, okay? There's 2 North America and one in Europe. And out of those 3, there's only one that is never into conflict with any of its clients, okay, and it's us. So when those constellations, they come into play, if it's indirectly for us and via our clients, somebody will earn that business, and we'll benefit from it in time.

[Gervais Jacques, executive]

Yes.

[Operator]

Next question is from Frederic Tremblay at Desjardins.

[Frederic Tremblay, analyst]

On the commercial agreement with Rio Tinto for tellurium, do you have any indication on when that may start? And, I guess, if you could provide some indication on the magnitude of it or sort of how much of tellurium supply may come from that agreement going forward?

[Gervais Jacques, executive]

Yes. We expect the first shipment to arrive here in Q4. If you look at the Project St. Laurent we will be commissioning in Q3, then we will start receiving material in Q4 and moving forward. That type of -- the way they are operating their facility, they will -- they are building inventory and then, when they come to a certain threshold of inventory, they're shipping it to us. And that's going to be how we're going to be proceeding with them. And in terms of percentage, I think that we are working with them to grow that over time. It was a Phase 1 that we announced. We're working with them and other miners as well to make sure that we can diversify our sourcing of tellurium, and that's the aim and this is the reason why we invested on Project St. Laurent.

[Richard Perron, executive]

And as usual, we're not extremely vocal when we -- when it comes to volume, for various strategic reasons.

[Frederic Tremblay, analyst]

Okay. But fair to say that, I guess, it's sort of incremental supply, not necessarily replacing any other suppliers? It's more incremental to support your growth?

[Richard Perron, executive]

It's incremental.

[Gervais Jacques, executive]

It is definitely incremental, and we want that to be replicable with them and with other mining companies. And I think that the fact that they are now more inclined to look at what they could extract from their deposits -- they -- I think, from an ESG standpoint, for Rio Tinto and other big mining companies, that type of project is really good, because they can look at what they are currently have on hand and what they could valorize. And maybe 5 years ago or 10 years ago, it was not high on their agenda, but today it is definitely really high on their agenda.

[Frederic Tremblay, analyst]

Okay. Great. And you did mention some other potential capacity expansion project products. Is that something that could play into the 2022 CAPEX budget, or is it something that's a bit more [indiscernible].

[Richard Perron, executive]

Most likely 2023. 2022 will be a lot around -- I mean, completing Project St. Laurent and other things already [indiscernible].

[Frederic Tremblay, analyst]

Okay. Perfect. And, last question for me, you did mention inflation in the quarter. Just maybe get your latest thoughts on where you're sort of seeing inflation. What sort of buckets -- is it labor, is it transportation -- and I guess maybe your outlook for that and your ability to pass through those costs maybe for the next couple of quarters?

[Gervais Jacques, executive]

Again, I think the dynamic pricing adjustment is something we have introduced in our contract, and we're continuing to introduce that principle to most of our contracts. And the intent is -- we know that we are living in a world that is quite dynamic, and we want to be able -- we're good in producing high-quality value-added materials. We're not a transport company. We're not there to start bidding on the transport. The transportation needs to be something that we are -- the freight cost needs to be something that is carried out to our contracts. And this is the principle we are working on, is making sure that we are doing what we can control. And what we can't control, together with our partner, our customers, we say, "Well, look, if you can do better and take it from our facility and transport that material at a cheaper cost, then just do it. You can do it."

[Operator]

[Operator Instructions] And your next question is from Michael Glen at Raymond James.

[Michael Glen, analyst]

Can you just -- the revenue impact from the Tilly closure, how much that is supposed to be?

[Richard Perron, executive]

I don't think we've mentioned it so far, and it will -- I mean, Tilly produces different products, so we'll need to come back with the final assessment of it, because some products may -- some sales may continue and others not, and it has not been fully determined at this point in time.

[Gervais Jacques, executive]

And again, we are still on Phase 1 of the [indiscernible] process, and the decision will be -- all that type of impact will be communicated when we're going to be moving on Phase 2. Then we need to -- according to Belgium law, we need to follow the process. And on Phase 1, no decision has been taken yet.

[Richard Perron, executive]

Yes. And going forward, as we've mentioned in all of our communications, it's going to be shedding some revenue, but it will be -- it will have a positive impact on the bottom line cash flow and the release of net working capital. Obviously, it's the right thing to do if we're doing it.

[Gervais Jacques, executive]

Then our margin overhead -- overly, our margin will increase.

[Michael Glen, analyst]

Yes, that much is very clear. Based on your prior experiences in Belgium in terms of pursuing this type of effort, is it for sure that this plant would ultimately be closed? Like, is there some probability that you can be forced to keep it open?

[Gervais Jacques, executive]

On Phase 1, there is 2 options that you can -- that could happen. We're looking at who else could be interested in buying. And as time goes by, the type of buyer could change in a disparate -- you can get somebody at the end of the process who's demonstrating some interest. Then this is -- part of Phase I is looking at opportunities, alternatives, can you produce something else. But for us, for 5N, we will no longer be producing the same kind of product in this facility.

[Richard Perron, executive]

The key is that [indiscernible] lead-based products and chemical nitrates.

[Gervais Jacques, executive]

Yes. Then the short answer is no, 5N will no longer be operating that type of product on that facility.

[Richard Perron, executive]

And Tilly has other products that we're likely to pursue.

[Michael Glen, analyst]

Okay. Is -- so you're not -- Tilly's not operating in that type of product, so is it being -- is there a revenue -- are you losing revenue, then, in the short term? Like, is there a revenue headwind there as you make that product transition? I'm just trying to understand.

[Richard Perron, executive]

It's going to be a phase-out that will occur over quarters, so the answer is yes, okay? But most of it -- that shortfall, that revenue shedding -- will be 2023.

[Operator]

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

[Richard Perron, executive]

Okay. Well, we would like to thank you all for joining us this morning. Have a good day.

[Gervais Jacques, executive]

Well, thank you all. Enjoy your summer vacation, for those who are leaving on vacation. Thank you for following us, and let's stay in touch altogether.

[Operator]

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