5N Plus Inc

TSX:VNP

Earnings Call Transcript 2022-Q3

[Operator]

Thank you for standing by, and welcome to 5N Plus Inc. Quarter 2022 Results Conference Call. [Operator Instructions]

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

[Richard Perron, executive]

[Foreign Language] Good morning, everyone, and thank you for joining us for our Q3 2022 results conference call and webcast. We will begin with a short presentation, followed by a question period with financial analysts. Joining me this morning is Gervais Jacques, our President and CEO. We issued our financial results yesterday and posted a shared presentation on the Investors section of our website. I'd like to draw your attention to Slide 2 of this 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 description of the risk factors that may affect future results is contained in our management's discussion and analysis of 2021 dated February 22, 2022, 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. For further information, please refer to our management discussion and analysis.

I will now turn the conference over to Gervais.

[Gervais Jacques, executive]

[Foreign Language] Welcome, everyone. Yesterday, we released our third quarter results with a 31% increase in revenues and adjusted EBITDA of $9.1 million, bolstered by our new and higher value-added products. We're quite pleased with these results, especially given the challenging and dynamic environment in which we have been operating. The revenue and adjusted EBITDA growth compared to Q3 2021 reflects strong demand in specialty semiconductors for renewable energy and space applications. This is further supported by the strategic acquisition of Azur in November last year. Performance Materials continues to deliver a strong performance, significantly above the same quarter last year.

This is supported by dynamic pricing adjustments to mitigate the impact of inflation and improve operational competitiveness for pharmaceutical and health products. Our revenue and earnings growth in Q3 2022 are a testament to our ability to execute on our strategy to focus on value-added businesses and client partnerships. Part of that strategy is our commercial excellence program. Under that program, we recently signed 2 strategic agreements that further solidify our position as a leading supplier of specialty semiconductors. The first of these strategic agreements is the largest award in the history of 5N plus. Our long-term partnership with First Solar is now reaching another level with this new multiyear agreement for the supply of semiconductor materials for the manufacturing of 10 SIM PV modules.

Our annual production volume will increase by 35% in 2023 and by more than 100% in 2024, consistent with First Solar's own growth plans. We're definitely entering a unique period to support the world's clean energy transition and other technological advancements as an essential provider of sustainable solutions. We will be initiating production capacity ramp-up to address rapidly increasing demand in the renewable energy, solar space and medical imaging markets. The second strategic agreement is the 10-year exclusive partnership with Sierra Space through our Azur subsidiary, signed subsequent to quarter end. After several years of collaboration, we are thrilled to now begin a commercial relationship with Sierra Space, an American company at the forefront of space innovation. Under the terms of the agreement, we will produce a new solar cell for you...

[Audio Gap] The strategic review of our operations remain ongoing during the third quarter. We previously announced our intention to help production in Tilly, Belgium. The low-margin products produced at this facility will no longer be part of our offering. At this stage, we are contemplating 2 options for the site, an orderly closure following the Venlo process or finding a third party willing to take over the site. We will keep the market informed should there be any important developments as this process follows its course. With respect to our Celera project, which will expand the development and manufacturing of advanced 2 6-based semiconductors in Montreal. It continues to progress. We are currently performing the preoperational verification process and operating the equipment with pressurized water.

The project is now expected to be completed and fully commissioned during the fourth quarter of 2022 in time with the reception of Tellurium feed in the first quarter of 2023. Capitalizing on our segmented approach to commercial partnering and value pricing strategy, we believe we are advantageously positioned in key fast-growing markets. Several of our key end markets are expected to sustain well above double-digit growth rates over the coming years. Specifically, we expect high growth in the renewable energy and space sectors, supported by growing demand in both North America and Europe. We also expect significant growth in medical imaging applications. This is supported by technology advancement and medical imaging equipment manufacturers, introducing photo counting detectors to replace scintillator technology, allowing significantly lower radiation and improve image-enhancing diagnostic accuracy.

The successful integration of AZUR is also progressing as planned. A business, which is now under the supervision of Roland Dubois, -- in addition to his appointment as Chief Commercial Officer, Roland has also assumed the leadership of our specialty semiconductor segment. A disciplined approach to the execution of our growth strategy is our top priority across our business segments. We will continue to execute on our commercial excellence program, while extending into value-added markets and adding value-creating partnerships. As with the sign agreements with First Solar and Sierra Space, we continue to approach all business opportunities with discipline in terms of partners and project selection. This continues to be critical as we invest in our business to ramp up production capacity to capitalize on anticipated industry growth and increase our total addressable market. I will now hand over to Richard to discuss our results in more detail before we take questions from analysts. Richard? Over to you.

[Richard Perron, executive]

Thank you, Gervais. The company's key business sectors continued to outperform in the third quarter despite macroeconomic and geopolitical uncertainties. The soft performance translated into significant revenue and adjusted EBITDA growth over the same quarter last year, supported by strong demand in the specialized semiconductor segment on the renewable energy and space and the acquisition of AZUR. The renewable of our supply agreement with First Solar as well as the agreement with Sierra Space with [indiscernible] both confirm the company is advantageously positioned in these markets. Regarding these 2 significant incremental supply contracts, it is important to note that we expect the net cash out that will be deployed from a CapEx perspective over the coming years to fulfill this incremental demand will not exceed in terms of value our typical annual depreciation charge for PPE. This becomes either supported by our partners or well within our scope of expertise.

Turning now to revenue, gross margin, adjusted EBITDA for Q3. Revenue increased by 31%, reaching $66.4 million compared to $50.8 million for the same quarter last year, reflecting higher demand in specialty semiconductors from renewable energy space, supported by the acquisition of Azur as well as pharmaceutical and health and Performance Materials. Adjusted gross margin was favorably impacted by the product mix, reaching $16.2 million compared to $10.8 million in Q3 of last year. Adjusted EBITDA reached $9.1 million compared to $5.5 million in the same period last year. The adjusted EBITDA increased by $2.5 million under specialty semiconductors and $1.7 million under Performance Materials despite the impact of inflation, supported by a favorable product mix. Now looking at the annualized backlog. The backlog on September 30 represented 192 days of annualized revenue, an increase of 52 days or 37% over the backlog of June.

The increase is attributable to favorable negotiations of long-term contracts under specialty semiconductors, confirming the near-term growth potential in renewable energy and solar space applications. With specialty semiconductors representing 297 days of annualized segment revenue, an increase of 102 days of 52% over the backlog of June. The backlog Performance Materials represented 93 days of annualized segment revenue, a decrease of 6 days over the backlog of June. The decrease on the Performance Materials, reflecting our attention to seize operations in Tilly, Belgium . Turning to expenses. Depreciation and amortization expenses in Q3 amounted to $4 million compared to $3 million for the same period of 2021. The increase mainly explained by the acquisition of Azur in Q4 2021. SG&A expenses in Q3 were $6.5 million compared to $4.7 million. The increase may be explained by the acquisition of Azur as well as general inflation impacting various expenses, anything of restrictions related to COVID-19. Financial expense in Q3 2020 amounted to $1.6 million compared to $0.8 million.

The negative impact is mainly due to the interest on long-term debt and imputed interest, which is our -- following the acquisition of Azur as well as the significant increase in interest rate noticed in Q3 2022 with similar impact on a year-to-date basis. In terms of income taxes, the company continues to be impacted by deferred tax assets applicable only in certain jurisdictions. Covering liquidity. In Q3, cash generated by operating activities amounted to $10.1 million compared to $5.2 million in Q3 of last year due to the positive changes in nonworking capital. In Q3, cash used in investment activities totaled $3.3 million compared to $2.3 million in Q3 last year, mainly attributed to the timing of additions to PPE such as [indiscernible] Montreal, which was partially mitigated by the proceeds of $2.8 million from the disposal of assets held for sale in the quarter. In Q3 of this year, cash used in financing activities amounted to $3.3 million compared to $0.2 million in Q3 of last year. The increase of $3.1 million was mainly explained by the reimbursement of $2.5 million of the credit facility in Q3 and an increase in lease payments. Now looking at growth in net debt, total debt stood at $122.5 million on September 30 from $126 million at the end of Q2. However, net debt after considering cash and cash equivalents decreased by $6.3 million to $83.3 million at the end of September from $89.6 million at the end of Q2.

In conclusion, let me reiterate that we intend to continue to approach business opportunities with discipline in terms of partners and project selection to strategically position ourselves over the midterm and long term. The Sierra space and the first solar agreements are strong demonstrations of this commitment and strategic focus -- we remain focused on our long-term strategy to position 5N Plus for growth in value-added markets and look forward to capturing value-added growth opportunities. Thanks to our unique expertise we can bring in our targeted and rapidly growing end markets, whether for specialty semiconductors or performance materials. One last comment. In terms of adjusted EBITDA for the full year, no surprise, but we expect to reach the upper range of our yearly guidance, well positioned into 2023. This concludes our presentation. Operator, back to you for the question period.

[Operator]

[Foreign Language] [Operator Instructions] Your first question comes from David Ocampo from Cormark Securities.

[David Ocampo, analyst]

Richard, I first want to start on your last comments there on the '22 guidance, your expectation to come in the top end of the range of $25 million to $30 million. But when I take a look at the year-to-date performance, you're at $23.3 million. So I'd imply that if you get to the top end, there is a pretty material step back in profitability from the Q2 and Q3 performance. Is there anything driving that? Or is there just a lot of conservatism baked into your recent guidance?

[Richard Perron, executive]

It's a combination of conservatism plus the fact that historically, Q4 has always been a bit more soft than the other quarters. And with the acquisition of Azur is a bit of unknown historically Azur has always been very strong in the second half, and in particular in Q4, while this year seems to be a bit more heavily distributed throughout the year. So those are the main reasons for the, let's say, conservatism. But obviously, we're working definitely hard to beat it.

[David Ocampo, analyst]

Okay. That makes a lot of sense. And then you guys provided some revenue numbers for the Sierra contract, but you only provided volume guidance for the first solar agreement. So can we expect the revenue to ramp up proportionately with the volumes? Or is there going to be some price decreases that's embedded in the First Solar contract?

[Richard Perron, executive]

No, you can assume an increase in volume pretty much aligned with the -- in terms of revenue aligned with the volume, and there's been no pressure on prices. If anything, it's the other way around. The team this time is really about securing supply. So it was not at all the same pressure on prices that we have experienced in the previous years. It's a different context now, very favorable to 5N.

[David Ocampo, analyst]

That's helpful. And I guess when I'm thinking about the growth of 35% and 100%, is that based on '22 volumes or year-to-date volumes that are annualized?

[Richard Perron, executive]

No, it's on the full year 2022 perspective. And remember, in the previous years, what we've mentioned is that the current contract, out of which we're in the second year, it was back loaded. So that increases over the best of the 2 years of the current contract.

[David Ocampo, analyst]

Got it. Got it. And then last one for me, just on FX, just given all the changes that we've been seeing, and it's been quite topical. Is there any material impact to you guys with the U.S. dollar increasing and the euro deteriorating here?

[Richard Perron, executive]

Well, definitely, we're in 2 businesses where the USD is the functional currency for most of it from a revenue perspective and also for a lot of the actual raw material partitions and chemical purchases and all of that. So for us, it's definitely -- it's favorable in our case.

[Operator]

Your next question comes from Michael Graham from Raymond James.

[Michael Glen, analyst]

So I just want to hash out this first solar agreement in a bit more detail. So look, if you're running somewhere between $40 million to $45 million annualized right now in 2022 for First Solar, we should think about that business approaching $80 million to $90 million of revenue in 2024?

[Richard Perron, executive]

As we've said, the zone is going to be 100% more than what we're going to achieve this year.

[Michael Glen, analyst]

Okay. And then the margins for that business. I know you don't explicitly break them out. But year-to-date for that segment, you're somewhere in the, call it, between 20.5% EBITDA margin. So is the first solar margin that we should think about? Is it in line with that type of margin that you've reported?

[Richard Perron, executive]

It's usually better than the average.

[Gervais Jacques, executive]

And again, if I may say it, Michael, I think the context we are currently in with the geopolitical situation is very different than a couple of years ago. And I think it is part of 5N's strategy to really differentiate itself with the French [indiscernible] strategy, talking -- being sure that we can connect furthermore with our customers while building our commercial partnership. Then I think this will benefit to 5N going forward.

[Michael Glen, analyst]

And I mean... I don't want to -- this is all obviously very positive, okay? I just want to try to -- like what can go wrong with this contract, basically, if you're looking out over the next 2 years, I'm sitting here looking at my model seeing, wow, like this is going to add quite a bit to EBITDA. But what -- like where are the risks embedded in terms of how this contract shakes out? I just want to -- is there anything that you can speak about there where there might be some uncertainty?

[Richard Perron, executive]

We see risk extremely limited for the following reasons for solar has the capacity to make their products, okay? They have new plants up and running. They have new ones coming up. They have a strong backlog and the agreement we have with them is a take or pay. So the risks are extremely limited.

[Michael Glen, analyst]

Okay. And can you just hash that little bit more, the take-or-pay aspect of it. How exactly that is...

[Richard Perron, executive]

It's a minimum volume commitment per year.

[Michael Glen, analyst]

The numbers that you've disclosed then for the ramp in...

[Richard Perron, executive]

Yes. Yes.

[Michael Glen, analyst]

Okay. And then just on Azur. What is -- can you disclose what Azur's revenue expectation is for this year or what the current run rate for revenue is year-to-date for Azur?

[Richard Perron, executive]

We don't disclose by unit, as you know. But if you recall, when we made the acquisition, we mentioned that historically, it's a business that does around EUR 60 million a year of sales. So that's pretty much the pace that they're at for 2022.

[Michael Glen, analyst]

And when you look into 2023 for Azur, given everything that you have signed, customer pipeline, would you expect growth above EUR 60 million in 2023?

[Richard Perron, executive]

Yes, exactly. Just remember, the Azur business is different than the rest of our business. The business that we're locking in now is for like late '23, '24. So whatever we're going to realize in 2022 was secured before the acquisition, okay? So everything that we're mentioning in terms of news and health, it's obviously incremental to what they were historically doing and that's to come in the coming years, '23, '24.

[Operator]

Your next question comes from Nick Agostino from Laurentian Bank Securities.

[Nick Agostino, analyst]

I guess a few questions for me. First, on the corporate expense, it looks like this quarter, the number that you guys recorded somewhere around $2.5 million, $2.6 million. Just looking at my model, it seems like the run rate historically or in recent quarters more like 3.3 million, and I'm just wondering is that new number for Q3 is that sustainable or was that just a one time -- some one time thing in the quarter?

[Richard Perron, executive]

We -- no I suspect Q3 will be a typical Yes. We have -- obviously different projects going on, and that triggers some corporate expenses. But no, that should be pretty much -- no, that's the range. That should be a typical quarter.

[Nick Agostino, analyst]

Okay. I appreciate that. And then just on the -- maybe for Gervais on this question here. I just -- I know when you joined the company, obviously, you brought techniques and all that other good stuff to the firm. And I'm just wondering, obviously, we've got a new commercial officer, I believe that's the title. You've got that new role implemented. Is there anything else that you guys have done in the last, say, 9 months or so to change -- that's changing your sales approach that's helping you guys deliver on the First Solar side, helping you guys deliver on the Sierra space side? And is there anything you guys plan to implement, again, from a sales perspective?

[Gervais Jacques, executive]

One step further into market segmentation, looking at the end market, looking at the needs and going back to our current customers and identifying future customers. And -- when we're sitting down with them, we're looking at the end markets, we're looking at what we can bring in terms of competitive advantage country located where outside of China and being able to provide security of supply for their long-term needs and also looking at what can we bring in terms of ESG component as well. Then those are the things that we're currently working with the current customers and the future customers to really differentiate 5N with the current geopolitics context. Then in a nutshell, I will say we're probably halfway through in terms of deployment, then we're still working on other potential partnership. We're also quite active with the big mining companies to incentivize them to valorize their by-products to get access to more of these minor metals. Then that's the portfolio of activities that we're currently doing.

[Nick Agostino, analyst]

Okay. Appreciate that color. Very helpful. And then just one last question, maybe for Richard. Just want to confirm on the bookings number for the quarter, that would include the First Solar contract, but does not include Sierra space, which would be part of the Q4 number. Just confirm that, and I'll pass over the line.

[Richard Perron, executive]

Just very important, the backlog, it looks forward 12 months. So it does not obviously have all First Solar's contract. It does not have all of CRS contract. And it's everything locked on September 30. So you would have a portion of Sierra.

[Nick Agostino, analyst]

Same thing on the bookings number?

[Richard Perron, executive]

Bookings is the mathematic yes.

[Operator]

Your next question comes from Frederic Tremblay from Desjardins.

[Frederic Tremblay, analyst]

First question for me is on Europe. Just wondering if the energy crisis that we're seeing over there has had an impact on your manufacturing activities or if you're expecting any impact on your business outlook in that region?

[Richard Perron, executive]

Risk of, I don't know, gas shortages or else, we have installed at our German facilities, LNG capabilities in terms of storage and conversion that represents many days and weeks of supply.

[Frederic Tremblay, analyst]

Okay. Great. And just on Performance Materials. You spoke about strong volume in health and pharma as well as dynamic pricing. I see that revenue for that segment in the quarter declined a little bit. Just wondering what caused that. Is that volumes from Tilly already sort of declining? Or is there something else, another category that...

[Richard Perron, executive]

Yes. The main cost is definitely Tilly. The phase out that we have initiated and just something to remember, in general on performance material H1 is always better than H2. But in present case what you're referring to is mainly Tilly.

[Frederic Tremblay, analyst]

Okay perfect that's helpful. and lastly for me on those new agreements with Sierra for solar, and you did comment on CapEx. I was wondering if you could comment maybe on working cap sort of inventories, how that might be impacted by that new piece of business, if there's any impact whatsoever.

[Richard Perron, executive]

Definitely, especially in the second half of '23 and '24 to have a slightly higher level of net working cap. But keep in mind that we'll have to be ultimately outed. So one on to the other, still not 100% sure, but it will likely be at equal level than today. Not done an increase on the net basis.

[Frederic Tremblay, analyst]

[Audio Gap] congrats on record.

[Richard Perron, executive]

Thank you.

[Operator]

[Operator Instructions] [Audio Gap] then from Raymond James.

[Richard Perron, executive]

[Audio Gap] of the process. At best. Yes.

[Michael Glen, analyst]

And those would be noncash? Or those would be cash charges?

[Richard Perron, executive]

There will be a combination of both because, obviously, we have to take care of our people to announce over there.

[Michael Glen, analyst]

Okay. And the revenue from Tilly now, is it gone? Like you're not generating revenue at a Tilly anymore?

[Richard Perron, executive]

No, we do. We do. Tilly is operating today. at reduced rate but...

[Michael Glen, analyst]

Tilly is still operating? Yes. Okay. When would you stop generating revenue from Tilly?

[Richard Perron, executive]

This is unknown today because we're still in the planning phase of the sole phaseout. And as we've been mentioning, we need to respect the local laws over there. Let's refer to as the law and also we're following the process.

[Michael Glen, analyst]

Okay. So Tilly is operating at lower volumes than previously with some expectation that it's going to...

[Richard Perron, executive]

Definitely not... It's definitely not at the pace of 2021. Yes.

[Michael Glen, analyst]

Okay. And the amount of losses coming out of Tilly right now, are they -- they're meaningfully smaller than they were in the past?

[Richard Perron, executive]

No, they're more important this year for a combination of things, including the inflation and the cost of energy in Belgium, which is drastically higher than anywhere else in elsewhere than Europe.

[Gervais Jacques, executive]

And we still have the same labor to produce at minimum capacity...

[Richard Perron, executive]

At a lower output.

[Operator]

Presenters, there are no further questions at this time. Please proceed.

[Richard Perron, executive]

Okay. Good. We would like to thank you all for joining us this morning. Have a nice day.

[Gervais Jacques, executive]

Thank you, everyone, and thank you for your support.

[Operator]

[Foreign Language] Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.