5N Plus Inc

TSX:VNP

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the 5N Plus Inc. Fourth Quarter 2022 Results Conference Call. [Operator Instructions].

I would 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 Q4 and full year 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 short presentation on the Investors section of our website. I would 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 discussion of the risk factors that may affect future results is contained in our management's discussion and analysis of 2022, dated February 21, 2023, 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] and good morning, everyone. Yesterday, we released our fourth quarter and annual results for the year ended December 31, 2022. While revenue for the fourth quarter was slightly down due to the divestiture of our Tilly, Belgium operations, revenue for the year was up 26%, with adjusted EBITDA coming in at $30 million, which hit the high end of our guidance range for the year. The acquisition of AZUR, which has now been fully integrated, played a significant part in the increase in revenue for the year. Our performance was also bolstered by higher demand for renewable energy in specialty semiconductors and pharma and health and performance materials.

We are delighted with these results, especially in light of the challenging year and headwinds caused by inflation and geopolitical events. These results demonstrate our success in executing on our strategy to focus on value-added end markets and client partnerships. Also contributing to our success was our ability to secure strategic agreements like those with first order, Sierra Space and Rio Tinto in high-growth sectors. We also were successful in quickly implementing the first wave of our commercial excellence program to mitigate the negative impact of inflation on product margins resulting in a sequential improvement of consolidated adjusted gross margin from 21.9% in Q1 2022 to 26.7% in Q4 2022.

With our Specialty Semiconductors segment, we continue to be the only viable global supplier outside China of ultra-high purity semiconductor compounds used in a wide range of critical technologies essential to people's lives. The space power market is experiencing growth above our most optimistic forecast. And during the fourth quarter, we were highly focused on implementing 24/7 production schedules to critical back-end production areas at AZUR and ensuring a comprehensive review of our overall capacity to address near-term demand.

We are investing in our operations to meet exceptional customer demand over the coming years across our key markets as a market leader. We are also uniquely positioned to play a significant role in the new photon counting detector technology for CT scan, which is set to revolutionize medical imaging in the medium term. In addition, we are exploring other potential market opportunities for our specialty semiconductor products in the defense and security sectors.

Under Performance Materials, we expect our health and pharmaceutical products to continue providing high profitability and consistent cash flows, and we continue to focus on the right sectors to expand the segment's product mix in attractive end markets. Before the end of 2022, we completed the strategic review of our operations. As part of that review process, we completed the divestiture of our Tilly, Belgium operations, which streamlines our product offering, improves our footprint and marks our exit of the low-margin extractive and catalytic sector.

In 2022, we also completed our Saint-Laurent project in Montreal expanding the development and manufacturing of critical minerals for advanced 2/6 based semiconductor compounds. For this facility, byproducts sourced from our strategic agreement with Rio Tinto Kennecott Utah Copper operation started late December 2022. Across our manufacturing sites, we will continue to invest in capacity building in line with the ramp-up of our commercial agreements.

With high value-added products and strategic contracts signed, we are excited about our prospects for the future. Across our business, we remain at the forefront of our field as a critical supplier to critical industries around the globe and a genuine differentiator and partner of choice in the field of specialty semiconductors, and as we enter 2023, we will build on this strong momentum.

Strategically, we continue to implement operational optimization initiatives where appropriate to bring incremental benefits to support organic growth while remaining disciplined on acquisition and strategic partnership opportunities. On a final note, to our employees, we would like to thank them for their dedication and hard work and to our stakeholders and shareholders, the company like to thank them for their continuing confidence and support.

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

[Richard Perron, executive]

Yes. Thank you, Gervais, and good morning, everyone. So as Gervais mentioned, fiscal 2022 was an important chapter for 5N Plus. From a purely financial performance perspective, the company showed capability to respond quickly to difficult conditions. Notwithstanding the sanctions impacting Russia-based clients, which impacted our Q1 results, cost pressures remain intense throughout the year due to global inflation and the energy prices. Our response was to quickly implement the first wave of our commercial excellence program, aim at rapidly mitigating the negative impact of inflation on product margins, which improved consolidated adjusted gross margins from 21.9% in the first quarter to 26.7% in the last quarter.

By the end of the year, we completed the strategic review of our operations to support our long-term positioning in value-added markets. This ultimately led to the divestment of our nonstrategic manufacturing operations located in Tilly, Belgium, divested in late December to a third party. This transaction is expected to provide incremental adjusted EBITDA contribution to the consolidated results of approximately $2 million a year. In addition, it supports more favorable net working capital levels and better allocation of resources.

As the impairment charges and loss on divestiture recorded in Q3 and Q4 were noncash in nature, we're able to realize most of our affiliate net working capital, repatriating the excess liquidity prior to the transaction. As Gervais noted, we successfully integrated AZUR SPACE this year, enhancing the growth prospects for our space solar power products beyond our initial expectations. At the moment, the business carries a backlog representing approximately 2x AZUR's historical level keeping in mind that our definition of backlog presented in these reports refers to shipments over the next 12 months only.

Turning now to revenue, gross margin and adjusted EBITDA for Q4 and the full year. Revenue in Q4 decreased slightly, reaching $61 million compared to $64.6 million in Q4 of last year. The decrease is primarily attributed -- attributable to the phaseout initiated earlier in the year of our extractive and catalytic products manufactured in Belgium and our divestiture of that facility in late December. However, for the full year of 2022, revenue increased by 26%, reaching $264.2 million compared to $210 million in full year of 2021, supported by the November 2021 acquisition of AZUR and higher demand from both segments.

Adjusted gross margin in Q4 was favorably impacted by product mix and our commercial excellence program. Adjusted gross margin reached $16.3 million or 26.7% compared to $15 million or 23.2% in Q4 of last year. For the full year, adjusted gross margin was also favorably impacted by our volumes and the acquisition of AZUR. Adjusted EBITDA in Q4 of 2022 reached $6.7 million, a decrease of $3.4 million compared to $10.1 million in the same quarter of last year. The adjusted EBITDA decreased by $2.6 million under specialty semiconductors mainly due to AZUR's better balanced quarterly adjusted EBITDA contribution throughout the year 2022 compared to 2021, when most of the contribution was realized in Q4 following the AZUR acquisition in November.

Under Performance Materials, adjusted EBITDA decreased by $1.2 million, mainly impacted by inflation and a phaseout in divestiture of our low-margin products manufactured in Belgium. For the full year, the adjusted EBITDA reached $30 million, meaning the high end of our forecast. The increase of $1.8 million over 2021 was mainly attributable to growing specialty semiconductors despite the negative impact of the Russia-Ukraine conflict that began in Q1, while Performance Materials was the most impacted of the two operating segments by global inflation and additional corporate expenses associated with the integration of AZUR and other corporate projects.

In full year 2022, EBITDA was $4.6 million compared to $25 million in 2021, while adjusted EBITDA increased by $1.8 million, the increase did not compensate for the impairment of noncurrent assets of $5.4 million recorded earlier in the year. In addition to the loss on divestiture recorded in Q4 and the impairment of noncurrent assets of $7.1 million recorded in Q3 following our confirmed intention to exit the manufacturing of low-margin products in Belgium, the various charges are noncash in nature.

Now looking at annualized backlog. Backlog on December 31, '22 represented 253 days of annualized revenue, an increase of 61 days or 30% over the backlog of Q3. When compared to Q4 of last year, the backlog of specialty semiconductors increased by 77 days, largely attributable to favorable negotiations on long-term contracts, confirming the near-term growth potential in renewable energy and space applications. Conversely, the backlog for Performance Materials decreased by 36 days compared to December of last year, reaching 124 days compared to 160 days. The decrease is mainly associated with the divestiture of our Belgium operations.

As I noted earlier, our definition of backlog refers to shipments over the next 12 months as and though we do have orders and commitments beyond 2023 on the renewable energy and space.

Turning to expenses. SG&A expenses in Q4 and full year were $7.2 million and $28.6 million, respectively, compared to $7 million and $21.9 million. The increases are mainly explained by the acquisition of AZUR, inflation and the lifting of restrictions related to COVID. Litigation and restructuring costs of $3.2 million and $3.8 million we recorded in Q4 and full year 2022, respectively. These included $2.6 million related to the divestiture of our subsidiary, $0.4 million of the site closure in Asia and $0.4 million for the settlement of a contract by mutual agreement recorded in Q1.

In Q4, we divested 100% interest -- our 100% interest in 5N Belgium SA and recognized a loss on divestiture of $7.8 million. Financial expense in Q4 amounted to $0.2 million compared to $2.2 million in Q4 of last year. The positive impact is mainly due to interest income earned following the recent settlement of an international tax arbitration between two jurisdictions where we operate. Again, on foreign exchange and derivative mitigating our interest on long-term debt and imputed interest following the acquisition of AZUR, on a full year basis, financial expenses amounted to $5.2 million compared to $4.1 million last year.

Covering liquidity. In 2022, cash generated by operating activities amounted to $23.8 million compared to $10.3 million last year, the increase due to the positive changes in nonworking capital, especially under Tilly, Belgium. For the full year 2022, cash used in investing activities represented $19 million compared to $49.9 million last year, of which $42.2 million was attributable to the acquisition of AZUR and $2 million for the acquisition of a minority equity stake in Microbion Corporation. A good portion of the PPE acquired under investing is presented as a growth, excluding the cash contribution from clients, recognized as deferred revenue under operating activities.

On a full year basis, cash released by financing activities amounted to $2.4 million compared to $36.2 million, mainly explained by the difference in the net brought down of the credit facility during the period and the acquisition of AZUR last year.

Now looking at gross and net debt, total debt stood at $121 million at the end of the year with net debt after considering cash and cash equivalents, decreasing by $1.8 million to $78.3 million at the end of December '22.

Now turning to guidance. With unprecedented demand for our renewable energy and space solar power products, investments in high-growth opportunities and a streamlined product mix, 5N Plus enters 2023 with strong momentum and a more streamlined predictable business. This is illustrated by our ability to provide guidance for the first time for the next 2 fiscal years. So for fiscal 2023, we expect adjusted EBITDA to be in the range of USD 35 million to USD 40 million with a higher contribution in the second half of the year due to planned release of orders, and for fiscal 2024 to be between USD 45 million and USD 50 million.

In conclusion, we are better positioned for the future to build and maintain our market leadership position in the promising sectors in which we excel. We believe the future is promising and expect consistent growth in the years ahead.

So now thank you all. I will now turn the call back to the operator for the analysts' questions.

[Operator]

[Operator Instructions] And your first question will be from David Ocampo at Cormark Securities.

[David Ocampo, analyst]

I guess first one for Richard. For your 2023 and 2024 guidance, I was just curious, is there any revenue or profitability baked in there related to the CT scanner market or any of the new other verticals that you guys are pursuing, such as security and defense?

[Richard Perron, executive]

Okay. There's a little bit, obviously, introduced. But nothing I'm going to use the word important because we continue to believe that, that opportunity is more a 3- to 5-year horizon in the next 2 years. But there's a little bit of improvement into it -- build into it. Yes.

[David Ocampo, analyst]

Okay. That makes sense. And then Gervais, I was just hoping you could speak in more detail about the opportunities that you are seeing in space, and if you require any large CapEx to meet and service that demand?

[Gervais Jacques, executive]

Well, thanks for the opportunity of addressing this. I think the first thing we've been doing is introducing 24/7 operation and 7 days operation. When we acquired AZUR, that was mainly operating in the two shifts in 5 days. Then we slightly introduce a sixth phase and now we are -- it's a continuous operation. Then that was the first move we did. Obviously, that's not enough to meet all the demand that we're facing, and we are contemplating targeted growth, but it has to be always backed with firm order, making sure that we know exactly the payback of these investments.

[Richard Perron, executive]

Maybe just to add, and I made a short reference in my introduction. We do have clients that are providing us with equipment to support capacity expansion.

[Gervais Jacques, executive]

This is part of our partnership approach. If they definitely need more capacity, then we need to find ways to work with them to address this gap because there is clearly a gap to be addressed in this market. I think the opportunity is up there, and we need to find creative solution with them.

[David Ocampo, analyst]

That's helpful. And I guess with the 2024 guidance out there, you guys probably have some pretty good confidence and visibility on the order backlog beyond the 12 months. Just curious if your capacity is also sold out for '24 and '25, just beyond the 12-month backlog that you guys gave?

[Richard Perron, executive]

We're definitely going to be [ floating ] with the high, high end of that -- of our capacity by then, yes.

[Gervais Jacques, executive]

Yes.

[Operator]

Next question will be from Michael Glen at Raymond James.

[Michael Glen, analyst]

So I just want to look at your specialty semiconductor EBITDA. And if possible, look at it relative to 3Q because the top line in the business was for all intents and purposes, it was about the same, but the margin came off and the EBITDA contribution came off sequentially. So I'm just trying to understand, like between the third quarter of '22 and fourth quarter of '22, what's sort of the variance in the product mix or some of the profitability that impacted the specialty semiconductor segment?

[Richard Perron, executive]

We -- with AZUR changes, our usual rule of thumb, but we definitely had a bit more renewable energy in the second half than the first half. We don't look at it Q3, Q4. We look at it -- especially renewable energy is more on a semester basis that we look at it now. Like we know the second semester this year now is going to be materially better than the first half and last year, it was also the case. AZUR is a more difficult beast to forecast from a mix perspective between -- from one quarter to another, client and product wise. So I would probably need to be a little bit deeper into the mix of clients and products for AZUR between Q3 and Q4 to answer properly.

[Gervais Jacques, executive]

And if I may -- let me add that when we acquired AZUR, we had to deliver a contract that have been signed previously. Now starting this year, the new contract that we've been signing will kick in. And I think that's -- and we will see that happening now, but more and more at the back end of the year and then next year. Then the -- reflecting the higher demand, we'll see the impact later on this year and next year. And now we -- because of the way it works with that type of program, programs are normally lasting between 12 to 18 months, sometimes 24 months, then now we're delivering the order that were signed under previous ownership.

[Richard Perron, executive]

So that's a high level. But then at least on a quarterly basis, as also it's on dynamic.

[Gervais Jacques, executive]

Yes.

[Michael Glen, analyst]

Okay. And then can you just touch on like in terms of your guidance, how we should think about CapEx and free cash conversion for both '23 and '24?

[Richard Perron, executive]

Okay. '23, the usual rule of thumb applying, which is usually CapEx in the range of our net cash out CapEx because remember, some clients are participating, will be in the range of our PPE -- depreciation on PPE charges. For 2024, we're still working on it. We may have a little bit more than the usual depreciation, but we're working on the current CapEx program as we speak.

[Michael Glen, analyst]

And so like if I'm looking at the $16 million of PPE in '22, I think that's what the full year number was, it would be in line with it?

[Richard Perron, executive]

Cash out was in the range of $12 million. Net cash out. Part of the client's contribution is added under deferred revenue and other things.

[Michael Glen, analyst]

Okay. And just one more for me. Can you just -- as we look at some of your commodities right now, so tellurium and bismuth market pricing for those two commodities. How do you see those two commodities impacting results in '23?

[Richard Perron, executive]

I mean there's no way for us to think that it's either going to be materially up or down from an inflation perspective. So we assume stability at this point.

[Michael Glen, analyst]

So there's nothing in the market right now that would...

[Richard Perron, executive]

Exactly, stable from current level.

[Operator]

Your next question is from Rupert Merer of National Bank.

[Rupert Merer, analyst]

So it seems your R&D expenses were up a bit in the quarter, and that may have been weighing on the EBITDA. You referred to some moving parts related to subsidies and grants and in your disclosures. Can you talk about what we saw in Q4 for R&D? Give us a little more color there. But also, what should we expect into the future? It seems to be mostly related to AZUR.

[Richard Perron, executive]

Yes. Today, the distribution of our R&D charges between our businesses, AZUR will carry a higher weight versus the usual 5N. But at the same time, because of its strategic positioning in Europe in health, they're getting a fair bit of grants, but distribution of those grants from one quarter to another quarter will vary. We have a pretty good idea of the full year perspective, but the actual realization recognition from a quarter to another, that's going to be a bit more unequal.

[Rupert Merer, analyst]

So am I right that, that was up about $2 million this quarter versus what we've seen in...

[Richard Perron, executive]

The plus $2 million is a combination of two factors, grant level and as part of the integration of AZUR to 5N Plus, we continue to realign the bookkeeping, the accounting, the definitions of AZUR to the rest of the group. So there's a portion of that which is just a proper classification forward aligned with the other units of the group, which is, I mean, a normal as part of that first full year of integration to 5N Plus.

[Rupert Merer, analyst]

Okay. So the run rate going forward could be a little lower than you'd anticipate?

[Richard Perron, executive]

We anticipate it's going to be, yes, slightly lower.

[Rupert Merer, analyst]

And then on the guidance, I was wondering if you can give us a little more color on that bridge. I mean what your assumptions are for the baseline business relative to 2022? And also if you can give some color on maybe what the biggest risks are to the guide? And any opportunities you might have to find new business that will be incremental to the guide?

[Richard Perron, executive]

Okay. The guidance essentially is a bottom-up exercise where all of our subsidies -- subsidiaries and people participated. It's essentially based on contracts for which we have committed, a little bit of growth under medical imaging and stability on the rest of our business. So it's built mostly around renewable energy and our space business. The rest there's a little bit of upside, but we're very prudent.

[Rupert Merer, analyst]

Okay. So what do you think would be the biggest risks and opportunities to the guide?

[Richard Perron, executive]

Opportunities, sectors like medical imaging happening sooner than expected. There's always a little bit of effect that may play favorably. There's always a little bit of notation that may play favorably. Current assumptions are, as I said, show a decent level of conservatism. So those are the things. But we have to be honest, renewable energy and space, I mean, we have long-term contracts. Space, as we've mentioned, we have 2 years of backlog and that business used to carry about a year of backlog.

So the next couple of years, there -- I mean, the range that we're providing, I think we have, as I said, a fairly good level of conservatism built into it. Upsides will be, as I said, things that are less of our control, notations, effects. And maybe, as I said, medical imaging, where we know we're going to be playing a role. The challenge is to assess when that market will pick up in a material way.

[Gervais Jacques, executive]

Yes. And let me add maybe as well the Inflation Reduction Act that is happening in the U.S. in terms of geopolitics could also be an upside. I think we see a first wave and we see that happening more and more, then I think that could be another potential upside.

[Rupert Merer, analyst]

Great. Just one final question. Could notations be a headwind to the guidance? What would you see as the potential...

[Richard Perron, executive]

That's why we're providing a range. I don't have 100% control over the -- on all factors impacting our business. That's why it's a range.

[Rupert Merer, analyst]

That headwind is manageable then, any potential risk from...

[Richard Perron, executive]

Yes. Yes. Yes. We're definitely -- I mean, with the divestiture of Tilly, we now have a product offering where the actual metal content is lower and lower and continues to be lower than anything that has been in place a few years back. So we're less and less exposed to metal. But look, we make products that are made out of minerals.

[Operator]

Next question will be from Nick Agostino at Laurentian Bank Securities.

[Nick Agostino, analyst]

I just wanted to just cover off a couple of, I guess, housekeeping items, just the issues that plagued the company in the past. Just looking at shortages, was there any -- when you look at the shortage situation through 2022, how did -- was there any impact that you may have seen in Q4? Or is that pretty much in the rearview mirror?

[Richard Perron, executive]

Just to make sure I understand your question. When you're referring to shortages, can you be just...

[Nick Agostino, analyst]

So just any supply chain -- supply chain issues, whether it's chip-related? Just anything to supply chain in general?

[Richard Perron, executive]

No, I don't think the -- I mean, the global topic of shortages impacted us in any way in '22. No. We've been able to find carriers. We've been able to source our key chemicals and consumables. I mean it required a bit more work, but it did not impact our business.

[Nick Agostino, analyst]

Okay. And then the other question, just as you're going through the Q4 on contract renewal process, and in the past, you guys talked about the value pricing strategy and pushing through higher pricing, is that discussion still happening? Are there contracts where you are bringing that topic to the table? And if so, how is it being received as you're talking to customers when it comes to their contract renewal and trying to push through pricing? And more so, are you able to get pricing increases well above the -- just the rate of inflation?

[Gervais Jacques, executive]

Well, you've seen our margin that has been increasing from Q1 to Q4. And yes, we are addressing that systematically with all customers. Yes, sometimes it's easier than other. But what we're doing now is we're producing very complicated products, high technology. And I think we need to make sure that we are valorizing these products at the right level. And our assumption is that was not the case, and this is what we're trying to do on a daily basis, making sure that our key differentiator attributes and -- are valorized making sure that we're partnering with our customers for not only the product that we're producing today, but for the next generation of products, and also addressing where we could R&D opportunities with them.

Then -- it's a basket of opportunities, but commercial excellence means really partnering with the customers and making sure that we are valorizing our products at the right level. And we believe there is still room for improvement, and this is built in, in our guidance for the next 2 years.

[Nick Agostino, analyst]

Okay. That's helpful. And then just a couple -- two more questions. I just want to make sure I heard correctly, Richard, did you say that on AZUR, the backlog is at 2x the historical level? I just want to make sure I heard that correctly.

[Richard Perron, executive]

Yes. Yes, it is the case. But as I also mentioned, the KPI that we're presenting in our documents, our definition, if you read it in the back, it says that putting the next 12 months. Reality is that renewable energy and space goes beyond 12 months and space, as I've mentioned, they used to carry a year or so now. They now carry about 2 years' worth of backlog.

[Nick Agostino, analyst]

Right. Which is my second question, why not provide -- I know that your -- the backlog number you're providing is the 1 year for the next 12 months, why not disclose what the backlog looks like beyond 12 months, given the fact that you're providing a 2-year EBITDA guidance number?

[Richard Perron, executive]

Nick, it's a good question. The plan is the following: We wanted to complete 2022 on the same basis of 2021. For '23, we may have additional comments to give you a bit more flavor on what we're just mentioning now.

[Operator]

[Operator Instructions] And your next question will be from Frederic Tremblay at Desjardins.

[Frederic Tremblay, analyst]

Just one, maybe I want to go back on the project Saint-Laurent there for a minute. Maybe if you can discuss the ramp-up of the equipment there and sort of the initial deliveries from Rio Tinto. Just sort of initial thoughts on how that project and partnership is going so far?

[Gervais Jacques, executive]

Well, we did the start-up commissioning in December, then -- and now we are operating at a normal rate, the way...

[Richard Perron, executive]

There's still definitely room for improvement from a performance perspective, but the project has been commissioned.

[Gervais Jacques, executive]

Yes. But what we're doing now, we've been testing all the equipment one by one. We've been operating in a continuous way. And now part of the ramp-up, we're testing different materials than I think we have more than one source. We're trying to diversify the sourcing. Rio Tinto is one of them, which is a new one, but we're also working on other sources. And I think that's part of the commissioning, making sure that all the different products will be tested and then optimized. Then we're quite pleased about the way it's working now.

[Frederic Tremblay, analyst]

Okay. And then just switching to AZUR. I know in the past, the results have been historically skewed towards the second half of the year. Perhaps that wasn't really the case in 2022. But just wondering, going forward, with the visibility you have on their backlog and perhaps the deliveries, anything to mention there from a sort of a quarterly pace of revenue for them? Is it going to be back to the -- being [indiscernible] Q to Q also to the second half in 2023?

[Richard Perron, executive]

Currently, what I can foresee from a release perspective, okay? Q2 and Q3 will be the strongest, and I suspect Q2 will be stronger than Q2. That's what we can foresee, but there's -- I mean, there's always a potential for changes in the release date. Even though, again, we have a commitment for the full year, but the release dates may vary from 1 quarter to another. But so far, what I can see is Q2 and Q3 potentially be their strongest quarter with Q3 slightly better.

[Frederic Tremblay, analyst]

Okay. That's helpful. And then last question for me, just on capital allocation priorities. You mentioned CapEx earlier. But maybe you want to touch on a few other topics there. If you have any comments on debt reduction? And I know you briefly mentioned M&A as well. Maybe just your thoughts on those two areas, that would be helpful.

[Richard Perron, executive]

Well, as we -- as most people know, we're extremely diligent on how we manage the balance sheet. So we'll make sure we make the best use of our cash and our cash flow be used primarily towards making sure we can meet the customer demand. So that's what you see from allocation of capital in the next couple of years, but at the same time, within parameters that are diligent.

[Operator]

Next question is from Michael Glen of Raymond James.

[Michael Glen, analyst]

Can you just touch on what you're expecting in terms of the growth profile of the first solar business over 23%? I know it's 35% for the year, but how we should think about that over the course of the year?

[Richard Perron, executive]

The current -- I'm going to use the term again, like for AZUR release, the planned releases for the year is a much stronger second half than first half, okay? With Q1 being the lowest of all 4 quarters, Q2 improving a little bit from a release perspective, but the bulk of the volume and by default, the increase over '22 will be in the second half of this year.

[Michael Glen, analyst]

And can you just -- in terms of the material that you're selling to for solar is all of that now coming out of Montreal? Or is there still material coming out of other sites?

[Richard Perron, executive]

First solar, it's currently served by a combination of Montreal and one of our German plant. It has always been the case and it's going to be the case for the rest of '23. But in '24, you'll have a higher balance of the actual sell, the renewable energy that will be done from Montreal. So this year, we're applying ourselves to crank up the required capacity for '24 in Canada, in Montreal.

[Operator]

Next question is from Nick Agostino of Laurentian Bank Securities.

[Nick Agostino, analyst]

I just wanted to come back on that risk discussion given the fact that you guys are putting out 2 years' worth of guidance and the fact that space contracts, as you guys have alluded to in the past are lumpy. What sort of terms are in those contracts that give you the comfort to be able to put out the 2-year guidance? And specifically, is there a risk that contracts could be pulled over the next 2 years that could impact your guidance? Or are there terms in those contracts take or pay-type terms and the guidance you're providing is with that consideration in mind? So I'm just trying to understand the stability specifically on those solar -- sorry, space contracts.

[Richard Perron, executive]

Most of those contracts on a fully committed basis. And yes, you have to remember two things. This whole industry, there's only 3 players outside China, okay? So there's nowhere else to go. And this is the position as of December. The reality is we continue to put bids out there. So the level of predictability is very high for '23 and '24.

[Operator]

And at this time, gentlemen, we have no other questions. Please proceed with your closing remarks.

[Richard Perron, executive]

Well, we would like to thank you all for joining us today, and we wish you all a good day.

[Gervais Jacques, executive]

Yes. Thank you very much, and see you soon.

[Operator]

Thank you. 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.