5N Plus Inc.

Hello ladies and gentlemen, thank you for your patience and welcome to the telephone conference of the results of the first trimester 2023 of 5N+. Currently, the participants are in listening mode only. After the presentation, there will be a period of questions and answers. To ask a question, press star and 1 on your telephone keyboard. And if you need assistance, please press star 0. I will now hand over the floor to Richard Perron, head of the financial management. Good morning, ladies and gentlemen. Thank you for standing by and welcome to the 5N Plus, Inc. first quarter 2023 results conference call. At this time, note that all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, please press star then one on your telephone keypad. And if you require immediate assistance for the operator, please press star zero. And I would like to turn the conference over to your speaker today, Richard Perron, Chief Financial Officer. Please go ahead, sir.

Thank you. So bonjour à toutes et à tous. Good morning, everyone, and thank you for joining us for our Q1 2023 financial results conference call and webcast. We'll begin with a short presentation, followed by a question period with financial analysts. Joining me this morning is 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 two 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 risk and uncertainties. A detailed description of the risk factors that may affect future results is contained in our management discussion and analysis of 2022, dated February 21, 2023, available on our website and in our public filing. 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 analysis. I would now turn the conference over to Gervais.

Merci, Richard. Welcome, everyone, and good morning. Yesterday, we released solid Q1 results for the three months ended March 31, 2023. in what remains a complex global environment, but rich in opportunities in the market segments in which we operate. Adjusted EBITDA was up 56% because of our booming special semiconductor segment and an improved product mix in performance materials, reflecting our exit from the low-margin extractive and catalytic sector. These same factors also had a positive impact on our adjusted gross margin, which was up to nearly 30% for Q1. As per our previously provided guidance, we are seeing strong demand for terrestrial renewable energy and solar space power, and we remain the partner of choice for these high-growth value-added sectors. At quarter end, our backlog was 365 days for specialty semiconductor, and only because the estimated number of days based on our annualized revenues cannot exceed 365 per hour definition. The effective backlog, in fact, surpasses the next 12 months because of our confirmed long-term contracts. Last week, I was at the Space Power Conference in Los Angeles, where we met with many players of the industry and confirmed the progress of Azure on different satellite programs. The solid reputation of Azure is driving the increasing adoption of our space solar cell technology in North America as a complement to our solid position in Europe. As a preferred partner, we have been able to secure favorable terms in long-term contracts. We noted some examples of these key contracts in recent announcements, namely our role in the European Space Agency's mission to Jupiter and NASA's intention to employ Azure solar cells in its future mission to Jupiter. These projects, combined with our previously announced Sierra Space contract renewal, highlight our ability to meet unique needs and specifications and reinforce our leadership position in space applications with a more balanced geographical global presence. To meet this extensive pipeline of contracted work in the Specialty Semiconductors segment, we continue to invest in capacity in line with the ramp-up of our commercial agreements across our manufacturing sites. At Azure, we just announced a program to increase production capacity by 30% over the course of 2023 and 2024. To achieve this growth, we are making productivity improvements Installing new equipment and commissioning co-investment equipment. In our performance materials segment, we are seeing the positive margin impact of our improved product mix. We remain confident in the outlook for the health and pharmaceutical sectors that contribute to the demand for our key performance materials. Our strategic focus for fiscal 2023 remains embedded in our Commercial Excellence Program. The first pillar of that program is to prioritize innovative partnerships that further solidify our role as the premier viable supplier of critical enablers in growing sectors. The second focus of our Commercial Excellence Program is the continued value optimization across our product offerings. which allows us to manage pricing for the benefit of our growth, while providing cost-effective solutions to our clients. Finally, our strategy looks to promote co-investment initiatives that accelerate our go-to market for our specialty products and optimize our capital deployment. We remain highly optimistic about our prospects for the future with a clear strategy, a strong pipeline, and a continuous focus on commercial excellence. We are confident in our ability to meet our previously disclosed financial guidance for fiscal year 2023 and fiscal year 2024 with strong EBITDA contributions in the second half of fiscal 2023 as we hold firm in our value-added role as a critical supplier of enabling materials. I will now pass the call over to Richard to discuss our financial results in more detail before we take questions from analysts. Richard.

Thank you, Gervais. So, as Gervais just voiced, the first quarter of 2023 completed. We continue to be very optimistic and excited about the near-term outlook of our business segments, optimism supported by the conviction that the company has an important role to play in the success of its clients and to support critical technology advancements. Disclosed last night, the company ended the first quarter delivering solid financial results, supported by the rise on their specialty semiconductors, both in terms of revenue and adjusted EBITDA, and in terms of adjusted EBITDA on the performance materials, favored by an improved product mix following the divestment of Tilly at the end of last year. This combination allowed the consolidated adjusted EBITDA to increase by more than 56% compared to the same quarter of last year. Despite the global business environment remaining challenging for all, we continue to experience robust demand, market demand on the renewable energy and space power, as well as a real momentum in terms of positioning the company as a strategic supplier to our clients, remaining at the forefront of our commercial excellence program launched last year to mitigate the negative impact of inflation on product margins. This allowed us to sequentially improve consolidated adjusted gross margins from 21.9% in Q1 of last year to more than 29.8% this quarter. For this, we believe 5 and Plus is a stronger company today than at any point in its history. Turning now to revenue, gross margin, and adjusted bids for Q1 of this year. Revenue in Q1 of this year reached 55.3 million compared to 64.4 million for the same period last year. The anticipated decrease is attributable to the company's exit from the manufacturing of low-margin extractive and catalytic products in the second half of 2022 and related divestiture of its steely Belgium operations during Q4. The consolidated revenue, however, impacted by strong demand for products under specialty semiconductors. Regarding the adjusted gross margin, Q1 was favorably impacted by the consolidated product mix. reaching 16.5 million or 29.8 percent compared to 14.1 or 21.9 percent. This allowed the company to realize an adjusted EBITDA of more than 8.8 million this quarter, an increase of 3.2 million compared to 5.6 million in Q1 of last year. The adjusted EBITDA increasing by 1.6 million or 27 percent under specialty semiconductors supported by Erdemen, and underperformance materials increasing by 1.8 million, or 70%, impacted by more favorable product mix. Now looking at the analyzed backlog. The backlog on March 31st, 23, represented 306 days of analyzed revenue, an increase of 53 days, or 21%, over the backlog of December 2022. For specialty semiconductors, it represented 360 days of analyzed revenue at similar level over the backlog of December. when expressing days. Important to mention, and we're referring twice to this this morning, the estimated number of days based on analyzed revenues cannot exceed 365 days per hour definition. It is essential to note that the effective backlog under specialty semiconductors surpasses the 12-month period due to confirmed long-term contracts in renewable energy and space applications. As for the backlog of performance materials, it represented 153 days of analyzed revenue an increase of 29 days or 23% over the backlog of December. Here, the increase on the performance materials expressed in number of days is calculated over a reduced annualized revenue following the company's exit from the manufacturing of extractive and catalytic products last year. The key contracts under the segment now present an improved product mix that continues to be mainly renewed in the fourth and the first quarters of the year. Turning to expenses, Depreciation and amortization expenses in Q1 amounted to 4.1 compared to 4.8 for the same period of 22, the decrease mainly associated with the company's divestiture of its Thiele Belgium operations. SGN expenses in Q1 were 6.9 compared to 7.5 for the same period of 22, also positively impacted by the divestiture of Thiele. There were no improvement charges recorded in Q1-23 compared to an impairment on non-current assets of 5.4 million in Q1 of last year under specialty semiconductors to reflect the assessment of the current value of intangibles due to the impact of the Russian-Ukraine conflict. Financial expenses in Q1 amounted to 2.3 compared to 1.6, the negative impact mainly due to the increase in interest rates between the two quarters. The company reported earnings before income taxes of 2.5 million in Q1 of this year. Income tax expense this quarter were about a million compared to an income tax recovery of 0.5 in the same period of last year. Quickly covering liquidity, this quarter cash use and operating activities amounted to 2.8 compared to 4.9 last year. The decrease comes from the net difference between higher contribution from operating activities minus a less favorable change in the non-working cap this year. In Q1, cash generated from investing activities amounted to 2.9 compared to cash used in investing activities of 4.1 in Q1 of last year. The increase of 7 million is mainly explained by the proceeds on settlement of an index deposit agreement, which was amended during Q1 of this year, resulting in a receipt of cash of 6.5 million. In Q1, cash used in financing activities amounted to 0.6 million compared to 0.8 million. Now looking at gross and net debt, total debt stood at 121 million, with net debt, after considering cash and cash equivalents, ended at 79.6 million, slightly higher than year-end. In conclusion, in recent years, we have refocused our operational footprint to advise divestments and the Azure acquisition, investing strategically in sectors and products that offer high growth potential and superior margins. In terms of business guidance, supported by innovative partnerships, and transform businesses, management maintains it's projected adjusted to be that range, to be between 35 and 40 million for this year, with higher contribution in the second half of the year, and between 45 and 50 million for the full year of 2024. So thank you all. I will now go back to the operator for analyst questions.

Thank you, sir. Ladies and gentlemen, if you do have any questions, please press star followed by 1 on your touchtone phone. You will then hear a three-tone prompt acknowledging your request. And if you would like to withdraw from the question queue, please press star followed by 2. And if using your speakerphone, we do ask that you please lift the handset before pressing any keys. Please go ahead and press star 1 now if you have any questions. And your first question will be from David Ocampo at Cormark Securities. Please go ahead.

Thanks. Good morning, gentlemen.

Good morning. Morning.

Yeah, I guess my first question here is just on your largest customer, First Solar. We've seen some pretty good commentary from them over the last few quarters where they're now selling capacity into 2029. They're looking for more visibility on their supply chain and they're even considering even further expansion plans. So with that context in mind or those comments in mind, how should we be thinking about growth with First Solar beyond 2024? And what's your expectation on another multi-year agreement in the near future?

Expectations are fairly easy. Essentially, we're going to be supporting them in their growth going forward. So we're going to be adjusting capacity in order to support them over the course of the coming years.

Right. I'm sorry, go ahead, Gerard.

Yeah, just adding that we're meeting frequently with them and, you know, we're looking at the future, what needs to happen. And, you know, I think their market is simply booming. I think you've seen the growth. They have a large backlog. And this growth is happening largely now in North America and some of it will be India. Then, you know, we're in terms of – we're perfectly located to – to try to optimize our business with them. And I think we are working with them to find the right way of delivering this project pipeline.

So the relation between the two parties is one of a partnership. So we're definitely working with them to support them and contribute to the success of our clients.

And you talked a little bit there about capacity. Is your Montreal facility enough to meet the demand beyond 2024? And just curious how you guys are handling the feedstock to meet that increased demand.

The current changes or additions that we're making is going to bring us beyond 2024. But as you just referred to, the backlog for solar is very important. So we're going to have to make additional adjustments in time.

And then just a housekeeping question here. The expansion plan that you guys announced at Azure a couple weeks ago now, is that 30% less captured in your 2024 guidance, or is that growth that we can expect beyond 2024?

No, most part of it is captured in our 2024. For example, the additional shifts and things like that. Then comes the additional capital investments on our own and those that are based on co-investments. Those will, part of the co-investments will contribute to the 24 and are part of our guidance, but the sum of all three, let's say, items here will contribute for the most part in 25 and beyond.

Okay, that's it for me. Thanks a lot, guys.

Thank you. Next question will be from Michael Glenn at Raymond James. Please go ahead.

Hey, good morning. So when you bought Azure... the EBITDA margins were indicated at about 12% range. So just wonder if you can comment on where margins are tracking right now with Azure and how we should think about Azure margins trending through the rest of this year and into 2024. Okay.

As we've mentioned in previous calls, the Azure business is very different than the rest of our businesses, okay, in the sense that you sell projects. So the year 2022 and a good portion of the year 2023, those were contracts that were earned by the previous owners, previous shareholders. So us, margins are improving because we're obviously putting in place different initiatives from an operational perspective, but you'll see the benefit of better contracts in late this year, but most of them will have an impact in 2024 and beyond. So these days, we're tracking a slightly better margin than when we acquired ESSER. But again, the real benefits from our commercial excellence programs and different other initiatives that we have in place at the operational level will contribute later in 2024.

Okay. And is there any way, like you indicate to us what First Solar was, but can you talk about revenue growth? at Azure, like where revenue came in at for the quarter?

Revenues with revenue growth, man, it comes from, well, we had the balance again, as we've mentioned, the balance of our clients between North America and Europe has changed. So there's definitely a higher balance of North American clients in this quarter than in Q1 of last year, okay? It's a more balanced client mix going forward than historically for Azure. Q1 reflects that as well.

Just circling back to First Solar, if you listen to their Q1 conference call, one of the talking points on their side was they're waiting for some clarity with respect to domestic content requirements for the manufacturer. of the solar cells. I'm just wondering if this is something that could perhaps temper some of the rampant production in the near term, or if it's something you're in discussion with them on.

That's a very good question, Michael. We made sure that the North American production was part of the local requirement. At this point in time, the production that is coming from the Montreal site will be accounted as local requirement for them.

Today, most of the semiconductor products that we're supplying them are coming from Europe. We're going to be having a different allocation in the coming quarters where their North American needs will be supplied from Montreal, Canada and complying with their North American content requirements.

Okay. And then maybe just one more for me on the inventory side. What was the inventory build in the quarter and what's the schedule to unwind that?

Yeah. Yeah, there's a small inventory built in Q1. For us, the way we look at it, it's essentially normal in the first half of each year. We always have a little bit more inventory. And that inventory build is across all of our product lines.

Okay, thank you for taking the questions.

Next question is from Rupert Mayer at National Bank. Please go ahead.

Hi, good morning. Great quarter. Good morning. So it sounds like your activity levels are pretty high here. You're running flat out at least in some of your operations. How much excess capacity do you have across the company, across all of your product lines? And if we look at your guidance out to next year, if the business opportunities remain strong, are you capacity limited or do you think you could beat the high end of your guidance if things go well.

We have the capacity, obviously, to reach the high end of our guidance. Otherwise, we would not have provided such range. And we have also given ourselves a little room for improvement. So don't worry. We have capacity to go to the upper range of that guidance.

So you are effectively capacity limited today and you are expanding the operations as a result. Is there an opportunity to expand faster?

The reality is the following. Under performance materials, plenty of capacity because we've made important investments in the last few years to improve processes. That's for performance materials. Under specialty semiconductors, we do have extra capacity, but it's a bit more of a stretch, and we're making different investments this year to make sure that 24 goes easy. But in 23, we have a little bit of extra capacity because of different things that we've been doing last year and we're doing now. But beyond 24, specialty semiconductors, everything that we're doing now needs to come in line, obviously, to bring us additional benefits.

And I think we're playing with the different levers we have in hand. We're doing continuous improvement initiatives on many different sites, looking at the way we've been doing things, how can we do it differently through Kaizen and other types of continuous improvement initiatives. We're also looking at organization. What we've done in Azure, moving from five days to seven days, moving to the 24 hours full coverage, We can also do it in Montreal and other sites because we're not 24-7 everywhere. Then that's another lever that we have in hand. And then we're also looking at the bottleneck and see what we can do to adjust the bottleneck some part of our process.

Okay, great. That's helpful. Thank you. And just back to the inventory follow-up on Michael's question. With the closure of Tilly, We anticipated we might see some drop in inventory. Am I looking at that right? Are there opportunities to improve working capital efficiency following the closure of Tilly?

What we expect is the following. Year over year. Leave aside that in the first half of the year, we always have a little bit of additional working capital. Year over year, you're likely to see a small decrease. But remember, we're positioning ourselves for 24 where demand-demand is much higher than 23, okay, based on earned contracts.

All right, very good. I'll leave it there. Thank you. Thank you, Rupert.

Thank you. Once again, ladies and gentlemen, if you do have any questions at this time, please press star followed by 1 on your touch-tone phone. And your next question will be from Frédéric Tremblay at Desjardins.

Thanks. Good morning. Morning. Good morning. I wanted to touch first on the performance materials segment margins there, 19.8% adjusted EBITDA margin, really strong. I was just wondering, does that capture the entire effect of exiting extractive and catalytic materials, or is there potential for further improvement on the margin side in coming quarters?

No, at the EBITDA level, The exit represents a small portion of the additional benefit under that segment. If you go in the notes of the MD&E, you'll see that on an annual basis, TD was losing about $2 million. So divide this by four, and you get a pretty good estimate of the impact for Q1 of this year. So the balance are true additional benefits from an improved mix and a better cost structure with TD out of the picture.

Okay. And then maybe switching to the balance sheet, debt levels were pretty much flat sequentially. Richard, do you have any thoughts on expectations for leverage as we move through 2023?

What you're going to see is an improvement in terms of ratios this year, so lower leverage by year-end.

Okay. And does that technically provide you ammunition for potentially acquisitions? Is that part of the strategy or are you focused mainly on increasing capacity and sort of internal growth initiatives?

It's obviously always there, but at the same time, we're not going to compromise 2024. So in terms of the resources allocation, we're making sure that we're ready to succeed in 2024, which may mean decent level of inventory and making sure we accelerate the capital investments where needed.

Great. Maybe one last question for me on the co-investments. I just want to maybe better understand if there's a margin or pricing impact to those co-investments, meaning our clients that are agreeing to co-invest in some equipment with you guys, are they expecting some benefits on the pricing side? What's the dynamic there? That would be helpful.

Thanks. Well, thanks for the question. I think the strategy is pretty clear. Co-investment strategy will enable the customer to get their product faster. Then it's a go-to-market strategy. You know, we are at full capacity in some places. If they want to jump the queue and go faster, then they can co-invest and buy equipment. But we will not compromise on margins. Great, thank you.

Thank you. Next question is a follow-up from Michael Glenn at Raymond James.

Oh hey, thanks for getting me in again. In the specialty semiconductor segment, if we're looking at the portion of business outside of First Solar and Azure, can you give some general comments? Because I think there's a bit of a hodgepodge of different things in that revenue bucket that will be left over? Like, can you give an indication of how that's tracking?

Yeah, so you have, I'm going to use the term, three key sectors as part of that segment. So, renewable space, and we have another one that we refer to as sensing and imaging, and it touches medical imaging, for example. So, quarter over quarter, it's at similar level. And as we've mentioned on other calls, that segment, there'll be growth. It's part of our growing segment. But most likely, it's going to be more of a mid-term growth. It probably needs a couple of years more to be materially better. But you'll see over the year from one quarter to another quarter some improvements. But again, on a full-year basis, we think it's going to take a couple of more years to be materially better than hysterical performance.

Okay. And then... Richard, are you able to give like a gross capex figure that we should think about for the year?

Yeah, same rule of thumb. I mean, we should have capex in the range of our depreciation charge on PPE, on property, plant, and equipment, which should flirt with the figure between 10 and 12. 10 to 12 million. That's on a net cash out basis before co-investments.

Okay, and what would be the, can you say what the gross number would be, though?

Like on the... With the co-investments, on the co-investments, there's a bit more, I'm going to use the term volatility, because it's divided into phases with milestones and else. So it can easily move from one fiscal year to another. You use a figure between three and six. for the co-investments.

Okay, thank you.

Thank you. Next is a follow-up from Rupert Mayer at National Bank. Please go ahead.

Hi, just a standard quarterly update question here. Can you give us an update on your medical imaging market and high-power semiconductor market opportunities?

Thanks, Rupert. Well, the medical imaging market, as previously said last quarter, it's moving slowly. I think they're still doing their testing. We're still working with... We're providing the high-purity material to produce the sample, but the volume is not significantly higher than the previous quarter. Then... I think they are doing qualification. We still have our partners, Samsung, they still have a few equipment in operation over the world trying to qualify their product and get also more data to commercialize them at mass scale. and they're also partnering with others to accelerate this market penetration. But we're still seeing that happening, not this year or probably not next year in terms of being a significant higher volume. It's probably more 2025.

So the industry is still pursuing their technology change. They're moving away from scintiller-based detectors to PCD detectors. That is happening. That continues, but it's taking longer, as Gervais just mentioned.

Okay, very good. Thank you very much. Thank you.

And at this time, gentlemen, we have no further questions. Please proceed.

Okay, well, we'd like to thank you all for joining us this morning. Have a nice day. Thank you very much.

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