5N Plus Inc.

Hello ladies and gentlemen, thank you for your patience and welcome to the telephone conference of the results of the third trimester 2023 of 5N+. Currently, the participants' lines 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. If you need assistance, press star 0. Good morning, ladies and gentlemen. Thank you for standing by. And welcome to the 5M Plus Inc. 3rd Quarter 2023 Results Conference Call. At this time, note that all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, please press star, then the one on your telephone keypad. If you require immediate assistance for the operator, please press star zero. Je vais maintenant céder la parole à Richard Perron, chef de la direction financière. And I would like to turn the conference over to your speaker today, Richard Perron, Chief Financial Officer. Please go ahead.

Bonjour à tous, à toutes et à tous. Good morning, everyone, and thank you for joining us for our Q3 2023 Financial 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 investor 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 discussion of the risk factors that may affect future results is contained in our management's discussion analysis of 2022, dated February 21st, 2023, available on our website in our public filings. In the analysis of our quarterly results, you will note that we use and discuss certain non-IFRS measures, 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.

Thank you, Richard, and welcome, everyone. We are from Lubeck, Germany today. Yesterday, we announced Q3 results from the quarter ended September 30th, 2023. Our solid performance here today continues to support our growth strategy and commercial excellence program. We have successfully evolved to focus on higher value added products for growth industries and this is reflected in our results. We have strong long-term customer relationships, and we are leveraging our position as a leading global supplier of ultra-high-purity semiconductor materials based outside of China. Our year-to-date results put us on track to achieve a strong annual performance and realize our adjusted EBITDA guidance for fiscal year 2023. We are also well positioned as we head into 2024, despite global microeconomic and geopolitical uncertainty. In performance materials, revenue for the quarter and year to date was lower than the same period last year, but only because of our strategic exit from the low end margin extractive and catalytic products in the second half of 2022. Importantly, due to our higher value-added and higher margin products, adjusted EBITDA and adjusted gross margin have continued to improve significantly. In our specialty semiconductors segment, while the timing of incremental contributions from Azure resulted in softer adjusted EBITDA, we were pleased that revenue was up 9.8 million this quarter and 20.8 million year-to-date, compared to the corresponding periods last year. The backlog from this segment remains extremely strong, maxed out at 365 days as per our definition. You may have seen some examples of our long-term customer relationship this past quarter. Our space solar cell technology is on the Indian Space Research Organization's Chandrayaan-3 lunar mission, with other solar cells powering the propulsion module, the lander, and the rover, as announced late this summer. Back on Earth. Raygen opened its energy storage power plant in Australia in September, powered by Azure's triple junction solar cells, which we developed in close partnership with Raygen over the last few years. As the plant is the world's largest and highest efficiency next-generation long-duration solar energy storage project, we are making a significant contribution to the clean energy transition. These strong customer relationships are the central focus of our commercial excellence program. We build them through our value-headed product development, our innovation and customization, our value optimization pricing strategy, and our co-investment initiatives. These pillars bolster our industry-leading position and will serve us well over the coming years. To match our innovative corporate mindset, recently we revamped our corporate logo and website with a more contemporary appearance. Over the past several years, we have moved away from the commodity metals business to a more value-added company focused on advanced materials for critical growth markets. With this refresh, we feel our brand image now better reflects the company we have become. To meet the increasing demand from our customer, our previously announced plans to expand our production for Azure and our renewable energy applications are both on schedule. As previously disclosed, we are extending Azure's output capacity by 30% by the end of 2024, as well as increasing production capacity for renewable energy application by 35% in 2023 and 100% in 2024 compared to 2022 to meet contracted demand. We also continue to secure additional complex feeds. and secondary streams for the recovery of critical minerals, following our recent expansion of reciting and refining capacity in Montreal. Our strong customer relationships and long-term contracts, as evidenced by our increasing backlog, support our expectation that demand will remain strong in both the terrestrial renewable energy and space solar power markets under specialty semiconductors and in the health and pharmaceutical sector under performance materials. As we continue our commitment to execute on our commercial excellence program and value-added product mix to achieve growth, we look forward to further solidifying our market-leading position and partner of choice. Richard, I will turn the call back to you to provide a deeper dive into our financial results before we take questions from analysts.

Thank you, Gervais. So we are pleased with our results to date this year. Despite a shift in contributions from Azure from the third to the fourth quarter, our key performance indicators remain strong and our fundamentals for growth are unchanged. We continue to see increasing demand and have a consistently high backlog, especially in specialty semiconductors. As we invest in our production to meet the demand from our clients, we see strong return on investment for our future. I will start by providing details on our revenue, gross margin, and adjusted EBITDA. Revenue for Q3 2023 was $62.9 million, which was down 5% from $66.4 million last year. As we have previously noted, this decline is largely a result of our strategic exit from the manufacturing of low-margin products with the divestiture of our TD Belgium operations in the second half of 2022. By executing on our strategy to focus on higher margin, value added products, we continue to generate higher adjusted gross margin and adjusted EBITDA. For the quarter, adjusted gross margin was 24.9% and year to date was 29.1% this year compared to 22.9% last year. Not only has our strategy to improve our product mix improved our gross margin performance, but also the successful institution of our commercial excellence program has had a positive impact. In Q3, we generated adjusted EBITDA of 9.6 million, representing a 6% increase over the same period in 2022. On a year-to-date basis, the increase is more notable. We achieved adjusted EBITDA of 29.3 million, an increase of 26% compared to 23.3 million last year. On a segmented basis, Adjusted EBITDA for specialty semiconductors was 4.7 million for the quarter, representing a 28% decrease from last year. But year-to-date, it came in at 20.1 million, up 8% over last year. Softer Q3 results reflect a shift in incremental contributions from Azure from Q3 to Q4, which also resulted in a less favorable product mix. In addition to Q3 2022 being Azure's strongest quarter last year, This change was not unlike the shift we saw for Azure from Q1 to Q2 earlier this year. Results for the segments were also impacted by planned reductions to our summer operations, which impacted productivity and period costs. Our performance materials segment adjusted with a 6.6 million for the quarter, up 1.5 million or 30%, and was 17.3 million year-to-date, up 4.1 million or 31% over the same period last year. The improvement for this segment is primarily attributable to our exit from the manufacturing of extractive and catalytic products and related divestiture, as previously mentioned. In terms of EBITDA, we've reached $9.6 million for the third quarter of 2023 compared to $1.8 million in the same quarter of 2022. Year-to-date EBITDA was $35.9 million compared to $8.3 million for the same period of 2022. The increase for the quarter of $7.8 million is largely a result of an impairment of non-current assets of 7.1 million recorded in Q3 last year. Turning to backlog, our backlog on September 30th of this year represented 284 days of analyzed revenue, a decrease of only 5 days or 2% compared to June 2023. For specialty semiconductors, our backlog remained max at 365 days, which is the same when compared to June. As we have noted in the past, while the estimated number of days based on analyzed revenue cannot exceed 365 days per hour definition, with confirmed contracts in both renewable energy and space solar power, our effective backlog under specialty semiconductors still surpasses the next 12 months. The backlog for performance materials represented 122 days of analyzed revenue, up nine days, or 8%, compared to the backlog on June, as I noted, Last quarter, the difference is largely because of the quarterly realization of yearly contracts. The key contracts under this segment, which now represent an improved product mix, continue to be mainly renewed in the fourth and first quarters of the year. This also explains the size decrease in the consolidated backlog. Turning to liquidity, year-to-date cash generated from operating activities was 5.5 million compared to 10.3 million year-to-date in 2022. The decrease this year for the nine months first is mainly from the net difference from the higher contribution of funds from reporting activities of 17.1 million, negatively impacted by an unfavorable change in non-cash working capital year-to-date in 23 to support our expected growth and demand for 2024. Year-to-date cash use and investing activities was 4.3 million compared to 10.1 million year-to-date of 22. As noted last quarter, The decrease is mainly explained by the proceeds on settlement of an index deposit agreement amended during Q1 of this year, resulting in a receipt of cash of $6.5 million, which was partially mitigated by proceeds from disposal of assets held for sale in Q3 of last year, net of lower additions to PPE year-to-date. Year-to-date cash use and financing activities amounted to $14 million in 2023, compared to cash generated from financing activities of $4.7 million in 2022. The 18.7 million increase is mainly attributable to the reimbursements of 7.5 million in Q2 and 5 million in Q3 of 23 of the credit facility, while we made a net drawdown of 7.5 million year-to-date of 22. Now looking at debt, net debt ended at 78.6 million on September 30th from 78.3 million on December 31st, 22. Sequentially, net debt did increase by 5.2 million, primarily reflecting ongoing capacity building to meet contracted demand in 2024 in our specialty semiconductor segment. Finally, on outlook, our results to date for fiscal 2023, including a strong adjusted gross margin, adjusted EBITDA, and consistently high backlog are a testament to our strategy for growth and ability to execute on it. We are pleased that we remain a critical supplier and preferred partner to key players in critical industries. With these results, we are on track to achieve our target adjusted EBITDA of between $35 million to $40 million for fiscal year 2023. We are tracking towards the middle to upper end of this range. In addition, as we look to our strong customer relationships and long-term contracts, we are also maintaining our guidance for fiscal 2024, which we expect to be in the range of $45 to $50 million. Beyond that, we expect to have enough visibility in early 2024 to provide guidance for fiscal 2025, so stay tuned for that. On adjusted gross margin, we're tracking to end the year in the area of 29%, which far surpasses our performance in prior years. We believe this margin range is not only sustainable over the long term, but also that there is room for further expansion over the short to medium term, contingent on continued revenue growth favorable product mix, and further optimization efforts. As I noted before, our long-term customer relationships that we have developed through our commercial excellence program position us for further growth in higher margin segments. With our investments in production capacity, we look forward to capitalizing on the increasing demand for our innovative products in the areas of space, solar power, and terrestrial renewable energy. So this concludes our formal remarks. I will now Turn the call back to the operator to open the call to questions from a financial analyst.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star, followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. If you wish to decline from the pulling process, please press star, followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Mesdames et messieurs, nous allons maintenant commencer la séance de questions-réponses. Si vous avez une question, appuyez sur l'étoile suivie du 1 sur votre téléphone à clavier. Vous entendrez trois tons confirmant votre demande et vos questions seront traitées dans l'ordre où elles sont reçues. Si vous souhaitez vous retirer, veuillez appuyer sur l'étoile suivie du 2. Si vous utilisez un téléphone à haut-parleur, veuillez décrocher le combiné avant d'appuyer sur la touche. Your first question comes from Rupert with National Bank. Please go ahead.

Hi, good morning. Good morning, Rupert. Good morning. Looking at Azure, so you have more than 365 days in the backlog and you are adding production capacity. Can you remind us what you're doing on the shifts, how many shifts you're running now and how that's increased over the last year?

Essentially, what we've done since spring is to progressively add enough shift to cover the seven days. I'm using the term progressively because in time, but also on a per-production phase. Not all stages of the production was increased at the same pace, and each of them were progressively filled up by additional employees in order to reach that capacity. We're now getting into Q4 at a point where Most of our shifts, if not all of our processes, are properly staffed for a 24-7 schedule.

Okay, so you can't add any more. Is there enough in your backlog for delivery?

That's from the number of shifts perspective, but we have also ordered equipment in order to increase order capacity, equipment that should come online towards the middle end of Q2 next year.

Right. Okay. Very good. And then can you give a little more color on the product mix you saw in the specialty semiconductor segment this quarter? Seems like you had higher revenue, lower margin mix than what we might have anticipated. And I understand there's some revenue moved into Q4. Just wondering if you can give us a little more color on the scale of what we shifted there.

Well, if... What we experienced in Q3 and we're going to experience in Q4 is similar to what we've gone through between Q1 and Q2. As you recall, we had a very strong Q2 over Q1 and a large portion of it was explained by Azure's performance. So Azure, while we have a lot of visibility on the year from one quarter to another due to a combination of factor and the product mix being an important one, we'll have some highs and lows. So Q2 was a low and Q4 will be a high. So what the market should expect is that for Q4, in terms of allocation of EBITDA and gross margin contributions from the segments, it's an allocation that will be much more aligned with what we've been through in Q1 and Q2 of this year.

Okay. And then can you give a little color on the product mix you saw in specialty semiconductors in the quarter? It seemed like higher revenue despite having some revenue shifted into Q4 and and lower margin? Was that, say, an increasing mix coming from products sold to First Solar?

Mix has more than one level. It's between the sectors, the weight of each sector within the quarter, and within a sector, for example, within Hazard's client and product mix, there's another level of mix, which was unfavorable on both levels.

And don't forget that the contract that we're currently fulfilling are the ones that the that have been signed a year and a half ago and two years ago. There's always a lag between when we've been awarded a contract and then we can deliver it. Now and next year, the contract that we will be realizing will be the one that we signed a year ago and that we've been signing since then. Then we're about to complete the portfolio of the former products.

So we're depleting... prior backlog earned by a predecessor, realizing more favorable contracts forward. And time-wise, Q3 was impacted by that. Plus, what I've mentioned, we had some plan reductions to our summer operations, which impacted productivity and period costs. Explaining the shift between Q3 and Q4.

And the demand is very healthy. We keep having discussion with customers for more demand than... I think... This market is still booming, and I think we'll see that over the next few months, everything will continue to improve.

Okay, very good. Thank you for the call.

Your next question comes from Frédéric Tambry with Jardin. Please go ahead.

Thanks. Good morning, Jardin and Richard. Hello. I just want to dig maybe a bit deeper on the working cap. It was a negative diagram on cash generation in the quarter. Just maybe your expectations in terms of maybe inventories and other working cap items as you move towards high growth 2024. Any further investments in working cap needed?

Probably not much, if any, anymore. One other factor, there's definitely the inventory that we have increased to be ready to meet demand of 2024, which is going to be, as you can imagine from the guidance, is going to be fairly important. There's also a cut-off issue. We've been paid first week of October payments due late September due to systems challenges with one of our key clients. All of that collected today. But the main reason behind the increase in networking cap is ready to be geared for 2024. And the level that we're now at is most likely the level that we're going to be maintaining forward rather than increasing it further.

Okay, great. And then you mentioned that you may be in a position to provide 2025 guidance early next year. Does that mean that your discussions with First Solar, for example, are progressing nicely and any sort of early insights you can give into your expectations with your business with them?

We're in discussion with First Solar on a weekly basis and obviously we're both working together in order to reach our respective production level. In terms of contract information, it's most likely going to happen early in the year 2024 rather than later in the year as we've done in the past. But both parties are well aligned in order to meet our respective plans for the future.

Great. Maybe if I could squeeze in the last one here. On performance, materials really strong, adjusted EBITDA margins in the quarter of 31%. Is that something that you feel is sustainable, or was there something related to product mix specific to the quarter in Q3?

What we've experienced in Q3 is the perfect world under performance materials and one of the worst under semi. Altogether, all good for a company. We're happy with the consolidated results, but performance materials was definitely on a super high end in terms of margins.

Understood. Thanks for taking the questions.

Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the one. Your next question comes from Michael Glenn with Raymond James. Please go ahead.

Hey, good morning. So just to circle back on the Azure dynamic, Richard, in the past, I think you've talked about Azure sort of tracking towards maybe a revenue line in and around $60 million. Can you give a sense as to where that would have lined up in the quarter? Was the revenue substantially below that type of runway at Azure?

No, revenue was not lower, actually. Revenue was at a decent level. But as we've been explaining, this business, You have visibility over the year, but when it comes to the actual release on a quarterly basis, that can be uneven. And then, as we've mentioned, we're still, I'm going to use the term, depleting older contracts, which are not as favorable as the newer contracts that we're going to be realizing in the coming quarters. So it's not a question of revenue level, more of a mix, and timing of release of a poorer mix.

Okay, so there was a sizable release on an unfavorable portion of a contract then?

Contracts that were released based on customer demand and the schedule was definitely not optimal, while Q2 was optimal. So what you're going to see is what we're referring to on this call is a shift from Q3 to Q4, and the full year will be aligned with our expectations. and then on a forward-looking basis, you'll have better contracts coming in and kicking in, as we've been mentioning in the past. That's why we're confident that the current gross margin on a consolidated level of 29% or so has plenty of room to improve in the coming quarter of years.

And when you look at that Azure backlog, are there other instances of this type of contract maybe with other customers that you see still in there that will come impact results in future quarters as well? Should we be thinking about that?

What will continue to occur, it's the nature of the industry. From one quarter to another, while production and deliveries for the years are on hold, there'll be some movement from one quarter to another. But in terms of, I don't know, the intensity of our... I'm going to use the word, how bad the contract that we actually realized in the quarter, that's most likely the worst case scenario that we just experienced.

Not to the same extent, to the same type of volume that we're referring to.

You'll have volatility from one quarter to another, but the volatility will be much less than what we experienced in this Q3.

Okay. And then I know you don't talk about... you know, specific margins of Azure, but it would appear that Azure was negative EBITDA in the quarter. Is that a safe assumption?

No. It was a very small contributor to the EBITDA of the quarter, but it was a positive EBITDA.

It was a positive EBITDA. Okay. And was there any difference then in what we should – in this quarter, would there be any difference in what we should expect from first solar margins? in the period?

For solar, the margins are known. Then it's a question of sales cutoff and else as we distribute our products to various locations of first solar.

Okay. But there, too, the yearly volume is well known and committed.

Yes, exactly.

Okay. Thank you.

If there are no further questions at this time, please proceed.

Okay, well, thank you all for joining us this morning, and we wish you all a good day.

Yeah, and again, I think what we can see is that the market is still very strong, and we're meeting customers currently, and I think we're quite busy to complete the year.

Thanks again.

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