5N Plus Inc.

Merci d'avoir patienté et bienvenue à la conférence téléphonique des résultats du quatrième trimestre 2023 de 5N+. Présentement, les lignes des participants sont en mode d'écoute seulement. Après la présentation, il y aura une période de questions-réponses. Pour poser une question, appuyez sur étoile et le 1 de votre clavier téléphonique. Si vous avez besoin d'assistance, veuillez appuyer sur étoile 0. Good morning, ladies and gentlemen. Thank you for standing by and welcome to the 5N Plus Inc. 4th Quarter 2022 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 1 on your telephone keypad. And if you require immediate assistance for the operator, please press star 0. 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, sir.

Bonjour à toutes et à tous. Good morning, everyone, and thank you for joining us for our Q4 and full year 2023 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 description of the risk factors that may affect future results is contained in our management's discussion and analysis of 2023, dated February 27, 2024, available on our website and in our public finds. In the analysis of our quarterly results, you will note that we use and discuss the non-IFRS measures, which definitions may differ from those used by other companies. For further information, please refer to our management's discussion and analysis. I would like now to turn the conference over to Gervais.

Thank you, Richard, and welcome, everyone. Yesterday, we announced results for our four-quarter and fiscal year ended December 31, 2023. For full year 2023, we delivered record reported adjusted EBITDA and significant margin expansion while sustaining a strong backlog. Our performance across these key metrics is proof that our strategy focused on commercial excellence, value-added products, and long-term partnerships is delivering tangible results. It is also enabling us to provide the market with increased visibility on our growth path. I will begin by discussing our segmented performance. Specialty semiconductors continued to benefit from strong demand, especially in the high-growth terrestrial renewable energy and space solar power sectors. Both revenue and adjusted EBITDA were up in the quarter and the year compared to 2022. On terrestrial renewable energy, as previously communicated, Growth was more than 40% compared to 2022 levels. This follows the historic multi-year agreement we signed with long-time partner First Solar announced in late 2022. In terms of projects that highlight the role we play for our customers is the solar power plant recently inaugurated at Rio Tinto's Kennecott Copper operation in Utah, from which we secured a tellurium supply agreement. They inaugurated a 5 megawatt solar power plant with first solar panels made with the very tellurium we refined for first solar, really bringing things full circle. On the other side, high-profile projects that use our solar cell technology included the European Space Agency's mission to Jupiter and the Indian Space Research Organization's lunar exploration mission. In addition, RAGEN inaugurated the world's largest and highest efficiency next-generation long-duration solar energy storage project in Australia, which also uses Azure's solar cells. These projects are just a handful of examples demonstrating that our world-class expertise, favorable global footprint, and value-added product development continue to be valued by our key customers in critical sectors of the economy. In performance materials, we are still seeing a drag on revenue due to the strategic exit from our low-margin business in Belgium in the second half of 2022. However, adjusted EBITDA from this segment was higher in the fourth quarter and full year compared to 2022. Looking ahead, we expect most of the growth from this segment to come from the health and pharmaceutical sectors. We will also continue to explore product expansion opportunities and development initiatives both independently and through partnerships. Turning to operation, as you know, we have been investing in our production capacity to ensure that we could fully capitalize on the growing demand for our specialty semiconductor products. On terrestrial renewable energy, we successfully increased capacity by 40% at our Eisen-Uttenstadt facility. Now, we are executing the extension project in Saint-Laurent, Montreal, to increase capacity by 60%. The Montreal project is being led by the same project lead as in Germany. To meet strong demand for our Azure Space Solar technology, we are also investing to increase production capacity by 30%. Finally, As we secure additional complex feeds and secondary market streams for the recovery of critical minerals, we expect operations in recycling and refining in Montreal to be at capacity in 2024. Our success in 2023 is a direct result of our focus on commercial excellence. Our approach ensures we are an integral and valued part of our customers' solutions, focusing on the development of strategic long-standing relationships, working with customers to produce innovative products that meet their unique needs. With this approach, we also seek to accelerate our go-to-market timeline while optimizing capital deployment through co-investment initiatives. This entrenches us with key customers and solidifies our market leadership position, allowing us to grow revenues without compromising margins. With our strong backlog and growing demand in the critical end markets which we supply, we have confidence in our approach and our future. Records are made to be broken and it is our objective to do just that in the coming years. We are confident in our approach, And as reflected in our guidance for 2024 and 2025, we expect to be able to keep leveling up our performance year after year. For full year 2024, we are maintaining our previously disclosed adjusted EBITDA guidance range of between $45 and $50 million, which, if realized, would represent growth of 17 to 31% over 2023. 100% supported by organic growth initiatives. Additionally, we are pleased to introduce adjusted EBITDA guidance for full year 2025 of between 50 and 55 million dollars. Taking the midpoint of this range, This would represent an approximately 37% increase over 2023 or 11% increase over 2024. Also, 100% supported by organic growth initiatives. To achieve our goals, we will continue our disciplined execution on our growth strategy and commercial excellence. including prudent investment in our production capacity. By leveraging our strong customer relationships and deep industry expertise, we expect to continue on our growth trajectory while maintaining our unique position as a trusted developer and manufacturer of ultra-high-purity specialty semiconductors and performance materials. Of course, None of this would be possible without our amazing team on three continents. Our people have been instrumental in our success to date and will continue to play a key role in helping execute on our game plan and record-breaking ambitions. Richard, over to you for a review of our financial results in more detail.

Thank you, Gervin. Good morning, everyone. To begin, I would like to echo Gervais' positive sentiments with respect to our results for the fourth quarter and fiscal 2023, as well as with respect to our expectations for the years ahead. Our strategy for growth and customer-centric approach continues to bear fruit and much better adjusted with the results. We believe this is the tip of the iceberg and that we will continue to benefit from our proven approach, capitalizing on a variety of future opportunities for continued profitable growth. Starting with revenue for Q4 2023, revenue was up 7% over last year. The increase is primarily attributable to the growth in specialty semiconductors from the renewable energy and space power sectors, offset by lower revenue in performance materials resulting from our strategic exit from the manufacturing of low margin extractive and catalytic products in the second half of 2022, and related divestiture of Belgium operations in Q4 last year. We expect Q4 to be the last quarter to experience this drag on the performance materials as the transition period is now behind us and revenue comparisons will no longer be skewed by the exit. Adjusted gross margin reached 28.5% in the fourth quarter compared to 26.7% in Q4 of last year. For fiscal 2023, adjusted gross margin was 29% compared to 23.7% last year. We achieved an adjusted EBITDA in the fourth quarter of $9 million U.S., an increase of $2.3 million, or 35% compared to $6.7 million in the fourth quarter of 2022. On a year-over-year basis, we reached a reported adjusted EBITDA of $38.3 million, an increase of 28%, over the $30 million achieved last year. This is the strongest reported adjusted EBITDA performance since the company's inception. On a segmented basis, adjusted EBITDA for specialty semiconductors was $7.5 million in Q4, an increase of 31% over the same quarter last year. For the year, adjusted EBITDA was $27.5 million, an increase of 13% over fiscal 2022. For the fiscal year, our adjusted EBITDA margins was 18% compared to 20% for the same period last year. It is worth noting that in the second half of 2023, the company brought on board additional qualified manpower to be integrated and trained, as well as accelerated preventive maintenance and other initiatives to bolster production and support incremental demand in 2024. In performance materials, adjusted EBITDA in Q4 2023 was $4.6 million, an increase of 15% over the same quarter last year, and representing an adjusted EBITDA margin of 24% compared to 14% in Q4 last year. For fiscal 2023, adjusted EBITDA was $21.9 million, an increase of 27% over fiscal 2022, representing an adjusted EBITDA margin of 26% compared to 12% for fiscal 2022. This is where you see the positive impact of our improved product mix. Looking at our backlog, on December 31st, 2023, it represented 290 days, which was eight days higher than the previous quarter and 39 days higher than at December 2022. For specialty semiconductors, backlog is close to max at 350 days, which is down 15 days or 4% compared to September and December due to the timing of signing and or renewal of contracts. The backlog for performance materials represented 157 days of annualized revenue, up 35 days or 29% compared to the backlog on September, and up 33 days or 27% compared to December last year. also due to the signing and or renewal of contracts, which for this segment typically occur in the fourth and the first quarters of the year. Total debt stood at $108.5 million as of December compared to $121 million last December. However, net debt after considering cash and cash equivalents decreased by $4.5 million to $73.8 million on December 2023 from $78.3 million on December 2022. lastly i will provide some remarks on our outlook given our long-standing customer relationships contracted demand and proven customer excellence program we are confident we will continue to benefit from increasing demand and the trust of our long-term and strategic clients with this in mind we are reiterating our previously disclosed adjusted beta guidance for fiscal 2024 which we expect to be between 45 million and 50 million dollars we also pleased to introduce full year 2025 adjusted EBITDA guidance, which we anticipate will be between $50 and $55 million. Consistent with what we discussed on our Q3 call, we ended 2023 right on target with an adjusted gross margin of 29%, which exceeded our past performance in this metric. We continue to believe this level of gross margin is sustainable over the long term and that there is potential for higher margins over the short to medium term. assuming continued revenue growth, favorable product mix, and further optimization efforts. Our conviction and our ability to deliver on these targets is thanks to our successful move over the last several years away from more commodity-driven and lower margin products towards more high-growth markets and value-added products supported by our strong go-to-market and client partnership approach. We will keep executing on this path in 2024 and beyond to deliver our growth and value creation objectives, This concludes our formal remarks. I will now turn the call back to the operator for the Q&A session.

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 touch-tone phone. You will hear a three-tone prompt acknowledging your request and your questions will be pulled in the order they are received. Should 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. One moment, please, for your first question. Your first question comes from David Ocampo with Cormark Securities. Please go ahead.

Thanks. Good morning, gentlemen.

Morning.

My first set of questions is on specialty semiconductors. I mean, if we take a look at the Q3 and the Q4, the margins in the quarter were weaker than the first half of the year. And I think on the last conference call, you guys called out some old contracts with Azure that was signed by the previous ownership group that was negatively impacting margins. Curious if that was the case this quarter and when you expect all those contracts or the older contracts to be completely rolled off yearbooks. Okay.

Two factors. There's what you just described, the contracts that were earned by, I'm going to use the term, our predecessor, that are being realized, and then we're going to be going to periods where we're going to be rising those recently earned contracts, so that will improve. This will continue for part of 24, and for most of them, will be behind us towards the second half of this year, but most certainly in 2025. The other factor impacting The absolute dollars and margins, as we've seen, are superb. As a percentage of sales, as I mentioned in my webcast, demand is important in 24 and in 25. So in the second half of 23, we brought on board, I'm going to use the term incremental qualified manpower, We've done some proactive preventive maintenance and a bunch of other initiatives to make sure that we bolster production and increase our capacity so that we can be ready for 2024. So that, by default, had also an impact, but it was all done for good reasons, as you can imagine.

Yeah, that's very helpful. And then thinking bigger picture on specialty semi, I mean, this is clearly your growth segment, and all of your products do seem mission critical for your end customers. When I look at even the first half of pullet 23, the margin profile lags your performance material division. What are some of the drivers that you guys can pull where the margins can inflect higher than where your performance material segment is?

The margins for 2023 on the performance materials were, as you can see, extremely good. But it's simply because from an operation perspective and commercial perspective, all the stars were well aligned, but it's going to be difficult to maintain that same level of margins forward. You will see specialty semiconductors improving over time and performance materials expressed as a percentage of sales most likely be lower than 2023. So 2023 is a is a superb year for that segment that brings these little challenges to repeat year after year.

Gotcha. And then last one for me. You guys haven't signed a new first solar agreement, but we clearly see the growth there with the opening of two new facilities in 25 and 26. I'm just curious what volume growth assumption you guys are using for your 2025 guidance as it relates to first solar. I'm just curious if there's any other initiatives that are baked into that guidance, whether it's from Raygen or from your CT scanner business.

Well, with First Solar, as you may imagine, we have started to discuss about the next few coming years. You are aware that they are going through a vast expansion mode in the U.S., then, you know, what we have taken into consideration is conservative growth, and we will conclude this negotiation in the next few months.

The reality is we're very aware of the need in the coming years, and we've picked a level for the purpose of our guidance at this point in time, and we'll adjust it in time if required.

Okay. That's it for me. I'll hop back in the queue.

Your next question comes from Michael Glenn with Raymond James. Please go ahead.

Hey, guys, just to follow up on the first solar negotiation, would it be, you know, if we were to think about the potential, should we be thinking about potential for a bump to the EBITDA guidance once that contract is negotiated? Okay.

It's a possibility that we will communicate in time.

Okay. And then just circling back onto the margins, if I'm thinking about Azure margins in 2024 versus 2023, You're describing there is still some more of this older backlog that needs to be worked through. Will Azure expand margins in 24 versus 23?

In 24, by default, as we have made an announcement, we added the capacity. So on an absolute basis, like dollar basis, margins will be higher. And it will also improve on a percentage basis because of the additional volume and the effect of older contracts being realized. So the short answer is yes, a combination of volume-driven for the absolute dollars and contract mix if you want. from a percentage basis.

Yeah, and we expect that to continue, obviously. In this segment, we're managing growth. Then it's all about the art of adding the right people at the right time. We had a new shift a few months ago. Now we're adding equipment. We're managing growth. We're working closely with our customers, and we're making sure that the new contract that we will be realizing will be at better margins.

Okay. And in the quarter, did Azure have – are you able to indicate at all what Azure's exit run rate was on revenue this year?

It was definitely higher than the previous year. Let us – we – It's a competitive industry, obviously. We're in Europe, so ultimately in time numbers will be available to the public, but for competitive reason, we would like to keep it at the segment level rather than breaking down the sectors.

Okay. And just then, can you give an outlook? I mean, if I'm looking at your cash flow statement next year, what would be the capex number? we will see on the cash flow statement in 2024. Okay.

First, as we explained on the MRS calls before, we have under our safe dollar action business, we have clients that are providing assets. But as per IFRS, those assets are presented in the accounting cash flow as a capex to us. But ultimately, we get reimbursed on a cash basis. The CapEx figure out of the accounting cash flow does not represent the true CapEx out. The rule of thumb that I've communicated in the past where on average, on a net cash out basis, CapEx should average the depreciation charge, the annual depreciation charge for property, plant, and equipment.

Still got it. Okay. But what the

just the absolute figure that I see on the cash flow statement would be something equivalent to the figure that... Yeah, if you remove the reimbursement received from that partner, you would end up at a figure that is close to what I just described as a rule of thumb for CapEx in time. Okay.

Thank you. Your next question comes from Rupert Mayer with National Bank. Please go ahead.

Hi, good morning. Good morning, Rupert. Good morning. Now, you've already given us some color on your guidance over the next couple of years with respect to expectations for solar and from your margin changes, but I'm just wondering if you can go through on a high level your general process for building up guidance the next couple of years and what some of the assumptions that you use for that guidance are. Maybe if If you're depending on any capacity expansions to hit those numbers, it's basically a general high-level look at the process for building guidance.

It's a similar approach to the approach we've used for 23 and 24 and 25. We're using very conservative level of growth on the performance materials. We still foresee that under specialty semiconductors, the fencing and imaging sector will grow, but much slower than the other sectors. And then we're left with contracts on hand for the other two sectors. That's how we built our guidance forward.

Okay, so contracts on hand for the other two sectors. So potentially, is there upside from additional contracts, not just from First Solar, but maybe from the space industry as well?

Yeah, and I'll continue, I guess, the second half of your question from a capacity perspective, and that will answer that last question. We brought on board, as I've mentioned, the incremental qualified manpower to be ready. We've had it. We are adding and we've added equipment here and there, and the capacity added from both a human resources perspective and equipment exceeds the assumptions used for guidance. So any additional orders coming our way, we will be able to address.

Okay, very good. Thanks. And then secondly, Terrestrial Solar, you also have your initiative with Raygen. I believe you delivered to Raygen in previous quarters. Can you give us an update on the outlook for that business? And is any of that baked into your guidance the next couple of years?

Well, what we have in our guidance is the contract we have with Raygen for the time being. And as you may imagine, they're currently developing other options. You know, they are looking at other potential sites to produce energy. And this is not included in the guidance.

So the existing contract you have with them, is that a material amount for the next couple of years?

If you sum the two years, yes, it is.

Yes, yeah. All right, very good. I'll get back in the queue. Thank you.

Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the one. Your next question comes from Frédéric Tremblay with Desjardins. Please go ahead.

Good morning. Good morning. Morning. I just want to maybe clarify the incremental manpower and preventive maintenance. So, am I right in sort of interpreting this as kind of a headwind in the second half of 2023, but this will actually be offset in 2024 to an increased level of business. Essentially, it was a bit of a possibility headwind in Q4, but should normalize in 2024? Is that the right way to look at it? Or is there still going to be, call it a bit of margin pressure in early 2024 from this?

Thanks for the question. Managing growth is always complicated. You want to make sure that you will have both the equipment ready and all the capacity as well in terms of the workforce being trained. Then what we've been doing, we've been growing this company organically. we have contracts on hand, we're having capacity both at Azure and also in our terrestrial division in Montreal now. We did Eisen-Nuttenstadt last year. Then what we look is the optimal way to execute the game plan. And this is why we've done that in Q4. We hired more people in Q4 than expected. We decided to do preventive maintenance. in order to be ready to break records again in 2024.

Okay, perfect. That's helpful. Just on contract renewals, I know Q4 and Q1 are busy periods for that. Can you maybe just generally speak to what you're seeing or hearing from clients in terms of their volume needs and their views on pricing? Is your positioning in the industry allowing you to... to generate attractive pricing in the current environment?

For the sectors we serve, I mean, we don't see any contractions on volume because of, I don't know, general economic conditions, if that's where you're going. Except a tiny little portion of our business, like we still have a small portion of our business that we refer to as technical materials. Those may be a bit more impacted by any slowdown that could occur in time. For the rest, for pharma products and other key sectors that you know now very well, volume in pricing, we don't see any negative trend of pressure forward.

And, you know, we're currently negotiating contracts at Azure for 2027 and 2028. Then we don't see any slowing demand. We see the demand being very strong.

Okay, perfect. I think you mentioned your recycling capacity, being basically at capacity in 2024. Overall, in terms of the supply environment, is there enough supply in your pipeline to realize the growth opportunities that you're seeing out there, or is it becoming more challenging on the supply side?

You know, what we've been doing for the last couple of years is developing this capacity, working with different companies in order to valorize their feed. And what we see is the appetite. from this company to valorize their secondary feed is increasing. They are quite active. Sometimes it's from a sustainability standpoint. Sometimes it's also good from an economic standpoint for them. But we're no longer chasing them. They're chasing us to valorize their byproducts.

Helpful.

Thanks for taking the question.

Your next question comes from Michael Glenn with Raymond James. Please go ahead.

Hey, I just want to – Gervais, in your opening comments, you talked about the first solar contract renewal being – I believe the wording used was within the next few months. Is that – do you guys think that that's something you could have out before Q1 reports?

Honestly, we don't want to put any pressure on the timing. We want to get the best contract possible. You know, if it's Q2, it will be Q2. Okay.

Understood. Thank you.

There are no further questions at this time. Please proceed.

Okay. Well, we'd like to thank you all for joining us this morning, and we're wishing you a good day. Thank you.

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