5N Plus Inc.

Good morning, ladies and gentlemen. Thank you for standing by. And welcome to the 5N Plus, Inc. first quarter 2024 results conference call. At this time, note that all participant lines 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 time, 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 donner 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 Q1 2024 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 Yelva 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 discussion and analysis of 2023, dated February 27, 2024, 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 analysis. I would now turn the conference over to Gervais.

Merci, Richard. Bonjour à tous. Welcome, everyone. We announce our results for our first quarter of 2024. On the back of a strong 2023 performance, Q1 results reflect an equally strong start to 2024. Sustained demand in space solar power applications and terrestrial renewable energy continue to drive growth and profitability in specialty semiconductors. while a favorable product mix generated increased EBITDA and strong gross margins in performance materials despite lower revenue. Combined, we were able to deliver on all our key metrics, with consolidated revenue up 18% and adjusted EBITDA up 33% over Q1 2023, as well as a gross margin above 30% and a solid backlog. In specialty semiconductors, in the first quarter, we secured a record $135 million in contracts during a single quarter for Azure. These multi-year contracts are primarily for deliveries beyond 2025, which is beneficial for our long-term visibility and demonstrates both the demand for our space solar power applications and Azure unique position as a trusted supplier. We expect further contracts to be signed in the near term, namely on the terrestrial renewable energy side. In North America, the clean energy transition is happening and is being supported by the Inflation Reduction Act, putting us in a favorable position. We also recently announced a U.S. Department of Defense grant for $14.4 million. This will go towards supporting our production facility in St. George, Utah, for the manufacture of germanium substrates used in solar cells for defense and commercial satellites. Covering a four-year term, the grant is subject to certain conditions and the achievement of preset milestones. In addition, We issued a press release regarding the validation of our GaN on silica patent portfolio. These patents are key to the development of novel vertical GaN on silica power device for applications in high performance electronics, EV and AI server applications that would take power switching technology to the next level. We are actively in discussion and evaluating various opportunities and scenarios under which we can capitalize on this portfolio, which will fast-track go-to-market for companies operating in these end markets. Finally, on the terrestrial renewable energy side, our customer region an Australian solar and storage company, announced in April that they raised additional funds to expand manufacturing and support offshore opportunities. Azure manufactures the solar cells that are critical components of radiant, long-duration energy storage solutions, and so we are very optimistic about the continued growth potential for projects with this valued customer. In performance materials, while revenue in Q1 decreased, adjusted EBITDA increased by 10%, and adjusted gross margin came in at 35.3% compared to 29.8% in the same quarter last year. As we have said before, growth in this segment is expected to come largely from health and pharma. On that front, subsequent to quarter end, Microbiome, a clinical stage pharmaceutical company in which we have an equity stake, publish phase 1b results for its bismuth-based active pharmaceutical ingredient or API, PreviBismaine, which is currently under development. As the future manufacturer of this API, we are encouraged by the progress they have made. We view this as a two to five year growth opportunity. Reflecting our confidence in microbiome, in Q1, we increased our equity stake for an amount of $1 million, bringing our total investment in microbiome to date to $4 million. Looking at our operations, our capacity expansion plans remain on track. This year, we expect to complete our previously announced capacity expansion plans for terrestrial renewable energy applications in Montreal and for space solar applications at Azure in Germany. In addition, and as previously discussed, we anticipate that our previously expanded recycling and refining operations in Montreal to be at capacity this year as we secure additional complex feeds and secondary market streams for the recovery of critical materials. Our continued focus on the right priorities and end markets, clear strategy, and solid execution are generating predictable, sustainable, and profitable growth. Only one quarter into the year, our results validate our outlook and put us well on track to meet our financial objectives for fiscal year 2024. This is supported by high demand in specialty semiconductors, particularly in terrestrial renewable energy and space solar power, where we are already seeing new and renewed contracts and improved product mix in performance materials. We are also confident in our attractive pipeline of organic growth opportunities over the medium to long term. Richard, over to you for a review of our financial results in more detail.

Thank you, Gervais, and good morning, everyone. We are very encouraged that, as expected, our success in 2023 is carrying over into 2024. We are seeing new contracts being signed, growth from our customer, and expect key contracts renewal to continue into 2024. We are also executing well from an operational standpoint to keep up with demand. To that end, we are confident in our strategy and our ability to deliver through 2024 and 2025 in line with our previously disclosed guidance and with potential upside down the road. Turning first to our consolidated results for the first quarter of 24, revenue was up 18% over last year driven by strong growth in specialty semiconductors, more than compensating lower revenue in performance materials. We maintain a strong adjusted gross margin of 30.9% compared to 29.8% in Q1 of last year. As we noted on our last call, we believe these to be sustainable consolidated gross margin levels with potential upside over the short to medium term, assuming continued revenue growth, favorable product mix, and further optimization of our operations. Adjusted EBITDA was $11.7 million, an increase of $2.9 million or 33% compared to $8.8 million in the first quarter of last year, representing an adjusted EBITDA margin over a revenue of more than 18%. On a segmented basis, revenue for specialty semiconductors was $45.2 million compared to $32.7 million in Q1 last year. Adjusted gross margin in Q1 was 29.2% compared to 31%. The decline in margins reflects our less favorable beginning of the year inventory position expressed on a dollar per unit compared to last year, which is expected to normalize going into Q2. Adjusted EBITDA was $9.6 million in the first quarter, an increase of 32%. In performance materials, revenue was $19.9 million compared to $22.5 million last year. The decline is largely due to lower business sales volumes. However, with the favorable product mix and inventory position, adjusted gross margin came in at 35.3 million% and adjusted EBITDA was $4.9 million, an increase of 10% over the same quarter last year. Looking at our backlog, on March 31st, 2024, it represented 288 days of analyzed revenue, which was four days lower than the previous quarter and eight days lower than March 31st of last year. This primarily reflects the timing of signing and or renewal of contracts for both segments and the quality realization of long-term contracts on the performance materials. Net debt came in at $83.9 million compared to $73.8 million last year. This reflects anticipated increases in working capital in H1 and planned capital expenditures on their specialty semiconductors. Our net debt with the ratio remains stable at 1.8 times as at March of this year, well within our comfort level. In March 24, we reduced our subordinated term loan with Invisima Québec, replacing it with a $15 million term loan. The new loan has similar terms to the previous loan. In Q1, we also received cash to additional new interest-free loans, which are dependent upon eligible capital expenditures. one from Invesma Quebec and the other one from Canada Economic Development for Quebec regions. Finally, turning to our guidance, while we are only one quarter into the year, we are off to a strong start. We are proud of our unique position as the leading global supplier of ultra-high purity semiconductor compounds outside China, trusted by key customers with which we have long-term partnerships. Our results for the first quarter are proof positive of the success of our customer excellence program and overall strategy for growth focused on high growth markets and value-added products. All of this gives us confidence in our previously disclosed guidance of adjusted EBITDA ranging between $45 million to $50 million for this year and between $50 and $55 million for next year. Our objective, like last year, is to set the bar high and push ourselves to meet or exceed our objectives as we continue to leverage our competitive advantages and strong demand in our key sectors. That concludes our formal remarks. I will now turn the call back over to the operator for the Q&A session.

Thank you. Merci. Should you have a question, please press star followed by 1 on your touch-tone phone. You will hear a prompt that your hand has been raised. And if you would like to withdraw from the question queue, please press star followed by 2. And if using a speakerphone, you will need to lift the handset first 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.

I guess for the $135 million of contract awards that you guys announced for Azure, do you guys need additional capacity to support that, or is it simply just replacing some of the older contracts that roll off, so no incremental capacity needed?

The contracts that we've earned in Q1 of this year are, for the most part, to be delivered for the years 26 and 27, for which, by the end of this year, we'll have the capacity to supply. Obviously, any additional orders, and we expect more orders to come, for those, we may have to increase capacity in time, and all of that is under review at the moment.

Okay. Can you talk about your ability to expand your German facility? I recall you guys mentioning that you may have an extra floor of unused capacity.

We have essentially the space within our own walls today. So we have a plant that takes care of those products in Germany. It's on a multi-floor building, and we have one full floor empty, ready to receive equipment and house required to increase capacity.

And then on the $14.4 million grant from the Department of Defense, I think you guys briefly touched on this in the past about a potential U.S. expansion of Azure. Does this grant give you the confidence to spend more capital in the U.S. to build a facility that's similar to your German facility?

The grant is essentially very specific at supporting our U.S. operations around operations described as crystal growth and substrate manufacturing. It has some specific conditions around what we're doing in the US and that's what we're doing in Germany. In Germany, we have other grants and other incentives to support those operations specifically.

Okay, got it. And then just lastly here, just on the new contract with First Solar, on the last conference call, you guys talked about potentially signing a new deal in the coming months. Is that still the case, or how should we be thinking about timing as we move through the year?

Well, the negotiations are progressing as per management expectations, and I think we're in the middle of it.

Okay, that's helpful. That's it for me. Thanks, guys.

Thanks. Thank you. Next question will be from Rupert Mayer at National Bank Financial. Please go ahead.

Hi, good morning. Good morning, Rupert. Following up on the $135 million in new contracts, can you give us some color on the orders? How many customers was that, for example, and how many months of production is that roughly at your current capacity?

It's about four or five customers. And remember, Azure's business is about selling projects, so the same customer may come back with more than one project. But what we sign in Q1, it's four or five customers.

And you mentioned that you could look at expanding your capacity if more orders came in. Do you believe that the bookings could continue at an elevated rate, even if not at $135 million a quarter?

I have in mind we're currently in the middle of a fairly important capacity expansion at Azure for which we expect to commission and ramp up our equipment towards the end of the summer. And the orders we have on hand are for those years 26 for the most part, for the years 26 and 27. They're still not fulfilling up all of those years with the new capacity, but since we're very early in time, and the demand continues to be very high, and we're bidding on different projects. I mean, we're going to fill up those here, but at that new capacity, and if it exceeds the current capacity at that point, we'll increase further capacity because we have the space.

Okay, very good. Your PP&E was a little higher in the quarter, about $9 million, I believe. Can you talk about where you invested this quarter and remind us How much of that capex could be rebated from your customer?

Okay, exactly. So the figure that you're presenting comes out of our cash flow from the statutory financial statements. So the figure there excludes any cash contribution or reimbursement by our key partners. I would say about a third, a bit less than $3 million that was covered by our client here out of those PPEs. And the net coming out of it, for the most part, is actually from Azure as part of that current expansion that we're undergoing.

Can you remind us how much CapEx you expect to have this year and maybe the timing of the receipt of the contribution from your customer? Sure.

This is happening as we're completing milestones, and we'll be completing those milestones throughout the year, so we don't know exactly on a per-quarter basis. We have an idea of where the year will end, but from a net cash-out perspective on CapEx, it should flirt with something around $13 million, $14 million on a net cash-out basis. But the figure represented on our secure financials will be higher because of what we just described.

Right. I'll get back in the queue. Thank you.

Thank you. Next question will be from Frederic Tremblay at Desjardins. Please go ahead.

Thank you. Good morning. Good morning. I just wanted to come back on the capacity expansion or potential for expansion. I appreciate the detail on one floor being being empty at the moment, if we put it on a percentage basis, like what could this potentially represent in terms of capacity increase? Is that one floor? Is that like 10% capacity increase, 25%? Can you maybe provide some numbers around that potentially?

Well, you know, we have different scenarios in mind depending on exactly the type of solar cells we would be producing, but we could easily increase the capacity by more than 50%.

Okay, that's great. Maybe switching gears to performance materials, great results on the profitability front. Just curious on the lower bismuth sales though, are volumes down for a structural reason or was there some one-time or timing-related factor in the quarter?

You know, it's linked to our commercial excellence program. I think we are really, you know, we're moving from productors to marketers, and we want to make sure that we're always extracting the best value out of every single deal. Then, you know, we're not really focused on volume. We're focused on value. And from time to time, it means that, yes, you know, we could have, we can sell less, a little bit less, but with better margin. And this is why we're targeting all these products related to pharma.

Okay, yeah, that makes sense. And then I guess moving back to Azure more on the contract execution and margin basis, I think you had previously mentioned that around mid-2024 is when you would sort of be done cycling through the lower margin contracts that were signed by the prior owners. Is that still the case, or is there other dynamics there in terms of contract execution and margin outlook for Azure?

It's a... Realizing the older contracts versus the new contracts, not something with the fixed point in time, because those are projects that are throughout the year, but it will happen. It will represent a certain percentage of the full year sales. It's not like starting Q3, those are new sales with new margins. It's all happening a little bit every quarter, but unequally from one quarter to another.

Okay, perfect. Thanks for taking the questions, and congrats on a great quarter.

Thanks. Thanks.

Thank you. Once again, a reminder to please press star 1 if you have any questions. Next will be Michael Glenn at Raymond James. Please go ahead.

Hey, good morning. Can you just talk a little bit about the Montreal plant ramp with the business with First Solar and how everything's aligning with the First Solar capacity expansion?

Well, we're progressing quite well. You know, we had two steps. I think the first step is now almost completed. The second step, which will be we need to qualify the products, you know, it will start at the end of Q2. Then what we're doing, we will be producing a certain quantity that will be tested into the first solar facility and then qualified. And then... Things are progressing according to plan. We got our team from Germany who will arrive over the weekend and complete the startup.

And can you just remind us how much, when Montreal is completely ramped, how much that increases your capacity for the material?

I would need to redo the math, but it will at least be double what it was at the beginning of 2023. Okay.

And then on the sourcing strategy, specifically where you sit with your tellurium sourcing, can you talk about how that has been evolving more recently? Have you been able to secure additional supplies of tellurium.

Well, what we call Projet Saint-Laurent, you know, our capacity to recuperate the tellurium, you know, for the first time since the construction a year and a half ago, it will be at full capacity with the contracts we have on hand. And we're now, you know, this capacity is now operating almost at full capacity.

to learn either from a complex, either from complex feeds and or commercial grade metals. Like we have a very large inventory that explains the use of cash for networking capital. So that has been, like we have a lot secured already. Plus, as Gervais just mentioned, we're working on a bunch of new feeds and we're very busy at recycling and refining complex feeds.

Okay. And I'm just going to ask one more. On the DOD agreements, you sort of started down this road, Gervais, but maybe can you just speak to, like, how exactly does the IP work with the products that are being developed or being researched? Who owns the IP, and how do you use the IP in future years?

The IP essentially remains the property of the company. Yes.

And commercialization of that, like when do you think you would be able to commercialize any of the new products that would come out of that?

The grant is for a combination of things. Current products improvement, improvement to the processes, upgrade of the equipment, and new products per se. So it's a combination of all of them. So we're improving what we're doing today plus developing new products. Okay. So short-term, a lot of the money will be used to improving processes, renewing equipment and else, and mid to long-term new products. Yes.

Okay. Thank you.

Thank you. And at this time, Mr. Perron, we have no other questions. Please proceed.

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

Thank you, sir. Merci. 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.