5N Plus Inc.

Hello ladies and gentlemen, thank you for your patience and welcome to the telephone conference result of the third quarter of 2024 of 5N+. Currently, the lines of participants are in listening mode only. After the presentation, there is a period of questions and answers. To ask your questions, press star and the 1 of your telephone keyboard. If you need assistance during the call, please press star 0. Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Fire and Dust, Inc. Third Quarter 2024 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 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 now 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 Q3 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 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 discussion 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 and analysis. I would now turn the conference over to Gervais.

Thank you, Richard, and warm welcome, everyone. Yesterday, we announced our results for the third quarter of 2024. Since the beginning of the year, 5N Plus has delivered a strong performance across its key financial indicators. Our Q3 results reflect sustained growth momentum in our specialty semiconductors business. as well as a stellar performance by our performance materials segment. Our financial results, year to date, position us well to not only meet but slightly exceed our adjusted EBITDA objective for the full fiscal year. Looking at specialty semiconductors, this was another strong quarter despite usual Q3 seasonality. with excellent year-over-year revenue and adjusted EBITDA growth and solid margin expansion. On the operational front, in Montreal, new semiconductor compound capacity was commissioned in the quarter as planned. Upon full ramp-up, this represents a 100% capacity increase over 2022. This newly installed capacity will enable us to meet near-term contracted demand for our renewable semiconductor compound. In addition, Montreal is now well positioned from a process and infrastructure perspective to efficiently expand capacity further in future. In Heilbronn, at Azure, we completed our previously announced capacity increase program ahead of schedule. We also surpassed our initial 30% increased target by 5%, therefore increasing Azure's space solar cell capacity by a total of 35% over 2022 levels. Subsequent to quarter end, we announced plans to increase Azure's solar cell production capacity by a further 30% in early 2025. This will require minimal additional investments as most of the equipment has been purchased and delivered. As a result, 5N Plus is in good position to capture organic growth in terrestrial renewable energy and space solar power in the near to medium term. On the customer front, Azure has also had much to celebrate in the last few months. NASA's Europa Clipper was successfully launched mid-October, enabled by Azure's solar cells. Its supersized, solar-cell-covered wings are critical for utilizing the maximum amount of sunlight possible to generate power, as the spacecraft will be traveling through some of the most extreme environments in our solar system. We are proud to have our technology once again powering a critical space mission, demonstrating Azure's strong expertise and ability to push the boundaries of deep space exploration. Azure was also recognized by a long-standing client, Maxar Space Systems, for the second year in a row with a Supplier Excellence Award. This year, it was in recognition of on-time delivery and excellent quality performance of the Sirius XM11, Sirius XM12, and EcoStar 25 programs. Congratulations to the team on this well-deserved recognition. Turning now to performance materials. This segment had a very strong Q3 2024, generating solid revenue growth, record quarterly adjusted EBITDA, and impressive margin expansion, and this is despite lower volumes. Unlike previous quarters, this year, Q3 results benefited from a favorable product mix year over year from the company's basement-based products. The team also delivered notable operational results, both from a productivity and operating costs perspective. Turning to our outlook for the rest of the year, we now expect to surpass our adjusted EBITDA guidance range and slightly exceed the 50 million mark. This is on the strength of the strategic sectors we serve in specialty semiconductors, as well as health and pharma on the performance materials side. Looking ahead, our collective work and strong execution of our strategy over the last few years position us well for the next chapter of our growth as a valued and trusted global actor in advanced materials technology. We are now in a strong position to efficiently capture additional organic growth opportunities in the near term thanks to our increased capacity and enhanced operational flexibility. We are also now actively on the lookout for incremental external growth opportunities. We will remain focused on opportunities that extend or leverage our competitive advantages, capabilities and value chain. We will also ensure that our advanced materials remain a critical enabler of our customers' products without being a critical cost component, in line with our current and proven approach. Richard, over to you for a review of our financial results in more detail.

Thank you, Gervais, and good morning, everyone. 5M Plus has once again delivered a very strong quarter, meeting the needs of our clients while also executing well on the operational front, both from a productivity and a capacity increase standpoint. Specialty Semiconductors continues to perform very well, with TASER fully integrated and pursuing its growth path. At the same time, performance materials also generated strong results this quarter, including record gross margin percentage and adjusted bid-down numbers. All of this positions us well as we enter the fourth quarter and as we look further ahead to our next chapter of growth. Looking first at our consolidated results, for the third quarter of 2024, revenue increased by 25% to reach $78.8 million. This was primarily driven by continued momentum from the terrestrial renewable energy and space solar power sectors under specialty semiconductors. Performance materials also generated an improved performance despite lower volumes. Adjusted EBITDA reached $15.6 million, an increase of 62%. This was supported by higher volumes under specialty semiconductors and better pricing over inflation, consistent with prior recorders, as well as a strong contribution from performance materials. This brings our adjusted EBITDA year-to-date to $40.8 million. Adjusted gross margin increased more than 50% year-over-year to reach $24.5 million in Q3 of this year, favorably impacted by the same factors as for the adjusted EBITDA. Adjusted gross margin percentage improved to 31.1% compared to 24.9% in Q3 of last year, with margin expansion under both of our reporting segments. Year-to-date, adjusted gross margin percentage also came in at 31.1%, and we expect to keep our margin above the 30% threshold by year-end. Drilling down on specialty semiconductors, revenue in Q3 of 2024 was $53 million compared to $41.8 million in Q3 of last year. Adjusted EBITDA increased by 85% to reach $8.7 million. Adjusted gross margin as a percentage of sales was 24.8% compared to 17.3% in Q3 of last year. The overall growth across these KPIs, and despite Q3 seasonality in Europe, reflects strong demand from the terrestrial renewable energy and space solar power sectors, higher prices over inflation, and favorable unit costs from economies of scale. Performance materials also had a really good quarter. Revenue reached $25.9 million compared to $21.2 million in Q2 of last year. Adjusted EBITDA increased by 44% to reach $9.6 million. Adjusted gross margin as a percentage of sales came in at a record 44.4% compared to 39.4% in Q3 of last year. The stellar quarterly performance reflects a more favorable segment product mix and a strong performance from a productivity and operating cost perspective. This is despite lower volumes. Tuning now to consolidated backlog, which stood at $250 million, representing 289 days of annualized revenue at the quarter end. This is 11 days lower than the previous quarter and at a similar level than the same period last year, probably due to the timing of contract signings and renewals. Under specialty semiconductors, our backlog remained maxed out at 265 days due to confirmed long-term contracts consistent with last quarter end. As a reminder, the estimated number of days based on analyzed revenues cannot exceed 265 days as per our definition. But in reality, the segment's backlog continues to surpass the next 12 months. The backlog for performance materials represented 111 days of analyzed revenue, a decrease of 11 days compared to the backlog of June 30, 2024. This is mainly due to the signing and or renewal of contracts, which typically occurs in the fourth and first quarters of the year for this segment, and the quarterly realization of long-term contracts. Finally, net debt increased by 19.9 million to 93.7 million on September 30th, from 73.8 million on December 31st, 2023. As previously discussed, this reflects an increase in strategic working capital, as well as planned capital expenditures under specialty semiconductors. As mentioned last quarter, our objective is to keep our net debt to EBITDA ratio in and around two times, which we have achieved, with our leverage ratio coming at 1.99 times at quarter end. Turning to guidance, based on our promise to date, we have revised our adjusted EBITDA guidance for 2024 upward, and we now expect to slightly exceed the 50 million mark. Adjusted EBITDA guidance range for 2025 of between 50 to 55 million remains unchanged. Consistent with last year, we intend to introduce 2026 adjusted EBITDA guidance outlook in conjunction with the release of our fourth quarter results this winter. At that time, we'll be in a better position to provide that visibility as we are currently completing a group-wise bottom-up detailed review. In conclusion, looking ahead, we're focused on the one end of capturing organic growth opportunities within areas of expertise and working closely with our strategic clients to provide them with enabling materials core to their products, both now and in the future. We are also exploring external growth opportunities as a critical materials technology player and partner of choice in several key sectors to support our future growth, with the complementary support of external resources. As we pursue our plans, we will continue to focus on commercial excellence in leveraging our unique and global leadership position as a trusted supplier of specialty semiconductors and performance materials. So that concludes our formal remarks. I will now turn the call back over to the operator for the Q&A session.

Merci. Mesdames et messieurs, si vous avez des questions, veuillez appuyer sur l'étoile suivie du 1. Ladies and gentlemen, if you do have any questions, please press star followed by 1 on your touch-tone phone. You will hear a prompt that your hand has been raised. And should you wish to decline from the polling, please press star followed by 2. And if on 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, everyone.

Good morning, David.

I just wanted to start on specialty semiconductors here. I know it's a good improvement on a year-over-year basis margin-wise, but we did see a step back sequentially. I was just wondering if you guys can comment on what's causing that. Was it related to maybe potentially legacy Azure contracts that you guys are still working through? Any comment on that would be great.

No, it's essentially a combination of product mix and a bit of slowdown usually occurring in Europe in Q3 that occasion a bit more periodic costs, that's all. But in absolute terms, the business is doing much better than last year on a year-to-date basis and elsewhere.

Okay, so there wasn't any Azure contracts in there that were legacy?

No, this is essentially behind us at this point in time.

Yep. Okay. And then for the margin profile heading into Q4, do you still expect some weakness there? I mean, first half of the year appears to be strong based on last year's performance and a bit of a step back in the back half of the year.

No, no, nothing particular. It will continue to improve over time. In Q4, we're likely to do obviously better than in Q3 in terms of margins. But that business, we're really looking at it on a full-year basis, and we'll complete the year in a much better position than we've done last year. So it's just a combination of mixed periodic costs associated with the European slowdown of Q3 that impacted Q3.

Gotcha. Okay. And then, Gervais, I mean, good to see you expanding user again, and you've previously talked about only expanding if you're seeing the demand to support it. So I'm curious how much of your capacity that you've sold out for 2026 and maybe even 2027 now.

Well, 2025, as you know, it's all being sold. 2026, I would say more than half currently is on contract and 2027 as well. We now start to negotiate also contract for 2028. Then You know, the way it works, you earn contract programs normally on multi-year, two or three years. Then we are exactly in the position that we want to be because we want to have some capacity to gain new contract. This is why adding 30% of capacity, additional capacity next year was happening at the right time because we want to have this flexibility to earn new contract.

Gotcha. And just to confirm, you're 50% sold in 2026, including the 30% increase that you just announced?

Yes, already reflected.

And then final one, just on the overall margin profile, I think previously you guys alluded to targeting around 35% in 2025. Is that still the case that you guys are looking for?

That's the target to our reverse teams across the organization, yes.

We want to have by the end of 2025, we want to be at 35.

Okay, that's quite a bit of improvement. So we'll look forward to it. I'll stop there on my line of questioning. Thank you. Thanks.

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

Hi. Good morning, gentlemen. Congrats on the quarter. Thanks.

Good morning.

If I can follow up on Heilbronn, can you talk to us about what you're adding there specifically? Are you changing the business mix in any way, or do you see this as really a 30% increase in your revenue and margin capacity at that plant?

You know, there are many processes. It's a full semiconductor fab. Then we have 17 to 18 different steps. what we've been doing initially again just a quick recap when we acquired the business what what we've done initially was adding new shifts operating 24 hours seven days then after we added reactors you know we and then we also with together with the support of sierra space you know we also integrated equipment dedicated for their products Then we increase the capacity. The first step was for that. Then we look at where were the bottlenecks. Then we identified the bottlenecks and we had a new equipment. And this is what we're now doing with the new reactors that are being commissioned and in operation now. Now we are targeting the different bottlenecks that we have in the value chain and that will unlock an additional 30% capacity.

Great. And so you've highlighted that you're sold out for 2025. So how does this capacity at Heilbronn come online? Is it 30% online day one, or does it take a little bit of time to run?

When we're referring to 2025 sold out, it's definitely based on that new capacity of those additional shifts, those additional reactors at the front end, and the various pieces of equipment we've added for a specific client and other development initiatives along the line.

Then yes, it's in line with the new capacity.

Okay, great. And then looking at the performance materials group, we saw much higher margins this quarter. You've talked about some operational improvements. Are those improvements sustainable? Should we be thinking about a higher performance run rate for this business going forward? I understand there was some product mix in there too, which maybe we won't see next quarter. But basically, what's the outlook for this business in the future?

I'm going to go with the similar comment that I've made last year when I said performance materials went through. All the stars were super well on 2023. It's a similar thing that happened in Q3. So in Q3, we had one of the most optimal product mix sold. And we're also experiencing better costs from a consumable perspective. The various chemicals we're using in our processes, the costs have come down and more pronounced in Q3 of this year versus the same period last year. And then we've been able to make some, I'm going to use the term, opportunistic buy of the metal we use to make our products as well. So it's the combination of those three plus operations running smoothly. that allowed that superb gross margin for performance materials in Q3. That segment will continue to do superb, but Q3 is like a... The first two quarters were fine, but with Q3, we're back on a year-to-date basis with a superb performance for that segment, and we expect it to continue forward. But Q3 at 44.4 is, again, similar comments to last year. All the stars were super well aligned for that segment in this quarter.

Great. And then just a final question, a follow-up on that. So if I look at how well you did in Q3, how well you're doing year-to-date, your guidance suggests you'll be slightly ahead of your 50 million, the upper end of the range. And if you're only slightly, I guess it depends how you define slightly, but it would suggest the quarter could be a bit softer in Q4 than what we've seen this year. Am I reading that correctly?

Historically, we had more soft Q4 than stronger Q4 over the previous quarters. That's going back historically to the company. And that, by default, is usually more pronounced on the performance materials because of the type of product we sell there. And very often our clients, they like to manage their balance sheet that comes year-end, and they're usually less open to receive goods in the second half of December, all of those things happening in the background. That's why typically Q4 is softer than the other quarters. So we're prudent, and we're essentially assuming the same will repeat itself this year.

Very good. I'll leave it there and get back in the queue. Thank you.

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

Hey, good morning. I just want to circle back to the margins in the semiconductor segment. So if I look at top line for Q3 versus Q2, the segment had a slight increase on the top line, but the margins were quite different between the two periods. I'm really just trying to understand exactly what the primary drivers of the margin change between the 3Q and the 2Q are, if you can provide some insight.

It's essentially a combination of reduced operations in Q3, okay, clients' release of orders going into more of Q2 and more of Q4, I would rather look at it from a year-to-date perspective. Okay. And we expect Q4 to be much better from a margin perspective for specialty semi. And then on a year-to-date, you'll see those margins most likely cross the 30-something percent level.

And when you think about Q4 being much better from a specialty semi, is that driven by Azure predominantly?

It's a combination of the renewable, terrestrial renewable and space. But space has, in terms of release, much better mix in Q4 and it had in Q3. And first solar is just on its regular path and it should do a bit more in terms of release in Q4 and Q3.

Okay. And Richard, are you able to provide any indications for how revenue at Azure is trending so far a year today and what your outlook for revenue for Azure might be for the full year 2024?

We don't break down, as you know, the segments into the sectors. What I can say, though, is the following. With the announced additional capacity increase, we expect Azure next year to have at least two times the revenue it had when we acquired it, and EBITDA that should flirt with three times what it had when we acquired that business. So it's on a definite growth path. And this year, they're aligned with that growth path, okay?

Okay. And then just looking at the balance sheet, would you say that the working capital that I know that you're building for working capital for growth, is that dynamic predominantly in the background at this point in time?

Most of it has been done. Yes, that's the answer. And I think I've mentioned that last call. So it started in Q4 of last year, and definitely the first two quarters of this year, all of that is aligned to SICR commercially as our year 2025. Yes. So from an incremental perspective, going forward on the networking gap, the increases will be of a much, much smaller scale, and you might see some down and up as we go through 2025. Okay. Okay.

Thank you for clarifying. That's it for me. Thank you.

Thanks. Thanks.

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

Thank you, and congrats on this strong quarter. Thanks. This may be starting with a bit more of a macro question. With the U.S. election today, I'm wondering what are your thoughts on the potential impact of a Republican win on terrestrial renewable energy? And I guess conversely, if the Democrats win, does anything change or evolve in that segment in your opinion?

Well, I think we're monitoring the situation closely, as you can imagine. If the Democrats win, we expect that a second wave of inflation reduction act will happen. Then we expect that the program to be renewed, which we know how it works, will benefit from the customers of our customer. Then that's something that is predictable. If the Republican wins, they might use a different tool called tariff to make the solar energy more competitive in the U.S., then the impact will be indirect. Maybe they will be putting additional tariffs on the solar panels coming from China or components coming from China. Then it may take time to see the full impact of it, but we're confident that in both ways it will be beneficial for a company that is producing their solar panel in the U.S., And the Republicans are quite negative with wind. You know, they're talking a lot about turbine negatively. Then if you want to produce renewable energy and you don't want to have the windmills, then there's only solar remaining. Because hydro, it's way more complicated to install hydropower in the U.S. these days. It will take decades.

All the big U.S. companies at record in terms of energy consumption this year sold The need for energy and the movement towards clean energy generation is not going to slow down.

And one statistic that is quite interesting, if you look at all the chemical industry in the U.S., In 2023, they consume less energy than AI, Google, and Amazon, and all these data centers together. And this year, they expect the difference to be higher than 20%. Just to tell you that the growth is happening with data centers and AI, and this will most likely continue. In this company, they want to have access to renewable energy.

That's a great cover. Thanks for that. Maybe sticking with that theme, I guess. On their most recent call, First Solar did mention a few project delays. Obviously, you know that you've got contracted volumes with them, but just wondering if you're expecting any sort of speed bumps in your volumes to be delivered to them. Maybe any insights that you can provide on that would be helpful.

No, there'll be no impact. The agreement we have with First Solar is a minimum commitment. So any guidance we're going to be providing the market and else is based on that minimum commitment. And obviously, they can add any spot business they feel they need. But contracts communicated to the market are all secured with no changes in terms of release years.

And they still have quite a healthy backlog of more than five years.

Okay, perfect. And then maybe last question for me. Do you have an update on your evaluation of options for your patents on the gallium nitride on silicon market? Is there anything to share here?

Well, we continue to meet different parties. And we have a meeting scheduled next week again. It's just finding the right opportunity to be able to valorize it. The gallium nitride industry is going through a difficult time. You might have seen that some companies have shut down in Europe. There's a lot of competition in this market. Timing is probably not the best to sell IP these days. when some of these facilities are shutting down. But we will continue to meet different parties and try to valorize it.

Thank you very much. That's it for me.

Thank you. And at this time, gentlemen, we have no other questions registered. Please proceed.

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

It will be a long day. It's quite interesting. Thank you.

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