5N Plus Inc.

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the 5N Plus, Inc. Fourth 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 this session, please press star then 1 on your telephone keypad. And if you require bated 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 2024 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 investors section of our website. I would like to draw your attention to slide two of this presentation. Information in this presentation and remarks made by the speakers today will contain statements about expected future events and financial results that are forward-looking and therefore subject to risk and uncertainties. A detailed description of the risk factors that may affect future results is contained in our management discussion and analysis. of 2024, dated February 25, 2025, available on our website and in our public findings. 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's discussion and analysis. I would like now to turn the conference over to Gervais.

Thank you, Richard, and thank you all for joining us on the call this morning. I am pleased to report strong operational and financial results for the fourth quarter, confirming 2024 as another outstanding year for 5N+. At this time last year, we gave ourselves the objective to break our 2023 adjusted EBITDA record, and I am proud to say we went even further. We generated annual adjusted EBITDA of 53.3 million, a 39% increase from the previous record year. Across both segments, we continued to deliver on our margin expansion efforts. We sustained an elevated backlog, particularly in specialty semiconductors. where the backlog continues to be maxed out. We also ended the year with a solid balance sheet, providing for flexibility to invest in our business growth. From a financial perspective, our specialty semiconductors business had another stellar year, with strong demand driving volume growth in our strategic sectors and continued margin expansion. From an operational standpoint, we accomplished a lot in 2024. I want to acknowledge our teams, both in Montreal and at our Eisenhüttenstadt and Heilbronn locations in Germany, for their impeccable execution. We made targeted investments and increased capacity at several sites to meet demand. In Montreal, new semiconductor compound capacity was commissioned in Q3 of last year. Installed capacity has now tripled from 2022 levels and will enable us to meet the strong demand we're seeing, including to serve our strategic client in this sector. As you know, we renewed our multi-year agreement with this client in early 2024 with favorable terms and a 50% volume increase compared to the previous agreement. At Azure in Heilbronn, we completed a program to increase space solar cell production capacity last year ahead of schedule. It is now 35% over 2022 levels, 5% more than initially targeted, and we're not done. As announced last year, we are growing capacity by another 30% with minimal additional investment, a work that is now well underway. This puts us in a strong position to stay competitive in two high-growth sectors, terrestrial renewable energy and space solar power. We expect that demand will remain the rule in both of these end markets. Demand for energy is rising, especially in the U.S., and solar energy, which is both clean and fastest to market, is part of the solution. In the space solar power market, there is also unprecedented growth, from telecommunication and national security to scientific research and exploration, the space revolution is in full swing. We also anticipate continued growth in imaging and sensing applications for the security, defense, and medical sectors. On the medical imaging front, photon counting detector technology which is set to replace traditional scintillator detectors, represents the next frontier. In 2024, we work closely with several major corporations in their product development ahead of this transition. This work will continue in 2025, and we expect this to provide an additional growth avenue in the medium term. Turning now to performance materials. An improved product mix and solid operational execution also contributed to strong profitability in this segment. Despite flat revenues, this segment generated outstanding gross margins and good earnings generation, reflecting on our continued focus on value add over volume. In performance materiel, growth will continue to be primarily driven by the health and pharmaceutical sector, where we expect demand for bismuth chemicals to keep increasing in line with GDP. We are well positioned to capture this opportunity with our state-of-the-art facilities in Lubec. and since we already supply what we estimate to be the lion's share of global demand for bismuth chemicals. As we celebrate our 25th anniversary milestone later this year, we are determined to pursue both organic and external growth and further cement our position as a trusted partner in growing markets. We will continue to build on our 2024 momentum and forge ahead on our profitable growth path in 2025, as reflected in the upward revision to our 2025 adjusted EBITDA guidance. The rapidly evolving trade environment has injected additional uncertainty in some of the jurisdictions where we have operations or do business. but we believe that we have the right strategy and competitive advantages to navigate the headwinds ahead. We will maintain our focus on higher margins, value-added advanced materials, a critical supplier without being a critical cost to customers operating in high-growth markets. With our more resilient and agile business model and clear strategy, I am confident in our ability to continue on our path of long-term value creation to the benefit of our stakeholders. Richard, over to you for a review of our financial results in more detail.

So thank you, Gervais, and good morning, everyone. So our performance in Q4 contributed to our strong 2024 results. including solid revenue growth, record adjusted bid-add generation, and further margin expansion. We are very pleased with the evolution of our business segments, with specialty semiconductors ready to meet high-demand and strategic sectors. Performance Materials is also a more resilient and higher-margin business with an improved product mix. All of this positions us well to build on our 2024 momentum as we pursue our growth this year. Turning now to our consolidated financial results for Q4 in the full year, revenue in Q4 grew 9%, reaching $17.9 million. The increase is primarily attributable to strong growth under specialty semiconductors, offsetting the minor decrease on the performance materials. Total revenue in 2024 reached $289.3 million, representing a healthy 19% increase over 2023. Adjusted gross margin increased by 26% to reach $23.4 million in Q4. For the year, adjusted gross margin was $91.3 million compared to $70.2 million in the same period last year. Gross margin was favorably impacted by higher specialty semiconductors volume and better prices over inflation. As a percentage of sales, adjusted gross margin improved year-over-year both in the quarter and for the year. coming in at 33% for Q4 and 31.6% for 2024. Adjusted EBITDA increased by 38% in Q4 to 12.5 million. Adjusted EBITDA was a record 53.3 million for the full year, representing a 39% increase over 2023. Of note, our 2023 adjusted EBITDA was also a record. With another strong performance in 2024, we surpassed the top end of our initial $45 to $50 million guidance range on this annual key metric. Turning now to our segments, under specialty semiconductors, revenue in Q4 was $51.9 million compared to $45.7 million in Q4 last year. For the full year, revenue was $202.3 million compared to $156.5 million in 2023. This strong growth was supported by our demand from the terrestrial renewable energy and space solar power sectors. Adjusted gross margin as a percentage of sales was 33.3% in Q4 compared to 26.7% in the prior year quarter, a marked improvement. Adjusted gross margin as a percentage of sales for the full year was 30.1%, also a significant improvement over 26.3% in 2023. Margin extensions was primarily driven by economies of scale thanks to our production and our prices net of inflation. Adjusted EBITDA in Q4 increased by 5.2 million, or 69% over the same period last year, to reach 12.6 million. Adjusted EBITDA in 2024 increased by 16.5 million to 44 million. The increase is primarily attributed to higher demand in the terrestrial renewable energy and space solar power sectors, higher prices, net inflation, and favorable unit costs from economies of scale. Under performance materials, revenue in Q4 reached 19 million compared to 19.4 million in Q4 last year. For 2024, revenue was 87 compared to 85.9 million. Adjusted gross margin as a percentage of sales was 33.5% in Q4 compared to 33.8% in Q4 last year. For the year, adjusted gross margin as a percentage of sales was 35.9% compared to 34.6% in full year 2023, reflecting a more favorable product mix throughout the year. Adjusted EBITDA for Q4 decreased by 0.9 million and came in at 3.7 million. Adjusted EBITDA in 2024 increased by 0.1 million to 22.1 million. Turning now to backlog. Backlog at the end, number of days for specialty semiconductors represented 365 days, an increase of 15 days compared to the backlog of December last year. The segment's backlog has been maxed out for the last several quarters due to confirmed long-term contracts. which speaks to sector demand and anticipated volumes. As a reminder, as per our definition, backlog cannot exceed 265 days, but in reality, it goes beyond the next 12 months. The backlog for performance materials represented 173 days at year-end, an increase of 16 days compared to 167 days on December last year. Combine or backlog at year-end represented 326 days of annualized revenue, an increase over last year representing the timing of contract signings and renewals. Net debt was $100.1 million at year end compared to $73.8 million as of December last year. This reflects an increase in working capital and planned capital expenditures under specialty semiconductors as previously discussed. Finally, we ended the year with a net debt to EBITDA ratio of 2 in line with our targeted range. Turning now to guidance. Gervais spoke to the opportunity and strong demand in many of our markets in the near and medium term. Looking at 2025 specifically, based on existing contracts and anticipated demand, primarily in specialty semiconductors, we believe the business will generate adjusted EBITDA between 55 and 60 million in 2025. This represents an upward revision from the range of 50 to 55 million we had introduced at the beginning of last year when we provided a two-year guidance. As you know, refocusing our strategy on value-added products, long-term customer relationships, and growing end markets, where we have unique expertise, has threatened the resilience and agility of our business. It has also helped us get good predictability and visibility into the future. That's why our intention was to maintain the practice, providing a two-year guidance on adjustability. However, current global economic uncertainty associated with most recent U.S. presidential orders, unprecedented in terms of scope and number, introduces new variables to be dealt with in a very short period of time. This includes but is not limited to potential U.S. tariffs and various global retaliatory measures, altogether making it difficult at this time to make forecasts beyond 2025. For this reason, we are deferring 2026 guidance until we can get a better handle on the implications of a new trade landscape on our business. It's a responsible thing to do. Whatever the impact may be, it doesn't alter our commitment to our long-term objectives from a profitable growth or margin expansion perspective, nor the execution of our ongoing strategic initiatives. From energy to health and pharma applications, we play a central role in today and tomorrow's economy and across numerous critical sectors. We will leverage our strengths and competitive advantages to capture opportunities in these dynamic markets while managing any headwinds in the short term. So that concludes our formal remarks. I will now turn the call back over to the operator for the Q&A session.

Thank you. Ladies and gentlemen, as stated, if you would like to ask a question, please press star followed by one on your touch-tone phone. You will then hear a prompt that your hand has been raised. And should you wish to decline from the polling process, please press star followed by two. And if you're using a speakerphone, you will need to lift the handset first before pressing any keys. Please go ahead and press star one now if you have any questions. First, we will hear from David Ocampo at Cormark Securities. Please go ahead, David.

Thanks. Good morning, everyone. Morning. My first question is just based on First Solar's conference call yesterday. I'm sure you guys listened in as well. But they did mention that they're taking additional measures to reduce their Chinese tellurium dependency, just given the export restrictions that are being put in place. Maybe it's a bit too early. Can you guys speak to maybe some of the discussions that you're having with them as it relates to for solar's international capacity that you might be supplying them with tellurium? Is it something that could increase beyond, I think, the 50% that you alluded to in the past?

Yeah, without being able to go into all the details of it, we are expecting additional spot business essentially over and above the current contract that is in place. So that's how it's likely to come up. It's likely to be extremely positive to us in time.

That makes sense. And then just on the potential tariffs that could come to Canada, I'm curious if First Solar is willing to absorb any 25% tariffs that may be placed on the tellurium that's coming out of your Montreal campus, or if there's even pricing escalators built into First Solar's contract that could absorb some of that impact.

Thanks for the question, David. Well, let me start by For the vast majority of our commercial contracts, any import duty or similar taxes are at the buyer's charge regardless of the final destination and this anywhere in the world. These contractual terms are applicable to all products within our high growth sectors. We would like also to highlight that for most of our products, we directly compete with China. currently and prospectively subject to duties at a higher rate level. Also worth mentioning, the company partners and supplies its clients with products that are key enablers to their products and technologies while representing a low-cost component as a percentage of our clients' finished products. A portion of our commercial transactions are on a spot basis, with future pricing to be adjusted for any duty or similar taxes. And before anyone asks him, let me add that our exposure to consumables source from the USA is currently very limited. And just maybe to conclude, in case of any doubt, The recently announced 10% tariff on Chinese imports applies in addition to any previously existing tariff with China.

So that applies to first solar and, as mentioned, any other agro sectors we serve.

Gotcha. Yeah, that makes a lot of sense. So then maybe just a last one from me before I turn the call over. Richard, when we think about the range in your guidance, maybe you could speak. a little bit to the puts and takes that would either put you at the low end or the top end of your 25 EBITDA targets, especially since you guys do have those long-term contracts in place with more or less fixed pricing?

I guess it's going to be similar factors to what is behind the fact that we want to defer our 2026 guidance. Essentially, with everything happening, it's likely to have indirect effect. Inflation, for example, At this point, an increase in consumables, energy, or even international freight could have an impact. So that has an impact on the range. Those are factors that could influence the high or the low end of the range. And those are the same factors why we're differing in 2026. But we have, by default, better visibility for this year than next year.

Okay. That's it for me. I'll hand the call over. Thanks a lot, everyone. Thanks.

Next question will be from Amir Issaat at Centum Capital. Please go ahead.

Bonjour, Richard. Bonjour et félicitations pour ces résultats.

Merci.

So I believe your last conference call was during election day, and I'm just wondering if, you know, like you are seeing any major shifts in customer behavior, be it shorter contract terms or maybe pricing pressure to counter the tariffs. I mean, in your prepared remarks, you guys have highlighted strong demand in both solar and space, but also held off on 2026 guidance. So I'm wondering if you could just give us a bit of color on how customer behavior, I guess, has evolved since your last conference call.

There's been no change in the customer behavior because, well, first 2025 and 2026, for the most part, is all under contract. And remember, For most of the products that we're making and selling, the only other option or the main competitor is in China. So at the end, the motivation is more around securing supply than negotiating tariffs. In fact, I don't think we had any discussion with any clients since the election about tariffs. It's all about security of supply and the sectors we serve there's a stretch between the supply and the demand. So discussions are more about capacity level, being able to ship earlier in time than any discussion on tariff.

Okay, no, that's perfect. Then, you know, like back on that, you know, like specialty semiconductors, you're still like maxed out at 365 days. And you guys are speaking about contracts in 2028. Just wondering, you know, like how much price and power are you guys seeing when speaking or negotiating these longer term agreements, given the strong demand environments that you've described?

Well, we've been able to increase our margin quarter after quarter. And I think this is reflected in our results. And I think that's part of the answer.

Again, remember, our business, we're looking at, in most, if not all of the things we're doing, we're looking at those three key attributes. We want to make sure that what we're making selling is an enabler. It represents the smallest cost components to the end products of our clients. And it all starts with a partnership. So that is supporting, essentially, the current backlog and other favorable terms we have.

Fantastic. Then maybe one last one before I pass the line, you know, like on capital allocation, like, you know, like M&A opportunities, potential debt reduction, like how should we think about 2025?

2025, yeah. We have, internally, we have resources dedicated at identifying our next M&E targets. We're also supported by external resources, so M&E is definitely on the agenda for this year. But, I mean, further capacity expansion, especially in light of additional spot business, most likely coming our way from First Solar, following yesterday's comment they've made. and the space industry that continues to be on a growth mode, although it's surprising us in terms of number of projects that we're bidding on and else, will most likely be another area where we're going to further increase capacity.

Okay, so should we be looking for you guys to make a formal announcement on increased capacity organically?

There's a good chance we do so at some point during the year, yeah. We're still at this point saying virus options, and we'll see if it's worth mentioning publicly, but most likely. Without me making a promise, most likely is the answer.

Fantastic. That's very good, Keller, and congrats again on the quarter. Thank you.

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

Hi, good morning, gentlemen, and congratulations on the full year, too. Thanks. If I could start with inventory, so it ticked up a little bit in the quarter. Give us a little color on that. Is that related to just timing of sales, or is that a natural expansion as the company grows, or maybe even a strategic reason to increase inventory?

But behind it there's that thing that we occasionally refer to called commercial ledging. Okay. We have the contracts. We want to make sure we're able to control the margins forward. That's allowing us to give that guidance with a fairly small range. So behind it is the motivations are mostly commercial.

Okay. And on material availability, you talked a little about the tellurium supply chain. Can you just make a quick comment on the germanium and bismuth markets and any concerns that there may be from trade restrictions coming out of China?

Well, if you think about germanium, we're sourcing our germanium mainly from Europe and partially from Canada. through a producer in British Columbia, then Germanium availability for us is not an issue.

And bismuth? Bismuth, same thing. We have continuous supply of bismuth. China introduced what they refer to as control, not a ban, not a tariff. So what we have to do is we apply to export bismuth to export permits and the goods are sent to various locations as expected. That's how things stand today.

Okay, thanks. And moving on to capacity expansion. So you've got 30% growth for the space solar business this year. And of course, you had the 35% from 2022. How does that phase in this year? How should we expect the the cadence of your capacity expansion to support revenues. Could you give us maybe a year-over-year capacity expansion expected in Q1 and for the full year?

Let's see what we do on our next call, but it might actually be difficult to stage it on a per quarter basis. We have already communicated and increased year over year. That obviously does not happen at the start of 2025. Some of it will require some ramp up over the course of 2025. We'll give it a bit more thought, but most likely we won't be communicating like a quarter over quarter increase in capacity, but continue to provide a full year basis.

So you should think of this as being back-end loaded, though, for 2025?

By default, in the case of 2025, most of it from quarter two to four rather than Q1.

And when you look at your operations, what sort of capacity utilization can you achieve? And with the space business, are there any issues with setups and teardowns that may reduce utilization?

Well, we have, you know, in the case of space solar cells, we have a team fully dedicated in operational excellence. And they're working to increase this efficiency from end to end, from all the different processes there, you know, when you produce a space solar cell. And that will be the focus to reach the next level of improvement. Adding equipment is one thing, making sure that they are fully utilized and that there's no waste is also something super important. Then this is the challenge of 2025 is productivity.

The way we tackle capacity expansions is very different between our TINFIM photovoltaic materials and our space solar cells. Space solar cells, by default, involves a lot more steps in making the finished products than our semiconductor compounds, for example. So they're looked at very differently. And as Javier mentioned, when you get into our space solar cell business, you need to apply all of the best practices at the various steps to realize the full benefits of your most recent capacity expansion. It takes a bit more time.

Just a follow-up on that expansion. Now, you had talked in previous quarters about the fact that you're bringing in new contracts at new prices but still working through some of your legacy contracts. How much of those legacy contracts remain today? So contracts signed at prices from the time before you owned Azure?

It's all behind, ultimately.

All gone.

All behind us by now.

Very good. I'll leave it there. Thank you very much. Thank you, Rupert.

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

Hey, good morning. Just to start, so the medical imaging timeline that you're giving today, just in terms of that outlook, is this in line with your expectations, you would say, or has there been any pull forward at all with medical imaging?

Well, in terms of volume, we've been very prudent while communicating volume because the way it works with them, you have to reach multiple steps. In the last four months, Siemens made an announcement in Germany, and then we've seen some volume increasing with them. Now what we see is a shift from other producers, other competitors from Simmons. And it maybe takes a little bit longer than expected, but, you know, we are teaming with most of them, and we will benefit from this growth in due time. But to say the least, they are not moving super fast.

Maybe worth mentioning, similar to previous years, when we compiled our guidance range, I just did a bit of the range, We take into consideration contracts on hand under renewable energy space and health and pharma, and we assume very conservative assumptions when it comes to our medical imaging business. But as we always say, we're working hard to obviously grow that segment as fast as we can.

Okay, and Richard, those comments sort of fall into my next question. I know you do not provide revenue guidance, but what are some of the, if we think about the three main business lines, Bismuth, Azure, First Solar, what are some of the main incrementals to think about in terms of revenue in 2025 versus 2024?

By default, from a revenue perspective, The growth in revenue will come from both renewable and space more than our pharma and health business. And that growth should be pretty much in a similar range for both. So this should account for about 50-50 of the revenue growth that we're going to be experiencing this year.

Is there anything additional, new business that rolls into, like how much new business rolls into Azure? Should we think about the revenue growth at Azure similar to the capacity expansion? Or is there other drivers there that are going to move it above that number?

Probably not. You probably cannot make a direct link. The revenue growth is going to be important. As I just said, it's going to represent at least 50% of the overall revenue growth for the company. But what's going to be very beneficial for us is the actual product mix. So even though, well, like we've been vocal in the past, We expect this year that the revenue for Azure will be about twice what it was when we acquired it, but we expect the actual EBITDA to be generated from that business to be about three times what it was when we acquired it. So the product mix is definitely an important factor in the benefits we're going to get out of that business going forward. Beyond the volume and the impact on the revenue.

Okay, and just to come back to the working capital and the inventories, so where do we sit right now in terms of total working capital? Will it continue to grow in 2025? Like, what's the outlook on working capital from here?

Okay, working capital forward will not grow to the same extent it did last year. Essentially, last year we applied what I referred to earlier and we do on numerous occasions. as a commercial edging strategy. So we brought on board the key components to make those signed contracts for the next two years. So there'll be, obviously, some movement in the networking cap, but never to the extent of, let's say, last year.

And my last question is, earlier in the conference, to one of the questions you responded, there will be more spot business. with respect to Tellurium and First Solar. I don't understand exactly what that means. Can you just hash that out a little in more detail for me?

Well, the contract that we have with this customer, it's a minimum volume. Then, you know, as you remember, we increased the capacity of this contract for the next two years 50% higher than what it was three times than what it was in 2022. Having said that, You know, they could order more, what we call spot business. What Richard referred to is most likely, and they will ask for more than just the minimal volume, which was already a huge increase compared to previous year.

Okay, thank you so much. I'll leave it there.

Thank you. Once again, a reminder to please press star 1 if you have any questions. Next, we will hear from Frédéric Tremblay at Desjardins. Please go ahead.

Thanks. Good morning. Good morning. Just coming back on this last question, just wondering what's embedded in the 2025 guidance from First Solar. Is it the 50% or are you assuming some spot business? And I guess another follow-up on that would be, do you have internal capacity now to take on significant spot business with them?

So the guidance assumes the contract. As I've mentioned, we compile our guidance using Contracts Enhanced, the first Two of our growth sectors under specialty and the contracts we have under our pharma and health business, so the guidance assumes different contracts. Now, in terms of additional spot business, a bit early to confirm or modify the guidance, okay, going forward. And the capacity, yes, we do have capacity to address additional spot business. If that spot business

uh was to be like very very important we can quickly increase capacity under our attention for the world trade control business okay great and then just on the 2026 uncertainties uh shall you mention inflation as one potential impact just wondering if you're um concerned or or if you're seeing any risk to the volume, even though it's contracted business? Is there potential for it to be some project delays and things of that nature that can impact volumes in 2026? Or is it mostly from a cost inflation perspective?

It's not from a commercial perspective. It's all about costs and other challenges to move freely goods around the world. So it's inflation and anything around all of those conflicts we see around the world. So, it's mostly around inflation and its impact on costs.

Okay, great. Thanks for that. And are you seeing any demand pull forward in Q1 ahead of potential tariffs, or is it pretty much business as usual?

No, again, tariffs, again, It is odd there, but not a major factor for us, so none of our clients pulled goods faster earlier than planned. Again, remember, we do ship goods to all of our customers, from Europe and North America, so it does not come exclusively from Canada. And on top, what we're supplying to our customers, those are enablers that, again, represent a very small percentage of the cost components of the end product of our clients. So mathematically, it's not a big impact.

Great. That's helpful. And then this last question for me on potential M&A. You mentioned that as being on the agenda. Any color on the current pipeline and the current environment sort of leading you more towards US-based targets or are you agnostic on geography?

By default, we have a preference for assets in North America at this point for various reasons. And one of them is the fact that we want to make sure that We leverage our clients we have and we continue to further increase our product offering around material technology and specialty chemicals, which by default brings more opportunities in North America these days than elsewhere.

Great. Thanks for taking the questions.

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

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

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