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Earnings call: 5N Plus Inc. sees record adjusted EBITDA, plans growth

 

5N Plus Inc., a leader in specialty semiconductors and performance materials, reported a record adjusted EBITDA in its fourth quarter and full year 2023 results, despite a decrease in revenue. The company’s segments saw varied performance, with Specialty Semiconductors benefiting from strong demand in renewable energy and space power sectors, while Performance Materials experienced a revenue drag due to strategic business exits.

However, both segments reported higher adjusted EBITDA. With investments in production capacity and a strong backlog, 5N Plus Inc. (VNP) is poised for continued growth, underpinned by a strategy focused on commercial excellence, value-added products, and long-term partnerships. The company has provided positive guidance for 2024 and 2025, expecting to meet growing demand and maintain sustainable gross margins.

Key Takeaways

  • 5N Plus Inc. reported record adjusted EBITDA for Q4 and full year 2023.
  • Specialty Semiconductors segment revenue and adjusted EBITDA increased year-over-year.
  • Performance Materials segment saw revenue decline due to exiting low-margin business but increased adjusted EBITDA.
  • Company expects to operate at capacity in recycling and refining by 2024.
  • Adjusted EBITDA guidance for 2024 is between $45 million and $50 million, with 2025 projections between $50 million and $55 million.
  • Ongoing negotiations with First Solar (NASDAQ:FSLR) and contract renewals with AZUR for 2027 and 2028 reflect a strong demand outlook.
  • The company is hiring additional staff and conducting preventive maintenance in anticipation of growth.

Company Outlook

  • 5N Plus Inc. maintains a positive outlook with increasing demand and strong long-term customer relationships.
  • The company’s growth strategy includes commercial excellence, value-added products, and long-term partnerships.

Bearish Highlights

  • Revenue decreased by $4.5 million to $73.8 million in December 2023 from the previous year.
  • The Performance Materials segment experienced a drag on revenue due to strategic business exits.

Bullish Highlights

  • The company is investing in production capacity to meet expected demand in 2024.
  • Specialty Semiconductors segment saw increased demand in renewable energy and space power sectors.
  • The company has a significant backlog and is focusing on commercial excellence and value-added products for growth.

Misses

  • Despite record adjusted EBITDA, the company reported a decrease in revenue year-over-year.

Q&A Highlights

  • The company is in negotiations with First Solar and does not anticipate negative trends or pressure on volume or pricing.
  • Discussions with AZUR for contract renewals for 2027 and 2028 are underway, with no expected slowdown in demand.
  • 5N Plus Inc. is working with various companies to valorize byproducts and sees an increasing appetite for this.
  • The company is preparing for increased demand through hiring and preventive maintenance.

In conclusion, 5N Plus Inc. remains confident in its ability to meet the growing demand for its products and services, supported by a strategy that emphasizes commercial excellence, value-added offerings, and solid partnerships. With a strong backlog and ongoing negotiations for future contracts, the company is well-positioned for continued success in the coming years.

Full transcript – None (FPLSF) Q4 2023:

Operator: [Foreign Language] Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the 5N Plus Inc. Fourth Quarter 2023 Results Conference Call. [Operator Instructions] [Foreign Language] And I would like to turn the conference over to your speaker today, Richard Perron, Chief Financial Officer. Please go ahead, sir.

Richard Perron: [Foreign Language] 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 Investors section of our website. I would like to draw your attention to Slide 2 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 risks 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 filings. 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 to now turn the conference over to Gervais.

Gervais Jacques: Thank you, Richard, and welcome, everyone. Yesterday, we announced results for our fourth 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 has proved 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 multiyear agreement we signed with long-time partner First Solar announced in late 2022. In terms of projects that highlights the role we play for our customers is the solar power plant recently inaugurated at Rio Tinto (NYSE:RIO)’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 refine for First Solar, really bringing things full circle. On the AZUR 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, RayGen inaugurated the world’s largest and highest efficiency next generation, long-duration solar energy storage project in Australia, which also use AZUR’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 the 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 operations. 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 Eisenhüttenstadt 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 AZUR 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 customer 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 million 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 million and $55 million. Taking the midpoint of this range, this would represent an approximately 37% increase over 2023 or 11% increase over 2024. Also, support — 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 3 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.

Richard Perron: Thank you, Gervais. 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 continue to bear fruit and much better adjusted EBITDA 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 USD 9 million, 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 record 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 margin 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 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 31, 2023, it represented 292 days which was 8 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 this year — 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 EBITDA guidance for fiscal 2024, which we expect to be between $45 million and $50 million. We are also pleased to introduce full year 2025 adjusted EBITDA guidance, which we anticipate will be between $50 million 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. [Audio Gap] 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. So this concludes our formal remarks. I will now turn the call back to the operator for the Q&A session.

Operator: [Operator Instructions] Your first question comes from David Ocampo with Cormark Securities.

David Ocampo: 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 of AZUR 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 completed?

Richard Perron: Yes. Two factors. There’s what you just described, the contracts that were earned by [indiscernible] 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 — in absolute dollars of 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, that’s also an impact. But it was all done for good reasons, as you can imagine.

David Ocampo: Yes, 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. And when I look at even the first half of, I’ll call it, ’23, the margin profile is — or it lags your Performance Materials division. What are some of the drivers that you guys can pull where the margins can inflect higher than where your Performance Materials segment is?

Richard Perron: The margins for 2023 under Performance Materials were, as you can see, extremely good, but it’s simply because from an operation perspective and commercial perspective, as I can say, all the stars were well aligned, but it’s going to be difficult to maintain that same level of margins forward, okay? 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 superb year for that segment that brings as well challenges to repeat year after year.

David Ocampo: Got you. 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 2 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?

Gervais Jacques: 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 what we have taken into consideration is conservative growth, and we will conclude this negotiation in the next few months.

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

Operator: Your next question comes from Michael Glen with Raymond James.

Michael Glen: Just a follow up on the First Solar negotiation. Would it be — if we were to think about the potential, is there — should we be thinking about potential to — for a bump to the EBITDA guidance once that contract is negotiated?

Richard Perron: It’s a possibility, that we will communicate in time.

Michael Glen: Okay. And then just circling back on to the margins. If I’m thinking about AZUR’s margins in 2024 versus ’23, you’re describing there is still some more of this older backlog that needs to be worked through. Will AZUR expand margins in ’24 versus ’23?

Richard Perron: In ’24 by default, as we have made an announcement, we are — we added capacity at AZUR. 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.

Gervais Jacques: Yes. 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, adding the — we had a new shift in — a few months ago. Now we’re adding equipment, then it’s — managing growth. We’re working closely with our customers, and we are making sure that the new contract that we will be realizing will be at better margin.

Michael Glen: Okay. And in the quarter, did AZUR have — are you able to indicate at all what AZUR’s exit run rate was on revenue this year?

Richard Perron: 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 reasons, we would like to keep it at the segment level rather than breaking down the sectors.

Michael Glen: 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?

Richard Perron: Okay. First, the — as we explained on numerous calls before, we have under the — our space power and healthcare business, we have clients that are providing assets for us, that as per IFRS, those assets are presented in the accounting cash flow as a CapEx to us, but ultimately, we get reimbursed. So 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 were, on average, on a net cash-out basis, CapEx should average the depreciation charge, the annual depreciation charge for property, plant and equipment [indiscernible].

Michael Glen: Okay. But with the — just the absolute figure that I see on the cash flow statement would be something equivalent to the figure…

Richard Perron: Yes. 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.

Operator: Your next question comes from Rupert Merer with National Bank.

Rupert Merer: You’ve already given us some color on your guidance over the next couple of years with respect to expectations from First Solar and from your margin changes. But I’m just wondering if you can go through, on a high level, your general process of building up guidance for the next couple of years? And what some of the assumptions that you use for that guidance are? Maybe 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.

Richard Perron: 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 under Performance Materials. We still foresee that under Specialty Semiconductors, the sensing and imaging sector will grow, but much slower than the other sectors. And then we’re left with contracts on hand for the other 2 sectors. That’s how we built our guidance forward.

Rupert Merer: Okay. So contracts on hand for the other 2 sectors. So potentially, is there upside from additional contracts, not just from First Solar, but maybe from the space industry as well?

Richard Perron: Yes. 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, added the incremental qualified manpower to be ready. We’ve added — 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.

Rupert Merer: Okay. Yes. Very good. 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 for the next couple of years?

Gervais Jacques: Well, what we have in our guidance is the contract we have with RayGen for the time being. And as you may imagine, they are currently developing other options. They are looking at other potential sites to produce energy, and this is not included in the guidance.

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

Richard Perron: If you sum the 2 years, yes, it is.

Gervais Jacques: Yes. Yes.

Operator: [Operator Instructions] Your next question comes from Frederic Tremblay with Desjardins.

Frederic Tremblay: I just want to maybe clarify the incremental manpower in 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 profitability 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?

Gervais Jacques: 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 we’ve been doing? We’ve been growing this company organically. We have contracts on hand. We’re adding capacity both at AZUR and also in our terrestrial division in Montreal. Now we did Eisenhüttenstadt 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 a preventive maintenance in order to be ready to break records again in 2024.

Frederic Tremblay: Okay. Perfect. That’s helpful. Just on contract renewals. I know Q4 and Q1 are a busy period 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 generate attractive pricing in the current environment?

Richard Perron: 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 and pricing, and we don’t see any negative trend of pressure forwards.

Gervais Jacques: Yes. And we’re currently negotiating contract at AZUR for 2027 and 2028. Then we don’t see any slowing demand. We see the demand being very strong.

Frederic Tremblay: 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?

Gervais Jacques: What we’ve been doing for the last couple of years is developing this capacity. We’re 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 from — 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 are chasing us to valorize their byproducts.

Operator: Your next question comes from Michael Glen with Raymond James.

Michael Glen: 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 report?

Gervais Jacques: Honestly, we don’t want to put any pressure on the timing. We want to get the best contract possible. If it’s Q2, it will be Q2.

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

Richard Perron: Okay. We would like to thank you all for joining us this morning, and we’re wishing you a good day.

Gervais Jacques: Thank you.

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

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