5N Plus, Inc. (CPMPO:FPLSF) Third Quarter 2022 Results Conference Call November 2, 2022 8:00 AMm. , Eastern Time
Participating companies
Richard Perron – Chief Financial Officer
Gervais Jacques – President, Chief Executive Officer and Director
Conference Call Participants
David Ocampo – Cormark Securities
Michael Glen-Raymond James
Nick Agostino – Laurentian Bank Securities
Frédéric Tremblay – Desjardins Securities
Operator
Welcome to 5N Plus Inc. ‘s Quarter 2022 Earnings Conference Call[Operator Instructions].
Now I’d like to speak with your speaker today, Richard Perron, Chief Financial Officer. Keep going, sir.
Richard Perron
Good morning everyone and thank you for joining us in our call and webcast of the third quarter 2022 effects convention. We’ll start with a brief presentation, followed by an era of question-and-answer with monetary analysts. This morning Gervais Jacques, our President and CEO, is with me. We publish our currency effects and publish a shared presentation in the Investors segment of our website. I would like to draw your attention to slide 2 of this presentation.
The data involved in this presentation and the comments made by speakers today will include statements about expected long-term events and forward-looking monetary effects and are therefore subject to threats and uncertainties. A detailed description of the threat points that may also be Enforcement effects are included in our 2021 Management Discussion and Analysis dated February 22, 2022, found on our online page and in our public filings. When you look at our quarterly effects, you will notice that we use and talk about certain non-IFRS measures. , whose definitions may differ from those used by other companies. For more information, see our MD
Now I’ll pass it on to Gervais.
Jacques Gervais
Welcome everyone. Yesterday we released our third quarter effects with a 31% increase in revenue and adjusted EBITDA of $9. 1 million, supported by our new higher value-added products. We are very pleased with those effects, especially given the stimulating and dynamic environment in which we operate. Revenue expansion and adjusted EBITDA through the third quarter of 2021 reflects strong demand for specialty semiconductors for renewable energy and area applications. This is further supported by the strategic acquisition of Azur in November last year. higher than the same quarter last year.
This is supported through dynamic price changes to mitigate the effect of inflation and improve the operational competitiveness of pharmaceuticals and healthcare. Our earnings and earnings growth in the third quarter of 2022 is a testament to our ability to execute our strategy of focusing on value-added businesses and component partnerships with our customers. Part of this strategy is our business excellence program. As a component of this program, we recently signed 2 strategic agreements that further strengthen our position as a leading specialty semiconductor supplier. The first of those strategic deals is the largest contract in 5N plus’ history. Our long-term component partnership with First Solar now reaches another point with this new multi-year semiconductor fabric source agreement for the manufacture of 10 SIM PV modules.
Our annual production volume will increase by 35% in 2023 and more than one hundred percent in 2024, in line with First Solar’s own expansion plans. We are definitely entering an exclusive era to help the global transition of blank energy and other technological advances as a fundamental provider of sustainable solutions. We will begin to increase production capacity to meet growing demand in the renewable energy, solar and medical imaging markets. The current strategic agreement is the exclusive 10-year partnership with Sierra Space through our subsidiary Azur, signed after the end of the quarter. After several years of collaboration, we are excited to now begin an announcement with Sierra Space, an American company at the forefront of space innovation. Under the terms of the agreement, we will produce a new moving sun for you [technical difficulty].
The strategic review of our operations will continue in the third quarter. In the past, we have announced our goal of producing in Tilly, Belgium. Low margin products manufactured in this factory will no longer be part of our offering. are contemplating 2 features for the site, an orderly closure following the Venlo procedure or the location of a third component willing to take over the site. We will keep the market informed of any significant developments as this procedure develops. For our Celera project, we will expand the progression and manufacturing of the complex 2 6 semiconductors founded in Montreal. Continue to progress. Lately we are wearing out the pre-operational verification procedure and operating the apparatus with pressurized water.
The task is now expected to be completed and fully commissioned in the fourth quarter of 2022, in time with the receipt of Tellurium’s force in the first quarter of 2023. Leveraging our segmented technique for business partnership and pricing strategy, we are well placed in fast-developing key markets. Several of our major end markets are expected to maintain expansion rates well above double digits in the coming years. Specifically, we expect a strong expansion in the renewable force and area. supported through the development of calls in North America and Europe. We also expect significant expansion in medical imaging applications. Decrease radiation and improve diagnostic accuracy by improving the image.
The successful integration of AZUR is also progressing as planned. A company, which is now under the supervision of Roland Dubois, in addition to his appointment as Chief Commercial Officer, Roland also assumed leadership of our specialty semiconductor segment. Technique for executing our expansion strategy is our most sensible precedent across all our lines of business. We will continue to deliver on our business excellence program, while expanding into value-added markets and adding partnerships that create value. As with the agreements signed with First Solar and Sierra Space, we continue to analyze all commercial opportunities with the field in terms of partners and assignment selection. This remains critical as we invest in our business to build production capacity to capitalize on the expected expansion of industry and construction. our general addressable market. I will now give Richard the floor to talk about our effects in more detail before answering questions. of analysts. Rich person? To you.
Richard Perron
The company’s core business segments continued to outperform in the third quarter despite macroeconomic and geopolitical uncertainties. The weak functionality translated into significant expansion in profit and adjusted EBITDA compared to the same quarter last year, supported by strong demand in the specialty semiconductor segment in renewable energy and area acquisition and AZUR. The renewal of our source agreement with First Solar as well as the agreement with Sierra Space with [indiscernible] verify that the company is advantageously located in those markets. With respect to those 2 additional significant source contracts, it is critical to note that we expect the net outlay that will be deployed from a capital expenditure attitude over the next few years to meet this additional charge demand not to exceed in price our typical annual depreciation rate for PPE. This is supported through our partners or within our experience box.
Now let’s turn to revenue, gross margin and adjusted EBITDA for the third quarter. Revenue generation increased 31% to $66. 4 million from $50. 8 million in the same quarter last year, reflecting increased demand for specialty renewable energy semiconductor construction, driven through the acquisition of Azur, as well as pharmaceutical, health and functionality products. Adjusted gross profit definitely had an effect on the product mix at $16. 2 million compared to $10. 8 million in the third quarter of last year. Adjusted EBITDA reached $9. 1 million compared to $5. 5 million in the third quarter. same time last year. Adjusted EBITDA increased to $2. 5 million for specialty semiconductors and $1. 7 million for functional fabrics despite the effect of inflation, supported by a favorable product mix. Now let’s take a look at the annualized order book. The backlog as of Sept. 30 accounted for 192 days of annualized revenue, a 52-day rollover or 37% over the June backlog.
The buildup is attributed to favorable negotiations of long-term contracts in special semiconductors, confirming the prospect of near-term expansion in renewables and space-based solar applications. Special semiconductors accounted for 297 days of annualized segment revenue, a cumulative of 52 days in 102 days. % over the June backlog. The Performance Materials backlog accounted for 93 days of annualized segment revenue, 6 days less than the June backlog. The decline in Performance Materials, reflecting our capture operations in Tilly, Belgium. Let’s move on to expenses. Depreciation and amortization expenses in the third quarter were $4 million compared to $3 million for the same time in 2021. The accumulation is basically due to the acquisition of Azur in the fourth quarter of 2021. SG Expenditure
The negative impact is basically due to long-term debt interest and theoretical interest, which are ours, following the acquisition of Azur and the significant accumulation of interest rates observed in the third quarter of 2022 with a similar effect on an annual basis. In terms of source of income taxes, the company continues to have an effect through deferred tax assets applicable only in certain jurisdictions. Liquidity coverage. Third quarter cash flow from operating activities was $10. 1 million, compared to $5. 2 million in the third quarter of last year due to positive adjustments in current capital. In the third quarter, money used to conduct investment activities totaled $3. 3 million compared to $2. 3 million in the third quarter of the previous fiscal year. , primarily due to the opportunity of additions to property, plant and equipment such as [indistinguishable] Montreal, which was partially offset by proceeds of $2. 8 million from the disposition of assets held for sale during the quarter.
Cash used on financing activities $3. 3 million in the 3rd quarter of this year, compared to $0. 2 million in the 3rd quarter of last year. The $3. 1 million accrual is primarily due to the $2. 5 million repayment of the credit facility in the 3rd quarter and an accrual in lease payments. Looking now at net debt growth, total debt stood at $122. 5 million as of September 30, up from $126 million at the end of the current quarter. However, net debt after accounting for money and money equivalents decreased through $6. 3 million to $83. 3 million at the end of September, compared to $89. 6 million at the end of the current quarter.
To conclude, let me reiterate that we intend to technically continue business opportunities with field in terms of partners and variety of assignments to position ourselves strategically in the medium and long term. The Sierra and Primer Sol agreements are strong examples of this commitment and strategic direction: we remain focused on our long-term strategy to position 5N Plus for expansion in value-added markets and look to the future to take advantage of value-added expansion opportunities. With our unique expertise, we can bring our specific and developing end markets, whether for specialty semiconductors or functionality materials. One last comment. In terms of full-year adjusted EBITDA, there are no surprises, but we expect to succeed in the best result of our full-year guidance, well placed until 2023. This concludes our presentation. Operator, back for the consultation period.
Q&A session
Operator
[Operator Instructions]. The first comes from David Ocampo of Cormark Securities.
David Ocampo
Richard, I need to start with your final comments on the $22 million forecast, your expectation to be at the high end of the $25 million to $30 million range. But when I look at year-to-date performance, you’re at $23. 3 million. So, I would say that if you succeed in the top finish, a pretty significant decrease in profitability compared to the performance of the second and third quarters. Or is there simply a lot of conservatism in your recent guidelines?
Richard Perron
It’s a mixture of conservatism and the fact that, traditionally, the last quarter has been a bit softer than other quarters. And with the acquisition of Azur, it is a bit unknown. Traditionally, Azur has been very strong in the mid-moment, and especially in Q4, while this year it turns out to be a bit more strongly distributed over the total year. Those are the main reasons for, say, conservatism. But obviously, we are running very hard to beat him.
David Ocampo
It is ok. That makes sense. And then he provided profit figures for Sierra’s contract, but provided volume indications for the first sol deal. So can we expect profits to increase in proportion to volumes?Or will there be value discounts built into the First Solar contract?
Richard Perron
No, you can assume that a volume is accumulating more or less aligned with. . . in terms of revenue aligned with volume, and there has been no price tension. In any case, it is the other way around. The team this time is taking care of ensuring supply. Therefore, it was not at all the same value tension that we experienced in previous years. Now it is another context, very favorable for 5N.
David Ocampo
It’s useful. And I guess when I think about 35% and one hundred percent growth, is it based on the 22 volumes or the cumulative volumes of the year that are annualized?
Richard Perron
No, it is in the attitude of the full year 2022. And remember, in past years, what we discussed that the existing contract, in which we are at the moment, is retroactive. Then it increases over the most productive of the 2 years. of the existing contract.
David Ocampo
they gave it to me they gave it to me And then, the last one for me, only in FX, contemplating all the changes that we’ve seen, and it’s quite current. here?
Richard Perron
Well, Array we are in 2 corporations where the USD is the functional currency for the maximum from the point of view of profits and also for a lot of genuine walls of raw fabrics and purchases of chemicals and all that. So, for us, it’s. . . It is favorable in our case.
Operator
The next one comes from Michael Graham of Raymond James.
Michel Glen
So, I just need to detail this first solar deal in a little more detail. Look, if you’re running between $40 million and $45 million annualized right now in 2022 for First Solar, are we thinking about this company with $80 million for $90 million in profit in 2024?
Richard Perron
As we said, the domain is going to be one hundred percent higher than what we are going to achieve this year.
Michel Glen
It is ok. And then the margins of this company. I know you don’t divide them explicitly. But since the beginning of the year for this segment, you’re somewhere, call it, between 20. 5% EBITDA margin. So is it the first solar margin we think of?consistent with the type of margin you declared?
Richard Perron
This is higher than average.
Jacques Gervais
And again, if I may, Michael, I think the context in which we find ourselves now with the geopolitical scenario is very different from a few years ago. And I think it’s a component of 5N’s strategy to differentiate us from the [indistinguishable] French strategy, so to speak, to be sure that we can bond more with our consumers while building our society of commercial components. Then I think you will get 5N advantages in the future.
Michel Glen
And I mean. . . I don’t need. . . This is obviously very positive, shall you?2 years, I’m sitting here looking for my style watching, wow, how it’s going to go up a little bit to EBITDA. But where are the built-in dangers in terms of how this contract is shaken?I just need, is there anything I can communicate about where there might be some uncertainty?
Richard Perron
We see the threat incredibly limited for the following reasons because Sun has the ability to manufacture its products, okay?They have new factories in operation. New ones are coming in. They have a huge delay and the agreement we have with them is to be made or paid. The threats are incredibly limited.
Michel Glen
And can you cut a little more, drink or pay?How exactly it is. . .
Richard Perron
This is a volume commitment consistent with the year.
Michel Glen
The numbers he released for the ramp. . .
Richard Perron
Yes. Yes.
Michel Glen
Can you reveal Azur’s earnings forecast for this year or what is the current earnings execution to date for Azur?
Richard Perron
We don’t reveal through unity, as you know. But if you remember, when we made the acquisition, we discussed that historically, it is a company that achieves around 60 million euros in turnover consistent with the year. So that’s the speed at which they’re in by 2022.
Michel Glen
And when you look back on 2023 for Azur, given everything signed, the client portfolio, do you expect an expansion of more than 60 million euros in 2023?
Richard Perron
Yes, exactly. Remember that the activity of Azur is different from the rest of our activity. The instances we are blocking now are for the end 23, 24. So everything we’re going to achieve in 2022 has been secured before acquisition, okay?So everything I mention in terms of news and health, which is noticeably additional to what they were traditionally doing and will take place in the next few years, ’23, ’24.
Operator
Next comes from Nick Agostino of Laurentian Bank Securities.
Nick Agostino
I guess some questions for me. First, in terms of business expenses, it turns out that this quarter, the number you recorded was around $2. 5 million, $2. 6 million. Just looking at my model, it turns out that the run rate traditionally or in recent quarters is more like 3. 3 million, and I wonder if this new figure for the third quarter is so sustainable or just once, once something in the neighborhood?
Richard Perron
We, no, I suspect the third quarter will be a typical yes. We obviously have other projects going on, and that triggers commercial spending. But no, it will be enough, no, it’s the beach. This will be a typical quarter.
Nick Agostino
It is ok. I am aware that. And then, just about the. . . for Gervais on this factor here. Alone. . . I know that when you joined the company, obviously, you brought techniques and all those smart things to the company. And I wonder, obviously, we have a new advertising officer, I think that’s the title. Is there anything else you’ve done in the last few months, say, nine months or so to replace?Do you adjust your sales technique that helps you deliver on the First Solar side, does it help you deliver on the Sierra side?And is there anything you’re contemplating implementing, again, from a sales perspective?
Jacques Gervais
One more step in market segmentation, looking at the end market, looking at desires and reaching out to our existing consumers and identifying long-term consumers. And, when we sit down with them, we take a look at the end markets. , we take a look at what we can bring in terms of competitive merit to countries outside of China that can get source security for their long-term desires and we also look at what we can bring in terms of ESG component So those are the things we’re currently running with existing consumers and consumers over the long term to differentiate 5N with the existing geopolitical context. So in a nutshell, I’ll say we’re probably halfway through in terms of implementation, and then they’re still working in other potential partnerships. We are also very active with giant mining corporations to inspire them to raise the price of their byproducts to have access to more of those minor metals. Secondly, it is the Portfolio of activities that we are currently doing.
Nick Agostino
It is ok. Enjoy this color. Very useful. I just need to check the number of bookings for the quarter, this would come with the First Solar contract, but it doesn’t come with the Sierra space, which would be a component of Number Q4. Just check that, and I’ll cross the line.
Richard Perron
Very important, the order book, looks forward to 12 months. So, obviously, you don’t have the entire First Solar contract. He doesn’t have the full contract CRS. Et everything is blocked on September 30. .
Nick Agostino
The same about the reservation number?
Richard Perron
Reservations are the mathematical yes.
Operator
The next one comes from Frédéric Tremblay de Desjardins.
Frederic Tremblay
Are you wondering whether the energy crisis we are experiencing there has had an effect on your production activities or whether you expect to have an effect on your commercial customers in this region?
Richard Perron
There is a risk, I know, of fuel shortages or we have installed LNG capacity in our German services in terms of garage and conversion which represents many days and weeks of supply.
Frederic Tremblay
You bien. Super. Et only on Performance Materials. You talked about the top volume in fitness and pharmacy and dynamic pricing. I see revenue in this segment declining slightly in the quarter. I wonder what caused this. Are Tilly’s volumes already declining?Or is there something else, some other category that. . .
Richard Perron
The main charge is definitely Tilly. La phase-out we started and anything to remember, in hardware functionality H1 is even greater than H2. But in this case, he is basically referring to Tilly.
Frederic Tremblay
Ok, it’s better utile. et after all for me about those new deals with Sierra for solar, and you made comments about CapEx. I was wondering if maybe I could comment on the operating ceiling of inventories, how it could just take effect through this new activity, if there is one.
Richard Perron
Certainly, especially in the current part of ’23 and ’24 to have a top point of network ceiling. But keep in mind that eventually we will have to be unmasked. Sure, though, you’ll probably be at the same point as today. No construction was made on a net basis.
Operator
[Operator Instructions]. [Technical difficulty] then Raymond James.
Richard Perron
[Technical difficulty] of the process. Maybe. Yes.
Michel Glen
Or would it be a money fee?
Richard Perron
There will be a mix of anyone because, obviously, we have to take care of our other people to promote it there.
Michel Glen
It is ok. And Tilly’s source of income now, have they disappeared?As if you no longer generate a source of income in a Tilly?
Richard Perron
No, we do. We do. Tilly works today. at a reduced price but. . .
Michel Glen
Tilly still works? Yes. When would you avoid making a profit with Tilly?
Richard Perron
This is unknown because we are still alone in the phase of drawing up disposal plans. And as we mentioned, we have to respect the local legislation there. Let’s call the law and we will also stick to the process.
Michel Glen
It is ok. So Tilly is running at a lower volume than before with some expectation that it will. . .
Richard Perron
Certainly not. . . It’s not at the speed of 2021. Yes.
Michel Glen
It is ok. And the amount of losses coming from Tilly right now, are they particularly minor than in the past?
Richard Perron
No, that’s more this year for a combination of things, adding inflation and the energy burden in Belgium, which is significantly higher than anywhere else in Europe.
Jacques Gervais
And we still have the same to produce at minimum capacity. . .
Richard Perron
It has a decreasing performance.
Operator
Presenters, there are no questions at this time. Continue.
Richard Perron
It is ok. Well, we must thank you all for being with us this morning. Have a day.
Jacques Gervais
Thank you all and thank you for your support.
Operator
Ladies and gentlemen, this concludes the call of today’s convention. You can now log out. Thank you.