5N Plus Inc. (VNP.TO), a leading producer of specialty semiconductors and performance materials, reported a strong financial performance in its Q3 2024 Earnings Call on October 31, 2024. The company announced a significant 25% increase in revenue to $78.8 million and a 62% rise in adjusted EBITDA to $15.6 million, surpassing expectations.
The growth was attributed to a 100% capacity increase in semiconductor compounds and a 35% increase at AZUR for solar cells, with an additional 30% capacity boost planned for early 2025. 5N Plus revised its 2024 adjusted EBITDA guidance upwards, now expecting to exceed $50 million. The company also discussed the potential impact of the U.S. elections on the renewable energy sector and reaffirmed its commitment to exploring opportunities in critical materials technology.
Key Takeaways
- Q3 revenue surged by 25% to $78.8 million, driven by the Specialty Semiconductors and Performance Materials segments.
- Adjusted EBITDA rose 62% to $15.6 million, with a year-to-date total of $40.8 million.
- 100% capacity increase in semiconductor compounds and a 35% increase at AZUR for solar cells.
- Plans for an additional 30% capacity boost in early 2025.
- AZUR's solar cells were used in NASA's Europa Clipper mission.
- Consolidated backlog stood at $250 million, with net debt at $93.7 million.
- 2024 adjusted EBITDA guidance revised upwards, expected to exceed $50 million.
- The company aims to capture organic growth and explore external opportunities while maintaining commercial excellence.
Company Outlook
- For 2025, 50% of the company's capacity for 2026 is anticipated to be under contract.
- A margin target of 35% by the end of 2025 for the Performance Materials segment.
- AZUR's revenue is expected to double and EBITDA to nearly triple next year compared to when it was acquired.
- Most working capital adjustments completed, with minor incremental increases expected through 2025.
Bearish Highlights
- Specialty semiconductor segment experienced a sequential margin decline due to product mix and a typical European slowdown.
- Q4 is historically softer for the Performance Materials segment.
Bullish Highlights
- Specialty semiconductor segment showed year-over-year margin improvement.
- Management expects improved margins in Q4 compared to Q2.
- Strong margins in Q3 for the Performance Materials segment due to an optimal product mix and lower costs.
Misses
- Project delays from First Solar (NASDAQ:FSLR), although contracted volumes remain secure.
Q&A Highlights
- A Democratic win in the U.S. elections may lead to continued support for renewable energy initiatives, while a Republican win could introduce tariffs affecting solar components.
- The Republican stance against wind energy emphasizes a shift towards solar as the primary renewable energy source.
- U.S. companies faced record energy consumption in 2023, with data centers and AI anticipated to drive growth in renewable energy access.
- Ongoing discussions with potential partners for gallium nitride on silicon patents, despite current market challenges.
The company's strong performance in Q3 is a testament to its strategic positioning and operational excellence. With a clear focus on expanding capacity and leveraging its technological advancements, such as those used in NASA's Europa Clipper mission, 5N Plus Inc. is poised to capitalize on the growing demand for specialty semiconductors and performance materials. The company's proactive approach to the potential impacts of the U.S. elections on the renewable energy sector further underscores its commitment to navigating market dynamics and securing its competitive edge.
Full transcript - None (FPLSF) Q3 2024:
Operator: [Foreign Language] Good morning, ladies and gentlemen. Thank you for standing by, and welcome to 5N Plus Inc. Third Quarter 2024 Results Conference Call. At this time note that all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. [Operator Instructions] [Foreign Language] And I now 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 Q3 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 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 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.
Gervais Jacques: Thank you Richard and a 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 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 AZUR, we completed our previously announced capacity increase program ahead of schedule. We also surpassed our initial 30% increase target by 5%, therefore increasing AZUR’s space solar cell capacity by a total of 35% over 2022 levels. Subsequent to quarter end, we announced plans to increase AZUR’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, AZUR has also had much to celebrate in the last few months. NASA’s Europa Clipper was successfully launched mid-October, enabled by AZUR’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 AZUR’s strong expertise and ability to push the boundaries of deep space exploration. AZUR 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 SiriusXM-11, SiriusXM-12 and EcoStar25 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 business-based products. The team also delivered notable operational results both from a productivity and operating cost 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.
Richard Perron: So thank you, Gervais and good morning, everyone. 5N 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 AZUR 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 EBITDA 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 our volumes under Specialty Semiconductors and better pricing over inflation consistent with prior quarters 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. Year-over-year 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 Q3 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 annualized 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 annualized 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 30 from $73.8 million on December 31, 2023. As previously discussed, this reflects an increase in strategic working capital as well as plan as for the most part now not completed capital expenditures under specialty semiconductors. As mentioned last quarter, our objective is to keep our net debt to EBITDA ratio in and around 2 times, which we have achieved with our leverage ratio coming at 1.99 times at quarter end. Finally, 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 million 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 on 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’re 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 and 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.
Operator: [Foreign Language] [Operator Instructions] And your first question will be from David Ocampo at Cormark Securities. Please go ahead.
David Ocampo: Thanks. Good morning, everyone.
Unidentified Company Representative: Good morning, David.
David Ocampo: 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 AZUR contracts that you guys are still working through? Any comment on that would be great.
Richard Perron: No, it's essentially – it's 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.
David Ocampo: Okay, so there wasn't any AZUR contracts in there that were legacy.
Richard Perron: No. This is essentially behind us at this point in time.
David Ocampo: 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?
Richard Perron: No, no. Nothing, nothing particular. It will continue to improve over time. In Q4, we're likely to do obviously better than ending Q2 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 mix periodic costs associated with the European slowdown of Q3 that impacted Q3.
David Ocampo: Got you. Okay. And then Gervais, I mean, good to see you expanding is there 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?
Gervais Jacques: Well, 2025, as you know, it's all being sold, 2026, I would say more than half currently is under 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 multiyear, 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.
David Ocampo: Got you. And just to confirm, you’re 50% sold in 2026, including the 30% increase that you just announced?
Gervais Jacques: Yes, already reflected.
David Ocampo: Okay. 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?
Richard Perron: That’s the target to our various teams across the organization.
Gervais Jacques: Yes. We want to have – by the end of 2025, we want to be at 35%.
David Ocampo: 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.
Gervais Jacques: Thanks.
Operator: Next (LON:NXT) question will be from Rupert Merer at National Bank. Please go ahead.
Rupert Merer: Hi, good morning, gentlemen. Congrats on the quarter.
Gervais Jacques: Thanks. Good morning.
Rupert Merer: 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?
Gervais Jacques: There are many processes when you’re – 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 we’ve done initially was adding new shifts operating 24 hours, seven days. Then after we added reactors and then we also together with the support of AZUR SPACE, we also integrated equipment dedicated for their products. Then we increased the capacity, the first step was for that. Then we look at where were the bottlenecks. Then we identified the bottlenecks and we had 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.
Rupert Merer: 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 that take a little bit of time to ramp up?
Richard Perron: Yes. 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 debottlenecking initiatives along the line.
Gervais Jacques: Then yes, it's in line with the new capacity.
Rupert Merer: 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 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?
Gervais Jacques: 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 [indiscernible]. 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 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 growth margin for Performance Materials in Q3. That segment will continue to do superb. But Q3 is like 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.
Rupert Merer: 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?
Gervais Jacques: Historically, we had more soft Q4 than stronger Q4 over the previous quarters. Okay. 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 products we sell there. And very often our clients, they like to manage their balance sheet that comes year end and they 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 or repeat out this year.
Rupert Merer: Very good. I'll leave it there and get back in the queue. Thank you.
Operator: Thank you. Next question will be from Michael Glen of Raymond (NS:RYMD) James. Please go ahead.
Michael Glen: 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? Or if you can provide some insight?
Richard Perron: 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 see those margins most likely cross the 30 something percent level.
Michael Glen: And when you think about Q4 being much better from a Specialty Semi, is that driven by AZUR predominantly?
Richard Perron: It’s a combination of the renewable – terrestrial renewable and space. But space has in terms of release, much better mix in Q4 than 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 than Q3.
Michael Glen: Okay. And Richard, are you able to provide any indications for how revenue at AZUR is trending so far year-to-date? And what your outlook for revenue for AZUR might be for the full year 2024?
Richard Perron: 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 AZUR next year to have at least 2x the revenue had when we acquired it. And in EBITDA, that should flirt with 3x 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.
Michael Glen: 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?
Gervais Jacques: 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 sticker commercially as our year 2025, yes. So from an incremental perspective going forward on the networking cap, the increases will be of a much, much smaller scale and you might see some down and up as we go through 2025.
Michael Glen: Okay. Okay. Thank you for clarifying. That's it for me. Thank you.
Gervais Jacques: Thanks.
Richard Perron: Thanks.
Operator: Thank you. Next question will be from Frédéric Tremblay at Desjardins. Please go ahead.
Frédéric Tremblay: Thank you and congrats on the strong quarter.
Gervais Jacques: Thanks.
Frédéric Tremblay: Just maybe starting with a bit more of a macro question with the U.S. Election today, 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?
Gervais Jacques: 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 to our – 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 tariff on the solar panel 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. They're talking a lot about turbine negatively. Then if you want to produce renewable energy and you don't want to get the wind – 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.
Gervais Jacques: All the big U.S. companies had record in terms of energy consumption this year. So the need for energy and the movement towards clean energy generation is not going to slow down.
Richard Perron: 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 (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN) and all these data centers together. And this year they expect the difference to be higher than 20%. Then it's 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.
Frédéric Tremblay: That's a great color. Thanks for that. Maybe sticking with that team, I guess on their most recent call, First Solar did mention a few project delays. Obviously that knowing 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.
Gervais Jacques: 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 analysis 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.
Richard Perron: And they still have quite a healthy backlog of more than five year.
Frédéric Tremblay: Yes. Okay, perfect. And then maybe last question for me. 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?
Richard Perron: Well, we continue to meet different parties and we have meetings scheduled next week. Again then, it's just finding the right opportunity to be able to valorize it. Gallium nitride industry is going through difficult times. You might have seen that some companies have shut down in Europe. Then 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.
Frédéric Tremblay: Thank you very much. That's it for me.
Operator: Thank you. And at this time, gentlemen, we have no other questions registered. Please proceed.
Gervais Jacques: Okay, well we'd like to thank you all for joining us this morning and we wish you all a good day.
Richard Perron: It will be a long day. It's quite interesting. Thank you.
Operator: Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines.
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