5N Plus Inc. (OTC:FPLSF) Q2 2016 Earnings Conference Call August 3, 2016 8:00 AM ET
Jean Mayer - VP, Legal Affairs and Corporate Secretary
Arjang Roshan - President and CEO
Richard Perron - CFO
Rupert Merer - National Bank
Nick Agostino - Laurentian Bank Securities
Mac Whale - Cormark Securities
Good morning. My name is Tessa and I will be your conference operator today. At this time, I would like to welcome everyone to the 5N Plus Second Quarter Earnings Announcement Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.
Mr. Jean Mayer, Vice President of Legal Affairs and Corporate Secretary, you may begin your conference.
Good morning, everyone and thank you for joining us for the presentation of the 5N Plus financial results for the quarter ended June 30, 2016. I'm Jean Mayer, Vice President, Legal Affairs and Corporate Secretary of the company and also in charge of Investor Relations. Before reviewing in more detail our quarter results, I would like to mention that we issued yesterday our financial statements for this period together with our management discussion and analysis. If you have not been able to get a copy of these documents, I invite you to do so by accessing our website at 5nplus.com or the SEDAR website at sedar.com, where these documents are posted. Earlier, we have also posted on our website a presentation on our quarter results that you may find helpful during this call.
Joining me this morning is Richard Perron, our Chief Financial Officer; and Mr. Arjang Roshan, our President and Chief Executive Officer. Mr. Arjang, Mr. Perron and I will now be reviewing our financial statements, and we will be available afterwards to answer questions during the Q&A period.
During this call, Mr. Roshan, Mr. Perron and I may be making forward-looking statements, which are subject to the usual cautionary remarks. More specifically, these statements are based on the best estimates available to the Company at this time and involve known and unknown risks, uncertainties or other factors that may cause the Company's actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. For a list of the factors that could cause our actual results to differ materially from those discussed or implied in our forward-looking statements, please refer to the risk factors described in our management discussion and analysis. In the analysis of our last quarter results, you will note that we used and discussed certain non-GAAP measures which definitions may differ from those used by other companies. For further information on the use of these non-GAAP measures, please refer to our management discussion and analysis.
I will now like to turn the conference to Arjang for a discussion of the quarter results.
Thank you, Jean. Good morning ladies and gentlemen. Thank you for your time as we review our second quarter results for 2016. I would like to start by reiterating what management has stated in the past few quarters, namely that our business requires a period of relative stability in the metal market in order to demonstrate contributions from its activities.
Now in an environment of increasing metal prices obviously the company benefits from further additional metal gains, however, the core of our business and the value proposition associated with it does not depend on the buoyancy of the metal markets. As we have also mentioned, the company is structurally long in inventory, so implications from metal pricing is mainly felt as a result of this factor.
Having said that let us look at Q2 2016. I believe this period can be characterized by an environment of moderate stability around metal prices associated with our business. Given this and a healthy demand for the company's products we are pleased to report a second quarter with improved performance and the best quarterly performance since 2014. Our adjusted EBITDA in Q2 came in at 4.7 million as compared to 2 million and EBITDA at 5.2 million versus a loss of 6 million for the same period last year. After several quarters of loss making the company was able to do away with the red ink in the second quarter of 2016.
Now let us have a closer look at the business. On the commercial front, the mix has continued to improve, which can be partly explained by our choice to be more selective for market opportunities and product positioning over the past several months. This being said, the business remained challenging with respect to certain products associated with electronic materials segment mainly linked to gallium and indium product lines. The continued disruption of production at a major customer exacerbated this challenge nevertheless considering the volume activity it is fair to surmise relative equivalency between both Q2 2016 and Q2 2015 as well as year-to-date 2016 and year-to-date 2015 with virtually all components of cost being managed at or below similar levels as compared to the previous year.
In the meanwhile, we continued with our lean approach towards managing capital employed as we further reduced working capital by 15% as compared to previous quarter, and substantially reduced investment activities associated with acquisition of PP&E. the culmination of all these factors contributed towards improving the company’s overall performance and was material in markedly improving gross margins in Q2 2016 as compared to Q2 2015 along with corresponding year-to-date numbers for both years.
A peek at the future indicators at the end of the second quarter shows backlog reaching 157 days of sales outstanding as compared to 145 days at the end of Q1 2016, and 137 days for the same period last year. I think this is a clear indication that the demand for our product remains robust.
I would now like to focus on the status of the company's strategic plan. As you may recall, earlier this year we declared our intent to devise and implement a strategy aimed at expeditiously moving the company back into black and subsequently improving profitability, while addressing relevant things such as volatility in our business. During the last quarter, we finalized the plan and have begun to implement certain elements. To provide a bit of transparency about its construction we should mention that we pursued a dual path where a plan based on an internal approach was challenged against a proposed plan designed specifically for the company by a reputable management consultancy firm.
We believe the culmination of these two elements enhanced by constructive challenge has yielded a final product, which is not only pragmatic and credible, but also has the commitment of the organization including the board of directors, which has moved to approve it.
Given the fact that we must ensure homogeneous communication of such events, and considering as many people take time off during August we have decided to wait until December before providing the highlights of the plan. This being said and as I have already indicated, we are moving forward with its implementation, including key themes such as maximization of the core business, appropriate positioning of the growth initiatives and optimization of the existing assets and operations.
One immediate outcome from these activities has been the closure of a jointly owned European manufacturing site at select regional offices. You can certainly expect more information and clarity about this plan in the near future, and as we move forward to communicate with the various parties.
I would like to now turn the call over to our Chief Financial Officer, Mr. Richard Perron, for his review.
Good morning everyone. Just before I start, just want to make it clear that our intention is to present the strategy plan in September and not December as I think AJ mentioned.
So, again good morning everyone. So as referred by AJ during his business coverage, the company completed a second quarter characterized by healthy demand for its products in an environment of moderate stability with respect to most commodity prices, resulting in the best quarter performance since 2014.
In addition, the company continued to manage cash diligently and operating expenses judiciously, ending the quarter once again with a solid balance sheet, presenting no usage of its credit facility and very good level of liquidity.
So starting with the coverage of revenues and gross margin. During the three and six month periods ended June 30, 2016 the revenue decreased by 34% compared to the corresponding periods of 2015. These decreases were mainly due to an important decline in underlying commodity prices initiated over the course of 2015 in both segments.
Although sales volumes were slightly lower for the three and six month period, gross margin has substantially improved reflecting the moderate price stability in metals, afforded by our selective approach focused on better margin products.
Now for EBITDA and adjusted EBITDA. In Q2 2016, EBITDA reached $5.4 million compared to a negative EBITDA of $6 million in Q2 of last year. EBITDA margin was positively impacted by price stability for most metals, absence of impairment charge on inventory and favorable foreign exchange gain. In Q2 2015, a foreign exchange loss of 1 million was recorded on the convertible debenture, denominated in Canadian dollars, which has been hedged by a cross currency swap contracted since December of last year.
For year-to-date 2016, EBITDA reached 8.2 million compared to a negative 2.6 million for the same period of last year for the same reasons mentioned. In Q2 2016, adjusted EBITDA rose by 2.7 million to 4.7 million compared to 2 million in Q2 of last year driven by better realized margins and lower operating cost. Adjusted EBITDA for the electronic materials segment increased by 0.4 million to 5 million, representing an adjusted EBITDA margin of 25% compared to 15% for the prior year quarter.
Adjusted EBITDA for the eco-friendly materials segment increased by 4.4 million to 2.7 million compared to a negative adjusted EBITDA of 0.7 million in Q2 of last year. The adjusted EBITDA [on corpus] for Q2 2016 was negatively impacted by a retroactive charge for foreign duties and recognition timing of R&D tax credits. In Q2 of last year proceeds from an insurance claim was recorded.
Net earnings ended slightly positive in Q2 2016 compared to a net loss of 20.5 million last year. Net loss reached 1.8 million year-to-date compared to 22.4 million in the year-to-date of last year. No inventory impairment charge was recorded in Q2 2016, and year-to-date 2016 compared to an inventory impairment charge of 6.5 million recorded in Q2 of last year.
For bookings and backlog, presented in number of days based on analyzed revenues to normalize the impact of commodity prices, backlog reached as of June 30, 2016 a level of 157 days of sales outstanding, an improvement over the backlog of last quarter of 12 days, which was at 144, and in June 2015 of 137 days. Bookings for the second quarter of 2016 reached 86 days compared to 89 days in the first quarter, and 73 days for the same quarter of last year.
Quickly going through the expenses, depreciation and amortization; expenses in Q2 2016 and year-to-date 2016 amounted to 2.5 million and 4.9 million respectively, compared to
14.6 million and 17.5 million for the same period of 2015. The decrease in fiscal year 2016 is really attributable to an accelerated amortization of selected intangible assets of 11.8 million that was recorded in Q2 of last year.
SG&As for Q2 and year-to-date 2016; SG&A expenses were 6.8 million and 13.2 million respectively, compared to 6.7 million and 13.7 million for the same period of 2015. Variation year-to-date is mostly explained by low wages and other expenses as well as favorable exchange rates across most local currency denominated expenses in 2015. Litigation and restructuring costs [Indiscernible] to reduce its operating expenses and renegotiate unfavorable purchasing contracts, the company recorded litigation and restructuring cost as a provision of 1 million for year-to-date 2016 compared to nil for the same period of last year.
Financial expenses and revenues. Financial expenses for Q2 2016 amounted to 1.2 million compared to 4.2 million for the same period last year. The decrease in financial expenses of 3 million is mainly due to a lower provisional charge from the change of the fair value of the debenture conversion options, combined with unrealized foreign exchange and derivative gain. The full value of the convertible debenture is currently covered as mentioned by a cross currency swap.
Financial expenses for year-to-date 2016 amounted to 4.3 million compared to 3.1 million for the same period last year. The increase in financial expenses of 1.1 million is mainly due to a provisional charge from the change in the fair value for the debenture conversion option that is compared to a gain for year-to-date 2015, partially mitigated by higher unrealized foreign exchanged and derivative gains.
Income taxes. The Company recorded net earnings before income taxes of 1 million in Q2 2016 and a net loss before taxes of 1.2 million for year-to-date. Income tax expense for Q2 2016 and year-to-date were [0.9 million] and [0.6 million] respectively compared to an income tax recovery of 2.9 million and 2.4 million for the same periods of last year. The tax expense for Q2 and year-to-date were higher due to last year's carry forwards, for which no deferred tax asset was recognized at that time.
Covering liquidity and capital resources, so cash provided by operating activities amounted to 1.4 million for Q2 compared to 21.4 million for Q2 of last year. Although the company continues to better manage non-working capital, especially inventory expressed in days, the lower impact on cash provided by operating activities is mainly due to lower commodity pricing and its impact on the value of the company’s products on a unit basis, with similar impact on accounts receivable.
For year-to-date 2016 cash provided by operating activities amounted to 10.9 million compared to 34 million for the same period of last year. Better management of non-working capital led to a further reduction of 6.9 million in inventory and 6.8 million trade accounts receivable, further improved by our accounts payable.
Cash used in investing activities totaled 1.5 million for Q2 and 3.5 million for year-to-date 2016, compared to 3.4 million and 9.6 million for the corresponding periods of 2015. This decrease is explained by lower acquisition of property, plant, and equipment and intangible assets. Cash provided by financing activities amounted to 0.7 million for Q2, and cash used by financing activities amounted to 0.9 million for year-to-date 2016 compared to cash used by financing activities of 14.3 million and 20.4 million for the corresponding periods of 2015. These decreases are mainly associated with the net reduction in the amounts drawn under the revolving facility. Ending with the coverage of net debt, net debt, after taking into account cash and cash equivalent, decreased by 7.4 million from 34.9 million as at December of 2015 to 27.5 million as of June 2016.
This will complete the financial performance coverage. Thank you.
Operator, we may now proceed with the Q&A period please.
[Operator Instructions] [Foreign Language] Your first question comes from the line of Rupert Merer from the National Bank. Please go ahead.
Good morning everyone. Great to see the stability. In your presentation that came out with the results, it shows that your volumes were down, it looks like about 8% year-over-year, I know you gave a little bit of color about being more selective on your business opportunities and some customer disruptions, just wondering if you can give a little more color on where specifically the volume decline came from, how much was from being selective with your business opportunities versus lower market activity or competition or your customer disruption?
I will maybe start and then Richard can augment. Good morning to you Rupert. Again my apologies, it was supposed to be September for the communication of the strategic plan just to reiterate that and not December. Maybe I had Santa Claus on mind. Anyhow, going back to your question, so as we indicated, when you look at the segment electronic materials, we have had some challenges in terms of a customer situation, but in general that segment has been – the market has been somewhat slow.
On the eco-friendly side, the demand has been fairly robust – has been solid. There are elements on the eco-friendly side, which we have clearly been very selective about, and as far as our solar activity goes that remains very solid as well. So that is sort of broad brush maybe, I don’t know…
Maybe at a higher level as we mentioned in previous quarters, there is always a little percentage of our business, which is trading metal [Indiscernible] facility away from that. So we are extremely selective and we are focusing on making products out of metal that we own and go for [products] forward.
Okay, great. So where should we see the volumes going on a go-forward basis, is it going to be a similar change the next few quarters or do you expect this trend to change?
Well, I mean, some of the issues surrounding the market will be really difficult to judge. I would expect that the trend would remain somewhat consistent, and I would see that the demand not materially changing one-way or the other.
Just to remind you, you are looking at it compared to last year, so this is the impact of initiatives, and if you look from actual, the actual is [reason you see decrease].
Okay, very good.
Just so, if you also look at the – our bookings, you will see that that remains very healthy.
Right, very good. Then just secondly, you mentioned you closed a joint owned European manufacturing facility, I imagine that is the gallium production, if you can give some more color there and talk about any potential charges we will see for the facility closures or any impact that might have on volumes?
So, yes, it is the gallium facility in Germany. Essentially that [type] prices of gallium it is not economical to operate. In terms of extraordinary charges, no, you won't see anything. It is a joint venture. We are essentially not consolidating the numbers of that plant, and everything has been fully accrued over the year from that plant in order to close it.
Okay, excellent. I will leave it there. Thanks very much.
Your next question comes from the line of Nick Agostino from Laurentian Bank Securities. Please go ahead.
Yes, good morning. I guess two questions, just picking up on the last theme with regards to volumes, when I look at your eco-friendly business, it looks to me like the revenues were a little bit less than what I was looking for, but margins there were stronger than I expected, I guess can you give – as you guys look through contracts on a selected basis, can you maybe give some color I guess by end market, specifically in the case of bismuth, are you focusing more on the pharmaceutical side, are you focusing more on the paint side of the market, can you maybe give some end market exposure where you think the contracts are more economical?
Good morning Nick. So, looking at eco-friendly, I suppose the best way to look at that is that, the demand for our bismuth product line remains very healthy. Where we are falling short is on the lead based product. This is product that we utilize actually, some may wonder why lead and eco-friendly, this is actually a product that is utilized in mining to reduce the usage of some basically cyanide product, to reduce that usage. So in that sense it is a eco-friendly product.
Our sales in that segment has fallen short. This product is not necessarily a huge contributor to our portfolio, and so we are continuing to put our effort into that to see if the second part of the year would have better news in that front and have that demand to be picked up. But much of it comes from lead, and when you look at it from volume point of view, it is larger volume, not necessarily larger margins.
Okay, is it possible specifically within the bismuth market you can give some color as to which end markets do you offer the higher margins, and in other words, how much higher do you think you guys could take your eco-friendly margins if you focus hypothetically at 100% on the highest margin opportunities?
So I’ll start and Richard you can augment any place I left off, but basically when we look at the bismuth product line, anything that is associated to the metallurgical applications tend to have lower margins. And the reason is fairly simple, it is more of a bulk material, the percentage of value add is not as great, and so for us it is a natural choice that, if we are going to focus our resources and be selective to put much of our activities elsewhere, I don't exactly want to telegraph my punches and tell you exactly where I am putting my activities, but that being said, in anything that has to-do with bulk, that has to do with metallurgical, that has to do with product that essentially the value add is not a great part of the end product, we have been fairly selective.
Okay, that is very helpful. And then just last question, I noticed your corporate expenses this particular quarter was up by $1 million quarter-over-quarter, can you give some color as to the cause of that and whether that was one time in nature?
Yes, what we have done is we recorded two, three types of what I would refer to as non-recurrent expenses. One of them is mentioned in the MD&A, where we booked a retroactive charge for duties in reference to prior periods, and also we booked some additional professional fees in order to support us in defending a claim.
So just to confirm, they were pretty much all one-time?
Okay. That was it. Thank you.
[Operator Instructions] [Foreign Language] Your next question comes from the line of Mac Whale from Cormark Securities. Please go ahead.
Hi, good morning. Just a couple of follow-ups, on that retroactive duty, how far back does it go, just trying to get an idea of what the sort of quarterly impact on that would be on the corporate overhead?
It is a provision that refers seven months back.
Okay. So it would be roughly, it is all seven quarters back, like the charge you took reflects the total sum of that?
It is seven months. So it reflects our potential exposure we have over-accrued, but we have been conservative in our approach here.
That seven month period.
Okay, in terms of the plant closure, is there sort of – can you put although there is no – you said there is basically no cost, is there any impact, positive impact going forward that we can expect to see like would it be on the corporate overhead and likewise for the sales offices?
If there is any positive impact from that closure, it will be a small distribution to both shareholders at the end of the quarter.
I see, okay. And in terms of the disruption you spoke about, is it ongoing?
Sorry, can you repeat the question?
You talked about the disruption at one of your customers’ business, is that an ongoing situation or was it sort of a disruption in the quarter and it has been resolved, or is it something that we should expect to see continue?
First of all, good morning Mac. You may recall that in Q1 when we reported out, we mentioned that we had a disruption at a customer side. This has continued into the second quarter. And at this point, we do not have the visibility as far as how long this will continue. Or if something is right now that it's somewhat indefinite, I would say.
Okay. And then just last is, maybe this is something you'll get into more in September when you talk about the strategic plan and give us some highlight. But would you be able to go talk about some of the opportunities that you've looked at in the past or spoken about in the past that really haven’t impacted yet the revenue line like 3D printing or activities in batteries that type of thing. Is there any major changes in what you see as opportunities that we should expect that you'll elaborate on? Just trying to get an idea of as we looked a little bit into '17 for estimates whether some of the things that we might be baking in or anticipating whether we should keep those in mind or whether they've changed at all?
Excuse me. So, as I mentioned, the strategic plan has three major components associated with it. One around maximization of the core business, once the second one would be appropriate positioning of the growth initiatives and the third one would be to optimize existing assets and operations. I think you can easily summarize that what we mentioned with some of these activities in Europe and closure of the regional offices that is linking to maximizing the assets, the latter to third item that I mentioned.
In terms of what you have referred to that's around growth initiatives and indeed we have a number of growth initiatives in our portfolio which we will focus on. And basically we will put all our options on the table. We clearly will be giving ourselves a defined timeline, a defined set of standards that we must measure who. If we are able to get there, obviously those main in the portfolio and if not and all options as I mentioned go on the tape. So, that's basically the way we're approaching it and certainly when we talk about it in September, we can give you more color on it.
Okay. Will look forward to. Thanks guys.
[Foreign Language] There are no further questions at this time. I'll turn the call back over to the presenters.
Okay. We now like to thank you all for attending this morning's call. We look forward to speaking with you early November at the release of our third quarter results. Thank you again, and have a great day.
Thank you. Thanks to all.
[Foreign Language] This concludes today's conference call. You may now disconnect.
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