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Edited Transcript of VNP.TO earnings conference call or presentation 6-May-20 12:00pm GMT

·39 min read

Q1 2020 5N Plus Inc Earnings Call Jun 9, 2020 (Thomson StreetEvents) -- Edited Transcript of 5N Plus Inc earnings conference call or presentation Wednesday, May 6, 2020 at 12:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Arjang J. Roshan 5N Plus Inc. - President, CEO & Non Independent Director * Richard Perron 5N Plus Inc. - CFO ================================================================================ Conference Call Participants ================================================================================ * Frederic Tremblay Desjardins Securities Inc., Research Division - Analyst * Hassaan Khan National Bank Financial, Inc., Research Division - Associate * MacMurray Davidson Whale Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research * Nick Agostino Laurentian Bank Securities, Inc., Research Division - MD, Head of Research & Diversified Technology Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (foreign language) Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the 5N Plus Inc. First Quarter 2020 Results Conference call. (Operator Instructions) I would now like to turn the conference over to your speaker today, Richard Perron, Chief Financial Officer. Please go ahead. -------------------------------------------------------------------------------- Richard Perron, 5N Plus Inc. - CFO [2] -------------------------------------------------------------------------------- (foreign language) Good morning, everyone, and thank you for joining our First Quarter Ended March 31, 2020 Financial Results Conference Call. We'll begin with an overview of our business performance and review of our financial results, after which we will begin the question period. Joining me this morning is Arjang Roshan, our President and Chief Executive Officer. We issued yesterday our financial statements, and we have posted a short presentation on the Investors section of our website. I would like to draw your attention to Slide 2 of the 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 description of the risk factors that may affect future results is contained in our management's discussions and analysis available on our website and in our public filings. The company is not aware of any significant changes to its risk factors previously disclosed. However, since January 2020, the gradual outbreak of the novel strain of the coronavirus, COVID-19, and its eventual declaration as a pandemic by the World Health Organization, has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures have caused material disruption to businesses globally, resulting in an economic slowdown. The outbreak of the COVID-19 should be considered a new risk factor. In the analysis of our quarterly results, you will note that we've used and discussed certain non-IFRS measures, which definitions may differ from those used by other companies. For further information, please refer to our management's discussion and analysis. I would now like to turn the conference call to Arjang for the discussion on the business performance and quarter results. Arjang? -------------------------------------------------------------------------------- Arjang J. Roshan, 5N Plus Inc. - President, CEO & Non Independent Director [3] -------------------------------------------------------------------------------- Thank you, Richard. Good morning, ladies and gentlemen. Welcome to 5N Plus conference call. I hope you and your families are doing well wherever you are and are remaining healthy and safe. Richard and I are conducting this call from 2 separate locations. So if there's a bit of a lag or cross communication, that's the culprit. That's where it's coming from. I'll start by saying that in 2020, prior to the full global pandemic, we had already set course for a year with notable achievements. As of today, we have not given up on that mission. In addition, we believe we have the inherent obligation to make sure we do our part within the larger global ecosystem and protect the continuity of supply for all customers with 5N Plus, many of whom -- many of our customers have been designated as essential businesses and producers of critical materials in the fight against COVID-19. Early this year, 5N Plus took decisive actions to further protect its employees and operations around the globe. We've been working closely with government agencies in various regions, implementing specific measures as for given jurisdictions. I think it's fair to assume that some of these measures have adversely impacted the company's operating efficiency. However, we believe these measures, as a whole, are protecting the health and safety of our people and enabling our operations to continue and serve our customers. Obviously, we remain vigilant as the situation remains fluid, and we'll do the utmost to anticipate and address other challenges that may still loom ahead. Last night, 5N Plus posted results for the first quarter of 2020. Adjusted EBITDA for the quarter came in at $6.9 million versus $5.6 million for the same period last year. Return on capital employed increased from 8.2% in Q1 2019 to 10.6% in Q1 2020. Revenue for the quarter reached $50 million as compared to $51.4 million for the same period last year. We are encouraged by how we have started the year. And despite added challenges from COVID-19, 5N Plus continues to make progress. As you may recall, last year, 5N Plus announced that the contribution from refining and recycling activities, or what we call upstream activities, were expected to substantially decline for several quarters. This was largely driven by key suppliers withholding their materials due to continued drop in metal notations reaching levels not seen in many years. Since launching 5N21 strategic plan, our upstream activities have grown faster and more profitable than initially expected. While in the years prior to 5N21, the vast majority of the key metals used as consumables in the company's products were procured as commercial-grade metal. A couple of years after implementing 5N21, less than 1/3 of these metals were procured as commercial metal. And the balance of the needed metals were procured from the newly established upstream activities, which utilizes metallurgical processes to valorize these metals at more favorable conditions versus commercial metal purchases. In our second quarterly communication last year, we estimated that going forward, the adverse impact of the reduction in contribution from upstream activities to be about 15% to 20% of adjusted EBITDA. When we compare Q1 2020 to the same period last year, we can indeed validate this figure. This being said, the adverse impact is not immediately evident in our overall Q1 2020 earnings because the margin -- the earnings growth in the downstream businesses more than compensated for this gap, as reflected in the 22% growth in adjusted EBITDA. So now let's turn our attention to the downstream businesses. Earnings for Eco-Friendly -- for segment Eco-Friendly Materials remained flat for the quarter as compared to the same period last year. As mentioned earlier, this includes the adverse impact from upstream activities. Furthermore, 5N Plus experienced certain headwinds due to COVID-19, including mandatory shutdown of its Chinese activities during the quarter, which was rapidly brought back online within a few weeks. During the quarter, the volume demand for industrial materials was higher than the same period last year. The overall revenue was lower due to metal -- to lower metal notations as compared to the same period last year. Considering some of the applications associated with industrial materials, including automotive and aerospace, which has been heavily impacted by the pandemic, we expect Q2 to be slower. Revenue for health and pharmaceutical materials were slightly lower for the quarter as compared to the same period last year. Over the past 12 months, 5N Plus has made tangible progress in qualifying its additive materials at certain key customers. 5N Plus is expanding its product offerings in this area to capture more synergies from its newly developed competencies. This should also enable its customers to benefit from streamlining their purchasing activities. In the next quarters, the growth of this activity will depend on how the pandemic will impact qualification campaigns at our customers. In Q1 2020, revenue for catalytic and extracted materials grew significantly as compared to the same period last year. As many of you know, in 2019, 5N Plus experienced production challenges, much of which were resolved by late 2019. This development, along with a full order book, positioned the company to start 2020 on the right foot and fully serve its customer demand, yielding stronger performance in the quarter. The performance of this activity over the next quarters will depend on further development in mining, petrochemical, oil and gas industries. Despite mandatory shutdowns of certain mines, the demand for the company's products remains strong. Earnings for segment equal -- I'm sorry, earnings for segment Electronic Materials was significantly better than the same period last year. During the quarter, our Malaysian site underwent mandatory shutdown. Other plants in this segment remain open, some of them due to essential business classification. Within renewable energy, revenue was lower than the same period last year while margins were notably higher, driven by both volume and favorable mix. We expect Q2 demand to be similar. Revenue in Security, Aerospace, Sensing and Imaging grew significantly with higher margins as compared to the same period last year. As you may recall, during 2019, 5N Plus faced production challenges associated with ramp-up of certain specialty semiconductor materials. As of Q1 2020, nearly all production challenges have been resolved. These, along with strong demand for infrared, medical and security markets, have resulted in significantly better earnings despite challenges in the space market. We expect this trend to continue in the next quarter. Revenue for technical materials were lower during the quarter as compared to the same period last year. The pandemic has significantly slowed product qualification campaigns, and the demand for microelectronics industry has been adversely impacted. We expect the next few quarters to remain challenging. 5N Plus entered 2020 with ample cost for optimism, driven by the strength of the company's order book and the efficacy of its activities. A few weeks into the new year, the pandemic started to add notable uncertainties. During the quarter, 5N Plus was forced to temporarily close 2 of its facilities while other facilities remained operational. How the year will continue to develop will depend on the demand for our customers' products, our customers' ability to produce these products and our ability to seamlessly serve our customers. Fortunately, the business of many of our customers has been identified as essential, and many of our activities share the same classification. This will be helpful in allowing us to serve these markets. Nevertheless, even with the essential classification and utmost efforts to protect employees and operations, production disruptions due to COVID-19 virus remain a possibility. In addition, we're finding the current environment particularly challenging for new business development, which often requires close human interactions, along with qualification campaigns at our customers. Recognizing these uncertainties, we have decided to adopt a prudent practice by many companies and temporarily refrain from providing earnings guidance. This being said, it might be helpful to mention that prior to the pandemic, we had estimated 25% to 35% growth in adjusted EBITDA going from 2019 to 2020. This range would already account for the previously mentioned unfavorable upstream conditions. Over the past several quarters, our company has been going through a transformation process, which has entailed migration towards enabling products with better margins, enhanced cost structure, improved productivity, bolster balance sheet, rationalized capital employed and ultimately an acceptable balance between risk and reward. I think we can agree that these are fundamental management principles. And as the case with many fundamental management principles, they are often overlooked or taken for granted and are undervalued until the crisis occur. And then it is these very fundamentals which will determine which businesses will emerge and perhaps thrive and which will suffer. Unfortunately, the COVID-19 virus has caused one of such crisis. I am very glad that over the past few years, 5N Plus has invested time and resources to strengthen our fundamentals. I have no doubt that this work will pay dividend, and believe we are well positioned to not only navigate through the current global pandemic, but most importantly, emerge stronger and more competitive than ever before. At this point, I'd like to turn the call over to Richard in sunny Montreal. -------------------------------------------------------------------------------- Richard Perron, 5N Plus Inc. - CFO [4] -------------------------------------------------------------------------------- Thanks, AJ. So good morning, everyone. As mentioned by AJ, following a staging year impacted by metal notations, 5N Plus entered 2020 rapidly implementing strategic measures to protect our global workforce from the COVID-19 virus, endeavoring to mitigate any long-term impact of the pandemic on our business. We believe we have and can continue to successfully navigate the crisis, maintaining strong demand for our core products, serving a diversity of markets, continuing to take calculated risks, while progressing, albeit slower-than-anticipated with the business development of our growth initiatives. During the quarter just completed, characterized by relative stability from most commodity prices and altered demand, the company has been able to significantly improve profitability, reporting a solid quarter in terms of adjusted EBITDA, achieving most of its short-term business objectives as well as managing cash diligently and operating expenses judiciously, ending the quarter once again with a solid balance sheet. Looking beyond confronting the immediate challenges of COVID-19, 5N Plus made important progress in the past years to address earnings volatility, significantly straightening its product portfolio, while improving capabilities and efficiency further with recent investments expected to come online later this year. It's gating through challenging conditions for our upstream activities. So now starting with the coverage of revenue and gross margin of this quarter. In Q1 2020, revenue decreased slightly when compared to the same quarter of last year. Our gross margin reached 24.4% compared to 22.4% in Q1 of last year despite lower contribution from the upstream activities, reflecting the impact of lower metal notations, while overall downstream volume was higher. Now covering adjusted EBITDA and EBITDA. This past quarter, the adjusted EBITDA was $6.9 million compared to $5.6 million in Q1 of last year, positively impacted by stable metal notations, and our overall downstream volume is gating the contribution shortfall from our upstream activities. Electronic Materials segment's adjusted EBITDA increased by $1.7 million to $5.8 million, representing an adjusted EBITDA margin of 29% compared to 20% in Q1 of last year, while Eco-Friendly reached $3.1 million and adjusted EBITDA margin of 10%, similar to last year. In terms of EBITDA, it reached $6.2 million compared to $4.2 million in Q1 of last year. The increase is mainly explained by the higher adjusted EBITDA, combined with lower share-based compensation expense, mitigating our foreign exchange and derivative loss. In Q1 of this year, operating earnings reached $3.6 million compared to $1.3 million in Q1 of last year. Net earnings were $0.6 million in Q1 compared to a net loss of $1.1 million last year. Now looking at annualized backlog and bookings. Backlog as at March 31, 2020, reached the level of 180 days of annualized revenue, a decrease of 55 days over the backlog ended December 31, 2019. The decrease was mainly driven by the bankruptcy filing of one of our end customers of a customer within Electronic Materials, resulting in retroactive adjustment for the backlog in terms of dollar and days of sales. Bookings for the Electronic Materials decreased by 77 days from 89 days in Q4 of last year. Following the retroactive adjustment to the backlog in reference to the bankruptcy filing of a customer's customer within Electronic Materials, the bookings calculated by adding revenues to the increase or decrease in backlog for the period divided by the annualized year revenue are also negatively impacted. Bookings for the Eco-Friendly Materials segment decreased by 6 days from 101 days to -- in Q4 to 95 days this quarter. Quickly going through the expenses. Depreciation and amortization in Q1 amounted to $3.1 million, similar to 2019. In Q1 of this year, SG&A expenses were $4.9 million compared to $5.5 million for the same period of '19. In 2020, the expenses were positively impacted by favorable exchange rates across most local currency-denominated expenses when compared to 2019 as well as timing of certain expenses, like travel expenses. Share-based compensation expense in Q1 2020 amounted to $0.2 million compared to $1.1 million for the same period of 2019. Financial expense in Q1 amounted to $1.3 million compared to $1.7 million in Q1 of last year. The decrease is mainly due to imputed interest recognized as a noncash expense related to the outstanding convertible debentures redeemed in March '19, net of our loss in foreign exchange and derivatives compared to the same period last year. The company reported earnings before income taxes of $2.2 million in Q1 2020. Income tax expense in Q1 2020 was $1.6 million compared to $0.8 million in Q1 of '19. Both periods were impacted by deferred tax assets applicable in certain jurisdictions. Covering liquidity. Cash generated by operating expenses amounted to $0.7 million in Q1 compared to cash used in operating expenses of $6.6 million in Q1 of last year. Increase in funds from operation has been explained by the higher EBITDA. In Q1 2020, cash used in investing activities totaled $2.3 million compared to $2.8 million in Q1 of last year, mainly attributed to timing of additions to property, plant and equipment. In Q1 of this year, cash from financing activities amounted to $3.8 million compared to $4.8 million in Q1 of last year. The small decrease is mainly explained by the net drawdown of $5 million from the credit facility, when in Q1 of '19, the company completed a 5-year unsecured subordinated term loan of $25 million, for which only $19.3 million were used to redeem the company's outstanding convertible unsecured subordinated debentures of CAD 26 million. Since the beginning of 2020, the company has repurchased and canceled 771,200 common shares under the NCIB plan for an amount of $0.8 million compared to 384,379 common shares for an amount of $1 million during Q1 of last year. Now looking at gross and net debt. Net debt after considering cash and cash equivalents increased by $3.1 million from $35 million at the end of December 31, $38.1 million as at March 31, 2020, mostly impacted by the drawdown of $5 million on the company's credit facility for working capital purposes. This will conclude the financial review. We are ready to take questions from analysts. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from the line of Mac Whale with Cormark Securities. -------------------------------------------------------------------------------- MacMurray Davidson Whale, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [2] -------------------------------------------------------------------------------- Nice progress on the margins. I'm wondering, when you look at the changes you made over the course of the last year, dealing with some of the start-up issues and -- that you've talked about, do you -- how has it shifted sort of your direct versus indirect costs? I'm wondering whether you could speak -- the reason I asked it, I'm wondering if you could speak a little bit to the sensitivity of the margins in a slowdown because it would be helpful to get an idea of how you're impacted operationally on the slowdown of shipments. -------------------------------------------------------------------------------- Richard Perron, 5N Plus Inc. - CFO [3] -------------------------------------------------------------------------------- Okay. On the slowdown of the shipments... -------------------------------------------------------------------------------- MacMurray Davidson Whale, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [4] -------------------------------------------------------------------------------- Well, I'm just saying if you're just slowing down -- if what's happening is you're still operating, and you're still getting good operating margin, but you're just not able to ship and you're going to see a slowdown or disruption due to customer demand and you're not shipping, how should we see that manifest itself? Like do you -- you've got a different direct versus indirect costs than before. And I'm wondering -- or whether you do or not, I'm just wondering how we should be thinking of that in terms of our modeling. -------------------------------------------------------------------------------- Richard Perron, 5N Plus Inc. - CFO [5] -------------------------------------------------------------------------------- Yes. Well, it depends. The scenario you're describing, it depends how long it lasts. But in the first few quarters, what you'll see is we're not likely to stop production. So what you see is an increase in our inventory. And at -- and the current inventory is in good health. And in the coming quarters, even if for some reason, clients are asking to delay shipments, we see no reason why that inventory could not continue to be profitable as market turn better. So we need -- frankly, describing, we need to extend like way beyond 1, 2 and likely to say, 3 quarters. But if for some reason, it really slows down like -- for like 3 quarters, what will likely happen is we'll have extended maintenance shutdowns toward the end of the year type of scenario, not to impact quality or the economy cover and inventory on it. But we will not stop production and impact margins as you -- during the last -- in the first quarter unless this is something that would drag over a very long period of time. -------------------------------------------------------------------------------- MacMurray Davidson Whale, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [6] -------------------------------------------------------------------------------- Okay. That's helpful. I mean, so in reading that answer and sort of parsing it, it sounds like if you're not counting on that level of disruption, like 3-plus quarters. -------------------------------------------------------------------------------- Richard Perron, 5N Plus Inc. - CFO [7] -------------------------------------------------------------------------------- At this point, no, no, no. Yes, we're pessimistic. -------------------------------------------------------------------------------- Arjang J. Roshan, 5N Plus Inc. - President, CEO & Non Independent Director [8] -------------------------------------------------------------------------------- We're not -- sorry, again, for cross communication. We're not anticipating it based on at least what we see. Remember, part -- one of the things that helps us is some of the things we do is actually central in this environment. We have a fairly good list of customers that carry that classification. So that is, I guess, part of it. But we have indeed -- in the background, we've done a contingency planning for, let's say, the worst case. As Richard mentioned, we can withstand the worst case for a very long time, based on the resources we have in the company, based on our strength of our balance sheet. So we'll be able to go for many, many months on this. -------------------------------------------------------------------------------- MacMurray Davidson Whale, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [9] -------------------------------------------------------------------------------- Okay. Okay. And then looking at the backlog, in terms of it -- I'm wondering what the terms of it are. And what I'm looking for is some insight into when you get -- when you go through a quarter on some of that business, if you don't get a follow-on order, is that lost revenue? Or is it delayed? And I'm wondering a little bit because if you can imagine in something like food additives, if that hasn't been purchased, it's going into feed. Those animals don't need to be fed twice as much next year. So that's just -- it's gone, right? So I'm wondering whether that not -- whether that is or not the case for a lot of the other businesses. -------------------------------------------------------------------------------- Arjang J. Roshan, 5N Plus Inc. - President, CEO & Non Independent Director [10] -------------------------------------------------------------------------------- So I think I would encourage you to look at certainly our backlog number a little bit differently because the major influence here is not really -- is not necessarily the question of whether we've won the business or not with a customer. It has to do with contract cycles. Remember, we look 12 months out. And we are a company that supplies to many industries and have a fairly long list of clients. And they all have their patterns, purchasing patterns. They have a mixture of long- and short-term contracts. Sometimes -- and I think I've said this in the past, sometimes you may be getting to a point where with a portfolio of contracts that 12 months is running out at that -- meaning your long-term contract is coming to term, and you have to renew that. Now when that happens, there's still another unknown. And the unknown is, will the customer themselves want to go long-term contract or not? And then there's another unknown whether 5N want to go long term or not. And obviously, in those negotiations, it all depends what benefits you. So when you look at our backlog number, I understand that it's gone to 188. We consider that actually a very good backlog number. I am not aware of that being influenced materially by loss of business or adverse impact. I am -- to the best of my knowledge, everything that I see has to do with contract cycle, certain contract cycles and then whether we will renew them or not. Now I actually expect that number right now not to go higher. It might even go lower in the next quarters. And if it does go lower, and it is because of the contract cycle, I'm not too terribly concerned. Because I think given the current condition, we have to weigh our options and our customers are weighing our options. Do we lock things for 12 months? Or do we go on more of a short-term or even spot practice? Those are decisions that needs to be made, and we're going to be prudent how we make those decisions. So just for me to show a good backlog number to the market, this is probably the danger with this backlog number. Sometimes it projects a really good image, and sometimes it doesn't, but the fact is it's also a choice in terms of whether you decide to go long term with your contracts or not. I don't know if that is recommended. -------------------------------------------------------------------------------- MacMurray Davidson Whale, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [11] -------------------------------------------------------------------------------- Yes, that's helpful. That makes sense, right, like to sort of warn us not to read the same thing from it that we had in the past because if your customers are exactly as you say, your customers are adjusting, saying, "Well, we don't really know." You don't want to get locked in either way. You don't want to enter into a bad contract simply because -- I mean, because you can't tell what's happening. And you may see it all come back very rapidly. It's possible. -------------------------------------------------------------------------------- Arjang J. Roshan, 5N Plus Inc. - President, CEO & Non Independent Director [12] -------------------------------------------------------------------------------- Exactly. And being a publicly traded company, and I'll put this out there so that it's very clear, we don't want this to be what determines our behavior because we may get involved in a negotiation that will be protracted because we just simply don't want to accept certain terms. And we do that because we think the customer at the end of the day has to buy the product. Now whether they do it on long term or stop, they're going to need that product. And so we may even protract some of these discussions until we think the position that we're in is adequate for us. So if -- again, if this number were to go further down, I -- and if the reason is exactly what I said and not loss of business, I certainly wouldn't be concerned about it. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- Your next question comes from the line of Frederic Tremblay with Desjardins. -------------------------------------------------------------------------------- Frederic Tremblay, Desjardins Securities Inc., Research Division - Analyst [14] -------------------------------------------------------------------------------- On the Electronic Materials segment in Q1, the favorable product mix was mentioned as a reason for the strength there. Just wondering if there was anything in that, that was one-time in nature or if it's part of the planned ongoing evolution of the product mix. And how should we think about the impact of product mix on margin going forward given the current demand environment? -------------------------------------------------------------------------------- Arjang J. Roshan, 5N Plus Inc. - President, CEO & Non Independent Director [15] -------------------------------------------------------------------------------- Well, I'll start, and then maybe Richard can augment it. When you look at Electronic Materials, obviously, that is the part of our business that by itself has better margins. Now this particularly was the case in terms of -- the better mix was the case in renewable and in SASI, but obviously, the production-related issues that were impairing our ability to really demonstrate the margins is primarily limited or in large part limited in SASI. Because last year, as you recall, we had issues with production of a number of our engineered materials. So I would say most of the operational improvements comes from SASI, and the mix is shared between somewhat equally, I would even say, between those 2. Richard, do you have a better answer than that? -------------------------------------------------------------------------------- Richard Perron, 5N Plus Inc. - CFO [16] -------------------------------------------------------------------------------- No, no, that's fine. And it's -- I don't think it's a one-time effect of Q1. You see that repeat over the upcoming quarters. We'll have variation from one quarter to another, potentially, especially on the SASI business. But overall, we should have this year a better mix than last year for different things that have evolved -- developed.. -------------------------------------------------------------------------------- Frederic Tremblay, Desjardins Securities Inc., Research Division - Analyst [17] -------------------------------------------------------------------------------- Great. I wanted to speak a bit on inventory management. First, I was wondering if you've seen any supply chain disruption. And then in terms of inventory management, you mentioned, AJ, in terms of the backlog, potentially some customers or 5N Plus potentially electing to go shorter term or spot. How does that potentially impact your inventory management going forward? -------------------------------------------------------------------------------- Arjang J. Roshan, 5N Plus Inc. - President, CEO & Non Independent Director [18] -------------------------------------------------------------------------------- I think you came to an important item, the second point you made. Indeed, when you have longer-term contract, by default, you're able to better commercially hedge. Commercial hedging for us is actually physical as we physically secure those materials. So indeed, you're correct. When you have longer term -- when you secure longer-term contracts, you're able to do a better job in terms of commercial hedging. So yes, you're -- if we go into more shorter-term situations, then inventory management becomes more of a challenge because you essentially have to buy your inventory also somewhat on the spot. That being said, when we make those decisions, we try to balance them against -- balance the benefits against it. If you look at, for example, the current metal market, some of the metals that we use extensively are at such low notations that, for us, we don't speculate on metal. But certainly, in terms of dollar value going down versus going up, there's limited exposure. So we're going to put that also into that equation. In terms of supply disruption, no, we did not have supply disruption, I won't say that it was easy because remember, our upstream -- the event that happened last year in upstream was pretty abrupt. It was quickly that some things dried up. And it had an impact on us, and we had to go and be able to still procure things without disrupting the whole supply picture, the fundamentals within supply picture creating bubbles and whatnot. And I think our teams have done a fantastic job of doing that. And then you have to be able to obviously then manage against COVID-19, be able to continue to keep your supply chain intact. I think, again, our team has done a great job. Part of that obviously has to do with us having to build sometimes some buffer to be able to withstand delays and whatnot. But overall, we -- I think we've gone through this period without any interruption in our supply chain. -------------------------------------------------------------------------------- Frederic Tremblay, Desjardins Securities Inc., Research Division - Analyst [19] -------------------------------------------------------------------------------- Great. And last question for me would be on the competitive environment. Do you think that the current COVID situation is impacting some of your competitors? Is it creating some organic and inorganic opportunities for 5N Plus? -------------------------------------------------------------------------------- Arjang J. Roshan, 5N Plus Inc. - President, CEO & Non Independent Director [20] -------------------------------------------------------------------------------- I guess I'll try to not say too much there for obvious reasons. What I do know is that we have received additional inquiries. I am not sure if that's got to do with COVID. I don't know if that has to do because some of them have financial situations. But yes, I think I'll just probably stay there. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- Your next question comes from the line of Hassaan Khan with National Bank Financial. -------------------------------------------------------------------------------- Hassaan Khan, National Bank Financial, Inc., Research Division - Associate [22] -------------------------------------------------------------------------------- I'm calling on behalf of Rupert. So we wanted to get a better handle of taxation. It's fairly high this quarter. We understand it's from different jurisdictions. -------------------------------------------------------------------------------- Arjang J. Roshan, 5N Plus Inc. - President, CEO & Non Independent Director [23] -------------------------------------------------------------------------------- Can you please speak up a little? I have a hard time hearing you. -------------------------------------------------------------------------------- Hassaan Khan, National Bank Financial, Inc., Research Division - Associate [24] -------------------------------------------------------------------------------- I'm sorry. Working from home is painful. Can you hear me better now? -------------------------------------------------------------------------------- Arjang J. Roshan, 5N Plus Inc. - President, CEO & Non Independent Director [25] -------------------------------------------------------------------------------- Yes, it's better. -------------------------------------------------------------------------------- Hassaan Khan, National Bank Financial, Inc., Research Division - Associate [26] -------------------------------------------------------------------------------- Yes. So we just wanted to get a better handle of taxation. We understand it's coming from different jurisdictions, but can we get a sense of what a normalized run rate would look like moving forward? -------------------------------------------------------------------------------- Richard Perron, 5N Plus Inc. - CFO [27] -------------------------------------------------------------------------------- Okay. The difficulty with our business is the following. We're into, I don't know, 9 jurisdictions or so -- no, less than 9. But we have 9 sites, okay? And all sites have their own product lines. And so the difficulty is that we may be making more money with a certain product than others or in some country rather than other. So you cannot take the average tax rate of all the countries that we're operating in because they're not all profitable at the same level, and they're definitely not at the same -- with the same level of deferred taxes and other tax opportunities. So I understand it's hard to modelize. Let's just say that by default, we have a couple of plants in Germany. So we tend to be more often taxed in Germany than other countries because we have 2 plants. Canada is obviously a core play. So I guess, if you pick a rate somewhere between Germany and Canada. But then again, we're in so many different countries that -- but I don't have an easy answer for you because it also varies from one quarter to another. But by default, we do tend to pay more taxes in Germany and Canada than the other countries because of the -- our footprint. -------------------------------------------------------------------------------- Hassaan Khan, National Bank Financial, Inc., Research Division - Associate [28] -------------------------------------------------------------------------------- That's helpful. And just like one other follow-up question. From our understanding, the customer was OneWeb -- not the customer, but the potential impact, that had an impact on the backlog. And if, hypothetically, because those assets are garnering attention from tech heavyweights, would -- if that materializes, if that can open the door for renewed business opportunities? -------------------------------------------------------------------------------- Arjang J. Roshan, 5N Plus Inc. - President, CEO & Non Independent Director [29] -------------------------------------------------------------------------------- So I'll try not to address any particular clients. Even though OneWeb isn't our client, it's a customer of a customer. But I'll try to answer your questions. I think I should probably perhaps even correct myself to an earlier question because I said some of the changes in the -- or the changes in backlog was a lot of that to do with contract situation. Indeed, there were a bit of impact from a situation with our customers. We didn't lose business. But obviously, in this environment, there are customers that potentially can go out of business. And yes, there was that impact. There was some of that. And if they come back online, we'll add the number. And assuming the situation stands, we'll -- that will be an upside. But to the best of our knowledge, as soon as we get formal bankruptcy protection notice, we have -- we adjust our numbers, yes. And just to make it clear, in terms of exposure to any ongoing bankruptcy filed, it's limited in terms of receivables and whatnot. Our teams are -- have been really working diligently to make sure that given the current COVID condition that all credit lines, everything is being monitored very closely. And at this point, we don't have exposure that is -- that would be significant. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- (Operator Instructions) Your next question comes from the line of Nick Agostino with Laurentian Bank. -------------------------------------------------------------------------------- Nick Agostino, Laurentian Bank Securities, Inc., Research Division - MD, Head of Research & Diversified Technology Analyst [31] -------------------------------------------------------------------------------- First, let me just say thank you for that color on the backlog. It was really helpful to understand the dynamics between short term and long term. On that same topic, AJ, can you maybe give some color as to how much of the decision was on 5N's part versus your customers part when it came to going short term in some cases? And the reason I ask is just trying to understand whether the backlog decline was a function of just lower visibility from your customers? Or maybe if it's 5N equally recognizing that if we go short term with these contracts, as you said earlier, the demand will be there and maybe you see it as an opportunity to maybe pick up some margin in the short term. So any split on that would be great. -------------------------------------------------------------------------------- Arjang J. Roshan, 5N Plus Inc. - President, CEO & Non Independent Director [32] -------------------------------------------------------------------------------- Okay. Sure. So perhaps I didn't do a good job of explaining it. We haven't really, at this point, declared that we're going to go short term. Where we are is you're looking at the next 12 months. And some of the contracts that require renewal are beginning to fall in those last months. And we have started the process of -- it depends on the client, but we've started the process of negotiation. So I can't tell you that we have declared one way or the other in terms of whether we'll go short term or long term. Typically, our posture is, look, if we can get the terms that we believe is what it should be, then, obviously, this happens sooner. And if not, we'll continue to negotiate. My expectation, I can only give you my expectation, is that you're going to -- in that number, you're going to get a V-type of a situation where it's probably going to go down. I'm not sure if we're going to work everything out. Because remember, as we're working to renew contracts, the 12-month window is also moving the next quarter. You've moved in 3 more months into that. So I think we'll go into a V. We'll go into the bottom, and then, at some point, we'll come up. When that happens, I don't know. That's my expectation. Now if it goes down and stays down there because -- then the question is, did it happen because we lost business? Typically, that hasn't been the case. Or is it because either parties have decided not to lock up? But I think it's too soon for that discussion right now. Give us, I would tell you, 2 more quarters, and I think we should have a better visibility on that. -------------------------------------------------------------------------------- Nick Agostino, Laurentian Bank Securities, Inc., Research Division - MD, Head of Research & Diversified Technology Analyst [33] -------------------------------------------------------------------------------- Okay. I appreciate that color. And then my next question is when I look at, I guess, your metal price charts in your slide presentation, it looks like we saw a little bit of a flattening through Q1. Can you -- do you have any color -- now that we are sitting here in the month of May, any color on what's happening on the upstream supply? Is COVID -- you spoke in the past that some of the suppliers may be holding on to metals in hopes of higher prices. Are you seeing any loosening there as an indication that maybe metal prices have started to recover during -- in the last month or maybe financial situations are causing them to, I guess, give out their supply regardless of where the metal prices are? -------------------------------------------------------------------------------- Arjang J. Roshan, 5N Plus Inc. - President, CEO & Non Independent Director [34] -------------------------------------------------------------------------------- So just the last 5 seconds, I didn't fully understand what you said, but I think I ... -------------------------------------------------------------------------------- Nick Agostino, Laurentian Bank Securities, Inc., Research Division - MD, Head of Research & Diversified Technology Analyst [35] -------------------------------------------------------------------------------- Yes. So I'm just wondering if -- within the last month, if you've seen a loosening of supply on the upstream side. In other words, maybe prices are starting to bounce up a little bit and more supplies -- metal prices coming into the market from those that maybe were hoarding it in the past. Or if possibly, because of COVID, because of their financial situations, maybe they're having to, I guess, release supply into the market regardless of pricing. So anything you guys are observing there would be appreciated. -------------------------------------------------------------------------------- Arjang J. Roshan, 5N Plus Inc. - President, CEO & Non Independent Director [36] -------------------------------------------------------------------------------- Okay. I'll try to do this without speculating and infusing my prejudices. Just to answer the last point, no, we have not seen any loosening on the supply -- on behalf of our supplier in terms of bringing additional or getting access to additional feed material for refining and recycling activities. And now coming back to -- the basket of minor metals is a large basket, and they all have their own dynamics. So let me limit this discussion at least with the 2 largest metals that we deal with at bismuth and tellurium. I think the big item that we should keep in front of us is, last year, in November, we had a big auction, a Fanya auction, where somewhere for business, about 20,000 tons of this material was sold off within China. And the price, if you've put in some transactional costs in it, is probably somewhere in the neighborhood of $2.20 a pound and probably not too far off a bit here, bit there. And so you've got yourself a -- I would say, a notable figure because 20,000 tons of business is quite a bit. It's 1.5 years of production or whatnot. So you've got that factor sitting there. That clearly puts a bit of -- the ballast tank for business kind of gets filled up with that, with a $2.20. And on tellurium, that number was $45. Now tellurium has a -- these metals have different dynamics. On the tellurium side, the reserve had only, I think, 4 months of global production. But obviously, that also set a notable number. So $2.20 and $45 are things that -- on those 2 metals that I think are notable. We think that for -- obviously, business to go up. Well, there's always behaviors that don't necessarily make sense from the market point of view. But if you purely look at it from a market point of view, I would say, I see little reason for it to necessarily go hugely higher at this point. And some of the what's there needs to be consumed. But that being said, again, within this space, certain players can hoard or get government help or whatnot and drive the price up, albeit temporarily. On the tellurium side, similar situation. There is -- to the best of our knowledge, these materials are available. So this is why, last year, when we brought the whole situation with upstream to your attention, we mentioned that we don't expect this to be something that will immediately resolve itself. Certainly after Fanya occurred, this -- we confirmed our belief that this would be more protracted. So the way we are modeling ourselves is we're not counting on necessarily seeing our current situation change, and I think we're okay with that because I think even in the given current situation, if we continue to work, make sure we've been competitively procure metal, albeit not as much from upstream, but from buying metal for metal, and then continue to grow our downstream businesses, we should be able to continue to provide earnings growth as well in a non-COVID-19 environment. And we'll see what the impact of COVID is. -------------------------------------------------------------------------------- Operator [37] -------------------------------------------------------------------------------- Your next question comes from the line of Mac Whale with Cormark Securities. -------------------------------------------------------------------------------- MacMurray Davidson Whale, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [38] -------------------------------------------------------------------------------- Just a quick question on the trials you had in the Micro Powders segment, you had a fair number of customers looking at that material. And I know you talked about new business is challenging as you need to be sort of face-to-face. But with those projects or programs that are well advanced, where they're doing the evaluation, are those continuing? Like should they not be able to continue and maybe not face as much of a delay as we might expect? -------------------------------------------------------------------------------- Arjang J. Roshan, 5N Plus Inc. - President, CEO & Non Independent Director [39] -------------------------------------------------------------------------------- So we have 2 factors here. We've had customers that have -- that were planning new products. They have delayed some of their plans. And then we've got exactly what you mentioned, us generally qualifying with customers. And you're right. There are files that are advanced enough that are continuing. It's not an issue. The comment we made primarily has to do with developing new files, being able to -- because this is a growth initiative. You need to continue to generate new files. You need to continue to put as many balls up as you can. And right now, we're -- if I'm honest, we're struggling with that because our people can't travel. We can't really sit there and entertain new discussions around new applications that are coming. The visibility from our customers is also fairly poor. We don't necessarily get to see right now what's happening within the larger scope of -- especially within electronics industry. -------------------------------------------------------------------------------- Operator [40] -------------------------------------------------------------------------------- And there are no further questions at this time. I will turn the call back over to the presenters for closing remarks. -------------------------------------------------------------------------------- Richard Perron, 5N Plus Inc. - CFO [41] -------------------------------------------------------------------------------- Well, we'd like to thank everyone for joining us this morning. -------------------------------------------------------------------------------- Arjang J. Roshan, 5N Plus Inc. - President, CEO & Non Independent Director [42] -------------------------------------------------------------------------------- Thank you very much. Be safe. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- This concludes today's conference call. You may now disconnect.