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Edited Transcript of VNP.TO earnings conference call or presentation 3-May-17 12:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 5N Plus Inc Earnings Call

SAINT-LAURENT May 8, 2017 (Thomson StreetEvents) -- Edited Transcript of 5N Plus Inc earnings conference call or presentation Wednesday, May 3, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Arjang J. Roshan

5N Plus Inc. - CEO, President and Non Independent Director

* Jean Mayer

5N Plus Inc. - VP of Legal Affairs and Corporate Secretary

* Richard Perron

5N Plus Inc. - CFO

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Conference Call Participants

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* MacMurray D. Whale

Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research

* Nick Agostino

Laurentian Bank Securities, Inc., Research Division - Head of Research and Special Situations Analyst and Diversified Technology Analyst

* Rupert M. Merer

National Bank Financial, Inc., Research Division - Analyst

* Shruti Gupta

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Presentation

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Operator [1]

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Good morning. My name is Jessa, and I will be your conference operator today. At this time, I would like to welcome everyone to the 5N Plus Earnings Announcement Conference Call. (Operator Instructions) Mr. Jean Mayer, Vice President, Legal Affairs and Investor Relations, you may begin your conference.

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Jean Mayer, 5N Plus Inc. - VP of Legal Affairs and Corporate Secretary [2]

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(foreign language) Thank you. (foreign language) Good morning, everyone, and thank you for joining us for the presentation of the 5N Plus financial results for the quarter ended March 31, 2017. 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 statement 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 Arjang Roshan, our President and Chief Executive Officer; and Richard Perron, our Chief Financial Officer, Mr. Roshan, 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's discussion and analysis. In the analysis of our last quarter results, you will note that we use and discuss 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 would now like to turn the conference to Arjang for a discussion of the quarter results.

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Arjang J. Roshan, 5N Plus Inc. - CEO, President and Non Independent Director [3]

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Thank you, Jean. Good morning, ladies and gentlemen. It's a pleasure to be with you as we go through our 2017 Q1 results. I will start by providing you a general business review, and Richard will follow up with a financial review for the quarter. I believe the words that best describe this quarter are tangible results.

Last night, we posted our financial results. Adjusted EBITDA and EBITDA for Q1 2017 reached $6.1 million and $9.7 million compared to $4.3 million and $2.9 million for Q1 2016. Net earnings reached positive $0.05 a share versus a loss of $0.02 per share for the same period last year. Return on capital employed reached 9% for Q1 2017 versus a negative ROCE in Q1 2016. Clearly, 5N Plus has improved its performance and profitability over the past year.

Now let's look to see what's behind these numbers. Even prior to unveiling of the strategic plan 5N21, you've been listening to me talk about selectivity and focus. When we came out with 5N21, we told you the plan was designed with selectivity and focus in mind. Thankfully, we can now match these words with tangible results and prevent them from becoming a mere cliché. As many of you know, over the past several quarters, the underlying price of a number of metals used in our products have remained relatively stable. In our industry, such environment is suitable for measuring a company's capacity to create and capture value from its customer base, independent of metal markets. For a material technology company, this is a measure of true value creation, and I believe we have made tangible progress. Given 5N Plus' discernible product quality and market reputation, we have repositioned our commercial activities to reflect value extraction based on value creation at our customers. We have abandoned activity-based pricing or commercial postures, which focus purely on market share. We have also reevaluated certain long-term contracts, with aim of reconciling term security against opportunity losses. Over the past few quarters, this work has resulted in a number of changes.

Over the past months, we have changed a number of commercial contracts to reflect margin optimization versus guaranteed market share and price adjustments based on value creation at the customer. The result of this work is beginning to emerge. Gross margin has improved from 19.4% in Q1 2016 to 23.1% in Q1 2017. This is in light of nearly a million more in write-backs last year. Also, this work has resulted in contract amendment and contract discontinuation, the positive impact of which is seen the low adjusted EBITDA.

Now let's have a look at the different business segments. The quarter ended with strong performance for Electronic Materials, with adjusted EBITDA 103% higher than Q1 2016. During Q1 2017, the demand for a majority of products in this segment was strong with products linked to imaging industry, specialty glass and conductive alloys utilized in power generation performing especially well. These products had a higher percentage of value-added activities versus metal content, which enables higher contribution per unit of sales. The Eco-Friendly segment closed the quarter with adjusted EBITDA 36% below Q1 2016. While customer mix played a role in this picture, it is expected that much of the shortfall will be reconciled in the next quarter as timing of the shipments played a role in the quarterly shortfall. It is worthwhile to note that the market demand associated with this segment remains solid in virtually all sectors. This being said, during the quarter, 5N Plus walked away from certain contracts which did not meet the company's minimum return requirements, especially when adjusted for risk as metal content accounted for a large portion of selling price in these contracts.

While this will impact our revenues in the next quarters, we expect little to no impact to bottom line from this action. Also, we expect further reduction of earnings volatility due to metal markets from this decision. As general -- as a general comment across all of our businesses, in the past quarter, we continued to commercially hedge a portion of metal content in our future contracts to further reduce earnings volatility.

On the operating front, our team continued to make progress with respect to footprint consolidation of the plants in the U.K. and Wisconsin, U.S.A., with a number of activities being transferred to the other plants within the group. This project continued to run in line with management's expectations. We maintain our commitment to reach full contribution potential from this activity by Q1 2018.

During the quarter, we continued to maintain a healthy balance sheet. Given the variabilities associated with our industry and sporadic demand for funds, we believe prudent companies in our space remain conservative with respect to debt position and carry adequate cash to not only address abrupt working capital requirements but also support various growth initiatives of the company.

As a you may recall, 5N21 plan highlighted 3 key deliverables, which in the order of contribution to our performance in short, medium and long terms are: one, extracting more value from global assets and core businesses; two, optimizing contribution from upstream activities; and three, delivering quality growth from both organic and nonorganic initiatives. Upon completion of the past quarter, we have executed much of the items associated with the first deliverable, namely extracting more value from global assets and core businesses. We are beginning to see tangible results from these actions and we expect this to further improve in the future.

Looking to the rest of the year, we maintain our guidance of $21 million to $27 million for adjusted EBITDA, assuming relative price stability of the metals.

At this point, I'd like to turn over the call to Richard for a financial review of the quarter.

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Richard Perron, 5N Plus Inc. - CFO [4]

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Good morning, everyone. So as referred by AJ during his business coverage, the company exercised discipline during the quarter, made further progress towards the execution of its 5N21 plan and continue to execute on its most recent footprint optimization initiatives. We essentially continue to take calculated risks actively and optimistically pursuing new opportunities while maintaining control. The diversity of the markets we serve continue to yield benefits during the quarter, supporting our new model, one that is focused on providing sustainable value without the impact of metal prices.

As you can read in our MD&A, the company continued to improve profitability, reporting a strong quarter in terms of EBITDA and maintaining a strong balance sheet to support its growth trajectory, combined reflecting management's determination to maintain all options available to finance growth projects and liquidity strong to execute its footprint optimization ambition.

So now starting with the coverage of revenues and gross margin. During Q1 2017, revenue decreased by 5% compared to the corresponding period of 2016. Although sales volumes were slightly lower in Q1, gross margin, a more relevant metric to measure our performance, has significantly improved, reflecting the moderate price stability in metals, supported by our selective approach, focused on better margin products. The gross margin reached 23.1% in 2017 compared to 19.4% in 2016 or 22.4% for the whole year of 2016.

Now for the adjusted EBITDA, EBITDA net earnings. In Q1 2017, adjusted EBITDA rose by $1.8 million to $6.1 million compared to $4.3 million in Q1 2016, driven by better sales mix and associated realized margins. In terms of EBITDA, it reached $9.7 million compared to $2.9 million in Q1 of last year. For this last quarter, the company's EBITDA was positively impacted by moderate price stability from most metals; sustainable demand for its products; better realized gross margins; the favorable impact from litigation and restructuring income resulting from contract amendments, where we secured our margins in the short term versus higher market share; and terminated a non-core commercial acuity, the net result of which yielded a positive impact of $3.4 million compared to restructuring charges of $1 million for the same period last year. And also, a gain on disposal on redundant property. Adjusted EBITDA for the Electronic Materials segment increased by $3.5 million to $7 million, representing an adjusted EBITDA margin of 36% compared to 17% for Q1 of last year, supported by additional volume across and better margin, while the adjusted EBITDA for the Eco-Friendly Materials segment decreased by $1.4 million, representing an adjusted EBITDA of 6% compared to 9% in Q1 of last year, impacted by timing of shipments, customer mix and recognition of certain charges for which the company expects that by the end of the second quarter, the segment will reconcile and likely outperform last year's performance over the 6 months' period. The adjusted EBITDA on the quarter for Q1 2017 was impacted by our short-term incentive provisions of $0.3 million compared to the same period of last year. Net earnings reached $4.2 million in Q1 compared to a net loss of $1.9 million in Q1 of last year.

For bookings, backlogs presented in number of days based on annualized revenues to normalize the impact of commodity prices, backlog reached as at March 31, 2017, a level of 128 days of sales outstanding, slightly lower than previous quarter, resulting from restructuring of certain contracts to balance market share against profitability as well as client activities associated with retooling and upgrading of their manufacturing footprint.

Backlog as of March 31, 2017, for the Electronic Materials segment represents 211 days of sales outstanding, an increase of 44 days or 26%. The backlog for the Eco-Friendly Materials segment represented 90 days of annualized segment revenues, a decrease over their backlog of December, resulting from restructuring of certain contracts to balance market share against profitability. Bookings in Q1 2017 reached 97 days compared to 78 days in Q1 -- in Q4 2016 and 89 days for Q1 of last year.

Quickly going through expenses. Depreciation and amortization expenses in Q1 amounted to $2 million compared to $2.4 million for the same period last year, impacted by the accelerated depreciation the company recorded in Q3 of last year.

SG&A. For Q1, SG&A was $7 million compared to $6.4 million for the same period last year. Variation is mostly explained by wages and other expenses, mitigated by favorable exchange rates across most local currency. Litigation and restructuring costs in Q1 2017, the company recognized an income resulting from contract amendments for securing higher margins in the short term versus higher market share in the downstream business, mitigated by costs related to the termination of non-core commercial activities in the upstream business activities. While in Q1 of '16, the company recorded litigation and restructuring cost as a provision of $1 million following initiatives to reduce its operating expenses and renegotiate on favorable purchase contracts. Financial expenses and revenues for Q1 amounted to $2 million compared to $3 million for the same period of last year. The decrease in financial expenses of $1 million is mainly due to low interest expenses combined with a small gain related to the fair value of the debenture conversion when compared to a loss last year.

Income taxes. The company reported net earnings before income taxes of $5.8 million in Q1 and net loss before income taxes of $2.2 million last year. Income tax expense for Q1 was $1.7 million compared to an income or tax recovery of $0.3 million for the same period last year. These amounts were unfavorably impacted since the company does not record the benefit of all tax losses incurring -- incurred during those periods in certain jurisdictions.

Covering liquidity and capital resources. Cash consumed by operating activities amounted to $2.2 million in Q1 compared to cash provided by operating activities of $9.5 million for the same period. Better management of nonworking capital led to a further reduction of $5.2 million in inventory but was mitigated by our trade receivables of $8.4 million and lower accounts payable of $4.9 million. Cash used in investment activities totaled $0.6 million in Q1 compared to $2 million for the corresponding period of 2016. The decrease is explained by the proceeds from disposal of a redundant assets and by lower acquisition of property, plant and equipment and intangible assets.

Cash used in financing activities amounted to $0.5 million in Q1 of this year compared to $1.6 million for last year. The decrease is mainly associated with a net reduction in the amounts drawn under the revolving facility, better management on noncash -- and a better management of noncash working capital. The company had no drawdown under its credit facility at the end of Q1 2017 nor at the end of the previous fiscal year. This decrease was partially mitigated by the common share repurchase program started in October 2016.

Ending with the coverage of net debt. Net debt, after considering cash and cash equivalent, increased by $1.9 million from $19 million to $20.8 million as at March 31, 2017.

So this will conclude the financial coverage. Before we go for questions, I just want to welcome Arrowhead, more precisely Shruti Gupta, who will be covering our company going forward. Thanks.

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Jean Mayer, 5N Plus Inc. - VP of Legal Affairs and Corporate Secretary [5]

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Operator, we may now proceed with the Q&A period, please.

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Questions and Answers

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Operator [1]

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(foreign language) (Operator Instructions) (foreign Language] You have question from Rupert Merer from National Bank Financial.

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Rupert M. Merer, National Bank Financial, Inc., Research Division - Analyst [2]

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In the slides that you put out with this quarter, which reconciles the change in revenue for Q1 this year versus last year, it showed a $4 million headwind from volume. Wondering if you could comment on how much of that headwind was related to the business selectivity. And what do you think the change in volume would be on an organic basis for your business segments? So if we weren't seeing this decline from business selectivity, where could volume growth be today?

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Richard Perron, 5N Plus Inc. - CFO [3]

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Okay. So first question on the actual bridge of the revenue line and the impact of volume, selectivity can explain easily half of it, okay? And the second half will be timing, as we referred, for the Eco-Friendly Material.

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Rupert M. Merer, National Bank Financial, Inc., Research Division - Analyst [4]

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Okay. So looking at your markets and Eco-Friendly and then the technology metals, how much growth are you seeing? How much growth are you seeing in demand for, say, your bismuth products, your tellurium products? And how do you expect that to develop over the next year?

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Arjang J. Roshan, 5N Plus Inc. - CEO, President and Non Independent Director [5]

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So when we talk about bismuth, and hopefully somewhere down the line we'll talk less about metals and talk more about the different markets, I think that's where we'll eventually go to, bismuth is -- has got a very diverse usage, Rupert, and it goes into a number of industries and they all have their own, if you will, growth profile. So if you're looking at, for example, certain applications of bismuth in bulk usage, nitrification and so on, these don't grow more than probably 2%, 3%. But then there are certain precursors, chemicals that can grow as much or higher than the rate of GDP, 7%, 8%, 10%. And so if you put them all together, if you put all the markets together, I would say we can probably come to about a rate of GDP. And this is why we think this selectivity approach is an interesting approach because at least at this point, a lot of the bulk usage, which is not growing as much, also brings with it inherent risk and volatility, and then you've got other businesses that have better margins and that allows us then to be a bit more selective in terms of which ones we're going to pursue. We are assuming in our -- especially in our 5N21 plan, we're assuming growth at the rate of GDP. We don't -- for that plan to materialize, we don't need it to grow faster than that. But obviously, if we can do better, we'll capture that as well.

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Rupert M. Merer, National Bank Financial, Inc., Research Division - Analyst [6]

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Excellent. Then as a follow-up, I know you have a basket of growth opportunities that you're looking at and investing in and you don't want to promise growth in any one particular area, but wondering if you could give us an update on your growth initiatives and if there are any areas that are getting you excited right now?

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Arjang J. Roshan, 5N Plus Inc. - CEO, President and Non Independent Director [7]

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Well, the reason, just for the sake of clarification, the reason why we don't comment too much is because, obviously, we're trying to make sure that we build credibility. And sometimes, when you start talking about things that are still in R&D and in a sort of a test tube stage, building a lot of excitement around it could certainly backfire. So we've got -- you're absolutely correct, we have a portfolio of growth opportunities and they are in different stages. What we see probably that is going to be more near-term contributing is going to be the various applications that we see in specialty semiconductor. Those could be anywhere from compounds to engineered substrates or whatnot. We see that being an earlier contributor. We are, without, again, telegraphing our punches, are looking at a couple of other initiatives, which is in the Eco-Friendly space, and those could also come in, in, let's say, mid-term. And then within Eco -- or Electronic Materials, we have 2 items in there that are, let's say, more further staged, meaning it'll take longer for them potentially to valorize. But the way we have our growth portfolio right now, we've got certain things that we expect are going to contribute within the next, I don't know, 18 months to 2 years. And then, we've got other things that we think is going to take potentially several years to show up because it just -- these are for the markets of the future, and yes.

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Operator [8]

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(foreign language) (Operator Instructions) (foreign language) Mac Whale from Cormark Securities, please go ahead.

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MacMurray D. Whale, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [9]

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If you look at the gross margins in the 2 different segments, can you comment a little bit on where you are now in those gross margins and where you -- like, are you satisfied that what you're experiencing in both those segments is what you expect to see, say, over the next 12 months?

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Richard Perron, 5N Plus Inc. - CFO [10]

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We still expect to see improvement to our gross margin going forward. Hard to say at this point in time which, between the 2 segments, will likely perform better in terms of upward trend. I expect we need to consider the whole picture here is the contribution from our upstream business, which by default supports both of those segments going forward. So all I can say at this point in time, we believe there's still plenty of room to improve the gross margin, but as to which segment will do better in terms of upward trend, too early to say at this point in time.

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Arjang J. Roshan, 5N Plus Inc. - CEO, President and Non Independent Director [11]

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And just, Mac, if I can add to that. It also -- remember, we're trying to manage that along with market share, the balance between them. So that's the other variable. If you want to continue to keep large market shares in some of these segments, that gross margin ends up being a bit more diluted.

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MacMurray D. Whale, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [12]

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Okay. And then if you look, if you could even if it's just qualitatively, if you look at, say, the gross margin, if you divided the business upstream and downstream businesses, how do they look? And how have they changed?

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Arjang J. Roshan, 5N Plus Inc. - CEO, President and Non Independent Director [13]

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I think it is, to be very frank with you, it's too early to do that analysis on the upstream side. As you well know, this is something that we've just begun. We -- one of the reasons why our reporting has not changed is because it is a project that is in its infancy. It is, again, part of our growth initiatives. I would be hard-pressed to speculate, especially on the upstream, has its all of its own dynamics. It's going to heavily depend on price of metals. It's going to depend on what kind of complex feeds you're bringing in, what kind of valorization potential you're bringing in, how our technology development is going to progress. So there are still a number of factors for us that are very fluid and giving numbers around it, I think, at this point in time would not be credible. Now this question will become material, I would tell you, in a year or 2 as we establish ourselves more in that space and have stabilized and have understood our capabilities. We have -- we still have pent-up potential that we need to really put into play and understand.

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MacMurray D. Whale, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [14]

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Okay. And when you look at the 2 segments as they are today and you talked about your near, medium and long term, some opportunities that you're looking at, are there new compounds? Or are there new materials that we should be thinking about you getting into in any of those time frames?

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Richard Perron, 5N Plus Inc. - CFO [15]

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By default, when you look at the 2 segments at this point in time, we see more opportunities under the Electronic Materials segments for new opportunities of business/clients at this point in time.

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Arjang J. Roshan, 5N Plus Inc. - CEO, President and Non Independent Director [16]

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Yes. I think, as Richard said, that's exactly true right now. Eco-Friendly -- or electronic has more -- let's say we come up with more ideas there than we do for Eco-Friendly. That being said, I think we should not underestimate the potential for Eco-Friendly in terms of finding other markets which could be of interest to us.

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MacMurray D. Whale, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [17]

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So the way you look at it today, though, those opportunities are in perhaps new compounds or new, say, form factors of materials that you already make. Is there any new materials that you'd be looking at? Like, is there another whole vertical that is of interest, say, in the near term? Or are those really much longer opportunities?

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Arjang J. Roshan, 5N Plus Inc. - CEO, President and Non Independent Director [18]

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So I guess it's a definitional thing. If your definition by material is that we could still use our current basket of metals but apply them differently, then I would tell you, yes. There are still new materials out there that we think has potential for us to be in and play with. If your question is, are we going into materials that requires different metals as its enablers? At this point, I would say that is less of a possibility.

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Operator [19]

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(foreign language) Nick Agostino from Laurentian Bank Securities, please go ahead.

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Nick Agostino, Laurentian Bank Securities, Inc., Research Division - Head of Research and Special Situations Analyst and Diversified Technology Analyst [20]

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So if I could just start off, I just want to make sure that I heard you guys clearly. Did you suggest that on the Eco-Friendly side of the business, you expect EBITDA margins to go back to where they were in the second half of last year and you expect that to happen over the course of 2017?

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Arjang J. Roshan, 5N Plus Inc. - CEO, President and Non Independent Director [21]

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It will go back, Nick, yes.

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Richard Perron, 5N Plus Inc. - CFO [22]

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Yes, definitely.

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Arjang J. Roshan, 5N Plus Inc. - CEO, President and Non Independent Director [23]

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The answer is yes.

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Richard Perron, 5N Plus Inc. - CFO [24]

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You'll need to look at it over a 2-quarter period.

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Nick Agostino, Laurentian Bank Securities, Inc., Research Division - Head of Research and Special Situations Analyst and Diversified Technology Analyst [25]

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Okay. I just want to make sure I was correct on that. And then switching gears and kind of tying in to an earlier question. When we look at the electronic side of the business, obviously, a very strong 36% EBITDA margin this quarter, what sort of growth rate does that kind of margin suggest from a revenue top line perspective? And if you guys were to accelerate that growth rate, would the trade-off be -- can I assume the trade-off would be a lower margin?

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Richard Perron, 5N Plus Inc. - CFO [26]

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We'll definitely have growth under the Electronic Materials coming from top line perspective, as you've just been asked. In terms of gross margin impact, will that be maintained, increased or reduced slightly as a percentage? It's likely to reduce likely but still will be maintained at very high level.

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Arjang J. Roshan, 5N Plus Inc. - CEO, President and Non Independent Director [27]

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So I guess, just a cautionary note, a conservative view, I would tell you, at least we are not counting on the same level of, let's say, increase in some of these products that we have -- we've done very well with in Q1. Now if I'm wrong, okay, but least we're not counting on it. And that's -- our guidance is free from that.

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Nick Agostino, Laurentian Bank Securities, Inc., Research Division - Head of Research and Special Situations Analyst and Diversified Technology Analyst [28]

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Okay. And -- but what sort of growth rate do you guys build into from a revenue perspective on the electronics side of the business as far as top line is concerned? Like, how should we be looking at it given the fact that you're, obviously, more selective on the contracts you focus on?

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Arjang J. Roshan, 5N Plus Inc. - CEO, President and Non Independent Director [29]

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So your question is, what does our top line will look like down the road?

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Nick Agostino, Laurentian Bank Securities, Inc., Research Division - Head of Research and Special Situations Analyst and Diversified Technology Analyst [30]

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Yes, yes, yes.

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Richard Perron, 5N Plus Inc. - CFO [31]

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At this point in time, to be very honest, it's difficult to say it's going to be linear, okay? But we expect to see improvement, especially around Q4 and the beginning of next year. That would be more, let's say, material on our P&L.

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Arjang J. Roshan, 5N Plus Inc. - CEO, President and Non Independent Director [32]

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Yes.

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Nick Agostino, Laurentian Bank Securities, Inc., Research Division - Head of Research and Special Situations Analyst and Diversified Technology Analyst [33]

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Okay. And then the last question...

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Arjang J. Roshan, 5N Plus Inc. - CEO, President and Non Independent Director [34]

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Just if I may, Nick, please remember something here. There is in the -- to help all analysts looking at us, there's a -- behind the scene, there's a bit of a replacement going on between items that may have large revenues but potentially very little margin to items that may not have as big of revenue but better margins. So if you think about that, it's growth in revenue at least -- until this stabilizes, does not become a very good measure for ultimate growth of the company because there is quite a bit of that going on in the background.

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Nick Agostino, Laurentian Bank Securities, Inc., Research Division - Head of Research and Special Situations Analyst and Diversified Technology Analyst [35]

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Right. And I'm quite aware of that. Obviously, we're seeing, relatively speaking, your revenue state, for all intents and purposes, flat year-over-year. But obviously, you're swapping that out for the better-margin contracts, that's quite clear. And so really, the question is, now that -- once that whole swap has been completed, how should we be looking at your top line? It sounds like when it comes to the Eco-Friendly side of the business, at the base case, model it more as a GDP growth rate and, hence, the question on the electronics side to see what kind of growth rates we should be looking at there once your business stabilizes.

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Arjang J. Roshan, 5N Plus Inc. - CEO, President and Non Independent Director [36]

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I think what you're assuming is fair, is the way we would recommend. That being said, again, for us, it's difficult right now to give you better visibility on how this will -- the revenue will grow in the future. I'm thinking about, I don't know, early next year maybe or sometime next year we should be able to give you a better picture of that.

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Nick Agostino, Laurentian Bank Securities, Inc., Research Division - Head of Research and Special Situations Analyst and Diversified Technology Analyst [37]

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Okay. And then just lastly, and, again, I think I heard you make comment to space, want to get clarity. I think last quarter you talked about putting hedging in some of your customer contracts. Can you confirm that you said earlier that you did do some of that? And if so, how has it been received as you introduce it to all your customers or at least try to? And secondly, how much of your contracts have you been able to build that into?

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Arjang J. Roshan, 5N Plus Inc. - CEO, President and Non Independent Director [38]

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So last quarter, I think the comment I made, if memory serves, is that we actually have done some. We've made progress on it. And you're quite correct. This quarter, we have continued with that. It is -- obviously, it requires participation from customer. In certain schemes, it requires participation from also the supplier. And it's not for -- not everyone agrees to do it, but we have done, I would say, a material part of our portfolio. Again, for competitive reasons, we don't really -- that's sort of a secret for us. We don't really disclose how much of our portfolio has been forward hedged, but I think you can assume that it is material in terms of risk mitigation. And just to add to that, Nick, this is going to become part of our regular posture. So this will become part of our activity, I would tell you. Now the percentages may vary, depending on market conditions and whatnot, but this will be a tool in our toolbox, which we'll continue to use. It's not a onetime one-off type of thing.

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Nick Agostino, Laurentian Bank Securities, Inc., Research Division - Head of Research and Special Situations Analyst and Diversified Technology Analyst [39]

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Understood. Can I assume in that, that the -- when you present the case, you possibly asked for -- if they sign off on some sort of commercial hedging agreement, you may be given a better margin rate? And if they decline that type of agreement, you maybe, I guess, look to get a higher margin in that same contract? Is that a fair assumption?

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Arjang J. Roshan, 5N Plus Inc. - CEO, President and Non Independent Director [40]

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So the answer, it depends. As an example, if metal prices are at -- very low notations, actually, that's the best time for the customer to do it. We have, in those cases, customers that want to do it. We don't necessarily have to give any type of a concession. Now as metal prices go up, that becomes a more difficult value proposition for a customer. And then, yes, there may be some giveaways that we have to give again. Anything we do, we have to look at the risk versus return. But today, metal prices aren't particularly high, if you look at historic bases. And so this kind of -- this is the right environment. It's conducive to this type of activity because, essentially, those customers that do it, they're the ones that are speculating on metal prices in the future and they believe they have more to gain than to lose.

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Nick Agostino, Laurentian Bank Securities, Inc., Research Division - Head of Research and Special Situations Analyst and Diversified Technology Analyst [41]

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Okay. And then just lastly. I notice your receivables were up about $9 million quarter-over-quarter. Can we assume there'll be a nice reversal of that in Q2? Or is that something that is -- should we be modeling a higher receivables run rate?

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Richard Perron, 5N Plus Inc. - CFO [42]

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No. Receivables should go down. Essentially, for the quarter, we had a special billing done, plus we had more shipments from one specific client than usual because of the 31 days in the month, plus we've traded a fairly high level of, I'm going to say, precious metals in the quarter, which is not recurrent every quarter.

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Operator [43]

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(foreign language) Shruti Gupta from Arrowhead, please go ahead.

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Shruti Gupta, [44]

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I have some -- couple of queries, so maybe to start with, maybe you people have touched bases, but to start with, if I can see in the PPT, this quarter's revenue has decreased vis-a-vis Q1 '16. The basic reason was the major lead is contributed due to the deduction in volume by $4 million. I just wanted to know, it will be great if you can give me the detail on specifically if the volume decline came from the electronic or the Eco-Friendly business. Followed by this question, as you have mentioned that 5N has lost the contracts in this quarter, which will surely impact the revenues in Q2, so what is the company's future plan in terms of coming quarters to ensure the company will achieve the full year guidance number, which you have given in 5N21 plan? And lastly, I have one more question regarding the news release in which 5N has mentioned about the approved amendment related to the right of purchase for the cancellation. I just wanted to understand the lead impact somehow to the company's numbers. Is there any immediate potential impact, which 5N can expect to have in its book of accounts with respect to this amendment?

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Arjang J. Roshan, 5N Plus Inc. - CEO, President and Non Independent Director [45]

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Let me just make a correction and then I'll turn it over to Richard. We did not say we lost business. We said we walked away from business. That's a distinct difference. And the reason why we termed it as such is that, essentially, we felt that the portfolio business that we walked away from was one that had less value-added activity and more metal content, given the fact that we are structurally long on inventory and given the fact that minor metals tend to be quite -- well, they're different in terms of their volatility. We felt that the premiums that the customer had -- or that we could get from those contracts would not justify the risk that would go with it. Now in terms of revenue impact, yes, indeed, we said there is going to be revenue impact, but the margins will remain virtually unchanged in terms of the total margin of the segment and our guidance will not be affected. We have maintained our guidance, the one that we've given under 5N21 for this year, and that remains. Richard, do you want to look at the other items?

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Richard Perron, 5N Plus Inc. - CFO [46]

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Yes, just maybe quickly. As to the split of the reduction of volume in Q1 of this year versus last year, it was equally between -- equally distributed between Electronic Materials and Eco-Friendly Materials but maybe slightly more under the Eco-Friendly Materials, okay, for this quarter. But as AJ mentioned, all that was done with one key purpose, being more selective. So we walked away from that. As to your question about the amendments that impact favorably our business, for which we have an income recorded in the quarter, the benefits forward, we expect those to start around Q4, but most of it will actually realize itself on our P&L during 2018 and '19.

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Shruti Gupta, [47]

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Okay. But regarding that contract which had -- just on the bond, so are you planning to talk to the existing contract or something to make the amendment to those contracts also to make it more beneficial for the 5N? Or whatever the new contracts 5N is planning to go into, are they planning to change into the terms and conditions or something on those lines to make those contracts more value added and -- to the business?

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Richard Perron, 5N Plus Inc. - CFO [48]

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Yes. In terms of amendments or changes to current contracts is very limited. This is kind of exceptional. We don't have many of those. What we're going to do is, forward, make sure our contracts are well aligned with our strategy.

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Shruti Gupta, [49]

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Okay. So is there any potential contracts or clients that the company is having? If you can tell at least not quantitatively so at least in qualitative terms?

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Arjang J. Roshan, 5N Plus Inc. - CEO, President and Non Independent Director [50]

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Can you repeat your -- I want to just make sure we're answering your question.

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Shruti Gupta, [51]

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Sure. Any potential clients which are already in line with 5N Plus. which company is planning to go into with them for the upcoming contracts, if can you give me any numbers?

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Arjang J. Roshan, 5N Plus Inc. - CEO, President and Non Independent Director [52]

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Well -- so, Shruti, we don't usually discuss name or that -- those elements around our contracts. We're probably the only now publicly traded...

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Shruti Gupta, [53]

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Qualitatively, can you tell qualitatively?

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Arjang J. Roshan, 5N Plus Inc. - CEO, President and Non Independent Director [54]

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But we have a very large list of customer base. And depending which industry they're on, the nature of contract is different. We have spot contracts. We've got long-term contracts. And in fact, if you look at our backlog number, you'll see that compared to last quarter, it has dropped by 8 days. One of the reasons for that is that we have actually opted not to have some of these long-term contracts and essentially have that relationship be more in a spot basis. So I don't -- we don't -- at least as best as I know, we don't really -- we have probably, I don't know, 1,200, 1,300 different offerings to various customers. We don't really measure ourselves that way. It's case by case, it's industry by industry, and it's -- yes.

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Operator [55]

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(foreign language) There are no further questions at this time. I turn the call back over to the presenters.

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Jean Mayer, 5N Plus Inc. - VP of Legal Affairs and Corporate Secretary [56]

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Okay. So we would like to thank you for attending this morning's call as we hope to see you at our Shareholder's Meeting taking place in Montréal at 10 a.m. today. And we look forward to speaking with you in early August for the presentation of our second quarter results. Thank you again, and have a great day.

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Arjang J. Roshan, 5N Plus Inc. - CEO, President and Non Independent Director [57]

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Thank you.

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Richard Perron, 5N Plus Inc. - CFO [58]

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Thank you.

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Operator [59]

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(foreign language) This concludes today's conference call. You may now disconnect.