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5N Plus Inc
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[Foreign Language] Good morning, my name is Jessa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the 5N Plus First Quarter Results Conference Call. [Operator Instructions] Thank you. Mr. Jean Mayer,[Foreign Language] Vice President, Legal Affairs, Corporate Secretary, also in charge of Investor Relations, you may begin your conference.
Thank you very much. [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, 2018. 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 results, I would like to mention that we issued yesterday our financial statements for this period, together with our management discussion and analysis. If you have not been able to get a copy of these documents, I invite you to do so by accessing our website at 5nplus.com, or the SEDAR website at sedar.com, where these documents are posted. Earlier, we have also posted in 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 discussion and analysis.In the analysis of our last quarter results, you will note that we used and discussed certain non-GAAP measures, which definitions may differ from those used by other companies. For further information on the use of these non-GAAP measures, please refer to our management discussion and analysis.I would now like to turn the conference to Arjang for the discussion of the quarter results.
Thank you, Jean. Good morning, ladies and gentlemen. It Is a pleasure to be with you as we discuss our results for Q1 2018. I will start by summarizing the salient points about the past quarter, and Richard will follow up with a comprehensive review of the financial results. Last night, we posted our results for Q1 2018. Adjusted EBITDA and EBITDA for the first quarter closed at $7.9 million and $7.8 million as compared to $6.6 million and $9.7 million for the same period last year. You may recall that our EBITDA result last year were positively impacted by extraordinary items. This being said, on a recurring basis, this reflects a 20% improvement in the adjusted EBITDA number.Total revenues for the period closed at $58.5 million versus $60.9 million for the same period last year, which was impacted by the decline in pass-through revenues. What we call pass-through revenues are mainly specialty metals that are used as consumables in our products, generating little to no margins while carrying certain amount of risk. Over the past 2 years, management has been guiding the company toward products requiring higher value-added activities and lower content of these specialty metals. During this time, value-added revenues have continued to grow, while revenues from specialty metals or what we call passed-through revenues have continued to shrink. In the meanwhile, revenue growth from the value-added activities have not yet been enough to surpass the loss of revenues from pass-through metal content.Given the fact that this approach has improved margins across our business and have reduced the company's risk exposure, management is pleased with the outcome and remains fully committed to see it through. As the proverb goes, "The proof of the pudding is in the eating," and there -- and I should say here, we continue to see growth in gross margins over the past 2 years in both absolute dollars and percentages to be that very eating proof that we mentioned. In the most recent quarter, gross margin continued this trend and registered at 25.1% in Q1 2018 versus 23.1% for the same quarter last year. Also, in Q1 2018, return on capital employed closed at 15.2% versus 10.3% for Q1 2017. Before moving further with management analysis of the results, I would like to remind everyone that starting this year, financial impact of the long-term incentive plan has moved from above-adjusted EBITDA to below-adjusted EBITDA figure. While this change will not alter the company's earnings, it should allow the financial community and our shareholders to conduct analysis based on adjusted EBITDA on a more equal footing. We will also reflect this change in 5N21's long-term guidance in Q2 to ensure the original performance targets are kept whole and the improvements associated with this change does not replace the original growth commitment communicated by management in 5N21.Let's now look at segment Electronic Materials with its 3 sectors, namely technical materials; security, aerospace, sensing and imaging; and finally, renewable energy. In Q1 2018, segment Electronic Materials posted $6.9 million in adjusted EBITDA, which was nearly the same as the same period last year, while the revenues grew by 7% as compared to the same period last year.Revenues for technical materials were down year-on-year, driven by lower volumes from LED compounds and lower metal sales, while the revenues and margins per unit of sales were up substantially.Revenues for security, aerospace, sensing and imaging materials were up significantly year-on-year, driven by strong growth from company specialty semiconductor materials resulting in notable backlog. Our best information indicates a demand shift toward materials produced by 5N Plus based on improved quality and enhanced performance across most applications associated with this sector.Revenues for renewable energy materials grew substantially as compared to the same period last year. As you may recall last year, the demand for materials in this sector were negatively impacted by a major customer-related changeover of manufacturing assets in preparation for a new generation of photovoltaic products. Recently, this picture has changed as the demand for the thin-film PV has materially increased, which in turn has resulted in strong demand for semiconductor materials and services provided by 5N Plus.Early this week, 5N Plus announced that it has been awarded a series of multiyear contracts for products and services linked with this sector for which the company is uniquely positioned to supply given 5N Plus' global footprint and service platforms covering various jurisdictions.Moving now to Eco-Friendly Materials and its 3 sectors industrial materials, health and pharma, along with catalytic and extractive materials. In Q1 2018, segment Eco-Friendly Materials' adjusted EBITDA reached $3.8 million, which is 57% higher as compared $2.4 million for the same period last year.Revenues for this segment during the quarter closed at $37.9 million, which was 9% lower than the same period last year.Revenues for industrial materials dropped year-on-year. Historically, this sector contained a number of products utilizing bulk amounts of metals, which in turn generated large revenues. Given the fact that much of the revenues were pass-through or metal related and the contribution from value-added revenues were significantly less, this sector relied primarily on speculative movements in the minor metal markets to generate bottom line earnings, which in turn could cause substantial earnings volatility. In 2015, when the company was negatively impacted by the drop in the metal market, this sector was responsible for a notable portion of the company's loss. In the advent of 5N21, our management has made fundamental changes to this sector and has repositioned the business with emphasis on margin generation based on value-added activities.As expected, this work has resulted in revenue reduction, while margins from value-added activities have improved. Much of the decline in the company's overall revenue over the past quarters come from this repositioning.Revenues for health and pharmaceutical materials were up year-on-year, with strong demand across the board. Last year, 5N Plus announced its entry into specialized additives for the feed industry. Subsequently, progress has been made with groundbreaking, and we have begun construction of the state-of-the-art manufacturing facility in Germany. The project is progressing on time and on budget. Commissioning is planned for the end of this year. In 2017, one of eco-friendly materials growth initiatives, namely catalytic and extractive materials, began to emerge. The product associated with this sector are used to enhance process yield, process throughput and reduce environmental impact from activities in mining, oil and gas industries. During the first quarter of 2018, this sector experienced significant growth as compared to the same period last year, driven by demand from extractive materials.As mentioned early this year, management has begun to increase its focus on the second and third deliverables under 5N21 strategic plan, namely increasing contribution from upstream activities and delivering quality growth from new initiatives.Last month, 5N Plus announced new investments to expand its recycling and refining capacity and capability across its facilities in Asia and Europe with the aim of increasing contribution from upstream activities. 5N Plus has been undergoing a significant shift in how it procures specialty metals. The most notable changes have been valorizing more metals from complex feed versus direct purchase and diversifying the origin of the feed to enhance access.Considering the wave of trade and tariff headlines associated with various metals and country jurisdictions, management completed an initial assessment of this theme. Based on this assessment, at this point, we see little to no impact from current potential geo-economical in positions. When considering the countries at the center of this dispute, it is important to note that our company's flow of goods and services between these jurisdictions remain limited. More specifically, we believe some of the changes over the past few years, including diversifying the origin of our metal supply and utilizing local assets to address the specific requirements of the local market will be extremely helpful in a world of trade disputes between jurisdictions. This being said, we will continue to monitor this situation and make adjustments as needed.As we progress into 2018, considering our current visibility and how the year has started, we believe an adjusted EBITDA guidance range of between USD 30 million and USD 33 million to be realistic.Before turning over the call to Richard, I would like to add that we're simply pleased by how the year is beginning to take shape. Our teams are energized, and we are certainly excited about the future prospect of our business. Rest assured we shall not rest on our laurels.I now would like to turn the call over to Richard.
Good morning, everyone. Well covered by AJ, the company continues to see results from the realization of its strategic plan, promoting discipline across the business and improving profitability from its core activities.Reporting a strong quarter in terms of adjusted EBITDA, 5N Plus continued to create stability and sustainability, the desired effects to accelerate and create more value out of 5N21, further devoting investments and resources towards our most important assets, our clients and technology, which we continued to leverage to access a wider diversity of market sectors expected to yield important benefits.Before I start with the coverage of our financial results, as briefly mentioned by AJ, I would like to mention a change to our non-IFRS measures definition. Going forward, adjusted retroactively for all periods presented in our MD&A, we are not going to remove the share-based compensation expenses from the calculation of adjusted EBITDA to better reflect the performance of the company without the charges associated with share price appreciation. The share-based compensation expenses will remain within the calculation of EBITDA. This change reflects the common practice for most public companies on the TSX.Also, I would like to quickly mention that we recently closed a USD 79 million senior secured multi-currency revolving syndicated credit facility to replace our existing $50 million facility. Addressing current financing and other corporate purposes, the new credit facility is also expected to be used to finance growth initiatives. This new credit facility has a 4-year term. Subject to landers' approval, the company can exercise its option to request an extension of the credit facility to a $30 million accordion feature, which would increase the total size of the facility to USD 109 million. So now starting with the coverage of revenues and gross margins. During Q1 2018, revenue decreased by 4% compared to the same period of 2017. Similar to previous quarters, although sales volumes were lower, our gross margin has improved supported by healthy demand for our core products and our selective approach. The gross margin reached 25.1% in Q1 of this year compared to 23.1% for the same quarter last year, or expressed in dollars, $14.7 million compared to $14.1 million last year.Now for the operating earnings, EBITDA, adjusted EBITDA and net earnings. This quarter, operating earnings reached $5.8 million compared to $7.8 million in Q1 of last year, mainly impacted by positive nonrecurring items recorded in Q1 of last year, as income from litigation and restructuring was $3.4 million compared to $0.6 million this quarter. Negative variance mitigated by better realized gross margins this current quarter. In this quarter, adjusted EBITDA reached $7.9 million compared to $6.6 million in Q1 of last year, supported by favorable sales mix, strong product demand and overall performance of our operating activities, marked by an increase in the adjusted EBITDA of Eco-Friendly Materials. In this Q1, EBITDA reached $7.8 million compared to $9.7 million last year, the decrease due to the reasons mentioned before, essentially a lower income from nonrecurring items compared to last year. For bookings and backlog presented in days based on annualized revenues normalized the impact of commodity prices. As of March 31, 2018, the backlog reached a level of 172 days of sales outstanding, representing an increase of 44 days when compared to the same period last year, and a decrease of 15 days compared to the previous quarter, both segments at very healthy levels.Quickly going through the expenses. First, I would like to mention that our euro-based expenses increased following the appreciation of the euro versus the U.S. dollar, reaching approximately EUR 1.23 compared to EUR 1.26 -- EUR 1.06 against the U.S. dollar last year. However, it is important to note that the impact on gross margin is minimal as we're close to a natural hedge for this currency and make opportunities [ foreign exchange contracts ] as appropriate.Now starting with the depreciation and amortization. Expenses in Q1 2018 amounted to $2.2 million, similar to last year. For Q1 of this year, SG&A expenses were $6.8 million, slightly lower than the same period last year. Share-based compensation expense for Q1 this year amounted to $0.7 million compared to $0.6 million for the same period of last year. Litigation and restructuring income in Q1 of this year, the company recorded an income from litigation and restructuring of $0.6 million, representing a nonrecurring item relating to an amount receivable from an inactive legal entity for which no receivable has been recorded given the uncertainty. In Q1 of last year, the company reported 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 noncore commercial activities in the upstream business activities for a net income of $3.4 million. Financial expenses for Q1 2018 amounted to $1.7 million compared to $2 million for the same period last year, decreased due to lower imputed interest noncash in nature.Income taxes. The company reported an earnings before income taxes of $4.1 million in Q1 of this year. Income tax expense for Q1 was $1 million, representing an effective tax rate of 25% compared to $1.7 million, or 29%, for the same period last year.Covering liquidity and capital resources. Cash used in the operating activities amounted to $6.6 million in Q1 of this year compared to $0.2 million for Q1 of last year. The decrease is mainly due to negative variance from working capital changes resulting mainly from an increase of $3.8 million in accounts receivable, $2.3 million in inventory, aimed at hedging commercial positions combined with the decrease in trade and accrued liabilities of $6.5 million. In Q1 of this year, cash used in investing activities totaled $2.6 million compared to $0.6 million for Q1 of last year. This increase is explained by our investment in property plant and equipment combined with slightly less proceeds from the disposal of redundant property plant and equipment. Cash provided by financing activities amounted to $0.2 million in Q1 of this year compared to cash used of $0.5 million last year. The company has no drawdown under its credit facility.Ending with net debt. Net debt after considering cash and cash equivalent increased by $9.4 million from $11.4 million at the end of last year to $20.8 million as of March of this year, as mentioned, impacted by the increased in working capital. So this will conclude the financial coverage. We're now ready to receive your questions.
[Foreign Language] [Operator Instructions] Your first question comes from the line of Rupert Merer from National Bank.
So we've had a couple of announcements recently: one, on the extension of contracts at First Solar; and another on increasing the capacity production of specialty metals. Are the 2 connected at all? I guess, I'm asking, are you going to be increasing your production of tellurium metal going forward?
The 2 announcements are pretty disconnected. The announcement around upstream investment is essentially a follow-up on our second pillar of our strategy where we said we will continue to go upstream, increase our sourcing more from complex feeds rather than metal purchases because we're able to create more value in that manner. And so this -- the investments we're making, we're getting additional capacity and capability because as you gain capability, you also are able to bring in even more complex products and, ultimately, the whole equation. The announcement regarding the renewable energy side, that is a different situation altogether.
So your increased production of specialty metals, is that primarily focused on business?
It's actually across the board. It's actually across the board. We -- as you know, as we look at our product planning, we are getting into a lot of areas, for example, related to semiconductor products, related to imaging, sensing. And so there is a number of products or metals, I should say, that we think we will need in order to be able to address these markets today. We go to market to purchase them or some of them. And in the future, more of that we would like to do internally. So no, it's -- I would not say it is targeted at the metal that is -- that goes into the photovoltaics or directly targeted into that. What I would also tell you is that there are some precious metal capabilities that we're adding. Much of -- or I should say some of the feeds we get contain precious metal, and we want to be more competitive in terms of being able to valorize those because, ultimately, if you're able to valorize those, you gain access to additional streams. So no, it's -- again, I would say, don't think of it as us concentrating it on any one metal. It is looking at our future portfolio, what we need. They're trying to be able to become more flexible on our upstream sourcing so that we can address that downstream future portfolio more competitively and, on top of that, getting capabilities so that we can also do more with the precious metal content of some of these complex feeds.
Looking at First Solar's growth, it's my understanding they will need a pretty large portion of the world's tellurium supply. And I believe you do valorize some tellurium already in some of your facilities. Do you have an opportunity to produce more tellurium yourself? And can you give us a sense of how much of the metal or tellurium you might use in the future, you will produce yourself versus purchase from third parties?
So the answer to your question is -- simple answer is yes. Yes, we will increase the amount of production related to the metals that are used in thin-film photovoltaics that's consumed by our customer, First Solar. In terms of the volumes, we typically don't give that out. It is not an information that we typically put out. What I would tell you is we think we are -- if not one, we are the world's largest certainly buyer of that metal. We're certainly up there, if I would tell you, in the top 1 or 2 slots. And we are increasing our options in terms of how we can get access to tellurium. We're also getting -- increasing our access to other metals that could be potentially used in thin film as well.
Your next question comes from the line of Stephen Harris from GMP Securities.
Gentlemen, just a couple of quick questions here. First, related to your guidance and the accounting change, the $30 million to $33 million, what's the underlying assumption embedded there on share-based comp? Just trying to reconcile with our previous numbers.
Essentially, the assumption there is -- from a reconciliation of the stock-based compensation, is the average of '16 and '17 for a value of approximately $3 million.
Okay, so no change there. And just a broader question on metal price impact. We saw in the quarter, basically, everything, except business rally, of your 6 key commodities, and you had a concerted effort over the last couple of years to take down your metal price exposure and to reduce the volatility of your earnings stream. And I guess, 2 questions then, can you quantify the impact of rising metal prices on EBITDA and the quarter? And the second question is, it's one thing to model these things and try to determine what your volatility is, but what's the actual real experience relative to what you've been modeling and planning for? What did you realize in the quarter?
Yes. Just as a reminder, as you know, one of the key goal of 5N21 is essentially to create a model where we're providing value without the impact of metal prices, which means that essentially, we're giving a bit of the upside to protect the downside. So the impact coming from current increase in our minor metal prices is very minimal to the adjusted EBITDA.
Okay. So would you go as far to, say, nearly 0?
No. There's a small -- it is a small improvement, but it's not at all as big as it used in the past because, again, our strategy is to reduce volatility by at least 50% from where it was in 2014. So it's less of a play than it used to in the past, all this to protect the downside.
Yes. No, I understand the motivation, and I agree with that. I just wanted to get a sense of how it's playing out in real time. And would you say you have reduced the impact of metal prices by 15%? Do you think that's played out in the quarter [indiscernible]
Yes. No, no, for sure it does. We're already seeing that impact today.
Absolutely. And as you said, Stephen, you cannot make the same assumptions over that basket on equal basis because our mix is much different as well, some of the ones that have really taken off or we're not really utilizing...
We're less into those.
So I would not -- I would say, from metal impact, the results are fairly pure.
Your next question comes from the line of Nick Agostino from Laurentian Bank Securities.
I guess, 2 questions on my part. First, if we look at your inventory levels, they did continue to creep up a little bit more this quarter. Obviously, they were a bigger increase we saw going to Q4. Can you just provide some color as to that increase? Is it because of the rising metal prices? Or is it more strategic in nature biz, maybe tied into some contract opportunities that you have coming up in 2018, and you're just taking a little bit of a -- this opportunistic -- opportunity to build some stockpile ahead of those contracts?
As we all mentioned in our MD&A, and also, I think, mentioned it during my little speech there, essentially, a portion of our inventory has been what we refer to as commercially hedged. So it is strategic. It's for stuff that is essentially sold, okay? And also, part of it has to do with growth that we're experiencing and the time of the year. The impact of prices per se is small because, as we mentioned earlier, some of those metals where you see the most important increase in prices, and I'm going to name 2, gallium and psyllium, we're definitely much less into those metals than we used to in 2014, for example.
Okay. Sorry, AJ, do you want to add anything there...
Well, I just wanted to say that, as you know, we are changing the way we're closing some of the contracts. When we -- typically, when we get contracts with long-term visibility, we start going on the path of strategic hedging. And you guys know from public information that we have secured some longer-term contracts and so we have -- in line with those, we are hedging ourselves. And so much of what you're seeing is indeed from a strategic nature rather than from metal prices.
Okay. So I guess, if we monitor that and if we see any sort of significant growth, we could assume that there's a little bit of larger deals that were signed on a forward basis. Is that a fair assumption?
Well, I mean, at this point, that is a fair assumption. I mean, if, down the line, in subsequent quarters we have too much inventory that is due to, let's say, us not being as judicious as we are today, we'll certainly tell you. But at the moment, much of what we do is there's rationale behind why the inventory is what it is. And it is indeed what you said, is of strategic nature, whether it has to do with businesses that we secure, whether we were able to be opportunistic on certain supply contracts. Those are all the things that goes in there, and that number will fluctuate. At this point, much of it is because of management discretion rather than, let's say, the system not being as lean as it should be.
With the nonexistent and noncontribution.
Okay. And then second question. Obviously, you guys announced that you've got a new credit facility in place. I think you indicated 4 growth initiatives. I'm just also wondering because you've got a convertible debenture that comes due in about a year. Is there any thought to using that credit facility assuming it has better terms to pay off the convertible debenture? Or is that something that you guys are going to treat entirely separately? So basically, what's the idea process behind the convertible debenture? And I'll leave it there.
Right. It's definitely an option. But at this point in time, we want to keep all options open, okay? And we'll see how the year goes. And again, priority for us remains financing growth going forward.
[Foreign Language] [Operator Instructions] Your next question comes from the line of Mac Whale from Cormark.
I just wanted to ask a couple of questions on the renewable segment. When you look at the quarter, the contribution to that vertical seems very strong relative to -- given where your major customer there is in terms of their ramp. Is there something in the quarter that was particularly like sort of unusual like a catch-up in inventory or stocking from the customer? Or are we sort of at -- are we starting to see the impact of that customer's changes in capacity?
No, it's actually -- no, there's really nothing special in this quarter apart from timing. I mean, we have a pretty good view of where things are going to go this year. So what happened in Q1 up or down is just timing issue.
Okay. So do we expect from this point on like -- can that be very volatile to the point -- I'm not familiar with the seasonality of what they may be doing there. Is there something to be aware of as the year plays out? Or is it typically a Q1 bump?
So, Mac, I think it's worth noting that in the process of negotiating some of these contracts, we have actually changed the nature of the contract. In the past, much of the contract was driven by a master contract that dictated the terms. Now it's more fragmented, and it is more -- as even the press release says, it's in series of contracts. And there we are indeed introducing, I would say, a bit of variability in a sense that there is products in there and there are services there. And so I think you may find that in certain quarters, the mix will go one way versus the other depending on which side of this is stronger. We typically have better visibility on the products side. As an example on the service side, we do recycling, and that's also something that probably helps answer a question that Rupert had brought up. And this is not something that we get a very good visibility around. It's -- it comes to us when it comes to us type of thing. So yes, there will be a bit of change in terms of -- a bit of variation in terms of the mix that we get in that particular segment. So some quarters would be stronger than others.
Okay. So in general, that -- the nature of those differences, is that in terms of getting -- doing some extra work for the customer to, say, ramp up or change technology in some way, will you now see that as a separate rather than as opposed to a per-unit margin that you have to sort of embed it in to get -- if you know what I mean. Not a great -- posing of my question is not great. But I think you understand what I mean.
I know what you mean. Let me answer it this way. They are layered now. The contracts are layered. So you might have a certain product that runs x amount of time with a certain pricing. And on top of that, there is another layer with another or even similar contract with different types of pricing, depending on how the contract is positioned. So we actually now have layers of pricing and servicing that runs along...
But with different terms.
Yes.
Okay. And it was that -- did that come about from your request to try to extract more recognition, for instance, of your value add? Is that where that comes from? Or is that on your customer side?
Well, look, the customer relies on us to do a number of things. We -- I would call it cradle-to-cradle. Truly, this is -- if there is such a term outside of being a cliche, this is something that we're doing. And we're involved in just about every step of this along the way. So whether it was us or them, honestly, I don't know...
No, it's a common agreement. Both sides are positive to it.
Yes. You start -- you sit across the table. You're negotiating. If you're not able to do a master contract, you start going at various parts of [ things ].
You break it in pieces...
And then eventually, you come to agreement, and the byproduct is a series of contracts that gets you there. That's, I would say, more of the [ insight ] that came out of the negotiation.
Okay. And on -- turning on to the recycling side of that. When -- as we see more facilities start out, is there typically a phase where you see a lot of material to be recycled because it's off stack or they're ramping up lines and are debugging it and you get a whole bunch and then it smoothes out?
We're not seeing that yet.
No.
Actually, they're very good at what they do as you can expect.
Yes.
Okay. And then in terms of margin, do we -- as those contracts -- I'm wondering if you can contrast the new situation versus the old situation where, when we look at margins, would they be considerably -- I'm trying to understand where they come in, in terms of your overall margin report for that segment. Is it a thing where we should see margins actually rise because I noticed the margins are actually down in the quarter. So I'm wondering, does that one big contract have a positive impact? And should we see it, over time, decline from some initial bump?
That's a difficult question to answer. And let me tell you why. In the past, you would have a master contract, there would be few parameters. And so those parameters would define essentially what rolls down to your bottom line. And it was more, I would say, consistent.
And that contract continues to run. It's not ending.
That is one of the layers, for example. The new contract that we have has a number of different things in it. And so it allows for different parts to contribute. And so whether the total sum of that will be the same or more than the previous contract, I think it all depends on the assumptions. You have -- even if you were to model -- if you were to model that, you would have to use your assumptions around all these different things that we do in the periphery and the margins associated with that. So unless Richard has a better answer, I don't have...
Key to mention is that the famous contract, let's refer to it as the original, continues to run until the end of its term. And everything that we've just signed is on top of it, okay? And it's different because it covers different products, services and else. That's why we're saying that in terms of timing, you may see, from one period to another, some variation. But overall, we have visibility over the year and over the whole term of those contracts.
Okay, I see. And then over time, I understand contrasting it to the past and sort of the new one. But over time, typically, they work into that volume declines in pricing typically?
Do you mean cost reduction due to volume? Or...
Yes, like the annual cost reduction.
Right. Those are -- I mean, as you can imagine, it's very typical in the industry. And it's not, obviously, the only industry doing that. But yes, all those usual bells and whistles are some of the things that we have to deal with and negotiate. Short answer to your question is yes.
Yes. And then when you just -- last question just on, I'm curious, whether that's a corporate set of contracts? Or do you go facility-by-facility?
Essentially, it's a corporate contract, and it refers to affiliate subsidiaries of ours because, I mean, First Solar is around the world and we are around the world. It doesn't change anything at the end.
I think -- yes, if you're talking legally, it does name different facilities, but if you're...
But it's a corporate account...
But if you're -- from the negotiation point, it's central, it's corporate, in a way.
Okay. So you can source wherever you want, and they can -- you don't necessarily know exactly where everything is going when you send it to them.
No, we're actually distributing at various sites of the client, no matter where they are in the world. And if they're opening up new plants in new countries of the world, by default we're going to be shipping there as well.
Your next question comes from the line of Frederic Tremblay from Desjardins Capital Markets.
Just moving on from First Solar for a minute. I'm just curious on the -- if you could speak on progress with new customers. Is there somewhere where you're seeing or expecting more traction in terms of business development going forward?
Well, as we said in our text, on the catalytic and extractive, we've been able to grow that business. And so there are -- indeed, there has been new customers that have been developed there. When we also look at -- on the imaging side of, we call it, SASI -- it's the name of the sector, security, aerospace, sensing and imaging -- the imaging side remains extremely strong. In terms of semiconductor compounds, we actually have backlogs, and we are looking at options to increasing our production there. And also, when we look at -- to -- I would say, the other thing is alloys. On the alloys side, especially within technical alloys, we had a pretty strong growth, and we brought on board a notable blue-chip customer that helped get us there. Those are the things that spring up to mind at this point.
Okay. And then on the M&A, can you update us on your M&A ambitions in pipeline in terms of sectors of interest and then sort of the valuations that you're seeing currently?
Yes. So when you look at the market, even with the recent declines in the total market, we find that the things that we really like and we believe would create accretion are quite expensive, to be very honest with you. So in those areas, we're being patient. I will be the first to tell you that my -- at least my read on the situation is we're gonna -- it's gonna take some time. We're going to have to be patient. When you look at our multiples and look at the people that we like to partner with or do a deal with, it's just -- it's at a different level. And so we will not -- we're not seeking M&A just to seek the headline. It has to make sense. And this being said, we are continuing to put effort and emphasis on the number of different internal growth initiatives. And we are at a point, in 5N Plus', if you will, life that we have options. We could -- if we deem that the nonorganic way is not the best way, it's too expensive or what have you, we believe we can develop other options internally also to continue our growth path. But yes, I guess, that's as much as I can say.
Okay. And speaking of internal options, you're entering animal feeding, you're making investments in upstream, and you've got other projects. I'm just wondering what this implies for the CapEx in 2018? Do you have any guidance to share there?
So right now, we are -- as you rightfully said, we have growth initiatives around powdered alloys for electronic industry. We've got growth initiatives in a number of semiconductor activities. We've got growth initiatives in specialty additives. We've got also our upstream activity, on its own, rightfully, it's 8 growth initiatives. For those 4 -- those 4 fit under the umbrella of 5N21. And in that strategic plan, we said that those growth initiatives would be at the rate of depreciation. We -- our depreciation was $10 million per year. 5 years was the length of the 5N21. So we said the total price tag is $50 million, and it is at the rate of depreciation. This year -- oh, I should also mention that in the early parts of the plan, the expenditure would be less because, obviously, we're concentrating on a lot of core activities. At the latter part, we were -- we're going to be spending more money. And we can see that we are, indeed, beginning to spend more this year. Last year, we did not spend at the rate of depreciation. If my memory serves, it was somewhere in the neighborhood of 7%. This year, it will be more, and it will be closer to the rate of depreciation as we're continuing to invest more on our growth initiatives.
There are no further questions at this time. I turn the call back over to the presenters.
Okay, thank you. So we thank you for joining us this morning. And on behalf of the company's Board of Directors and management, I would like to invite you to attend our Annual Shareholders Meeting taking place at 9:30 a.m. today at Club St. James in Montreal. Again, thank you for attending this morning's call, and have a great day.
[Foreign Language] This concludes today's conference call. You may now disconnect.