5N Plus Inc

TSX:VNP

Earnings Call Transcript 2021-Q1

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the 5N Plus Inc. First Quarter 2021 Results Conference Call. [Operator Instructions]And I would like to turn the conference over to your speaker today, Richard Perron, Chief Financial Officer. Please go ahead, sir.

[Richard Perron, Chief Financial Officer]

[Foreign Language] Good morning, everyone, and thank you for joining our first quarter ended March 31, 2021, financial results conference call. We will begin with an overview of our business performance, review of our financial results and strategy update, 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 discussion and analysis available on our website in our public filings. The company is not aware of any significant changes to its risk factors previously disclosed. However, since January 2020, the outbreak of the coronavirus COVID-19 and its declaration as a pandemic is still ongoing today resulting in government 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 risk factor still ongoing today.In the analysis of our quarterly results, you will note that we use and discuss certain non-IFRS measures, which definitions may differ from those used by other companies. For further information, please refer to our management discussion and analysis.I would like to turn the conference to Arjang for the discussion on the business performance and quarter results. AJ?

[Arjang J. Roshan, President, CEO & Non Independent Director]

Thank you, Richard. Good morning, ladies and gentlemen. [Foreign Language] This morning, I will start with the analysis of the company's performance in the quarter. Richard will follow with financial analysis for the quarter before taking your questions. I will come back one more time and highlight some strategic themes, along with our priorities for the year.Our company's performance in Q1 2021 came with mixed results. Revenue and adjusted EBITDA were lower than the same period last year, while net earnings remained the same. Adjusted EBITDA for Electronic Materials was notably lower, while adjusted EBITDA for Eco-Friendly Materials was notably higher as compared to the same period last year. Backlog, which is an indication of the strength of our order book for Electronic Materials surged as compared to the same period last year and Q4 2020. Backlog for Eco-Friendly Materials remain nearly at the same level for those periods.So let's look at the performance of Electronic Materials, which was impacted by mainly 2 factors, 2 items. Item 1, late last year, 5N Plus announced it had secured a series of multiyear contracts in renewable energy. These contracts are asymmetrically structured, meaning there are more revenue at the latter part of the contract. Also within these contracts, there are various pricing regimes and fixed pricing conditions. Given this, the company secured certain options as a measure of commodity risk protection, especially against contracts with fixed pricing. Such options allows 5N Plus to be more selective about the businesses the company accepts.In Q1 2021, as expected, volume and sales mix were less favorable than the same period last year. We expect this transitory trend to be with us for the next 2 to 3 quarters. I would discourage you to draw a direct correlation between customer capacity expansion announcements and short-term supplier sales performance. Such correlation at this juncture is not meaningful. To make sure there is no misunderstanding, the market is clearly growing. However, the timing of the growth announcements and the procurement events can be disjointed.Item 2. Last year, nearly every quarter, the company reported exceptional demand for its specialty semiconductor products, despite challenges in the space sector. The demand for specialty semiconductors used in imaging applications was strong. The demand for medical imaging detectors was exceptionally strong, and this had little to do with COVID. Over the past several years, 5N Plus has been collaboratively developing a new generation of detector materials based on 2-6 semiconductor compounds. 5N Plus has been utilizing various business models and collaboration structures to develop this material as the critical core for medical imaging applications based on photon counting detectors or PCD. This is a significant change to the current technology, which has been in use for many years.We believe this area is ripe for change based on meaningful innovation, and it appears this sentiment has market support. The unique attributes of the PCD technology, which our materials enable our significant reduction of radiation exposure to the patient and markedly enhanced diagnostic potential. After some years of development in late 2019, we successfully fulfilled key project milestones, essential for medical imaging devices based on PCD technology to undergo regulatory trials. This has prompted a notable player in this space and a customer of 5N Plus to adopt PCD into its product road map based on semiconductor products from 5N Plus. This decision has resulted in a significant buildup of medical imaging devices, which drove the demand for our products in 2020.Currently, the fleet is being completed and will undergo qualification and regulatory trials. We expect this process to take 24 to 36 months with mass production to follow upon success. We are already experiencing additional interest from other parties based on the success of this project. We are extremely pleased by our company's progress in this area and believe we are uniquely positioned to benefit from this technological shift. During the trial period, we expect the demand to be lumpy. This year, we expect a pullback. This being said, the interest in the technology is palpable and is gaining momentum beyond medical imaging and into other imaging applications, which I will cover a bit later.Now let's look at Eco-Friendly Materials and its performance in Q1. This segment has been most exposed to the adverse impact of COVID. I am very proud of our people for the proactive management of the numerous challenges COVID has presented. Nearly all adverse impact due to COVID came from customer-related activities, including customer site closures. In Q1 2021, Eco-Friendly Materials posted strong results with gross margin surging to record levels and met layup recovery in customer activities and stellar performance of our whole global operating activities were the main reason for the enhanced performance. Also, the mix of sales during the quarter favored products with higher margins. Over the past few years, 5N Plus has been moving segment Eco-Friendly Materials away from products with high commodity exposures to those with more value-added activities.Let's discuss the earning guidance for the year. As you know, the acquisition of AZUR SPACE is subject to the customary closing conditions, including regulatory approvals, which are ongoing. This introduces a timing variability with respect to the closing and financial consolidation of the 2 companies, which makes it more challenging to provide a guidance for 2021. Nevertheless, we felt obliged to remain consistent with past practices and provide a guidance, albeit with a larger variance than in the past. Adjusted EBITDA for the year 2021 post-integration is estimated to be in the range of USD 25 million to USD 30 million.Beside the uncertainty around the closure of the AZUR deal, another key variable is tellurium pricing. Over the past months, tellurium notations have surged with little fundamental or sustained demand to support this trend. Market speculation and unusual practices in this space is creating these locations, which are not sustainable. 5N Plus does not disclose details of how it procures consumable metals such as tellurium. Also, the company does not disclose how it prices its end product. However, it is worth mentioning that the company has built certain risk mitigation measures against metal related volatility, especially against contracts with fixed pricing.One measure is to secure options on both procurement of the needed metals and sale of the end products containing these metals as consumables. Given the current speculative nature of the tellurium market and the unusual activity surrounding this commodity, we think tellurium notations are inflated. To that end, management may invoke certain risk mitigation measures to get ahead of this situation. Without getting into the details, one measure can be for 5N Plus to forgo some of the previously mentioned options. To keep our choices open, we have decided to play it safe and include the adverse impact of this and other potential actions in the earning guidance of 2021. Should the situation improve, an upside can be expected.Let's talk about investments. Over the recent years, we have invested in operational optimization of our core businesses while also investing in organic growth initiatives. Furthermore, we have invested in environmental, health, safety and sustainability projects and successive share buyback programs or NCIB. We've achieved this totality and at the same time have been able to reduce the company's net debt to below $10 million. We've been able to achieve all of this because our core business is healthy and cash generating. In the first quarter this year, 5N Plus generated about $5 million of cash from operating activities. Also, certain customers and agency partners continue to demonstrate their trust in our product development projects and fund select activities. We expect additional contributions in 2021. For 2021 CapEx -- or I should say, for 2021, CapEx is expected to remain below the rate of depreciation.When you look at 5N Plus, you see a company with a core business, which is a source of financial stability. You also see a company with a portfolio of early stage businesses that can have notable future upside, and today, like many early stage businesses come with performance fluctuations. Therefore, transient pullbacks such as the one we're experiencing this year is to be expected, followed by a push upward. Over time, we expect a compelling upward trend. Over the past 5 years, we have demonstrated this on the earnings side. In the next 5 years, we expect to demonstrate this both on the earnings and revenue side.I admit this makes the quarterly earnings more challenging and the results lumpy. However, net-net, we believe it is worthwhile -- it is a worthwhile journey. As an example, just look at the return on capital employed as of Q1 2021. It is at 13.1%. This is above our cost of capital and certainly competitive.I'll now turn it over to Richard for a financial review.

[Richard Perron, Chief Financial Officer]

Good morning, everyone. So as mentioned by AJ, the quarter just completed is characterized by the announcement of 2 strategic growth initiatives, a transformational acquisition in the field of specialty semiconductors and a strategic investment to support our active pharmaceutical ingredients activities, setting the foundation of our ambition to become a unique advanced material technology company. From a more operational tactical perspective, the company maintained strong demand for its core businesses, achieving most of the short-term business objectives as well as maintaining cash diligent -- as managing cash diligently and operating expenses judiciously, ending the quarter once again with a solid balance sheet.However, results were impacted by a less favorable mix of products when compared to the last -- to last year under Electronic Materials, which shortcomings affecting sensing and imaging, more precisely medical imaging revenue and gross margin and to a lesser extent, renewal energy, only partially mitigated by Eco-Friendly Materials, completing a stellar quarter in terms of operating activities, resulting in significant improvement in the segment's margins. Nevertheless, the company substantially improved its backlog over the period, especially under Electronic Materials and has been able to further reduce its net debt to $9.6 million, positioning itself favorably with the renewed and expanded senior credit facility.During 2021, we will continue to invest in projects to support our ongoing transition towards our added-value products, and that allows us to be more cost competitive. The company well engaged into a path to realign its product offering to larger addressable markets, margin expansion, risk reduction and simplification. 5N Plus is committed to grow its role as a global material technology leader.So now starting with the coverage of revenue, gross margin and adjusted EBITDA. In Q1 2021, revenue decreased by 6% compared to the same quarter of last year, impacted by a less favorable mix of products on the Electronic Materials segment as well as sea freight logistic challenges affecting both segments, while gross margin reached 24.9% compared to 24.4% in Q1 of last year. In Q1 this year, adjusted EBITDA was $6.3 million compared to $6.9 million in Q1 of last year, moderately impacted by lower revenue and unfavorable product sales mix under Electronic Materials. Electronic Materials segment adjusted EBITDA in Q1 decreased by $1.5 million, representing an adjusted EBITDA margin of 23%. Eco-Friendly Materials segment adjusted EBITDA in Q1 increased by 1% to $4.2 million, representing an adjusted EBITDA margin of 15% compared to 10% in Q1 of last year.Now looking at annualized backlog. Backlog on March 31 represented 195 days of annualized revenue, an increase of 6 days or 3% over the backlog of December and 7 days versus Q1 of last year. Backlog for the Electronic Materials segment represented 261 days of annualized segment revenue, an increase of 37 days or 17% over the backlog of December. The backlog for the Eco-Friendly Materials segment represented 150 days.Quickly going through the expenses. Depreciation and amortization expenses in Q1 amounted to $2.6 million compared to $3.1 million for the same period. This is similar to the level of Q4. SG&A expenses in Q1 of this year were $5 million, similar to Q1 of last year. Share-based compensation expense in Q1 amounted to $1.4 million compared to $0.2 million for the same period of 2020, reflecting the scheduled vesting and long-term incentive plans and the rise in the company's share price initiated at the end of 2020 till quarter end.Financial income in Q1 2020 amounted to $0.1 million compared to financial expenses of $1.3 million in Q1 of last year. The positive impact is mainly due to gain on foreign exchange and derivatives compared to a loss for the same period last year, while the interests on our long-term debt were at similar levels. The company reported earnings before income taxes of $2.4 million in Q1 of this year. Income tax expense in Q1 was $1.6 million, same level of Q1 2020. Both periods were impacted by different tax assets applicable in certain jurisdictions.Covering liquidity, cash generated by operating activities amounted to $5.8 million in Q1 of this year compared to $0.7 million in Q1 of last year. The increase is mainly due to the positive change in noncash working capital in Q1 of this year. In Q1 of this year, cash used in investing activities totaled $3.7 million compared to $2.3 million last year, mainly attributed to the acquisition of a minor equity stake in Microbion as well as the timing of additions to property, plants and equipment. In Q1, cash used in financing activities amounted to $6.4 million compared to cash generated from financing activities of $3.8 million. The decrease of $10 million is explained by the reimbursement during the quarter of $5 million to the credit line, while in Q1 of last year, the company made a drawdown of $5 million.Now looking at growth and net debt. Total debt decreased by $5 million and stood at $45 million compared to $50.1 million as of December, following the reimbursement of $5 million to the credit facility. Net debt after considering cash and cash equivalents went from $10.2 million to $9.6 million at the end of the quarter.This will conclude the financial review. Let me turn back to AJ for a strategy update, after which, we will be taking questions from analysts. AJ?

[Arjang J. Roshan, President, CEO & Non Independent Director]

Thanks, Richard. Let me come back on the topic of specialty semiconductors. Given how this market is developing, we believe 5N Plus is uniquely positioning itself with an ecosystem that is unmatched. Within this constellation, 5N Plus is poised to be the only company that can go from upstream procurement of critical elements all the way to transformation of these elements to specialty semiconductor engineered substrates customized with epitaxy technology. With this broad set of capabilities within the critical part of the specialty semiconductor value chain, 5N Plus will only become more valuable to its customers and agencies that are increasingly finding it difficult to have reliable access to exactly this value chain.We did not roll out of the bed 1 day and decided to go down this path. This intention has been a few years in the making with some planning, including investments in specialty semiconductors for space, medical imaging, infrared imaging, security applications and more. Also investments in capacity and process technologies in Montreal for semiconductor compounds and St. George, Utah for Engineered Materials. Our recent acquisition announcement is a clear expansion along this vector. AZUR will provide us with a unique family of technologies based on epitaxy. This capability will allow 5N Plus to customize its engineered materials. It also enables the company to enter much larger markets and sustainably or substantially, I should say, increase its TAM.By the way, more is underway, and there will be additional important developments, which will be announced in the near term. Suffice to say that we are expanding our business in specialty semiconductors and are aligning our value chain in concert with the needs of our customers and their future growth trajectories. We will play our part to ensure competitive and sustainable supply of critical materials are available to our customers and related agencies.Before turning to Q&A, I would like to state the following important priorities for 2021. They're not in any particular order, with perhaps the exception of the first one. Number one, when 5N Plus engages a market, I should start by saying when we engage in market time and again, we've demonstrated that it can -- we can emerge as the market leader. We backed this claim by highlighting our estimated market share of 45% within a TAM, total addressable market of $400 million. For us to grow further, it is essential to expand our TAM rather than to try to extract more market share from the existing market. This is why expansion of our company's TAM has become a critical milestone.We've stated that we will be utilizing M&A as a tool to support this goal. So far this year, we've had 2 announcements in this direction. The acquisition of AZUR SPACE is truly transformational for our company as mentioned earlier. In the short term, AZUR will enable TAM expansion through vertical integration within the space market. In the long term, AZUR will open the much larger 3-5 specialty semiconductor market, including high-power electronics, electric mobility, wireless charging, advanced communications, security and more. Successful completion of this deal and integration of AZUR with 5N Plus is a key management priority for 2021.Number two. Also in 2021, management will finalize a strategic review of businesses with higher commodity exposure and initiate the appropriate actions, which position them for their best development path forward. We expect the completion of this project to take some time. Over the recent years, we have optimized these businesses and as demonstrated in Q1, they are performing well. The question is, what is the best environment for these businesses to continue to grow and grow more rapidly?Number three, we will aim to further develop our business and supply chain for the family of 2-6 semiconductors. We continue to see increased interest for various applications based on these materials. Most specifically, we see increased interest in imaging applications. I've already talked plenty about medical imaging, but we are seeing also increased interest from infrared applications and applications in security industry. And number four, we will continue to scour the market for M&A opportunities in line with our strategic playbook. As an example, our company's global leadership in production of ultra-high purity compounds has ideally positioned it to play an enabling role in select segments within pharmaceutical compounds.Over the past years, we have invested in production and process technologies and have continued the organic development of this business. This said, we believe this business is ripe for more M&A activity, similar to the specialty semiconductor space to get current market valuations of the desired targets make this task a bit challenging. This being said, similar to specialty semiconductors, we will be prudent and patient and will endeavor to find an elegant way to onboard a suitable target in a manner which can be strategically and financially justified.At this point, we're happy to take questions or any questions that you may have. Richard?

[Richard Perron, Chief Financial Officer]

Yes.

[Operator]

[Operator Instructions] And your first question will be from Rupert Merer at National Bank.

[Rupert M. Merer, Managing Director and Research Analyst]

Can you walk us through the impact of rising tellurium prices with a little more color? Wondering if you can talk more about the structure of your renewable energy contracts? Maybe how much of the business is on a tolling basis? And how much flexibility do you have to forgo sales?

[Arjang J. Roshan, President, CEO & Non Independent Director]

Okay. I'll try, and Richard, if I fall short somewhere, please help me. It's a pretty beefy question. So I'll start by saying that we've said this before that the contracts are layered. So you've got contracts that have toll elements in them, but you have contracts that go from stem to stern. It's a full contract. You have also services associated with it. So as I mentioned, there are layers into this. But coming specifically to your question, part of this entire contract structure is based on fixed pricing to the customer. So you provide the products that the customer wants with these contracts, with this group of contracts at a certain fixed price to them, and these could vary, and they could also have variability in that.The reason why we have called this particular thing out, there is -- as you know, there's minor metals. There are times where there are speculation, ongoing speculation on things. In this case, the reason why we call this out is because when you look at the overall supply and demand of tellurium globally, really, nothing has changed. Renewable energy continues to grow. That growth has been, let's say, forecasted. The production of tellurium has grown as well. So there is no real shortage of tellurium. There is absolutely none. And this is often the case in this situation. But there are market speculation. There are some, let's call them, irregularities that are in the market that are quickly driving up these prices. So now us having this exposure in terms of meaning what, meaning that you -- at some point, your fixed contract to the customer becomes less profitable or potentially not profitable. We have protected -- we protected these contracts by put declaring options against some of them.And so well, having the option to declare option on them, I guess, is where I'm going. And so what we're saying is if this continues, we would certainly declare those options. Now how much of this is as a total and breakdown? First of all, it's far too complex. We need to remember it all. But anyhow, we would not really disclose that to the market. As you can appreciate, these are very sensitive information, and we didn't want everyone in the world to know about them. Richard, is there anything I'm missing there?

[Richard Perron, Chief Financial Officer]

No, as you just said, it's a combination of products and services, all of those adverse timing of realization over the contract. And there are some clauses where we can pick the timing of realization. So in a period of rising metal prices, we may delay and push to later the realization of those sales in order to make more money. So but...

[Arjang J. Roshan, President, CEO & Non Independent Director]

I think that's actually -- I know there's a reason why I went to Richard. That's an excellent point, which I forgot to mention. You shouldn't assume that the sales event is lost necessarily. You can assume that the sales event gets delayed. That's an important point.

[Rupert M. Merer, Managing Director and Research Analyst]

So what's the risk here? If tellurium prices are up for a sustained period, is there any risk you're going to give up as sales opportunity and maybe your customer would need to replace you?

[Arjang J. Roshan, President, CEO & Non Independent Director]

No, no, I wouldn't say that at all. I think the risk here is that we do this in consultation, obviously, with the customer. There are a couple of things. First of all, there aren't that many people. It's not like our customer has 50 people out there that they can go to. There is hardly anybody. I would say there's actually nobody that has built the type of overall ecosystem around this material as what we have. That being said, we are willing to accept certain amount of pain, and that's already reflected that in our numbers. But at some point, if it's sustained, the number of -- or I should say, channels open up, renegotiation of contracts could be very much on the table.Remember, this is not everything that we do. It's a certain portion of the activity, but renegotiation could be on the table. I strongly believe it's not going to sustain to that point. It -- history shows it's never been able to sustain. And even if you look back, when they build a whole Fanya thing around this thing, after a while it popped. So I'm less concerned about -- by definition, it's not going to sustain because there's just really nothing to back it up.

[Rupert M. Merer, Managing Director and Research Analyst]

Okay. Great. Maybe just a couple of quick follow-ups, and I'll get back in the queue. So how long can you delay the sales before the situation gets a little more complicated and you may need to look at renegotiation? And can you let us know how much of a headwind is this to your guidance? What have you baked in for 2021 as a worst case?

[Arjang J. Roshan, President, CEO & Non Independent Director]

Well, I think -- I guess the way the question is being posed is that if we're like delaying sales, we're not. We've not reached that point. Nothing has been delayed. This is a forward guidance. I think we got to be very careful not to get ahead of ourselves here. We have not -- as of now, we haven't delayed anything. This is just management being very proactive and saying, look, if this thing were to continue, continue, continue, we may just put a bit of a pin prick into this bubble or balloon that's getting inflated to just let some air out. Because remember, we are one of the biggest, if not the biggest purchasers of this stuff in the world. So what we do should have some level of impact. So -- and that's really going forward. There is nothing in the past. Richard, any guidance regarding how much impact we've put into this?

[Richard Perron, Chief Financial Officer]

No. At this point, no. Just…

[Arjang J. Roshan, President, CEO & Non Independent Director]

Yes. We tend not to want to really get into the dollars and cents, I think for obvious reasons. We're the only publicly traded company in this space and others are sort of watching.

[Rupert M. Merer, Managing Director and Research Analyst]

I guess the message is that you can cool the market yourself through your own commercial activities, if it gets a little too hot?

[Arjang J. Roshan, President, CEO & Non Independent Director]

Well, look, again, I'm not going to guarantee things, but what I can tell you is we are, by some account, the world's largest purchaser of this stuff for industrial use. Now if somebody wants to just buy this stuff and warehouse them, okay, they can do that if someone has that wallet. But in terms of industrial use, we are the world's largest. And so that would -- for us, that means we should be able to have some level of impact. And all we're doing here as a good, sustainable and responsible company saying that for us, it's about these metals being somewhat stable actually. We're industrial players. We need them to be -- to serve the best interest of the market, our customers and everybody, we need to make sure that it's stabilized to the best ability that we have. And so we would use our leverage here to certainly cool it down a bit.

[Operator]

Next question will be from Frederic Tremblay at Desjardins.

[Frederic A. Tremblay, Analyst]

First question on the Electronic Materials backlog, which was up meaningfully. Just wondering if you could comment on what drove that increase, which end markets were beneficial there? And maybe your thoughts on the margin profile of that, call it, new business that you added, is it similar to the Q1 margins or more similar to last year?

[Arjang J. Roshan, President, CEO & Non Independent Director]

I'll start. And then, Richard, you can maybe augment. On the -- as I mentioned to the earlier caller, the -- as we look to our backlog looking forward, let's say, 12 months, the -- for example, the renewable energy business is a business that we said is asymmetrical, right? And we have not really done anything in terms of foregoing any options. So as I said earlier, those are all sort of been baked in there, but not yet really fully materialized. On top of that, we've got contributions from specialty semiconductor. What we're certainly seeing is a strong push for space.This is a market that historically has -- well, it's a cyclic market over the past, I would say, 7 years, it's been in the down cycle, at least based on what we hear from the market customers, agencies, what have you, it's beginning to go into its up cycle. And so the order books are quite strong there. Now we all know that space also comes with delays. That's just part and parcel for that business. So that is somewhat -- not fully, but somewhat has been incorporated. Richard, anything to add to that?

[Richard Perron, Chief Financial Officer]

Exactly. As part of the backlog, we do have an increase coming from other areas in renewable energy, explaining the additional days of sales there. And from a margin perspective, if I get -- I got your question right, going forward, Electronic Materials is expected to do better than Q1, independent of tellurium going up or down. In any of the scenario, we expect Electronic Materials to perform better in terms of adjusted EBITDA forward.

[Frederic A. Tremblay, Analyst]

Okay. I wanted to ask about tellurium, but maybe from AZUR'S perspective, can you remind us if they have any exposure to the tellurium headwinds that you're facing at 5N Plus? And I guess, more broadly…

[Arjang J. Roshan, President, CEO & Non Independent Director]

None, none whatsoever.

[Frederic A. Tremblay, Analyst]

Sorry?

[Arjang J. Roshan, President, CEO & Non Independent Director]

None, none whatsoever. AZUR is a 3-5 -- I'm sorry for interrupting. AZUR is mainly a play on 3-5 semiconductor materials and germanium, almost nothing in 2-6.

[Frederic A. Tremblay, Analyst]

Perfect. Then I guess the follow-up to that question for me was, can you then speak to their, I guess, typical contract structures? Do they have a meaningful fixed price component to their business?

[Arjang J. Roshan, President, CEO & Non Independent Director]

Well, as you know, AZUR provides the majority of their business is providing solar cells for space. Indeed, they have unit price, which assumes fixed pricing. And also remember, by the time you get to the solar space, the content of metal becomes much less -- much smaller as compared to your selling price. And that's exactly the type of business model that we're more and more going towards to businesses where metal is a much smaller portion of that. So no, they -- it's a product price. It's based on market value and metal is -- comes along with it, which is a smaller portion of it.

[Richard Perron, Chief Financial Officer]

Yes. Price -- discussions will be around pricing and volume and not metal per se.

[Operator]

Next question will be from Michael Glen at Raymond James.

[Michael W. Glen, Equity Research Analyst]

Just going back to the tellurium situation. Can you just clarify exactly like what is the competitive situation on the product involved? I mean, if the customer isn't purchasing it from 5N Plus, where -- I guess, they need it, so where are they getting the product from?

[Arjang J. Roshan, President, CEO & Non Independent Director]

Okay. So this is exactly why I made some of the comments I made. The procurement activity for these materials and the need -- the market need should not be assumed that they are like subsequent events. Without getting into too much detail, you should assume that people that -- look, the minor metals are very critical for a number of growing industries. And a lot of good companies that are also our customers have learned that in order to be able to manage their risk, going to a JIT model, just-in-time inventory is not the best play. You need to have some protection. And so there are inventories that have been built all along the way. That's why we think the market is inflated because when you look at the overall demand of the metal, and then you look at how much is being out there just in metal form. And then you put all the inventories in the supply chain together and all the way to the customer, the market is flush. It's full. There's quite a bit.So one should not assume that if we walk away from an option, that option is going to be at the benefit of somebody else. It's not the case. In fact, as I mentioned earlier, actually, Richard pointed to it, that what's going to most likely happen is that option is probably going to get rolled into the back of the contract. So that you can exercise it at a different time. So it's more of a timing of revenue recognition because the market is flooded with this stuff in different buckets. It's just that at the metal side of it, this location is being created based on hyper, I would say, speculation.

[Michael W. Glen, Equity Research Analyst]

So is it -- can we work with an assumption that your customer has enough inventory on hand themselves to mitigate it?

[Arjang J. Roshan, President, CEO & Non Independent Director]

Absolutely. Absolutely.

[Michael W. Glen, Equity Research Analyst]

Okay. And do you have any inventory on tellurium right now?

[Arjang J. Roshan, President, CEO & Non Independent Director]

Let me just say that we all protect ourselves. Again, we want to be responsible to point something that is coming up to our certainly shareholders. But I don't want to get into tactical signaling of what we have, what we don't have. I don't want my -- the very people that are inflating the market to know exactly what I'm holding in my hand. We're playing a little bit of a poker game here. So you can just -- I think you should just assume that we are all comfortable in terms of what we have. And that while, yes, as a publicly traded company, I have to come in front of you and tell you that I might forgo certain recognition -- revenue recognition events, I'm not concerned about being replaced. I'm not concerned about losing demand. I'm not concerned about any of that.

[Michael W. Glen, Equity Research Analyst]

Okay. And just outside of this particular business, are there any -- like what are some of the other large uses of tellurium out there?

[Arjang J. Roshan, President, CEO & Non Independent Director]

Well, tellurium is a very -- it's part of the family of 2-6, very effective in imaging applications. It's effective, as you know in solar applications. It's effective in sensing and security applications. There are usages of it elsewhere. And -- but the single largest use of it comes from solar. So if you look at it, it's like a large bar chart, and then there is a whole bunch of little charts that follow the rooster tail to it. And that large bar chart is renewable. And then there's a whole bunch of other applications that comes out of it. Tellurium is used in steel industry and in various things, in paste, in different things. And so there are other applications of it.

[Michael W. Glen, Equity Research Analyst]

Okay. So -- and then for the guidance, is AZUR -- I don't know if you're able to break out an amount, but do you have an incremental contribution on EBITDA embedded in that $25 million to $30 million from AZUR?

[Arjang J. Roshan, President, CEO & Non Independent Director]

So we -- when we were sitting down, we thought what should we do to provide the most visibility for our investors, yet at the same time, make sure it's credible. As you know, there are variable -- there's the timing in terms of when the deal closes. And then it's space business, which means the way the demand comes, it comes in jobs. It's not like -- when you look at AZUR's business, at least in our due diligence, it's not a continuous revenue week-over-week, month-over-month. You get spurts of revenue because you do lump shipments. You do patch shipments. Their order books are quite full actually. And that's why, again, we made a comment about space business being in the upswing because it seems that the order books are quite strong.But we have that variability in terms of, "hey, when does the deal close?". And by the time it closes, what is going to be the remaining of the year in terms of revenue recognition? How many of those spurts are we going to see, right? So that was one variability. And then you've got everything else as 5N Plus itself. We decided at -- yes, we decided if you're going to go give you one number that we don't then come and break it down into its components because honestly, there is a bit of sort of judgment call on some of these things. And if you get into granular level, I wouldn't be able to necessarily rationalize it all the way. But it's a judgment call. We've protected for a little bit of delay on the closure. We've protected for a little bit of lumpiness, and we've protected for tellurium in this case. And that's really how we rolled it up into the guidance that we provided you.

[Richard Perron, Chief Financial Officer]

The range is the outcome of 4 or 5 scenarios put together.

[Michael W. Glen, Equity Research Analyst]

Okay. And one last one for me. Can you just -- is there anything related to other metal say bismuth, I think the price is rising there as well. Maybe just comment, is that something that could have an impact on your margins through the balance of the year?

[Arjang J. Roshan, President, CEO & Non Independent Director]

So we would have probably made the same comment there because when it comes to business and tellurium, we are the largest purchasers of these metals worldwide, at least certainly for industrial application. Again, I have to clarify that because someone can always come and trade, but for industrial application. And so -- and you're right. You're very correct in what you said. Bismuth has been rising quite a bit. That too, in our view was speculative because if you look at the demand, the actual demand, we don't see more than, let's say, 3% growth in that. And so it didn't make sense for it to just jump to that level.And -- but it has retracted. The reason why we have not really come out and called that out is we have -- it's been coming down. We think it's actually -- as we said, it's not -- these things aren't sustainable. They usually come down. Now in terms of better fit, look, we've said this before, when prices go up, there is some benefit for us certainly in business. That being said, that benefit has become less and less. Why because we essentially do a physical hedge. So we closed the position. I don't want to get too technical, but we closed the position. So there's really, you lock in your margin, you don't benefit from, if the metal goes up and you don't get hurt if the metal goes down.So we've been able to do that there. And so as it goes up, there is some benefit. It's not like it was 5 years ago. But as you can see, it's coming down. Your question -- your subsequent question is, why can't you do probably this on tellurium? The difference is because with tellurium, the volumes that we're speaking are much, much larger in terms of the actual volumes that are being traded. And so you don't want to bid against yourself. You still try to do physical hedging as best as you can, but you don't -- in something that is even less thinly traded, you don't -- to go and do that, you don't want to falsely inflate prices. I don't know if that makes sense, but -- yes. Does that answer your question?

[Michael W. Glen, Equity Research Analyst]

I'll probably have some follow-ups on it. But we can take it offline.

[Operator]

Next question will be from Mac Whale at Cormark.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

AJ, I just wanted to talk a little bit about the tellurium again. Just so that we're clear. In the Q1, the effect, it was essentially on margin. There was no curtailment on your side on shipping because you didn't like the margins?

[Arjang J. Roshan, President, CEO & Non Independent Director]

Exactly. In Q1, there is no curtailment on shipment. There is no foregoing of the options. Everything was served as it should have been served. But remember, with asymmetrical volume, meaning lower revenue in certainly Q1.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. And so sorry, I'm just sort of thinking through the question. The -- when I first read it, it sounded as if you were sort of playing hardball saying, look, this fixed price, this is a problem with fixed price. We're starting to see it and that you were really sort of playing hardball with the customer. But the more you talk about it, it sounds more like you're aligned with the customer. Is that fair? Or is this -- is it more of a standoff between -- like between your customer and you? Or is it your customer and you against this sort of speculation that you perceive is going on?

[Arjang J. Roshan, President, CEO & Non Independent Director]

Okay. So allow me to -- this is going to be a little bit of a longer answer because I got to set the table. In order for these industries to develop, we -- our customer base believes that there needs to be efficient and adequate access to the very raw material that you need to build these industries. And the path forward is making sure that these things are going to increase in notations, but obviously, there needs to be market demand behind it, not speculative or, let's say, irregular demands behind it. And so I think it is very well understood among industrial players and that when situations like this happen because we've learned now a few things, right? I mean if you look back to the Fanya experience, we've all learned that when these things go way up, while a lot of people make money, we could make money at it is. It's not a sustainable situation. At the end of the day, it hurts the industry.So more and more the community of companies that are responsible in this space that want to see more and more technologies continue to develop, they try to proactively manage the supply chain. Us being a notable player in this space, we've got to play our parts. And so the moves that we are making is well understood by our customers because they are the ones who essentially have agreed to the mechanism of the contracts, which enables us to make these moves because we all believe that in order for this industry to continue to grow at the rate it's growing, you want to make sure market forces are in play, not artificial forces.So indeed, this is not a controversial move. This is not something that our customer would like be surprised or it's -- in fact, they probably would look at it. My guess is they would look at it and say, "yes, this is their responsible way of dealing with the situation," and work with us on that because ultimately, they realize that it's for the benefit of the industry as a whole and the consumers. So no, there is no, let's say, controversial issue around it. And again, I'll say that the proof is in the pudding. It's in the fact that these options are now features of these contracts, which allows us -- and they are there for exactly such times.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. Just a couple of other questions. Does the epitaxy technology you're getting from AZUR, does that have application in the medical imaging side? Or are those sensors, there's no epitaxy that occurs in them?

[Arjang J. Roshan, President, CEO & Non Independent Director]

So I've got a -- I'll give you an answer, but I'd probably have to think about it later a little bit more. To the best of mine -- everything we're doing with epitaxy and with AZUR is going to be in the family of 3-5. There are sensors in 3-5 that goes into medical applications, but it's just -- think in top of my head, I can't think of imaging, I'm sure some smart guy later on will remind me there was. But not that I can call. So no, the epitaxy as I said is more in the field of electrification, high-power electronics, communication and so on, security and those types.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. And then lastly, on powders. Can you give us -- there was a lot of activity in -- from the downstream in those powders. I know that downstream electronics industry is dealing with other issues than going to, say, next generation. They're just trying to get the current generation out the door timely. Has that -- how has that played into the adoption on the powder side for some of the applications that maybe a year or 18 months ago were getting evaluated? It seemed to be really ready poised to take off. Is there a change there going on?

[Arjang J. Roshan, President, CEO & Non Independent Director]

Well, I'll answer what I think you're asking me, if not, then please clarify. On the -- our powders now are basically they're going -- they're targeted for 2 markets, right? There's the microelectronics. That work has gone forward, I would say, has made notable progress is because we're now in 5G phones and some notable -- with some notable players in that space. The COVID thing impacted us because when you're new to these markets, you really -- your scientists have to be sitting with your customers and working shoulder to shoulder and while -- okay, Zoom and all that is great. But that whole certification qualification was slow, but that is progressing, okay? And we were like nobody in that space a few years back. And now we're like with some really major players in their devices. So that's continuing to develop.On the 3D printing or [ active ] manufacturing, what we're doing is we are -- it's a vast, vast, vast market. And what we're doing, we believe we need to be focused. And so we're really putting a lot of our efforts on only a couple of different alloys because we believe, a, we have a distinct source of advantage there. And secondly, we believe that the market is really yearning for it. And so that work is also going. It's in its preliminary stages. We're going through qualifications with customers. As you know, we only launched that initiative, I don't know, 8 months ago. So it's quite young. All of this is to say that -- I would say, at this point, these are in activities that are EBITDA generating. But we think if we continue this, that picture will change in the next, I would say, 12 to 24 months.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. And then my last question is just you talked about -- you mentioned that the backlog in electronics is strong. But isn't that just because the revenue is down? I mean, the bookings don't look particularly strong. Or is -- are you looking at the -- is there something about the bookings at a more granular level that is making you very optimistic on it?

[Richard Perron, Chief Financial Officer]

It's the combination. It's the mix of the backlog, the combination of the time of realization that is virtually good for Electronic Materials.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. And that backlog, just remind me how the renewable -- how you recognize in that the renewable energy portion under these new contracts? Like that's assuming -- does that reflect the latest quotation on tellurium, for instance?

[Richard Perron, Chief Financial Officer]

The way it works, it's the -- it's always on a 12-month forward-looking basis, okay? And it takes the most recent mutation level.

[Operator]

[Operator Instructions] And the next question is from Nick Agostino at Laurentian Bank.

[Nick Agostino]

I guess 2 questions from me. First, obviously, we saw a little bit of a logistics headwind in Q1. And then you obviously talked about the evaluation exercise on the medical imaging side. Just wondering, as we sit here through the middle of Q2, is there anything else from a COVID perspective or any headwinds that may have popped up year-to-date when it comes to either deferred contracts that you haven't called out or even a delay in other segments of the business?

[Arjang J. Roshan, President, CEO & Non Independent Director]

On the medical imaging, I think we've -- yes, that's already incorporated into our guidance. Just to make it clear, it is with this specific potential customer that has decided to take like big leaps in this area and really go down this path. But we also, as I said in my text that we are also pursuing this path with others. And we actually -- there is another market, if you will, of PCD that we're supporting, maybe not exactly at that particular product level, but still within that supply chain, we're still involved. And that is continuing to grow as well. So that's also included.On the COVID side, look, when you look at COVID, it was a big hit to Eco-Friendly Materials. We actually have seen a bounce back. That has improved. And then the issues we do have indeed is with logistics, sea freight, specialty. Richard, you know even more about that as you're dealing with it on a daily basis. You want to comment?

[Richard Perron, Chief Financial Officer]

Exactly. COVID are addressed specialty under Eco-Friendly in H2 of last year. If you want, as you can see, we've done well. At this point in time, logistics remains a challenge to the ability of ships and containers and else. But at this point, I don't think we can declare that there's something very specific to COVID impacting Q2.

[Nick Agostino]

Okay. And then my second question, AJ. I think you said earlier, obviously, the whole metals dependency review on the business, specifically, industrials and technical, you said it's going to be a lengthy review. But I thought I also heard you say that those 2 pieces of business performed rather well, or at least that segment performed rather well in Q1. I'm just wondering, assuming that I heard correctly, does your observations over the last couple of months, are they changing maybe your thoughts about outright selling those businesses? Or is that completely still on the table?

[Arjang J. Roshan, President, CEO & Non Independent Director]

So you're correct to point out that the performance of Eco-Friendly Materials has clearly been good. And that -- and me acknowledging that -- I think what you should assume is the following is that we are -- we remain resolute about our strategic direction. We are more and more not a company that likes commodity, the risk that commodity exposure brings. We are more and more a company that likes to build products and really collect rent, if I can call it that, based on the value that we're creating in developing unique and differentiating products. And so if we remain to that trajectory, which we are, we -- long term, we have to find a different environment for those businesses that today we still have that have high use of commodities in them.And the reason is simple. These are good businesses. We have spent the past 5 years optimizing them. They are providing good returns. But in the future of 5N, may not be the best place for them to grow. Now what it also says is because they are performing well, I am in no rush to make some of these decisions. That's, I think, the way you should look at this. So indeed, they are healthy businesses. Within their own world, they're probably the most competitive ones you can find. Unfortunately, more and more, the environment we're creating in 5N Plus isn't the best place for a commodity-based business to grow. So long term, yes, something different needs to potentially happen. And lastly, because they are very healthy, we're in no rush to do anything about it. We will make the right decision. We'll be patient and make sure that they'll continue to thrive. So I guess a long answer to your short question is no, there is no change in our thinking. We're still consistent with what we said.

[Operator]

Next is a follow-up from Michael Glen.

[Michael W. Glen, Equity Research Analyst]

I think you mentioned this in an earlier question, I just missed it. But what is the -- what is -- is there a repricing mechanism at all on the tellurium to think about? And can you just clarify with that?

[Arjang J. Roshan, President, CEO & Non Independent Director]

We didn't really say anything about that. What we said is that because there is certainly enough material all along the supply chain, if we were to forgo certain options, it would not create a disruptive event causing someone to have to go somewhere else to purchase these materials. Then the question was, what if this thing sustained and was for a long time, the speculation continued. And we said, usually, when those things happen, then there is anyhow the opportunity to have adjustment in the pricing, such that then we would be able to exercise those options. But we're not there. I think we're actually far from there right now. And yes, that's as much as I can say about that.

[Michael W. Glen, Equity Research Analyst]

And not to belabor the point at all. But in the contract that you have negotiated right now, the tellurium assumption that's embedded in that contract. It's the same price throughout the duration of the contract?

[Arjang J. Roshan, President, CEO & Non Independent Director]

No, no. It's -- again, because of the nature of these materials, we tend to have a layered pricing. I wouldn't tell you that we would sell everything at one price completely. No, that wouldn't be the case. There are different pricing for -- because remember, it is not a homogeneous product either, right? They come in different formats and different things. So it is -- there are different pricings. And yes.

[Operator]

And at this time, gentlemen, we have no further questions. Please proceed.

[Richard Perron, Chief Financial Officer]

Okay. Well, we would like to thank everyone for attending this morning's call. Have a nice day to all.

[Operator]

Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.