5N Plus Inc

TSX:VNP

Earnings Call Transcript 2019-Q2

[Operator]

[Foreign Language] Good morning. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the 5N Plus Second Quarter Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Richard Perron, Chief Financial Officer. You may begin.

[Richard Perron, Chief Financial Officer]

[Foreign Language] Good morning, everyone, and thank you for joining our second quarter ended June 30, 2019 conference call. We will begin with an overview of our business performance and a review of our financial results. After which, we'll begin the question period. Joining me this morning is Arjang Roshan, the 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 to your attention -- 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 and in our public filings. 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's discussion and analysis. I would like now to turn the conference to Arjang for the discussion on the business performance and quarter results.

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

Good morning, ladies and gentlemen. It is a pleasure to be with you this morning. I hope wherever you are, you're having a good summer, and thank you for joining us as we cover the Q2 release for 2019. Last night, 5N Plus posted results for Q2 2019. Adjusted EBITDA and EBITDA came in at $5.9 million and $5.3 million as compared to $9 million and $7.9 million for the same period last year. Return on capital employed for Q2 registered at 8.2%. Revenue, including metal, reached $5.3 million for the quarter as compared to $58 -- sorry, $50.3 million for the quarter as compared to $58.4 million for the same quarter last year. In the last quarterly call, we shared information about the status of 5N Plus' transformation from metals and chemicals to higher value-added materials with higher margins. Through this transformation, we expect to not only make up for the expected margin contraction associated with older products, but also generate additional margins to support earnings growth as per 5N21's strategic plan. Over the past few quarters, we have been stating that 2019 will be a staging year with transitory challenges inherent from a confluence of events, mainly realization of lower margins from renewed long-term contracts in renewable energy and market introduction of new products, with enhanced margins in various stages of development and mass industrialization. In the last call, we mentioned 5N Plus was experiencing production challenges with certain products, especially in sectors, catalytic and extractive materials and security, aerospace, sensing and imaging materials. In addition, the continued decline in commodity prices associated with metals utilized as consumables are resulting in headwinds, mainly due to timing and inventory position, albeit the impact is markedly subdued as compared to the past, thanks to the implementation of our strategic plan. So the question is what transpired since our last call. Well, in Q2 2019, our teams made tangible progress in addressing our operational challenges, and while these items are not fully behind us, unlike Q1, our operations are ramping up production with critical parameters such as production yield and production throughput steadily improving. Also, during the quarter, 5N Plus announced a plan to invest over $10 million in process technology to increase capacity of the existing assets and enhance capability robustness across select assets. This package of investments should address some of the operational challenges impeding the company's progress. To be more clear, 5N Plus is utilizing proven process technologies to increase the capacity of the existing assets, to automate critical steps and increase yield along with enhanced product quality, to add new capacity for production of various ultra high-purity materials, which are the genesis of nearly all products we produce, and to reduce environmental impact of our footprint and the associated costs. With respect to the latter, 5N Plus continues to foster its leadership position in the industry and place itself on the leading edge of addressing environmental themes associated with our activities as our management firmly believes, without it, maintaining leadership in our industry is impossible and more importantly, business sustainability will cease to exist. Over the past several quarters, nearly all metals utilized by 5N Plus and its products as consumables have continued to experience price decline, with bismuth reaching levels not seen in more than 2 decades. The speculation behind the decline in the notations varies from metal to metal, ranging from regional reactions to overcome tariff barriers, to speculations about Fanya Metal Exchange. Thankfully, over the past 3 years, 5N Plus has significantly reduced its exposure to the price volatility of these metals. This being said, like any good material technology company, 5N Plus can significantly reduce its exposure to commodity prices, but not completely eliminate it. When metal notations decline, typically, the sales price associated with the materials containing these metals adjust quicker than the inventory value of the metal, resulting in margin contraction. Among the many measures taken by 5N Plus to address this, reducing reliance on commercial metal purchase in favor of procurement of metal through refining complex feed has been a notable change. As one of the pillars of our strategic plan, 5N Plus has been successful in employing proven process technologies to extract metal from [ complex feed ] at a discount to the market, enabling the company to generate additional margins. Even with metal notations continuing to decline to near historic lows, specifically in the case of bismuth, this approach has yielded favorable results. With bismuth notations now reaching levels not seen in many years, a number of complex feed suppliers have either stopped or have declined to market their bismuth-containing complex feed, biding their time for higher prices.Concurrently, the demand for 5N Plus' bismuth-containing products and materials remains strong. Given this situation, 5N Plus has begun to increase commercial metal purchases to compensate for the reduction in bismuth procurement from refining. With ample bismuth supply, we do not foresee any challenges with commercial metal purchases [ as being set ]. We anticipate a net opportunity loss as compared to procurement through the refining activities. Having said that, whenever the cycle changes and metal notations begin to climb, unlike pre-5N21, our company is ideally positioned to reengage in metal procurement through the refining route and rebalance the overall procurement picture. We believe such flexibility is an example of how the company has become more agile. Let's talk about the segment and sectors of our business. Segment Eco-Friendly Materials revenue and adjusted EBITDA for Q2 2019 was lower than the same period last year. Much of this deficit comes from the continued impact of lower metal prices. Revenue for sector health and pharmaceutical materials was higher than the same period last year. 5N Plus continues to certify its additive products with a broad customer base and have concluded small volumes of sales. We expect 2019 to be entirely focused on certification and qualification campaigns. The package of investments highlighted earlier has earmarked projects for this sector, which will further automate production and improve overall cost structure. Revenue for industrial materials was lower than the same quarter last year. Much of this drop can be explained by the drop in metal notations as this sector has the highest usage of pass-through metals. Revenue for catalytic and extractive materials was higher in Q2 2019 as compared to the same period last year. As discussed, after securing an unprecedented order book, 5N Plus struggled with production ramp-up in Q1. In Q2, our teams have been able to markedly improve this situation and keep up with the quarterly demand. The package of investments highlighted earlier has earmarked projects for this sector, which will improve production robustness and enhance production throughput. The demand for the company's product in this sector remains very strong, and our capacity is sold out into 2020. Segment Electronic Materials revenue and adjusted EBITDA was lower for Q2 2019 as compared to the same period last year. Revenue for renewable energy materials was stable year-on-year. Much of this business is governed by long-term contracts, with a mix of products and services. As mentioned in the last call, the contracts negotiated last year are in full effect. The product contracts provided higher sales volume, reflecting customer growth in this area, but at lower sales price per unit of volume when compared to the previous contract. Revenue for technical materials was lower than the same quarter last year due to lower volume of commodity chemicals and metal sales. This being said, the volume for engineered powders continue to grow. Over the past few quarters, our Micro Powder activities are receiving ample interest from the microelectronic market. As we speak, there are over 2 dozen customer-paid qualification and certification programs underway. Early in the year, we received confirmation of program award from application in advanced wearable electronics, such as smart watches and wireless ear buds, which are slated to be introduced to the market in the near future.During the quarter, we began to deliver regular monthly orders against this award. While the positive financial impact of this development is not large yet, the strategic value of this progress speaks volumes as it clearly demonstrates the viability and uniqueness of our products, especially for the markets of the future driven by increased demand for advanced functionality in various devices and speed of data transmission. Of course, to get this point -- of course, to get to this point, we've had to undergo [ for long ] qualification campaigns. And today, we continue to have the full pipeline of such activities. Revenue for security, aerospace, sensing and imaging grew slightly as compared to the same quarter last year. Last quarter, we mentioned this sector was experiencing production challenges associated with rapid scale-up of various semiconductor materials. During the quarter, our teams made notable progress in improving product yield and scalability. The package of investments highlighted earlier has earmarked projects for this sector to increase capacity. This sector continues to have a strong order book. For the second half of the year, our priorities are clear. We will continue to make significant progress in mass industrialization of the new products. We will continue to manage the impact of the metal markets, realizing that if we remain disciplined, the adverse impact of the movements in the metal markets on 5N Plus is limited and most importantly, transitory in nature. We will focus on investment [ files ] to ensure on-time and on-budget completion. We will continue to be diligent with our balance sheet to ensure our financial health remains strong and vibrant. Last, but certainly not least, we will aim to keep our order book healthy. Perhaps 2019 will go down as a tough year for 5N Plus. This being said, we at 5N Plus are encouraged with what we see and where the company is headed. What we see is a resilient company undergoing transformation and despite formidable challenges, delivering 23% gross margin and with each passing day becoming stronger. Where we're headed is toward building a thriving company focused on growth in the markets of the future. And I admit, the short-term challenges have slowed the company's earnings ability. This being said, our teams see these challenges as surmountable, the strategy viable and our goal achievable. In the meanwhile, we will allow the short-term issues to keep us up at night. But what we will not allow them to do is to distract us from focusing on the longer-term goals and the development of 5N Plus. At this point, I'd like to turn the call back over to Richard.

[Richard Perron, Chief Financial Officer]

Thank you, AJ. So good morning, everyone. As covered by AJ, similar and anticipated at the end of Q1. During the second quarter of 2019, despite strong demand, we continued to face challenges, this time, more important from the adverse movements in the notations of the key metals used as input to our materials. Despite that, one of the many important [ factors ] to our business since we initiated our transformation 2, 3 years back has been our ability to create alignment on the long-term strategic options despite the volatile and dynamic nature of our businesses, and we see no change to this. As mentioned in previous communications, the company continues to invest with focus and discipline to improve future returns, with a special emphasis this year for deploying surplus cash on capacity, capabilities and internal growth initiatives, supporting our ongoing transition towards higher added-value products, allowing us to be more cost-competitive. You should expect higher capital investments in 2019, especially during H2. To all, while there is more to do and despite headwinds outside of our control, we remain very optimistic, with the whole organization very focused on structurally improving costs, overcoming any challenges associated with realizing our internal growth initiative plans and continuing to increase the share of high value-added products. So now, starting with the coverage of revenue and gross margin. During Q2 2019, revenue decreased by 14% compared to the same period of 2018, with gross margin reaching 23% in Q2 compared to 26.5% last year, tracking an average gross margin of 22.7% after 6 months compared to 25.8% last year.Both revenue and gross margin were negatively impacted by adverse movements in the underlying metal notations, the application of the most recent commercial terms from contracts renewed within the renewable energy sector and to a lesser extent, production challenges. Now covering adjusted EBITDA and EBITDA. In Q2 of this year, the adjusted EBITDA was $5.9 million compared to $9 million last year, similar to sales, negatively impacted by adverse movements in metal notations, along with the application of the most recent commercial terms within the renewable energy sector and to a lesser extent, [ unrealized ] shipments due to production challenges.On a year-to-year-to-date basis, the adjusted EBITDA decreased by $5.4 million from $16.9 million last year to $11.5 million this year, impacted by factors just mentioned, with the more significant impact from [ unrealized ] shipments due to production challenges during Q1. In Q2 2019, EBITDA was $5.3 million compared to $7.9 million in Q2 of last year. On a year-to-date basis, EBITDA reached $9.5 million compared to $15.7 million in 2018, mainly explained by the lower adjusted EBITDA, but also no significant nonrecurring items recorded in 2019 while in 2018, the company recorded 2 nonrecurring items totaling $0.8 million, recognized as income. Now looking at annualized backlog and bookings. Backlog as of June 30, 2019 reached a level of 201 days of annualized revenue, similar to the previous quarter. Backlog as of June 2019 for the Electronic Materials segment increased by 56 days and by 15 days for the Eco-Friendly Materials segment compared to June of last year, reaching 201 days on a consolidated basis compared to 170 days, June of last year.Bookings increased by 14 days for the Electronic Materials segment and decreased by 13 days for the Eco-Friendly Materials segment compared to the previous quarter. Quickly going through the expenses. Depreciation and amortization expenses in Q2 and year-to-date amounted to $2.6 million and $5.8 million, respectively, compared to $2.2 million and $4.5 million for the same periods of 2018. Important to note that expenses in Q2 and year-to-date of this year included the depreciation of right-of-use assets of $0.3 million and $0.7 million, respectively, following the adoption of the new standard IFRS 16 as of June 1, 2019. SG&A expenses were $5.5 million in Q2 and $11 million year-to-date compared to $6.7 million and $13.5 million for the same period of '18. In 2019, the expenses were positively impacted by favorable exchange rates across most local currency-denominated expenses when compared to 2018 as well as timing of certain expenses. Share-based compensation expense in Q2 and year-to-date 2019 amounted to $0.4 million and $1.5 million, respectively, compared to $1.1 million and $1.8 million for the same periods of last year. These decreases are mainly due to the decline of the company's share price at the end of the second quarter of 2019 when compared to June 30, 2018. No expenses or income from litigation and restructuring activity were recognized so far this year, while in Q1 of '18, the company recorded an income from litigation and restructuring of $0.6 million, presenting a nonrecurring income relating to an amount receivable from an inactive legal entity, for which no receivable had been recorded given the uncertainty back then.Financial expense amounted to $1.1 million and $2.8 million in Q2 and year-to-date 2019 compared to $3 million and $4.7 million for the same periods of last year. The decrease in financial expenses of $1.9 million for both periods is mainly due to the [ accelerated ] interest of $1.5 million recorded as a noncash expense following the early redemption of the CAD 40 million convertible debentures in June of last year. The company reported earnings before income taxes of $1.8 million in Q2 and $1.4 million in year-to-date 2019. Income tax expense in Q2 and year-to-date were 0 and $0.8 million, respectively. Both periods were favorably impacted by deferred tax assets applicable in certain jurisdictions. Covering liquidity. So far, year-to-date this year, cash used in operating activities amounted to $7.2 million compared to $0.5 million year-to-date of '18. The decrease in funds from operations is mostly explained by the decrease in the adjusted EBITDA, with the negative change in noncash working capital year-to-date resulting mainly from the decrease in trade and accrued liabilities of $10.8 million and an increase of $6.5 million in accounts receivable mitigated by a decrease of inventory. In the year-to-date 2019, cash used by investing activities totaled $2.9 million compared to $4.6 million in the year-to-date of '18. This lower use of cash is explained by lower investment in PPE so far this year, very [ likely ] to change in H2.In the year-to-date 2019, cash from financing activities amounted to $1.5 million compared to $0.4 million last year reflecting in 2019, the net results from the most recently raised subordinated term loan, repayment of the outstanding debentures and the application of the NCIB. Now looking at gross and net debt. Total gross debt increased by $6.2 million to $55.1 million compared to $48.9 million as of December 2018, which is mainly due to the replacement of the convertible debentures by a 5-year unsecured subordinated term loan at a higher face value. As for net debt, after considering cash and cash equivalents, increased by $15.7 million from $22.2 million as of December 31, '18 to $37.9 million as of June 30, 2019, mostly impacted by noncash working capital requirements. With this, we'll conclude the financial review. We are ready to take questions from the analysts.

[Operator]

[Operator Instructions] Your first question comes from the line of Rupert Merer from National Bank. Your next question comes from the line of Mac Whale from Cormark Securities.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Have the margins, like, say, from a year ago or even from first quarter, have the margins on the first -- on the -- in the solar space really changed much? Given what -- have they been disrupted by the -- by some of the disruptions in Q1?

[Richard Perron, Chief Financial Officer]

By default, yes, the margins are different this year than last year, as we mentioned, due to the most recent renewable contract in the sector.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

But apart from that, like in Q1 -- from Q1 to Q2, has it changed?

[Richard Perron, Chief Financial Officer]

From Q1 to Q2, no, pretty much the same.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. So the fact that you -- when you look at the electronics segment, and if we use the -- you indicated how much revenue to one customer. And if we back that out, it just assumes some average margin for that business. The margin on the remaining business is actually, like obviously in Q1, it took a big hit. But in Q2, that margin on the remaining businesses double what it was in Q1, but it's still half of what it was a year ago. Can we expect that level of increase through Q3 and Q4? Like is the turnaround -- or does it plateau very quickly?

[Richard Perron, Chief Financial Officer]

By default, as you know, out of the different growth initiatives that we have in place that are improving quarter after quarter, those initiatives, as they realize themselves, will bring our margins over time. So all other things being constant, it should improve, yes, over the coming quarters.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

And will it -- do you expect that the gains you've made, like this $10 million that you're investing, will that have an impact immediately? Or will that take a year? Like, what is the sort of -- I know the payback is within what your strategic goals are, but can you give an idea of the impact on that part of the margin that you realize?

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

I think this year, you're not going to see paybacks, but because it's a staggered project, I think you're going to see gains starting next year. Beginning of next year, there should be -- the gains should start ramping up, especially from here onwards. And that by Q3, I think we should be in forward...

[Richard Perron, Chief Financial Officer]

Yes, within the H2 of next year, you should see the benefits [ arising ] themselves on the financial results.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. In the Powder business, are there firm time lines for the couple dozen programs that you're being evaluated for? Is there -- do you know of the time line? And is that -- is -- like how many more sort of iterations of material do you have to send to them? Like can you give us an idea of whether that's coming to the end or whether it's sort of just the beginning?

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

So the way we've positioned ourselves in that market is, and this is with intent, is to be a couple of tiers back from the major clients because, as you know, in the electronic market, the closer you get to the client, there's a lot of loss pressures. And when you're a couple of tiers back, you're better shielded. So we don't necessarily get -- the downside of that, of course, is you don't necessarily get the full visibility of where these products -- where these powders are -- well, you know what applications, for example, they go, but you don't see the full cycle time and a cycle plan for the customer that is using it. Now this recent award that we got with wearable electronics, it's something that was clear. It came to us and we knew upfront. But much of the other programs, the way they're postured is it's for application in such and such type of a chip packaging. And it's -- we don't sometimes even know necessarily what device or who the manufacturer, at the end, it's going to land in. So timing-wise, I can't give you a very good view, but I expect that most of these qualifications to take somewhere in the neighborhood of 18 to 24 months to go from product -- from the concept, to actually being approved for actual production. That's been our experience.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. And did I miss it, or was there no guidance provided? Typically, I think, Q2, you put out some guidance. Or did I miss the comment on that?

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

The way it works is we provide guidance in Q1, which we have, it's $26 million to $30 million. And then in Q3, we calibrate that, we make it tighter. That's the way we've been over the past 3 years.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. And so you're just keeping it at the same level as the first quarter?

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

We are, we are. I mean I think probably where you're going is with respect to the announcement that we made with regards to how we're changing our procurement of bismuth. And I'm just going to anticipate your question that how that's going impact it. We said that, even with bismuth prices being so low, credit to our guys, they have figured out processes that actually can still make money from secondary and waste and tailings or whatnot. With that drying up, obviously, we're back to buying from metal markets. Now the good thing is there is -- we have leverage because it is a buyer's market. But it's, at the end of the day, it's a commodity. So you don't get the same level of -- well, you don't get as much discount, if you will, as you would do if you do it yourself with good technology. So there will be an impact. Now the reason why we didn't really say anything about how -- what the magnitude is, is it really depends on how the metal market develops over the next 6 months or so. That can -- there could be a range in terms of what the impact could be. So we've kept it prudent. And by Q3, we should be in a much, much better position to be able to tell you what the impact's going to be.

[Operator]

[Operator Instructions] Your next question comes from the line of Rupert Merer from National Bank.

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

In Q2, how much of a headwind to results on a year-over-year basis was the falling price of metals or specifically, the falling price of bismuth?

[Richard Perron, Chief Financial Officer]

On a year-over-year, I know it's important, but we don't disclose that.

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

Okay. Do you have a sense for how in the [ trail ] it is? Or can you give some thoughts on the impact to the overall results?

[Richard Perron, Chief Financial Officer]

It's definitely important in Q2. We're talking millions of dollars of impact.

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

Just remember, Rupert, we've taken a lot of measures to reduce that, but there's still a lag effect, meaning it takes a few months for the impact of the metal to catch up, okay? So in Q2, if you just go back and look at some of the metals we discussed, you'll see that behind it, there was quite a bit of momentum. And so yes, the impact was certainly material.

[Richard Perron, Chief Financial Officer]

And I mean for the first 6 months of 2019, we had no impact or very minimal impact from metals back then compared to -- '18 had almost no impact or very minimal, if any...

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

I would say, even maybe on the positive side, because if memory recalls, it was a slightly going up type of thing. So maybe, yes.

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

And great. And then secondly, you talked about some progress you've made on the production of the semiconductor products. Where are you now versus where you need to be? So with the improvements, are you 25% of the way there from where you were last quarter or half the way there? Are you able to quantify that for us?

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

I think when it comes to aerospace-related products, we're probably more like 75%, 80% there. We're actually making very good progress there. In regards to infrared imaging, I would say we're -- we've moved quite a bit. We're probably better than 50% -- 50%, 60%. We're able to now fill certain orders. There are still other orders for products that are at higher, I think we talked about this last time, at higher diameters. We're able to now make those, but we are not yet ready to say we have a reproducible mass industrialization process with super good yield yet. But we're hopeful that in the next quarter or 2, we'll get there.

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

Okay. So on aerospace and infrared, how difficult is that final 50% or 25%?

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

Look, the way the team is making progress, I'm very hopeful. Now I have a quarter -- I mean last time, I know I was reluctant to give you more visibility on that. But from what I've seen, this is something that the team is really making good progress on. So I am -- I'm hopeful that, let's say, by the end of this year, maximum first quarter of next year, that we would have these things from an operational side addressed.

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

So given the improvements that you've made, will we see the difference in results in Q3 and Q4? Will the production of these products have a material impact on the EBITDA next quarter?

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

So as we said, Q2 this year will be better than Q1 -- sorry, half...

[Richard Perron, Chief Financial Officer]

H2.

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

H2. It will be better than H1. And part of that [ catalyst ] is indeed improvement in this part of the market.

[Richard Perron, Chief Financial Officer]

But likely to be backloaded.

[Operator]

Your next question comes from the line of Nick Agostino from Laurentian Bank.

[Nick Agostino]

Just going back to the guidance question. If we consider the fact that you guys put out the guidance back in -- post the Q1 results in May, at that time, we were already seeing the decline in the pricing environment. You were well aware of the production challenges as well. So just wondering how much of the environment that we see today were you guys already baking in into that guidance. And I ask that question just so we, come Q3, get an understanding of how much guidance may or may not change.

[Richard Perron, Chief Financial Officer]

From the time that we communicated that guidance, expectations, especially on bismuth, have fallen much more than we anticipated back then.

[Nick Agostino]

So the fact that you're going to have to, I guess, source from a different [ manner ] , that is something that was not baked in, not anticipated at all back in May?

[Richard Perron, Chief Financial Officer]

Certainly not in the upper range of that guidance.

[Nick Agostino]

Okay. But possibly so on the lower end?

[Richard Perron, Chief Financial Officer]

Part of it, yes. But as AJ mentioned, there's still a bit of unknown for the second half of this year. But yes, by default, weighted towards more the lower end of that guidance.

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

Let me also address this from maybe a different angle, Nick. When we talked about these trade issues, the challenges that are there or the so-called trade war, we, in the past, mentioned that we were, directly, we were not really concerned with it because we have plans that support the regional requirements. As an example, we have our plant in China that addresses China and [ that ] can potentially produce products for other plants, but none of them are for the U.S. plants. And so from that point of view, it wasn't really a concern and it isn't a concern. What happens with these issues now escalating is that we see a material drop in commodities. I think it's not just in bismuth. It's in other things as well. And you add to that the exchange rate and whatnot. And so that's been really a broader impact that, again, hasn't directly affected us, but it has impacted some of our suppliers. We're seeing actually pricing of some of these metals at a discount to the notations in China. So now you have suppliers that typically would run their secondary material through a circuit and then would give us the tailings of that circuit, now are not even doing that. And so that's been the larger impact, that if you would have talked to us a quarter ago, we would have had it on our radar screen, but wouldn't be able to really calibrate the range of its efficacy. And today, it's real. And so what we're doing is we're waiting to see how the market reacts. Based on that reaction by Q3, we'll be able to give you a more accurate assessment.

[Nick Agostino]

Okay. No. Fair enough. I guess the other question is just more of a theoretical question. If we look at -- let's just take your Eco-Friendly margins where they are today. If we look at the current 5N21 plan versus the prior plan, in a declining pricing environment like we're seeing now, can you maybe just quantify how much margins would compress under the new model versus under the old model? And I'll leave it there.

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

I'll start and then Richard, who is probably right now running his numbers, will give you a better one. I think we have to make a distinction here because under the old model, we also had other activities that were in our portfolio which were metal-intensive. I'm referring to activities, for example, that materials [ at link ] had gallium, indium, much, much more selenium. So I would tell you, had we not made the changes that we made, without me doing the numbers, I would tell you we'd be washing in red right now because those items are clearly -- a compilation of that will get you there.Now if you were to tell me, okay, take those items out and just look at what you have kept in the portfolio, so sort of a hybrid model of that, I would tell you that our losses still would be a multiple of what it is, in terms of margin loss, would be a multiple of what it is. Today, I don't know if it would put us into red or not, Richard.

[Richard Perron, Chief Financial Officer]

It would definitely have -- would have brought us much closer to a breakeven point rather than the $3.5 million that we're declaring in Q2 for the Eco-Friendly Materials.

[Nick Agostino]

Okay. Great. That's helpful. All right, AJ, you were going to add something or...

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

Well, one of the things that we are beginning to measure ourselves is we're in a business that as long as you use metal, and we're not the only ones, all -- any good material technology company in this space, including the very big ones, as long as you're using metal, you're somewhat exposed to that. And so we're now measuring ourselves as to, as each year goes by, how much less we are exposing ourselves to the impact of those items. And so if you measure us today versus, say, 3 years ago, I think you'll see that the improvement is in a multiple number, probably 3x, 4x better in terms of potential margin contraction than we would have otherwise had.

[Operator]

There are no further questions at this time. I will turn the call back over to the presenters.

[Richard Perron, Chief Financial Officer]

Okay. So simply, well, this will end our conference call for Q2. Thank you all for joining us today. Have a nice day.

[Operator]

This concludes today's conference call. You may now disconnect.