5N Plus Inc

TSX:VNP

Earnings Call Transcript 2020-Q2

[Operator]

[Foreign Language]Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the 5N Plus Inc. Second Quarter 2020 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 second quarter ended June 30, 2020 financial results conference call. We'll begin with an overview of our business performance and review our financial results, after which, we will begin the question period. Joining me this morning is Arjang Roshan, our President and Chief Executive Officer. We issued yesterday our financial statements, and we have posted a short presentation on the Investors section of our website. I would like to draw your attention to Slide 2 of the presentation. Information in this presentation and remarks made by 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 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. The company is not aware of any significant changes to its risk factors previously disclosed. However, since January 2020, the gradual outbreak of the novel strain of the coronavirus COVID-19 and its declaration as a pandemic by the World Health Organization has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures have caused material disruption to businesses globally, resulting in an economic slowdown. The outbreak of the COVID-19 should be considered a new risk factor.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 discussions and analysis. I would like to turn the conference to Arjang for the discussion on the business performance and quarter results. Arjang?

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

Thank you, Richard. Good morning, ladies and gentlemen. Welcome to 5N Plus conference call. I hope wherever you are, you and your families are doing well and are remaining healthy and safe. Last night, 5N Plus posted results for Q2 and year-to-date 2020. Adjusted EBITDA for the quarter and year-to-date grew to $7.6 million and $14.5 million versus $6.5 million and $11.5 million for the same period in 2019.In the second quarter, return on capital employed improved to 12.6% as compared to 8.2% for the same period last year. Revenue for the quarter reached $41.1 million as compared to $50.3 million for the same period last year. During the quarter, 5N Plus generated $16.2 million of cash from its operating activities and reduced net debt from $38.1 million to $24.4 million. Also during the quarter and year-to-date, 5N Plus posted 30.6% and 27.2% gross margin, which is a record for the company with its current businesses. I believe there are 4 relevant themes in our quarterly and year-to-date performance that we should pay attention to. Perhaps the most glaring theme in the quarter is the fact that the increased contribution from higher value-added businesses like semiconductor compounds and engineered substrates played a key role in expanding margins and growing the company's profitability. The component of revenue from these businesses contains much less metal revenue and much higher value-added revenue as compared to, say, industrial materials. The second theme is the overall improvement in operating fundamentals, which is beginning to result in lower cost per unit of output. 5N Plus continues to invest in process technologies and expect more improvements in this area in the future.The third theme relates to COVID-19. This factor remains a headwind for 5N Plus. This being said, we continue to operate our businesses effectively. Very early this year, 5N Plus took a number of decisive actions to protect its employees, its operations and the interest of its stakeholders. We continue to work closely with related government agencies and have implemented specific measures befitting the various jurisdictions. The fourth theme is the fact that multi-decade lows in relevant metal notations have continued to render the company's upstream activities suboptimized. Despite this, even at the current near historic lows, stability in metal notations have brought inventory values in line with market price, eliminating the transitory margin contraction experienced in 2019.Now let's delve into our various businesses and provide more color. Revenue for segment Eco-Friendly Materials was lower than last year. The majority of this difference can be explained by the lower metal notations. For this segment, the metal portion of the revenue generally moves with metal notations. So when notations move downward, the overall revenue also moves in that direction. Also, to a lesser extent, demand for industrial materials was lower than the same period last year, mainly due to delay or lower demand from COVID-affected industries, such as aerospace and automotive.We believe this trend will continue in the second half of 2020. Revenue for catalytic and extractive materials was lower in the second quarter as compared to the same period last year. The closure of certain gold mines due to the pandemic resulted in slightly lower demand for extracted materials. 5N Plus continues to benefit from a strong order book for these materials. The performance of this sector will depend on the end users' ability to keep their activities and operations open.Revenue for health and pharma remained flat in Q2 as compared to the same period last year. 5N Plus continues to make progress with the various qualification campaigns for the newly established additive business. Admittedly, given the current global situation, progress is slower than expected. For the second quarter, segment Eco-Friendly Materials posted adjusted EBITDA margin of 17%, which is better than the 11% for the same period last year despite headwinds that we just mentioned. Two factors explain much of the expansion in margins. Firstly, allow me to remind us that this segment of our business, specifically businesses related to industrial, catalytic and extractive materials, are most impacted by changes in metal notations. While relevant metal notations have remained near multi-decade lows, relative stability of these notations at such levels over the past several months have enabled inventory values to adjust in line with market price. This enables the downstream businesses to truly reflect their margins without interference from inventory values.Secondly, 5N Plus has continued to improve operating efficiency, and we are beginning to see the benefits from these projects. In the second half of 2020,we expect to complete certain investments related to automation and enhanced capacity utilization. We expect further efficiency gains, which should allow us to be even more competitive.Revenue for segment electronic materials was slightly higher in Q2 as compared to the same period last year. What is important to note is the fact that 5N Plus activities in this segment is attracting attention and tangible support from a number of leading customers and agencies. During the quarter, 5N Plus signed a $12.5 million contract with the U.S. government aimed at further advancing process and product technologies for specialty semiconductors. Such contracts enable 5N Plus to further strengthen its specialty semiconductor business with products aimed at future markets with larger revenue potential. Also during the quarter, 5N Plus launched a new generation of semiconductor products under the name of INZBE3 with applications ranging from gas detection for increasingly regulated industrial environments to security and surveillance for which the company is experiencing surging demand. Last but certainly not least, during the quarter, the demand for semiconductor products related to medical imaging was exceptionally strong. The net result of these developments resulted in an exceptionally strong quarter for security, aerospace, sensing and imaging materials. We expect this sector to continue to outperform last year's performance as we move into the second half of the year.During the quarter, revenue for renewable energy materials remained flat as compared to the same period last year, albeit with a better mix than last year. In the second half of the year, 5N Plus will be focusing on process technology enhancements aimed at a new generation of products for thin-film, high-efficiency solar power cells. With respect to technical materials, in Q2, 5N Plus continued to face headwinds as customer qualifications of our engineered powders slowed due to the pandemic. Given the technical nature of this work, close collaboration between 5N Plus and our customers is a prerequisite. We do not expect the situation to change in the second half of the year. Overall, Electronic Materials adjusted EBITDA margin improved from 25% in Q2 2019 to 34% in Q2 2020. The majority of this improvement can be attributed to the growth and higher contribution from semiconductor compounds and engineered substrates. Obviously, we're much -- we are very much encouraged by this development. We have always believed that our growth in this area will transform the company and serve as a catalyst for substantial profitability growth. As we move to the second half of the year, our top priority remains the health and safety of our people. Our best visibility indicates that the headwinds associated with COVID-19 will remain with us for the year. Also, the second half of the year has historically not been as strong in terms of earnings as compared to the first half. Despite these 2 factors, we still expect 2020 to be a stronger year as compared to 2019 with adjusted EBITDA in the range of $25 million to $28 million. Also in the second half of the year, we expect to complete certain key investments to further enhance our competitiveness and establish additional joint and strategic agreements. What is unique about our company's performance in the second quarter of 2020 is the fact that it provides a window into where 5N Plus is headed. As our company continues to increase the contribution from businesses with higher value-added activities and reduce revenue exposure to metal notations, we expect the quality of earnings to improve. Last quarter's 30.6% gross margin is a record for us. While I'm not yet ready to declare this as a normalized margin for 5N plus, I strongly believe that the proper execution of our plan will allow us to expand our margins and grow our earnings in an ebb-and-flow fashion to levels exceeding what we saw in Q2. At this point, I'd like to return the call over to Richard.

[Richard Perron, Chief Financial Officer]

Thanks, AJ. So good morning, everyone. So as mentioned by AJ, the company continues to successfully navigate the COVID-19 crisis, maintaining strong demand for its core business products, posting strong second quarter results, the best in about 7 quarters in terms of adjusted EBITDA and a record quarter in terms of gross margin expressed as a percentage of sales, and this in spite of the current pandemic difficult environment and historical low metal notations impacting the contribution from upstream operations. These results reflect the company's focus on improving production capability and efficiency supported by strategic investments, expected to generate benefits in the coming quarters, further strengthening our portfolio of products bolstered by the company's transformation and business model, favoring more value-added products and services with special emphasis for our sectors, pharma and health and semiconductors. During the quarter, the company continued to manage cash diligently and operating expenses judiciously, further strengthening its balance sheet by reducing net debt by more than $13.7 million from last quarter, maintaining a high level of liquidity, keeping all options open to finance growth projects. Similar to previous quarters, we continue to believe that 5N Plus is ideally positioned not only to navigate its path through the current environment, but most important, emerge stronger and more competitive. So now starting with the coverage of revenue and gross margin of this quarter. In Q2 2020, revenue decreased by 18% compared to the same quarter of last year, while gross margin reached a record level of 30.6% compared to 23% in Q2 of last year, tracking an average gross margin of 27.2% or $24.8 million after 6 months compared to 22.7% or $23.1 million, with both periods impacted by historically low underlying metal notations and relative metal notation stability during 2020. Now covering adjusted EBITDA and EBITDA. In Q2, adjusted EBITDA was $7.6 million compared to $5.9 million in Q2 of last year, positively impacted by a favorable product mix [ carried ] by security, aerospace, sensing and imaging sector, relative stability of the metal notations and reduced operating expenses across the company. In year-to-date, adjusted EBITDA increased by $3 million from $11.5 million in year-to-date 2019 to $14.5 million, impacted by factors mentioned before, mitigating the contribution shortfall from upstream activities due to low metal notations. In Q2 of 2020, EBITDA was $6.5 million compared to $5.3 million in Q2 of last year. The increase is mainly explained by the higher adjusted EBITDA, net of our foreign exchange and derivative loss. And year-to-date, EBITDA was $12.7 million compared to $9.5 million last year. The increase is mainly explained by the higher adjusted EBITDA combined with lower share-based compensation expenses, reduced by our foreign exchange derivative loss. In Q2 2020, operating earnings reached $4.1 million compared to $2.9 million last year and $7.7 million year-to-date compared to $4.2 million last year. Year-to-date, net earnings were $2.3 million compared to $0. 6 million last year. Now looking at annualized backlog. Backlog as at June 30, 2020, reach the level of 202 days of annualized revenue, an increase of 14 days or 7% over the backlog of March 31, 2020, at similar level in Q2 of last year.Quickly going through the expenses. Depreciation and amortization expenses in Q2 and year-to-date amounted to $3 million and $6.1 million, respectively, compared to $2.6 million and $5.8 million for the same period of last year. SG&A in Q2 and year-to-date were $4.6 million and $9.5 million, respectively, compared to $5.5 million and $11 million for the same period of last year. In 2020, the expenses were positively impacted by favorable exchange rates across most local currency-denominated expenses when compared to last year as well as lower travel and consulting expenses, either avoided or delayed due to the COVID-19 pandemic. Financial expense in Q2 amounted to $1.5 million compared to $1.1 million last year. The increase mainly due to the higher loss in foreign exchange and derivatives compared to the same period last year. The company reported earnings before income taxes of $2.6 million in Q2 and $4.9 million year-to-date. Income tax expense in Q2 and year-to-date were $0.9 million and $2.5 million compared to 0 last year and $0.8 million for the same period of '19, both periods were impacted by deferred tax assets applicable in certain jurisdictions.Covering liquidity, cash generated by operating activities amounted to $16.2 million in Q2 of 2020 compared to cash used in operating activities of $0.6 million in Q2 of last year. And year-to-date, cash generated by activities amounted to $16.8 million compared to cash used in operating activities of $7.2 million for the same period of '19. The increase in funds from operations is mainly explained by the positive change in the net changes in nonworking capital, combined with the higher EBITDA. And year-to-date, cash used in investing activities totaled $4.2 million compared to $3.9 million last year. In Q2 of this year, cash used in financing activities amounted to $5.8 million compared to $3.3 million in Q2 of last year. The increase is mainly explained by the reimbursement this quarter of the drawdown of $5 million from the credit facility done last quarter. And year-to-date 2020 cash used in financing activities amounted to $2 million compared to cash from financing activity of $1.5 million in year-to-date of last year. Since the beginning of 2020, the company has repurchased and canceled about 1.1 million common shares under the NCIB plan for an amount of USD 1.2 million compared to 1.7 million shares for an amount of $4 million last year.Now looking at gross and net debt. Total debt is stable at $55.1 million when compared to December '19. The drawdown of $5 million on the company's credit facility for working capital purposes in Q1 was reimbursed during Q2, following the cash and cash equivalent generated during the quarter. Net debt after considering cash and cash equivalents decreased by $10.6 million from $35 million at the end of December '19 to $24.4 million at the end of June 30, 2020.So this will conclude the financial review. We are ready to take questions from analysts.

[Operator]

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

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

In your comments, you mentioned that COVID is still a headwind or was a headwind in the quarter, and you could see it as a headwind in the back half of the year. Are you able to quantify how much of a headwind you've seen from COVID in the last quarter?

[Richard Perron, Chief Financial Officer]

It's actually a bit difficult, but we've seen some slowdown around our industrial products, okay, towards the end of the quarter, okay? And now we're in the middle of summer, it makes it hard to assess if it's COVID or a combination of the usual annual shutdown to some of those key industrial clients that we have incurred during the summer.

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

Just to add to Richard's point, most of the impact is felt on the Eco-Friendly Materials and in a specific part of Eco-Friendly Materials, mainly -- as Richard mentioned, mainly on the industrial side, albeit there is some also in the extractive -- catalytic and extractive because certain gold mines shut down or still not fully operating. So I guess if there is a good news in this is that a lot of this has -- the impact would be more on the revenue side than on the margin side. I would add that as well.

[Richard Perron, Chief Financial Officer]

Yes, that's correct.

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

Okay. So you don't think it had a big impact on your reported EBITDA for Eco-Friendly Materials in Q2?

[Richard Perron, Chief Financial Officer]

No, no, no. As we just mentioned, by default, what we see is a combination of COVID, annual shutdowns, but it's 4 product lines that are generating the lowest margin out of our portfolio.

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

Okay. Great. And then with your stronger balance sheet, wondering if you can walk us through any changes you may have in your thoughts on capital allocation going forward. Historically, you've talked about M&A. If you -- maybe you could talk about how that may be evolving or what your thoughts could be on increased share buybacks or investment in process technology. What are you going to do with your stronger balance sheet?

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

Okay. So I'll start and maybe Richard can augment. Starting with buyback, I believe we have a mandate under our NCIB to purchase up to $2 million. And we've been active. We've purchased, I believe, more than 50% of that so far, and we'll continue along that path. We -- our approach towards NCIB over the past couple of years has been to consistently take some off the market. We haven't been erratic with it. We've been very consistent. We've continued to be -- purchase our own share in a reasonable manner. And I think at this point, we'll continue with that. On the capital allocation to investments, we continue to invest into process technology. We believe that this is an area that is really important for us because whether it's our legacy product or brand-new product, process technology has a direct impact to our profitability. Obviously, in legacy areas, it increases efficiency, improves your competitiveness in new products by increasing things like yield, by optimizing your product or even maybe optimizing it for the customers' process. You end up being able to benefit not just on the cost side, but if you do it jointly with a customer, you can potentially improve your margins in terms of getting more for it at the customer. So that process will continue. We'll continue to invest in those activities. As with M&A, our hope is that the current environment will provide some opportunities for us. We're very much, let's say, active in the background, scouring the market to see if we can find opportunities that previously was submerged and is emerging, let's say. I guess that's all I can say. But as Richard mentioned, we are -- we've tightened up -- our balance sheet was good. We're continuing to even improve it because when the opportunity emerges, we want to be able to have the full range of flexibility to pull the trigger. In the meanwhile, we are continuing to invest diligently into our activities with discipline to make sure that the activities that we're investing in have appropriate paybacks.

[Richard Perron, Chief Financial Officer]

And just to add, the NCIB program continues as usual and we'll make opportunistic buy as per the limit of the program.

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

Is there much investment required in process technology to support the growth in your SASI business? Or do you see any of those investments increasing the market potential for other products like catalytic and extractive?

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

I think in terms of catalytic and extractive, we have already put in some investments. Some of it has already been mature. Some of it will be maturing in the next, I would tell you, 12 months. On products like SASI, anything that has to do with semiconductor compounds, the answer to your question would be a strong yes. Because we really believe there are -- we have some initiatives there that, over the long term, will truly transform the company. So we'll continue to invest in that. We also -- as I mentioned in my monologue, we have now customers and agencies, government agencies that are investing in those processes. So we believe that in our future, there will be quite a bit of investment made in those sectors, those new product sectors to be able to really expand the portfolio. The key is, for us, I think, is to start thinking about larger TAMs. We need to access larger revenue pools. We know that the revenue pools that today we have access to, we do quite well. We have earned a very strong market position in them. And so part of the play really is to increase the market size.

[Operator]

Next question will be from Nick Agostino at Laurentian Bank Securities.

[Nick Agostino]

So I guess my first question, AJ, we -- you've spoken about how value-add products are larger contribution in the quarter, and you suggested as much in prior quarters as well. I'm just wondering, is there a way to maybe quantify what percentage of total sales you guys attribute to value-add products. If you can do that for this quarter and even to prior quarters, just so we can gauge the momentum itself and see the better measure the benefit on the margin side as well.

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

Okay. I'll give it a go. Not sure I'll get there 100%, but I'll give it a go. So if you look at historically, from the revenue perspective, and Richard, you can correct me if I'm wrong, Eco-Friendly Materials was probably more like 60% of the revenue, maybe a bit more as compared to Electronic Materials. Within Eco-Friendly Materials, I would tell you, 2/3 of it are activities that require quite a bit of metal. And so there are benefits to that. When metal prices going up, obviously, your revenues can reach -- go up very quickly, very quickly. But then when it goes down, not only it comes down, but also starts chewing into your value-added revenue. On the electronics side, we have, I would say, done a good job of getting rid of a lot of the commodity-based products that were there. You may remember, we had stuff around gallium compounds for LEDs and indium compounds for thin film products and so on that were really commodity and have the same profile as something that has more metal and less value added. Those are largely gone. There's still remnants of it but largely gone. So that part of our business, I would tell you, probably is the other way around, maybe even more, I would say, the 2/3 or maybe 3/4 in terms of value added. And the rest is still, let's say, products that are heavy in terms of metal.And what's unique about, as I said in my text, in Q2 is this -- by chance, essentially, we were able to be given a window as to what happens when you have a different mix because Q2's mix was different. It was more favored, let's say, towards those value-added revenues. And here is where the future, I believe, lies for 5N Plus as we continue to expand into products that have more value added, less metal. You can see the margin expansion is quite -- is much more palpable than any impact on revenue. And I've always maintained -- one of the discussions I've always had with you analysts has been you've been looking for revenue, and I've been saying, look, guys, we still have a lot of revenue within our total revenue that is metal. And as we replace those with value added, even if we do it as 1:1 -- usually, it's less, but even if we do it as 1:1 in terms of revenue, you're not going to see growth. But in terms of expansion, there's a lot of opportunity. When you look at a gross margin profile that historically were in teens or maybe low 20s now, going up to 30s and beyond, obviously, there's quite a bit of opportunity there that we can capture.

[Nick Agostino]

Okay. That was very helpful, actually. And then I guess my follow-up question is we recently heard that the U.K. government is looking to put some money in to resurrect the OneWeb satellite operation. Just wondering if you've heard from your customers on that particular contract, whether it sounds like that contract might be coming back in the second half of this year or even if there's a time line for 2021. And if so, can you maybe help us understand what the, I guess, impact or benefit would be on your bookings and backlog?

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

So here, I'm going to take on the trademark positive but -- optimistic but cautious approach to it. In addition to this, actually, there are other programs now that are being discussed. There's a lot of stuff that's going on in space, as I'm sure you've been hearing about it. There are a number of constellation that are supposed to go up. We're very much encouraged by this. Specifically also, you mentioned OneWeb, which we have, by the way, taken out of our forecast. We are not counting on it, albeit we might be pleasantly surprised. What we see is that -- and we hear from our customer that, that business could potentially reemerge. The reason why we haven't quickly jumped on that bandwagon is it's coming back from restructuring. There are discussions about potentially moving some of the production from Airbus' facility, I believe, in Florida to potentially the U.K. We're not sure how that's going to affect the supply chain. But that being said, any of these constellations that go up that utilizes germanium wafers for their solar arrays is ultimately going to have to come to only, well, a couple of companies, us being one of them. So the trend I would tell you is very promising. I just don't want to speculate on it. I don't want to really -- at this point, I'll just use it as an upside if it comes, but I'm not going to count on it, only because the nature of the space is very, very shifty. So I don't want to create a lumpy situation in our demand profile. But for the time being, we've -- we're clearly very pleased by what's happening, but we're not going to put it into our forecast.

[Nick Agostino]

Okay. Fair enough. And then last question. You mentioned in your MD&A that your plant in Malaysia, I believe it is, has been halted due to a dispute, I believe, with the government. Can you provide any update there? And maybe give an indication as to how critical that plant is? What sectors it serves? And maybe when you think that plant could be back up and running? And I'll leave it there.

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

So given the fact that -- obviously, we are in the midst of some sensitive dialogues with the local government, there's only so much I can really disclose. Indeed, we have a dispute in terms of our activities there with the local government. We're working very closely with them collaboratively. We -- from our point of view, we haven't really changed -- to the best of our knowledge, we haven't really changed the nature of that activity. So for us, it's a bit -- I guess that's why we think it may be a misunderstanding because to the best of my knowledge, I'm not aware of material change in that. And so based on that, we continue to have the dialogue. Everything is going a bit slower anyhow due to the current pandemic. Some of these offices and things were closed for a long period of time. So we don't expect this to be something that's going to immediately be resolved. We have looked at the activity at -- in its current configuration. And given our global footprint and options that we have around the globe, we have assessed the impact to be marginal, not to be significant as we go forward. Obviously, if there's more update, obviously, if there are things that we can share with you, we certainly will.

[Operator]

Next question will be from Mac Whale at Cormark Securities.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

AJ, I just wanted to go through your thoughts on the rest of the year because I think you addressed this. But I'm a little curious, I'm a little surprised that you're not stronger than you let on. And part of that -- I mean if you look at the auto industry, gone through the worst part of what the expectations were and things are improving there. You've got gold and silver going through the roof. So every operation, those are all coming back online. They're processing a lot more ore. You've got the contract, you've announced, the semiconductor side for the satellite, you just announced it, but you haven't really seen a whole lot of that business presumably. And sure, the second half is not usually as strong as the first half, but there's a pretty unique situation going on here. I would have thought that given how well Q2 was, that you would actually be seeing -- you'd be able to or expect some stronger sense of progress in the second half. So can you take me through -- I know you mentioned you've got headwinds in the industrial side. But given the value-added part of the business, that's also relatively small. So I kind of feel we need a little bit more explanation about why you're not more bullish on the second half.

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

Yes. Of course, Mac, I understand your question. So let me try to delayer the onion. Let's start with some of the items you mentioned earlier. Gold is indeed having a heck of a run, and we had also expected that this would simply translate into additional demand. The issue there is not so much from where gold is. In some of these mines, there were closures, for example. The Canadian mines, we went to a very prolonged period of closure. And as COVID still works its way through some of these activities, they end up basically shutting down mine. So we continue to anticipate more impact from that. We certainly -- or at least our customers are indicating that we should at least anticipate that there could be still potential closures of mines due to the infection. On the industrial side, when you look at automotive -- aerospace, we actually have not -- while I know in the media, there's talks about automotive coming back, the demand for us has not returned yet. It has not returned. We're not seeing it in the forecast. Perhaps it could be that there was some stockpiling going on earlier. And now it's -- the customers are looking to bring down their stock. I'm not 100% sure there. But from the demand part, we certainly see that Q3 will continue to have it. We're not seeing improvements in the forecast that we're getting from the customer. Now the other factor that you should also consider on Electronic Materials is we had an exceptionally strong quarter for medical imaging. We're not assuming that -- or not certainly to that extent in the second half. Maybe we're surprised, but we feel that, as I mentioned, this is an ebb and flow type of a thing. We're seeing the same thing, for example, for INZBE, the new product. We see that, that product, over the first half, we've had an exceptional amount of demand there. But the way we've historically seen these products because you're a brand-new product is they come in, they go through a customer's production line or what have you and then there's a period of doldrum, and then you get a second surge that's even bigger than the first. So it's like a zig-zag model when you look at that demand profile. So -- and historically, the second half of the year have experienced that zig-zag model, and we've just amplified it because of COVID. So on the growth side, we think that we're not going to -- we're going to have strong demand in semiconductor area, certainly much stronger than last year, but we're not anticipating record level shipment for, for example, medical devices. And then on the industrial and on catalytic, we're not seeing -- our forecast, what the market is saying in terms of sales of cars returning or getting significantly improving, we're not seeing that. Richard, do you have more to add?

[Richard Perron, Chief Financial Officer]

No, exactly that. From our forecast, those 2 sectors, we don't see it yet, not on our side. So that's why we're [ prudent ].

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Yes, that makes sense. So is there -- in your experience, do you ever see -- like, can you -- are those forecasts accurate? Like in other words, do you -- when they -- like how advance are those? Like can they change a lot through the course? Because something similar happened in Q2, right, where the estimates were like 40% decline and it ends being 20%.

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

Yes. They're not accurate. I'd be the first one -- it's our best view. It's the forecast we get from our customers, but they are somewhat lumpy. No, I would not classify them as something you can bet your house on? Certainly not.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. But presumably, as you're sitting in August, you've seen a fair amount this quarter in Q3 already. So yes, I mean is what you're saying up to date? Or is it really reflecting the end of June?

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

So what we did is we looked at the forecast that we do have from our customers. We've sort of looked at also -- we kind of go back and create some of the forecast we had in the past. The information that we're giving you is our best information as of late, okay? I think that addresses one of your questions. But what we've done is we said, look, with this COVID and on top of that, with the fact that the demand -- look, I'll give you an example. I was not expecting the shift in the medical imaging to the extent that it happened, and the forecast didn't necessarily support it either. Now what we're saying is, as we go to the second half, we don't want to take the same type of an approach. You may call it more conservative, but I think it's just assessing that in the past year, second half has always been weaker, right? So we've added that. We still have COVID, and it's coming back in a second wave in certain areas. We're not seeing, certainly, our customers give additional let's say, increase in their demand. So we -- it's our best view, and we felt that we were going to this time also be giving you a guidance on EBITDA, right? So this is our compromise. We're giving you a guidance on the EBITDA in a very uncertain environment. But against that, we're tempering that with a more, let's say, middle of the funnel view of the demand.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. Okay. That makes sense. That's helpful. It's funny because we're sitting here looking at the stock market. It's kind of in a disconnect with calls like this, right, where there is a bit of a whipsaw or a zigzag, if you will, even from what we're seeing. So it's kind of -- it will be an interesting second half because you might be surprised or, we mention this, one way or the other. So -- but it was a great...

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

But I think even on the stock market, Mac, I think if you look, 2/3 of the stocks are behaving differently than the other 1/3.

[Operator]

[Operator Instructions] And your next question will be from Frederic Tremblay at Desjardins.

[Frederic Tremblay, Analyst]

So one of your stated priorities for the back half of the year is the establishment of additional joint and strategic agreements related to growth initiatives. Wondering if you could expand a bit on which growth initiatives you're specifically targeting in the second half. And then if you could explain a bit on what sort of strategic agreements you're thinking about here.

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

So as you know, when it comes to powders, semiconductor materials, that's an area that we're putting a lot of effort into. We believe that in those areas, we certainly have been getting very strong level of interest from potential customers. For -- they are in various fields. Some of it has to do with, for example, medical technology, some of it has to do with imaging. So we're working very closely with them, and we're looking to see if we can come to agreement on projects, which ends up essentially providing us a pathway in being able to make our way into their supply chain and becoming a supplier to them on a more long-term, sustainable basis. So that would be one item that I would tell you.Also, one of the things that as we -- our strategic plan is maturing. One of the things that we're beginning to see is that, look, when you look at the markets that we address, we tend to do very well in them. The challenge is that they are not huge markets. 5N Plus, if you look at its market share, it has earned its way to be #1 or #2 in just about everything that it touches. But the challenge is it's not -- it needs to increase the total addressable market. So this means for us to get into some of these adjacent areas that we've been -- we've seeded and invested in over the past few years. And there are different ways of getting in there. If you're going to go organically, obviously, M&A is something that we're definitely looking at, just a question of being able to pull the trigger and convincing ourselves that it's going to create value. But on the organic side, the way we prefer to do these are to really get in a base and level with the customer. We recognize that it takes a bit longer. I know some of our investors like to see these things to go faster, but our approach is to get into the base and level with the customers and start really developing those products for them. So that's really what we're talking about when we talk about strategic agreements. And certainly, working with governmental agencies helps us because the work that we do with them, we usually do it in a way which allows us to develop tangents, develop offshoots from those technology developments into other markets.

[Frederic Tremblay, Analyst]

Okay. And last question for me is on the balance sheet, obviously, a very healthy balance sheet here. As we think about ammunition for potential growth opportunities, can you remind us what's your leverage comfort level is?

[Richard Perron, Chief Financial Officer]

From a senior debt perspective, I mean, we could go up to 3x for a certain period of time and then bring it down, okay? And we could stretch it using a combination of additional junior on the balance sheet before getting to equity, which obviously is not optimal at this time.

[Operator]

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

[Richard Perron, Chief Financial Officer]

Okay. Well, thank you all. Thank you all for joining the call, and have a nice day.

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

Thank you very much.

[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.