5N Plus Inc

TSX:VNP

Earnings Call Transcript 2019-Q3

[Operator]

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

[Richard Perron, Chief Financial Officer]

[Foreign Language] Good morning, everyone, and thank you for joining our third quarter ended September 30, 2019, financial results conference call. We will begin with an overview of our business performance and review of 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 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 result is obtained in our management 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 discussion and analysis.I would now like to turn the conference to Arjang for the discussion on the business performance and quarter results.

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

Thanks, Richard. Good morning, ladies and gentlemen. It's a pleasure to be with you this morning as we cover 5N Plus Q3 and year-to-date results for 2019.Last night, 5N Plus posted results for Q3 2019. Adjusted EBITDA and EBITDA came in at $6 million and $5.9 million as compared to $8.6 million and $7.8 million for the same period last year. Return on capital employed came in at 8.7%. Revenue, including metal, reached $49.6 million for the quarter as compared to $53.4 million for the same period last year.If I were to summarize the quarter and year-to-date performance in a healthy paragraph, I would say, during Q3, 5N Plus made ample progress in resolving the majority of the challenges associated with mass scaling of its new products. These products were to fill the majority of the gap created by the anticipated overall margin reduction from renewable energy business as per the long-term contracts negotiated in 2018. Early 2019 production challenges associated with these products made it difficult to realize this ambition. The company's progress in this area during Q3 closed much of the gap for the quarter. This being said, deterioration in metal notations masked much of the progress made by the company and weighed on 5N Plus' performance.I'd like to add a bit more color to what I just said. Revenue for renewable energy sector as of year-to-date came in at record level driven by the strong demand for products offered by 5N Plus. The underlying fundamentals for this business remain strong. Contracts negotiated in 2018 enabled volume growth at lower margins per unit of production, resulting in overall lower margins in 2019. This was anticipated considering the fact that the entire renewable energy industry has been experiencing over 20% year-over-year cost reduction. In fact, our strategic plan, 5N21, assumed margin contraction from renewable energy with lower overall margin contribution in the outer years. As mentioned earlier, increased contribution from new products and businesses are expected to not only compensate for this but also deliver additional growth.So how are we doing on this front? Well, the best way I can answer this question is to point you to the backlog number. Over the past few quarters, we have secured a number of significant contracts, including those related to new products and have continued to grow the order book which is now at a level not seen in many years. Early this year, management communicated teething challenges associated with mass scaling of some of these products, which has impacted the company's performance. In the past several months, our global teams have been focusing on resolving these issues, and we believe much of the issues have been resolved. To address the remaining challenges, we've moved ahead with a $10 million package of investments, which should also improve efficiency and reduce environmental footprint. This investment package is expected to have a payback of less than 3 years and is due to be completed by late 2020.Over the past year, notations associated with the metals used in the company's product have continued to slide. As a reminder, please note that when metal notations decline, sales price associated with the materials containing these metals adjust quicker than the inventory value of the metals, resulting in lower margins. Three years ago, when 5N21 strategic plan was introduced, a major tenet of the plan was to significantly reduce earnings volatility associated with changes in metal notations.Over the past 3 years, the company has implemented a number of tactics supporting this strategy. I think I'm not being overly dramatic by declaring that these changes were not implemented a moment too soon, especially when we consider a tidal wave of woes metal markets have provided over the past 18 to 20 months. To provide an example, please consider the fact that notations associated with bismuth metal, which is the largest metal consumed by the company, has declined by as much as 40% in the past year and 15% just over the past quarter, reaching the lowest level in decades. While this has clearly weighed on our results in 2019, we're pleased to see such tidal waves no longer pose an existential threat to our company and is yet another evidence that our plan is working.We should also mention that over the past few years, reducing reliance on commercial metal purchases in favor of procurement of metal through refining complex feed has been a notable contributor to the company's bottom line. With notations reaching levels not seen in many years, in mid-2019, a number of complex feed suppliers, especially those related to bismuth, began to either stop or suspend marketing their products. As announced last quarter, this has caused the company to scale back its refining activities.Let's now move to the various segments of our business. Segment Eco-Friendly Materials revenue was lower and adjusted EBITDA in the same level in Q3 2019 as compared to the same period last year. While a further drop in metal prices had been -- have had notable impact in revenue generation and earnings, it is worthwhile to note that adjusted EBITDA margin for the quarter improved as compared to the same period last year. This is especially important given the fact that the adverse impact on the metal markets on this segment was nearly similar in percentage decline when we compare Q3 2019 with Q3 2018, confirming the company's move toward more value-added products and improved margins.Revenue for sector health and pharmaceutical materials was at the same level in Q3 as compared to the same period last year. 5N Plus continues to invest in process technology to improve the quality and cost structure in this sector with package of investments highlighted earlier as earmarks dedicated to this sector and is expected to be completed in 2020.Revenue for industrial materials was significantly lower than the same quarter last year. Nearly the entire drop can be explained by the drop in metal notations as this sector has the highest usage of pass-through metals. The actual margins for this sector improved as a percentage of revenue when compared to the same period last year.Revenue for catalytic and extractive materials was lower in Q3 2019 as compared to the same period last year. During the quarter, the production facility associated with these materials underwent extended planned shutdown to accommodate new investments, impacting the sector's results. Over the next 12 months, there are additional investments planned with aim to increase yield and throughput while reducing environmental footprint associated with this activity. During the quarter, 5N Plus continued to secure sizable business in this area, with 2020 order book nearly full.Segment Electronic Materials revenue for Q3 2019 was higher than the same period, while adjusted EBITDA was lower as compared to the same period last year. The deterioration in metal notations and lower margins in renewable energy masked the revenue and earnings growth provided by the growth initiatives, especially from security, aerospace, imaging and sensing-related products.Revenue for renewable energy Materials for Q3 was at the same level as Q3 2018. Much of this business is governed by long-term contracts with a mix of products and services. As already mentioned, the contracts negotiated last year are in full effect. And these contracts have resulted in revenue growth, albeit at lower sales price per unit of volume when compared to the previous contract.Revenue for technical materials was stable for Q3 as compared to the same period last year. The deterioration in metal notations adversely impacted older products in this sector. This said, volume and revenue for engineered powders continue to grow fueled by the introduction of ultra-fine engineered powders for the new generation of smartphones, smart watches, wireless earbuds and other wearables, for which 5N Plus has won contracts, ushering its entry into this new and exciting market. As devices continue to require more functionality within a limited space, the need for finer powders with specific morphology is expected to grow. We believe 5N Plus is uniquely positioned to satisfy this growing demand.Revenue for Security, Aerospace, Sensing and Imaging grew significantly as compared to the same quarter last year. During the quarter, our teams made notable progress in addressing production challenges associated with new products, resulting in increased output and higher contribution from this sector. In addition, the company secured important long-term supply contracts related to the family of [ 26 ] materials associated with new sensing and imaging applications. We look forward to further disclosure in the future. For now this is about as much as we're at liberty to discuss.After 3 years of tangible progress, 2019 has proven to be a challenging year for 5N Plus. This said, it would be a mistake to assume the year has been void of considerable progress. Over the past several months, 5N Plus has begun to introduce new products in a number of growth markets where the company previously had little to no presence, wooing market leaders and entering their coveted supply base by offering unique value propositions. 5N Plus has continued to invest in efficiency and sustainability projects and have ample progress -- and have made ample progress in developing competency platforms from which tangible growth can be sprouted.Even when we consider the adverse impact of metal notations, it is hard to ignore the positive implications. Just consider a time not so long ago when metal movements experienced in 2019 would have landed the company in the proverbial hospital. Today, we clearly see such event, while adverse, as no more than a case of common cold. Of course, we recognize much of the progress may not be visible to the naked eye, especially when we compare 2019 results to the previous year. However, we are convinced that this will soon become evident. To that end, my team and I remain committed to our strategy and keenly focused on our current trajectory.I now would like to turn the call over to Richard.

[Richard Perron, Chief Financial Officer]

Good morning, everyone. As covered by AJ, similar to previous quarters, during this third quarter of 2019, despite strong demand, we continue to face challenges, again, this time from important adverse movements in the notations of the key metals used as input to our materials, however, mitigated by continued improvement to our product mix, and this despite the dynamic nature of our businesses. As a point of reference, when looking at the last 4 quarters, the average market price for bismuth decreased by approximately 40%. Despite this factor out of our control, the company completed a quarter progressing on various fronts, more specifically in terms of investments to increase the competitiveness of our assets and product development.The company continues to invest with focus and discipline to improve future returns with a special emphasis on deploying surplus cash on capacity, capabilities and internal growth initiatives, supporting our ongoing transition towards higher added value products and allowing us to be more cost competitive. You should continue to expect higher capital investment in 2019 and early 2020 when compared to 2018. In addition, the company continued to manage cash diligently and operating expenses judiciously, ending the quarter once again with a solid balance sheet, presenting a very healthy inventory position despite high volatility in the metal market. So while there is more to do and despite headwinds outside of our control, we remain very optimistic. We are focused on structurally improving costs, overcoming any challenges associated with realizing our internal growth initiatives and plans and continuing to increase the share of high added value products.So now starting with the coverage of revenue and gross margin. During Q3 2019, revenue decreased by 7% compared to the same period of 2018. Gross margin reaching 23.5% in Q3, tracking an average gross margin of 23% after 9 months. While overall realized volume is higher when compared to the corresponding period of 2018, both revenue and gross margin were negatively impacted by the adverse movement in the underlying metal notations and the application of the most recent commercial terms for the multiyear supply and services contracts renewal within our renewable energy sector.Now covering adjusted EBITDA and EBITDA. In Q3 2019, adjusted EBITDA was $6 million compared to $8.6 million in Q3 of last year, negatively impacted by metal notations, recent deterioration of the contribution from our upstream activities due to the current metal market conditions, along with the application of the most recent commercial terms on the contracts renewal within the renewable energy sector. In year-to-date 2019, adjusted EBITDA decreased by $8 million to $17.4 million, impacted by factors just mentioned and production challenges associated with the new business activities. And year-to-date EBITDA reached $15.4 million compared to $23.4 million in year-to-date of '18. The decrease is mainly explained by lower adjusted EBITDA. In addition, no significant nonrecurring items were recorded in 2019 when compared to 2018.Now looking at the annualized backlog in bookings. Backlog as at September 30 reached a level of 215 days of annualized revenue, an increase of 14 days or 7% over the backlog of June. Backlog as at September for the Electronic Materials segment represents 293 days of annualized segment revenue. The backlog for the Eco-Friendly Materials represent 155 days of annualized segment revenue, an increase of 18 days or 13% over the backlog of June. Bookings for the Electronic Materials increased by 19 days from 96 days to 115 days. Bookings for the Eco-Friendly Materials increased by 12 days from 80 days to 92 days in Q3.Quickly going through the expenses. Depreciation and amortization expenses in Q3 and year-to-date amounted to $2.5 million and $8.3 million, respectively, compared to $1.9 million and $6.3 million for the same period of '18. The expenses in Q3 and year-to-date included the depreciation of right-of-use assets of $0.4 million and $1.1 million, respectively, following the adoption of the new accounting standard, IFRS 16 Leases as at January 1, 2019. In Q3 and year-to-date of '19, SG&A expenses were $5.2 million and $16.2 million, respectively, compared to $5.7 million and $19.2 million for the same period of 2018. And 2019 is 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 expenses in Q3 and year-to-date amounted to $0.6 million and $2.1 million, respectively, compared to $0.8 million and $2.6 million for the same period of 2018. No expenses or income from litigation and restructuring activity were recognized in year-to-date 2019. Financial expenses in Q3 amounted to $0.5 million compared to $1.1 million in Q3 of last year. And year-to-date financial expenses amounted $3.2 million compared to $5.8 million in year-to-date 2018. The decrease in financial expenses of $2.6 million is mainly due to less accelerated depreciation interest recognized as noncash expense following the early redemption of our remaining debentures in March of this year compared to those redeemed in June of 2018.The company reported earnings before income taxes of $2.4 million in Q3 and $3.8 million in year-to-date. Income tax expense in Q3 and year-to-date were $1.4 million and $2.2 million, respectively. Both periods were favorably impacted by deferred tax assets applicable in certain jurisdictions.Covering liquidity, cash generation -- generated by operating activities amounted to $4.7 million in Q3 compared to cash used in operating activities of $0.6 million in Q3 of last year. And year-to-date cash used in operating activities amounted to $2.5 million compared to $1.1 million last year. The decrease in funds from operations is mainly explained by the decrease in the adjusted EBITDA. The negative change in noncash working capital in year-to-date 2019 is resulting mainly from a decrease in trade and accrued liabilities of $14.1 million, and year-to-date cash used by investing activities totaled $7.1 million compared to $6.7 million year-to-date of '18. In Q3, cash used in financing activities amounted to $0.3 million compared to cash generated from financing activities of $0.4 million in Q3 of last year. In the year-to-date, cash generated from financing activities amounted to $1.2 million compared to $0.7 million last year.Now looking at gross and net debt. Total debt, including the cross-currency swap, increased by $6.2 million to 51 -- $55.1 million as of September 30 of '19 compared to $48.9 million as of December of '18, which is mainly due to the replacement of the convertible debentures by a 5-year unsecured subordinated term loan at a higher face value. Net debt, after considering cash and cash equivalents, increased by $14.7 million from $22.2 million at the end of '18 to $36.9 million as at September 30 this year, mostly impacted by noncash working capital requirements.So this will conclude the financial review. We are ready to take questions from analysts.

[Operator]

[Foreign Language] [Operator Instructions] Your first question comes from the line of Mac Whale from Cormark Securities.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

I'm interested in just getting a sense of how things have changed over the course of the year. So is this continued softness in bismuth a surprise? Sitting here in Q3, is it a surprise -- or actually Q4, is it a surprise to you compared to the first and second quarters? Or is that -- is it playing out as you thought it would back then?

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

So I would have to say, since we try not to speculate within the metal markets and we try to budget on basically a stable basis, this came as a surprise. And I say that -- and now I'm going to give you a little bit of probably speculation in that if you were to take us back 9 months ago, based on everything we know about the production costs associated with bismuth, with what the industry experts know, I think it actually came as a surprise to the industry as a whole. You're looking at a product that is now at -- well, okay, depending on what index you look at, $2.70. It went down -- I think, in China, it got down to about $2.40, $2.45. Many of the things that it's a byproduct of are now higher than what bismuth is. So no, it did come as a surprise. We certainly didn't, I would say, projected in our guidance -- we would not have assumed that it would be sitting at this level.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. And so I guess that's one of the elements feeding into the change in the guidance. So you're sort of expecting it to continue, I guess, is what I'm saying for Q4.

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

Well, this is -- remember, there's a lagging effect when these things happen, right? So it works its way through the inventory. So I think this is the predominant reason why we had to change the guidance.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. So then -- so as you look -- and you talked -- the words or the phrases used before were 2019 being a setup year for stronger growth in 2020. And you've reported now, you've got customers in these new initiatives, you've got contracts and the backlog's up. Is it enough? Given what you've just talked about bismuth, is 2019 really still a setup for 2020? Or as you lower your guidance, is it really a sign to us that 2020 is just not going to be that year that you thought it was?

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

Well, again, I will profess this by -- I need to build a contingency to say I don't know where metal is going to go, okay? Or I'm certainly not going to speculate on that. But at constant metal, we still see 2020 to be -- based on the order book that we have, based on the businesses we've secured, based on the feedback we get from the market and our customers, to be a better year. We have no reason to believe that that's not the case. Now will the -- whatever we -- and we're going through the budgeting process, obviously, so I can't really comment. But whatever that number comes out, will it be lower than what we had thought it would be the next year? Well, that all depends again on where the metal is going to go.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. Okay. That's helpful. And I just have a question about -- the margin was -- I think I'm looking at, let's see, year-over-year, okay, Eco-Friendly Materials, margin was down. It was up year-over-year but down sequentially. Yet, if you...

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

Eco-Friendly, what I have is margins stable year-to-date. If we do revenue over EBITDA. And then for the quarter, it was actually up.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

But then sequentially, it was down. And the reason I'm asking is because I'm looking at Q2 '19, revs were lower than Q3 '18, and yet the margin was almost twice as good. Is that all bismuth margin? I'm just trying to get an idea because the margin went down sequentially and so did the revenue. I get that. But I'm trying to get an idea of what I missed. Like is there -- I guess the impact on bismuth is just really big, I guess, is why the changes are substantial.

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

There are a couple of factors here. There's the upstream contribution that is becoming less, which is indirectly related to metal notations because, obviously, we can't secure -- so the inputs, it's not being marketed. So that's one factor. The second thing, remember that we had an extended shutdown in the quarter, Q3. Those are the 2 elements. Richard, can you think of anything else? Those are the 2 that come in mind.

[Richard Perron, Chief Financial Officer]

Key are the -- to some extent, the actual mix within Eco-Friendly because we're growing our catalytic and extractive business at the same time so that, from one period to another, that may -- has an impact on the actual performance of Eco-Friendly. But definitely, the upstream not contributing as much is an important factor in the actual distribution of the margins under Eco-Friendly.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. And then my last question is around the more -- the good news, on the SASI and Micro Powders progress, are you ahead or behind where you thought you would be a couple of quarters ago? And are the companies that were examining the products, are they all still interested? Or have some of them decided not to pursue it?

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

On the Micro Powders, I would say we're basically on plan. It's -- we're proceeding as we had envisioned. On the SASI, right now, we're actually doing very well. What we're seeing is we're -- not only some of these applications are new for us, it's also new for our customers. And so if you were to talk to me 9 months ago, I was the one that was tardy because of my production issues with the customer, and the customer was pushing and pushing for product.Now we are in a much, much better place. And then the question is will the customer have issues in its supply chain because they're also learning as they go along. I mean some of these applications, I think you know, are fairly new. And so as of right now, I would tell you those tools are proceeding with Micro Powders, year-to-date, on budget, if I can use that word. SASI, not yet on budget, slightly actually behind but catching up because we had a very strong third quarter. And then we'll see how it goes in terms of where the customer demand is.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. And just the other part of that was just whether guys have -- there was a lot of people looking at these products and testing them. Are they all still testing? If they haven't -- the guys that haven't taken out contracts, are they still in the game?

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

Yes, we have not reduced the number of qualifications that we're running. My guys probably would tell me it's increased, if anything. Again, the challenge we're having is we're being told by our customers that it's only a matter of time, but they can't make it very clear to us what that time is. For example, talking about Micro Powders. The powders that we have are -- there are only very few people in the world that can provide them in the type of distribution and morphology that we can. And these are all for advanced applications. It's all for future devices and wearables. And so it's very much tied to when those are going to come in. So our customers' success is really dictating now our growth because we think we have the product.

[Operator]

Your next question comes from the line of Rupert Merer from National Bank Financial.

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

You talked about the tactics that you've employed to reduce your earnings volatility, and one of those is commercial hedging. I think you suggested about half of your bismuth sales are commercially hedged. Is that correct? And do you see any changes to the amount of the bismuth that's being hedged? As metal prices move lower, do you see that hedging activity increasing?

[Richard Perron, Chief Financial Officer]

Some of that hedged bismuth was actually realized in the first part of the year because we've been referring to that earlier in the year. As you remember, many of our annual contracts are renewed in Q4 and Q1. So now we're kind of entering a new period where the hedging needs to be assessed. And so...

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

Would you expect your customers to be more open to hedging with the lower metal prices or do you think they're looking at the prices and assuming they could go down further?

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

It really depends on the customer. We have -- I guess one thing I would have to say is that most people in the industry did not really envision the prices to go to the levels that it has dropped to. They all had their sort of opinion as to what the sustainable level is, and it's crossed -- I think it's gone through just about every one of those levels. So there is a bit of a pause among our customers. They're looking at it. I think their confidence has been shaken by it. For us, we are -- obviously, we can serve them if they want to hedge. And if they don't, that's fine, too.As you know, for us, it's a transitory effect. And I think the thing that's really important to notice in this is, look, 3 years ago, if we can visualize it, we were standing on the fourth floor. And if we were to -- if these things -- if we were to drop, it would be a mortal wound. It would be fatal. 5N21 brought us to the second floor, so a fall would result in probably broken parts but not mortal. And now with bismuth prices being where they're at, we're on the ground floor. We can still fall, but we might not even get severely injured. As an amount of dollar per kilogram, each percentage is worth less now. So for us, there's only so much to go.

[Richard Perron, Chief Financial Officer]

Our clients were as much surprised than us of the current bismuth model. That's why the dynamic with the contract renewals at this time is a bit different than last year. So -- but we'll see.

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

All right. Great. And you did give up some product lines that were more working capital intensive. Someone took that business on. Are you seeing some of your competition suffering at this point? Is there any evidence that you can see of the change in the competitive dynamic?

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

So because there were some information on the news, and then they got disputed, I have to be careful what I say, only to say that there's clearly information in the marketplace that indeed there are competitors that are -- that could allegedly -- again, I'll go with the news that we read -- be facing, yes, serious issues. And again, that's why I say it wasn't a moment too soon. We -- as you may recall, we have parted ways with a lot of products that were commodity-based, with us creating little value. They were in -- among electronic, metals and also even within eco-friendly, a number of product lines. I think had we not done that today, our picture would have been significantly different. So I think from that point of view, we definitely have a competitive edge.

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

All right. And switching over to Electronic Materials, you've talked about making progress on your production challenges. It doesn't sound like those challenges are holding back sales at this point. But are you able to quantify what those challenges did to your margins in this quarter? And what -- or maybe looking at it the other way, if you're making progress on production challenges, how much improvement that we could see in margins going forward?

[Richard Perron, Chief Financial Officer]

Still early to give you any magnitude, but we're definitely doing better this quarter than in previous quarters.

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

The -- I think there's a degree of deficit that you're referring to between quarters, Q3 '18 and -- I'm trying to exactly understand your questions. What is your point of comparison in terms of baseline, last year's Q3?

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

I'm just trying to get a sense for what the result this quarter could have looked like if you weren't experiencing production challenges. It doesn't sound like those challenges were holding back revenues in this quarter, but were they holding back your margins? How much improvement could you see with improved production processes in the future?

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

Well, so let me -- again, I'll try to ground this to some level of something more numerical that you can relate to. If you look at Q3 last year compared to Q3 this year, there is a difference. I would tell you, just off the top of my head, 40% would be -- of that deficit comes from the fact that there were margin deterioration on renewable, as we've mentioned. I would say then the remaining 60%, 30% is still probably due to the fact that operationally we have got still improvements to make. I think you know that in electronic industry, yield is a huge factor. We've done tremendous improvements, but there's still more to do. And then the other 30% is primarily metal related because we -- again, there was an impact of -- on the notation. So that's how I would probably divvy it up.

[Richard Perron, Chief Financial Officer]

And you still -- you have to keep in mind that those new businesses that we're developing at this point in time in their life, from 1 quarter to another, we're still going to see a fair level of variability. So this is hard for us to project in time as an equal contribution over time.

[Operator]

Your next question comes from the line of Stephen Harris from GMP Securities.

[Stephen C.A. Harris, Head of Research]

Just to follow up to the last point, and I may have missed it, but the 40-30-30 split that you just talked about, does that relate to the decline for the quarter or the year-to-date? What period are we talking about?

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

I'm looking at the quarter. I was just looking at the...

[Stephen C.A. Harris, Head of Research]

At the quarter. Okay. Okay. All right. Coming back to my other questions, can we talk a little bit about what's going on in the bismuth market, in particular, what you're hearing about the Fanya Metal Exchange and their inventories of bismuth? Do you expect that will come out? There's been a number of auctions of some other metals. What are your industry sources telling you?

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

Well, so last week, tellurium, gallium, germanium, selenium, these metals all went on the auction block and were all picked up by -- well, they got picked up by a Chinese company or companies depending how we look at it. Prior to that, there were other metals that also went on the block. Tungsten was one. Antimony was another. Part -- and initially, there was a partial auction of indium, very partial. I think it was only like a couple of percentage of the total stock, not a lot. The bismuth situation is one where it's -- there are something like close to 20,000 tons that is on this -- on Fanya. This is equivalent to -- depending how you look at it, 1.5 to 2 years of global supply. It's a sizable amount. So again, if you just connect the dots, there is a good chance that, that too will be auctioned off. I guess how will it be up, it's not exactly yet determined. But I suggest you look at what's being reported on the 4 metals that I called out: tellurium, gallium, selenium and germanium, and it's going to be probably in the same manner, the same type of an environment.

[Stephen C.A. Harris, Head of Research]

And is your view that, that could sort of form some sort of a bottom in prices here. Presumably, the markets have been anticipating an event like that for a number of months.

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

Logic would say that it should, and it should. The question is the participants in the market, will they follow the supply-demand rules of the game afterwards. And if they do, then that should be the bottom line, yes.

[Stephen C.A. Harris, Head of Research]

Okay. The progress that you had mentioned in the backlog, is it fair to attribute all of that to the new growth initiatives and the orders that are coming through there? Or is there a different breakdown you could provide us there?

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

No, I think we should differentiate between growth initiatives and new products because even in our, let's say, traditional sector, we have new product offerings that we've put into the market. It is fair to say that a large part of it comes from growth initiatives and new products.

[Stephen C.A. Harris, Head of Research]

Okay. All right. And on the same vein, you had mentioned that you were -- you put together a group of investments in various areas that would total $10 million, but you'd expect to have that implemented by the end of 2020. Is that incremental to normal CapEx that we would have assumed? And in the past, you've always talked about CapEx being within depreciation. Do you think you will stay with that in the course of the next 5 quarters? Or do you think you'll likely go ahead of depreciation?

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

So indeed, in the 5N21 plan, highlighted $50 million over, I believe, 5 years, which is the rate of depreciation. The $10 million package that we released last quarter is in line with that. So we're not changing anything about what 5N21 has called, it's still within that $50 million envelope. What I would tell you is the completion dates -- because there are different modules in there, and not all of it is completed by the end of 2020, some will be completed earlier. And when you total it all together, we've estimated about a 3-year payback.

[Stephen C.A. Harris, Head of Research]

Okay. And is there any single portion of that directed at any initiative that stands out?

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

Any single -- well, I think -- we've given some themes. I think efficiency, we're really -- there's -- a good chunk of that investment is in process technologies, which should really improve efficiency in our products, improve yield. Again, our -- where we're going with our business -- in a material business, my opinion is you live and die by your yield numbers. And so we're definitely investing in yield.

[Richard Perron, Chief Financial Officer]

We're increasing capacity under SASI, and we're also increasing capacity under catalytic.

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

But it's important to note that some of our capacity increases isn't in just going and building a new plant, it's debottlenecking. We talked about this, for example, under catalytic and extractive, we said we're not going to go build a new plant just because our order books are full. We're going to figure out how to use process technology to debottleneck. So you can call that efficiency, I guess. Yield, however, that theme fits.

[Stephen C.A. Harris, Head of Research]

Okay, great. And just one final one, just to sort of tie this all together, you had talked about this 2019 as a sort of a staging year, a transition year. And in talking about what it meant for 2020, there was confidence at one point that your growth initiatives would allow you to say, well, 2020 EBITDA should be able to exceed the level that you generated in 2018. Do you still feel confident in saying that? I know metals prices have changed. But in the context of where we are today, is that possible?

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

Stable metal prices...

[Richard Perron, Chief Financial Officer]

At constant metal prices, the short answer is yes at this time.

[Operator]

Your next question comes from the line of Frederic Tremblay from Desjardins Capital.

[Frederic Tremblay, Analyst]

Maybe related to the last question there, AJ, you mentioned earlier the lagging effect as some of the metal notations work their way through the inventory. Can you remind us what -- like how long is that lagging effect? I'm just trying to figure out, assuming stable prices going forward as a base case, how long until we sort of stop seeing that large impact from lower metal notations.

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

So indeed, this is actually a good point to bring up because there is a lag effect. So to the previous question, some of that will be carried out by definition into next year. Even then, we still think we'll do -- it should be a better year certainly than 2018. Now let's talk about directly what you asked in terms of the timing. It really varies from metal to metal. We've tried to -- and depending on where the demand is, the mix changes each quarter and then those numbers change, but we've tried to give a rule of thumb of about 6 months. The -- I think that's -- Richard, I think that's still valid, no, 6 months?

[Richard Perron, Chief Financial Officer]

Yes.

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

There's a 6-month lag that comes through. But again, remember that as the metal moves down in price, it gets to a point where each percentage of previous decline has less impact.

[Richard Perron, Chief Financial Officer]

The absolute dollar impact is less.

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

So the absolute dollar impact is becoming muted, if I can use that term.

[Frederic Tremblay, Analyst]

Okay. That's helpful. And I just wanted to talk a bit on the new agreements in Micro Powders and SASI that you signed. Any color on, I guess, maybe in aggregate, the size revenue-wise of those agreements? And potentially, maybe talk about the margin profile versus your -- the rest of the Electronic Materials business?

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

So on the Micro Powders, I would tell you it's not more -- it's not a large revenue play, but it's the fact that here comes this company, 5N Plus, that was a no-name in that industry when it came to micro powders and electronic packaging 3 years ago, 4 years ago, and is now not only specked in but is in production with -- I can't mention the name, but with arguably a household name in smart watches, smart devices and all of that. So for us, it's a notable accomplishment because to get specked in and get actually going to serial production with customers of that caliber, you really have to be the best at your game. This is something that the slightest mistake in these -- the slightest flaw in these powders can potentially result in these devices just not working anymore. And I think you all know that that's -- for these big players, that's just a no-go. It can really create sizable damages. So for us, to be able to get in and then get into serial production on their advanced, their most advanced products, is really a big victory.Now on the SASI side, again, I'm not under -- I'm not at liberty to really name anyone. We are involved with customers that are looking to disrupt the market. And these are, again, customers that are very large companies, very credible companies. And so being able to secure exclusivity and be a part of that initiative, for us again, is quite an accomplishment. And there is actually some sales that's being generated right now from it. The numbers aren't huge. But again, a lot of what we're doing, I think we're positioning ourselves for the world of the future. When these initiatives become mainstream, I think, we'll have a very strong position.

[Frederic Tremblay, Analyst]

Are these multiyear contracts? And what's the structure of the contracts?

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

In the Powders business, they don't give you typically multiyear contracts, it's project-based. In the SASI, it is definitely a long-term contract.

[Operator]

There are no further questions at this time. I turn the call back over to management for closing remarks.

[Richard Perron, Chief Financial Officer]

Okay. Well, thank you all for attending the call.

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

Thank you.

[Operator]

Thank you. [Foreign Language] This concludes today's conference call. You may now disconnect.