5N Plus Inc

TSX:VNP

Earnings Call Transcript 2021-Q3

[Operator]

[Foreign Language] Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the 5N Plus Inc. Third Quarter 2021 Results Conference Call. [Operator Instructions] 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 third quarter ended September 30, 2021 financial results conference call. We'll begin with an overview of our business performance, the review of our financial results and the highlight of key strategic teams, after which, we'll 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 detailed description of our risk factors that may affect future results is contained in our management's discussion analysis of 2020, dated February 23, 2021, available on our website and in public filings, with an update in the current quarter in the ending.In the analysis of our quarterly results, you will note that we use and discuss certain non-IFRS measures, which definitions may differ from those used by other companies. For further information, please refer to our management discussion and analysis. I would like now to -- I would now like to turn the conference to Arjang for the discussion on the business performance and quarter results. AJ?

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

Thank you, Richard. [Foreign Language] Good morning, ladies and gentlemen. It's good to be with you from our headquarters in Montreal. This morning, I will start with the analysis of the company's performance during the quarter. Richard will follow with financial analysis. Before taking your questions, I will come back and highlight some of the items in focus. Looking at our company's performance during Q3, 3 items stand out. #1, 5N Plus's revenue during the quarter grew by 28% as compared to the same period last year. Earnings -- #2, earnings and margins were adversely impacted by increased costs from freight and consumables due to challenges associated with global supply chain; and #3, after a long and thorough vetting process, European authorities have approved acquisition of AZUR SPACE by 5N Plus. Excuse me.Okay. So now let's add a bit more color to these themes. In the last webcast, we said going forward, revenue growth would be an important KPI. The 28% revenue growth during the quarter is attributed to the performance of eco-friendly materials with strong demand across all sectors, while the demand for industrial catalytic and extractive was supported by a continued recovery from the pandemic, the demand for our pharmaceutical and health products were exceptionally strong. Revenue for electronic materials was lower in Q3 as compared to the same period last year with lower contributions from renewable energy and medical imaging. In renewable energy, consistent with our previous communications, we've taken measures to discourage on new speculative activities related to the tellurium metal purchases within tellurium markets. A notable portion of the thin film photo will take or solar power systems produced by our customers rely on such metal. As you may recall, earlier this year, notations for this metal surge without additional industrial/product demand supporting it, to bring a degree of equilibrium to the market we've held back on -- we've held back -- or in certain cases, actually deferred select purchases along with revenue recognition events. We expect this situation to remain unchanged in Q4.In medical imaging, we are extremely encouraged by the recent developments and announcements by major OEMs identifying PCD based technologies, Photon Counting Detector, that's PCD based technologies, as the wave of the future. As a major supplier of semiconductor compounds for PCD applications, 5N Plus is uniquely positioned to benefit from a shift from current technology to PCD. In the meanwhile, 5N Plus has been developing wafering technologies to convert its own compound semiconductor materials to wafers, which form the critical core of PCD imaging detectors. The recent announcement around the long-standing joint program between 5N Plus and Samsung, along with the long-term supply agreement in the 2 companies, signal 5N Plus's entry into this market with not only engineered compounds but also engineered substrates. Furthermore, these developments give credence to the efficacy of our company's expanded technology portfolio for medical imaging.The recent announcements by major OEMs in our own market data assumes the ramp-up for PCD based medical imaging devices to start by 2025. Between now and then, many stakeholders, including 5N Plus, will be focused on further development activities, including qualification campaigns and regulatory approval processes. Last year, the demand for detector materials was supported by the initial buildup of the feel PCD based medical imaging devices required for these regulatory campaigns. This demand had a notable positive impact on our P&L. For this year, we've started -- we stated that we expect a more muted demand from this activity and the company's performance in Q3 has been in line with that expectation.In space, over the past 2 quarters, we've experienced growth in revenue as compared to the same period last year. Going forward, this is supported by a strong order book. There are indications that the space industry is finally beginning to move to its up cycle, and we expect to also increase our market penetration, supported by enhancements in our products and production systems, which have been under development for the past 2 years and supported by key partners and investments.As a general reminder, and to make sure we keep the discussions grounded, we should mention that metal notations do impact revenue development and some of the overall revenue growth during the quarter can be attributed to higher metal notations as compared to the same period last year. This said, less than 30% of the revenue growth during this quarter was attributed to the increase in notations. The remainder was demand driven and independent of any planned price adjustments to mitigate cost increases due to the current supply chain challenges.Having addressed the top line -- the top line performance, let's talk about earnings. Global supply chain challenges provided some headwinds during the quarter. I believe many companies are facing these headwinds. In the case of 5N Plus, the costs associated with freight shipment has jumped dramatically to about 3x to 5x. In the case of consumables, we're witnessing notable price increases, partly due to energy price hikes, especially in natural gas in Europe. Despite strong demand and revenue growth, the increased costs associated with the current challenges in the supply chain had a notable impact on our earnings in Q3.To provide some level of quantification, when we compare adjusted EBITDA of Q3 2021 to Q3 2020. International freight and consumables account for about $1.5 million of the GAAP. In addition, in Q3 of last year, 5N Plus received nonrecurring government subsidies totaling $1.2 million. Adjusting for these 3 factors alone replaced EBITDA in Q3 2021 in line with Q3 2020, for the same period last year. Meanwhile, our commercial teams are engaging with various customers to address the added costs imposed by the global supply chain challenges.As you may recall, our cust -- commercial contracts are a mix of long-term and short-term or, in some cases, spot contracts. We are anticipating and experiencing more success adjusting pricing in the short and spot contracts. Therefore, in the short term, we do not believe we will be able to fully recover the additional costs. Over the midterm, we believe we are making prudent investments to make our company more resilient against global supply chain challenges. The recently announced investment of $8.5 million in Montreal -- in our Montreal campus, will not only consolidate a portion of our supply chain and simplify logistical challenges, but will also reduce unit cost of production and require less working capital. Another example is the $10 million investment package, mainly targeting our eco-friendly plants in Europe and China, which was completed late last year and is beginning to bear fruit. This package of investments, among other things, is improving production yields and requiring less consumables per unit of output. I think you agree that the timing for such investments could not have been better. Given these effort, beyond the short-term impact, we expect the compression of margins to be compressed.The third item that I would like to address is the acquisition of AZUR SPACE. In March of this year, we announced 5N Plus's intention to acquire AZUR SPACE. Given the sensitivity and novelty of the technology associated with acquisition and AZUR's strategic position within the supply chain, the transaction required vetting and approval by the European authorities. At the time of the announcement, we could not commit to a specific time line, given the increased scrutiny by regulatory bodies in a number of jurisdictions and a new -- and new procedures related to strategic and national security assets. Out of abundance of caution, we did indicate that we hoped for an expedient process, but the dossier could prolongate well into fall of 2021. In the meanwhile, we protected for this delay in the lower range of adjusted EBITDA guidance provided in Q1.Well, the process did take the long path, 8 months to be exact. And the transaction was closely scrutinized by a number of agencies to ensure 5N Plus is the appropriate suitor for AZUR SPACE. While over the past several months, this has caused delays, we're pleased by the outcome of the process. We believe this level of intense scrutiny only confirms the importance and relevance of AZUR SPACE and the criticality of the technology portfolio. We have always seen AZUR as more than a space company and beyond the coveted space business. The company's demonstrated capability and success in III-V semiconductor materials, along with its cutting-edge space technology, is well positioned to address much larger markets, including high-power electronics, advanced communications, electrification, renewable energy and more.Looking beyond the short and medium term, this acquisition clearly heralds a new era in our company's history. Much of the work performed over the last several years by our global teams have been to move our company away from commodity focused businesses while planting the organic seeds of growth opportunities in advanced materials. AZUR's acquisition catapults 5N Plus well into the cauldron of advanced material technology with access to specific growth markets of the future with unique products and value propositions. Last, but certainly not least, we are elated by the pool of outstanding talent our company gains with this acquisition.I will now turn the call over to Richard for a financial review.

[Richard Perron, Chief Financial Officer]

So good morning, everyone. As mentioned by AJ, in the third quarter, the company delivered significant revenue growth under eco-friendly materials, delivering another solid performance despite global operating cost inflation, accentuated by global pandemic, notably for international trade and consumables. As well to previous quarters, electronic materials performed in line with the company's expectations with lower contributions from products related to medical imaging and renewable energy.In terms of the company's strategic transformation to our critical material technology, 5N Plus recently received the necessary approval from the regulatory agencies to acquire all of the issued and outstanding shares of AZUR SPACE. For the near term, the acquisition and successful integration of AZUR will be a key priority. This transformational transaction will uniquely position 5N within the specialty semiconductor space. 5N Plus continues to carefully align its business development, emphasizing higher value-added products and better margins, allowing the company to deliver solid results despite unforeseeable factors, progressively increasing its addressable markets, while taking purposeful and truthful action to support the business simplification along with strategic transformation.So now starting with the coverage of revenue, gross margin, followed by adjusted EBITDA and net earnings. Revenue in Q3 increased by 28%, reaching $50.8 million compared to $39.9 million in the same period last year, favorably impacted by our demand under the eco-friendly materials segment. Gross margin in Q3 was $10.8 million or 21.3%, impacted by inflation at [indiscernible] international freight as well as consumables. While on a year-to-date basis, gross margin was $34.3 million or 23.6% compared to 37.2% or 28.4% in the previous year. Adjusted EBITDA in Q3 reached $5.5 million compared to $7.7 million in Q2 of last year, impacted by an unfavorable sales mix under electronic materials, materially higher costs for international trade and consumables, partially mitigated by increased sales and the solid performance under eco-friendly materials. On a year-to-date basis, adjusted EBITDA was $18.2 million compared to $22.2 million last year, for the same reasons just mentioned. On a year-to-date basis, net earnings were $2.1 million or $0.03 per share.Now looking at annualized backlog. Backlog on September 30 represented 174 days of annualized revenue, a decrease of 25 days or 13% over the backlog of June, impacted by the renewal pattern of virus contracts occurring in Q4 and Q1. Backlog on September 30 for the Electronic Materials segment increased by 79 days versus Q3 of last year. The Eco-friendly Materials segment decreased by 49 days compared to September of last year, reaching 134 days, impacted by the renewal pattern.Quickly going through the expenses. Depreciation and amortization in Q3 in the year-to-date amounted to 3 and $8.2 million compared to 3 and $9.1 million for the same period of last year. SG&A expenses in Q3 and year-to-date of this year were 4.7 and $14.9 million compared to 4.5 and $14 million for the same periods in 2020. The expenses in year-to-date 2020 were positively impacted by lower travel and consulting expenses, either avoided or delayed due to the COVID-19 pandemic.For litigation and restructuring costs or income in Q3 2020, the company made the decision to consolidate selected activities and closed 1 of its subsidiaries located in Asia. A provision for restructuring costs was recorded then with an additional $0.5 million in Q3 of this year, consisting of severances and other costs related to the site closures. The company also recorded an impairment charge on nonrecurring assets back then and impairment of specific production equipment related to this site.Financial expense in Q3 amounted to $0.8 million compared to $1.6 million for Q3 of last year. The positive impact is mainly due to a gain in foreign exchange and derivatives compared to a loss in the same period last year, while the interest on long-term debt, imputed interest and other interest expenses were at similar levels for both periods. On a year-to-date basis, financial expense amounted to $1.9 million compared to $4.5 million last year.The company reported earnings before income taxes of $1.2 million in Q3 and $6.4 million on a year-to-date basis. Income tax expense in Q3 and year-to-date were 2 and $4.3 million, respectively, compared to 0.8 and $3.4 million for the same periods of last year. Both periods were impacted by differed tax assets applicable only in certain jurisdictions.Covering liquidity. In Q3, cash generated by operating activities amounted to $5.2 million compared to $2.3 million from the same quarter last year. In Q3 of this year, cash used in investing activities totaled $2.3 million compared to $2 million last year. On a year-to-date basis, cash used in investment activities totaled $7.3 million compared to $6.1 million last year, mainly attributed to the acquisition of a minor equity stake in Microbion earlier this year.In Q3 of this year, cash used in financing amounted to $0.2 million compared to $0.8 million last year. On a year-to-date basis, cash used for financing activities was $6.7 million compared to $2.8 million last year. The increase explained by the reimbursement earlier this year of our credit line for $5 million.Now looking at growth and net debt. Total debt increased by 5.1% and -- decreased by $5.1 million and stood at $45 million compared to $50 million at the end of December 2020. Net debt after considering cash and cash equivalents ended at $11.8 million on September from $10 million at the end of last year. So this will conclude the financial review. Let me turn back to A.J. for the highlight of key strategic teams, after which, we'll be taking questions from analysts.

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

Thanks, Richard. Before we move to your questions, please allow me to comment on a few items. We believe we will end the year with adjusted EBITDA in the range of $25 million to $27 million. This number carries the following assumptions: that the headwinds from the global supply chain will remain intact. As we mentioned earlier, most industry pundits believe this will be with us well into 2022. That the sales mix will remain somewhat consistent with the past 3 quarters and that the contribution from AZUR will be based on less than 2 months in 2021. To add further color to the last point, please note that revenue recognition for space is lumpy by nature as the business runs like a series of projects and activities and their organized increments. Our guidance assumes project completion, favorable revenue recognition for Q4 of this year. So we assume that it will be favorably asymmetric towards Q4 of this year.After 2015 and up to 2020, our primary focus had been on margin improvement while reducing exposure to commodity-based businesses. This inherently resulted in revenue reduction from $311 million in 2015 to $177 million in 2020. At the same time, EBITDA surged from $4.3 million or 1.4% of sales in 2015 to $28.8 million or 16.2% of sales in 2020. Going forward, we will continue to shed commodity revenues when it makes sense. However, starting this year, we've begun to shift our focus toward revenue growth. Absent AZURs contributions in 2021, and independent of any benefit from metal notations, we expect a year to deliver revenue growth, which is the first since many years, as risk contributions will only enhance this picture.Given the fact that we're converting nearly half of our current total addressable market or TAM to revenue, future meaningful revenue growth will require enlargements of our TAM. We aim to enlarge our total addressable market through both organic and external M&A initiatives. Many of you are familiar with the organic initiatives, which are progressing. These include, but are not limited to semiconductor products for sensing, security and medical imaging applications, new health and pharma products and engineered powders. These products are currently under development with many of them undergoing customer qualification campaigns and regulatory approval processes.We are excited and are committed to develop these new markets and recognize that a ramp-up to mass production and thus notable revenue growth is still a few years away. In the meanwhile, we are utilizing M&A as a path to address revenue growth over the next few years. The acquisition of AZUR is a tangible state in that direction. In addition to revenue expansion, the acquisition will immediately increase 5N Plus's TAM by more than 1/3.Furthermore, we will be applying AZUR's competencies beyond space and towards much larger markets, which are currently yearning for new solutions. We will have much more to say about this in the months ahead. We're now ready to take your questions.

[Operator]

[Foreign Language] [Operator Instructions] Your first question comes from David Ocampo with Cormark Securities.

[David Ocampo, Analyst of Institutional Equity Research]

AJ, I appreciate the commentary on the Samsung contract and indicating that it'd be longer-term in nature. But can you walk us through that near term opportunity? Can we expect something similar to what you guys saw in 2020 when one of your customers ramped up their fleet for their qualification campaigns? Is that something that we can see as well for Samsung in 2022 or 2023?

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

David, I won't comment specifically to any name, especially customer name. What I will tell you, though, is that, yes, indeed, we -- as mentioned in the monologue, this -- these were demands supported by initial fleet of devices that needed to be built for regulatory approval. We have projects with not just that individual company, but others. We expect, in the short term, to have those types of campaigns. Can we time them and tell you when? No, we can't. I should mention, as I said in my text, that anyhow, from the compound side, we continue to see growth for the II-VI material. And we continue to see -- which basically is an indication that, that market is continuing to progress well. But from the compound side, in the short term, we should -- we do expect growth, but the larger revenue units are on the engineered wafers. On those, we do expect more demand from whether that individual customer or others for their campaigns to build up. But the caveat is we cannot tell you the timing by definition because it comes from them essentially.

[David Ocampo, Analyst of Institutional Equity Research]

Okay. And then I just wanted to circle back on the comments you made about shedding some of that commoditized revenue and moving into -- more into specialized semis. Is that going to take you guys divesting certain assets? Or how should we think about that comment that you made?

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

Well -- so -- as some of you may recall, in 2016, I would tell you, when you would look at 5N Plus and say, okay, how much of the revenue is advanced materials, I would put the number depending how you quantify it to 10% to 20%, I would say. That would be as a percentage of revenue. Last year, this number was probably more in the 40s. And in the future, in the, I would say, in the next few years, we're looking to take this to probably upwards of 70% to 80%. And by the way, I know you didn't ask this question, but I think it's worth mentioning. During this time, I remember analysts asking us a number of times, you're not growing revenue. We were saying, well, in a way, we are because our value-added or advanced materials is -- was essentially penetrating and growing. So going forward, I think the vast majority of that growth will come from -- it's going to be between the organic initiatives. Organic initiatives, as I said, will take a bit of time, I want to make sure that everyone understands. These are start-up businesses essentially. And those revenue units, the larger revenue units are a few years away. And then also M&A. Does that mean that we may shed assets? Yes. You've seen, for example, we announced the closure of one of our facilities as we continue to consolidate, build economies at scale when it's opportune, get out of certain businesses that take our resources but don't necessarily give us appropriate returns, yes, you could see us exiting certain things.

[David Ocampo, Analyst of Institutional Equity Research]

And one last one for me. It's more a maintenance question for Richard. How should we be thinking about CapEx as we head into '22, especially with AZUR in the fold and you guys developing out their product mix into other areas?

[Richard Perron, Chief Financial Officer]

So similar attention forward, we're going to be keeping our CapEx slightly over our depreciation rate, and that will be the same approach with AZUR's CapEx going forward.

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

I think with AZUR, you should give us a little bit of time to get in because everything we will tell you right now is really at the due diligence level, right? I mean, up until recently, all we've done is due diligence, I should say, up until all we've done actually, not up until recently. And so, from that perspective, what I see is, AZUR, part of the benefits that we have in the AZUR deal is -- a condition of the deal was that they would have to get access to the full IP portfolio of wide band gap materials and also do some upfront investments to be able to position for it. So based on what we have been told and everything that we've seen, that work has obviously been done. And so my initial expectation is that we will have to invest in AZUR -- or my expectation is, it will be above the rate of depreciation, but not in the earlier phase because they've already done some investments. And we need to make those investments effective before we go ahead and add to it. So in the short term, based on our best visibility, what Richard said, longer term, I think as we go into these much larger markets, you should expect investments.

[Operator]

Your next question comes from Rupert Merer of National Bank.

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

Now with AZUR, I know you said it's early days and in the near term, you're going to focus on integration. Can you give us some more color on what's involved in that integration process? And then any more color you can give on what you think could be the priorities in the near-term for new technology development or new market development?

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

Okay. So that's a fairly loaded question. I'll try to de-layer it. Let's first talk about AZUR. Indeed, our first and foremost priority once the deal is closed is integration. We are seeing, as I said earlier, that the space business seems to be beginning to climb in its up cycle. As many of you know, it is a cyclic business. And at least everything we see from AZUR indicates the same thing. So I think our focus there is going to be initially, as I've said, not just making sure the 2 companies would come together in a meaningful way. And I think, by the way, the fact that AZUR operates on only one site, it has 240 employees on one site in Heilbronn, Germany, which is near city of Stuttgart. It makes it a lot easier. Those of you that have been involved in these kind of initiatives know that as the sites grow, so does the complexity. So we -- our initial priority there is going to be also to really integrate our what we call their semiconductor triads. We -- as you recall, we've got Montreal that is world-renowned for its activities in semiconductor compounds for II-VI, II-V semiconductor materials. We've got St. George that utilizes essentially those compounds to grow crystals and now we'll have AZUR that could use those -- some of those substrates and grow Epitaxy -- grow crystals of Epitaxy -- semiconductor crystals on it and make calibrated and tailor made devices -- or I shouldn't say devices, cells for chips and cells for final customers. So that integration goes beyond people. It goes beyond being able to have those processes, those production systems, the stream of innovation to really latch on and really get nicely connected. And that's really important because if we're successful there, we're going to make 1 plus 1 equals 3, not 2. So that's the key focus. Now you asked about new technology, what will be our area of focus. As I mentioned, I think I won't belabor it. The whole area with sensing and imaging is really our bailiwick, is our core. Why? Because it's got -- II-VI semiconductors have one application in medical imaging, but it's got another set of applications in security, sensing and imaging in infrared or in various detectors. We see this area to really become more and more of a focus for the future when you look at how various industries are developing. So this will be a notable area. The other area of focus is going to be wide band gap materials, and this is through AZUR. Why? Because this is what's going to increase our TAM, okay? So these 2 initiatives by themselves will be a notable escalation for us in terms of total addressable market. On the pharma -- health and pharma products, we've got a very good core that is doing quite well. What we've got to do is build on this core. I really believe that we've got something there. The caveat is, I don't think we can do that all organically, not to the extent that we did with semiconductors. If you look at our semiconductor business, you see we've done a lot of things organically, but now we've engaged M&A. On pharma I believe we will have to engage M&A more aggressively than in the past. So those would be the priorities that I would put forth at this point.

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

And then secondly, on the logistical challenges, you talked about $1.5 million of increased costs in the quarter. Do you have a view on how much of that is -- could be transitory, how much could be permanent? And can you also maybe make some comments on other places you could be seeing inflation? For example, we're hearing from other companies about pressure on wages. Just wondering if you're seeing that, too.

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

Sure. So on the $1.5 million, I think it would be worthwhile to say that the majority of that was freight. And a smaller portion of that was consumables. That being said -- so the way we look at it is, freight is the one that will come down quickest. I think there has been a surge. There's -- if you look at the supply chain, some of the containers are even misplaced. There -- more of them are on this side of the ocean versus the other side of the ocean type of thing. So these things will reach equilibrium, we believe faster. We believe that number will go down much faster. So that's definitely transitory. Consumables, they go up today for us, at least the explanation, most of them is natural gas prices in Europe. So we expect those also to reach equilibrium, albeit we expect that to reach equilibrium slower than freight. In the meanwhile, what we've done is, we've really expanded our capabilities in terms of improving our production processes, relying on less of these materials. And also, on the labor side, like the investments we made in Europe actually automated a good portion of our pharmaceutical plant, which moves well on the labor side of things. At this point, if I were to project, my expectation is, I think what we'll see is for consumables to be a little bit persistent. I think that will carry into next year. I think that might actually be more than what it was this quarter. The freight, I expect freight to start coming down. So we'll see if that happens. And then on the labor, thus far, it has not been a huge impact for us, but we're monitoring that.

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

And on the freight, how much of that would be on raw materials versus finished goods? And then how much can you bring that down by just adjusting, say, your sources or the methods of shipping?

[Richard Perron, Chief Financial Officer]

By default, we do a lot of our transformation in Europe and North America. So raw materials and WIP will probably be the biggest part.

[Operator]

Your next question comes from Michael Glen with Raymond James.

[Michael W. Glen, Equity Research Analyst]

So AJ, just circling back to the space market, you're talking about a potential move up in an up cycle. Can you remind us what the total addressable market is for space with 5N Plus right now? I'm excluding AZUR from that, of course. But what that looks like, and just trying to get a sense of what that might mean from a top line perspective.

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

Sure. So I'll actually try to give you both of those TAMs. On what we do today, which is primarily at engineered substrates, meaning wafer levels, the total addressable market has declined over since 2014 as it's gone into its down cycle. We estimate it's somewhere in the neighborhood of $30 million, $35 million. And a lot of this is because -- decline is because the large primes in the past would launch big satellites. Maybe 25, 30 of them in a year. These are as big as a school bus, let's say, which would utilize a lot of material, a lot of engineered substrates. That trend over the past few years have changed. These large primes have been really looking at how that industry is changing because that industry also had another approach, which you see, for example, with SpaceX and OneWeb. There's a lot of small satellites, much -- thousands of them, but smaller. And it looks like that approach is going to become a hybrid. There will be some of these big satellites, but there's going to be a whole host of those little ones. And so, when we now look at the TAM from not just what we provide, but what we will be providing through AZUR, which is actually solar cells for space, that TAM expands to north of $120 million, today. And you then have to look at it -- we expect that number to grow fairly nicely as space goes through its up cycle.

[Michael W. Glen, Equity Research Analyst]

Okay. And then thinking about 5N Plus, and again, just versus what the company was offering as products in the previous up cycle and versus what would be available, and again, just not referencing AZUR there, but has there been any internal product development on the space side that would allow you to capture additional market share or additional TAM in this up cycle?

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

The short answer is yes. If you look back to some of our press releases, you'll see that we announced certain packages of investments and even subsidies that we received to really bolster our products and our processes. And as I think I mentioned earlier, over the past 2 years, we've done quite a bit of that. We've definitely upgraded our processes, our products, without naming customers, I can tell you, we now have a much, much more -- a stronger order book than what we did before, and we have more names in that order book. That was the other thing is, we relied on very select list. Now we've got a larger list in our supply base. So, the reason why I am positive on this is because our products and processes have improved. A lot of that cost, you have not seen because it's been essentially subsidized. On top of that, those benefits are showing at the customer. And the proof of that is the fact that our order books are quite strong, and we now have more customers on that list. That would be the proven.

[Michael W. Glen, Equity Research Analyst]

And to try to characterize what you're seeing, could this start to come in during next year, 2022 in a notable way on the revenue line? Or would it be something longer dated?

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

So I do expect -- remember, we just talked about the TAM. It's not a huge revenue generator. It is -- any time you go into semiconductors, obviously, margins are interesting -- more interesting than, I would say, revenues. For next year, we do expect notable growth. Now, I'll be a little bit conservative, every time -- just my experience. Every time I see a fab shop, having to upscale substantially, and that's what we're planning for. You go through teething problems. We saw that if -- you may not have been involved, but a couple of years ago with indium antimonide, when all of a sudden, we had a much larger demand, we went through a period of difficulty in order to scale it. So, the good news is, the order book is very strong. It suggests a notable increase for next year. The cautious note is that we need to make sure we -- the teething issues need to be minimized. I would just put a caveat.

[Michael W. Glen, Equity Research Analyst]

Okay. And then just on AZUR. With the transaction closing shortly, when you announced that you indicated a price range of EUR73 million to EUR79 million, are you able to give an indication where that might fall into at this point in time?

[Richard Perron, Chief Financial Officer]

It. It should fall to -- not within that range, potentially, the lower part of that range.

[Michael W. Glen, Equity Research Analyst]

Lower part of the range. Okay.

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

I don't think it's going to be anymore, right, Richard?

[Richard Perron, Chief Financial Officer]

No.

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

In fact, we can safely say that it's -- we're well protected.

[Michael W. Glen, Equity Research Analyst]

And it's still 6.5 million shares that get issued as part of the purchase price?

[Richard Perron, Chief Financial Officer]

Yes, it is.

[Michael W. Glen, Equity Research Analyst]

And have you indicated a price at those -- on those?

[Richard Perron, Chief Financial Officer]

No. The way the transaction is structured, it's a fixed number of shares that will ultimately be shoot on the day that we do the closing.

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

So we will be providing you with colors on that soon as the deal closes, we'll give you -- you'll have a lot more acccurate information. We just -- please understand we're just -- we're in the process of closing the deal.

[Richard Perron, Chief Financial Officer]

But if you want an estimate, you can use today's share price and then you'll be fairly close to it.

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

I think so. And the other thing you should know is, at the time that we were negotiating the deal, the share prices were within a certain range, and we've protected for that, meaning there's a fixed mechanism there that protects our -- the equity contribution on this. So there's a bit of a protection mechanism there, which enables us to keep the whole deal at a -- finally at a certain range of pricing consistent with what we've communicated in the past.

[Richard Perron, Chief Financial Officer]

Or just saying it in different words. The final purchase price is not determined on the price of our shares, there's a range. So it's within the range of our share price.

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

I'm sorry, I want to make sure this point is well understood, Michael. So you're clear on the message we're sending, yes, on this?

[Michael W. Glen, Equity Research Analyst]

Yes. I understand the ins and outs. I wanted to just try to get an update to see if you had some of the numbers more definitive at this point in time.

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

You will have those numbers fairly soon.

[Operator]

Your next question comes from Frederic Tremblay with Desjardnis.

[Frederic A. Tremblay, Analyst]

I was wondering if you could give a bit more color on the better-than-expected demand in health and pharma in the quarter as well as -- are you seeing any secular trends in that market that would lead you to be -- to think about M&A more aggressively in that health and pharma market?

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

Sure. As you recall earlier, I said, in 2016, our advanced materials accounted for something like 10% to 20%. Part of that was actually a budding a much smaller, let's say, health and pharma, and we've actually seen continued increase in that market for us for the materials. As you know, we are the world's largest producer of business based pharmaceutical advanced API, advanced pharmaceutical ingredients -- active pharmaceutical ingredients, I should say. And so a lot of that has continued to grow. I think it would be worthwhile to mention that we also were involved in additives business a few years back. We're continuing to see positive momentum there. That also has helped certainly grow the revenue in that sector. But from where we stand, a lot of our active pharmaceutical ingredients are still based on precursors that have some level of minor metals in them, whether it be business, cobalt, I don't know, or others or iodine or what have you. And so, we have the capabilities. When you look at our pharmaceutical activities or FDA approved, GMP certified, we're going through all the motions that a small pharmaceutical company would go through, yet we haven't really applied it to a larger scale. So coming back to your question on M&A, what we're trying to do is latch that ability on to a much larger market, small molecules, for example, APIs, and see if we can really utilize those competencies across at a much revenue base. And so, that's really been the core of our activities over the past months.

[Frederic A. Tremblay, Analyst]

Okay. And with AZUR closing soon, would you say that you already have appetite to close additional acquisitions? Or do you expect to take a bit of a pause there as you integrate AZUR and reduce leverage? Or...

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

I think later -- in the latter part of your statement, I think our immediate focus, as you all know, M&A -- that a critical part of M&A is integration, that's what makes it or breaks it. I think we're going to be shifting to really integration mode. That's going to be priority #1 to make sure everything gets buttoned up properly. And we'll continue to run our M&A pursuit in the background. There is no announcements that I have right now that I can share.

[Richard Perron, Chief Financial Officer]

But we do have resources dedicated to that. So we're scouting in the background.

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

Yes. Indeed.

[Frederic A. Tremblay, Analyst]

And just last question for me. Given the global supply chain constraints that we're seeing, I guess, any comments on your inventory position and comfort with your supply of materials would be helpful.

[Richard Perron, Chief Financial Officer]

We don't have issue with getting goods. It's the cost of moving them and the conversion cost because of the consumables. But we have no issue in terms of getting goods, buying the goods and other things we need as part of our business. That's really the movement and the consumables, so the cost of transforming.

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

The easier way I can -- the easiest way I can paint the picture is, you have a choice right now, in today's market, in today's environment, with all the challenge. You can get your goods if you're willing to pay a bit extra. So recognizing that we're revenue focused, we want to serve this demand. And by the way, our customers rely on us, our reputation for being reliable. We certainly would not want to -- we want to be -- we want to come to their aid in this time. We've obviously chosen the former as an option as we are paying 3x to 5x more on logistics to make sure that we have the things in place at a time that is needed.

[Operator]

Your next question comes from Nick Agostino with Laurentian Bank.

[Nick Agostino]

Richard, if I could ask, in -- on the question with regards to the pricing for AZUR, you indicated probably towards the lower end of the initial range. Can you maybe -- guys, can you just comment on how AZUR's business has been doing since you announced the transaction back in, I believe it was February, if the business is performing as per expectations or better or worse than initially thought?

[Richard Perron, Chief Financial Officer]

Yes. So if you compare where they're at this year and compare that to the same time last year, we actually, they had quite a bit more sales, and profitability is in a similar range or slightly higher. So we see 2021 as -- I don't want to use the word replica, but a similar pattern, but with slightly better sales and slightly better profitability.

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

I think when you look at the -- also the pipeline, at least based on...

[Richard Perron, Chief Financial Officer]

And they continue to carry a solid backlog, okay? So what we expect to get at closing is a company that is performing as expected and as per our due diligence exercise.

[Nick Agostino]

Okay. And then just looking at your renewable energy business, it looks like the revenue contribution was lower. And I believe, A.J., you've already talked to that. Can you guys comment about how a lower tellurium price in the quarter, if that had any benefit to you guys when it comes to the margin around that specific piece of business? If that's what you saw, just any color there.

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

So if we look at the renewable energy business, as we've said before, a portion of that business -- a good portion of it is on fixed pricing basis. And so, as obviously, as prices go up, the margin gets impacted and the revenue doesn't necessarily change, okay, because it's a fixed price. And as the prices go down, again revenue necessarily doesn't change and it improves your margin. But when we look at -- to address your specific questions, as you know, there is also a lag time that comes with it. So like [indiscernible] you've got a global supply chain around it and there's a WIP that's going through. And so the pipeline carries a certain value, that value over the past months has gone up, but I believe we're beginning to see now tellurium has gone down, I think if I'm not mistaken, by like 15% or so, 15%, 20%. And so we expect that to also -- if the trend continues the way it's continuing to normalize for us.

[Nick Agostino]

Okay. Now when you talk about a lag, is that 1 quarter, 2 quarters?

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

I would go with 2.

[Nick Agostino]

Okay. Okay. And I guess my last question. I just want to make sure I understood this. I believe in your press release -- I'm not sure if this was asked or talked about earlier, but I believe in your press release, you talk about possibly some pricing increases to help offset some of the inflationary costs that you've talked about before. If you're going to put those pricing increases through, is that something you've already started to implement? Maybe what the timing of that implementation? What scale you're anticipating? Is it going to be across the board all customers in all sectors? Or is it going to be selective? And do you anticipate possibly some pushback with some customers or some type of response?

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

So we have begun that work. Indeed, we are looking to increase our prices to reflect -- because the logistical issue, for example, or even some of the consumables really is somewhat ubiquitous, and so it needs to be addressed holistically. Now as I mentioned, we've got a mix of -- the way you should think of it is, the fixed contracts are very hard to open up and renegotiate on those because the whole concept of fix is, well, if there's benefit, it's yours, if it's not, it's also yours. So it's going to leave us -- we'll still try on some of those because we think we should still, we've got enough fundamental. But mainly, our focus is, to create some value, is going to be on the short and spot side of things. There, it's going to be across the entire business. So there's no like -- I wouldn't tell you I think one business is more than the other. Clearly, eco-friendly will have a lot more impact because there's a tonnage of material that moves is larger. It's -- and we're talking about logistics here also and then some of the consumables. So that's where we're going to put a lot of our focus. In terms of impact and our success, please give me a little bit more time. We've just begun. I shouldn't say just, we actually started probably 5, 6 weeks ago. These things require negotiations. We see on the spot stuff, it's -- we're -- that's beginning to actually happen. Is there pushback? Absolutely. Everybody is under the pinch, and it's -- everybody's -- it's sort of everyone's trying to do their best in this. And so I think in spot and short term, we have pretty good leverage. I think where our leverage dies down is more on the long-term stuff.

[Operator]

Thank you. [Foreign Language] We have no further questions at this time. Please proceed.

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

Thank you.

[Richard Perron, Chief Financial Officer]

I would like to thank everyone for attending the call. Have a nice day. [Foreign Language]

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

Buh-bye.

[Operator]

[Foreign Language] Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Thank you.