5N Plus Inc

TSX:VNP

Earnings Call Transcript 2017-Q4

[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 Fourth Quarter and Year-end 2017 Results Conference Call. [Operator Instructions] Mr. Jean Mayer, Vice President, Legal Affairs and Corporate Secretary and in charge of Investor Relations, you may begin your conference.

[Jean Mayer]

Thank you. [Foreign Language] Good morning, everyone, and thank you for joining us for the presentation of the 5N Plus financial results for the quarter and fiscal year ended December 31, 2017. I'm Jean Mayer, Vice President, Legal Affairs and Corporate Secretary of the company and also in charge of Investor Relations.Before reviewing in more detail our quarter and year-end results, I would like to mention that we issued yesterday our financial statements for this period, together with our management discussion and analysis. If you have not been able to get a copy of these documents, I invite you to do so by accessing our website, 5nplus.com, or the SEDAR website at sedar.com, where these documents are posted. Earlier, we have also posted on our website a presentation on our quarter and year-end results that you may find helpful during this call. Joining me this morning is Arjang Roshan, our President and Chief Executive Officer; and Richard Perron, our Chief Financial Officer. Mr. Roshan, Mr. Perron and I will now be reviewing our financial statement, and we will be available afterwards to answer questions during the Q&A period.During this call, Mr. Roshan, Mr. Perron and I may be making forward-looking statements, which are subject to the usual cautionary remarks. More specifically, these statements are based on the best estimates available to the company at this time, involve known and unknown risks, uncertainties or other factors that may cause the company's actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. For a list of the factors that could cause our actual results to differ materially from those discussed or implied in our forward-looking statements, please refer to the risk factors described in our management discussion and analysis.In the analysis of our last quarter and year-end results, you will note that we used and discussed certain non-GAAP measures, which definitions may differ from those used by other company. For further information on the use of these non-GAAP measures, please refer to our management discussion and analysis.I would now like to turn the conference to Arjang for the discussion of the quarter and year-end results.

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

Thank you, Jean. Good morning, ladies and gentlemen. It is a pleasure to be with you as we discuss Q4 and full year results for 2017. I know it's February and many of you have already moved on, nevertheless, allow me to take this opportunity and wish you all a great 2018. Before I start, I would like to welcome Desjardins Capital Markets and GMP Securities to our call. They have recently started covering 5N Plus. Today, I will commence by summarizing our activities and will then provide more clarity for 2017 financial year. As usual, Richard will follow up with a comprehensive review of our financial results.Last night, we posted Q4 and full year results for 2017. Adjusted EBITDA and EBITDA for the year closed at $25.1 million and $26.9 million as compared to $20.1 million and $15.1 million for 2016. This translates to earnings per share of $0.14 for 2017 versus a loss of $0.07 per share for 2016. The adjusted EBITDA came slightly higher than the midpoint guidance of $21 million to $27 million provided by the management for the year. Now let's dig a bit deeper. In 2017, segment Electronic Materials posted 25% growth in adjusted EBITDA as compared to previous year. The factors, technical materials and security, aerospace sensing and imaging contributed to the earnings growth with higher content to a value addition. During the year, sector renewable energy materials experienced the anticipated demand reduction. This has been a topic of discussion over the past year. This development is due to transitory changes associated with the scale-up of new products at our customers' manufacturing sites. Given the fact that the company's strategic plan, 5N21, was designed in 2016 when the industry was facing notable challenges, management decided to take a conservative view of the future demand for our renewable energy materials. Therefore, embedded in 5N21 lies the assumption that the contribution for -- from renewable energy materials in percentage of company's total revenues will decrease. This is largely driven by high rate of growth from other sectors within Electronic Materials. Given the recent upbeat trends in the market and the anticipated growth in demand for products requiring our semiconductor materials, we are encouraged. This being said, at this point, we see no reason to change 5N21 assumptions.Going to business sectors: security, aerospace sensing and imaging. 2017 proved to be a strong growth year with record demand for a number of products. In addition, during the year, our teams won a number of contracts well above the rate of anticipated growth for the market. Given the fact that much of the sectors is associated with our organic growth initiatives, we are developing options to increase capability and capacity across our North American facilities service sector.Looking to technical materials. First, I will address the LED market. As mentioned last time, this market has been facing an oversupply situation. Given the company's selectivity model, in 2017, unit sales when compared to the previous year was lower. This being said, the overall margin contribution from this business has improved. Our management is currently developing options for the future of this business in line with the market realities. Now let's consider another activity within technical materials, namely Micro Powders. 2017 was a decisive year for this venture. As you may recall, in May 2014, the technology behind this activity was acquired with the aim of becoming a supplier to the broader electronic packaging and 3D printing markets. Subsequently, a state-of-the-art manufacturing facility was built in Montréal. Over the past several quarters, management has engaged external consultants to assess the viability of this activity. Our exhaustive assessment indicates that the technology and product capability behind this venture are indeed unique and can provide notable differentiation in the marketplace of the future. This being said, to maximize value creation, the scope of this activity must become more focused on complex requirements of the market where it provides most value. Let me give an example. One of the major markets for this technology is electronic packaging, the vast segment which today requires various alloys of specific morphology and purity with individual particle sizes ranging from 15 to 40 microns. Today, most manufacturers of these alloys utilize process technologies suitable for volume production around current market requirements. In comparison, 5N Plus' Micro Powder technology is designed for particle sizes, which are, in order of magnitude, smaller and with more rigorous quality requirements. We now consider some of the trends in the electronic industry, such as increased functionality, smaller components, lighter packaging, tougher durability requirements along with continued demand for miniaturization. It is fair to say that we are well aligned with the future demand trajectory of this market. To that end, we must focus on this trajectory and now speaking metaphorically, refrain from grinding cuts of filet mignon to sell as hamburger meat in order to move volume.Let's move to segment Eco-Friendly Materials. In 2017, adjusted EBITDA from this segment grew by 11%. While the demand for products associated with industrial materials were lower than 2016, the demand for product associated with health and pharmaceutical materials, along with catalytic and extracted materials, were at or above the 2016 levels. Sector industrial materials represent a number of products with bulk use of metals, which historically provided an intricate vehicle for speculation and trading. In the advent of 5N21, activities linked to trading have been greatly regulated and utilized with specific mandates, mainly risk mitigation. Furthermore, 5N Plus have elected to remain disciplined in respect to pricing plus to match risks with rewards. This has resulted in loss of sales, mainly in products with high content of metal and lower value-added activity. Given the company's strategy, management views this as a tolerable outcome given the fact that the risk associated with the lost revenues exceeds any potential value creation. The demand for health and pharmaceutical materials were generally in line with the previous year. In late 2017, 5N Plus announced its entry into the animal feed market with high purity trace materials essential for health and nutrition in animals. The investment in this project has already started, with plans to build and commission a plant in Europe by the end of 2018, which will produce a range of products marketed under the brand name of Nutritive. We believe the company's long-standing experience and track record of success with high-purity materials and highly regulated industries, especially as it pertains to health, will be a unique and a differentiating factor for 5N Plus.In 2017, one of Eco-Friendly Materials' growth initiatives, namely catalytic and extractive materials, began to emerge. The products associated with this sector are used to enhance process yield, process throughput and in some cases, reduce environmental impact from activities related to mining, oil and gas industries. By the end of 2017, all projects related to production, location, optimization were successfully concluded. Some of the key projects included product relocation from Wellingborough, U.K. and Wisconsin, U.S.A. with other facilities within the group. Over the past 18 months, the company has repositioned its core business through selectivity and emphasis on value addition. With successful completion of this milestone, it is fair to say that the first deliverable under 5N21, namely extracting more value from core businesses and existing assets, have been largely addressed, and we have begun to further increase our focus on the second and third deliverables under the plan, namely increasing contribution from upstream activities and delivering quality growth from new initiatives.The company's upstream activities made solid progress in 2017. During the year, 5N Plus continued to expand its process capabilities while enhancing throughput from refining assets around the globe. The company increased metal valorization from complex feed. As you may recall, these metals are a large portion of consumables in our downstream products and considered a flow-through cost. We will continue to utilize technology to efficiently extract these metals from various feeds. Nearly 18 months have passed since the unveiling of 5N21's strategic plan, and we believe a number of key performance indicators suggest the plan is working. Gross margins across the business expressed in percentage of revenue and absolute value have grown markedly. Various components of costs and working capital are well under control. Earnings volatility reduced significantly, partly due to relative stability in the metal markets but also, in large part, due to specific measures taken by the company. The culmination of these factors have resulted in 25% growth in adjusted EBITDA, an improvement of return on capital employed from 6.7% in 2016 to 12.3% in 2017. We are pleased by the progress and view these achievements as a foundation on which additional progress will take shape. As we look to 2018, prevailing themes will be progress in upstream activities and expansion of growth initiatives, both of which should result in further growth in the overall margins. I would like to thank the men and women of 5N Plus for their valued contributions and express our gratitude to our shareholders for placing their trust in us. At this point, I will turn the call over to Richard.

[Richard Perron, Chief Financial Officer]

So good morning, everyone. As well, before I start, I would like to welcome Frederic Tremblay from Desjardins Capital Markets and Stephen Harris from GMP Securities to their first call with us. As communicated by AJ, the year just completed is an important year confirming we are an organization fully aligned on leading the transformation of 5N Plus, creating a company and then seeing its business model and growth strategy. As you can read in our Q4 and year 2017 earnings release documents, the company continued to demonstrate improved profitability, recurrent cash flows and a solid balance sheet, rightsizing its portfolio of assets across a wide range of products in both mature and fast-growth developing markets under the mantra, selectivity. Also 2017 saw the company achieve a number of key milestone -- milestones making considerable progress towards its renewed strategy, with the impact on a full run-rate basis to be realized in 2018. In addition to the improved profitability and quality of earnings, the company expects most of this work to reduce earnings volatility with the diversity of the markets we deserve to continue to yield substantial benefits. So now starting with the coverage of revenues and gross margins. During Q4 and full year 2017, revenue decreased slightly compared to the same period of '16, but our gross margin has improved significantly, reflecting the price stability in metals, powered by our selective approach, reaching 26.3% in Q4 2017 compared to 21.8% in Q4 of last year, tracking an average gross margin of 26.1% for the year or $57.3 million compared to 22.4% and $51.8 million for 2016. Now for the operating earnings, EBITDA, adjusted EBITDA and net earnings. In full year 2017, operating earnings rose by $15.2 million and reached $18.6 million compared to $2.4 million for the corresponding period of last year, positively impacted by better realized gross margins, favorable litigation and restructuring income, lower depreciation, amortization and a gain on disposal of properties before impairment of noncurrent assets recorded in Q4 this year. EBITDA for the full year '17 increased by $11.8 million to $26.9 million compared to $15.1 million for the same period last year, positively impacted by better realized gross margins, better price stability for most metals and sustainable demand for our products. For full year 2017, adjusted EBITDA of the Electronic Materials segment increased by $5 million to $24.8 million, representing an adjusted EBITDA margin of 34% compared to 25% last year. Adjusted EBITDA for the Eco-Friendly Materials segment increased by $1.5 million to $15 million, representing an adjusted EBITDA margin of 10% compared to 9% last year. The adjusted EBITDA on the corporate for the full year decreased compared to '16 due to our long-term incentive plan provisions recording, following the important increase in the company's share price during the period. Net earnings reached $2.2 million in Q4 compared to $0.2 million in Q4 of last year, while net earnings reached $12 million for the full year compared to a net loss of $5.9 million in '16. For bookings and backlog presented in days based on annualized revenues to normalize the impact of commodity prices. When you compare Q4 of '17 to Q3 of '17, backlog reached 187 days of annualized revenue, representing an increase of 9 days compared to the previous quarter. When you compare Q4 of this year to Q4 of last year, backlog for the Electronic Materials segment reached -- increased by 137 days and by 6 days for the Eco-Friendly Materials segment. Bookings increased by 37 days for the Electronic Materials segment and by 27 days for the Eco-Friendly Materials compared to the previous year quarter. Quickly going through the expenses. The decrease in depreciation expenses is primarily attributed to the accelerated depreciation recorded in 2016, following the company's decision to optimize its footprint. SG&A for the quarter and full year finished at similar level than the same period of '16. As for litigation and restructuring costs or income, in Q4, the company recorded litigation and restructuring costs of $0.4 million related to an incident delaying the consolidation of U.S. operations into a new facility initiative announced in 2016. For the full year, the company recognized in Q1 '17 an income resulting from the contract amendments -- from contract amendments for securing higher margins in the short term versus higher market share in the downstream business, mitigated by costs related to the termination of noncore commercial activities in the upstream business activities for a net income of $3 million. In Q3 of last year, the company recorded a provision for litigation and restructuring costs of $4.9 million, representing $3.5 million, following the company's announcement to consolidate specific sites and optimize its footprint, and litigation of $1 million, following initiatives to renegotiate unfavorable purchasing contracts. The company also recorded nonrecurring costs of $1 million for the closure of an administrative office in Europe as well as for the settlement on unfavorable supply contracts. In reference to impairment of noncurrent assets, in Q4 of this year, the company recorded an impairment charge on noncurrent assets of $3.1 million, broken as $1.1 million for production equipment and $0.8 million for technology and $1.1 million for development costs. All that presents in under Electronic Materials segment, reflecting recent development assumptions used in assessing the current value of specific product development assets. Change in assumption is from an active decision to alter the market penetration strategy, other factors remaining constant. It is motivated by intentional delays in increasing production level in order to prioritize products with higher premiums in niche applications requiring longer market development cycle compared to other products. Financial expenses for the full year amounted to $6.1 million compared to $7.3 million for the same period last year. The decrease in financial expenses of $1.2 million is mainly due to lower imputed interest and other interest expenses mitigated by unfavorable foreign exchange and derivatives when compared to last year. Income taxes. The company reported earnings before income taxes of $0.6 million in Q4 and $12.5 million for the full year. Income tax recovery for Q4 was $1.6 million while income tax expense was $0.5 million for the full year compared to $0.7 million and $2 million for the same periods last year. These amounts were favorably impacted by deferred tax assets realized in certain jurisdictions.Covering liquidity and capital resources. For the full year, cash provided by operating activities amounted to $13.1 million compared to $23.5 million for the full year '16, due to negative variances from working capital changes mitigated by the increase in EBITDA. The negative change in nonworking capital results mainly from an increase of $10.3 million in inventory, aimed at protecting commercial positions, and $6.2 million in other current assets referring to an equity swap agreement. For 2017, the cash used in investing activities decreased, explained by proceeds from the disposal of redundant PPE. Again, in 2017, cash provided by financing activities amounted to $0.9 million compared to 0 for last year. The increase is associated with the timing of contributions from a product development partnership program. At the end of 2017 as for the end of '16, the company had no drawdown under its credit facility. Ending with the coverage of net debt. Net debt after considering cash and cash equivalent decreased by $7.6 million from $19 million at the end of last year to $11.4 million at the end of December '17. With this, we'll conclude the financial coverage, and we are ready for questions.

[Jean Mayer]

Operator, we may now proceed with the Q&A period, please.

[Operator]

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

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

Inventory was up a little bit in the quarter. And Richard, I think you suggested it was up because you were aiming to protect your commercial position. So is there an increase in volumes in inventory? Or is that also partly price-driven? Metal [indiscernible].

[Richard Perron, Chief Financial Officer]

It's essentially volume on specific component of our inventory.

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

Okay. And could we talk a little about how well the business can take price shocks? Or what kind of tailwinds you could have from rising metal prices? I see that, for example, bismuth was up 10% on average quarter-over-quarter and a number of your other metals have seen increased prices. Are you still going to see tailwinds from rising prices? Or should we expect that reduced volatility given the selectivity in the business and some of your contract restructuring?

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

Indeed, we are changing that model of the business as compared to the past. We're doing -- we have done a number of things, we've executed a number of things. One of them, as an example, is commercial hedging where, for certain contracts, we end up closing the position to lock in our premium and not expose the contract to metal risks. And this is also part of why inventory has gone up. So to that end, given that -- that was just one measure. There are other things, you mentioned selectivity. There are things that we've done in the business. With that, we have reduced business' volatility, which means when metal prices rise, we're not going to rise as much. And when metal prices drop, we're not going to fall as much. So for us, right now, actually, we consider what's happening in the metal market, the [ perturbation ] 10%, not really hugely material for us.

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

Are you able to quantify how much of your revenue would still be exposed to moving metal prices?

[Richard Perron, Chief Financial Officer]

By default, we remain a business exposed to a certain extent. But what we've done is to reduce the volatility by a lot.

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

So our goal was to drop it by 50% by 2019. And I think we are at least 70% there. So if you were to model us, and we've done this on our website, you would see that with -- I think we've done it with a 30% increase in metal prices, see substantially less volatility, up or down, in our final results.

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

Okay, great. And then just as a follow-up. So we see the metal markets are firming up, but there is news that the Fanya Exchange could auction some of its stockpiles later this year. Do you have any insight into that process? And whether or not it could be disruptive in those metal markets?

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

Yes. Before I answer the Fanya question, I think it's worthwhile to also note, Rupert, that the changes that happens in the metal markets, a lot of it are transitory at this point. There is no -- at least to the best of our knowledge, there is no -- at least with the metal that we are engaged with, there is no sustained shortage or -- well, oversupply that's driving it. And to that end, if there are speculative elements in the market, that's what drives some things up and some things down. And our whole goal has been to be a company, to be much, much less exposed to those elements. So that's why we -- if you see us not being overly excited or concerned by it, it's because we're basically going in a different direction. And those speculative elements are of little interest to us, albeit it still has some impact. Now the Fanya situation, no, we do not have any, let's say, information that's available -- that's, let's say, not available to the open market. I think there are some things that are pretty obvious there that -- I mean, the fear in the market has always been that they would unload the metal into the market, okay? That could be the case maybe, maybe not. We don't know. This is all just speculation for us. As time goes, it becomes less and less of concern because how we're changing our model, our business model. I would argue that as time goes, my competitors would probably be impacted much worse than we would be. And if the Chinese government were to do that, it would probably hurt a lot of the local producers more so than Western companies. So those are the only things that we can comment to, but we do not have any additional information.

[Operator]

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

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

I just wanted to -- I have a couple of questions here. You had mentioned the focus shifting in 2018 to the upstream. I wonder if you can just give us some color on where you've come from in terms of your total metal inputs. What's your sourcing from unrefined sources versus refined metal that you're buying in the market? Where you've come from? Where you are now? Where you hope to get to?

[Richard Perron, Chief Financial Officer]

Well, I'll let AJ follow, but I'll start simply by saying that there's different things that we cannot disclose on the phone for strategic reasons, okay? But...

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

Yes, I guess, just to add. With that in mind, to add color, what we're trying to do in upstream is to move more and more away from direct commodity purchase in a sense that when you go and purchase metal in its purest form, there is very little room for a negotiation in a sense. There are notations, and some of these come from places where there are inefficiencies. So it's -- recognizing that, for us, we are a material company. We're not a metals company. We don't make -- our business isn't to make speculative [ announce ] out of metal. So what we've done is we have gone upstream with our technological know-how, our metallurgical technologies. And what we've now done is gotten engaged in a number of files where we bring in complex feeds and extract metals. And if we're doing that, it usually means that we're able to do it at a more attractive terms. Now obviously, I can't really comment to what are those contracts. If I give quantities and things like that, it wouldn't really be the right thing. But I can tell you that in 2018, the things that we're doing is we're expanding our capabilities. Technologically speaking, we're developing more flow sheets -- that's the technical term in the industry, which allows us to valorize more diverse feed into our activities. We are increasing capacity. Some of that is by debottlenecking in order to be able to do more, and we are optimizing essentially our refining plants in the same process. And our commercial folks are looking at more complex feeds to bring in. And that work has already started. We expect in 2018 that we make progress in that regard.

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

Okay. Maybe as a follow-up then. Are there any of your refined metals that are sort of really there aren't any options for you to access through buying unrefined feeds and the like? Are there some that are just closed, and you're going to have to stay as a purchaser of a refined metal? Are there any products that stand out in that way?

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

The enabler in that industry typically is having the capability. So I would tell you that I would -- my immediate answer would be no, but let me qualify that no. The reason why I would say no is if a metal becomes of strategic importance to us, we would, especially having the balance sheet that we have, we would invest in getting the capability to valorize it from feeds. And as of today, all the metals that we are using in our business, we have options. There are various options. I should say the ones that are being used in predominant quantity, we have options to either purchase directly in the market or go upstream and valorize it ourselves.

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

Okay. I wonder if you can give us -- on a separate issue, just a little more color on the bookings and backlog. Bookings, in particular, seem to be firm across the business. If you had to break that down between what is mix, what is price and what's sort of just firm underlying customer demand, what would you -- how would you do that?

[Richard Perron, Chief Financial Officer]

You know what? Essentially, backlog and bookings have improved because of contracts that we've earned and also as we communicate usually, Q4 and Q1 is that time of the year wherein we renew different contracts. So it's not really a question of mix per se. In our case, the Electronic Materials segment did pretty well in terms of renewing contracts.

[Operator]

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

[Nick Agostino]

I guess I just wanted to follow up on if there's any possibility for further footprint optimization, specifically in Asia. I believe that's something you guys called out on the last conference call.

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

So as you saw, we are always looking at our business in terms of trying to find out if there are ways we can improve its flow. At this point, in -- specifically in Asia, the major activities that we are engaged with, we think they're optimized. In terms of some of the minor activities, there might be additional items, but it's too early to say. The team is finishing their assessment. And I think by next quarter, we should be able to give you better color.

[Nick Agostino]

Okay. And then specifically going back to the bookings commentary, it looks like it was up on the Eco-Friendly side, but it was down on Electronic Materials side. Is there -- is that just more of a timing issue as far as what we should read through on that, specifically on the -- on Electronic Materials?

[Richard Perron, Chief Financial Officer]

But the Electronic Materials is actually backlog while booking is a bit -- you're right, in terms of numbers, a bit less. But the overall backlog is much better. It's such just question. Key figure remains the backlog as you can see, which is up -- which is materially up from last year's same quarter and Q3.

[Nick Agostino]

Okay. And then as far as the renewal contract momentum, as you said, Eco-Friendly starts to pick up on the renewals in Q4, continues into Q1. Can you just maybe confirm that, that momentum into Q1 was as expected?

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

I think, I guess, we're pondering it a bit. But the question...

[Richard Perron, Chief Financial Officer]

Yes.

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

Part of, I think, what you should keep in mind, Nick, and you see we don't even know the backlog is very good, and we're not touting it very strongly. The reason is because this is really -- some of this has to do with how we choose to manage our contracts, if there are opportunities to lock in longer contracts because we believe that's the right play for the business or sometimes, if we feel that we will have pricing power or better options later on, we tend to be -- tend to go on shorter contracts. So those elements play a big, big impact on backlog. And so I wouldn't read a huge amount into it.

[Richard Perron, Chief Financial Officer]

No.

[Nick Agostino]

Okay. That's helpful. And then, I guess, the 2-part question on -- just given that you did provide 2017 EBITDA guidance when you put out your strategic plan a few years back. Any -- is there any plans to provide 2018 EBITDA guidance along the same lines to kind of just further illustrate the visibility you guys have in your market?

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

Yes. So our plan is, as you know, we -- being exposed in the past much more so to metal prices, the reason why the company is reluctant to provide those guidance is what's -- obviously, you want to make sure that what you do is credible. What we've decided is that in Q1 2018, we will give you a range. And then in Q2 or Q3, we will tighten that range based at -- based on how Q1 is developing. So that's what we're...

[Richard Perron, Chief Financial Officer]

That's the plan. Similar to last year.

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

We're committing to. And that's -- yes, that's fairly similar to what we did last year.

[Nick Agostino]

Okay. And then, I guess, just lastly, when I look at your 2021 EBITDA guidance, it was in the range of $40 million to $60 million. I believe to hit the upper end, you would have to do M&A to get there. So just look at the low end of that sort of $40 million number, if we look at where you are today, what kind of organic growth rate do you guys build in to your model assumptions to get you guys to that $40 million number? And I'm going to assume, it's obviously just going to come from -- obviously from new initiatives that you're planning to undertake on the upstream side.

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

That's correct. That's correct.

[Richard Perron, Chief Financial Officer]

And downstream side as well.

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

And that -- well, actually, a lot -- yes, both. You're correct. So the $40 million is indeed organic. For the $60 million to happen, we need to do something, most likely, nonorganic. Now on the $40 million, you're looking at -- when we built the plan, it was a 15%, 1-5 percent year-over-year EBITDA growth. So last year, we did better than that. And we think that there are a number of projects that currently we're working on. Some of them being in, for example, in the aerospace, imaging, sensing, security. There are -- the Micro Powder is part of that initiative. There are upstreams. There is the additive, feed additive that we're engaged in. So we've got a number of growth initiatives that we believe should be able to credibly support that growth trajectory of 15% year-over-year.

[Richard Perron, Chief Financial Officer]

And the actual contribution is almost equally broken between upstream and downstream. There's a lot of stuff also happening on the downstream side.

[Nick Agostino]

Okay. I guess, you gave that guidance based on EBITDA growth. Should we be modeling, in the case of new contract opportunities, a yield higher margin potential? Or should we be also modeling some sort of revenue growth profile? And what would that revenue profile -- what do you guys suggest it should look like?

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

Yes. And we will be able to say more about revenue growth later in the year. Initially, if you recall, the explanation for revenue reduction is because our revenue includes metal in there. And while -- or actually, the value-added component of our sale is increasing, so we're actually growing the business. What the market sees is a reduction in revenue, and that's because the metal is actually declining. And the amount of metal content, which is a pass-through for us, is larger than the growth in the value-added part of the business. Now this can go for so long. If you are truly a growing business, this can go for so long and eventually, even the revenue side of it has to go up. And we think that will come. We think that will come, and it will come sooner than later. But allow me 1 or 2 more quarters, and I will give you more color there.

[Operator]

[Foreign Language] [Operator Instructions] Your next question comes from the line of Frederic Tremblay from Desjardins Securities.

[Frederic Tremblay, Analyst]

Is there a way to quantify or characterize the proportion of value-added activity that's in your backlog currently versus what the backlog -- versus what the proportion was in the backlog a year ago? Or what's in the backlog currently versus what was in your revenues for 2017? Just any way to sort of characterize the evolution of the value-added activity.

[Richard Perron, Chief Financial Officer]

Look, at a high level, you could take the dollar value of the backlog and apply our most recent gross margin increase, and you would have a pretty good estimate there.

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

Incidentally, just to add to that. As we -- to earlier caller Nick's point, at some point essentially, our revenue growth will also take place. And at that point, one of the things that we think we will observe is that our gross margin -- because we've had a pretty strong gross margin growth. At that point, we think the gross margin will be somewhat at the same level as 2017, 2018.

[Frederic Tremblay, Analyst]

Okay. That's helpful. And just -- when you're looking at your markets, just at the -- for example, the animal feed market, you're partnering with someone there. Just trying to figure out, I guess, for future new markets what the commercialization strategy will be. Will you most often seek to partner with existing players? Or I guess, it will depend maybe on your know-how? Just your view on the strategy for new markets.

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

So to give a bit more color there, Stefan, one of the things...

[Frederic Tremblay, Analyst]

Frederic.

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

Frederic, I'm sorry. One of the things that you should consider is that how we got into this market because it's -- it might not be overly obvious how a material company gets into a feed market. We have essentially a lot of the competencies that was necessary for a production of these materials. We have years of experience in high purity material production. We are a company that is FDA, GMP certified. We are -- on a daily basis, are exposed to very rigorous qualifications that exist in a number of industries, as an example, aerospace. So the company had the technical know-how, the operational know-how. What the company did not have was the channel to market. And so that's what our partnership with JADIS ADDITIVA in Europe is about. We believe they are a very strong company in that regard and are very well linked to the market. Now the other thing that we should also consider is that when you target a market, you typically try to go for the deepest end of the profit pool. And when it comes to these types of additives, the European market is exactly that part of the pool, given the quality and the tight requirements and the stringent standards that surround food. That is a strong place to start from. So our plan is to work with our partner in that market, expand into that market. And as we learn, we will develop additional options for other markets around the globe. But that's, right now, trajectory without, I guess, telegraphing all the punches.

[Operator]

Your next question comes from the line of Paul Strigler from Esplanade Capital.

[Paul Strigler, Analyst]

Just 2 quick questions. Earlier in the script, you sort of talked down renewables as potential source of growth, yet one of your largest customers has publicly stated that they intend to actively triple their capacity. Now obviously, you may not capture 100% share of that. But what -- I guess, what's preventing you from sounding more optimistic about sort of the renewables part of your business? And how that might contribute certainly to bottom line growth if not top line growth as well?

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

Well, so I think some of the things you're referring to are recent announcements due to changes in how import tariffs will be dealt with and so on. For us, that information is -- actually is not data complete. And we believe there is still a lot of uncertainties there that are yet to be determined. And so until we get better visibility on that and understand it, we think that it is prudent to remain where we are in terms of our guidance.

[Paul Strigler, Analyst]

But -- okay. But I think that, that specific customer said that they're expanding sort of irrespective of whether the Section 201 tariffs in the U.S. remain at the current levels or go to 0. I guess, I would have sort of expected a little bit more optimism on the renewables front, but maybe you're leaving to put some gas in the tank there to discuss later.

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

Well, again, we don't really comment on specific customer's activities. But for us, the key point here is of us making sure what we forecast has a degree of credibility. And at this point, again, because things are not certain, we refrain from really trying to speculate what that means. And some of the customers -- some of the people in that space, also as an example, one of things they say is that the future technology also utilizes a per watts of power generation less material. So when we put those things together, it is not [ fait accompli ], as I said earlier, that you can linearly project where your business is going to be. There's -- I think there is a lot more behind-the-scenes that's happening that we would like to sort out, and we said we are cautiously optimistic. So we're not completely like undermining it, but I think to be prudent, to be credible, these things needs to be worked out. There is a whole equation behind the scene around what type of material utilization and how that works before we can really discuss whether -- what that means to us.

[Paul Strigler, Analyst]

Great. And then I respect you're holding off until Q1 to provide sort of 2018 guidance, but you sort of provided a few pieces here. I think you said that gross margins might be flat year-over-year at the very improved level, call it, 26% to 26.5%, give or take, which is a very impressive improvement versus where they were. On the revenue front, obviously, given that you are moving from -- let's just pass-through metal pricing more -- to more value-add. The revenue transition, I think you said you'd provide more details later in the year. But without revenue growth, can you guys grow EBITDA year-over-year? And that's -- I don't need a number or even a range, but given that, I think also on the call, you talked about investing in the pet food facility in Europe, ramping up businesses. You have to ramp up the, I think, the U.S. semiconductor business. There are some probably incremental expenses there. I guess, with all the puts and takes, while I don't need sort of an EBITDA guidance range, like is it fair to say EBITDA should grow next year kind of no matter -- when you piece all that stuff together? Or is it possible that EBITDA takes at least a pause for you while you guys sort of make some investments to sort of transitioning the business to where it is now in a much better place but it's now, to get back at sort of the growth mode at the top line, you have to sort of make some investments this year, where maybe EBITDA takes a breather for a year?

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

So I would encourage you to have a look at our website and read the 5N21 plan. In there, it actually talks about how and what we do in terms of investment. As an example, what we're saying is this 5-year, 15% year-over-year type of projected growth, let's say, in terms of EBITDA comes with a price tag that is, in CapEx, at the current depreciation rate. That's in there. And so we are staying consistent with that trajectory. So you shouldn't assume that because we're making these announcements with investments that somehow we're increasing expenses. And a part of the reason for that is because historically or in the past, the company had invested quite a bit in capabilities. And in our first phase of our strategy, we were harvesting it. So we've got still -- an example being, for example, what we said in our webcast just now, we have a state-of-the-art powder production facility in Montréal, which we don't necessarily need to now in that business do more investment. So in terms of EBIT guidance -- by the way, in your statement, you made an assumption that we had said there is no revenue growth. I don't think we said that. We -- I have not said anything about that. In fact, I've suggested that at some point, if our story holds, the revenue will grow. And I just haven't said that. I've asked for maybe a quarter or 2 to bring more clarity. And I guess, at this point, that's as far as I'm comfortable in terms of commenting about that.

[Paul Strigler, Analyst]

Great. And then just one last question about trade issues that aren't -- isn't related to Solar. So with NAFTA negotiations sort of still ongoing, is there -- and I follow it loosely and not as intimately as you folks do over there. Is there anything sort of on the metals front just given some of your cross-border transactions that would be potentially impacted or actually favored by sort of their current negotiations or is [indiscernible] handicapped?

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

The simple answer is no, no impact.

[Operator]

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

[Jean Mayer]

Okay. Thank You. So we would like to thank you all for attending this morning's conference call, and we look forward to speaking with you again in early May while we will be presenting our Q1 2018 results. Thank you again, and have a great day.

[Operator]

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