5N Plus Inc

TSX:VNP

Earnings Call Transcript 2018-Q4

[Operator]

Good morning. My name is Matthew, 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 Results of 2018 Conference Call. [Operator Instructions] [Foreign Language] Mr. Jean Mayer, Vice President of Legal Affairs and Corporate Secretary, you may begin your conference.

[Jean Mayer, VP of Legal Affairs & Corporate Secretary]

[Foreign Language] 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, 2018. I am 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 of 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 at 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 statements, 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 and 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 use and discuss certain non-GAAP measures, which definitions may differ from those used by other companies. For further information on the use of these non-GAAP measures, please refer to our management discussion and analysis.I would now like turn the conference to Arjang for a discussion of the quarter and year-end results.

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

Thank you, Jean. Good morning, ladies and gentlemen. Thank you for joining 5N Plus conference call. It is a balmy morning in Montréal with temperature of minus 20 degree Celsius. I hope, where ever you are, it's warmer.This morning I plan to provide you with an update on our business, and Richard will follow-up with a financial review. Also since we are reaching the halfway point in our strategic plan 5N21, I will bring you up-to-date as to where we stand. So let's begin.Last night, 5N Plus posted its results for Q4 and financial year 2018. Adjusted EBITDA and EBITDA reached $32.4 million and $29 million in 2018 as compared to $29.6 million and $26.9 million in 2017.Return on capital employed reached 15.1%, which is at the same level as 2017. Revenue, including metal, remained flat for year -- for the year, while net earnings grew by 17% from $12 million in 2017 to $14 million in 2018.In Q4, net earnings, adjusted EBITDA and EBITDA all closed ahead of the same period last year. Adjusted EBITDA and EBITDA in Q4 were lower than the average of the first 3 quarters and consistent with the cyclical pattern observed in the previous years and in line with management expectations.In 2018, and more specifically in the second half of the year, 5N Plus faced an important test with respect to the key deliverable -- to a key deliverable under 5N21 strategic plan pertaining to the reduction of earnings volatility. During this period, nearly all notations associated with the key metals used by the company moved unfavorably by as much as over 30%. Despite this effect, 5N Plus continued to grow its earnings. In contrast, just a few years ago, such movement in metal notations would have substantially impaired the company's ability to maintain stable earnings, let alone grow there.To quantify the difference, we simulated 5N Plus under the new and old business models. The analysis indicates that under the old business model, the company would have experienced $12 million negative impact towards adjusted EBITDA, whereas under the new business model this impact has been reduced by more than 50% to about $5 million. We believe a number of items contributed to this positive development, including our selectivity approach, movement into products with less metal content and more value-added transformation, commercial hedging and overall streamlining of the operations.The new business model also assured certain side effects, such as reduction of overall revenue and moderate increase in inventory. The reduction of overall revenue, which includes metal content, can be explained by substantial reduction of pass-through metal revenue, while at the same time, the company's value-added revenue has continued to grow year-over-year in the past 3 years.The ladder, namely growth of value-added revenue, has not been large enough to offset the drop in pass-through metal revenue, but growth is the main reason for substantial improvement in the company's earnings over this period and a key feature of our business model under 5N21.As with the increase in inventory, this can be explained by commercial hedging practices aimed at substantially reducing the company's exposure to metal prices. Part of this approach is to physically hedge metals for specific contracts. Considering that the company delivered 15.1% return on capital employed for 2018, additional financing costs associated with commercial hedging more than justified in light of the magnitude of risk mitigation this approach enables.Given these results, we believe that we have delivered 1 of the 3 deliverables under 5N21 plan, namely reduction of earnings volatility by 50%, and this has been achieved a year earlier than anticipated.In the initial phase of 5N21, along with the company's selectivity approach, the global footprint of 5N Plus underwent major streamlining. Both of these actions have yielded positive results for the company. In 2018, management began to shift its focus more toward growth initiatives, along with the investment opportunities, further make the company's core businesses competitive. In 2018, 5N Plus invested in projects, such as the new additive plant in Germany, which was constructed by the end of Q4, a series of investments in our newly created upstream business to improve capability and capacity in Asia and Europe, which is well advanced in its execution, and doubling of capacity of the semiconductor plant in Montréal, which is proceeding on schedule. In addition to the growth seen, during the latter part of the year, the company identified a number of investment opportunities within its core businesses with reasonable payback profile.We plan to launch some of these investment opportunities in 2019. We continue to remain within the $50 million investment envelope or rate of depreciation over 5 years. We have declared that if we increase this sum, we will also increase the adjusted EBITDA target for 2021, which is today stands at USD 45 million.Let's spend a little time and review the business segments and sectors. Segment Eco-Friendly Materials revenue and adjusted EBITDA in 2018 was lower than 2017. The impact from movement of notations had the most effect on this segment, while the demand for our core products remained consistently strong. Revenue for sector health and pharmaceutical materials remain stable year-on-year with a robust demand for the company's products.During the year, 5N Plus completed the construction of its high-purity additive plant in Germany on time and in line with our budget expectations. 5N Plus has begun the process of certification and qualification of its products to support commercial activities, which are gaining momentum.Revenue for industrial materials dropped considerably year-on-year. As you may recall, this is the sector most affected by the change in metal notations. Metals, which are a pass-through component of sales and a consumable, are responsible for a relatively large part of the revenue in this sector. 5N Plus continued to commercially hedge its exposure whenever viable. The demand for the company's products remain stable.Revenue for catalytic and extractive materials grew significantly year-over-year, driven by strong demand for the company's products. 5N Plus has secured a strong order book well into 2019, and is expanding its product portfolio beyond the current family of products.Segment Electronic Materials revenue and adjusted EBITDA in 2018 was notably higher than 2017. Revenue for Renewable Energy materials was significantly higher year-on-year, driven by strong demand for the company's products and services related to semiconductor compounds used in thin-film terrestrial solar arrays. Much of this business is governed by long-term contracts between the mix of products and services.Revenues for technical materials dropped considerably year-on-year. 5N Plus is taking this sector through a complete transformation shifting away from commodity materials to engineered powders and alloys. During the year, 5N Plus moved away from sales of commodity chemicals and metals associated with gallium and indium to over the past few years that provided thin margins and ample notation exposure. Alternatively, 5N Plus has been focusing its resources on Micro Powders, where revenues continue to grow, albeit not at the same rate as the loss of revenue from commodity business.During the year, engineered powders and alloys produced by 5N Plus Micro Powders gained ample interest from the market with over 2 dozen ongoing qualification and certification programs sponsored by potential customers in various parts of the world. Based on the feedback we are receiving from the potential customers, our products are uniquely qualified to fulfill the stringent requirements of the electronic market with respect to miniaturization and performance of future devices. In the next several quarters, we expect the number of qualification campaigns to grow and the application of these alloys to expand to other industries.Revenue for security, aerospace, sensing and imaging material grew substantially. Much of the growth for the year came from applications associated with security, sensing and imaging. Admittedly, the surge in the demand appeared unexpectedly, which prompted additional investments to support the growth. The order book for aerospace business remained strong, albeit a number of programs experienced delays, which is nothing unusual in that industry.Before turning the call over to Richard, I would like to mention that this morning 5N Plus announced that its board has approved a normal-course issuers (sic) [ issuer ] bid plan. Under the NCIB plan, over the next year, 5N Plus has the right to purchase for cancellation, a maximum of about 3.5 million shares, which represents 7% of the public float.In a quest to deliver compelling value to our shareholders, along with building a sustainable business, we continue to entertain various options. We believe the appropriate M&A investment is one of such options. Over the past 18 months, we have developed specific criteria of what we believe is the right fit, for 5N Plus and have been continuing to actively monitor and engage the market as appropriate.Admittedly, we are being picky and are exercising patience and prudence to ensure any action taken by 5N Plus is accretive. In the meanwhile, we believe activating an NCIB program and investing in ourselves is a very good use of our resources to ensure value is being created.Last, but not least, I would like to remind everyone, in line with the past practices, we will be providing earnings guidance for 2019 in our Q1 reporting, and will narrow the range in Q3.I will now like to turn the call over to Richard.

[Richard Perron, Chief Financial Officer]

Good morning, everyone. As covered by AJ, we continue to prepare the company for the future. Reporting on fiscal year 2019, we see that the company continued to report positive results from the realization of its strategic plan, well positioned to deliver 5N21's targets, with the business remaining focused on structurally improving costs, realizing its internal growth initiative plans and increasing the share of added value products.We still have more to achieve with the whole organization remaining very focused on delivering the internal growth initiative projects. And as for previous quarters and years, despite the usual cyclicality associated with Q4, the diversity of the markets where they serve continue to yield benefits with financial results evolving positively, the performance reflecting strong demand for our products and an enhanced business model improving product mix and quality of earnings.As financial outcome for 2018, the adjusted EBITDA and EBITDA reached $32.4 million and $29 million compared to $29.6 million and $26.9 million in 2017. Reporting a strong fiscal year in terms of adjusted EBITDA, the company is creating stability and sustainability, financial results evolving positively despite unfavorable movements of metal notations in the second half of the year, a performance, as mentioned by AJ, reflecting strong and improved product mix and reduced earnings volatility. Also important to highlight, net earnings for the year reached $14 million or $0.17 per share compared to $12 million or $0.14 per share for the year 2017, the highest level reached in a number of years.Before continuing with the financial coverage, I would like to mention or remind that the company has raised a subordinated term loan with the intention to use the majority of the proceeds to repay, redeem the outstanding portion of its debentures due at the end of Q2, at the end of Q1 for an aggregate amount of CAD 26 million, all pursuant to the terms of the convertible debenture and venture agreement.Worth mentioning, the new long-term financing has no dilution potential for our shareholders and offers a competitive rates -- rate. The balance of the proceeds will be used to support our internal growth initiative, offering additional flexibility when compared or combined to our senior credit facility.So now starting with coverage of revenues. During Q4 2018 and fiscal year 2018, revenue decreased slightly by 9% and 1%, respectively, compared to same periods of '17, tracking an average gross margin of 26.1% for both years. Revenue and gross margin were negatively impacted by metal notations, especially in the second half of '18. Worth mentioning, the stability of revenue and gross margin in 2018, despite adverse impacts from the commodity markets, is congruent with the company's new business model under its strategic plan to reduce earnings volatility.Now covering adjusted EBITDA, EBITDA and operating earnings. In Q4 of '18, adjusted EBITDA was $6.9 million compared to $6.8 million same quarter of last year. As mentioned before, in fiscal year 2018, adjusted EBITDA increased by $2.8 million from $29.6 million in '17 to $32.4 million in '18, supported by favorable six -- sales mix, strong demand -- strong product demand and overall performance of our operating activities, while operating earnings were $20.4 million in '18 compared to $18.6 million in '17. All of these key metrics show inevitable improvement when compared to last year.On the electronic materials segment, the adjusted EBITDA increased by $4.4 million to $29.2 million in '18, representing an adjusted EBITDA margin of 36% compared to 34% last year.For Eco-Friendly Materials segment, the adjusted EBITDA decreased by $2.5 million, representing an adjusted EBITDA margin of 9% compared to 10% last year. The figure is adversely impacted by metal notations. The structure of contracts in this segment makes it nearly impossible to easily eliminate such relativity.For net earnings, net earnings reached $4 million or $0.05 per share in Q4 of this year compared to $2.2 million or $0.03 per share last year. As mentioned earlier, in fiscal year '18, net earnings reached $14 million compared to $12 million last year. We're clearly looking at bookings and backlog presented as annualized number of days to normalize the impact of commodity prices, backlog as at December of '18 -- 31st of '18 reached a level of 217 days of annualized revenue, representing an increase of 36 days compared to the previous quarter or 30 days compared to last year. Bookings in Q4 reached 105 days compared to 86 days in Q3, or 108 days in Q4 of last year.Covering expenses. Depreciation and amortization expenses were slightly higher in '18 attributable to completion of specific capital expenditures late 2017 and early '18. SG&A for Q4 and fiscal year '18 were $4.7 million and $22.9 million, respectively, compared to $6.7 million and $26.2 million for the same periods of '17, positively impacted by various initiatives to control the overhead expenses.Share-based compensation expense was lower in '18 compared to '17, mainly due to the important rise in the company's share price during the second and third quarter of '17.Litigation and restructuring costs from income in Q4 of '18, the company recorded litigation and restructuring costs of $0.8 million related to severance costs associated with workforce optimization initiatives implemented throughout the year, in line with our strategic plan. In addition, in Q3 of '18, the company sold its participation in the joint venture, Zhuhai Gallium Industry, recognizing a small loss, partially mitigated by an amount received following the liquidation of its joint venture, Ingal Stade, which had closed its manufacturing activities in '16. In Q1 of this year, the company recorded an income from a nonrecurring income relating to an amount receivable from an inactive legal entity for which no receivable had been recorded, given the uncertainty there.Impairment of noncurrent assets. No impairment of noncurrent assets was recognized in Q4 or in fiscal year '18. Financial expenses in fiscal year '18 amounted to $6.5 million compared to $6.1 million in the same period of last year. An increase in financial expenses of $0.4 million is mainly due to the accelerated imputed interest of $1.5 million, recognized as a noncash expense following the early redemption of the CAD 40 million convertible debentures in June 2018, mitigated by lower costs associated with a drawdown on the senior credit facility as well as lower imputed interest on the outstanding debentures during Q3 and Q4 of '18.Income taxes. The company reported earnings before income taxes of $2.2 million in Q4 and $13.9 million in fiscal year '18. Income tax recovery in Q4 was $1.8 million and $0.1 million for fiscal year '18 compared to $1.6 million and an income tax expense of $0.5 million in the same periods of last year. These amounts were favorably impacted by deferred tax assets applicable in certain jurisdictions as well as adjustments to provisions in respective prior years where the outcome was different than initially estimated.Covering liquidity and capital resources. In fiscal year '18, cash provided by operating activities amounted to $2.2 million compared to $13.1 million last year. The negative change in noncash working capital in fiscal year '18 resulted mainly from a decrease in trade and accrued liabilities combined with an increase in inventory aimed at hedging commercial positions. In fiscal year '18, cash used in investing activities increased by $5 million explained by higher investment in probably plant and equipment and less proceeds from the disposal of redundant PPE. Fiscal year '18 cash provided by financing activities amounted to $0.7 million compared to $0.9 million last year, pretty similar on a net basis of all items comprising the financing activities.Covering net debt. Net debt after considering cash and cash equivalents increased by $10.8 million from $11.4 million at the end of '17 to $22.8 million at the end of '18, mostly impacted by noncash working capital requirements.This completes the financial coverage. We are ready for questions.

[Jean Mayer, VP of Legal Affairs & Corporate Secretary]

Operator?

[Operator]

[Operator Instructions] Your first question comes from the line of Rupert Merer.

[Unknown Analyst]

I'll be speaking on behalf of Rupert. To start off, a question around First Solar. First Solar has plans to grow to 7 gigawatt of production capacity. With the contracts that you signed in Q1 last year, I'm wondering how the growth is looking like for VNP?

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

Obviously, the growth -- when we discussed this in first quarter of last year, we -- there were different opinions on this topic. We took, what I would consider, the more prudent approach in terms of not getting overly excited. But not also -- not trying to sandbag at the same time. We've taken a prudent approach, and I think it's been very reasonable for us. You can see in our results that we mentioned in our Renewable Energy segment, our revenues grew substantially. And well -- the customer you mentioned, being a major part of that, obviously, contributed to that. So I know it's been in line with what we had anticipated. It has continued to grow. But I'd also like to remind you that the nature of the contract is much different than it used to be before. It is now a mix of services and products, not just products, which on the top line can have certain influences. If you're making something versus if you're providing a service, that has a different revenue profile.

[Unknown Analyst]

Okay. Understood. And then just a question on bismuth. Do you think the competitive dynamic in the market is changing? We noticed recently that a Chinese producer bought a production facility in Spain, which should give them easier access to customers in the U.S. and in Europe as well. Is the bismuth industry becoming more competitive with this new entrant in Spain?

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

I don't think the new, the eco-friendly segment, as a whole or specifically if you want to go to metals, business is getting any more competitive. I think it's been always competitive. And what we have been doing is we have been focusing on the parts of the business that really fits what we do best. Since you're bringing up the competitive side of this, there are a lot of other, also, information that is bundled in what you mentioned. We have recently been approached actually by our customers that some of the Asian competitor, that is in question, has been having difficulty delivering products, for example. And in fact, they are now looking for 5N Plus to fill that gap with some of the situations in China. Credits tightening, we see cash flow issue with our competitors. So there is -- actually, if I had to look at it as a very broad picture, there is always forays into what we do. This particular competitor, actually, the reason why it seems like they have stubbed their toe it's because they have gone to Europe and tried to essentially project into the European businesses and have ran into issues. The particular transaction you are referring to has a number of headwinds associated with it. So while we're monitoring it, while we're remaining very well grounded, there is a lot more layers there that needs to be dealt with in order for that business to become a competitive business. It is a business that is fraught with a number of certifications, qualifications. There is a fairly high barrier of activities that needs to happen in order to be able to position yourself for the desirable part of the market. Making headlines by just breaking into a business, easy to do, but being able to sustainably generate bottom line performance and grow that business is a different thing. So yes, we are monitoring it. We don't think the business is getting any more competitive. We think there is -- the air in the balloon keeps moving in all places where our friends get into, they end up having issues in other places. So net-net, I think, we're -- it's neutral, I would say.

[Unknown Analyst]

Okay. Got you. And then moving on to the animal feed business. You commissioned a facility in Germany by -- in the end of 2018. Could you give us some more color and guide us to what we can expect in 2019, and what are the milestones for the business?

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

Yes, sure. So look, this is a segment admittedly which we've forayed into, it's new for us, right. 5N Plus in the past was not in this sector. This is one of our growth initiatives. We have partnered with JADIS ADDITIVA, who has many, many years of experience in this. They are running the commercial channel on -- for Europe for us right now. And what we're -- so as you rightfully mentioned, the facility is being constructed, it's obtained all its qualifications from the government and so on, the things, the operating activity, so it's commissioned. And now it's going through a number of certifications by the customer. Our first view is that our customer, the customers or potential customers are looking at the facility very favorably because we have actually invested quite a bit heavily into process technology, and in that market having consistent quality within a very tight narrowband is a must. And so there, we're getting a lot of positive feedback. What we are hoping to do is essentially spend the next quarter or 2, going through these search programs because each customer, obviously, before they end up sourcing must need to go through that. And we think that any type of a realistic business should come probably in the second half of the year. So I wouldn't necessarily say that in 2019, there is going to be huge contribution from it. We're sort of ramping that business up in 2019.

[Unknown Analyst]

And then last one on the recently announced satellite business with SolAero. When do anticipate the start of revenues? And how much revenue would you expect? And more specifically -- how much of that satellite business would be focused in PV panels, and now much could we expect to come from the detector business?

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

So this is -- you're getting into the 2019 theme. This morning, we hope to focus more on the 2018 theme to close the year. But I'll give you, I guess, a bit of a teaser there. That is a business that -- indeed, there are different levels of that business that is happening. We believe 2019 will be a lot of still staging of the program. The first launch, I believe, is scheduled today, but it has been delayed. It's typical in that industry to have delays with the rocket readiness, for example, sometimes causes that. So the way, at least, we're treating, I mean, there is different projections, the projection that most likely we will take in 2019 is we will not look to put a huge amount of revenue against it because it is still staging. It is essentially ramping up. There has to be over 20 different launches that comes into play in order to put all the satellites in the orbit. So in 2019, we'll be prudent on that front. As to the revenue in divisions, we typically don't disclose those -- that information.

[Operator]

Your next question comes from the line of Nick Agostino.

[Nick Agostino]

I guess, a couple of questions. First, as a follow-up, if I heard correctly, on the Renewable Energy side of the business, it looks like certainly revenues were up handsomely and largely contributed due to one particular customer. You mentioned, AJ, that, that contract is now products and services. So I'm just wondering, is Q4 -- does that define, say, the new run rate for this particular contract? Or was -- would you say that the Q4 was a little bit of an anomaly when it comes to that market in general and that particular contract?

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

I'm sorry, can you repeat the last part of your question?

[Nick Agostino]

Was Q4 an anomaly when it comes to Renewable Energy revenues, in general, and that particular contract with that solar customer?

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

It's hard to say that it's an anomaly. It does -- the contract has its perturbations. So just backing up, indeed, and I think we've been mentioning this that now the contract you're referring to is a mix of...

[Richard Perron, Chief Financial Officer]

Services and products.

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

Service and products. So -- and we don't necessarily get immediate visibility as to which one is coming. It's sort of, as a customer fits, they sort of pull and we set it out, so that we can serve both contracts, so...

[Richard Perron, Chief Financial Officer]

And also on the Electronic Materials, we've done well in '18 for our sensing and imaging division...

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

Exactly.

[Richard Perron, Chief Financial Officer]

When we pull out. And if you recall, we did an announcement of increased capacity early in the year or so for that.

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

So the improvement in the Electronic Materials as a whole isn't just due to this contract. It's actually -- there's other elements of some of our growth initiatives have done quite well in this regard. But coming back to this particular thing, just to close the subject, because of the nature of the contract, it's hard to tell you it's an anomaly when it is a mixture that's really controlled by the customer, and it really is at their discretion in terms of whether they want to go the service route or the product route on some of these things.

[Nick Agostino]

Okay. And, I guess, the second question, obviously, we've seen a pretty good increase on the backlog year-over-year and, in particular, on the bookings for both businesses, including the eco-friendly side. Obviously, I'm going to assume that that's attributable to the start of the contract renewal season. Can you shed any light as to whether any contracts were lost during this renewable period? And at the same time, where are we at the end of Q4 on the renewal cycle relative to prior years? Are you seeing contracts get renewed at a faster rate, slower rate, any color there would be appreciated?

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

Yes, the -- as far as I can recall...

[Richard Perron, Chief Financial Officer]

By default the backlog in booking figures confirm that things are doing well.

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

No. We, again, I wanted to be prudent here, but I don't recall any losses. If anything, as I mentioned, you are also seeing now some stress in some of our Asian competitors. So -- but coming back to the backlog and booking, if you recall, over the calls, over the past, I think, what 18, 24 months, we've successively had very strong backlogs and bookings, and I've been prudent and conservative maybe by some estimates in terms of not really surfing on that. And here is the reason, we -- as we've changed the nature of the business, there are times that we engage long-term contracts because we think it's favorable for us, and when we do that, naturally you're going to bump up the backlog.

[Richard Perron, Chief Financial Officer]

The backlog, yes.

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

And then there are times where we think, "Well, no, we're not going to go there because we believe that we have -- we'll have better opportunities down the line." And then it might be a spot contract. And so -- okay, so that today, I would say over the past 18 months, clearly, we have closed more long-term contracts, that's one reason. But don't be surprised down the line if the backlog is not as large as it is today, it is not because of our business is suffering, it could be because management decision to go more on the spot contract on some of these things or shorter contract on some of these things. There's another reason why it's longer, we actually have secured a good chunk of business in one of our growth initiatives. Now we're being conservative about it, again, not touting it because, as I mentioned, there are -- there's ramp up that's associated. So we have the contract, a long-term contract -- or actually there's a couple of them that we've got the contracts. But we know that as we go through the ramp up of the business, it might come potentially later, not everything's within our control. The customer, for example, may say, "All right, we have a contract for X amount of units of a certain product over so many years." Now how they pull it is not something I control, it's more of something they control. And what we do is, okay we -- how do you treat that as a backlog, most likely you treat it, in most cases, linearly, but the reality could be that it could be further backloaded than frontloaded. So those elements play in there. That's why you've noticed we've been conservative in terms of not wanting to, let's say, overplay our hand with touting that.

[Nick Agostino]

Okay, that's very helpful. And last question. When I look at your corporate costs, it looked like they came down considerably this quarter at about $1.3 million, and that to me looks like it's almost a 4 or 5-year low. Was that just -- is that an indication that some of your spending internally, be it on R&D and what have you, is starting to ratchet down? Or was it just more of a Q4 things, just -- the spending just wasn't there on the Q4, and we'll see a kind of a tick back up as we move back -- or as we move into 2019? I'll leave it there.

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

On the R&D side, I think, what you will see more is that we're becoming a company where, I think, our customers want to do projects with us, and in this there is typically cost sharing and things. So we expect our R&D expenditures, if it ratchets up, it's certainly still not as much as that we actually spend because a good chunk of it gets funded. Now having said that -- remember, we took the company through a lot of changes. And in these changes, we have streamlined the company, we have focused the company. And so some of what you're seeing is essentially, you don't need the same level of SG&A when you are much more focused, when you're beginning to bring -- put together the synergies. So some of that I would attribute to that. I wouldn't tell you that it will continue to stay at this level because as we grow our growth initiatives, I do expect that the SG&A will grow. But obviously, we will be judicious in terms of trying to make sure that its growth is commensurate with the activities that we're following. We mentioned a number of -- we've got a number of growth initiatives that will require probably additional sales channels. These things will drive additional SG&A. So yes, it's come down. A lot of it has to do with the actions of the past, the benefits are beginning to catch up. And if you recall in the past conference calls, we said some of these benefits will catch up. But I wouldn't say that it's going to necessarily stay there. I think there will be some increase there. Richard, do you want to say something?

[Richard Perron, Chief Financial Officer]

Yes. Also in terms of R&D on, let's say, a gross basis before any subsidy grants announced, we will continue to invest a lot in R&D. But the realization or recording of such subsidy may change from one quarter to another, so.

[Operator]

Your next question comes from the line of Stephen Harris.

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

Just a couple of questions that have been covered already. On the eco-friendly side, it sounds like there's been an impact on both price and volume. And I'm wondering if you could maybe give us some color on that on the proportion of the decline that was in revenues that was attributable to volume versus price?

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

I'll start and then maybe -- do you want to...

[Richard Perron, Chief Financial Officer]

Actually, Q4 is mostly, not exclusively about notation.

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

It's about -- yes, that's what I was -- so what you're seeing on volume, we don't necessarily see -- let's just use volume as, I don't know, tonnage or units of product moved. We don't necessarily see a huge impact there because -- yes, we have, over the past, especially 2 or 3 years, we've lost volume on the industrial materials. We've mentioned it also in our revenue. I think, we mentioned it. But we are actually growing. As an example, our catalytic and extractive business is growing substantially. In fact, our production is basically sold out. So from the volume, I wouldn't say that's the case. What I would say is on the pricing -- and remember, this is a segment that is particularly exposed because of the -- mainly because a lot of it comes from industrial material, in that there is metal content associated with it. And when you have notations dropping by, I don't know, 35%, obviously, you're going to have -- you're going to feel that on the revenue line. But for us, it's not really caused an impact to our bottom line because they're value-added revenue. So the transformation revenue that we secure, we don't report it for competitive reasons, has actually grown. So that part continues to grow. But obviously, the activities that are on the metal side has shrunk and it has impact on overall revenue because the losses of pass-through revenue by metal being depreciated is larger than the additional revenues you may gain on the value-added.

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

Okay, great. And while we're on the subject of metal prices, in general, 2018 was a bit of a down year for a number of your commodities. Can you give us a bit of a sense of your insights into the market? And how you see that developing through '19 and beyond?

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

So I think, under our new business model, I think you know we don't really speculate on metals. We consider ourselves neutral as much as we can be neutral in the market. So all I can tell you, I guess, is the following; that we have always stated the minor metal business, there is plenty of these metals out there. It's usually when they flare up, it's because of inefficiencies -- regional inefficiencies, sociopolitical situations, tariffs, these types of things, that things start moving one way or another. The metals that we worked with over the past 3 years, certainly we have diversified the source. If you look at our previous communications, we say these tariffs and things have had little effect on us, part of it is because we are diversifying, or we have diversified, where we get these metals. If you look at a metal like, for example, bismuth, it is sitting at a 13-year low. Can it go lower? I suppose it could. If it does go lower, there isn't really much more room for it. I mean, you're at, I think, something like, today's notation is $3.70 per pound. So -- and this is coming from last year was -- or early in the year, it was like $5.20, and few years back it was as high, I think, I don't know, $8, $9, $10. So it's already come down quite a bit. Can it go lower? Well, I don't have a crystal ball. But I would tell you that our business model anyhow is based on -- it's not really based on this needing to go higher. We don't -- as we've said this repeatedly, we don't need these metal prices to go higher for us to deliver the $45 million that we have in our 5N21 by 2021. If there is 0 amount in that $45 million, that's attributed to this. So for us, it's -- we're really neutral about it. I wouldn't tell you that anyone of these metals are in shortage. And so -- but they are, especially the one that I mentioned, is at a historic low. So logic says, there's only so much low rate can go and, obviously, there's more room on the upside, if and when it goes.

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

Okay, great. Appreciate the color. And just one final question. From -- just aggregating some of the comments you've made, it feels like if you look at 2019, this will be a year where you're getting a number of your growth initiatives off the ground. You're getting the additives plant in Germany commissioned and ready to do business, but probably not doing a lot of businesses here. Again, in the optoelectronics semisubstrates, that's a contract that's going to come on this year, but really deliver in 2020. Is it fair to say that 2019 is shaping up as a year where you kind of set the groundwork for harvesting in 2020? Is that the way we should be thinking of the outlook for 5N Plus here?

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

I think that is a very fair comment. You are correct. If you look at 2019, we call it a staging year. We've got order books across our semiconductor various 3-5 and 2-6 family of materials. So the order book is solid, but we just -- we have to ramp it up. There's a number of things that have to go in there. The customer programs, these things, some of them are going into very new applications. So these things have to also move. There's a number of factors that really isn't in our hands, but obviously, the spending is going to have to be there to support it. We're clearly excited about the markets that we're going after. But obviously, it's not in our hands in terms of that growth there. With micro powder, as I mentioned, we've got conservatively 2 dozen different certification -- customer certifications. Now these programs, it costs the customer money to tie up its assets. So if they're doing it, it's typically a strong sign of interest. And so -- but these are long certification cycles, and it involves products that are more advanced, that are yet to come. So there is also the timing there. And then on the feed additives, we've talked about that as well. We're going to be continuing to do a lot of qualification. So yes, the year is going to be filled with a lot of qualifications, certifications, a lot of activities. We call it a staging year to really promote the second half of our strategic 5N21 and be able to launch ourselves toward our goal.

[Operator]

Your next question comes from the line of Mac Whale.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Just following up on the metal pricing outlook. And just to sort of paraphrase, your comment was essentially, you don't really care, so to speak, about where they are because you're neutral. But I'm trying to figure out what that means then in '18, if we're sitting here a year ago? And you put out your guidance and you talked about on this call how you would've done so much better had the pricing not dropped. So you did predict that it would drop to establish your guidance? So you do have a view, is that correct?

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

Well, I guess, Mac, from that point of view, you're right to say we don't care is probably -- would be a falling on my side. I shouldn't say that we don't care. I guess, what I would say is, look, when it moves either way, it's either a onetime gift or a onetime hit. So -- and it's not nearly as big as it used to be and we've substantiated it. Richard and his team has gone through a lot of work to do that. And so you see that the magnitude isn't nearly as big. Now you bring up 2018 and your question, if I'm surmising it correctly, did we anticipate it? I wouldn't say we anticipate it because it's really hard to -- we're not really in the business of forecasting metal prices. We have our own views. We didn't necessarily anticipate it, but when you issue guidance -- and this is why we give you guys ranges and this is why at times you may find us coy is because when we provide you with guidance, we know there is a looming risk either way. And we sort of -- it becomes a bit of an arc in terms of where you put your guidance. No -- we didn't really predict it. You're right, had it -- yes, go ahead.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. So where I'm going with it is I'm -- so let's suppose we get to a period where all of them seem to be going up, need not -- not a huge amount. Would you be doing something differently that would reduce the impact? Because I'm trying to get my head around this idea that you've -- if you've made your business neutral, does that mean you won't benefit from it when it does come, if it all comes together at the same time?

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

I would caution you not to use the phrase we made the business neutral because I cannot claim that, we have not. We are still exposed. We're just exposed much less. And as we continue down this 5N21 path, we hope to eventually become even much, much less. So this is a -- please consider that this is a transitory situation. And through this transitory situation, each year we hope to reduce that impact. Now if today metal prices were to shoot up, we will benefit from it, it's just that the benefit won't be as much. So had 2018 gone the other way, in the old regime, you would've gotten, I don't know, $10 million, $12 million benefit. In the new regime, you may have gotten -- going up, you don't get the benefit as fast. So that's why you see we use a bit of a smaller...

[Richard Perron, Chief Financial Officer]

At the end, there is no miracle behind it. You have to give up a bit of the upside to protect the downside.

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

So yes -- so before we take too much credit for it, that's actually a good point Richard just made. We gave up the upside, much of the upside to also get away from much of the downside. So if it does go up, we will benefit one time, but that's it, yes.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

I get it. That's a good answer. In terms of -- just a question on the solar. What's the nature of the difference in this? What constitutes a service versus a product? Is it -- I'm trying to get an idea of what it's related to? Is it that new generation of cell comes out, so you're doing some work before the lines are put in, installed or you're debugging some lines that you have to send some guy down there? Or is it just you're doing the same thing, you're sending the product, they just want to call it a service versus a product for some accounting reason? I'm trying to get an idea of the risks associated with those 2 different activities.

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

I'll give you 2 examples of what a service could be, there is more. One would be, for example, touting rather than making, so that we don't take on the exposure on the capital, that's one. So that's not hugely different. The other one is, as you know, a good chunk of the value proposition with this type of thin film is how you manage the close loop on it. We have developed quite a bit of capability to be able to recover spent materials and be able to essentially deal with byproducts that are generated in the process of manufacturing. And we provide that as a global service because we are the only one in the world that can do this on 3 continents. And it also helps the customer to manage their metal much more efficiently. They don't need as much metal because of this. So it's a pretty important service that we have. And like I said, we're uniquely prepared for them around the globe. So those are 2 different types of services that could be in that batch. There are other things with respect to metals management, there are other things with respect to some of the new stacks that come online, but yes, that's the type of things we're doing.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. And then a lot of the discussion on '19 has to do with downstream activities, lots of different initiatives that are reaching sort of the -- they're going through qualification or reaching early revenue stage. And where -- what is your thinking around the operational focus and investments on the upstream part?

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

You know we -- the reason why we probably haven't set a huge amount about upstream is because we've got some investments that are currently in the pipeline. As we said, it's progressing well. We're improving our capabilities. When we talk about that, that means basically better valorization of metal. We are -- we think that we are now developing ourselves in a very unique way because most people that get involved in upstream, they usually have one huge asset in one location in the world where they have to feed. So it's -- you better have the right volume that's going through it. And what we've done is, we've actually -- we've got the centralized assets now on 3 different continents that we actually feed with a diverse set of feed from different places. This helps us quite a bit in terms of not being either leveraged by any particular region or by any particular political situation. It also gives us contingency plan. So we're actually continuing to invest in this. And what I see in 2019 for upstream is now that we have announced these investments last year that we've progressed on investing in these facilities, I see them commissioning these and start yielding results.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. Any thoughts on segmenting your business or giving some disclosure on the upstream versus downstream side of your business so we can see how those 2 contribute to bottom line?

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

One day, but not today.

[Operator]

Your next question comes from the line of Frederic Tremblay.

[Frederic Tremblay, Analyst]

Just a couple of questions from me. I wanted to get your thoughts on the current M&A environment, in particular. How that affects, I'd say, your order of preference in terms of future capital deployment between internal initiatives, M&A and potentially share repurchases now that you announced an NCIB?

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

Yes. Of course. We have been -- actually, over the past 18 months, we've been pretty active. We -- internally, we had to, obviously, develop, as I mentioned, a criteria for what we were looking for and we have continued to fine-tune that. We started broad, and over the past, especially, I would say, 4, 5 months, we have really honed in as to what we believe would be viable for 5N Plus. We have a number of external firms that we've engaged in that. What we see is, the market, if you look at the things that we like to engage, they tend to be still valued, admittedly, substantially higher than what -- where 5N Plus is. So we are remaining patient because -- it's not like in the meanwhile we don't have other options internally. As you we can see, we are very busy with our growth initiatives. These things, over the next 2 years, certainly, will require capital. So we are not keeping capital idle, we are actually going to be employing it in constructive way to continue and generate result from it. And on top of that, we felt that for the time being, again, not wanting to keep capital and potential idle, we -- the board felt that engaging in a meaningful way into an NCIB program would be a good use of those proceeds. Knowing that, if and when, we are able to see more value with the valuations, whether it'd be because our valuations have increased or whether the market has further adjusted, we can always reengage and go down that path. But there has been no slowdown in our M&A effort. It is -- a lot of it might be understated, but there's quite a bit of activity screening that's going on. It's just that I will refuse -- I refuse to pull the trigger, just to pull the trigger, it has to be meaningful. As I said, there needs to be some level of accretion. Otherwise, we'll continue on this current path because it remains viable, and we've got plenty of upside that we can still internally work on.

[Frederic Tremblay, Analyst]

Understood. And then lastly, quickly on -- just on inventory. We saw that it increased this quarter despite lower metal notations. Is it fair to say that you're commercially hedging a higher proportion of your future business? Or is that you're being maybe more opportunistic in the context of the low metal prices? Just your views on inventory in general?

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

If we -- I wouldn't say we're being opportunistic in light of low metal prices because that's kind of going back probably on our business model and creating open positions that we will try to refrain from. I think it is indeed what you said earlier, it is commercial hedging, as I mentioned. And one application -- there are different things we do in commercial hedging, but one of the things that I have already disclosed is when we close long-term contracts, we try to physically secure those metals. And that has been a big part of why inventory has gone up.

[Operator]

And we currently have no further questions at this time. I will turn the call back over to our presenters for any closing remarks.

[Jean Mayer, VP of Legal Affairs & Corporate Secretary]

Okay. Thank you. So we thank you all for attending this morning's conference call, and we look forward to speaking with you, again, in early May for the presentation of our Q1 2019 results. Thank you, again, and have a great day.

[Operator]

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