5N Plus Inc

TSX:VNP

Earnings Call Transcript 2019-Q4

[Operator]

[Foreign Language] Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the 5N Plus fourth quarter results conference call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your speaker today, Richard Perron. Please go ahead.

[Richard Perron, Chief Financial Officer]

[Foreign Language] Good morning, everyone, and thank you for joining our fourth quarter ended December 31, 2019 financial results conference call. We will begin with an overview of our business performance and review of our financial results after which, we will begin the question period. Joining me this morning is Arjang Roshan, our President and Chief Executive Officer. We issued yesterday our financial statements, and we have posted a short presentation on the Investors section of our website. I would like to draw your attention to Slide #2 of the presentation. Information in this presentation and remarks made by the speakers today will contain statements about expected future events and financial results that are forward looking and therefore, subject to risks and uncertainties. A description of the risk factors that may affect future results is contained in our management's discussion and analysis available on our website and in our public filings. In the analysis of our quarterly results, you will note that we use and discuss certain non-IFRS measures, which definitions may differ from those used by other companies. For further information, please refer to our management discussion and analysis document. I would now like to turn the conference call to Arjang for the discussion on the business performance and quarter results.

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

Good morning, ladies and gentlemen. Welcome to 5N Plus conference call, and thank you for joining us. Last night, 5N plus posted results for the last quarter and full year 2019. Adjusted EBITDA for the quarter and full year came in at $4.5 million and $22 million compared to $6.9 million and $32.4 million for the same period last year. Return on capital employed registered at 8.2% versus 15.1% for the same period last year. Total revenue for the year reached $196 million versus $218 million in the previous year. Events of 2019 culminated in, what we would call, a perfect storm. Some of the challenges were fully anticipated, others came as a surprise. Last year, we began by declaring 2019 as a staging year and explained the rationale behind lowering earnings expectation. For example, we highlighted that some of the contracts in renewable energy sector, while providing healthy revenue development, came with lower margin per unit of output, resulting in overall lower earnings from this activity as compared to the previous year. Also, we've mentioned we were positioning our growth business or market introduction in our core businesses to be even more competitive. We said throughout this process we expected some challenges associated with adapting to our new environment, and as such, expected lower earnings as compared to 2018. What we and arguably the entire industry did not anticipate where the additional challenges that ensued, driven by significant and rapid deterioration of minor metal notations. Bismuth, for example, which is the largest metal consumed by 5N lost -- 5N Plus lost the 1/3 of its value during the year and ended 2019 nearly 40% lower than 2015, which is regarded as one of the metal's poorest performing years ever. Considering these challenges, 5N Plus delivered 11.2% adjusted EBITDA margin on $196 million of sales as compared to 14.9% for 2018. This falls short of our goals for the year. Nevertheless, it highlights a significant positive development since the launch of our strategic plan 5N21. Since just a few years ago, headwinds of this magnitude would have utterly derailed the company and would have yielded much more punitive outcome. As you may recall, our strategic plan 5N21 has 3 key drivers, or as we call them, pillars. Pillar one, development and extract value from upstream activities; pillar two, deliver quality growth from new initiatives; pillar three, maximize value from global assets and capabilities. So the question is, how are we doing with respect to this plan? Well, let's start with the first pillar, which is the upstream activities. Since the introduction of the strategic plan, we have made ample progress in procuring the metals we need for the newly established upstream activities versus purchasing them as commercial-grade metal from the market. This has allowed 5N Plus to access new earnings streams, the key priority has been to implement processes, which enable lower treatment cost of the complex feed continuing the metals received. When metal prices drop, as was the case in 2019, there are 2 important impacts: one, short term, whereas we referred to a transitory; and one longer term. Short-term impact is mainly evident in the downstream product businesses and is caused by temporary margin compression resulting from the difference between the selling price of the product and cost of the product on inventory. This is simply because the product being sold contains metal, and the price of this metal adjusts much quicker to market conditions and the inventory cost of the metal. Our strategic plan has been very effective in reducing this impact through a number of measures, including commercial hedging, moving the company further down the value chain and into products with lower content of pass-through metal, higher portion of value-added activities. The longer-term impact from deteriorating metal notations is mainly evident in our upstream business, which extracts needed metal from complex feed. Profitability of refining and recycling activities, which formed a core of the upstream business, rely on the net margin between treatment of complexity and sale of extracted metals. So when metal prices drop, this margin also drops. Our answer to this challenge has been utilize process technology to continually reduce treatment costs of complex feed. This approach has been effected -- effective despite continuous drop in metal notations with the upstream activities remaining surprisingly profitable. Over the recent years, the contribution from upstream activities had reached 10% to 15% of the company's earnings with a road map to reach 15% to 20% by the end of the strategic plan. What has been more difficult to anticipate is the situation with our complex feed suppliers. With certain metal prices approaching historically low levels, some of the suppliers have either ceased production or decided to withhold their material citing on favorable market condition. Given this, in the second half of the year, the input for our recycling and refining plants reached suboptimal level impacting the profitability of our upstream activities. We estimate that the total negative impact from metal notations to the company's EBITDA in 2019, which means both the transitory short-term impact to downstream and the longer-term impact to upstream to be about $7 million. Without implementation of 5N21, we estimate this negative impact would have surged to about $16 million to $20 million in EBITDA terms, clearly demonstrating the efficacy of the strategic plan and reducing earning volatility by more than 50%. Moving forward, our best indicators show that the key metals we use, such as bismuth and tellurium, remain available with the aggregate global inventory estimated at about 2 to 3 years of global demand. This has been augmented by the full release of metals held by the former Fanya Exchange in 2019 -- late 2019 in China. At its peak, Fanya was holding business metal stocks equivalent to 1.5 to 2 years of global demand. This entire inventory of business was released into the market in November 2019 at a discount of more than 20% in China. Considering the sheer volume of this transaction, one could arguably assume that the price associated with this transaction establishes a floor for the business metal. In line with this expectation, bismuth notations have since narrowed their gap to about 10% of where Fanya's stock was sold. Assuming we're reaching an environment of price stability for business, downstream businesses should perform better in 2020, even at the current historically low metal notations. We reached this conclusion because of the following 4 reasons: one, perhaps the most important reason is the fact that much of the transient negative impact on our product business from downward movement of the metal is already behind us; two, downstream businesses do not need metal price recovery to slide and yield margin expansion. In fact, all is needed for downstream business to do well is stable metal prices. Three, one can reasonably argue that Fanya inventory was the largest uncertainty bismuth notations have ever faced, and its removal will serve as its formidable stabilizing factor. Four, while upstream business of 5N Plus was envisioned to account for 15% to 20% of the earnings by 2021, downstream businesses have a much larger contribution to the company's profitability. A more stable bismuth metal market along with a strong and growing order book for 5N Plus' downstream products can only promote margin expansion and improved earnings. Let's move to pillar 2, which is delivering quality growth from new initiatives. Fiscal year 2019 started with 5N Plus positioning a number of growth initiatives at various stages of development. Let's consider security, aerospace, sensing and imaging. After securing sizable contracts in this sector, we began 2019 by ramping up operations to reach mass production scale for a number of products. This was a first for 5N Plus. What is interesting to note is that we're not the only ones. Some of our customers were also entering new markets and ramping up production. In anticipation of this challenge, in early 2019, the year was declared as a staging. As expected, these challenges did materialize throughout the year and culminated in lower sales. This being said, by year-end, nearly all the issues had been resolved, and we're better positioned to serve these markets in 2020. Let's consider the case of catalytic and extractive materials. In 2019, this sector also faced similar challenges associated with increasing production. In recent years, 5N Plus have made significant progress in penetrating select markets within this sector. And by late 2018, company's production capacity where -- the following year was sold out. This positive development meant that the facility responsible for producing these materials have to increase production to unprecedented levels. As a result, we experienced a series of production interruptions that impacted revenue as our teams grappled with this challenge throughout the year. It may be worth mentioning that both of these cases, while unfortunate, are part and parcel to the kind of transformation 5N Plus is undergoing, and the progress made during 2019 is simply encouraging. Now let's move to the case of feed additives. After the completion of a state-of-the-art automated additive plant in Germany in 2018, 5N Plus allocated significant resources in 2019 to address regulatory requirements and customer qualifications. By year-end, several potential customers had listed 5N Plus as qualified suppliers to trace minerals aimed at improving animal health. While our goal was to move faster through these qualification trials to secure a larger order book, we're pleased to be entering this market in 12 months after completing the construction of the plant. We expect several contracts from high-profile customers in 2020, we're learning that it takes time to reach critical milestone in this space considering the rigor associated with commercializing products for animal health. Let's talk about Micro Powders. We're encouraged to see strong reception for products from this segment. It's a clear indication that the engineered powders we supply to the electronic industry deliver unique attributes that enable functionality and reliability in tomorrow's devices. We're honored to have been awarded a series of programs for next-generation wearables and smart devices during 2019, confirming the viability of our approach and product road map. Given the uniqueness of our product and their ability to meet demanding specifications, we have positioned them at a premium. Our growth in this segment will be dictated by our customers' continued success in launching new products with ever more challenging requirements. I'd like to emphasize the role of our customers in expanding the growth initiatives. Many of 5N Plus' new initiatives target new markets or serve as an enabler to the new generation of products planned by 5N Plus' customers. How rapidly 5N Plus gains traction in these markets also depend on the growth of our customers in these markets. In our plan, we had expected to generate about 19% of the revenue from the new initiatives in 2019. The actual contribution from the new initiatives reached 16% of the revenue. And while this is slower than what we had expected, it reflects solid progress, and the question is, not if, but when. Let's move to pillar 3, which is maximizing value from global assets and capabilities. Under a strategic plan, we earmarked a capital expenditure budget of $50 million over approximately 5 years. This amount is approximately equivalent to the company's annual rate of depreciation across the planning period. In 2019, we launched a package of investments worth more than $10 million in process technology aimed at sustainably increasing capacity in our existing plants, enhancing capability and providing notable environmental benefits. The package was designed to provide a 3-year payback and is expected to be fully implemented by the third quarter of 2020. By the end of 2020, we expect to have invested approximately $40 million of the $50 million and remain well in line with what we declared under the plan. To conclude the review of the 3 pillars of the strategic plan. I think it is fair to say that up until recently we're -- all 3 pillars were performing at or better than plan's expectations. Considering current metal notations, the upstream activities are performing at suboptimal conditions. As mentioned earlier, in assuming status quo, the impact on adjusted EBITDA target for the last year of the plan for 2021 can be 15% to 20% as compared to the plan's guidance. As with the other 2 pillars of the plan, namely, delivering quality growth from new initiatives and maximizing value from global assets, both of these are progressing well. And we expect them to contribute to earnings growth in line with what was assumed under 5N21. As we close 2019, it is worthwhile to note that despite the various challenges, 5N Plus delivered 23% gross margin, invested in both new and core initiatives, grew revenue contribution from new businesses and actively participated in an NCIB plan. All while delivering a strong balance sheet, which will continue to self-fund our activities as we move forward. I believe this is a clear testament to the company's agility, especially when faced with punitive circumstances. As we move to 2020, the outlook for both core and new businesses are strong, supported by record backlog on the order book. Given the current visibility and despite suboptimal conditions of the upstream business, we expect earnings to grow in 2020. This naturally assumes current market fundamentals and a stable global economy. I should mention we're keeping a close eye on the impact of coronavirus. Thus far, we have been -- there has been little impact to our business. This being said, we are monitoring this dynamic situation and are working diligently to remain ahead of the various risks associated with this global challenge. We are progressing amicably, but we remain vigilant and fully alert. As usual, management will be providing a guidance for 2020 during the Q1 earnings release. I'd like to now turn the call over to Richard.

[Richard Perron, Chief Financial Officer]

Again, good morning, everyone. As mentioned by AJ, despite the dynamic nature of our businesses, the company demonstrated resilience, achieving an adjusted EBITDA of $22 million showing clearly how far the company had come since the previous important backdrop in metal notations, while demand continues to be strong for our products. The diversity of the markets we serve continued to yield substantial commercial benefits, the core of our business persisting to outperform when adjusted for the decline in metal notations. That said, 2019 proved to be a challenging year in terms of underlying metal notations with, for example, bismuth declining to level not seen in decades. Various operational issues at the beginning of the year, impacting our output. The cost of key consumables other than metal increasing from prior years, and growth initiatives and experiencing market delays. Fundamentally, the current environment of low metal notations bring unpleasant pressure to our upstream activities directly impacted for both the opportunity to source complex feeds and valorize its metals economically, making it very difficult to contribute at this time. Reinforcing what AJ mentioned earlier, it is important to remember that in the past such combination would have brought disaster while causing only damages to our financial performance today. Despite many factors out of our control, we achieved progress on various fronts and continued to manage cash diligently, deploying surplus cash on capacity capabilities and internal growth initiatives, allowing the company to be more competitive in the future, while maintaining a healthy balance sheet. Looking ahead, we expect short-term conditions for our upstream activities to remain challenging, while many indicators show encouraging signals confirming the potential of our growth initiatives and the improved competitiveness of the company from recent investments, uniquely positioning 5N Plus. So now starting with the coverage of revenue and gross margin. In Q4 2019, revenue decreased by 6% compared to the prior year fourth quarter. Gross margin reached 22.3% in Q4 compared to 25.3% in Q4 of last year tracking an average gross margin of 22.8% compared to 26.1% last year. Both revenue and gross margin were negatively impacted by adverse movements in the airline metal notations. Recent deterioration of the contributions from our upstream activities due to the current middle market conditions, along with the application for the most recent commercial terms from the multiyear contracts awarded in sector renewable energy. Delivering higher volume of products at lower margins. Now covering adjusted EBITDA and EBITDA in Q4, adjusted EBITDA was $4.5 million compared to $6.9 million in Q4 of last year. Negatively impacted by adverse movements in the underlying metal notations, recent deterioration of the contributions from our upstream activities, along with the application of the most recent commercial terms within renewable energy. In full year 2019, adjusted EBITDA reached $22 million from $32.4 million last year, impacted by factors just mentioned and production challenges associated with new business activities at the beginning of the year. In Q4, EBITDA was $3.7 million compared to $5.6 million in Q4 of last year. While in full year EBITDA reached $19.1 million compared to $29 million in full year last year, the decreases mainly explained by the lower adjusted EBITDA. In Q4, operating earnings reached $1.2 million compared to $3 million in Q4 of last year and $8.2 million for the full year compared to $20.4 million last year. For the full year of '19, net earnings were $1.8 million or $0.02 per share compared to $14 million or $0.17 per share last year. Now looking at annualized backlog and bookings, backlog at the end of '19 for the Electronic Materials segment reported 206 days of annualized segment revenue, an increase of 13 days or 4% over the backlog ended at the end of Q3. The backlog for the Eco-Friendly Materials segment represented 189 days of annualized segment revenue, an increase of 34 days or 22% over the backlog of the previous quarter. Backlog at the end of the year for the Electronic Materials increased by 15 days and by 23 days for the Eco-Friendly Materials segment compared to December of last year, reaching 243 days on a consolidated basis compared to 217 days last year. Quickly going through the expenses. Depreciation and amortization expenses in Q4 and full year amounted to $2.9 million and $11.1 million, respectively, compared to $2.5 million and $8.8 million for the same period of '18. The expenses of 2019 included depreciation of right-of-use assets of $1.5 million following the adoption of the new standard IFRS 16, referring to leases. In Q4 and full year, SG&A expenses were $4.9 million and $21.2 million, respectively, compared to $4.7 million and $23.9 million for the same periods of '18. In 2019, the expenses were positively impacted by favorable exchange rates across most local currency-denominated expenses when compared to 2018, lower expenses following restructuring initiatives in 2018 as well as lower short-term incentives. Share-based compensation expense and full year of '19 amounted to $2.6 million compared to $2.3 million in '18, mainly due to the decrease in the company's share price at the end of 2019 when compared to 2018. No expenses or income from litigation and restructuring activity were recognized in 2019. In full year 2019, financial expenses amounted to $4.4 million compared to $6.5 million last year. The decrease of $2.1 million is mainly due to less accelerated imputed interest, recognized as noncash expense following the early redemption of the CAD 26 million convertible debenture in March of 2019 compared to those following the early redemption of CAD 40 million convertible debentures in June of '18. The financial expense in Q4 of '19 and full year of '19 included the imputed interest related to lease liabilities of $0.1 million and $0.3 million respectively, here too following the adoption of the new standard IFRS 16. The company reported earnings before income taxes of $2.8 million for 2019. In 2019, income tax expense was $2 million compared to an income tax recovery of $0.1 million last year. Both periods were impacted by deferred tax assets applicable in certain jurisdictions. Covering liquidity, cash generated by operating activities amounted to $5.2 million in Q4 of '19 compared to $2.3 million in Q4 of '18. For the full year, cash generated by operating activities amounted to $2.7 million compared to $2.2 million last year. In Q4, cash used in investing activities totaled $3.1 million compared some -- pretty similar to Q4 of '18. In full year 2019 cash used by investing activities totaled $10.2 million compared to $9.8 million last year. For the full year of '19, cash generated from financing activities amounted to $2.8 million compared to $2.7 million last year. The increase in working capital compared to December of '18, was mainly attributed to lower current liabilities following the early redemption of the CAD 26 million convertible debentures in March of '19, reclassified as short term during '18, which were replaced by a 5-year unsecured subordinated term loan as well as less payable following lower inventories when compared to December of '18. Now looking at gross and net debt, total debt, including the cross-currency swap, increased by $6.2 million to $55.1 million as of December 31, '19, compared to $48.9 million as of December 31, '18, mainly due to the replacement of the convertible debentures via a 5-year unsecured subordinated term loan at a higher face value. Net debt, after considering cash and cash equivalents increased by $12.8 million from $22.2 million last year to $35 million at the end of '19, mostly impacted by noncash working capital requirements. So this will conclude the financial review, we are ready to take questions from analysts.

[Operator]

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

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

So if I can summarize, you mentioned 2019 as a staging year, but it sounds like we're out of staging now. You also mentioned the transitory impact of low bismuth prices is largely behind us. So I know you haven't given guidance yet, and maybe you'll give us some guidance in Q1. So my first question is, if we can expect some guidance, but in events about should we be anticipating a material improvement this year given the staging's behind us and the outlook for the impact of metal prices has improved?

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

Rupert. Indeed, we will be providing a guidance in Q1. This is what we've been doing over the past years. We do see a better year ahead, and you've picked on, I think, all the right drivers. The factors that is outside of our control is metal prices. So far, the deterioration that the market went through, much of it has been -- is past us. It's no longer there. But we have to -- we're still monitoring. As I mentioned, there has been quite a bit of inventory that has come to the market, for example, from Fanya, and the prices have adjusted. What we don't know is how that plays out. Is that going to adjust further, there's still about 10% arbitrage between where that floor was set and where the price is today. So we still have to monitor those situations. But given the current circumstances, indeed, we expect a notably better year ahead of us.

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

And you discussed a few changes or, say, drivers of results in 2020. You talked about a potential for animal feed contracts. You talked about your $10 million investment in production capacity increases, which I think are largely coming online in the second half of the year. So given all the things that you see coming in terms of sort of revenue growth, how should the year shape up? Is this going to be largely back-end loaded? Should we be looking for most of the improvement in the second half of the year?

[Richard Perron, Chief Financial Officer]

So the investment, I don't think, really shows the benefit in 2020 because it comes in so late in the year. The animal feed situation, I expect that to also ramp-up. As you know, that's like a start-up business for us. We -- it's been a, as a start-up, it's been a money-losing business. And we are trying to, obviously, bring it to a breakeven this year. How that plays out. Again, I would suspect that would work its way through the year and increase momentum through the year. Now there are other factors in play that will impact how the quarters will look like, historically, it's been difficult to estimate those. Again, there are our growth initiatives. Some of this has to do with our customers. As I mentioned, some of the products that we are -- they're using from us itself is also going to new applications. How they're -- we've seen, for example, in the satellite market, while satellites are being launched, they're being launched much later than what the original plan was. So it may be lumpy. I would have to say, in transparency, it's a very -- I've always said this is a difficult business to forecast quarter-by-quarter. And so I would expect it to be lumpy. But I think, as I said, net-net, all the signs tell us that it should be a better year, assuming global fundamentals stay.

[Operator]

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

[Parth Shah, Associate of Research]

This is Parth here on for Nick. My first question is, can you shed some light on what the renewal activity is looking like given the bookings were slightly lower in Q4?

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

Just to be sure, you're asking about our renewal energy sector?

[Parth Shah, Associate of Research]

No, the renewal in contacts, like overall. Are you seeing any improvements? Given like you were a little bit shorter on bookings in Q4, especially in electronic materials.

[Richard Perron, Chief Financial Officer]

I'm not sure I fully understand the question, but maybe just for -- as a general information, in the case of electronic materials, most contracts, they get a -- earn at different point in time in the year, while in the case of eco-friendly, many of the contracts they get earned in Q4 and Q1, so I would not put too much attention to the booking of Q4 for electronic materials in order to -- because when you look at the overall backlog, you see that as -- I mean, the bookings came in at other point in time in Q4. It's all there to be realized.

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

And just to add to what Richard said is, historically, we've tried not to overplay the whole backlog and booking. The reason why recently, we've been talking about it is because it's remaining consistently high. If you look at our backlog, it's actually quite impressive. Now this being said, I think I should put a disclaimer that we have contracts that come up for renewal, some of them larger than others. So if, let's say, I don't know, in a few quarters, you see the backlog drop substantially, part of it has to do with the fact that we may be out of one contract and trying to negotiate another and we haven't yet fixed the commitment, if you will, from the customer. It could also be that we may decide that we have moved to a spot play because we think pricing favors us. So there's -- there are factors behind, which can influence those numbers, which are at our discretion.

[Parth Shah, Associate of Research]

Okay. Just moving into your -- book-to-bill was a bit lower, was it mainly due to the demand side of the equation or pricing? Could you give us some color on that?

[Richard Perron, Chief Financial Officer]

No, I think what is important to know is notations by default, do have a big impact on the actual revenue line. And again, what we're fighting for is the absolute premium out of which we deduct our operating expenses. So...

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

So when metal prices drop, you have large drop in on the revenue side. But that doesn't necessarily mean that the demand has subsided. The actual unit of volumes you're moving out the door are somewhat independent.

[Richard Perron, Chief Financial Officer]

And as I mentioned in my -- beginning of my presentation, looking at the core business of 5N Plus, I mean, volume continued to be strong and outperforming previous years.

[Parth Shah, Associate of Research]

And just shifting gears to coronavirus, and you spoke about it earlier as well during the call. Are you seeing any constraints for sourcing metal, mainly for the commercial markets regarding this issue?

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

Look, the whole coronavirus is a very dynamic situation. And the way we are managing it as a communication with external world is that we can only, let's say, go based on as much visibility as we can get, which is, I would say, 2 to 3 weeks at a time in terms of whether we're seeing issues. Right now, what we know, as an example is -- well, maybe I should go back a bit. We obviously operate in China. We have a plant in China that not only serves the local market, also helps our supply chain, our internal supply chain. Our plant is located closer, I would say, to the Shanghai region, Port of Shanghai and the Port of Ningbo, which we ship out of have been opened. The roads in Zhejiang Province, which a lot of the commercial activity for us takes place are open. As of right now, we have had little impact. Our folks -- our good folks in China are back to work, and they're doing an excellent job in terms of managing the situation. What we -- what Richard does is we've told our analysts that on a monthly basis, we will keep them abreast because, like I said, this is a very dynamic situation. I think to give a long-term forecast would simply be irresponsible. So for the time being, we have basically no impact. We are doing everything we can to have plans in place, mitigation plans, backup plans, in place -- in case it becomes an issue. But as we learn more, we'll inform as well.

[Parth Shah, Associate of Research]

Got it. And I understand that you'll give guidance during Q1. But if you could just shed some color on what the annual EBITDA guidance looks like for 2020?

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

Well, you want basically a guidance, which will be provided in Q1. And I think I'll stick to my statement that right now, assuming we don't have any issues on a macroeconomic level or a geopolitical level, what we see is a better year ahead.

[Operator]

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

[Frederic Tremblay, Analyst]

First question would be on the -- your inventories. Just wondering, assuming we reach a floor for metal notations. Eventually, how long do you think it would take you to run through your, let's say, higher priced inventories and then for margins to sort of stabilize and then pick up?

[Richard Perron, Chief Financial Officer]

Well, there -- well, the current situation for us, as you can see from the financial results, there is no impairment on inventory being recorded, which means that our inventory is in good shape when compared to the market, okay, on an overall basis. So I would expect at this point to be very short, at max, the quarter.

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

Yes. So as you know, we adjust to net realizable value and it's well within that. So as Richard says, any impact shouldn't be more than a quarter, assuming metals stay where they are at.

[Richard Perron, Chief Financial Officer]

Stable, obviously.

[Frederic Tremblay, Analyst]

Okay. And on your backlog, pretty spectacular increase to 243 days there. Just wondering if you could comment a bit further on some of the factors that may have driven that? And was there anything that was maybe onetime in there, meaning potentially some delays of deliveries that would have pushed the backlog up at year-end? Just maybe a little more color on that, please?

[Richard Perron, Chief Financial Officer]

I'll go with a first comment here. The core business, as mentioned, is strong. And then you have growth initiatives that are slowly picking up that are adding on top. So...

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

So on the growth initiatives, actually, we have a fairly good backlog for the year. I've been careful to manage expectations there because there are growth initiatives, right? And so they could be lumpy. So for the time being, from everything we see, for the year, they look good. We're getting demand from -- we're seeing notable demand from the market for our products. And so as Richard said, it's actually -- the backlog isn't specific even to, I would say, one segment, it's spread out.

[Frederic Tremblay, Analyst]

Okay. And congrats on the progress on the growth initiatives.

[Operator]

Your next question comes from the line of Mac Whale with Cormark.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Can you remind us on -- in terms of the contracts for the solar materials, what happens when you progress from year-to-year? Is there a set reduction in pricing or volumes? Can you just remind us what 2020 would look like versus '19?

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

So it's a bit of a layered answer. The way that the program used to be, it used to be basically, to put it simply one, price for a number of activities, services, products and so on. And the industry as a whole has been going through a fairly severe cost reduction, I think the number is something like in the order of 20% year-over-year. What we, as the supplier, has been facing is those pressures, but obviously, we haven't really had to go to that level. This being said, we had to -- about 1.5 years ago, we had -- or when we negotiated the contract, we had to change how we actually set up the contract. We -- again, if we were going to take on the challenge of helping our customers deal with that. We were going to then also go a la carte on a lot of our activities. And basically negotiate various contracts layered -- I think we've referred to it as layered contracts. So what you saw in 2019 was the culmination of certain contracts and depending on what they pull on coming together, which, on the revenue side, was actually a pretty good year. But on the margin side, the mix was not favorable. In 2020, we expect, I would say, slightly better. I don't see worse at this point, I see slightly better. And then how the contracts come up with renewal because they're staggered, they're almost like a ladder contracts with different timing, those negotiations will also come in, in that manner, which means there isn't like a set point in time. I can tell you where we renegotiate everything, and there are different things that comes at different times.

[Richard Perron, Chief Financial Officer]

So the mixed services and products to be realized in 2020 will be different than '19, but individually, just to go back to your question, pricing is not unfavorable in '20 versus '19. If anything, it's better.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. Okay. Okay. The -- can you contrast the mix by -- roughly by segment in the backlog in the electronics from today versus a year ago? Like if we were to look, if we had insight into -- I know you're not going to go into great detail, but just roughly speaking, the major buckets, how they vary this year versus a year ago?

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

I think it's fair to say that certainly, for aerospace, for SASI, it should provide a better mix. For renewable, we expect also a slightly better mix. For technical material, I would say it's similar, yes. Richard? I mean...

[Richard Perron, Chief Financial Officer]

Yes. It's similar.

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

It’s similar to -- yes. So we would say, net-net, the mix across the 3 sectors in electronic materials should improve.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. And that's when you say that, you mean both -- like you mean from a revenue and a margin? Like I think you're -- I think you're implying more in our margin?

[Richard Perron, Chief Financial Officer]

Yes, yes. By [ default ].

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

Yes. At this point, I -- we're implying more on the margin because on -- the revenue has the metal part of it.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Yes.

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

Which makes it a bit tricky.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. Okay. If metals, you talked about that there's still a premium on some of that material from Fanya. If that disconnect closes, should we expect to start seeing your -- like your inventory levels start to increase? Are you going to take advantage of that?

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

So we've been very disciplined in terms of not trying to play the metal game so much. Look, first of all, I think just on where that floor is. I think it's worthwhile to note that there is a price that's been reported, which has been sold at. And then there are costs associated with it, which then we think that's where the level -- the floor level will be established. We're not too far from it. Now if you look at the amount of material between that and what's on the business market, it's substantial. So there's going to be -- the question is, how is that going to find its way into the market? We think that it certainly will be a great stabilizing play. We think as so long as business stays stable, we'll do quite well. Are we going to take a position because we anticipate it's going to go up? That has not been historically what this management team has done. At this point, I don't see any reason to change that.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

I guess the issue is, there's a different way of looking at it, right, instead of speculating as it goes up, you might be looking at it saying, well, I'm securing my supply. I don't care where it goes. Like I know I can buy this material at this level, secure my supply for x amount of time, and I'm not doing it to speculate. I'm doing it to basically absorb -- you're a big buyer. And so you're absorbing the overhang in the market.

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

Okay. So I -- if we can secure -- if we can do commercial hedging with it, if I can close some of the positions that I think I'm going to have, I think then, yes, it would make sense.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. Okay. And then last question is just when you look at the weak pricing. So you talked about the 3 pillars. And the 2 -- pillar 2 and 3, you're happy with where they are, maybe a little bit ahead of where you would expect on that 5N21 plan. Is there any adjustment you need to make, given that where we are Q1 2020, and you've got a $45 million adjusted EBITDA goal in '21 and a 17% ROCE. Are those still achievable?

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

So if I had to declare it right now. I would have to, as I said in my -- in what we discussed earlier, I would say that, that target of $45 million is now, if I assume the current market condition, is impacted by between 15% to 20%. So I that was...

[Richard Perron, Chief Financial Officer]

Because of upstream.

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

Yes. Because of upstream and because of the fact that some of my refineries are at suboptimal level. Now you still have, what, a year or more to reach the end of that. There might be other events that allows us to make up some of that gap and there may not be. So from that point of view, if I'm -- if I have to be fully transparent, I would say, 15% to 20% impact. Now on the return on capital employed, that one, I'm not yet quite ready to give up.

[Richard Perron, Chief Financial Officer]

No. That's still achievable because, by default, if upstream is not back, because metal prices are low and by default...

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

That helps.

[Richard Perron, Chief Financial Officer]

The whole capital employed is in a better shape.

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

Yes. So that one I think we'll stick to. And I think we've already proven the third one, which is reducing by 50%. In fact, I think we've done a lot better than 50%. So...

[Operator]

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

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

Just on that last answer, you mentioned that you, of course, could find growth in other areas. I'm just wondering if you can give us a sense for how your pipeline of new opportunities is developing. We've got updates on animal feed, on the catalyst market, metal powders, for example, but are there any new opportunities coming to the company?

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

So we're always obviously looking for new opportunities, and our teams are busy working on that. I would tell you that those projects are what I would call pipeline projects. I don't think they will contribute in the next 18 months. Those are projects where we're still going through their feasibility studies and trying to make the business case and determine the investments. So indeed, we have a pipeline. That pipeline, obviously, has to support the company post 5N21 -- for 5N21 which comes to fruition within the next, I don't know, 20 months or so. I wouldn't say they will contribute, no.

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

Can you give us any previews as to what those opportunities might look like?

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

If you allow me, I'll stay to my answer. Allow us to mature them a bit more before giving you that.

[Operator]

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

[Richard Perron, Chief Financial Officer]

I would like to thank everyone to be a part of this call, and wish you a good day.

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

Thank you.

[Operator]

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