5N Plus Inc

TSX:VNP

Earnings Call Transcript 2020-Q4

[Operator]

[Foreign Language] Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the 5N Plus Inc. Fourth Quarter 2020 Results Conference Call. [Operator Instructions]And I would like to turn the conference over to your speaker today, Mr. Richard Perron, Chief Financial Officer. Please go ahead, sir.

[Richard Perron, Chief Financial Officer]

[Foreign Language] Good morning, everyone, and thank you for joining our fourth quarter ended December 31, 2020, financial results conference call. We will begin with an overview of our business performance and review our financial results, after which, we'll begin the question period. Joining me this morning is Arjang Roshan, our President and Chief Executive Officer. We issued yesterday our financial statements, and we have posted a short presentation on the Investors section of our website.I would like to draw your attention to Slide 2 of the presentation. Information in this presentation and remarks made by the speakers today will contain statements about expected future events and financial results that are forward-looking and, therefore, subject to risks and uncertainties. A 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.The company is not aware of any significant changes to its risk factors previously disclosed. However, since January 2020, the gradual outbreak of the novel strain of the coronavirus, COVID-19, and its declaration as a pandemic still ongoing today has resulted in governments worldwide and acting emergency measures to combat the spread of the virus. These measures have caused material disruption to businesses globally, resulting in an economic slowdown. The outbreak of the COVID-19 should be considered a new risk factor from 2020, still ongoing today.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's discussion and analysis.Before turning the conference to Arjang for the discussion on the business performance and quarter results, I would like to welcome Michael Glen from Raymond James to this call. Michael is a new analyst and is covering our company since January of this year.AJ, your turn.

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

Thank you, Richard. [Foreign Language] Good morning, ladies and gentlemen. Thank you for joining us. I hope wherever you are, you and yours remain healthy and safe.Allow me to set the table for today's call. I will begin by going over the company's high level financials, and we'll focus much of my time on the following 3 items. Item 1, I will provide some specifics about the impact of COVID-19 especially within segment Eco-Friendly Materials. I will discuss how 5N Plus was able to deliver a more favorable performance in 2020 versus that of 2019 despite a challenging environment. Furthermore, I will provide some details about what 5N Plus is doing to grow this segment's revenue along higher value-added materials.Item 2, we will analyze segment Electronic Materials. I will talk about the outstanding performance of the semiconductor materials in 2020 and its notable contributions to the company's earnings growth. We will also cover renewable energy business and 5N Plus' continued success in this space. I will finalize my comments for this segment by highlighting our company's entry into larger markets of engineered powders for additive manufacturing.Last item or item 3 will be -- before turning the call over to Richard, I will provide some information about the next phase of our company's transformation and key elements of focus for 5N Plus. So let's start our discussions. But first, let's do the high level financials.Last night, 5N Plus posted its 2020 quarterly and full year results with strong performance well above the same period in 2019. Adjusted EBITDA for the full fiscal year reached $28.8 million versus $22 million for the same period in 2019. Similarly positive was adjusted EBITDA for Q4 2020, which closed at $6.5 million compared to $4.5 million for the same period in 2019. These earnings figures were supported by margin -- by a notable margin expansion. Our full year gross margin in 2020 surged to 27.6% as compared to 22.8% in 2019.Naturally, we're very pleased with these results, especially when one considers the context in which this performance was delivered. The pandemic adversely impacted certain businesses of 5N Plus, and the company's upstream business has remained in the state of suboptimization since mid-2019, driven by historically low metal notations. Despite this landscape, 5N Plus generated $24.9 million or nearly $25 million of cash flow, eviscerating net debt while concurrently finalizing a series of investments linked to the company's growth initiatives and enhancement of operational agility. These actions culminated in a strong balance sheet, not seen since MCP acquisition and will provide us with great flexibility to pursue viable options for the future growth.Now moving on to the first item of the agenda. It is worthwhile to note that the pandemic adversely impacted businesses related to catalytic and extracted materials and those in industrial sector. During the year, while 5N Plus was able to adequately manage its own supply chain, the supply chain of some of our customers faced periods of stagnation, felt most palpably by those customers needing extractive materials. Also, many of the industries associated with catalytic business, such as oil and gas industry faced demand challenges from directly translated -- they faced demand challenges, which directly translated to lower demand for our materials.The industrial materials sector was also impacted by lower activity in industries such as aviation, automotive, glass, industrial coatings and industrial pigments, all of them affected by the global pandemic. Therefore, when we look to the revenue contribution from Eco-Friendly Materials, the difference between 2020 and 2019 can be mostly explained by not only lower metal notations, but also lower volume from those industries, which were impacted by COVID-19. Allow me to remind everyone that industrial, catalytic and extracted materials contain notable pass-through metal revenues.The picture for adjusted EBITDA for Eco-Friendly Materials is different. The segment's earnings grew as compared to 2019. This growth was mainly supported by a more favorable product mix with higher demand for products with higher value-added activity and lower pass-through metal revenue. Also enhancements in operational efficiency supported by the recent investments, improved unit cost of production, all of which resulted in Eco-Friendly Materials delivering about 5% growth in earnings despite the challenging environment.Over the past several years, 5N Plus has increasingly moved away from products with heavy exposure to pass-through metal revenues and those facing commoditization pressure. As an example, 5 years ago, large changes in metal notations and hereby large, I'm referring to something more than, let's say, 40% or more, could result in about $35 million to $50 million in EBITDA swing. The same level of movement in notations today would result in perhaps $7 million to $12 million in EBITDA swing. 2019 was a clear demonstration of this improvement and the added resilience 5N Plus exhibits.Given this, we believe the time has come for 5N Plus to move further away from products affected by commodity prices. Our Eco-Friendly Materials segment carries most of such exposure. To that end, in 2020, we decided to pivot more of our business toward health and pharmaceutical products, much of which carry large content of value-added activity with relatively low commodity exposure. Today, 5N Plus is the global leader in nearly all markets of niche, health and pharma, which the company serves. We plan to utilize our internal competencies, along with external means to enter markets with much larger total addressable market, whereas you'll hear me say later on, TAM.In support of this plan, early in 2020, we began negotiating a strategic agreement with Montana-based Microbion Corporation, aimed at developing Microbion's new class of antibiotic and antibiofilm active ingredients. This agreement was finalized earlier this year. Under the terms of the agreement, 5N Plus has taken an equity stake in Microbion and will assume responsibility for the manufacturing of business-based active pharmaceutical API -- active pharmaceutical ingredients or API, required in Microbion family of drug products currently under development. Over the next quarters, we will be supporting all related activities as the family of drugs move through the FDA process. In the meanwhile, we will continue to seek other opportunities in this space to expand our reach beyond the current family of health and pharma materials.Moving on to the second item on the agenda. Segment Electronic Materials delivered a strong performance in 2020, supported by increased contributions from growth initiatives, especially related to semiconductor materials associated with medical and infrared or IR imaging and semiconductor compounds essential in the renewable energy industry. Over the recent past, 5N Plus has been closely collaborating with select global medical technology OEMs, or original equipment manufacturers, to develop semiconductor compounds and detector chips for a new generation of disruptive medical imaging devices.The aim of this activity is to significantly reduce patients' radiation exposure and markedly improve diagnostics through enhanced imaging. I'm pleased to report that as of 2020, 5N Plus has surmounted the technical hurdles of the project and has begun to deliver products, meeting customers' demanding requirements. This progress made notable financial contributions to the company's improved performance in 2020.We believe much of the demand experienced during the year was related to the buildup of the fleet of devices required for regulatory certifications and qualifications at various customers of our customers. While we believe the scale of this technology and mass proliferation is still some years away, we are extremely pleased by the increased level of activity in this area, supported by the performance of the technology. 5N Plus has now been approached by other major OEMs to collaborate in similar type of projects, which is simply yet another promising sign of the future potential of this market and our company's critical place within that ecosystem.In 2020, 5N Plus introduced the third generation of engineered semiconductor substrate, INZBE3, designed for IR imaging and detection applications based on the family of 3-5 semiconductor materials. In early 2020, after market introduction, 5N Plus quickly gained a sizable order book with major OEMs, which contributed to the improved financial performance of the company. In addition, 5N Plus has begun to develop IR imaging detector chips based on the family of 2-6 materials. This work stems from the customer's request based on the company's proven success in medical imaging. 5N Plus is now negotiating collaboration programs with major OEMs in the field of security and aerospace.Moving on to the business of space. 2020 proved to be a challenging year. Early in the year, a major customer of one of our customers declared bankruptcy, citing COVID-related reasons. Thankfully, this impact was more than offset by previously mentioned business developments. What is important to note is that after several years of softness in space industry, this cyclical industry is beginning to once again gain upward momentums. The previously mentioned customer of our customer is now out of bankruptcy and has restarted its plan to launch low-orbit web-based satellites. There are also other low-orbit web-based constellations moving forward from planning to preparation for launch, and traditional programs for mid-orbit and deep space are similarly gaining momentum.5N Plus has used this relative quiet period to secure a $12.5 million contract with the U.S. government aimed at further advancing process and product technologies for specialty semiconductors in support of future space and satellite programs. We're taking strategic steps to ensure our company is poised to capture opportunities when the upcycle arrives.In 2020, the revenue and contribution margin from renewable energy business improved as compared to 2019. As we have mentioned in the past, the long-term projected volume growth of this business remains strong. This is supported by the increase in demand from semiconductor compounds utilized in thin film, utility-scale terrestrial solar panels. We have continued to maintain that the long-term sustainability of this business will depend on product technology, enabling higher efficiencies and process technology, enabling cost efficiency. To address the former, 5N Plus has been working closely with its largest customer in this space to develop engineered semiconductor compounds for their new generation of solar panels, which is scaling up. Judging by our customers' success and their input, we're pleased by our performance. Also in 2020, 5N Plus launched specific projects aimed at improving the company's unit cost of production based on enhanced process technologies. We will have more to share about this activity in due course.Before I move to our engineered powders activity, I would like to take a moment and highlight the fact that 5N Plus' performance with respect to finished engineered semiconductor products in 2020 was nothing short of a banner here, registering the company's best ever performance in this business. This positive development resulted in improved margins and enhanced profitability for the company as a whole. We are extremely pleased with this development and have long identified this business as a key driver of future growth. Recognizing that much of the current progress has been accomplished through organic initiatives. Time has come to augment our activities in this sector by engaging external means and expanding our reach to larger markets of the future with markedly larger TAM. We will have more to say about this subject in the future.As some of you may remember, a few years ago, we made our entry into engineered powders for microelectronic industry. Over the past 18 months, our team has been making tangible progress in penetrating the market by securing important programs related to handheld devices and wearable electronics with leading global manufacturers of this -- of these devices. It's fair to say that our technology and product portfolio are ahead of their time, and our customers come to us to provide engineered powders for their most challenging applications. As an example of this would be the first -- the fact that these devices are increasingly getting more complicated and the increasingly smaller chip packaging is driving the demand for more engineered powders for 5N Plus. Recognizing this trend, we've decided to utilize our competencies in larger markets so as to expedite the growth in this area and move toward markets with larger TAM.In support of this strategy, in 2020, 5N Plus entered the market for engineered powders related to additive manufacturing, commonly referred to as 3D printing with a portfolio of new developed products. We also established a strategic relationship with Metalpine GmbH of Austria to further augment our portfolio of engineered powders. The market for additive manufacturing powders has been growing between 20% to 25% year-over-year, and most funded forecast this rate of growth to remain for the foreseeable future. Some of the most conservative forecast placed this market in excess of USD 1 billion in revenue by 2025. Given the ecosystem built by 5N Plus, we believe we have one of the most comprehensive product portfolios available in the market. Over the next 12 to 18 months, our aim and priority will be to start penetrating this market.As alluded earlier, in 2020, our management with support from our Board began the next phase of strategic transformation with 2 key objectives: one, to move the company's product offerings toward advanced materials essential for select critical industries of the future; and two, move the company away from products highly influenced by metal notations and those facing commoditization pressure.Time and again, 5N Plus has demonstrated that once fully engaged in a new market, we have an excellent track record of emerging as a leader. This claim is backed by our estimated market share of roughly 42% to 48% of the total addressable market of our collective business segments over the past few years. Therefore, as we move toward advanced materials with higher margins based on higher-value creation, a critical goal is to meaningfully push the ceiling of our total addressable market.Up until recently, we've utilized organic channels as the primary path to growth. We believe time has come to engage nearly all external means, including M&A to achieve this goal. We believe we will increasingly engage significantly larger markets with quality clients and compelling margins. You're already beginning to see this take shape.At the same time, we're in the early stages of these markets, which means often, our performance is lumpy. Visibility is hazy and while measuring progress quarter-over-quarter can be a challenge, tangible progress over time transcending the ebb and flows is a more viable measure of our progress. As with the second objective of moving away from metals and commodities, we believe this is not only necessary to further enhance the company's future sustainability, but it is critical in our goal to further simplify 5N Plus' story and focus its full energy on fewer number of verticals.Management has begun to develop option for those businesses with greater commodity exposure. We expect this picture to become clearer by the end of 2021. Please note that all nearly -- that nearly all nonrecurring charges taken by the company during the year and especially in the last quarter is related to the preparation of these businesses for their future options.In closing, I would like to thank our people for their valiant performance in 2020. This was a tough year for many of them and their families. Yet their dedication remains simply unyielding. I'd also like to thank our customers for the trust they've placed in us each and every day. Last but certainly not least, I would like to thank our shareholders for their patience and the resources they have provided.At this point, I'd like to turn the call over to Richard. Richard?

[Richard Perron, Chief Financial Officer]

So good morning, everyone. As mentioned by AJ, we just completed an exceptional year finishing on I marks with full year adjusted EBITDA up 31% versus 2019 at $28.8 million. The company generated more than $24.9 million in cash flows despite headwinds from COVID-19 and historically low metal notations weighing on upstream activities.Regardless of the challenges associated with the pandemic, the company has shown resilience to this extraordinary event and remain focused on its new business model with improved margins supported by a shift in product mix away from commodities to higher value-added products, with notable achievement under our segment Electronic Materials together with solid demand for our pharma and health products.One of the many important factors to our business and financial improvements so far has been our ability to create alignment on long-term strategic options despite the volatile and dynamic nature of our businesses. Turning these into effective, tactical and strategic decisions, we have improved the full year gross margin from 22.4% in 2016 to 27.6% in 2020. Our initiated transformation continues to differentiate 5N Plus from its peers with increasing evidence that return on capital, now reaching 14.4% and a focus on providing sustainable value without the impact of metal prices is taking precedence over short-term gains.Reflecting management's determination to maintain all options available to finance growth, the company has transformed its balance sheet as we will briefly cover next. During 2021, we will continue to invest in projects to support our ongoing transition towards higher added-value products, and that allows us to be more cost competitive. Today, a clear market leader, the company is well engaged into a path to realign its product offering to larger addressable markets, margin expansion, risk reduction and simplification. We remain optimistic that the improvements achieved so far can be sustained, and there is more to do.So now starting with the coverage of revenue and gross margin. In Q4, revenue increased by 3% compared to the same quarter last year, with gross margin reaching 25.2% compared to 22.3% in Q4 of last year. On a full year basis, we are tracking an average gross margin of 27.6% or $48.9 million compared to 22.8% or $44.7 million last year supported, as mentioned, by an improved product mix favorably impacted by various activities related to semiconductor compounds and engineered substrates and solid demand for our pharmaceutical and health products, mitigating lower demand for industrial products associated with COVID-19 and low metal notations impacting upstream activities.Now covering adjusted EBITDA and EBITDA. In Q4, adjusted EBITDA was $6.5 million compared to $4.5 million in Q4 of last year. In full year 2020, adjusted EBITDA increased by $6.8 million from $22 million last year to $28.8 million, supported by the same items, supporting the increase in gross margin mentioned just before. For full year 2020, EBITDA was $22.4 million compared to $19.1 million in full year of last year. The increase mainly explained by our adjusted EBITDA, lower share-based compensation expense and a nonrecurring gain related to the settlement and termination of a supply agreement, net of restructuring and impairment charges. In 2020, operating earnings reached $13.5 million compared to $8.2 million for all of last year.More specifically under Electronic Materials segment, the adjusted EBITDA increased by $7.3 million to $26.9 million, representing an adjusted EBITDA of 33% compared to 24% in full year 2019. Under Eco-friendly Materials segment, the adjusted EBITDA increased $5.5 million to $11.5 million in full year 2020, representing an adjusted EBITDA margin of 12% compared to 10% for last year.Now looking at annualized backlog and bookings. When you look at Q4 of 2020 versus the previous quarter, Q3 2020, backlog on December 31 represented 189 days of annualized revenue, an increase of 18 days or 11% over the backlog of September 2020. Bookings for the Electronic Materials increased by 140 days from 23 days in Q3 to 163 days in Q4 2020 due to the renewal timing of a long-term contract within the segment.Bookings for the Eco-Friendly Materials segment increased by 20 days from 86 days in Q3 to 106 days in Q4. The renewal of long-term contracts, mostly occurring at year-end and Q1 for this segment. When looking at Q4 of this year versus Q4 of last year, bookings for the Electronic Materials segment increased by 74 days and by 5 days for the Eco-Friendly Materials segment.Quickly going through the expenses. Depreciation and amortization expenses finished slightly higher than full year of '19 at $11.7 million. SG&A expenses for the full year 2020 were $19.9 million compared to $21.2 million for 2019. In 2020, the expenses were positively impacted by lower travel and consulting expenses either avoided or delayed due to the COVID-19 pandemic. The company also recorded a reduction in wage expenses of $0.2 million in full year 2020, resulting from the Canadian emergency wage subsidy program.Share-based compensation expenses for 2020 amounted to $1.8 million compared to $2.6 million for the same periods of '19. In reference to litigation and restructuring costs, looking at it on a net basis, in Q3 2020, the company recorded a nonrecurring income from the settlement and termination of a supply agreement, and the company also made the decision to consolidate selected activities and close one of its subsidiaries located in Asia following the introduction of unfavorable business conditions and new regulations by local authorities preventing the site to be economically viable, incurring a provision for restructuring costs, while no expenses or income from litigation and restructuring activities were recognized in full year 2019.In reference to impairment of noncurrent assets, last quarter, the company recorded an impairment charge on noncurrent assets of $4.9 million following the decision to close one of its subsidiaries just mentioned as well as impairment of specific production equipment related to the site affected by the termination of a supply agreement. For full year 2020, financial expense amounted to $6.3 million compared to $4.4 million in full year 2019. The increase is mainly due to higher noncash loss from foreign exchange and derivatives compared to the same period last year mitigated by lower interest on long-term debt for the full year of 2020. The company reported earnings before taxes of $7.2 million in full year 2020. Income tax expense was $5 million. The reader will find -- those attending this call will find more details in Note 15 of our audited financial statements.Covering liquidity, in full year 2020, cash generated by operating activities amounted to $36.8 million compared to $2.7 million last year. Increase in funds from operations is mainly explained by higher adjusted EBITDA and favorable net working capital. Cash used in investment activities was $8.5 million this year compared to $10.2 million last year. For the full year of 2020 cash used in financing activities amounted to $8.8 million compared to cash from financing activities of $0.8 million in full year of last year. In 2020, the net movement in the credit line resulted in a decrease of $5 million and 0 for last year. Last year, the company completed a new 5-year unsecured subordinated term loan of $25 million, for which only $19.9 million were used to redeem the company's outstanding convertible unsecured debentures of CAD 26 million.Since the beginning of 2020, the company has repurchased and canceled a bit less than 1.8 million common shares under the NCIB plan for an amount of USD 2.2 million compared to a bit less than 1.7 million common shares for an amount of $4 million last year.Now looking at gross and net debt. In 2020, total growth debt decreased by $5 million and stood at $50.1 million compared to the year. This accounts for both the junior and our senior debt on the balance sheet. Net debt, after considering cash and cash equivalents, decreased by more than $24.9 million from $35 million to only $10.2 million on December 31, 2020.This will conclude the financial review. We are ready to take questions from the analysts.

[Operator]

[Operator Instructions] [Foreign Language] And your first question will be from Rupert Merer at National Bank of Canada.

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

My first question, wondering if you can give us some thoughts on how you're thinking about acquisitions. I believe historically, you looked only for deals that are immediately accretive. But with the technology gaps you're looking to fill, what's your appetite for acquiring companies that aren't immediately accretive? And how patient do you think you can be with acquisitions on the time to revenues and profitability?

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

So indeed, we have been -- I would even go to say that over the past few years, we've been very much internally focused. And as we've mentioned, we've begun to change that. We're beginning to see some semblance of that in terms of some of the deals that we have engaged in the recent past, and now we're truly trying to go beyond that and indeed close what you call technology gap. We are looking at spaces. For example, I mentioned that earlier, semiconductor space for us is a -- electronic material and semiconductor space is going to be the core of this company going forward.And we are looking to truly make ourself different than anything that's out there to have a distinct advantage. There aren't many, for example, semiconductor companies that can turn, for the lack of better word, mud into a chip. Today, we can do that. We can go from highly diluted feeds, extract the things we need and go through the various stages of that and turn that into a wafer -- a semiconductor wafer. We're looking now to add to that capability, and we'll be looking in that space. We have been looking in that space to do more with that.And your assumption is correct. Some of these things will not be immediately -- they will be accretive, but they will not be immediately contributing to the bottom line because you're essentially trying to bring in a technology and be able to really expand into additional markets. So the answer to your question is, we do have appetite for acquiring things that allows us to truly expand our portfolio value-added activities. And even if that means we need to be a little bit patient, we'll be patient for that.

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

Okay. Great. And then related to that, I suppose, your leverage is lower than it's been for almost a decade. How much debt capacity do you think you have? What's a reasonable amount of debt for the business to sustain? And tied into that, with potential for asset sale, I imagine you could be looking to release some cash from working capital. How much do you think you could raise from asset sales this year?

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

So to your latter point, I'm going to right now not answer it because I probably wouldn't be able to give you an accurate estimate or we're still really in the midst of that. So let's for now park that in the future, we'll do a better job of answering that.To the former part of your question, it really, Rupert, depends on the -- where we're -- our evolution is, that's the word I'm looking for, our evolution is. You understand that. Historically, we've always said we're a conservative company when it comes to cash because there could be fluctuations in the metal market. You need capital in case metals jump and whatnot. Well, as years have passed, our exposure to those metals are becoming smaller and smaller. So that safety margin doesn't need to be necessarily as large either. So when we look to do an acquisition, this is the best time for a company like us to do that because net debt is virtually nonexistent. And so how far we're willing to leverage ourselves, I would say that we can go probably, just my opinion, and I'll look to Richard to comment on that, but I would say we could easily get to about something that starts with a number 3. Richard, what's your thoughts?

[Richard Perron, Chief Financial Officer]

Yes. In reality, we could even go a bit above 3 because if you look at our balance sheet and especially in the notes, remember, our debt structure is, we have a combination of a junior a senior, on junior being extremely patient with the extended terms. And then on our senior, our leverage on the senior is even lower than anything you can compile if you just take gross debt against cash. It's in the negative or the actual senior -- net senior debt-to-EBITDA is on the negative side, which means it's unused. So we could short-term stretch a bit more, but the range given by AJ is not bad as a starting point.

[Operator]

Next question will be from Michael Glen at Raymond James.

[Michael W. Glen, Equity Research Analyst]

Just a follow-on with the semiconductor angle. So when we're thinking of M&A in that space, is what you're looking at specifically, is it an adjacency to existing lines of business? Is it completely new verticals? Are we thinking about new customers? Or is it business that you can leverage the existing customer network as well?

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

Okay. So here, I think we should differentiate customers and verticals from competency. When it comes to the competency, we are looking to acquire a set of competencies that would be -- that would complement what we have. It wouldn't compete, it would complement, meaning it would stretch the value chain, okay? So that's from the competency point of view. In terms of customers, you have a mix. By doing this, in our plan, there are going to be certain markets where we can go to the same customers that we have today and simply expand the range of offerings that we offer them because we have these new competencies, proven competencies.And then there is the second part where it's going to open up new markets. Remember, a key, key, key part of our approach is to increase our total addressable market. So we want to get into some of these new markets, which this competency, along with what we have also in the historic competency in semiconductor would allow us to get in there. That was the end of the response.

[Michael W. Glen, Equity Research Analyst]

Okay. And then when I'm -- so there's been a lot of articles recently about the macro level noise surrounding certain of these specialty or semiconductor materials from overseas, particularly from China. So if I'm looking at your business in the U.S., when we're reading these articles, is there a direct benefit I can think about in terms of your positioning in North America?

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

Before I answer that, I have to say that we've tried to remain agnostic with that. We clearly have some of the western governments like U.S. government, Canadian government and so on that count on our contributions. But we've remained, let's say, neutral in that space. That being said, at least from what we see in terms of trends is that the competencies that we have put together -- the pool of competencies and businesses that we've put together today and the ones that we're trying to do for tomorrow is increasingly becoming much more strategic to these governments. They are -- they're engaged with us like never before. I think the proof of that is last year's $12.5 million program. That's -- and if I'm not mistaken, that's a record for us. And where we're expanding, especially in the field of semiconductors and even in the field of APIs, active pharmaceutical ingredients, is smacked up in the middle of some very sensitive materials that these nations want to be independent with.And so we clearly see a large amount of interest. We're engaged in a number of programs and discussions and negotiations. I don't know what the future holds. Some argue that we're going to have to get used to this deglobalization and dual value chains across the globe. If that becomes the case, I think you will see that we will benefit significantly. And if that does not happen, I think we'll still benefit because the themes that we're pursuing, these are megatrends in their own regardless of what happens in terms of global supply chain, independent of the supply chain.But I see -- I don't really see anything negative. We don't have -- the other item I should add is, we have a presence, for example, in China. Our policy has not been to like be a cheap manufacturer in China to support the Western markets. We've never engaged that. We never thought that's a sustainable way of doing your business. Our presence in China, in large part, supports the Chinese market and takes advantage of the supply chain that exists. So that -- the way we're postured, I believe, from that point of view, could only benefit, and there shouldn't be any negatives there.

[Operator]

Next question will be from Nick Agostino at Laurentian Bank.

[Nick Agostino]

I guess my first question, just looking at EBITDA margins in general. This past quarter, you guys put some nice numbers up on the Eco-Friendly side. And I'm assuming that's probably pharma, health care-related. And then we saw, I guess, a little bit of a downtick on the Electronic Materials margins. So my question is, as you guys go through this strategic review, how should we be looking at equal margins through 2021 and beyond? And similarly, how should we be looking at Electronic Materials as you add more value, but at the same time as the first solar contract starts to weigh in? How should we looking at margins for both segments?

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

I'll start there, and then I'll pass it to my colleague, Richard, because I'm sure he has even more color. On the Electronic Materials side, we've got some variables, and that's why I made sure in my monologue, I talk about the lumpiness because some of the growth markets that we've engaged, that we've had quite a bit of interest, as an example, medical imaging, it is our opinion that the demand that came in, in 2020 is part of that lump. And then when the next loan comes, I can't tell you because it all depends on how many systems these customers are building for their pilot lines. And so there would be some of that in there.And then on the space side, as you know, we had a tough year last year. So how is that -- like how is that going to play? Because, obviously, things are beginning to be more on the -- at least the indications, as I mentioned, is on the upswing. The first solar, as you referred to as contract is more back-loaded than front-loaded, okay? And so I expect the contributions be better in 2022 versus 2021, just the way it was negotiated, nothing to do with demand. You should know that how we supply and how they're developing their market is completely disjointed. It's actually by design.And then on the ecofriendly materials, COVID has some things to say there. We've learned to live with COVID. We certainly don't take it lightly. But we don't look at it as aberration anymore. It's a new normal for us. And so we've got a lot of protection in place, and there's still some of our businesses, as I mentioned, extractive, catalytic and industrial are impacted because, obviously, still with us.So Richard may be better in terms of providing specific like metrics in terms of numbers, but those are the general trends that are going to impact those businesses going forward. Richard, what's your thoughts there?

[Richard Perron, Chief Financial Officer]

Well, as you can imagine, we have various levels of product mix impact. Actually, the first one being a segment over the other segment and then within each segment. In the case of the Electronic Materials segment, we started, I think, point in Q4. Q4 of 2020 was, okay, a bit lower in terms of margins to, let's say, the full year of 2020, but I would not worry at all. Going forward, it's probably going to be something, I'm just adding on AJ's comment. It's probably going to be something around the middle point of those 2. Or it's definitely going to be around the close to the 30% pipe level.As for the Eco-Friendly Materials, last year, we experienced challenges around our industrial products, which by default or those that are bringing the lowest margin, especially if you compare those against our pharma products, for example. So there's a bit of unknown going forward, but I mean with a bit of chance, the mix within that segment will continue to be strong, and we should expand in absolute terms, better figures, okay, hoping that the industrial sector recovers from last year. So in absolute figures, you should have dollar figures, you should have a better figure. But from a percentage perspective, maybe mathematically, it may be at similar levels that we have done in 2020 rather than improve forward.

[Nick Agostino]

And I guess switching gears on the bookings and backlog. They were up nicely quarter-over-quarter. Is that the usual Q4, Q1 renewal period? Or is that -- are you factoring in some of these -- the first solar contract renewal? Was that playing in there? And maybe some of these other contracts that maybe were deferred earlier in 2020?

[Richard Perron, Chief Financial Officer]

You just -- I can refer you to the definition of our backlog and bookings. Essentially, our definition of backlog says those are commitments 12 months forward, okay? So if you capture a contract of no matter the size or a big contract, let's say, we take the following the next 12 months commitment out of that contract, and depending if it's for longer term, okay? And by default, those contracts that are yearly as the quarters are passing by, they get depleted until they get renewed later on. And then at that point in time, it captures the 12 months ahead. They're going to have movements.And as we're mentioning in our communication, by default, Eco-Friendly, the contract renewal pattern is usually around Q4 and Q1 and then you start selling. You go through those quarters, you have to wait that period for those to be renewed again. But Electronics, it's different. Many of the contracts are -- the key contracts are now more than a year.

[Nick Agostino]

Okay. And then my last question. In prior quarters because of COVID, you spoke about inabilities to maybe conduct product qualifications or cases of delayed or deferred orders. I'm just wondering, is COVID having an impact in that regard? Or is all of that ability to generate new business and conduct existing business? Is that more of a -- we're leaving it behind 2020?

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

When I mentioned earlier that we're not treating this as an aberration, but a new norm, that's one of the items is indeed, business development is tougher. It's tougher. You're limited by essentially your customers' ability to be able to run its activities and everything is happening a bit slower. So no, we're still impacted by being able to qualify our products. Just doing -- there is this coefficient of drag that's on the business due to COVID that makes things -- unless it's something established in there, if you're trying to establish new things, which is what we're all about, it makes it a little bit harder. But not impossible.

[Operator]

Next question will be from Frederic Tremblay at Desjardins.

[Frederic Tremblay, Analyst]

AJ, one of the barriers in the past to acquisition activity, I believe, was elevated transaction multiple. I imagine that hasn't changed much recently. So just curious to get your thoughts on maybe your views on what types of multiples you're willing to pay. Or if you find a way to maybe navigate around the multiples to gain exposure to certain markets?

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

So unfortunately, you are correct. The multiples have not subsided. If anything, they've probably become more elevated. I don't really have a number to give you because it's case-by-case as to what we're willing to pay. It really depends on how it -- the fit and its future trajectory. But I will tell you this, I believe we're taking a very different approach to this. I think we -- this isn't a topic that we rolled out a bet in 2020 and said we got to do. We've been looking at it for a number of years. And every time we said, "Well, it actually -- we should focus internally. There's plenty to do internally. Let's make sure we optimize."And through this period, I think there's been a lot of learning. We are actually taking a very different approach. I'm not yet ready to tell you what that approach is. Allow me another quarter. I might be much, much better place to tell you and even perhaps be able to talk about it more openly as to the approach that we're taking because, obviously, I don't want to telegraph all my punches at this point.

[Frederic Tremblay, Analyst]

Yes, that's fair. So then as you think of the 5N Plus of the future, a few years down the road once you've maybe completed next year acquisitions and refine the existing portfolio, what do you think is -- and maybe you can provide a range there. But what do you think is a reasonable organic growth expectation a few years down the road for 5N Plus?

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

So conceptually and I'll also give you more of a quantification, but conceptually, the 5N Plus of the future will be an easier company to understand with simpler or less number of verticals. Rather than going wide, we'll go deep. And there will be -- with the focus, with less number of verticals, we will be targeting much larger TAMs. I think I made it very clear that in what we're doing today, we're doing great. We're the leaders. But the pool that we're in has gotten too small now. We need to go to a pond or maybe a lake, not maybe ocean just yet, but certainly a pond or a lake because we're just -- we're a different size fish now. So that's the key. So it's going to be focused on larger TAM, simplification and going deeper, which means you should read that as higher value-added activity. Those are the criteria that we're using.Now in terms of what we're targeting, well, for us, by 2025, let's say or '22, whatever, the next 4 or 5 years. If it's 2026 and we're looking back, I'd like to be able to show my investors that on a -- like compounded on a year-over-year type of growth we've done, let's say, I don't know, 15% revenue growth, and we've been able to expand our margins against that. That's what I'd like to show them that. Not only we've expanded margins because so far, our story has been about expanding margins. Some of the people are not seeing the revenue growth because, obviously, we're trading metal revenue for value-added revenue. In 5 years from now, I'd like to be able to show them both to say we've expanded both revenue and we expanded margins. That's the playbook that we're following.

[Operator]

[Operator Instructions] And your next question will be from Mac Whale at Cormark Securities.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

A couple of quick questions. Given where your investment needs to go over the next couple of years, is your return on capital employed max out here? Or where do you see that going? Is there something structural in your business that lends you -- or leads you to believe there is a top to that number?

[Richard Perron, Chief Financial Officer]

No. Actually, there's still plenty of opportunities to improve it forward with initiatives and projects we have on hand. I mean you still need -- as you continue to improve the product mix, you're likely also to improve the capital employed.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

But can you -- I mean, 14.4% for the year, like on a yearly basis, I mean, is this a 15% business? Is it a 25% business? Can you structurally actually get above 20%?

[Richard Perron, Chief Financial Officer]

In the -- well, our -- we always use 17% as that target. But I believe if we do our things right, we're likely to go beyond 17%. If we manage our projects right and integration and time at all, I think there's potential to go above that internal 17% target that we've given ourselves.

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

And I think it also depends on the growth ramp, right? In this space, as Richard said, targeting a 15% to 20% and we've picked the bogey in the middle there, 17%, 17.5% is reasonable. But as management, if you really want to optimize for that, then you've got to sort of watch your ramp-up of things. That will optimize it, but it comes at the expense of the future, too. So how you slide along that scale depends on your future trajectory.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. Well, AJ, when you mentioned about the progress on the medical imaging, you talked about really what we've seen here as shipments to fulfill demand that's really only around certification. Is -- were you trying to imply that this may be a pause whether certification occurs? And you can -- or will you fill that with new customers? Can you just take us through how that ramp looks?

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

Well, it's -- as I mentioned, because visibility in these spaces are not perfect. I'm trying to, if you will, manage expectations. This is -- I'll give you an example. A lot of the stuff we're doing here is based on family of 2-6 material. This family of material has medical imaging as one vertical, but it also has aerospace and infrared imaging as the other vertical. The medical imaging, our visibility is that it's being produced to support the customers' pilot line. So they have a pilot production that they're doing some production of this. And then this pilot is being fed through the regulatory process. So yes, your assumption is correct. We're assuming that we fulfilled a good chunk of this order. And when the next group of order comes, we don't know.Now the reason why I introduced the aerospace and defense is, that side is now heating up. And I can't tell you, just like I couldn't tell you this one, I can't tell you when they're going to come and all of a sudden ramp up their demand on that because this is -- to the earlier color on strategic material, this is considered a strategic material. And so on the defense and aerospace, this is something that could scale up faster than we think. I just don't have the visibility.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

When you -- when your customers talking about that, or when you're talking about that pilot capacity, have they shared with you their road map on actual commercial capacity?

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

They have shared a good chunk of information there. We're under NDA. So....

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

But I mean, you have like presumably, they're telling you, okay, if this goes well, we need you to deliver x plus over the -- like you have to invest as well, right?

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

We have -- indeed, we have looked at the market as a whole. And by the way, it's just not one interested party. They are different ones. They all have their own numbers. And they have their own requirements. Some of them fits within our current capacity. Some of it doesn't. Some of it requires investment. But yes, indeed, we have files in the background that are running in terms of different scenarios as this scales up, how we need to invest.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. So when you look at all your business together the way it stands today, how big is 2-6 versus 3-5 all verticals?

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

So are you referring to what we provide today or what we provided in future?

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Yes. Yes. No. Today, I'm wondering on whatever revenue basis or if you want, EBITDA contribution. I'm just wondering what is all your 2-6 business contribute...

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

2-6 is much larger. It is -- 2-6 is much -- I'm sorry. I'm interrupting...

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Sorry. I'm interrupting you. I mean...

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

Yes, 2-6 is much larger, but let me quantify that. We are like fairly advanced when it comes to 2-6. We're -- I won't call us the global leader, but we're certainly one of them in the world that can provide 2-6 material. But the thing with 2-6 is it comes in different forms, right? There's compounds. And then there is also engineered, like semiconductor substrates, right? So like if I include all the activities, a lot of our solar business is based on 2-6 semiconductor compounds, right?So and now we've expanded into 2-6 Engineered Materials. So if I put that package together, it's a much larger as compared to 3-5, where recently, we have really entered imaging -- well, we always had a presence, but not a very large presence, but recently, we've made a material movement into infrared imaging with 3-5. And so I would say today, that's the case. But I think if we end up executing properly, I can see us in the future to -- for 3-5 to get as big as 2-6, while 2-6 is continuing to grow. And I would tell you, in even a longer term future, I could see 3-5 being even bigger than 2-6 because there's just so much going on there in terms of future materials.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

That's exactly where I was trying to get to. Yes. So that's helpful, right, because we can get this -- an idea of what you're trying you trying to position it. So just my last question is, if you look at your TAM a year ago versus now versus in a year, are those noticeably different?

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

When you look at TAM in our current posture, I would say the answer to your question is no. Because look, for example, I know that medical imaging could be quite a large TAM. It could be as big as half of today's company's TAM. But I'm not yet putting that in there because I'm still supporting pilot, right? So over a year or 2, no. But that step -- there could be a step change. I can see TAM being a step change for us. All of a sudden coming to you and saying, look, we're no longer a company that has x hundred millions of this. It's now in billions. Yes, that could come as a step change.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. Okay. And that is a step change that you think is in sort of 18 to 24 months?

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

I think if we continue to execute within 24 months, I should be able to communicate that, yes, that we have substantially increased our addressable market, yes.

[Operator]

Thank you. And at this time, we have no further questions. Please proceed.

[Richard Perron, Chief Financial Officer]

Okay. Well, I would like to thank you all for joining us this morning, and we wish you a good day. Thank you.

[Operator]

Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.