5N Plus Inc

TSX:VNP

Earnings Call Transcript 2021-Q4

[Operator]

[Foreign Language] Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the 5N Plus Fourth Quarter 2021 Results Conference Call. [Operator Instructions] I would like to turn the conference over to your speaker today, Richard Perron, Chief Financial Officer. Please go ahead, sir.

[Richard Perron, Chief Financial Officer]

[Foreign Language] Good morning, everyone, and thank you for joining our fourth quarter and fiscal year ended December 31, 2021 financial results conference call. We will begin with an overview of our business performance, strategies and the review of our financial results, after which we will begin the question period. Joining me this morning is Gervais Jacques, our Interim President and Chief Executive Officer. We issued yesterday our financial statements, and we have posted a short presentation on the Investors section of our website. I would like to draw your attention to Slide 2 of the presentation. Information in this presentation and remarks made by the speakers today will contain statements about expected future events and financial results that are forward-looking and therefore, subject to risks and uncertainties. A detailed description of the risk factors that may affect future results is contained in our management's discussion and analysis of 2021 dated February 22, 2022, available on our website and our public filings. In the analysis of our quarterly and full year results, you will note that we use and discuss certain non-IFRS measures, which definitions may differ from those used by other companies. For further information, please refer to our management discussion and analysis. I would like now to turn the conference to Gervais for the discussion on the business and quarter results. Gervais?

[Gervais Jacques, Interim President, Interim CEO & Director]

[Foreign Language] Good morning, everyone. Thank you for joining us this morning. I would like to start the call by saying a few words about my experience since being appointed interim CEO late last year, and the key elements driving our future growth. I've been a proud member of the Board of 5N Plus since May 2020, and now proudly serving as interim CEO since December 1, 2021, at a unique time for the company. I'm a chemical engineer by trade. Prior to joining the Board, I was the Managing Director of Rio Tinto Aluminum. And prior to that, I was the Chief Commercial Officer of Rio Tinto Aluminum. Since my appointment I have had the chance to meet with the many leaders and talented people that make this company a global leader in the markets in which we operate. Each of our sites, globally and our teams, bring unique expertise, scientific and manufacturing capabilities. Each contribute to providing critical products to a diversified set of sectors, including high-profile specialty semiconductors. The company just completed a demanding year, delivering significant revenue growth in the quarter and on a full year basis. This was driven by strong demand for health and [indiscernible] products, renewable energy, among other sectors, despite global business challenges. We also established a unique specialty semiconductor platform with the completion of our strategic acquisition of AZUR late in the quarter. This transaction is a result of growing recognition within the company that the dynamics have changed and that it was time to create a new business model for 5N Plus with a complete value chain, one that is focused on providing sustainable value. Looking ahead, there are 4 elements that enable us to differentiate ourselves in the market. and which are critical to our near-term success and growth objectives. First, the acquisition and integration of AZUR SPACE. Secondly, our investment at our Montreal site called Project [indiscernible]. Thirdly, our unique positioning in medical imaging and finally, commercial excellence. First, on AZUR. I have just returned from Germany where I spent time at AZUR SPACE, where we have just onboarded more than 300 people, a large number of which are scientists dedicated to developing and producing solar cells for space applications and CPV. Demand in this market is very strong, and we have a solid confirmed backlog. We also have a team of 30 professionals in R&D, developing new high technology materials products. AZUR is a market leader with compelling attributes, has highly skilled and experienced workforce, has strong portfolio of intellectual property, strong backlog and solid financial support from several agencies. The combination of 5N Plus and AZUR forms one-of-the-kind ecosystem, a fully integrated value chain of compound semiconductor products. From the procurement of critical materials to finished Epitaxy engineered substrates. In time, this will allow our entry and access to new larger markets such as high-power electronics, electric mobility, wireless charging and advanced communications with the development and commercialization of wide-band gap materials, more precisely gallium nitride. We aim also at unlocking tangible synergies, resulting in more value capture from the space and security market. Demand for satellites is on an upward trend, both for large and smaller-sized satellites. The main drivers of this demand are the need of -- for geo-localization, accurate weather forecasting, global communications and defense applications. There is no doubt that the combination of the 2 businesses will unlock synergies and solid long-term growth for 5N Plus. Second, our St. Laurent project here in Montreal. The past -- this past June, the company announced the extension of the development and manufacturing of critical materials including those containing tellurium for advanced semiconductor compounds and engineered powders. As a result of this investment, approximately 50% of all tellurium production worldwide will be produced here in Montreal, part of our onshoring strategy. Close loop management of critical materials, including much of our own in-process byproducts, those of our customers and suppliers, will no doubt enhance the sustainability and competitiveness of our business model. The St. Laurent project is progressing very well and is expected to be completed by the end of the second quarter of 2022. This will strengthen our positioning and ability to serve the renewable energy sector as well as for other technology applications. Demand for product related to renewable energy, namely solar power, has remained robust within 5N Plus, working collaboratively with its key customer to further enhance the overall viability and competitiveness of the [indiscernible] technology, and our ability to penetrate unsubsidized markets. Renewable energy remains a key growth vector for 5N Plus, and the St. Laurent project will reinforce our competitiveness and critical role in this sector. We also -- we will also continue to leverage our unique positioning in the medical imaging market. Our market is right for innovation, with increased demand for enhanced ironic, radiation reduction and lower operating costs. Photo content detector, or PCD, technology is at the forefront of addressing the latent demand associated with this market, and 5N Plus has expanded its value chain, utilizing its unique ultrahigh purity metals and compounds to develop engineered substrates. These efforts have resulted in an area of engineered substrates facilitating on unsurpassed performance in customer applications, ranging from PCD-based solutions in medical imaging to engineered substrates for infrared imaging and other applications within the security industry. Over the course of 2021, the medical imaging industry confirmed its intention to move to PCD, and 5N Plus is uniquely positioned to become the leading global supplier of engineered substrates for PCD-based medical imaging applications, a sector with high valuation. As an example, Canon's takeover of Redlen Technologies valued the company at over $400 million. Finally, a very important and overarching team for me is commercial excellence. Our commercial strategy has now been enhanced, and our go-to-market strategy for our market segments is clear and well-defined, and will be gradually implemented in 2022. We will be increasingly shifting on the customer supplier relationship to a partnership approach wherever possible, thereby creating additional values for both parties. Our goal is to have an even better understanding of the unique value of our different products in various applications. We will be able to offer a distinctive value proposition, implementing our value pricing strategy and clearly positioning the Western World advantage of 5N Plus. We have already had some quick wins and this go-to-market strategy will make the company more resilient. Our ultimate goal is to expand our addressable market with an improved product mix, clearly establishing our importance within the critical specialty semiconductor and performance materials space. With these 4 key elements and focus areas in mind, our near-term priority is to ensure the successful integration of AZUR to unlock the full potential of our now unrivaled vertically integrated specialty semiconductor value chain. We will also continue to accelerate the company's growth trajectory in 2022, both organically and through acquisitions, focused on the right markets. The company's mission is clear, and we will continue to invest in our people to be a strategic partner to our customers and to create long-term value for our shareholders. In conclusion, I wish to express our sincere thanks to our employees around the world for their dedication and many contributions in 2021. We also thank our customers for their trust in us, and our shareholders for their confidence and support. With that, I will turn the call over to Richard to discuss our fourth quarter and full year financial results. Richard, over to you.

[Richard Perron, Chief Financial Officer]

[Foreign Language] So good morning, everyone. So we are happy to report on our fourth quarter and fiscal year 2021 results with you all this morning. The company delivered strong results despite unfavorable global business conditions, establishing a unique platform around specialty semiconductors with the strategic acquisition of AZUR SPACE, strengthening the company's value chain, competitive capabilities and opening new business opportunities for the future. As mentioned by Gervais, the company delivered significant revenue growth over last year, notwithstanding AZUR SPACE, confirming the unique and strategic role the company plays in many critical industries we serve. Before we quickly go through some of the key figures, I would like to highlight that following the acquisition of AZUR SPACE, the company renamed its disclosed segments to Specialty Semiconductors and Performance Materials. The Specialty Semiconductors segment is similar to the former Electronic Materials segment, integrating the products and operations of AZUR SPACE, focusing on products, which are used on a number of applications such as renewable energy, space satellites and imaging. typical end markets include photovoltaics, medical imaging, infrared imaging, optoelectronics and advanced electronics. Products are sold either in semiconductors compound semiconductor substrates ultra-high-purity metals, epitaxial semiconductor wafers and solar cells. As for the Performance Materials segment, it is similar to the former Eco-Friendly Materials segment, focusing on products that are used in a number of applications such as pharmaceutical and health care, various industries as well as catalytic and extractive. Main products are [indiscernible] as active pharmaceutical increases, animal feed additives, specialized chemicals, commercial-grade metals, alloys and engineered powders. All commercial-grade metal sales have been regrouped under Performance Materials as well as those of engineered filers. Back to the performance of 2021. The company's results of 2021 were largely impacted by incremental costs associated with the international freight and consumables, daunting many other businesses worldwide. Adjusting for these factors, the adjusted EBITDA of both the fourth quarter and the full year have surpassed -- would have surpassed 2020. Mindful of inflation and its impact on our businesses, we continue to be disciplined, focused and methodic, yet bolt-on how we address those challenges to support growth. 5N Plus continues to carefully align its business development, emphasizing our value-added products and better margins, allowing the company to deliver solid results despite unforeseeable factors progressively increasing its adjustable markets. Mindful of inflation and its impact on our businesses, we continue to be disciplined focus. So now starting with the coverage of revenue and gross margin, followed by the adjusted EBITDA and net earnings. Revenue in Q4 2021 increased by 40%, reaching $64.6 million compared to $46.2 million in the same period last year, favorably impacted by the contribution of $17 million coming from AZUR, for the Specialty Semiconductor segment as well as higher demand for Performance Materials products. Adjusted gross margin in Q4 2021 was $15 million or 23.2% compared to $11.6 million or 25.2% in Q4 of last year. Impacted by inflation, notably for international freight and consumables, adjusted gross margin on a full year basis was $49.3 million or 23.5% compared to $48.9 million in the previous year. For Specialty Semiconductor segments, on a full year basis, revenue was $70.6 million compared to $57.6 million in 2020. And adjusted gross margin was 31.5% compared to 42.3% in full year 2020, mainly explained by an unfavorable sales mix and materially higher costs for international freight and consumables. In Performance Materials segments, the full year 2021 revenue was $139.3 million compared to $119.6 million last year, with adjusted gross margin at 19.8% compared to 21.2% last year. The group adjusted EBITDA in Q4 reached $10.1 million compared to $6.5 million in Q4 of last year, supported by the acquisition of AZUR, mitigating significant cost increases. On a full year basis, the adjusted EBITDA reached $28.2 million compared to $28.8 million last year, supported by the solid performance in Materials -- in Performance Materials, but impacted by cost. For the Specialty Semiconductor segment, the adjusted EBITDA decreased by $2.5 million to $18.8 million in full year 2021. While for Performance Materials segment, the adjusted EBITDA increased by $1.9 million to $19 million. On a full year basis, net earnings were $2.1 million compared to $2.2 million last year. So now looking at the annualized backlog. If you compare Q4 of this year versus Q3 of this year, the backlog on December 31 represented 221 days of annualized revenue, an increase of 47 days or 27% over the backlog of September. The contribution of AZUR represents 31% of the total value of the backlog as of December, and was included in the bookings of specialty semiconductors in Q4 of this year. The backlog on December 31, 2021, for the Specialty Semiconductor segment presented 293 days of annualized segment revenue, an increase of 52 days or 22% over the backlog of September. The backlog for the Performance Materials segment represented 160 days of annualized revenue, an increase of 16 days or 11% over the backlog of September. Quickly going through the expenses. Depreciation and amortization for the full year amounted to $12.5 million compared to $11.7 million last year. SG&A expenses for the full year were $21.9 million compared to $19.9 million for 2020, inclusive of AZUR. On a full year basis, share-based compensation expense amounted to $0.7 million compared to $1.8 million for the same period of 2020, reflecting the scheduled vesting of long-term incentive plans mitigated by the negative changes in the company's share price. In 2021, financial expense amounted to $4.1 million compared to $6.3 million last year. The decrease is mainly due to a lower loss in foreign exchange and derivatives recorded in full year 2021 compared to the same period last year. While the interest on our long-term debt increased in this year following the increase in the long-term debt flow -- following the acquisition of AZUR during Q4 2021. The company reported earnings before income taxes of $8.7 million this year. Income tax expenses this year were $5.6 million compared to $5 million last year, impacted again by defer tax assets applicable only in certain jurisdictions. Covering liquidity, cash generated by operating activities amounted to $10.3 million compared to $36.8 million last year. The decrease this year is mainly due to lower contribution of funds from operating activities, combined with a negative change in a noncash working capital. On a full year basis, cash used in investment activities totaled $49.9 million compared to $8.5 million last year, mainly attributed to the acquisition of AZUR, minority stake in Microbion earlier this year as well as the timing of certain additions to PP. On a full year basis, the cash generated from financing activities amounted to $36.2 million compared to cash used from financing activities of $8.8 million last year. The increase of $45 million, explained by the drawdown on our credit facility to finance the acquisition of AZUR, net of repayment of certain loans in AZUR. And during 2021, the company repurchased and canceled a lower number of common shares under its NCIB compared to last year. So now looking at gross and net debt. Total debt increase to $116 million compared to $50.1 million to finance the acquisition of AZUR. Then on a net debt basis after considering cash and cash equivalents, an increase to $80 million versus $10 million last year. This will conclude the financial review. We'll now be taking questions from the analysts.

[Operator]

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

[David Ocampo, Analyst of Institutional Equity Research]

Richard, last quarter, you guys noted that your expenses -- or your EBITDA got hit by $1.5 million on the higher consumable and freight expenses. I was wondering if you could provide a little bit more color on what the impact was this quarter, and your ability to mitigate those factors?

[Richard Perron, Chief Financial Officer]

Okay. For the fourth quarter, I don't have any of the exact figure, but the range is similar to Q3, okay? And then in order to mitigate all of that, as we've mentioned on the last call, for a good portion of our business, when it comes to Q4 and Q1, different products are negotiated for the full year, okay, long-term contracts.So as we mentioned last time, it won't be possible to recover all of that inflation impact. But we expect to recover a good portion of it, though, through adjustments to various pricing formulas that we have across those contracts, okay, which by default tends to be more under the Performance Materials segment.

[David Ocampo, Analyst of Institutional Equity Research]

Okay. And then if I take a look at the specialty semi margins, I know they're still down from last year, but they've rebounded quite nicely despite those pressures that we just talked about. So I'm just curious, what are the factors driving that? And how should we be thinking about the margin trend going forward?

[Richard Perron, Chief Financial Officer]

Okay. There's essentially 2 key factors, okay? Two main factors explaining the decrease. One of them, as you recall, 2020, we've done extremely well when it came to the medical imaging sector, okay? And as we've mentioned -- and now we have declared our partner, [indiscernible] that it's partnering up with Samsung, and other players within that sector that are not Samsung. But altogether, that sector -- Samsung and other clients, within the sector, they've done pretty well in 2020. And we've supplied a lot of semiconductor materials to these guys in order to qualify their products, okay? So that's one of the main factor that explains the difference between '20 and '21. The other factor, as you know, within renewable energy, we have long-term contracts with our partner that are renewed at various point in time. And the current contract that is in place is essentially more backloaded. So we do expect better volume this year than last year. And then on top of it, because of the weight is price, we ended up any, let's say, an unfavorable period last year due to varios aspects of that contract that will improve over time. But going into 2022, under renewable energy, essentially, the volume and mix of products that we supply under that segment will be more favorable than 2021.

[Operator]

Your next question comes from Rupert Merer with National Bank.

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

Looking at the contribution from AZUR in the quarter was stronger than what we might have anticipated. Can you give us a sense of how the results maybe came out compared to what you were anticipating. And what we should be looking for as a run rate from AZUR in 2022?

[Richard Perron, Chief Financial Officer]

Okay. Just for all listeners to this call. As we mentioned in the past, the business of AZUR, while we have a lot of visibility as to what will happen in the following year and the year after, when it comes to the actual realization of revenue and profitability in a fiscal year, it's not equal from one quarter to another, okay? Obviously, we'll do our best to kind of needle it over the various quarters, but it's going to be a challenge. So AZUR historically for the last few years, there profitability and sales was backloaded in the year, okay? And then going forward, it's a bit of unknown if that pattern will continue, but the pattern in terms of sales and profititability from one quarter to another is not perfect. It's not equal, okay. So we ended up acquiring AZUR at the end of the year. So we've captured a fair bit of that business.But on a forward-looking basis, as we've disclosed in previous press releases and following the acquisition, it's a business that brings EUR 60 million of sale or so a year, generates an EBITDA in a $7 million-plus range year-on-year, okay? And as Gervais mentioned during his introduction, I mean this whole industry of satellites for both large and small satellites on an upward trend. So what AZUR and ourselves see going forward is a ramp-up of sales and associated profitability.

[Gervais Jacques, Interim President, Interim CEO & Director]

And Richard, if I may add on. I think with AZUR, because of this satellite -- the demand for satellite, which is an upward trend, we have the unique opportunity to implement commercial excellence, and prioritizing value over volume. And I think we have a strong backlog. It's up to us to make sure that we're maximizing the value of it.

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

All right. Great. And can you talk about the business? What are the -- how diversified are your customers? Do you see any customer concentration with AZUR?

[Richard Perron, Chief Financial Officer]

By default, as we disclosed in previous press releases, AZUR has a strong position in Europe. So AZUR opens up Europe for satellites for us, okay? And out of Europe, they have a fairly diversified set of clients. But as you can imagine, the satellite industry, you're not talking of many hundreds, okay? But they're diversified as to the various players in Europe, and they also have clients in Asia and North America. But they're extremely strong by default in Europe, which is a positive for us as we're already established in North America.

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

Great. And then finally, on AZUR. So you've had the acquisition now for a few months. And you talked about the fact that you're active in R&D looking to develop some of these new products. Can you give us an update on your thoughts on timing of when you might be able to see an introduction of some of these new technologies to the market.

[Richard Perron, Chief Financial Officer]

Okay. Today, I mean, Gervais and myself were at AZUR last week. That team is extremely enthusiastic about developing what we refer to as wide band gap materials, more precisely gallium nitride. Over the last few years, they've made sure they have the right patents in place, they acquire the right equipment, and they've been able to produce samples for their clients in order to accelerate qualification. So then on a go-forward basis, the team has already prepared a long list of equipment and a qualification plan going forward. It's going to take -- it's not something that will pay over the next couple of years, but we expect that within a range of 3 years -- 3 to 5 years. We'll have a product ready to be commercialized and have success with it.

[Operator]

Your next question comes from Michael Glen with Raymond James.

[Michael W. Glen, Equity Research Analyst]

Maybe just a follow-up on the last question. You talked about some equipment purchases that might be necessary? Are you able to give some indications on what CapEx might look like over the next few years? [indiscernible] referring to please.

[Richard Perron, Chief Financial Officer]

Well, the team knows well, the team has already placed and received some initial equipment. The team is working out the final plant as to the rollout of required equipment, okay? It's going to be a ramp-up that will match the qualification phase and else, okay? So at this time, it's a bit early to disclose the full amount, especially that we're currently finalizing the rollout plan.

[Michael W. Glen, Equity Research Analyst]

Okay. And maybe just switching over, are you able to give some indications for working capital next year, Richard?

[Richard Perron, Chief Financial Officer]

Working capital, while you have our balance sheet as of December of this year, okay? As I've mentioned earlier, that the business of AZUR, the actual pattern of revenue and profitability is not it's not equal from one quarter to another. But assuming that the pattern of 2022 repeats 2021, the working capital that you see on our balance sheet as of December should be pretty much the range that we'll end next year.

[Michael W. Glen, Equity Research Analyst]

Okay. And then circling to the project sale that you're working on, can you talk about like how does this product change -- how is it anticipated to change your production cost profile for the material? And does it also change -- how does that change your sourcing strategy as well for the material?

[Richard Perron, Chief Financial Officer]

Okay. Looking at cost, okay? If you recall behind it, it's the combination of more than 1 site to 1 site. So by default, we improved the overhead associated with that type of operations forward, okay? And then we are introducing new technologies and where we have a better process flow and else. So overall, we expect gains from a cost perspective, an operating cost perspective, okay? And then on top of it, those new technologies will allow us to bring feed that we were not bringing in the past or that we're not able to economically treat in the past. So we'll have 2 key benefits there, okay? .

[Gervais Jacques, Interim President, Interim CEO & Director]

And if I may, again, on that, maybe this onshoring strategy will help us to really play this Western World advantage. I think being closer to our market -- producing the tellurium closer to our market will obviously bring some advantage.

[Michael W. Glen, Equity Research Analyst]

Okay. And are you able to indicate -- is it a 10%-type cost reduction, 15% or 20%, are you able to give some indication such as that?

[Richard Perron, Chief Financial Officer]

Not on this call, but it's definitely a 2-digit improvement on customer

[Gervais Jacques, Interim President, Interim CEO & Director]

Yes.

[Michael W. Glen, Equity Research Analyst]

Two digits. And then finally, just wondering, are you guys going to provide guidance for the full year with the Q1 report?

[Richard Perron, Chief Financial Officer]

Yes. That's the plan. The plan is to do like we've done in the previous years as we disclose our Q1 results, we'll provide the market with the range in terms of guidance.

[Operator]

Your next question comes from Frederic Tremblay with Desjardin.

[Frederic A. Tremblay, Analyst]

So one of the priorities that you're outlining for 2022 is acquisitions. I was wondering if you could provide a bit more color on your acquisition strategy, and how you plan to balance that strategy with the need to integrate AZUR as well as your current leverage on the balance sheet?

[Richard Perron, Chief Financial Officer]

Just maybe as a starting point, obviously, the integration of AZUR is a key priority of 2022. In terms of acquisition, I think we've been vocal in the past that we like pharmaceutical and health, okay? But at the same time, I mean, as you all know, we're a highly diversified business in terms of the markets we serve. So we're definitely open to more diversification if the opportunity arise. The key is to find the right business out of which will create synergies forward.

[Gervais Jacques, Interim President, Interim CEO & Director]

Yes. And again, on top of that, I would say that I'm quite impressed about the great capabilities that we have within 5N Plus. And I think we -- looking at it, I think the need for critical materials, and I think it's just increasing. Then we need -- I think we are now looking broadly of what else can we do as well. And the platform of 5N Plus is a great platform to build on.

[Frederic A. Tremblay, Analyst]

Great. Richard, maybe just on top of that, in terms of the leverage, what's your confidence on in terms of leverage, assuming additional aquisition

[Richard Perron, Chief Financial Officer]

Yes. The question of leverage, definitely, if you combine both the senior and the junior debt, I mean we don't want to go over 3. And ideally, we want to stay in the low 2s, okay? But from a senior net debt perspective, we're way below 2. So we're currently very comfortable with the level we're at. But obviously, as you know, we've always been very cautious on how we manage our balance sheet in the previous years. And that culture will never -- will not change. So on a going -- on a forward basis, if you leave -- if we put aside any new big projects that could -- will arise, we're going to be trying to maintain it and reduce it from where it stands today.

[Frederic A. Tremblay, Analyst]

Okay. Because we're on the subject of segments that you want to focus on. Just wondering, in terms of the strategic review of some of the legacy businesses that was announced a few quarters ago, have been put on old given the CEO transition? Or is that still ongoing?

[Richard Perron, Chief Financial Officer]

No. Not on hold per se, but obviously, the assessment of those opportunities and the various options that are open to us have been on hold, I guess delayed, okay? But it's all happening in the background of things. So we're still assessing those various portions of our business that are probably not as strategic on a go-forward basis. So we have not stopped that assessment just delayed it a little bit in order to, as you know, complete the acquisition of AZUR, okay, and make sure we close our year with AZUR, integrated with 5N Plus numbers. But that assessment of those businesses that we don't see a strategic is continuous. It's ongoing, okay? And it's definitely back on top of the first things that we have to title this year.

[Frederic A. Tremblay, Analyst]

Okay. And last question for me. Just on the margin side, Q4 on adjusted EBITDA margin of 15.6%. That's your highest number quarterly for the year. I'm assuming AZUR's strong revenue had something to do there. With that, given that AZUR's contribution can vary on a quarterly basis. I guess maybe on an annual basis, what sort of range are you looking at in terms of a sustainable margin profile for 5N Plus with AZUR on an annual basis?

[Richard Perron, Chief Financial Officer]

Okay. With the info at hand that we have today, we see an improvement versus 2021, but not to the extent of 2020, okay? That's expressed as a percentage, okay? In absolute terms, it will be better, though. .

[Gervais Jacques, Interim President, Interim CEO & Director]

And it is something, I think, that we will be working very hard on with the commercial strategy. I think that's our unique position in terms of go-to-market strategy, market segmentation, value pricing. I think it's all about increasing this margin, making them more attractive for the market, and again, playing the Western World advantage of 5N Plus.

[Operator]

Your next question comes from Nick Agostino with Laurentian Bank.

[Nick Agostino]

I guess Gervais, for you, you've spoken in the past about obviously putting through some pricing increases given the inflationary pressures you guys are going through a contract renewal cycle right now. And you also talked about better appreciation for 5N's value proposition and making sure that your pricing recognizes that as well. So just wondering, through the course of Q4, and as we sit here in Q1, how have those types of conversations been received by your customers when you talk about higher pricing, not just for inflationary purposes but to truly recognize the value proposition you guys bringing forward? Are your customers receptive to your points? Or are you getting any type of pushback?

[Gervais Jacques, Interim President, Interim CEO & Director]

Well, we're always getting some pushback. But this year, to be honest, talking about price increase, it's something quite easy because everybody is expecting price to increase. Now what we want -- what needs to be done is make sure that we can differentiate ourselves and talk about value. Because at the end, it's not only about pricing, but the value that your product is bringing to their products. And this is why we're moving from cost -- from just a relation from customer supplier to partnering, looking at how can we grow the pie together, how can we create more value together, how can a simple change sometime in specification can add on value. And I think that's the name of the game for the commercial strategy is to step back, look at the big picture, look at who's competing with 5N, what can we provide as a value distinctive approach for our customers and making sure that they can see the full picture. And we should never take for granted that the customer is understanding the full value chain. Then I think we're both learning. It's a learning process. We've got some early successes. And I'm quite excited to continue and to deploy the commercial strategy with our top 20 customer next year -- or this year, sorry. We're already in 2022. Time is flying so fast.

[Nick Agostino]

Is it possible that you can quantify how much of a pricing increase you anticipate? Obviously, it varies by metal and varies by application. But if you can quantify how much of a pricing increase you think you can get just by way of the value proposition that you believe is not fully being appreciated.

[Gervais Jacques, Interim President, Interim CEO & Director]

It depends on the market we're referring to. It depends on the product. It depends on the regions. But we are -- that's why the analysis needs to be done customer-by-customer, looking at their next best alternative. And their next best tentative both in terms of where they are sourcing from, freight strategy, derisking, talking about China or Western world and then also R&D capabilities to develop the next generation of products that we need to make sure that in every scenario, they are able to see the full value proposal of 5N. Then it is changing for one customer to another. And we do have more closer relationship with some, but the extent is how can we make sure that we're leveraging that capability across the board, and we're targeting the right customers for the future. And this is why I think the value over volume -- when you have a backlog, it's all about value over volume. You don't want just to use your capacity. You want to maximize your value. And this is what the strategy is all about.

[Richard Perron, Chief Financial Officer]

Already a combination of addressing inflation in the value. In some regions, the topic of inflation is definitely easier to deal with than others like Europe.

[Nick Agostino]

Okay. And then just maybe you talked about this earlier, Richard, but the whole freight and consumables cost impact. I think in Q3 is about $1.5 million that you guys quantified. I don't recall if -- what the level was for Q4. Is that something you can call out?

[Richard Perron, Chief Financial Officer]

I think I've mentioned it earlier, there was one question about. Essentially, I don't want the exact figure and, but it's in a similar range.

[Nick Agostino]

Okay. Okay. I heard the discussion, but I didn't quite catch it. And then my last question is, you guys are still comfortable when it comes to tellurium pricing. They continue to go down. I think on the Q3 call, you've indicated probably 2 quarters out, we should start to see the margin benefit. So let's call it, Q1, Q2. Are you guys still comfortable with that analogy given what you're seeing right now? And I can only assume that the project St. Laurent will only add to what the metal pricing is doing right now. So my question is simply, are you guys feel comfortable with, I guess, better margin relief on the tellurium side just given where pricing is going.

[Richard Perron, Chief Financial Officer]

Yes. The better margins on a forward-looking basis will be out of, one, the sales mix because we make different things, and we provide different services around tellurium, if you name this one. And yes, by default, if you then on -- let's say another aspect is the whole thing of project St. Laurent becoming -- starting being commissioned and else. And then as you referred to, patients around metals and else, the combination of those 2 give us a fairly high level of confidence that profitability will improve in 2022 and a bit more from a time perspective in the second half than the first half.

[Operator]

There are no further questions at this time. Mr. Jacques, Mr. Perron, you may proceed.

[Richard Perron, Chief Financial Officer]

Okay. Well, we'd like to thank you all guys to join us this morning, and we wish you a good day.

[Gervais Jacques, Interim President, Interim CEO & Director]

[Foreign Language] Thank you very much.

[Operator]

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