5N Plus Inc. (OTCPK:FPLSF) Q1 2020 Results Earnings Conference Call May 6, 2020 8:00 AM ET
Arjang Roshan - President and CEO
Richard Perron - CFO
Conference Call Participants
Macmurray Whale - Cormark Securities
Frederic Tremblay - Desjardins Capital Markets
Hassaan Khan - National Bank Financial
Nick Agostino - Laurentian Bank
[Foreign Language] Good morning ladies and gentlemen, thank you for standing by, and welcome to the 5N Plus Inc.'s First Quarter 2020 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]
I will now like to turn the conference over to your speaker today, Richard Perron, Chief Financial Officer. Please go ahead.
Good morning, everyone, and thank you for joining our first quarter ended March 31, 2020 financial results conference call. We will begin with an overview of our business performance and review of our financial results, after which we will begin the question period. Joining me this morning is Arjang Roshan, our President and Chief Executive Officer.
We issued yesterday our financial statements, and we have posted a short presentation on the Investors section of our website. I would like to draw your attention to Slide 2 of the presentation. Information in this presentation and remarks made by the speakers today will contain statements about the 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 discussions 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. Since January 2020 the gradual outbreak of the novel stain of the corona virus COVID-19 and its eventual declaration as a pandemic by the World Health Organization has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures have caused material disruption to business globally resulting in an economic slowdown. The outbreak of the COVID-19 should be considered a new risk factor.
In the analysis of our quarterly results, you will note that we have used and discussed 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 now like to turn the conference call to Arjang for the discussion on the business performance and quarter results. Arjang?
Thank you, Richard. Good morning ladies and gentlemen. Welcome to 5N Plus conference call. I hope you and your families are doing well wherever you are and are remaining healthy and safe. Richard and I are conducting this call from two separate locations, so if there is a bit of a lag or cross-communication that's the COVID that's where it's coming from.
I'll start by saying that in 2020 prior to the full blown pandemic, we had already set course for a year with multiple achievements. And as of today we have not given up on that mission. In addition, we believe we have the inherent obligation to make sure we do our part within the global – within the larger global ecosystem and protect the continuity of supply for all customer of 5N Plus, many of whom, many of customers have been designated as essential businesses and producers of critical materials in the fight against COVID-19.
Early this year, 5N Plus took decisive actions to further protect its employees and operations around the globe. We've been working closely with government agencies in various regions implementing specific measures as per given jurisdictions. I think it is fair to assume that some of these measures have adversely impacted the company's operating efficiency; however, we believe these measures as a whole are protecting the health and safety of our people and enabling our operations to continue and serve our customers.
Obviously we remain vigilant as the situation remains fluid and we'll do the utmost to anticipate and address other challenges that may still loom ahead. Last night, 5N Plus posted results for the first quarter of 2020. Adjusted EBITDA for the quarter came in at $6.9 million versus $5.6 million for the same period last year. Return on capital employed increased from 8.2% in Q1 2019 to 10.6% in Q1 2020. Revenue for the quarter reached $50 million as compared to $51.4 million for the same period last year.
We are encouraged by how we have started the year and despite added challenges from COVID-19 5N Plus continues to make progress. As you may recall, last year 5N Plus announced that the contribution from refining and recycling activities or what we call upstream activities were expected to substantially decline for several quarters. This was largely driven by key suppliers withholding their materials due to continued drop in metal notations reaching levels not seen in many years.
Since launching 5N21 strategic plan our upstream activities have grown faster and more profitable than initially expected, while in the years prior to 5N21 the vast majority of the key metals used as consumables in the company's products were procured at commercial grade metal a couple of years. After implementing 5N21 less than a third of these metals were procured as commercial metal and the balance of the needed metals were procured from the newly established upstream activities which utilizes metallurgical processes to valorize these metals as more favorable conditions versus commercial metal purchases.
In our second quarterly communication last year we estimated that going forward, the adverse impact of the reduction in contribution from upstream activities to be about 15% to 20% of adjusted EBITDA when we compare Q1 2020 to the same period last year. We can indeed validate this figure. This being said, the adverse impact is not immediately evident in our overall Q1 2020 earnings because the margin, the earnings growth in the downstream businesses more than compensated for this GAAP as reflected in the 22% growth in adjusted EBITDA.
So now let's turn our attention to the downstream businesses. Excuse me. Earnings for segment eco friendly materials remained flat for the quarter as compared to the same period last year. As mentioned earlier, this includes the adverse impact from upstream activities. Furthermore, 5N Plus experienced certain headwinds due to COVID-19 including mandatory shutdown of its Chinese activities during the quarter which was rapidly brought back online within a few weeks.
During the quarter, the volume demand for industrial materials was higher than the same period last year. The overall revenue was lower due to metal notations as compared to the same period last year. Considering some of the end applications associated with industrial materials including automotive and aerospace which have been heavily impacted by the pandemic, we expect Q2 to be slower.
Revenue for health and pharmaceutical materials were slightly lower for the quarter as compared to the same period last year. Over the past 12 months 5N Plus has made tangible progress in qualifying its additive materials at certain key customers. 5N Plus is expanding its product offerings in this area to capture more synergies from its newly developed competencies. This should also enable its customers to benefit from streamlining their purchasing activities. In the next quarters, the growth of this activity will depend on how the pandemic will impact qualification campaigns at our customers.
In Q1 2020, revenue for catalytic and extractive materials grew significantly as compared to the same period last year. As many of you know, in 2019 5N Plus experienced production challenges much of which were resolved by late 2019. This development along with a full order book positioned the company to start 2020 on the right foot and fully serve its customer demands, yielding stronger performance in the quarter. The performance of this activity over the next quarters will depend on further development in mining, petrochemicals, oil and gas industries. Despite mandatory shutdowns of certain mines the demand for the company's products remained strong.
Earnings for segment electronic materials was significantly better than the same period last year. During the quarter our Malaysian site underwent mandatory shutdown. Other plants in this segment remained open, some of them due to essential business classification. Within renewable energy, revenue was lower than the same period last year while margins were notably higher driven by both volume and favorable mix. We expect Q2 demand to be similar.
Revenue in security, aerospace, sensing and imaging grew significantly with higher margins as compared to the same period last year. As you may recall, during 2019 5N Plus faced production challenges associated with ramp up of certain specialty semiconductor materials. As of Q1 2020, nearly all production challenges have been resolved. This, along with strong demand for infra red, medical and security markets have resulted in significantly better earnings despite challenges in the space market. We expect this trend to continue in the next quarter.
Revenue for technical materials were lower during the quarter as compared to the same period last year. The pandemic has significantly slowed product qualification campaigns and the demand for microelectronics industry has been adversely impacted. We expect the next few quarters to remain challenging.
5N Plus entered 2020 with ample cause for optimism driven by the strength of the company's order book and the efficacy of its activities. A few weeks into the new year, the pandemic started to add notable uncertainties. During the quarter, 5N Plus was forced to temporarily close two of its facilities while other facilities remained operational. How the year will continue to develop will depend on the demand for our customers products, our customers ability to produce these products, and our ability to seamlessly serve our customers.
Fortunately, the business of many of our customers has been identified as essential and many of our activities share the same classification. This will be helpful in allow us to serve these markets, nevertheless even with the essential classification and utmost efforts to protect employees and operations, production disruptions due to COVID-19 virus remain a possibility.
In addition, we are finding the current environment particularly challenging for new business development which often requires close human interactions along with qualification campaigns at our customers. Recognizing these uncertainties, we have decided to adopt a prudence practiced by many companies and temporarily refrain from providing earnings guidance. This means that it may be helpful to mention that prior to the pandemic we had estimated 25% to 35% growth in adjusted EBITDA growing from 2019 to 2020. This range would already account for the previously mentioned unfavorable upstream conditions.
Over the past several quarters our company has been going through a transformation process which has entailed migration to enabling products with better margins, enhanced cost structure, improved productivity, bolstered balance sheet, rationalized capital employed, and ultimately an acceptable balance between risk and reward.
I think we can agree that these are fundamental management principles and is the case with many fundamental management principles that are often overlooked or taken for granted and are undervalued until a crisis occurs and then it is these very fundamentals which will determine which businesses will emerge and perhaps slide and which will suffer.
Unfortunately, COVID-19 virus has caused one of such crisis. I am very glad that over the past few years 5N Plus has invested time and resources to strengthen our fundamentals. I have no doubt that this work will pay dividend and believe we are well positioned and not only navigate through the current global pandemic, but most importantly emerge stronger and more competitive than ever before.
At this point, I'd like to turn the call over to Richard in sunny Montreal.
Thanks AJ. So, good morning, everyone. As mentioned by AJ following a staging year impacted by metal notations 5N Plus entered 2020 rapidly implementing strategic measures to protect our global workforce from the COVID-19 virus endeavoring to mitigate any long term impact of the pandemic on our business. We believe we have and can continue to successfully navigate the crisis, maintaining strong demand for our core products, serving a diversity of markets, continuing to take calculated risk while progressing as they had slowed and then speeded with the business development of our growth initiatives.
During the quarter just completed characterized by relative stability from most commodity prices and also demand, the company has been able to significantly improve profitability, reporting a solid quarter in terms of adjusted EBITDA, achieving most of its short-term business objectives, as well as managing cash diligently and operating expenses judiciously, ending the quarter once again with a solid balance sheet.
Looking beyond confronting the immediate challenges of COVID-19, 5N Plus made important progress in the past years to address earnings relativity [ph], significantly strengthening its product portfolio, while improving capabilities, and efficiency further with recent investments expected to come online later this year, mitigating the challenging conditions for our upstream activities.
So now, starting with the coverage of revenue and gross margin of this quarter. In Q1 2020 revenue decreased slightly when compared to the same quarter of last year. Our gross margin reached 24.4%, compared to 22.4% in Q1 of last year. Despite lower contribution from the upstream activities, reflecting the impact of lower metal notations while overall downstream volume was higher.
Now covering adjusted EBITDA and EBITDA. This past quarter, the adjusted EBITDA was $6.9 million, compared to $5.6 million in Q1 of last year, positively impacted by stable metal notations in our overall downstream volume mitigating the contribution shortfalls from our upstream activities.
Electronic Materials segment's adjusted EBITDA increased by $1.7 million to $5.8 million representing an adjusted EBITDA margin of 29%, compared to 20% in Q1 of last year, while Eco-Friendly reached $3.1 million and adjusted EBITDA margin of 10% similar to last year.
In terms of EBITDA, it reached $6.2 million, compared to $4.2 million in Q1 of last year. The increase mainly explained by our adjusted EBITDA, combined with lower share-based compensation expense mitigating our foreign exchange and derivative loss. In Q1 of this year, operating earnings reached $3.6 million, compared to $1.3 million in Q1 of last year. Net earnings were $0.6 million in Q1, compared to a net loss of $1.1 million last year.
Now looking at our annualized backlog and bookings. Backlog as at March 31, 2020 reached level of 180 days, annualized revenue, a decrease of 55 days over the backlog at the end of December 31, 2019. The decrease was mainly driven by the bankruptcy filing of one of our end customers of a customer within Electronic Materials resulting in retroactive adjustment to the backlog in terms of dollar and days of sales.
Bookings for the extractive materials decreased by 77 days from 89 days in Q4 of last year, following the retractive adjustments to the backlog in reference to the bankruptcy filing of a customer's customer within Electronic Materials, the bookings calculated by adding revenues to the increase or decrease in backlog for the period divided by annualized year revenue are also negatively impacted. Bookings for the Eco-Friendly Materials segment decreased by six days from 101 days in Q4 to 95 days this quarter.
Quickly going through the expenses, depreciation and amortization expenses in Q1 amounted to the $3.1 million similar to 2019. In Q1 of this year, SG&A expenses were $4.9 million, compared to $5.5 million for the same period of ’19. In 2020, the expenses were positively impacted by favorable exchange rates across most local currency denominated expenses when compared to 2019, as well as timing of certain expenses like travel expenses.
Share-based compensation expense in Q1 2020 amounted to $2.2 million, compared to $1.1 million for the same period of 2019. Financial expense in Q1 amounted to $1.3 million, compared to $1.7 million in Q1 of last year. The decrease mainly due to imputed interest recognized as a non-cash expense related to the outstanding convertible debentures redeemed in March 2019 net of our loss in foreign exchange and derivatives, compared to the same period last year.
The company reported earnings before income taxes of $2.2 million in Q1 2020. Income tax expense in Q1 2020 was $1.6 million compared to $2.8 million in Q1 of 2019, both periods were impacted by deferred tax assets applicable in certain jurisdictions.
Covering liquidity, cash generated by operating expenses amounted to $2.7 million in Q1, compared to cash used in operating expenses of $6.6 million in Q1 of last year. Increase in funds from operations has been explained by the higher EBITDA.
In Q1 2020, cash used in investing activities totaled $2.3 million, compared to $2.8 million in Q1 of last year, mainly attributed to timing of additions to property, plant and equipment. Q1 of this year, cash from financing activities amounted to $2.8 million, compared to $4.8 million in Q1 last year.
The small decrease is mainly explained by the net drive down of $5 million from the credit facility, one in Q1 of 2019, the company completed a five-year unsecured subordinated term loan of $25 million for which only $19.3 were used to redeem the company's outstanding convertible unsecured subordinated debentures of $26 million Canadian.
Since the beginning of 2020, the company has repurchased and canceled 771,200 common shares on NCIB plans for an amount of $1.8 million, compared to 284,379 common shares for amount of $1 million during Q1 of last year.
Now looking at gross and net debt. Net debt after considering cash and cash equivalent increased by $3.1 million from $35 million at the end of December 31, $38.1 million as of March 31, 2020, mostly impacted by the drawdown of $5 million on the company’s credit facility for working capital purposes.
This will conclude the financial review. We are ready to take questions from analysts.
Thank you. [Operator Instructions] Your first question comes from the line of Mac Whale with Cormark Securities. Please go ahead.
Hi. Good morning. Nice progress on the margins. I'm wondering, when you look at the changes you made over the course of the last year dealing with some of the startup issues and that you've talked about - do you - how has it shifted sort of your direct versus indirect costs? I'm wondering whether you could speak, the reason I ask is that, I'm wondering if you could speak a little bit to the sensitivity of the margins in a slowdown because it would be helpful to get an idea of how you're impacted operationally on the slowdown of shipments?
Okay. On the slowdown of the shipments.
Oh I'm just saying if you're just slowing down - if what is happening is you're still operating and you're still getting good operating margin, but you're just not able to ship and you're going to see a slowdown and disruption due to customer demand and you're not shipping, how should we see that manifest itself? You've got a different direct versus indirect costs than before and I'm wondering or whether you do or not, I'm just wondering, how we should be thinking of that in terms of our modeling?
Yes, it depends. The scenario you are describing depends how long it lasts, but in the first few quarters, which you'll see is a - we're not likely to stop production. So what do you see is an increase in our inventory and the current inventories is in good health and coming quarters even if for some reason clients are asking to delay shipments, we see no reason why an inventory could not continue to be profitable at that market and better.
We need to describing, we need to extend like way beyond one, two and like B to C three quarters. But if for some reason it really slows down like four, like three quarters, what will likely happen is we'll have extended maintenance shutdowns toward the end of the year type of scenario.
The economy cover our inventory on hand. But we will not stop production and impact margins says as you're doing lot in the first quarter, something that would drag over a very long period of time.
Okay. That's helpful. I mean, so in reading that answer in sort of parsing it, it sounds as if you're not counting on that level of disruption, like three?
At this point plus 4. We're not, sorry again for cross communication. We're not anticipating it based on at least what we see. Remember part, one of the things that helps us is, some of the things we do is actually essential in this environment. We have a fairly good list of customers that carry that classification. So that is, I guess, part of it. But we have indeed in the background, we've done a contingency planning for let's say, the worst case as Richard mentioned. We can withstand the worst case for a very long time, based on the resources we have in the company, based on the strength of our balance sheet. So we'll be able to go for many, many months on this.
Okay, okay and then looking at the backlog in terms of, I'm wondering of what the terms of it are, and what I'm looking for is some insight into when you get - when you go through a quarter on some of that business, if you don't get a follow on order, is that lost revenue or is it delayed?
And I'm wondering a little bit because if you can imagine in something like food additives, if that hasn't been purchased, it's going into feed those animals don't need to be fed twice as much next year. So that's just its gone, right? So I'm wondering whether that – whether that is or not the case for a lot of the other businesses?
So I think, I would encourage you to look at certainly our backlog number a little bit differently. Because the major influence here is not really – is not necessarily the question of whether we've won the business or not, with a customer it has to do with contract cycles. Remember, we look 12 months out. And we are a company that supplies too many industries and have a fairly long list of clients and they all have their patterns, purchasing patterns.
We have a mixture of long and short-term contracts. Sometimes, and I think I've said this in the past, sometimes you maybe getting to a point where with a portfolio of contracts that 12 months is running out that – meaning your long-term contract is coming to term and you have to renew that. Now when that happens, there is still another unknown and the unknown is, will the customer themselves want to go long-term contract or not?
And then there's another unknown, whether the 5N want to go long-term or not. And obviously in those negotiations, it all depends what benefits you. So when you look at our backlog number, I understand that it's gone to 188. We consider that actually a very good backlog number. I am not aware of that being influenced materially by loss of business or adverse impact. I am - to the best of my knowledge, everything that I see has to do with contract cycle, certain contracts cycles and then whether we will renew them or not.
Now I actually expect that number right now not to go higher. It might even go lower in the next quarters and if it does go lower and it is because of the contract cycle, I'm not too terribly concerned, because I think given the current condition, we have to weigh our options and our customers are weighing our options, do we lock things for 12 months or do we go on more of a short-term or even spot practice.
Those are decisions that needs to be made and we're going to be prudent how we make those decisions. So just for me to show a good backlog number to the market, this is probably the danger with this backlog number. Sometimes it projects a really good image and sometimes it doesn't, but the fact is, it's also a choice in terms of whether you decide to go long-term with your contracts or not. I don't know if that is recommended [ph].
Yes that's helpful and that makes sense, right. Like to sort of warn us not to read the same thing from it that we had in the past, because if your customers, exactly as you say, your customers are adjusting, same balloon [ph] we don't really know, you don't want to get locked in either way, you don't want to enter into a bad contract, simply because I mean because you can't tell what's happening and you may see it all come back very rapidly, it is possible.
Exactly and being a publicly traded company, and I'll put this out there so that it's very clear, we don't want this to be what determines our behavior, because we may get involved in a negotiation that will be protracted because we just simply don't want to accept certain terms. And we do that because we think the customer at the end of the day has to buy the product. Now whether they do it on long-term or spot, they are going to need that product. And so we may even, protract some of these discussions until we think the position that we're in is adequate for us. So if again, if this number were to go further down and if the reason is exactly what I said and not loss of business, I certainly wouldn't be concerned about it.
Okay, that's great. I'll get back in the queue and let some other guys ask some questions, thanks.
Your next question comes from the line of Frederic Tremblay with Desjardins. Please go ahead.
Thank you, good morning.
Good morning. On the Electronic Materials segment in Q1, the favorable product mix was mentioned as a reason for the strength there. So knowing if there was anything in that was one-time in nature or if it's part of – the plan ongoing evolution of the product mix and how should we think about the impact of product mix on margins going forward, given the current demand environment?
Well I'll start and then maybe Richard can augment it. When you look at Electronic Materials, obviously that is a part of our business that by itself has better margins. Now, this particularly was the case in terms of there is a better mix was the case in renewable and in SASI [ph]. But obviously, the production related issues that were impairing our ability to really demonstrate the margins is primarily limited or large part limited in SASI [ph], because last year, as you'll recall, we had issues with production of a number of our engineered materials.
So, I would say, most of the operational improvements comes from SASI [ph] and the mix is shared between somewhat equally I would even say between those two. Richard, do you have a better answer than that?
No, that's fine and it's I don't think it's a one-time effect of Q1. You'll see that repeat over the upcoming quarters. We'll have variation from one quarter to another potentially especially on the SASI [ph] business, but overall, we should have this year a better mix than last year for different things that have evolved, developed.
Great, thanks for that. I wanted to speak a bit on inventory management. First, I was wondering if you've seen any supply chain disruption? And then in terms of inventory management, you mentioned AJ in terms of the backlog potentially some customers or 5N Plus potentially electing to go to shorter term or spot. How does that potentially impact your inventory management going forward?
I think you point to an important item that the second point you made indeed. When you have longer term contracts by default, you're able to better commercially hedge. Commercial hedging for us is actually a physical as you physically secure those materials. So indeed, you're correct. When you have longer term, when you secure longer term contracts, you're able to do a better job in terms of commercial hedging.
So yes, if we go into more shorter term situations than inventory, management becomes more of a challenge because you're essentially have to buy your inventory also somewhat on the spot. That being said, when we make those decisions, we try to balance them against the – balance the benefits against it. If you look at for example, the current metal market, some of the metals that we use extensively are at such low notations that for us, we don't speculate on that. But certainly in terms of dollar value going down versus going up, there's limited exposure. So we're going to put that also into that equation.
In terms of supply disruption, you know what, we did not have supply disruption. I won't say that it was easy, because remember our upstream, the event that happened last year in upstream was pretty abrupt, it was quickly that something's dried up and it had an impact on us, and we had to go and be able to still procure things without disrupting the whole supply picture, the fundamentals within supply picture creating bubbles and whatnot.
And I think our teams have done a fantastic job of doing that. And then you have to be able to obviously then manage against COVID-19 to be able to continue to keep your supply chain intact. I think, again, our team has done a great job. Part of that obviously has to do with us having to build sometimes some buffer to be able to withstand delays and whatnot. But overall, we - I think we've gone through this period without any interruption in our supply chain.
Great And last question from me would be on the competitive environment, do you think that current the COVID situation is impacting some of your competitors, is it creating some organic and inorganic opportunities for 5N Plus?
I guess I'll try to not say too much there, for obvious reasons. What I do know is that we have received additional inquiries. I am not sure if that's got to do with COVID. I don't know if that has to do because some of them have financial situations. But yes, I think I'll just probably stay there.
Understood, thanks for taking the questions.
Your next question comes from the line of Hassaan Khan with National Bank Financial. Please go ahead.
Good morning. I'm calling on behalf of Rupert. So we wanted to get a better handle of taxation, it is fairly high this quarter. We understand it's from different jurisdictions?
Good morning. Can you please speak up a little? I have a hard time hearing you.
I'm sorry. Working from home is painful. Can you hear me better now?
So we just wanted to get a better handle of taxation. We understand it's coming from different jurisdictions. But can we get a sense of what a normalized run rate would look like moving forward?
Okay. The difficulty with our business is the following, we're into - I don't know nine jurisdictions or so, or less than nine, but we have nine sites. Okay? And all sites have their own product lines. And so the difficulty is that we may be making more money with a certain product than others or in some country rather than other. So you cannot take the average tax rate of all the countries that were putting in. Because they're not all preferable at the same level, and they are definitely are not at the same – with the same level of different taxes and other tax opportunities.
So I understand it's hard to modelize. Let's just say that by default we have a couple of plants in Germany. So we tend to be more often taxed in Germany than other countries because we have two plants and that is obviously a cold place, so I guess if you pick a rate somewhere between Germany and Canada, but then again we're in so many different countries that, so - but I don't have an easy answer for you because it also varies from one quarter to another. But by default, we do tend to pay more taxes in Germany and Canada than the other countries because of our footprint.
Thank you. That’s helpful. And just like one other follow-up question from my understanding, the customer was OneWeb, not the customer, but the potential impact that had an impact on the backlog. And if hypothetically, because those assets are garnering attention from tech heavyweight, if that materializes, if that can open the door for renewed business opportunities?
So I'll try not to address any particular clients, even though OneWeb is in our client, it's a customer of a customer, but I'll try to answer your questions. I think I should probably, perhaps even correct myself to an earlier question. Because I said some of the changes in the order of changes in backlog was a lot of activity with contract situation. Indeed, there were a bit of impact from situation with our customers. We didn't lose business, but obviously in this environment, there are customers that potentially can go out of business. And yes, there was that impact. There was some of that.
And if they come back online, we'll add the number or/and assuming the situation stands we will - that'll be an upside, but to the best of our knowledge, as soon as soon as we get formal bankruptcy protection notice, we adjust our numbers. Yes, and just to make it clear, in terms of exposure to any ongoing bankruptcy filed is limited in terms of receivables or whatnot. Our teams have been really working diligently to make sure that given the current COVID condition that all credit lines, everything to be monitored very closely, and at this point we don't have exposure that would be significant.
Thank you. It's really helpful. Hope you guys continue to be safe and healthy. I'll get back in the queue.
[Operator Instructions] Your next question comes from line of Nick Agostino with Laurentian Bank. Please go ahead.
Yes, good morning. First let me just say thank you for that color on the backlog. It was really helpful to understand the dynamics between short-term and long-term. On that same topic, AJ can maybe give some color as to how much of the decision was on [indiscernible] part versus your customers' part when it came to going short-term in some cases. And the reason I asked is just trying to understand whether the backlog decline was a function of just lower visibility from your customers or maybe if it's 5N equally recognizing that if we go short-term with these contracts. As you said earlier, the demand will be there and maybe you see it as an opportunity to maybe pick up some margin in the short-term. So any split on that would be great.
Okay, sure. So, perhaps I didn't do a good job of explaining it. We haven't really, at this point declared that we're going to go short-term. Where we are is you're looking at the next 12 months, and some of the contracts that require renewal are beginning to fall in those last months. And we have started the process of - depends on the client, but we've started the process of negotiation. So I can't tell you that we have declared one way or the other in terms of whether we'll go short-term or long-term.
Typically, our posture is look if we can get returns that we believe is what it should be then obviously this happened sooner, if not, we'll continue to negotiate. My expectation, I can only give you my expectation is that you're going to - in that number you're going to get a V, you're going to get a V-type of a situation where it's probably going to go down, I'm not sure if we're going to work everything out. Because remember, as we're working to renew contracts, the 12-month window is also moving. The next quarter is moved in three more months into that.
So I think we'll go into a V, we will go into the bottom, and then at some point we will come up. When that happens, I don't know. That's my expectation. Now if it goes down and stays down there because then the question is did it happen because, we lost business, typically that hasn't been the case. Or is it because either parties have decided not to lock up. But I think it's too soon for that discussion right now. Give us, I would tell you two more quarters and I think we should have a better visibility on that.
Okay, I appreciate that color. And then my next question is, when I look at, I guess your metal price charts in your slide presentation, it looks like we saw a little bit of a flattening through Q1. Can you give any color now that we are sitting here in the month of May, any color on what's happening on the upstream supply? Is COVID-19, you spoke in the past that some of the suppliers may be holding on to metals in hopes of higher prices. Are you seeing any loosening there as an indication that maybe metal prices have started to recover during - in the last month or maybe financial situations are causing them to, I guess – give out their supply regardless of where the metal prices are?
So just the last five seconds, I didn't fully understand what you said, but I simply I did it.
Yes, so I'm just wondering if within the last month if you've seen a loosening of supply on the upstream side, in other words maybe prices are starting to bounce up a little bit and more supplies, metal prices coming into the market from those that maybe were hoarding it in the past or if possibly because of COVID because of their financial situations, maybe they're having to, I guess release supply into the market, regardless of pricing. So anything you guys are observing there will be appreciated?
Okay, I'll try to do this without speculating and infusing my prejudices. Just to answer the last point, no we have not seen any loosening on behalf of our supplier in terms of bringing additional or getting access to additional feed material for refining and recycling activities. Now coming back to, the basket of minor metals is a large basket and they all have their own dynamics. So let me limit this discussion at least to the two largest metals that we deal with is bismuth and tellurium.
I think the big item that we should keep in front of us is last year in November we had the big auction, the Fanya auction where somewhere for business, about 20,000 tons of this material was sold off within China. And the price if you know, if you put in some transactional costs in it, it's probably somewhere in the neighborhood of $2.20 a pound, I'm probably not too far off a bit here, bit there.
And so, you've got yourself a - I would say a notable figure, because 20,000 tons of business is quite a bit, it's a year and a half of production or whatnot. So you've got that factor sitting there that clearly puts a bit of, the balance stand for business kind of gets filled up with that with the $2.20. And on tellurium that number was 45. Now tellurium has it, these metals have different dynamics.
On the tellurium side, the reserve had only, I think four months of global production, but obviously, that also set a notable number. So 2.20 and 45 are things that on those two metals that I think are notable. We think that for obviously business to go up, there's always behaviors that don't necessarily make sense from the market point of view. But if you purely look at it from a market point of view I would say, I see little reason for it to necessarily go hugely higher at this point.
And some of the books there needs to be consumed, but that being said again, within this space, certain players can hoard or get government help or whatnot and drive the price up albeit temporarily. On the tellurium side, similar situation. There is to the best of our knowledge, these materials are available. So this is why last year when we brought the whole situation with upstream to your attention, we mentioned that we don't expect this to be something that will immediately resolve itself.
Certainly after Fanya occurred, is we confirmed our belief that this would be more protracted. So the way we are modeling ourselves is we're not counting on necessarily seeing our current situation change and I think we're okay with that, because I think even in the given kind of current situation, if you continue to work, make sure we're being you know competitively procure metal albeit not as much from upstream, but from buying metal for metal and then continue to grow our downstream businesses, we should be able to continue to provide earnings growth well, in a non-COVID-19 environment and we'll see what the impact of COVID is.
Okay, thank you.
Your next question comes from the line of Mac Whale with Cormark Securities. Please go ahead.
Hi, just a quick question on the trials you've had in the Micro Powders segment, you had a fair number of customers looking at that material. And I know you talked about new business challenges that you need to be sort of face-to-face, but with those projects or programs that are well advanced that where they doing the evaluation, are those continuing or like should they not be able to continue and maybe not face as much of a delay as we might expect?
So we have two factors here. We've had customers that had – that were planning new products, they have delayed some of their plans. And then we've got exactly what you mentioned, us generally qualifying with customers. And you're right, there are files that are advanced enough that are continuing. It's not an issue. The comment we made primarily has to do with developing new files, being able to – as this is a growth initiative.
You need to continue to generate new files. You need to continue to put as many balls up as you can. And right now, we're – if I'm honest we're struggling with that because our people can't travel. We can't really sit there and entertain new discussions around new applications that are coming. The visibility from our customers is also fairly poor. We don't necessarily get to see right now what's happening within the larger scope of – especially within electronics industry.
Okay, that's helpful. Thanks.
And there are no further questions at this time. I will turn the call back over to the presenters for closing remarks.
Well, I'd like to thank everyone for joining us this morning.
Thank you very much. Be safe.
This concludes today's conference call. You may now disconnect.