5N Plus (TSX:VNP) reported second-quarter financial results on Tuesday. The transcript from the company's second-quarter earnings call has been provided below.
This content is powered by Benzinga APIs. For comprehensive financial data and transcripts, visit https://www.benzinga.com/apis/.
The full earnings call is available at https://app.webinar.net/PwNWKZOyGV3
Summary
5N Plus reported a 28% increase in Q2 revenue to $122.4 million, with a 30% year-to-date increase reaching $240.3 million, primarily driven by higher volumes in renewable energy and bismuth-based products.
Adjusted EBITDA for the quarter grew by 10% to $26.6 million, with year-to-date EBITDA at $55.8 million, supported by structural demand in key markets despite higher input costs and temporary operational inefficiencies.
The company reaffirmed its full-year adjusted EBITDA guidance of $100 to $105 million, highlighting the confidence in continued revenue growth despite anticipated margin pressures from increased metal and chemical costs.
Operational challenges included unplanned equipment maintenance and higher input costs, which impacted margins but are expected to be temporary with recovery anticipated over the next two quarters.
Strategic initiatives include ongoing capacity expansion plans, supported by a strong balance sheet with net debt reduced to $23.7 million, providing financial flexibility for potential M&A opportunities.
Full Transcript
OPERATOR (Operator)
Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the 5N Plus second quarter 2026 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. To ask a question during the session, please press star then one on your telephone keypad. If you require immediate assistance from the operator, please press star then zero. I will now turn the floor over to Stefano Bertolli, Director of Communications and Corporate Affairs.
Please go ahead, sir.
Stefano Bertolli, Director of Communications and Corporate Affairs
Good morning everyone and thank you for joining us for our Q2 2026 results conference call and webcast. We will begin with a short presentation followed by a question period with financial analysts. Joining us this morning is Richard Perron, our President and CEO, and Albin Fournier, our CFO. We issued our financial results yesterday and posted a short presentation on the Investors section of our website. We would like to draw your attention to slide two of this 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 these risk factors that may affect future results is contained in our Management's Discussion and Analysis of 2025, dated February 24, 2026, and available on our website and in our public filings. In the analysis of our quarterly results, you will note that we use and discuss certain non-IFRS measures, which definitions may differ from those used by other companies.
For further information, please refer to our Management Discussion and Analysis. We now turn the conference over to Richard.
Richard Perron, President and CEO
Thank you, Stefano. Good morning everyone and thank you for joining us. While the second quarter presented a more challenging operating environment, our results demonstrated the strength of demand across our strategic end market and the resilience of our business. We delivered another quarter of solid growth, capping a strong first half of 2026 in support of our full year objectives. Revenue increased 28% in Q2 and 30% year to date, reaching just over 240 million for the first six months of the year.
Adjusted EBITDA increased 10% in a quarter and reached 55.8 million year to date, representing growth of 24% over the same period last year. Profitability remains strong, although margins reflected higher input costs as expected and temporary reduced operational efficiencies. Most of these cost pressures are expected to be recovered over time. The equipment downtime and suboptimal operations experienced during the quarter and associated incremental expenses are temporary in nature.
Turning first to specialty semiconductors, the business delivered a strong quarter reflecting structural demand across our strategic end markets. Terrestrial renewable energy had a standout quarter, with higher volumes translating into record quarterly revenue. This performance reflects our key customers' continuous expansion and reinforces our position as a critical supplier within its value chain. Commercial activity also remained very strong in space solar power.
We secured significant new contract awards in H1 and participated in a record level of bids by dollar value during the quarter. This momentum reinforces the structural growth of this end market. It also underscores AZUR's position as a global leader in solar cell technology and a partner of choice. The quarter, however, was not without challenges. Both our renewable energy and space power businesses experienced comparable levels of unplanned equipment maintenance.
Our teams responded quickly through contingency planning, operational flexibility, and targeted inventory allocation. We continued to support customer demand and maintain deliveries during the quarter. Our teams continued to resolve the remaining issues and strengthen preventive maintenance measures. Beyond these temporary operational impacts, margin contraction in specialty semiconductors also reflected higher metal input costs. A portion of these costs is expected to be recovered over subsequent quarters, although the timing will vary by product and customer.
In the meantime, we are working to partially offset these pressures through economies of scale and continued operating efficiencies. Performance Materials also delivered a solid quarter. Segment revenue increased nearly 40%, driven primarily by higher volumes of bismuth-based products. As anticipated, margins continue to normalize from the record levels achieved last year and sustained in the first quarter. This reflects higher metal input costs and a significant increase in chemical costs in recent months.
Even so, the business continued to generate profitable growth and demonstrate the resilience of its portfolio. Halfway through the year, we continue to take a prudent approach to our outlook. Geopolitical risks continue to evolve rapidly and influence inflation across many regions. Various input and operating costs remain elevated. We're also increasing production volumes and operating our equipment at high capacity while integrating a significant number of new employees.
In this context, we remain firmly focused on disciplined execution and operational excellence. As we enter Q3, our priorities are to improve operational and maintenance processes, advance our productivity initiatives, and execute our capacity expansion plans. These expansion plans all remain on plan. Finally, our balance sheet continues to provide us with significant financial flexibility. Organic investment remains a priority as we expand capacity to support contracted demand.
We also continue to actively evaluate external opportunities that could complement or extend our capabilities. Near-term impacts and quality variations aside, we are building a business positioned to deliver sustainable, profitable growth over the long term by supplying advanced materials to critical industries. That strategy continues to be validated. Customers increasingly value secure, reliable Western supply chains, particularly in markets tied to renewable energy, space, security, and advanced technologies.
These trends reinforce the value of our differentiated capabilities, manufacturing footprint, and long-standing customer relationships. As a result, we remain well positioned to create sustainable value by executing our growth strategy. With that, I'll turn the call over to Albin, who will review our financial results and outlook in more detail.
Albin Fournier, Chief Financial Officer
Thank you, Richard, and good morning to all of you. Before turning to the results, I would like to reiterate how enthusiastic I am to be a member of the executive team of 5N Plus at such a critical juncture in its growth and development. I have engaged with our teams and with the investment community in the last three months. Those discussions have reinforced my confidence in our strategy, in the inherent strength of our business, in the strong financial foundation, and the opportunities ahead.
Turning now to our financial performance, revenue increased 28% to $122.4 million in Q2 2026 compared with Q2 2025. For the first half of the year, revenue reached $240.3 million, an increase of 30% over the same period last year. The increase primarily reflected higher volumes in renewable energy and more favorable product mix in space power. It also reflected higher volumes of bismuth-based products. Adjusted gross margin increased to $37 million in Q2 2026, representing 30.3% of sales.
This compares with $33 million, or 34.6% of sales, in the second quarter of last year. While adjusted gross margin increased in absolute dollars, margin percentage declined. This primarily reflects higher metal input costs, temporary operational inefficiencies associated with the production ramp-up, and higher chemical costs. For the first half of the year, adjusted gross margin represented 32.6% of sales. Adjusted EBITDA increased 10% to $26.6 million in Q2 2026 compared with Q2 2025.
Year to date, adjusted EBITDA reached $55.8 million, slightly above the midpoint of our full year guidance range. Net earnings amounted to $19.7 million, or $0.22 per share, compared with $15.2 million, or $0.17 per share, in the second quarter of last year. In Specialty Semiconductors, revenue increased 25% year over year to $89.2 million. The increase was primarily driven by higher volumes in renewable energy. Adjusted gross margin represented 30.2% of sales compared with 32.7% in Q2 2025.
This decrease primarily reflected higher metal input costs and lower operating efficiency. Adjusted EBITDA increased by 16% to $22.1 million. Higher volumes mitigated the impact of suboptimal operational performance and higher maintenance expenses. Backlog remained at the maximum level of 365 days as per our definition, with the effective backlog for this segment continuing to well surpass the 12-month mark. In Performance Materials, revenue increased 38% year over year to $33.2 million, driven by higher volumes of bismuth-based products.
Adjusted gross margin was 30.9% of sales compared with 41.1% in the prior-year period. The decrease reflected the anticipated margin normalization with higher metal input and chemical costs. Adjusted EBITDA increased 7% to $8.5 million. The increase was primarily attributable to a more favorable product mix and higher volumes, net of higher metal input and chemical costs. Backlog represented 99 days of annualized revenue, reflecting the timing of contract renewals and the continued execution of long-term contracts.
Turning now to our balance sheet and cash flow, in Q2 2026, cash used in operating activities was $1.9 million compared to cash from operating activities of $22.3 million in Q2 2025. Year to date, operating cash flow reflects continued growth in working capital in line with revenue and cost increases. Looking ahead, we expect net working capital to evolve broadly in line with revenue growth. Cash from investing activities includes $16.6 million of PP&E capex year to date, with proceeds from the renewal of our total return swap.
These proceeds were largely used to reduce debt. As a result, our financial position continues to strengthen. Net debt stood at $23.7 million as of the end of June compared with $50.3 million at the end of 2025. Our net debt to adjusted EBITDA ratio improved to 0.21 times. This highlights the strength of our balance sheet and provides significant financial flexibility to support our long-term growth. Turning now to guidance, in Specialty Semiconductors, structural growth across our core end markets continues to support demand, particularly in renewable energy and space power.
In Performance Materials, pricing conditions are normalizing largely as anticipated. More broadly, we continue to operate in a dynamic, rising cost environment. We notably expect margins to come under additional pressure in the near term due to higher metal input costs and chemical costs, which will partially be recovered with a timeline of at least two quarters. Against this backdrop, we are reaffirming our 2026 full year adjusted EBITDA guidance of between $100 and $105 million.
This reflects our confidence in continued revenue growth and higher gross margin dollars during the second half. It also incorporates a prudent assessment of the ongoing operating and input cost environment. That concludes our formal remarks. I will now turn the call back to the operator for the question and answer session with financial analysts. Thank you.
OPERATOR (Operator)
Thank you. If you'd like to ask a question, please press star one on your telephone keypad. One moment please, for your first question. Your first question comes from Baltej Sidhu from National Bank of Canada. Please go ahead.
Baltej Sidhu, Analyst at National Bank of Canada
Hey, good morning, Richard and Albin. Questions for you. So you noted higher metal input costs and the unplanned equipment maintenance at both the renewable and solar side as the primary drivers for the pressure in the segments. Could you help us think about the relative impact of both those factors as it pertains to margins?
Albin Fournier, Chief Financial Officer
Yeah. We assess that both factors, the higher metal input costs and the operational difficulties, have had a fairly equal impact on our gross margin during the second quarter of the year. So it's been fairly well shared between both parameters.
Baltej Sidhu, Analyst at National Bank of Canada
Great. And I think Richard had noted that the unplanned maintenance is temporary. How much of an impact could we see in the second half of the year and, by extension, did it have any impact on the backlog and decision to maintain guidance at this point in time?
Richard Perron, President and CEO
We don't foresee impact from a delivery perspective in H2. All of our people are applying themselves, obviously, on the remaining issues, improving our preventive plan, better staffing our night and weekend shifts. So everyone is applying themselves to turn this around. So we continue to say it's a temporary measure with no expected impact from a shipment perspective in H2.
Baltej Sidhu, Analyst at National Bank of Canada
Great. And then turning over to the ongoing capacity expansions, how much of an impact did it have on margins in Q2, and would it be correct to think of it as not being able to attribute the unabsorbed overhead?
Richard Perron, President and CEO
Missed the beginning of your question.
Baltej Sidhu, Analyst at National Bank of Canada
Yeah. So how much of an impact did the ongoing capacity expansion have on the margins? And is it accurate to assume that this is largely attributable to unabsorbed overhead?
Richard Perron, President and CEO
Yeah, exactly. It's a combination of unabsorbed overhead and also extra maintenance expenses. As Albin just mentioned earlier, the actual impact in Q2 was pretty balanced between the two. So a combination of, in the case of the equipment, extra maintenance expenses and, as you just referred to, unabsorbed operating costs during the period.
Baltej Sidhu, Analyst at National Bank of Canada
Fantastic. And the last one for me is just on the PM side. We've noted in the past few quarters we expect pricing to normalize. Would you say that Q2 represents a reasonable run rate for the business, or could we see incremental pressure just given what you're seeing in the market as of today?
Richard Perron, President and CEO
In the case of Performance Materials, going forward it will depend largely on the actual product and client mix to be realized over H2. Q2 was particularly low. So going forward, I guess gross margin around the year-to-date could be used for the moment. The tricky part remains chemical costs and other costs like this that continue to be on the rise: nitric acid, caustic soda, and all of those chemicals that we're using are on the rise. That's the unknown part.
From a forecasted client and product mix at this point in time, the year-to-date gross margin could be used as an assumption for H2 on Performance Materials.
Baltej Sidhu, Analyst at National Bank of Canada
Understood. Thank you again, Albin and Richard, and I'll pass the line. Thanks.
OPERATOR (Operator)
Thank you. Your next question comes from Amar Ezat from Canaccord Genuity. Please go ahead.
Amar Ezat, Analyst at Canaccord Genuity
Good morning. Thanks for taking my questions. Maybe just on the equipment, I think Richard, your comments suggested that some, but not all of it has been resolved. Did I misunderstand? Then can you help us understand, are these issues a function of the operational intensity associated with the significant volume and capacity ramp? Or can you just tell us what's the nature of the equipment issues you've had?
Richard Perron, President and CEO
Well, we've been integrating a number of new equipment, in a sense new designs and all of that. At the same time, we've been integrating a large number of new employees, and we're pushing every equipment we have close to its limit, while in parallel we continue to increase capacity by adding additional equipment to meet demand of '27 and so on and so forth. So it's really a combination of a large number of new equipment with different designs and operating parameters, a large number of new employees—we need definitely to better staff our night and weekend shifts—and we need to improve our preventive maintenance in light of those new equipment and parameters that we're working with today.
Amar Ezat, Analyst at Canaccord Genuity
Understood. And are they largely resolved? I understand you won't have any issues delivering, but are these equipment issues largely resolved?
Richard Perron, President and CEO
Most of them. But we still have issues here and there throughout the different product lines that we have. All of those issues are being addressed by some key members of the team with the support of external contractors. We're bringing on board a larger number of spare parts, for example, and all of these things. Look, we used to operate manufacturing operations with various sites. It's more challenging because there is more equipment, as I've just said, new designs and all.
But look, we're addressing all of those issues. We have contingency plans. On that basis, we don't see any foreseeable issue or risk of not making required shipments in H2.
Amar Ezat, Analyst at Canaccord Genuity
Fantastic. Your revenue is obviously extremely strong, significantly ahead of expectations, but like we spoke to, EBITDA was only modestly ahead of some of the issues you've outlined. I'm wondering, how much of the revenue upside actually came from higher physical volumes versus the metal prices? Sometimes you've got contractual pass-throughs, so they could inflate your sales and they're just pass-throughs. Would you quantify the strong revenues as really mostly volume driven?
Richard Perron, President and CEO
That is very high quality. As we've mentioned in the case of bismuth, clearly volume. Same thing with renewable energy and, to a smaller extent because of different operational challenges, our space solar business. But overall, volume is the main factor behind the increase in revenue.
Amar Ezat, Analyst at Canaccord Genuity
Fantastic. Then maybe one last one for me on capex. I'm looking at the year to date—you guys are approximately 17 million. I appreciate there are some of the equipment issues that you've outlined, and I believe that you said you guys are building redundancy as well. But I believe a couple quarters ago you mentioned the 2026 outlook for capex would be similar to 2025—like 20 or 21 million. Do you have a revised sort of full-year expectation for us on a net cash-out basis, considering that some of the equipment that you'll be adding in the U.S. is supported by a government grant?
Richard Perron, President and CEO
So the value remains valid at this point in time. We did, however, bring on board different equipment earlier in the year, in order to be ready to address 2027 volume requirements.
Amar Ezat, Analyst at Canaccord Genuity
Fantastic. Congrats on the very strong revenues, and I'll pass the line.
OPERATOR (Operator)
Your next question comes from Michael Klein from Raymond James. Please go ahead.
Michael Klein, Analyst at Raymond James
Hey Richard, just hoping that you can dig into some of the backlog that you're looking at in terms of the AZUR project wins right now. We've been reading a lot about these space-based data centers. Are you seeing any projects come in with those types of buildouts?
Richard Perron, President and CEO
The data centers in space are still under development. It will take probably a couple of years before you actually see those being launched. So at this point in time it's too early. As I've said in our introduction, in terms of bids that we've placed in this first half of the year, on a dollar basis it's at least twice the dollar amount compared to last year's same period. But to our knowledge none of those are specific to data centers. And based on our intel of the market, this is still a product under development.
Michael Klein, Analyst at Raymond James
And in AZUR, are you able to indicate: did you add new customers in the segment this quarter?
Richard Perron, President and CEO
New customers? No, I cannot say specifically. We've been supplying for years all of those primaries that are subcontractors, and there's been a few newcomers in the last two, three years but for most of them, if not all of them, they're already clients of AZUR Space.
Michael Klein, Analyst at Raymond James
Okay. And then just on the renewable side—or I'm not sure if it translates to the space side as well—can you give an update on where your product line sits with perovskite, and the timeline associated with any significant increase in perovskite volumes from 5N Plus?
Richard Perron, President and CEO
Currently the strategy for the company is to focus on the individual elements making up perovskite rather than the actual encapsulation technology. At this point in time, it's still early stage for outside China to introduce perovskite as a tandem material. So it's still early stage. We believe before any meaningful volume and introduction of perovskite into a commercial phase, we're most likely a year or two away.
Michael Klein, Analyst at Raymond James
Okay, and is this only applicable to terrestrial, or would it be applicable to both space and terrestrial?
Richard Perron, President and CEO
It could be applied to both, but the terrestrial applications are a lot more advanced in terms of introduction.
Michael Klein, Analyst at Raymond James
Okay, thank you.
OPERATOR (Operator)
Your next question comes from Daniel Lavois from Ventham Financial. Please go ahead.
Daniel Lavois, Analyst at Ventham Financial
Got two questions to start. One is the overall capacity expansion and the recent issues surrounding unplanned maintenance. Just wondering if that makes you think differently about the pace of capacity expansion. And when looking at AZUR's end customer, what needs to happen for you to see accelerating demand and give you confidence in taking a bolder move in terms of adding more capacity? And the second question is related to guidance. When looking at the guidance for 2026—obviously the very strong half at 55.8 million in realized EBITDA in H1—it kind of implies a flattish EBITDA dollar into H2 despite the strong revenue momentum.
So I understand there's some couple-of-quarter pass-through for the higher metal input costs, but can you just help us understand the math for the margin over there? Thank you.
Richard Perron, President and CEO
Okay, so on capacity expansion, same approach that we've been applying ourselves to in the last two, three years: in line with earning contracts, we're reassessing the capacity that we need to have installed, and we take at that point in time the appropriate measures to add capacity. That's the approach we'll continue to apply. We'll try to correlate as much as we can order taking with capacity investments. For the forward-looking part, we continue to take a prudent approach on capex.
It's a complex environment. We see a lot of inflation across many regions, and those factors continue to contribute to ongoing uncertainty and often with very limited warning to us. So, forward looking for the second half, we take a prudent approach, and we anticipate a certain lag—especially for metal input costs—in order to recover.
Daniel Lavois, Analyst at Ventham Financial
Thanks. And lastly, if I may, is the CdSe line up and running right now in Montreal?
Richard Perron, President and CEO
Oh, CdSe—sorry. At this point in time, the plan is to have it start running at some point in the second half, most likely around the end of Q3. We currently have products that are being pre-qualified, but the ramp-up and the formal qualification will occur later in the second half of this year.
Daniel Lavois, Analyst at Ventham Financial
Thank you, have a good day.
OPERATOR (Operator)
Thanks. Your next question comes from Nick Boichuk from ATB Capital Markets Coremark. Please go ahead.
Nick Boichuk, Analyst at ATB Capital Markets
Thanks. Morning, guys. Curious.
UNKNOWN Analyst
You mentioned that some of the larger constellations you're bidding on, the size of the backlog, the RFP. What makes these either interesting to you guys? Is there something about the characteristics, style of constellation, size of the opportunity? Just looking for a little bit of color, especially as that pertains to the mix comments that you made this quarter, about how AZUR had positive mix.
Richard Perron, President and CEO
Look, it's quite diversified in terms of referring to the high number and the high dollar value of the bids. It's highly diversified as to the clients and the constellations and our satellite programs. It varies a lot. There's nothing very specific that came up in H2 other than it's a large number with actually large dollars of bids that have been placed.
UNKNOWN Analyst
Okay. Anything in terms of the industry though, or everybody? Is everyone still acting rationally and sort of behaving as you would expect, or are you starting to see a little bit more increased demand either regionally, by constellation, by customer?
Richard Perron, President and CEO
No, at this point in time, the distribution regionally is similar to what we've been experiencing the last couple of years. It's just the number and the dollar values that have been, as I've just said, at least twice this first half of the year compared to the same period last year.
UNKNOWN Analyst
Okay, and then on the metal pass-through, what's the timing and the lag that you expect you'll be able to recover some of those costs?
Albin Fournier, Chief Financial Officer
The metal pass-through, we expect it to happen with at least a two-quarter lag, and the pass-through rate won't be 100%. So we are at the point where we see the margin for Q2 being extended in the second half of the year within approximately 1 percentage point.
UNKNOWN Analyst
Okay, thanks, Albin. So is it fair to assume then on that comment that the normalized margins this quarter, excluding the unplanned maintenance and the price impacts of the metals, would have been about 2 percentage points higher than where it currently landed?
Albin Fournier, Chief Financial Officer
Mathematically, assuming it's about half, that's our estimate. Yeah, that would work.
UNKNOWN Analyst
Excellent. Thanks much, guys.
OPERATOR (Operator)
Your next question comes from Nelson Nguyen from RBC Capital Markets. Please go ahead.
Nelson Nguyen, Analyst at RBC Capital Markets
Great, thanks and good morning, everyone. So your comment in terms of adding a lot of equipment and lots of employees, just to clarify, that's in the terrestrial renewable energy side or both renewables and AZUR Space as well?
Richard Perron, President and CEO
It's almost equally attributable to both terrestrial and space.
Nelson Nguyen, Analyst at RBC Capital Markets
Okay, got it. And then I think you mentioned that the ramp-up in the AZUR Space side is taking place in the second half of the year. So on the renewable energy side, obviously you have more volumes with First Solar over the next few years as well as starting last year. Is that ramp pretty gradual over, like, last year, this year, and the next two years?
Richard Perron, President and CEO
This year we definitely have more volume than last year. And then for the coming two years we'll have more volume, but not of the same magnitude in terms of incremental volume if you compare 25 to 26.
Nelson Nguyen, Analyst at RBC Capital Markets
Okay, but each year we'll have more volume.
Richard Perron, President and CEO
Yeah, 26 is a bigger volume increase, and then 27 and 28 are also increased volume, but of a smaller scale.
Nelson Nguyen, Analyst at RBC Capital Markets
Okay. And then just on the balance sheet, net debt was standing at around 24 million. So it sounds like you are on track to be roughly net-debt-free by the end of the year. I think you commented that working capital will be consistent with revenue increases. Is that correct?
Albin Fournier, Chief Financial Officer
Yeah, that's correct. It's going to be aligned with growth, plus or minus. Obviously, some additional investment we may make in terms of safety stock. Essentially in line with revenue growth. Plus whatever specific action we need to take for safety inventory or strategic inventory, but roughly in line with revenue.
Nelson Nguyen, Analyst at RBC Capital Markets
And then I know you previously talked about M&A opportunities and how you want to find the right opportunity sometime this year, but can you just talk about the environment now? And obviously there has been a bit of a pullback in valuations in some sectors, including the space-related sector. Can you just talk about some of the opportunities you're seeing, whether the environment has improved?
Richard Perron, President and CEO
Look, we continue to scour markets for M&A opportunities. Obviously, despite some corrections as you refer to in the space industry, valuations remain across many sectors that we cover quite high still today. But we continue to be very optimistic to get our hands on something accretive and strategic to 5N Plus. But things are definitely expensive still today.
Nelson Nguyen, Analyst at RBC Capital Markets
Okay, got it. And there's one last question. Just marine shipping costs — I don't know how big of an exposure you have on shipping costs, but since the Iran war, can you just talk about how that has kind of impacted your transportation costs?
Albin Fournier, Chief Financial Officer
So you're talking about the increased shipping costs that we see right now in the market. I think we cannot single out this factor, but overall it contributes to the increase we see in our chemical products, generally speaking. So it's one factor which we cannot single out, but which is a contributor.
Nelson Nguyen, Analyst at RBC Capital Markets
Okay, got it. I'll leave it there. Thank you.
OPERATOR (Operator)
Your next question comes from Frederic Tremblay from Desjardins Capital Markets. Please go ahead.
Frederic Tremblay, Analyst at Desjardins Capital Markets
Thank you. Good morning.
Richard Perron, President and CEO
Good morning.
Frederic Tremblay, Analyst at Desjardins Capital Markets
On the two-quarter lag to recover higher metal costs, I'm just curious: is that a lag because the metal prices went up so fast that it's going to be more gradual to implement price actions, or is it more contractual in nature? Just trying to better understand the two-quarter dynamic there.
Albin Fournier, Chief Financial Officer
It's a combination of both — obviously the speed and the magnitude — plus after that the recovery depends on a per-product, per-client basis, so contractual.
Frederic Tremblay, Analyst at Desjardins Capital Markets
Okay, perfect. And then just on the bidding environment, you mentioned for AZUR that things are going well on that front. I'm just wondering about competitive discipline — meaning, is the higher metal environment being properly reflected in new contracts and new bids across the industry, or are we kind of resetting to a different margin level given the metal environment?
Albin Fournier, Chief Financial Officer
So, you know, I think as Richard mentioned, there is a way to structure contractually our growth. We're working on it. So there will be capacity to pass through metal costs with a delay and with a certain percentage, but we are building that.
Frederic Tremblay, Analyst at Desjardins Capital Markets
Okay, and then last question, just on the U.S. germanium refining capacity expansion and the grant that you received or announced. Give an update on that, on how that's progressing.
Richard Perron, President and CEO
It's progressing as per plan. It's a fairly large project at the end. So we're expanding the building that we're in today. We started to receive some additional equipment. We have ordered more equipment that is on its way. To complete the project, it's going to take probably close to a year and a half, two years. But gradually we're adding more capacity and capabilities from one quarter to the next. So it's actually all per plan.
Frederic Tremblay, Analyst at Desjardins Capital Markets
Okay, that's all I had.
Richard Perron, President and CEO
Thank you.
OPERATOR (Operator)
Your next question comes from Jonathan Goldman from Scotiabank. Please go ahead.
Jonathan Goldman, Analyst at Scotiabank
Hey, good morning, guys, and thanks for taking my questions. I just want to clarify a couple points on the margin discussion. So gross margin was down 430 basis points year on year, and you're saying half of that was due to the unplanned maintenance. Is that correct?
Albin Fournier, Chief Financial Officer
Yeah, that's about that, yeah.
Jonathan Goldman, Analyst at Scotiabank
Okay, and when do you think you would recover that impact? Would it be a couple quarters? Few quarters? But the unplanned maintenance part, the overhead efficiencies from that, when would that be resolved?
Richard Perron, President and CEO
Okay, so unplanned maintenance and else — we're applying ourselves to resolve the remaining issues that we have. So for us, this is temporary and we have mitigation plans. And we don't foresee any issue in order to realize contracts on hand in H2. Metal is a bit more tricky because it varies from, as I've said earlier, product and clients, and by default also contracts that are different depending on the business lines and clients and products. So for that we take a prudent approach, and we see at least two quarters for that to be resolved.
Jonathan Goldman, Analyst at Scotiabank
Okay, that makes sense. And maybe I missed this in the prepared remarks, but did you mention additional margin pressure before we come back to the normalized margins when you recover the metal prices?
Richard Perron, President and CEO
Nothing specific, other than look, it's a complex environment and inflation, chemicals, energy and else can occur with limited warning. That's why we continue to take a prudent approach on our guidance and forecast for the second half of the year.
Jonathan Goldman, Analyst at Scotiabank
Okay, and Albin, I missed your comment — you said the margins in the second half kind of being where the Q2 level is, within 1%. Is that correct?
Albin Fournier, Chief Financial Officer
Yeah, that's the view that we currently have — that the gross margin that we've seen for Q2 would probably be a good projection for the second half within a 1 percentage point band.
Jonathan Goldman, Analyst at Scotiabank
Okay, understood. And then very strong growth in Performance Materials on the revenue line. I've always thought of this business as kind of a GDP-type growing business, and I think Richard, you mentioned a lot of that was supported by volume. So I'm just trying to understand what's supporting the strong growth there. And how should we think about the balance of the year in terms of the top line in Performance Materials?
Richard Perron, President and CEO
Typically, historically, if you look at a numerous number of years, Performance Materials would typically do better in the first half than the second half, with many of our clients under that segment reducing their inventory at year-end to show a better balance sheet and else. So typically, historically, the first half from a volume perspective has always been better than the second half. So that's essentially what we anticipate will happen again this year.
Jonathan Goldman, Analyst at Scotiabank
Okay, makes sense. And on AZUR, could you give us an update on the order book? How much of the order book is fully booked in 27, and how much orders are you currently taking to 28 and maybe beyond?
Richard Perron, President and CEO
Look, 26 is, at this point in time, sold out. 27 is sold out. And we continue — obviously we're assessing opportunities to increase further capacity for 27 — but at this point in time, we're working out scenarios for 28, 29 and 30 forward.
Jonathan Goldman, Analyst at Scotiabank
Okay, perfect. And maybe one more for me, if you could just remind us your capital allocation priorities. I mean, balance sheet's in great shape, it got better. I think an earlier analyst mentioned leverage neutral by the end of the year. But how do you evaluate M&A versus buybacks here? Organic growth, and what's the runway for organic growth to expand capacity further?
Richard Perron, President and CEO
With no surprise — and I'll let Albin complement — organic growth, proper inventory levels is the priority at this point in time because, as you know, commercially we have a lot of visibility and we need to fulfill those contracts.
Albin Fournier, Chief Financial Officer
And just to complement that, you know, as I've said, we're making room in our balance sheet. We continue to scan for M&A opportunities, so we want to have the room and the capability to make a valuable acquisition if it presents itself.
Jonathan Goldman, Analyst at Scotiabank
Is there any update on the M&A pipeline? Has anything become more interesting lately?
Richard Perron, President and CEO
There is nothing specifically, no. We have obviously a list of files that we do spend more time on than others, but nothing that we can share.
Jonathan Goldman, Analyst at Scotiabank
Okay, fair enough. Thanks for taking my questions. I'll get back in queue.
Richard Perron, President and CEO
Thank you.
OPERATOR (Operator)
As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. Your next question comes from Baltej Sidhu from National Bank of Canada. Please go ahead.
UNKNOWN Analyst
Sorry, I had myself on mute there. Thanks again for taking my question. I just wanted to quickly ask on AZUR and other product lines you may be considering, just the number of satellites that are looking to be set up into orbit over the next 10 years. Right now you're tackling true LEO. Are you looking at opportunities within the BLEO market? And then how should we think about the product suite that could culminate at the present time?
Richard Perron, President and CEO
As you know, our technologies are referred to as III-V multijunction solar cells, applied to what I often refer to as true LEO, MEO, and GEO distances from Earth. Are we contemplating adding a new product line to address the BLEO market? Maybe, but nothing confirmed or very concrete this morning. So we continue to focus on in applications for solar cell.
UNKNOWN Analyst
Great. Thank you. I'll pass the line.
OPERATOR (Operator)
And there are no further questions at this time. I will turn the call back over to Richard Perron for closing remarks.
Richard Perron, President and CEO
Look, I would like to wish you all a good day, and thanks for being with us this morning.
OPERATOR (Operator)
Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Merci.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.
Login to comment