5N Plus Inc. (VNP) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the 5N Plus Second Quarter 2026 Results Conference Call. [Operator Instructions] [Foreign Language] I will now turn the floor over to Stefano Bertolli, Director of Communication and Corporate Affairs. Please go ahead, sir.

[Foreign Language] 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 are Pierre Richard Perron, our President and CEO; and Alban 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 2 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.

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 markets 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 6 months of the year. Adjusted EBITDA increased 10% in the quarter and reached $55.8 million year-to-date, representing growth of 24% over the same period last year. Profitability remained 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 continue to support customer demand and maintain deliveries during the quarter. Our teams continued to resolve the remaining issues and strengthened 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 business-based products. As anticipated, margins continued 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 quarterly 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 Alban, who will review our financial results and outlook in more detail.

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've engaged with our teams and with the investment community in the last 3 months. Those discussions have reinforced my confidence in our strategy, in the inherent strength of our business and 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 part, 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 remains 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 business-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 contract. 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 COGS increased. 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 0.21x. 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 time line of at least 2 quarter. Against this backdrop, we are reaffirming our 2026 full year adjusted EBITDA guidance of between $100 million 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 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.

[Foreign Language] Thank you. [Operator Instructions] Your first question comes from Baltej Sidhu from National Bank of Canada.

Questions for you, 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 semi business. Could you help us think about the relative impact of both those factors as it pertains to margins?

Yes. We assess that both factors, the higher metal input cost 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 partners.

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, didn't have any impact on the backlog and decision to maintain guidance?

At this point in time, we don't see -- we don't foresee impact from a delivery perspective in H2. All of our people applying themselves, obviously, to -- on the remaining issues, improving our preventing plan, better staffing our night and weekend shifts. So everyone is applying itself to turn this around. So we continue to say it's a temporary measure with no expected impact from a shipment perspective in H2.

Great. And then turning over to the ongoing capacity expansions. How much of an impact did it have on margins in Q2? And then would it be correct to think of it as not being able to attribute the absorb overhead?

I'm not sure I missed the beginning of your question, Baltej.

Yes. So how much of an impact did the ongoing capacity expansions have on the margins? And is it accurate to assume that this is largely attributable to unabsorbed overhead?

Yes, exactly. It's a combination of unabsorbed overhead and also extra maintenance expenses, okay? That's how we come up with, as Alban just mentioned earlier, the actual impact in Q2 was pretty balanced between the 2. So a combination of it -- in the case of the equipment, a combination of extra maintenance expenses and as you just referred to unabsorbed operating costs during the period.

Fantastic. And the last one for me is just on the PM side. And you've noted in the past few quarters, you expect the 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, I would say?

In the case of Performance Materials going forward, it will depend in large to the actual product and mix to be realized over H2. Q2 was particularly low, okay? So going forward, I guess, gross margin around the year-to-date could be used for the moment, okay? The tricky part remains chemical costs and other costs like this that continues to be on the rise. Nitric acid, caustic soda and all of those chemicals that we're using on the rice. That's the unknown part. But from a forecasted time 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.

Your next question comes from Amr Ezzat from Canaccord.

Maybe just on the equipment. I think, Richard, your comments suggested that some but not all of it has been resolved that I misunderstand. Then can you help us understand, are these issues like 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?

We've been integrating a number of equipment, new equipment in a sense, new design and else, all of that at the same time, we've been integrating a large number of new employees. So -- and we're pushing every equipment we have close to its limit, okay? 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, 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.

Understood. And are they largely resolved? I understand you won't have any issues delivering, but are these equipment issues largely resolved?

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 and now with the support of external contractors and else. We're bringing on board a bit more -- a larger number of spare part, for example, and all of these things. So look, we used to operate manufacturing operations with various sites. So look, we're going -- it's more challenging because there's a larger -- there are more equipment, as I just said, new design and else and all. But look, we're addressing all of those issues. We have contingency plans. So on that basis, we don't see any foreseen issue or risk of not making required shipments in H2.

Fantastic. Like your revenue is obviously extremely strong, significantly ahead of expectations. But like we spoke to EBITDA was only modestly ahead because of some of the issues you've outlined. But I'm wondering like how much of the revenue upside actually came from higher physical volumes versus the metal prices and sometimes you've got contractual pass-throughs, so they could inflate your sales and they're just like pass-throughs? Or would you quantify the revenue -- the strong revenues is really mostly volume driven, i.e., very high quality?

As we've mentioned, in the case of business, clearly volume, okay? Same thing with renewable energy and to a smaller extent because of different operational challenges and a small extent, our space solar business. But overall, volume is the main factor behind the increase in revenue.

Fantastic. Then maybe one last one for me. On CapEx, I'm just looking at the year-to-date, you guys are approximately $17 million, and I appreciate like there's 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 of quarters ago, you guys mentioned like the 2026 output for CapEx would be similar to 2025 that's like $20 million or $21 million. Do you guys have a revised sort of full year expectation for it?

On a net cash out basis, considering that some of the equipment that we'll be adding in the U.S. is supported by a government grant. So the value remains valid at this point in time. We did do, however, brought on board different equipment earlier in the year than later this time in order to be ready to address 2027 volume requirement.

Fantastic. Congrats on the very strong revenues and I'll pass the line.

Your next question comes from Michael Glen from 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 type of build-outs?

The data centers and space, those are still under development. It will take probably a couple of years before you actually see those being launched announced. So at this point in time, it's too early. As I've said in our introduction, in terms of bids that we 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 development under product development phase.

And are you in, is there -- are you able to indicate did you add new customers in the segment this quarter?

New customers? No, I cannot say specifically. I mean, we've been supplying for years all of those primaries and our subcontractors. And there's been a few newcomers in the last 2, 3 years, but for most of them, if not all of them, they are already clients of other space.

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 time line associated with -- for any significant increase in Perovskite volumes from 5N Plus?

Well, currently, the strategy for the company is to focus on the individual elements making up Perovskite rather than the actual encapsulation technology or else, okay? At this point in time, it's still early stage for the -- outside China to introduce Perovskite as a tandem material. So, it's still early stage. We still -- we believe before any meaningful volume and introduction of Perovskite into -- in a commercial phase, we're still most likely a year or 2 away.

Okay. And this is only applicable to terrestrial? Or would it be applicable to both space and terrestrial?

It could be applied on both, but for the terrestrial applications are a lot more advanced in terms of introduction.

Your next question comes from Daniel Lavoie from Ventum Financial.

I got 2 questions to start. One is the overall capacity expansion and the recent issues running unplanned maintenance. Just wondering if that makes you think differently about the pace of capacity expansion. And when looking at Asia'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, a very strong half at $55.8 million of realized EBITDA in H1. It kind of implies like a flattish EBITDA dollar into H2 despite the strong revenue momentum. So I understand there's some, there's some couple of quarter for pass-through for the metal input costs, but can you just help us understanding the math for the margin over there?

Okay. So, on capacity expansion, same approach that we've been applying ourselves to in the last 2, 3 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 have capacity. So that's the approach we'll continue to apply. We'll try to correlate as much as we can order taking with capacity investments. So that's for the first question. In terms of -- you had a question on forward-looking. Look, we continue to take a prudent approach, okay, continue to take a prudent approach. I mean it's a complex environment. We see a lot of inflation across many regions. And as you probably -- as you know, those factors continue to contribute to ongoing uncertainty and often with a 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 to be in order to recover.

And lastly, if I may, is the CESU line up and running right now in Montreal?

Sorry, at this point in time, the plan is to have it to start running at some point in the second half, most likely around the end of Q3, okay? We currently have products that are being prequalified, but the ramp-up and the formal qualification will occur later in the second half of this year.

Your next question comes from Nick Boychuk from ATB Cormark.

Curious, 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 characteristic of the 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 as you had positive mix?

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 hand constellation and/or satellite programs. It varies a lot. There's nothing very specific that is -- that came up in H2 other than it's a large number with actually large dollars actually of bids that have been placed.

Okay. Anything in terms of the industry though? Are 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?

No, at this point in time, the distribution region and out is similar to what we've been experiencing for the last couple of years. It's just the number of 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.

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?

The metal pass-through, we expect it to happen with at least 2 quarter lags and in a partial way, it won't be 100%. So we are at the point where we see the margin for Q2 2026 being extended in the second half of the year within approximately 1 percentage point.

Okay. So, is it fair to assume then on that comment that the normalized margins this quarter, excluding the unplanned maintenance and the price impact of the metals, it would have been about 2 percentage points higher than where it currently landed?

Mathematically, assuming it's about half, that's our estimate. Yes, that would work.