AMG Advanced Metallurgical Group N.V.

on by. We're about to begin. Good day, everyone, and welcome to AMG's Q3 earnings call. Today's conference is being recorded. At this time, I'd like to turn the call over to Ms. Michelle Fisher, Vice President of Investor Relations. Please go ahead, ma'am.

Welcome to AMG's third quarter 2020 earnings call. Joining me on this call are Dr. Heinz Schimmelbusch, the Chairman of the Management Board and the Chief Executive Officer, Mr. Jackson Dunkel, the Chief financial officer, and Mr. Eric Jackson, the chief operating officer. AMG's third quarter 2020 earnings press release issued yesterday is on AMG's website. Today's call will begin with a review of the third quarter 2020 business highlights by Dr. Schimmelbusch. Mr. Dunkel will comment on AMG's financial results, and Mr. Jackson will discuss operations. At the completion of Mr. Jackson's remarks, Dr. Schimmelbusch will comment on strategy and outlook. We will then open the call to take your questions. Before I pass the call to Dr. Schimmelbusch, I would like to comment on forward-looking statements. This conference call could contain forward-looking statements about AMG Advanced Metallurgical Group. Forward-looking statements are not historical facts, but may include statements concerning AMG's plans, expectations, future revenues or performance, financing needs, plans, and intentions relating to acquisition, AMG's competitive strengths and weaknesses, reserves, financial position, and future operations and development, AMG's business strategy and the trends AMG anticipates in the industries and the political and legal environment in which it operates, and other similar or different information that is not historical information. When used in this conference call, the words expect, believe, anticipate, plan, may, will, should, and similar expressions and the negatives thereof are intended to identify forward-looking statements. By their very nature, forward-looking statements involve inherent risks and uncertainties. both general and specific. The risk exists and any prediction, forecast, or similar projections contained by such forward-looking statements will not be achieved. These forward-looking statements speak only at the date of this conference call. AMG expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in AMG's expectations with regard thereto or any changes in events, conditions, or circumstances on which any forward-looking statement is based. I will now pass the floor to Dr. Shimabushi, AMG's Chairman of the Management Board and Chief Executive Officer.

Thank you, Michelle. Out of over 30, out of 3,000 total employees in AMG, 33 sites in 15 countries, AMG has active confirmed coronavirus cases globally. Our Corporate Health, Safety and Environmental Center helps us manage this on a daily basis. That department reports to me, I get a report every morning and we react accordingly. We take this extremely seriously, as you might expect. In these unprecedented times, we believe it is imperative to preserve a strong liquidity position. The current global pandemic continued to significantly impact our financial results in the third quarter, with dramatically lower volumes in our aerospace-exposed businesses, compounding the historically low prices AMGs experienced across our portfolio. Our ongoing focus is on our comprehensive programs to reduce operating costs SG&A, working capital, and limit all non-essential capital expenditures. We are implementing an 8% workforce reduction, mainly in our aerospace-related businesses, or 250 positions, and we have 285 full-time equivalent employees in furlough or Kurzarbeit. As a result of these ongoing efforts, our liquidity position is 376 million as of September 30, essentially unchanged from the end of the last quarter. It is important to note that AMG Engineering's order intake in the first nine months of 2020 increased 5% from 169 million in 2019 to 177 million in 2020. This increase is due to the end market diversity within AMG's engineering product portfolio. We continue to execute our key strategic programs, the construction of the plant in Sainsville, Ohio, which will essentially double our recycling capacity for refinery residues, is proceeding as planned, utilizing the funds raised from our municipal bond issue. Basic engineering of the new lithium hydroxide refinery in Germany continues and a final investment decision is presently expected in early 2021. In addition, we are pleased to announce a segmental realignment which will provide investors increased transparency into our business and enable them to track the strategic differentiation more accurately within the portfolio of our activities. In future, we will report in three segments, clean energy materials, critical materials and critical materials technologies. The basis of the new segments was a thorough analysis in which the new segments had to meet three tests, similarity of end markets, similarity of business models, and inter-segment cross-fertilization potential. Green energy materials include the lithium and the tantalum business, AMG Brazil, and the vanadium business, AMG Venetium. Critical Minerals includes the Antimony, Tresorite and Silicon Metal units. Critical Materials Technology is the former AMG Technologies with the addition of the Grown Metal business. Peen Energy Materials is managing AMG's major growth projects including Cambridge II, essentially the doubling of our recycling capacity in Ohio, and the development of the first lithium hydroxide refinery in Germany. The global expansion of our recycling solution for spent catalysts and for vanadium-containing gasification ash is pursued through Shell AMG Recycling BV Amsterdam. Shell AMG Recycling continues to pursue refinery residue recycling opportunities globally with a focus on the Middle East and China, including the Science Memorandum of Understanding earlier this week. The Shandong Yulong Petrochemical Company Limited to enter into exclusive arrangements to evaluate the potential for construction and operation of a spent catalyst recycling facility in Shanghai, China. I have mentioned business model and end market similarities. The common end market across the clean energy material segment is electricity storage. That market is clearly the fastest growing market within the renewable energy sector. Critical Minerals has consistently proven stable earnings performance in difficult times as is typical for the industrial minerals industry. Antimony, silicon and graphite are neighbors in the section of the element table reserved for metallurgy. The business model similarity of the segment is evident. A ranging supply from difficult and non-conventional origins such as China provinces, Tajikistan, Vietnam, Madagascar, Sri Lanka, Mozambique, Colombia, long established process technology leadership and selling to hundreds of customers in the chemical, automotive, aluminum and building materials industries worldwide. Critical Materials Technologies is operating under a classic equipment engineering business model. In 2019, we added AMG titanium alloys to form AMG technologies following the global trend of engineering companies to flatten their order intake volatility by moving into own and operate models. Under those models, you don't sell the equipment, you build it for the customer who pays a fee to use it. The idea is steady cash flow. We introduced that idea successfully in our engineering business through heat treatment services. Now we are adding AMG chrome metal, formerly AMG super alloys, to form the new critical materials technology segment. The chrome metal product line is an essential alloy for aerospace turbines and adds to the attractiveness of the AMG portfolio to this market. Strategically and operationally, AMG management is very pleased with its segmental realignment. It also will add a great deal of transparency for our business. I would now like to pass the floor to Jackson Dunkel, AMG's Chief Financial Officer.

Thank you, Heinz. I will be referring to the third quarter 2020 investor presentation posted yesterday on our website. Starting on page three, with an overview of the financial highlights of the quarter, AMG's financial performance in the third quarter was lower versus the prior year. Revenue for the quarter decreased by 27% to $198 million, driven by pandemic-related impacts across AMG's entire portfolio. EBITDA decreased by 42% to $14.1 million in Q3 2020, which was primarily due to temporary pandemic-related interruptions to our business during the quarter. Our estimated COVID-19 negative EBITDA impact is approximately $23 million for the quarter. This has been estimated based on a bottom-up analysis of our business units and a detailed comparison to the company's financial plan prior to the pandemic. The majority of the coronavirus effect was caused by sales volume disruption as our customers temporarily shuttered plants or postponed orders. With regard to profitability, it is also important to note that in a period of declining prices, our EPA is impacted by having to sell higher priced raw material at lower prices. As you can see in the appendix on page 10, Q2 prices were lower than Q2 in 7 out of 10 of our materials, and while we try to minimize the impact by minimizing inventory, it is impossible to completely eliminate. As such, our Q3 purported figures are lower than run rate profitability, and we've included this inventory effect in our calculation of the Q3 COVID-19 effect of $20 million. Net loss attributable to shareholders for Q3 was $12.8 million compared to a $17.8 million loss in the prior year. The $17.8 million loss in the prior year primarily relates to a non-cash inventory cost adjustment in our Venetian business. Now I'll turn to review of our two segments. Let's start with AMG Critical Materials, which is shown on page four of our presentation. On the top left, you can see that Q3 revenues decreased by 29%, to 118 million versus prior year. This decline was largely driven by lower average prices across six of the seven business units, as well as lower volumes in our aluminum and super alloys units. These price and volume decreases were partially offset by higher sales volumes of ferrovanadium, lithium concentrate, tantalum, graphite, and silicon. Critical materials Q3 gross profit excluding exceptional items, decreased by 32% versus the prior year to $13.9 million. The decrease was driven by lower volumes and prices across the division, partially offset by the volume increases noted earlier. Critical Materials Q3 SCNA expenses were $15.6 million, $4 million lower than Q3 2019, primarily due to lower personnel costs, lower professional fees, and cost reduction efforts across the business. EVA-DA for the critical materials segment was $9.4 million, representing an EVA-DA margin of 8% and an increase of 7% versus Q3 2019. Moving on to AMG Technologies on page 5 of the presentation, and starting on the top left of the page, you can see the revenue decrease this quarter versus the prior year. This is mainly due to pandemic-related impacts as our aerospace customers continue to decrease and postponed volumes. We are also experiencing difficulty finalizing vacuum furnace orders and servicing our customers with replacement parts due to global travel restrictions, which impacted projects installation and final billing. These effects were offset by an improved performance from our heat treatment services business, which experienced higher demand as a result of the rapidly recovering automotive sector. Consequently, Q3 2020 gross profit, excluding exceptional items, decreased by 52% to $12.7 million. Q3 S&A expenses decreased to $14 million, which is $1.5 million lower than the same period in 2019 due to lower personnel costs, lower professional fees, and ongoing cost reduction efforts across the business. A&E Technologies' third quarter ETA decreased by 70% to $4.7 million compared to the same period in 2019 due to lower profitability related to the challenging economic environment as I outlined earlier. The company signed $40.9 million in new orders during the third quarter of 2020 representing a 0.7 times book-to-bill ratio. The quarter benefited from strong orders of induction melting and arc remelting furnaces for the specialty steel producers. Turning now to page six of the presentation, On the top left, you can see that AMG's third quarter 2020 SG&A expenses were $29.6 million compared to $35.1 million in the third quarter of 2019. The 16% decrease is primarily due to continued cost reduction efforts across the business. AMG's third quarter 2020 net finance costs decreased to $4.5 million from $5.9 million in the third quarter of 2019. Additionally, AMG capitalized $3.7 million of borrowing costs in the third quarter of 2020, primarily driven by interest associated with the company's tax-exempt municipal bond supporting AMG Vanadium's expansion in Ohio. AMG recorded an income tax expense of $0.1 million in the third quarter of 2020 compared to an expense of $1.5 million in the same period of 2019. This decreased tax expense was mainly driven by a quarter-over-quarter decrease of $2.7 million and non-cash tax expense due to movements in the Brazilian RAI. AMG made tax payments of 10.7 million in the third quarter of 2020, compared to tax payments of 7.2 million in the same period in 2019. The current quarter payments were a result of international COVID-19 tax measures, which enabled AMG to delay most of its tax payments from the first half of 2020 into the third quarter. Turning to page seven of the presentation, You can see on the top left that cash flow used in operating activities was $8.4 million in Q3 2020 compared to cash flow used in operating activities of $4.9 million in Q3 of last year. This decrease was mainly due to lower profitability and higher tax payments noted previously. AMG's annualized return on capital employed was 2.5% for the third quarter of 2020. AMG finished the third quarter of 2020 with $255.3 million of net debt. The increase versus year-end levels was mainly due to the significant investment in growth initiatives during the quarter, especially the vanadium expansion. AMG's balance sheet is sound, and the company enjoys significant liquidity. As of September 30, 2020, AMG had $206 million of unrestricted cash and total liquidity of of $376 million. That concludes my remarks. I would now like to pass the floor to Eric Jackson, AMG's Chief Operating Officer.

Thank you, Jackson. In addition to providing our employees with the safest working environment possible, our operating priorities continue to be to maximize cash flow, reduce operating and administrative costs, and improve productivity. Our business operations have to date managed the medical challenges of the coronavirus very well, and we've managed both quarantined and positive cases with no fatalities and experienced few operational interruptions. The negative impact of the coronavirus on end market demand and prices has, however, been sudden and substantial, and we continue to aggressively implement countermeasures in all of our business. We actively and continuously analyze our cost structure and review capacity utilization in all business units and, where appropriate, take action. To date, we have eliminated and or furloughed more than 500 full-time equivalent positions. We've also reduced discretionary spending and, with the exception of our transformative strategic projects, non-essential capital expenditures. We have had success in increasing sales to higher value-added distributed energy storage-related end markets in our chrome metals business as an offset to weaker aerospace demand. In addition, our long-term commercial contracts in ferrovanadium, tantalum, lithium, graphite, and silicon have enabled us to maintain full production and strong cash flow in those areas. This is the result of our ongoing focus on risk management. The financial impact of the coronavirus is especially acute in our aerospace related end markets. We do believe, however, that in addition to our strategic initiatives and cost reduction and productivity improvement actions, our diversified CO2 efficient portfolio positions us for substantial improved results when markets return to a more normal status. On a positive note, we have resumed full operation in our three heat treatment facilities, serving the automotive industry, and restarted production of titanium master alloys in the U.S. as a result of receiving new off-day quarters. The significant divergence of global vanadium prices, which we noted last quarter, continues to exist. However, North American steel production is increasing steadily and getting closer to historical levels. The major global vanadium producer, China, in the third quarter of 2020, for the first time has become a net importer of vanadium units. We continue to believe that we are the low-cost producer and most environmentally sustainable producer of ferrovanadium. and that this global price differential will normalize and prices will revert to the historical mean. All of our businesses are leaders in their niche markets and our strategic projects are progressing very well. We believe that our segment realignment will result in continued efficiencies and opportunities. I would now like to pass the floor to Dr. Hachimabush, AMG's Chief Executive Officer.

Thank you, Eric. These are exceptionally uncertain times with daily material news such as the German lockdown this week. AMG's first and most important priority is to ensure the health and safety of our employees. In our volatile environment, we continue to be focused on three priorities. Reserving our strong liquidity position That's one. Further reducing cost and further improving our productivity to maintain our low-cost position and prepare the company for an economic upturn. That's two. And three, driving long-term value creation by executing our transformational strategic project in vanadium recycling and in our lithium downstream expansion. We believe The second quarter EBTA was the low point, and we expect to continue to progress our EBTA goals in 21. Operator, we would now like to open the line for questions.

Thank you, sir. If you'd like to ask a question, please signal at this time by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one if you'd like to ask a question. And we'll go to our first question from Hank Zierman with Kenpin. Your line is open, you may be on mute.

Excuse me, yeah, hi. Hello, everyone. Thank you for taking my questions. So my first question would be on the vanadium operation. I was wondering how far along are you with increasing the recycling fees in Ohio? And so when will these higher recycling fees be visible in EBDA? And maybe you can quantify this Or is it more a matter of shifting the exposure on fair vanadium prices from you to the client? Or is it really that you're going to show on a like-for-like basis higher EBDA in vanadium?

Well, the shift in fees has happened. And there are relatively complicated formulas at work. which are relating the impact of those shifts of fees, upward shifts of fees to the venarium price. And so it's difficult to protect the quarter at which the shift will become visible because we need to insert So actually we don't want to comment further on this.

Okay, okay. The second question would be on the CAPEX, the capital expenditures. I think in Q2 you guided for 130 million for the second half of 2020. When I look at the cash flow statement, I only see slightly more than $30 million being actually spent on materials. So will there be a significant CAPEX expenditure in Q4, or will that be shifted towards 2021?

So the $130, Hank, was for the full year, and we would maintain that guidance. That clearly indicates, given we spent about $91 million year-to-date, that we will be spending roughly 40 in the fourth quarter. That will be largely driven, again, by our vanadium expansion in Ohio.

Okay. And then my follow-up will be on that as well, because that would imply that in 2021, your CAPEX will accelerate quite strongly. especially when you will continue with your lithium hydroxide facility in Germany. So my question would be, if the low material prices continue and the aerospace and market remains weak, then your net debt to EBDA will significantly move upwards in that scenario. I mean, we all know that the debt is structured a bit differently with the municipal bond, et cetera. How do you look at that kind of risk, that your debt will increase, whereas your EBDA will remain quite muted, especially when you start thinking about, you know, any potential cost overruns in the construction projects?

Well, let me start there. On cost overruns, we are on budget, and we've expended over 60%, or we've committed over 60% of the total project, so we feel pretty confident of bringing it in on budget. In terms of how we think about that, the answer is that, as you know, our only covenant is on senior secured net debt to EVDA, and the municipal bond falls below that. So while as optically we will have higher growth debt to EVDA, it doesn't impact our financial flexibility at all.

Right, right. Okay. And maybe my last question before I go back into the queue. When can we expect an FID for the catalyst recycling facility in Saudi Arabia? And could you maybe comment on how this will be financed in the JV? Should we expect an equity injection when these projects are being FID'd or is it fully financed with that in the joint venture? Okay.

You have to help me with FIT. What is that? Financial.

Final assessment decision. Excuse me.

Thank you. The Saudi Arabian project is in feasibility study and preliminary engineering. And so that's a relatively early stage. The financing of projects outside of recycling projects outside the United States such as in the Middle East and China are intrinsically linked to a government oriented support system as regards to financing because projects of this strategic importance attract government subsidies and long-term project financing structures so that there will be no significant equity necessary to finance those projects. Those projects are based on long-term contracts as regards to the supply of raw materials, meaning spent catalysts gasification ash, and long-term contracts as regards to the offtake of products. And therefore, since the technical risk or execution risk is practically absent, given the fact that we have proven recycling facilities of that nature in operation, and so there is no significant technical risk. Since there is a long-term supply agreement, since there is a long-term off-take agreement, since there is absence of technical risk, project financing, non-recourse project financing is the way to handle such projects.

Right, right. Okay, that's clear. So Just to confirm, judging from your comments, we should not expect a further update on the Saudi Arabia Memorandum of Understanding in the short term. So this year, probably we should expect an update only next... I didn't say that.

I didn't say that. I said how this project are being selected. Of course, I will not comment on the doings of our joint venture. We are under circular non-disclosure agreements and it is not my place here to comment on things within the organization of the joint venture.

Okay. Thank you for your answers.

All right. We'll take our next question from Martin Dendriver with ABN AMRO.

Yes. Good afternoon, gentlemen. My first question would revolve around the new structure, the new three divisions. During the 2Q second quarter call, you mentioned that it would not just be about reporting lines. So now that you've announced this new structure, what do you intend to do further? And second to that, you mentioned all the businesses that have been divided over the three new divisions, but I didn't see the aluminum business popping up anywhere. So what do you intend to do with the aluminum business? That would be question one.

The question one, the answer is the aluminum business has been assigned to the first division that segment meaning clean energy materials.

Okay, thank you. But you mentioned, as I said during the second protocol, that it would not only be about reporting lines, it would be about corporate restructuring. Can you shed some light on what type of corporate restructuring we should be thinking about then?

Well, each of the segments has a management committee, and this may by the management board of AMG signaling a very close communication between decision-making on the corporates levels and decision-making on the division-attached segmental level. So when we say reporting segments, there is behind that, of course, an operating element which is a joint management structure.

And that is in preparation of a possible equity carve out and therefore sale or would that be too soon to conclude?

I have said that the new segmental structure is meant to increase transparency, to improve intra-segmental communication and meet other criteria. I didn't mention Carpout we are of course aware that these divisions attract attract investor interest in a different way the clean energy materials division incidentally is the only the only corporate activity I know where three energy saving materials, energy storing materials are assembled under one corporate roof which is very attractive from the point of view of certain people, certain investment communities. Lithium and lithium for mobile batteries but also for stationary batteries. for stationary batteries and tantalum for the whole array of capacitors which are essentially micro batteries and super batteries which in the low end of the lithium batteries compete with lithium batteries. So the whole thing is meant to be one dedicated operation to the energy electricity storage world. And that is a very interesting work which has to be managed jointly because they are overlooking, everybody is connected to everybody else. To give you an example, we are planning in order to reduce our electricity cost in one particular major operation of AMG, we are planning to install a stationary lithium battery as an operator and that will be, I expect that to be announced in a while but it is firmly planned and that will be a symbol of the within that very closely managed energy storage operation.

Okay. I'll move on to my second question. The 8% employee reduction. Could you share with us the timetable in terms of execution and possible charges, and also, obviously, the savings. Unless the 15 million you've announced last quarter is the same target for this particular restructuring exercise.

This is a continuation, Martin, of the Q2 cost reduction. The cost savings have increased. roughly to $18.5 million from 2015. And the timing of delivering those cost savings is spread out mostly by Q2, but dragging on to Q3 and Q4 a little bit of next year. Okay, so nothing already. Yeah, no, we've already eliminated quite a few positions. But you can see from the restructuring charges in our EBDA breakdown, the cost of doing so was quite low. So we've managed in jurisdiction and using workers' council help to reduce our total restructuring costs.

Got it. Okay. Okay. Again, coming back to Cambridge too, 184 million committed on a budget of 310. You mentioned production of shoes and construction is in line with planning. Is that still the case then that we should count on start of operations in the second quarter and full EBITDA contribution as of the third quarter? Can you update us on that? And a second element to that, KMH2, can you confirm that you now have 100% of the capacity in place in terms of supply contracts?

We checked in as we got to the start-up data.

Yeah, this is Eric. You know, the startup of Cambridge 2 is really in three phases. It's the raw material storage building. It's our roaster, where we do have some excess capacity today in our Cambridge 1 mail shop, and then it's our mail shop in Cambridge 2. So really, we start that implementation, that process, implementation timing in Q4 on the raw material storage building. And it goes through to final full completion really in Q4 of 21. And so that's the estimated timing right now.

And as we got to 50, many times earlier, we are highly confident to to feed is sufficiently partly through existing contracts, partly through contracts which are under negotiation.

And just so I understand Eric correctly, so there will be some EBITDA contributions already in Q2, Q3, modest and then hopefully full EBITDA contributions as of at the end of the fourth quarter of 21. That's the right interpretation.

Yeah, that's the expectation right now and we're on our schedule. Of course there's a lot of moving parts right now.

And by the way, of course you hear the hesitancy here and the hesitancy here is mainly due to the palladium price. When you say EBITDA contribution Then under normalized Venetian prices, that is a very legitimate question under the present price. We are cash flow positive under whatever price, but that is of course to be calculated in here.

Yeah, I think it's important.

We are all time low in Venetian.

I think it's important to note that our existing Cambridge Venetian business is profitable. at today's exceedingly low prices. And I believe nobody else is producing the feral vanadium in the world is profitable.

Yes, that's true. We are the world's lowest cost producer. We are a recycler. We are the largest recycler in the world. The primary mining costs are higher, significantly higher. That can be calculated when you look at the publicly traded vanadium stocks, which are primary miners. And just to remind you, the present, the current price for vanadium is $11.29. That's spot. The three-year average vanadium price is $22.9. The five-year average is $17.8. So, So that is to be taken in consideration. We see the Venetian fall, by the way, the falling of the Venetian price has stopped fortunately. I want to remind you that the average Venetian price in Q3 2020 was 35% below Q3 2019. The current spot price vis-a-vis the last quarter, namely end of September, is for the first time a little bit higher. It is interesting to note that in the third quarter 2020, of the 17 relevant materials prices for EMG, in that third quarter, 13 were still down heavily. 13 of the 17. In the present spot versus Q3 20, only 6 were down of the 17 and in the last spot versus September that downward trend has vanished. So we are now Statistically, we have after a long, long, consistent fall, we have come to what we believe is the bottom. And that is absolutely supported by the fact that everybody who produces those things is practically making a loss when it's primary based. So we are PPTE positive. in most of our activities which are producing. So that means that we are the low-cost producer at the historical low-cost time. So it's an interesting observation for internal evaluation purposes.

All right. Thank you. One final question. I know it's early days, but you said that the second quarter was the trough. Q3 is better. You mentioned this whole, you have arguments for basically suggesting that vanadium is up for an increase in terms of price. Do you intend to propose a dividend for 2020, also in relation to the question that Hank posed you about leverage?

No, we don't give dividends.

Would you rather...

We have a dividend policy and we elaborately announced what that is and how we handle it. And that's it. As regards to the vanadium price, I'm not predicting a vanadium price rise. I'm not predicting any price rise. I'm just doing this for 40 years. I'm not a price predictor. But statistically, when for the first time in the history China, the structure of the Venetian market is as follows historically. There is a deficit in the western world and then there is a correction valve and that's China. China has a net exporter and a deficit in the western world. That has for the first time in history changed in the third quarter of 2020. Where China is now importing, it has become a net importer. So mathematically, as the steel industry is increasing its capacity utilization, especially in the United States, rapidly, also, of course, in China, but also in the United States, rapidly, it fell to 50%, it is now average 69% in the largest producer in the United States at much higher rates of capacity utilization. So if you put this together with the enforcement of the LIPA legislation in China, it is a mathematical, for an analyst, if I was an analyst, I would come to the conclusion that the price will rise. So I thought my prediction is just a reflection of if I was an analyst.

Thanks for the elaboration.

All right. We'll go to our next question. Caller, please go ahead. Your line is open. That will be Jordan Gregoff with Federated Investors. Please go ahead.

Hey, guys. Thanks for the call. I just had a follow-up on the net debt to EBITDA calculation because the term loan correct has a 3.5 times net debt to EBITDA covenant correct, which I would assume given the trailing 12 months and what things are shaping up for the fourth quarter would be in violation. Is that correct? And have they waived that covenant violation on the term loan?

As I'm sure you're aware, in any Term Loan B, we are allowed certain add-backs to EBITDA. And if you include those add-backs, we are definitively not in violation of our covenant.

Okay. Can you elaborate on what the EBITDA comes out to be with the add-back or what they are?

I can't. That is, you know, part of our covenant compliance certificate that we send to our banks. Okay. but I'm not going to detail what all the add-backs are.

Do you have, like, a total of what the EBITDA comes out to be in that situation?

It's significantly north. I'm happy to take this offline and have a more detailed discussion with you, but we have no covenant violation today, and we do not project any covenant violation going forward.

Okay. All right, thanks.

All right, we'll go to our next question from Krishan Agarwal with Citibank.

Hi, this is Krishan from Citigroup. Quick question. For the third quarter, if I look at critical indicators, EBITDA has gone up quite significantly from $5 million to $10 million. So is it fair to assume for me that the entire incremental EBITDA is driven by the cost reduction or was there an impact from better utilization of the capacity and hence a positive operating leverage in the quarter?

It is certainly not coming for price because the price as I mentioned has still given us headwinds and headaches. It is coming from slight uptick in capacity utilization across the board. Some divisions such as the industrial minerals operations are practically back to normal and Some are still very, very impacted by the aerospace, negatively impacted by the aerospace. But in general, nobody has deteriorated in that quarter. Some have improved. And I would say that the capacity utilization uptick, it's not a big one, but it has happened

is the common denominator that would be the reason if i had to write to name one reason and uh yeah yeah very clear so i mean is it fair to assume for us that capacity regulations after this september would have improved incrementally and then there is a potential for the type of further improve um in the fourth quarter

Just to repeat the question, you're asking whether or not capacity utilization has improved in the third quarter and projected to improve in the fourth quarter?

Yes.

Yeah. The capacity utilization, which is an extremely important indicator, will, I think, But that was last week. That was before the German lockdown. Everybody who is operating in Germany and we are heavily operating in Germany is analyzing right now what that lockdown means. But put that aside. We believe that the normalization process very slowly is underway. In some instances, it might be surprisingly far, as we mentioned on the price situation, for example. But also be reminded that some of our operations are operating under long-term contracts. So capacity utilization, when you have sold 100% of your production is 100% and we have several important parts of the company we are practically sold 100% or 80% or two serves or so because it's basic philosophy of AOT to seek long term stability as regards to customer relationships.

My final question is on the restructuring or the reorganization. The clean energy, that's clearly a division where most of the capital allocation is visible in terms of project implementation and then there is a potential for the project approval in terms of hydroxide. What is your outlook for the rest of the two divisions in terms of their growth drivers or the potential for capital capital allocation and then kind of add on to that I mean would you consider giving some kind of a you know margin guidance for these two businesses because technically these two businesses doesn't have any material you know pricing leverage efforts.

Well clearly the expansion potential of the electricity storage related segment-division is significant. The limiting factor is that we will delay each further project according to the availability of financing because we will not compromise our strong liquidity position in the company, we have a very strong handle on those expansion potential, and therefore they don't run away. To give you an example, our first hydroxide battery grade refinery, where we are the first mover in Germany and practically the first European supplier of battery grade hydroxide to the upcoming market around us in tracking distance in Germany is 20,000 tons of hydroxide. That is a very small amount as regards to the market. So we are thinking in terms of five modules. The first module is 20,000 tons. So, yes, there is a large potential, but we are very cautious in execution until our EBITDA level has corrected itself. And the limiting factor is our strong financial position which we want to preserve.

Got it, thanks.

All right, we'll next go to Frank Klaassen with the Groove Petercam.

Yes, good afternoon, Frank Klaassen. A question on the travel restrictions in the technology division. Could you estimate how much impact that roughly had in Q3 and what do you expect going forward given the COVID situation in Europe again?

No, we have... I think on the total impact and the total impact of COVID on our quarterly results is 23 million, I guess. And a significant portion of that is travel restrictions related. The travel restrictions per country are a myriad of complicated regulations. and we are working on all of those, especially on those where we have projects which are under execution. It is very difficult to predict how those regulations move. For example, when you read the joint announcement of the German Chancellor and the and the prime ministers of the German states two days or three days ago, which is practically a complete lockdown. We are analyzing right now what that means. So for me, it would be completely unjustified to now give a general answer. This is a moving situation. We have also a completely binary situation as regards to the US election. It is to be assumed that whoever is president there will have different philosophies as regards to lockdowns. So, as we have said to our board, the biggest risk is when you have a management which is not instantly reacting to situations. We are instantly reacting and managing situations and we have successfully done so in these five-six times repeatedly and we will handle it as necessary.

Okay, thank you. Then a question on expenses. I noticed that you adjusted EBITDA for strategic project expenses for roughly 2 million Q3. What can we expect going forward? You are working on these projects still, so can we expect more of these costs going forward, or was this a one-off?

I have said a very carefully worded outlook statement, and I don't want to go beyond that.

Operator?

Okay.

Everyone back in? That concludes our question and answer session for today. Thank you all for joining.

That does conclude today's call. We thank everyone again for their participation. Thank you.