AMG Advanced Metallurgical Group N.V.

Good day and welcome to the AMG Earnings Q2 2021 conference call. Today's call is being recorded. At this time, I would like to turn things over to Michelle Fisher, Vice President of Investor Relations. Please go ahead.

Welcome to AMG's second quarter 2021 earnings call. Joining me on this call are Dr. Hein Schimmelbusch, the Chairman of the Management Board and Chief Executive Officer, Mr. Jackson Dunkel, the Chief Financial Officer, and Mr. Eric Jackson, the Chief Operating Officer. AMG's second quarter 2021 earnings press release issued earlier today is on AMG's website. Today's call will begin with a review of the second quarter 2021 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. Schimelbusch will comment on strategy and outlook. We will then open the call to take your questions. Before I pass the call to Dr. Schimelbusch, 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 related to acquisitions, AMG's competitive strengths and weaknesses, reserves, financial position, and future operations and development, AMG's business strategy and the trends AMG anticipates in 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 expects, believes, anticipates, Plans, 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, and risks exist that any predictions, forecasts, or similar projections contained by such forward-looking statements will not be achieved. These forward-looking statements speak only as 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 change in events, conditions, or circumstances on which any forward-looking statement is based. I will now pass the floor to Dr. Schimmelbusch, AMG's Chairman of the Management Board and Chief Executive Officer.

Thank you, Michelle. With regard to COVID, active cases at AMG have receded to a very low level. However, it is with our deepest regret that I have to inform you that AMG experienced its first COVID-related fatality. We continue to apply all safety measures at our disposal with the highest degree of attention in order to ensure our employees are working in the lowest risk environment possible. All three of AMG's reporting segments performed well in Q2, and global demand for our products continued to strengthen throughout the first half of 2021. In 2007, we introduced AMG to the public markets as a producer of critical materials. The real meaning of criticality has become more apparent over time. And in particular, materials associated with electricity storage are now perceived as especially critical because increased electricity storage is required in order to enable higher utilization of renewable energy production. All of AMG's strategic projects cluster in our clean energy material segment and are proceeding as planned. Each of these projects is oriented towards growing our production of electricity storage materials or increasing our footprint in the circular economy. AMG's vanadium second spent catalyst recycling facility in Sainsville, Ohio, the largest capital project of AMG, AMG has undertaken to date, is scheduled to come in on time and on budget. AMG Lithium has signed the engineering contract and has purchased the site and long-term lead items for the battery-grade lithium hydroxide refinery in Bitterfeld, Sachsen-Anhalt, Germany. After extensive tests, a new plant to produce vanadium oxide and vanadium electrolyte materials from spent catalyst is under construction at EMG Titanium and Alloys and Coatings in Nürnberg, Germany. AMG Engineering is building AMG's first industrial battery, a hybrid lithium-venadium redox flow battery system for use in one of our operating units to flatten production-driven spikes in electricity demand and thereby reduce CO2 emissions and energy costs. The market potential for this battery concept is very large. I would now like to pass the floor to Jackson Dunkel, AMG's Chief Financial Officer. Jackson.

Thank you, Heinz. I will be referring to the second quarter 2021 investor presentation posted earlier today. And to start with, the cover of that presentation shows a recent picture of our new Zanesville Vanadium facility. Turning to page three, this shows an overview of the financial highlights of the quarter. Revenue for the quarter increased by 44% to $298 million. This increase was mainly driven by an improving price environment and increasing global demand for our products, which led to higher sales prices and volumes across all three of our divisions. Q2 21 EBITDA was $31.4 million. This result was over four times higher than Q2 last year, which represented our lowest profitability during the height of the slowdown due to the global pandemic. As you can see in the lower left corner, AMG has sequentially increased EBITDA every quarter since Q2 2020. Net income attributable to shareholders for Q2 was $3.6 million versus a $12.5 million loss in the prior year. Turning to a review of our three segments, let's start with AMG Clean Energy Materials, which is shown on page four of our presentation. Clean Energy Materials comprises our vanadium, tantalum, and lithium businesses. On the top left, you can see the Q2 revenues increased by 70% versus the prior year. This increase was driven mainly by higher volumes of vanadium, tantalum, and lithium concentrate, and higher prices in vanadium and lithium concentrate. Our realized spot mean prices were lower than market prices due to a two to four month lag associated with contractual terms. Gross profit for non-recurring items increased by $12.1 million compared to the same period in the prior year. Q2-21 EBITDA increased by $11.3 million to $12.6 million. And again, you can see the steady sequential EBITDA improvement. Clean energy materials is the segment which is and will continue to receive the most capital investment in AMGs. And the capital expenditures shown on the bottom left of $37 million mainly reflect our investment into the Zanesville Vanadium Facility. Turning to page five of our presentation, which shows AMG Critical Minerals. AMG Critical Minerals revenue increased by 60% to $77 million, driven by higher sales volumes and higher sales prices across the graphite, antimony, and silicon business units that comprise this segment. Gross profit before non-occurring items increased by 117% in Q2, and EBITDA more than doubled versus the prior year. Moving on to AMG Critical Materials Technologies on page six. This segment comprises our chrome metal, titanium alloys, and engineering units. Starting in the top left, you can see that Q2 21 revenue increased by 23%. This increase was due to higher revenue from engineering and heat treatment services businesses as well as higher sales volumes of titanium aluminides and chrome metal, both of which have begun to recover from the Q2 pandemic low. As a result, Q2 21 gross profit for non-recurring items increased by 61% to $21.1 million. AMG Critical Materials Technologies Q2 EVDA more than tripled to $9.6 million from Q2 last year and has improved sequentially every quarter since Q2 20. Order backlog was $191 million as of June 30th, 2021, in line with the $191 million as of the end of March. The company signed $57.3 million in new orders during Q2 21, representing a .92 book-to-bill ratio. The quarter benefited from strong orders of remelting and induction furnaces. Turning now to page seven of the presentation, on the top left, you can see that AMG's Q2 2021 SG&A expenses were $33 million versus $27 million in Q2-20. This increase was primarily driven by higher incentive payments and increased headcount at lithium GNDH. AMG's Q2-2021 net finance costs were $4.8 million compared to 6.3 in Q2-2020. This decline was mainly driven by favorable foreign exchange movements. AMG recorded an income tax benefit of $5.6 million in Q2 2021 compared to a benefit of $0.4 million in the same period in 2020. This variance was mainly driven by movements in the Brazilian Real offset partially by higher pre-tax income compared to the prior period. The effects of the Brazilian Real caused a $12.4 million non-cash deferred tax benefit in the second quarter of 2021, versus a $3.3 million expense in Q2 2020. Movements in the Brazilian real exchange rate impact the valuation of the company's net deferred tax position related to our operations in Brazil. AMG paid taxes at $2.5 million in Q2 2021, compared to a tax refund of $2.4 million in Q2 2020. This was largely due to international COVID-19 tax measures that enabled AMG to delay most of its tax payments during the prior quarter. Net income for the quarter was also affected by an increase of $11.7 million to the environmental provision associated with our decommissioned site, New Jersey, which decreased net income by $8.8 million after tax. We have completed the removal of the flag at this site, and we do not expect any additional remediation to be required. Turning to page 8 of the presentation, you can see on the top left that cash from operating activities was $23 million in Q2-21, an increase of $2.7 million over the same period in 2020. Moreover, cash from operating activities was $43 million on a year-to-date basis. more than double the total cash from operating activities for all of 2020. This underscores AMG's continued focus on cash generation as well as the increased profitability during the first half of 21. AMG's return on capital for Q2, return on capital employed for Q2 was 10% as compared to 2.9% for the same period in 2020, reflecting the increased profitability during the quarter. AMG finished Q2 21 with $220 million of net debt. This decrease was mainly due to the additional issuance of shares, which generated $119 million of net proceeds, offset by the significant investment and growth initiatives during the quarter, especially in our Vanadium expansion in Ohio. As of June 30, 2021, AMG had $341 million of unrestricted cash and total liquidity of $511 million. With this cash on hand and strong projected operating cash flow, AMG believes it can fully fund its current strategic projects while maintaining a strong balance sheet. That concludes my remarks. Eric?

Thank you, Jackson. Our businesses are extremely well positioned to capitalize on the global transition to clean energy, and our operating objectives continue to be to ensure that we are at the lowest cost highest quality producer in all of our businesses, and deliver our strategic investments on time and on budget. In regard to general market conditions, demand and prices for our products continue to improve and strengthen in the second quarter. That being said, we believe that in a number of cases, this is the beginning of a longer-term trend. Worth noting is that the spot ferrovanadium index price in North America is is today below the five-year average, and actual sales prices are as much as 20% below actual sales prices in Europe and China. This discount in North America is unsustainable in a region that depends on imports for more than 50% of its requirements. I also want to, once again, note that revenue recognition and price increases in many of our businesses are realized with a two to four month delay. The impact of this is most substantial in spodumene, where third quarter prices are likely to be $125 per ton higher than in the second quarter. We are operating this business at full name plate capacity. Tantalum prices have also increased dramatically in the last few months. However, higher tantalum prices will not be realized until the first quarter of 2022 as we complete deliveries on a fixed-price contract. In regard to our strategic investments, we manage them very closely in conjunction with the project engineering staff we assembled in the last year, and they continue to progress as planned in spite of logistical challenges relating to COVID. The impact of the coronavirus is most significantly felt on AMG Critical Materials Technologies, and the market for our aerospace-related businesses. However, AMG Critical Materials Technologies delivered its fourth quarter in a row of sequentially improved EVA TA, and the aerospace market continues to improve. We also see early signs of increased demand in our aerospace-related critical materials products, as our customers are forecasting substantial increases in requirements by mid-2022. Again, operationally, we continue to focus on those parts of the business that we can control, as well as delivering our strategic projects on time and on budget. I would now like to pass the floor to Dr. Heinz Schimmelbusch, AMG's Chief Executive Officer. Thank you, Eric.

AMG is in motion. The critical materials space is a very dynamic territory. Earlier, I talked about strategy, but before I close, With the outlook statement, I want to comment on three strategic highlights which illustrate where our value creation efforts coincide with our efforts to continuously upgrade our ESG profile. First, and that's on circular economy. After extensive tests, we are building a plant in Nuremberg to produce high purity vanadium from roasted spent catalysts. Our intention is that this vanadium will be used for electrolytes in vanadium redox flow batteries. This project is especially relevant for Shell AMG Recycling BV because it will provide a differentiated and growing end use for the large scale spent catalyst projects it is pursuing in the Middle East. Second, again, circular economy and electricity storage. AMG's engineering is building AMG's first industrial battery, a hybrid lithium-venadium redox flow battery system for use in one of our operating units to flatten production-driven spikes in electricity demand and thereby reduce CO2 emissions and energy costs. We believe the addressable market is very large. Our battery is a replacement for the traditional diesel engine generator that is deployed in many industrial sites to manage spikes in electricity demand. AMG refused to install such a generator due to the negative effect on our CO2 footprint, and we believe that in the future, many other companies will want to follow our lead. Third, electricity storage materials. The new all-solid state battery, referred to as ASSP, Materials Pilot Plant in AMG Lithium in Frankfurt, Germany, has been providing lithium sulfide and solid electrolyte samples to all of the major battery manufacturers working on the emerging transformation to ASSP technology. These battery manufacturers are focused on commercializing the all-solid state lithium battery by 2025, and we intend to have a leading position supplying the electrolyte materials to these battery manufacturers. I wanted to give you these selected examples of our current projects in order to remind you that AMG has been transitioning into a growth company. Now let me conclude with our earnings guidance. In May this year, we increased our guidance for 2021 EBITDA from exceeding 100 million to exceeding $120 million by 20%. Given the current market conditions, we reiterate our confidence in being able to exceed $120 million in EBTA for the full year of 2021, and we expect to continue to sequentially improve our EBTA quarter-over-quarter performance for the remainder of the year. Operator, we would now like to open the line for questions.

Certainly. And to everyone to ask a question, please press star then one on your telephone keypad. Please note that if you're on a speakerphone, pick up your handset or depress your mute function to allow that signal to reach our system. Again, that is star one to ask a question. And we'll go first to Martin Dindriver of ABN ODDO.

Yes, good afternoon, gentlemen, and Michel, Martijn de Dijver, Adrien, Ambro, Otto. The first question is with regards to the movement in sales and gross profit in two divisions. I can't get my head around what's happening in clean energy materials from Q1 and Q2. You've had roughly... 20 million incremental sales revenue, yet your gross profit before exceptional items has remained stable. Can you provide a bit more color on why that is? And I have follow-up questions. 20 million.

Well, that's really driven by the fact that, as I think you know, we provide vanadium back to our suppliers. So we move up with the price of vanadium and keep our margin constant. It's also due to what Eric mentioned with the lag on spodumene. So our prices on spodumene reflect effectively last quarter.

Okay. Let's take that as a face value now. A similar question for critical materials technology. Again, the delta versus Q1, 11 million. Gross profit before exceptionals. Hardly changed. What's the explanation here? There is no tipping fee here in critical materials. So perhaps you could share some light on that development.

Again, I think as we've spoken about in the past, in our chrome business, as well as our titanium alloys business, we attempt to have a constant margin above raw material price. And so prices go up, and our costs go up at the same time. And we get the same margin. So it isn't a margin-exposed business. You might have a point. on what's our leverage to increasing prices in CEM, but that's largely muted by the fact we give, again, two-thirds of our price back to our suppliers. So, it's basically the same answer.

Okay.

Especially in titanium alloys, for example, excuse me, in titanium alloys and chrome metal. We are essentially talking about conversion business. Mm-hmm, yeah. Converging business has the enormous advantage of having stable margins.

I get the part about gross profit, so that's the element I get, but then you would expect if you have your – well, let's move on to another question. You mentioned the solid-state, you mentioned the hybrid lithium-vanadium, you mentioned Tuck Germany and the vanadium pentoxide. What capex have you spent on those three projects and what should we take into account going forward? Is there any change in your guidance with regards to capex?

No.

Yeah, so we gave you $180 million. We gave you $180 million guidance last quarter. We would increase that maybe to $200 million, but it really depends because we're busy spending money on our Zaneville facility, and when the bills come in, matters a great deal, obviously, at this last stage of the project. In terms of CapEx associated with the two projects, It's far too early to discuss, but it's not going to be significant.

It's not a significant investment. If you pressure us to say something, it is below $10 million. Yeah.

Okay. Got it. And then on the slack remediation in New Jersey, I asked a question, I think it was one or two quarters ago about that. That point said that there was not going to be any more remediation costs. Now it's 11.7 million. Are there any other sites that we should be aware of where there is such a remediation risk?

No, it's the only one. And it's the very end of a 30-year remediation.

Okay. Well, that's it for now from my side. Thank you.

And again, everyone, as a reminder, that is SHA-1 on your telephone keypad if you'd like to ask a question. We'll now go to Henk Vermin of Kempen.

Hi, good day all. Thank you for taking my questions. I had a couple also. Maybe firstly on the engineering order book. When you look at the order book today, I think you gave the comment that you sort of see a stable sequential ordering flow. That is mainly related to the remelting and induction furnaces. But can you give me an approximate amount of how many orders related to airspace and related to the turbine blade furnaces are now in your order book? Or is that zero or almost zero at the moment?

In the existing, I didn't get it. In the existing order book, how much is aerospace related?

Yeah, how much is still aerospace related? Because in the previous quarters, I think the volume, the order book volume has been mainly driven by non-aerospace related orders of furnaces.

I would say that about half of the order book is related to a turbine plane quotas, which is clearly aerospace. That is still the case in the current order. This is a very dynamic sector. The question is difficult to answer because, for example, if you are building a large re-melting facility for an Asian customer, you do not know what the industrial allocation is of these customers and products. So, we are hesitant to make exact predictions. The largest single order inflow other than aerospace, direct aerospace, such as coating, is recycling. most of the furnaces which we sell into the metal industry of the world are used for rewards and for scrap treatment.

Okay, that's clear. Then on the lithium expansion plans that you have currently, you gave some incremental information already in the press release. We also discussed this last quarter, but My first question then will be, how does it look on the potential offtake agreements? And the second question would be on, yeah, I guess you still plan to install, let's say, the first 20k ton capacity, where you also have the engineering assigned now. can you at this point provide us with more information on how the, let's say, how the earnings will look for that incremental 20K? And then I have another question related to lithium.

But there was a host of questions here.

So octane and helium for battery-grade hydroxides?

Yeah, it is. It is not an industry where you are making off-date agreements, unless you have off-date agreements which have subjects where you can drive the drug through. And what are these subjects? It's quality, specific for the use. How this works is that elaborate test series is ongoing with each of the customers, where the customer demands through our laboratories are matched with our optimization of what we reproduce. And these are very elaborate procedures ongoing. It's a chemical product. It's not copper for long-term metal exchange where you do a long-term contract. So these are emerging customer relationships deeply embedded in test procedures and technical discussions. So that's to be... not confused with commodities. This is a very complex product, and the complex product has to be neatly fitting into the very high quality standards of the customers and vice versa. As regards to the profitability of the investment to increase our

The profitability associated with our 20,000 ton battery grade hydroxide, we're not at the point. We haven't finalized engineering, so we're not at the point.

Well, our general policy is that we don't authorize process unless you're, when you divide capex by the normalized annualized EBDA. If that multiple is higher than four, then it doesn't get authorized. So that should give you a guidance for that. What else was? No, that was it, I think. That was it.

Okay, yeah, that's very clear. Because, I mean, at the same time, you see a lot of automotive players also this quarter sort of revealing their EV plans and their investment outlay. I mean, you plan to spend about 100 million of capex on this project in the next two years. And at the same time, I think investors are also asking questions Where do you get the spodumene supply? Because there's a lot of spodumene needed already for this first 20K. So when is it planned that we do this?

We are in highly confidential negotiations with a variety of potential and existing spodumene producers and The result of that is a very elaborate map of spodumene potential for our modules and we are confident to be very successful in that effort. We have a very attractive mix which we can offer to junior miners which look for offtake agreements and which look for technical assistance, and which look for financing of import streams into Germany. So, I don't think that is a bottleneck.

Okay, thank you for that, Claude. My last question would be a follow-up on Martijn's question on environmental expense in the P&L. And just for my idea, it was not very clear to me. Is it also already embedded in the cash flow statement, or is it the provision now, and when will we see that cash out of 11, of 12, almost 12 million?

So it's completely provided for and has already, in fact, been shipped. But we do have a supply chain financing agreement with the waste provider. We took a decision to accelerate getting rid of the slag, and as a result, we received some attractive supply chain finance. So the cash out will be over the next 18 months.

The decision had to be, the decision was between doing it year by year. We decided to accelerate and get it behind us.

Right. That's clear. Thank you.

And once again, everyone, that is star one. If you'd like to ask a question, as a reminder, if you're on a speakerphone, please pick up the handset or depress your mute function to allow that signal to reach our system. Again, that is star one to ask a question. And we'll now go to Martin Verbeek from the IDEA.

Good evening, it's Martin from the IDM. You mentioned in your press release that you see the market potential for hybrid lithium vanadium redox flow batteries as very large. Could you give some more color about that, how you see that evolve over how many years and what kind of objectives you have to grasp, what part of the market you intend to grasp?

Yeah, that's question. We have in several of our operating units, like a myriad of similar operating units around the world, we have erratic electricity demand profile. Because when you turn on, for example, an electrical arc furnace, when the arc is closing, the electricity man shoots up, I don't know, five times or eight times or whatever. When you have a hot gas mill, same thing. That is penalized by the utility because the utility favors when they have the right to interrupt delivery, but they penalize you when you interrupt their continuous delivery profile. So you have high cost when you have such a profile. The traditional way of dealing with that is to build a standby power plant. And the classic way to have that done is a diesel engine island standby power plant. That exactly was the proposition of one of our operating unit management. And in thinking about that through our laboratories and through AMG Engineering, we came to the conclusion that it is a much better solution. It's a lithium-venadium hybrid battery. Why? A vanadium battery is low cost and easy to handle. However, it has a slow... lithium discharges in milliseconds. So the result was, since such a hot gas mill or such an electrical arc furnace needs very, very quick reactions, you needed a lithium battery for that, and then the lithium battery then gets being recharged by the vanadium battery, which gets recharged by a continuous flow from the grid. That saves electricity and it avoids penalties, saves electricity and avoids other environmental negatives associated with diesel engines. So therefore we decided This is a much better solution, and obviously we know that a very large number of people have the same kind of decisions, and you can Google the annual demand of diesel engine power plants for industrial solutions, island power plants around the world, and you come to a very high number. So I think the marketing potential of that is obvious.

Maybe as a follow-up. Maybe as a follow-up. If a client would purchase such a system, what would be his earn-back time?

As I said, we wouldn't invest if it's exceeding four times the ratio between investment and annualized, in this case, savings, normalized savings. It's very profitable because the penalties are very high for such erratic profiles. So the saved electricity costs finance the battery. And by the way, we are selling vanadium on the side into that system. As a vanadium producer, that's not bad at all.

Okay, thank you very much.

And with that, that does conclude today's question and answer session. I would like to turn things back to Michelle Fisher for closing comments.

That completes AMG's second quarter 2021 earnings conference call. Thank you all for joining.

And again, that does conclude today's call. You may now disconnect. We thank you for your participation.