AMG Advanced Metallurgical Group N.V.

Hello, and welcome to the AMG Q1 2024 earnings call. At this time, all parties are in a listen-only mode. Later, you will have an opportunity to ask questions. To ask a question, press star 1 on your phone keypad. If you'd like to remove yourself from the queue, press star 2. Please note that this call is being recorded, and I will be standing by should you need any assistance. I would now like to turn the call over to Michelle Fisher, Senior Vice President of Communications. Please begin.

Welcome to AMG's first quarter 2024 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 first quarter 2024 earnings press release issued yesterday is on AMG's website. Today's call will begin with a review of the first quarter 2024 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 expressly refer you to our statement on forward-looking statements and the meaning thereof, as we have used at all previous occasions and we will use at this earnings call. and which explanatory statement has been published as part of our financial presentation and on our website, all in connection with the earnings call. I will now pass the floor to Dr. Schimmelbusch, AMG's Chairman of the Management Board and Chief Executive Officer.

Thank you, Michelle. Market prices for all products in our portfolio weakened during Q124 compared to the same period last year. The decrease in adjusted EBITDA compared to Q1-23 was largely driven by the global decline in lithium and vanadium prices. The average quarterly prices of lithium carbonate and ferrovanadium, which are the material prices that impact our financial results more than any others, decreased 76% and 33% respectively. compared to the average Q123 pricing. However, Q124 adjusted EBITDA of 31 million is on track to meet our guidance for the year. Our lithium expansions remain on schedule. In Brazil, the expansion of our lithium concentrate plant from 90,000 tons per annum to 130,000 tons is progressing as planned. and we expect to reach full nameplate capacity in Q4 this year. In Bitterfeld, Germany, our lithium hydroxide refinery's first 20,000 ton module is on schedule, both in its advanced commissioning and product qualification process. We plan to ship production batches to clients in Q3 2024. Our low-cost position allows us to endure the current market conditions and prosper considerably at more normalized price levels. AMG Vanadium continues to execute its global satellite roasting strategy through the implementation of our recently acquired TTI technology. The Vanadium Electrolyte plant of AMG Titanium in Nuremberg is in the final stages of completion. We expect to have nameplate capacity available by the second half of this year as part of our vertical integration to leave our batteries. Last month, we formed Numox SAS in France to service the nuclear fuel market. Numox is a subsidiary of ALD Vacuum Technologies GmbH, which is based in Hanau, Germany. ALD, our engineering subsidiary focused on vacuum furnace technology, includes sintering furnace systems enabling the production of commercial nuclear fuel from plutonium and depleted uranium, named MOX. ALD's MOX technology has been deployed in Germany, United States, France, Belgium, and the United Kingdom, and recently ALD has been delivering such systems. to China. AMG LIWA is engaged in the execution of several battery projects to optimize the energy management of industrial plants and incorporate renewable energy sources. In June 24, we will celebrate the opening of a 4.5 MWh energy storage system shifting and solar energy for a major industry client. The system enables 80% self-sufficiency and is also used for peak shaving, process heating, and cooling. EV changing and grid services. I will now pass the floor to Jackson Dunkel, AMG's Chief Financial Officer. Jackson.

Thank you, Heinz. I'll be referring to the first quarter 2024 investor presentation posted yesterday on our website. Starting on page three of the presentation, on the top left, you can see that revenue for the quarter decreased by 21% to $358 million. Q124 adjusted EBITDA was $31 million compared to $118 million in the same period last year. As Dr. Shimawish mentioned, this decrease was primarily driven by the global decline in metal prices within our portfolio. predominantly the lithium price, which saw declines of 76% compared to Q123 pricing. Net loss attributable to shareholders for Q124 was $16 million compared to a net income of $56 million in Q123. While most of this decline was due to lower profitability in the current quarter, it was exacerbated by three non-recurring items totaling $12 million. As disclosed in our press release, These were a $7 million intercompany foreign exchange loss, a $3 million lower of cost or market inventory adjustment, and a $2 million one-time cost incurred during the expansion of our Brazilian spotting plant. The remainder of the net income loss was driven by our strategic project costs, which represent the ongoing investment into our battery-grade lithium hydroxide business and our LEVA battery growth plans. Now I'm going to review our three segments. I'll start with AMG Lithium, which is shown on page four of the presentation. On the top left, you can see that Q124 revenues decreased 68% versus Q123 to $42 million. This was driven mainly by lithium prices, which decreased 76% in the quarter. Q124 gross profit decreased 94% from Q123 due mainly to the decline in lithium price in addition to the unabsorbed fixed costs incurred during the construction of our spodumene expansion project in Brazil. EBDA for the quarter came in at $6 million. The quarterly capex, shown on the bottom left, of $20 million, mainly reflects our investment into the battery-grade lithium hydroxide plant in Bitterfeld, Germany, as well as the expansion of our lithium concentrate capacity in Brazil. Turning now to page 5 of our presentation, which shows the AMG vanadium segment. AMG Vanadium's revenue for the quarter decreased 15% to $165 million compared to Q123 due to lower sales prices in vanadium and chrome metal, which were partially offset by increased volumes in vanadium. Q124 gross profit was $9 million lower than Q123 due largely to the lower prices. Q124 adjusted EBITDA decreased 29% compared to Q123 to $14 million due to the lower prices versus last year. On a sequential basis, however, it should be noted that Q4 2023 benefited from a $10 million dividend as well as the full year $6 million production credit from section 45X of the Inflation Reduction Act. Please note, we are accruing the benefit of 45X by quarter during 2024. Moving on to AMG Technologies on page six, Starting on the top left, you can see that Q124 revenue increased by $26 million, or 21% versus Q123. This improvement was driven by strong revenues in our engineering unit, as well as higher sales volumes of silicon. Adjusted EBTA was $11 million during the quarter, compared to $8 million in the prior year. The increase was primarily due to higher profitability in engineering, driven by remelting and induction furnace sales, and a stronger performance in the after-sales and service division. AMG Silicon began operating two of its four furnaces in March, and we plan to run two of the four furnaces for the remainder of the year, although the results remain excluded in EBTA. Turning now to page seven of the presentation on the top left, you can see that AMG's Q1-24 SG&A expenses were $45 million versus $40 million in Q1-23. The variance was largely attributable to higher personnel costs driven by increased hiring in our lithium, engineering, and LEVA businesses. AMG's net finance cost in Q124 was $15 million compared to $7 million in Q123. The increase was largely driven by a $7 million non-cash intercompany foreign exchange loss that I mentioned at the start of my comments. AMG recorded an income tax expense of $3 million in Q124 compared to $36 million in Q123. This variance was due to lower profitability in the current quarter relative to the same period in the prior year, marginally offset by non-cash deferred tax expenses related to derecognition of certain tax assets. These tax assets were associated with our interest expense carry-forwards in our U.S. business as well as loss carry-forwards in our German and Dutch entities. AMG paid taxes of $8 million in Q124 compared to tax payments of 21 million in Q123. The reduced cash payments in the current period were largely a result of the decrease in profitability year over year offset by tax payments due in Brazil related to positive results in Q423. Turning to page eight of the presentation, you can see in the top left that cash used in operating activities was $15 million in Q124 compared to cash from operating activities of $93 million in the same period in 23, due to lower profitability in the current quarter. AMG ended the quarter with $381 million of net debt, and as of March 31, 2024, we had $285 million in unrestricted cash and $200 million available on our revolving credit facility. As such, we had $485 million of total liquidity at the end of the quarter, And if you include the $100 million term loan expansion, which closed on April 15th, we have close to $600 million in total liquidity. It's worth noting that we fixed our interest rate on the new issuance and now have a blended fixed rate of 5.7% across our bank debt and a blended fixed rate of 5.4% across our entire debt portfolio, including our municipal bond. Given today's interest rate environment in which three-month U.S. Treasury bills yield 5.4%, our low fixed rate interest cost is a huge advantage. That concludes my remarks.

Eric? Thank you, Jackson. Although falling prices for lithium and vanadium products negatively impacted our financial performance in the quarter, all of our operating units are performing exceptionally well and as planned. We continued our cost reduction and efficiency programs in the first quarter of 2024, and the execution of our strategic growth projects remains on schedule. Our Brazil lithium operation delivered 15,652 metric tons of lithium concentrate in the first quarter. The average realized sales price was $1,163 per ton SIF China, and the average cost was $616 per ton SIF China. Our lithium concentrate plant expansion from 90,000 tons to 130,000 tons is on schedule and ramping up. Second quarter shipping volumes and costs will be similar to the first quarter due to unabsorbed costs during the ramp-up. However, we expect to produce a full 130,000 ton annualized capacity in the fourth quarter with costs returning to the low $500 per ton area, SIF China. We believe net of co-product credits we are and will continue to be at or near the bottom of the global lithium concentrate cost curve, which is an important building block for our lithium vertical integration strategy. AMG's lithium battery-grade lithium hydroxide refinery in Germany is in advanced stages of commissioning and product qualification for the first 20,000-ton module. We will ship production batches for qualification to clients early in the third quarter of this year. AMG Vanadium's operations in Ohio continue to perform exceptionally well. Our operational and financial performance far exceeds the performance of our publicly listed competitors, as today's market prices are below many of their operating costs. This further validates the value of our environmentally focused recycling business model and is a leading factor in AMG's global lithium strategy. AMG Vanadium is presently focused on delivering and executing a global lithium satellite roasting strategy with the implementation of our recently acquired TTI technology. This process technology further diversifies our ability to accept a variety of vanadium-bearing material and supports our vanadium electrolyte expansion in Germany as well as our ferrovanadium operation. The vanadium electrolyte plant is in the final stages of completion. This facility will process spent catalysts to vanadium oxides and further on to vanadium electrolyte. The target capacity is 6,000 cubic meters of vanadium electrolyte, the equivalent of approximately 100 megawatt hours and a vertical integration into our AMG Levas batteries. In terms of our technology segment, AMG Engineering signed $82 million in new orders during the quarter. 8% higher than the first quarter of 2023. This order intake level was driven by strong orders of remelting and turbine blade coating systems, as well as spare parts and the service division. We had an order backlog of $300 million as of the end of the quarter, driven by the strong aerospace market and geographic diversification of supply chains. Our overriding objective continues to be the lowest cost, highest quality, and most environmentally responsible producer of all of our products, ensuring strong cash flow and profitability even at these cyclical low prices. I would now like to pass the floor to Dr. Hans Schimmerbusch, AMG's Chief Executive Officer. Thank you, Eric.

Regarding 2024 outlook, low prices continue for both lithium and vanadium, utilizing today's price levels, we reiterate that AMG's 24 adjusted EVDA will be approximately $130 million. AMG's lithium projects are progressing on schedule, and we expect that they will have a substantial positive impact as market conditions improve. Regarding AMG's five-year guidance, Utilizing a variety of price and quantity assumptions, with a lithium carbonate equivalent price of $25,000 per ton, we guide to an EBITDA of $500 million or more in five years or earlier. Operator, we would now like to open the line for questions.

Thank you. At this time, we will open the floor for questions. If you would like to ask a question, may press star 1 on your phone keypad. It is star 1 if you would like to ask a question. To remove yourself from the queue, press star 2. We will pause for a moment to allow questions to queue. We will take our first question from Martin Dendriver with Avnamro.

Yes, good morning, gentlemen. Thank you, operator. I have three questions, if I may. This one is for Eric first. How should we view the phasing of the capacity in Brazil to the nameplate capacity? Will that be linear in Q2, Q3, Q4, or will that be more backend loaded? Could you share a bit more on that phasing, please?

No, as I mentioned, Q2 volumes will be similar to the first quarter, and then ramping up reasonably quickly in the third quarter to full capacity in the fourth quarter.

Okay, clear. And then on the additional $100 million term loan, and then specifically related to the lithium resource development statement, What do you have in mind with regards to that 100 million? What are you going to spend it on? Gainshare, your thoughts on those plans.

Well, it's a general observation that when prices are very low, opportunities surface. And we don't have any specific target. But we want to be prepared to react. if such things occur.

And so that includes the whole palette, including a takeover, a partnership, a commercial partnership just on production. Does it run the full gamut of options, or do you have a specific element in it?

There is no limits to fantasy here.

Okay. Thank you. And then the third question with regards to the median term guidance, you've given the assumption on the lithium carbon price, $25,000, but is it still including the Brazilian conversion plans and a second train in Germany, or has there been a change in that scope as well?

Yes, it does. But this project in Brazil is technically and in very good shape, highly prepared. What is still optimized is certain site considerations. And of course, that has an impact on timing. But other than that, it is in the five-year plan.

Okay. And just a small question on AMG Lithium. You've given the sales volume and the price, so that's roughly 18, 19 million in revenue. You add a bit of tantalum based on a normal quarterly production. That's another 5 million. This is just roughly, I get to 24 million. But you reported 42 million. So what am I missing here? Maybe you can help me out.

I don't think you're missing anything. Well, I'll do the numbers and get back to you offline, but I think you're bang on.

All right.

In terms of 42 is 100% accounted for by our Brazilian sales of spodumene plus tanolin. But I'll tie the numbers for you after the call.

Thank you, Jackson. That's it from my side. Thank you. Our next question comes from Krishnan Agarwal with Citibank. Mr. Agarwal, your line is open.

You hear me?

Yes.

Yeah, thanks a lot for taking my question. I have to, if I may. So the 130 million guidance, I mean, should we assume that the Q1 EBITDA is supposedly a growth EBITDA because the prices in the spot market has improved somewhat, going to 25%. So how much of that, you know, improvement in the prices is likely to underpin our performance into the EBITDA guidance for later this year? That's number one. And number two, can you also touch upon the net debt position? I mean, how should we see the progression from here, given, as opposed to the peak of the cap, as would have been already there into the net debt number, how should we look at the net debt by year-end?

Thanks. For the first question, as it got to price assumptions, we don't assume any price increase in our 24 guidance. Noting that the present spot prices are sort of slightly above our price assumptions.

Yeah. So the increase is all volume in the back end of the year? Yeah. And then in terms of net debt, I think you know we're targeting $125 million of capital expenditures this year. and we are targeting working capital expenditures for our Bitterfeld startup. So we would expect net debt to increase slightly versus today.

And that is, of course, an acquisition.

If I can ask a follow-up, so $400 billion net debt probably is the highest, and obviously understandable because you are into the peak of project execution. Do we see or is there any kind of a net debt to EBITDA target you want to set once the projects are already done in the sector from 2025 onwards? Is there any kind of a thought process going on within the organization as a way to guide the market?

No, because obviously net debt to EBITDA is dependent upon lithium price. So we don't actually put out a target for net debt to EBITDA. What we have told the market is the maximum target net debt to EBITDA that we will incur is two and a half times over the medium term. So we've told that's the reason. But it's not a target, it's a max.

Yeah. Okay, and then there are no covenants as such on your the K-Rays loan municipal bonds you have or any of the loans?

We have one covenant It's on a revolving credit facility, and it is a net debt to EBITDA covenant of three and a half times. We have no covenants on our municipal bond.

That's rolling 12 months or trailing 12 months?

Yep, trailing 12 months, net debt to EBITDA of three and a half times. And I should point out that is net senior secured debt only. So it's only the bank debt, not the municipal bond. Okay.

Okay, understood. Okay, thanks a lot.

You're welcome.

Thank you. As a reminder, to ask a question, press star 1 on your phone keypad. It is star 1 if you would like to ask a question. And our next question comes from Viko Salvasti with ING.

Hello, good morning, and thanks for taking my question. It's Viko Salvasti from ING on behalf of Science Masters. I have a few questions. The first one would be whether you can provide some further color on the qualification process of lithium Germany. So did I understand correctly that the first test batches will go to customers in Q3, and whether you can then tell how the process will progress from there on, and what's the schedule?

Well, as you know, the qualification process of battery-grade lithium products, hydroxide products, is a very staged and highly disciplined process. We have said that we, in the third quarter, will do batches. Then the batches are going to the customer. While that happens, the plant is resting. Then, if any corrections are necessary, they are being implemented and then the plant is starting full. based on the qualification sites. So, I think that's all we want to say. We have certain assumptions and that has been specified, you know, that we will be reaching full production in the fourth quarter.

So, what's full production in the fourth quarter?

We will reach, depending on this qualification, we don't say which week we will reach full production. We say in the fourth quarter, full production will be reached.

Okay, thank you. And then just to confirm, on your longer-term guidance of 500 million or more adjusted EBITDA, so does this guidance include one, two, or more modules in Germany?

It includes two modules.

Perfect. Thank you very much.

So the first and the second one.

Yes. And the final question from my side would be, what was the price assumption, or can you share what was the price assumption of your previous longer-term guidance of 650 million EBITDA?

It was somewhat higher than the... It's very easy to preach. When we gave the guidance of 650, we were in a different stratosphere as regard to lithium prices. So we were a little bit optimistic. And when you correct that, then you come to the present guidance.

Perfect. Thank you very much. That's all from my side.

Thank you. There are no more questions at this time. However, if you would like to ask a question, you may press star 1 on your phone keypad. It is star 1 if you would like to ask a question at this time. It appears we have no further questions at this time. I'd like to turn control of the conference back over to our presenters for any additional or closing remarks.

Thank you, everyone, for joining the call. Our AGM will be at 1 p.m., and it will be available later, full webcast on our website if you're not able to join. Thank you.

Thank you, everyone. This concludes today's conference. We appreciate your participation. You may disconnect at any time.