Earnings Call: Q2 2021

Jul 28, 2021

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 Q2 2021 earnings call. Joining me on this call are Doctor. Heinz 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 Q2 2021 earnings press release issued earlier today is on AMG's website. Today's call will begin with a review of the Q2 2021 business highlights by Doctor. Schimmelbusch Mr. Dunkel will comment on AMG's financial results and Mr. Jackson will discuss operations. At the completion of Mr. Jackson's remarks, Doctor. Schimmelbusch will comment on strategy and outlook. We will then open the call to take your questions. Before I pass the call to Doctor. Schimmelbusch, I would like to comment on forward looking statements. This conference call could contain forward looking statements about AMG at PennzAllurgical 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 of 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 I will now pass the floor to Doctor. 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 twenty twenty one. In 2,007, 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 gaster in our Clean Energy Materials 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 contracts 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 AMG Titanium and Alloys and Coatings in Nuremberg, Germany. AMG Engineering is building AMG's 1st industrial battery, a hybrid Lithium vanadium 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 Q2 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 3, this shows an overview of the financial highlights of the quarter. Revenue for the quarter increased by 44 percent to $298,000,000 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 'twenty one EBITDA was $31,400,000 This result was over 4 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 $3,600,000 versus a $12,500,000 loss from the prior year. Turning to a review of our 3 segments. Let's start with AMG Clean Energy Materials, which is shown on Page 4 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 2 to 4 month lag associated with contractual terms. Gross profit for non recurring items increased by $12,100,000 compared to the same period in the prior year. Q2 'twenty one EBITDA increased by $11,300,000 to $12,600,000 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 AMG and the capital expenditures shown on the bottom left of $37,000,000 mainly reflects Our investment into the Zanesville vanadium facility. Turning to Page 5 of our presentation, which shows AMG Critical Minerals. AMG Critical Minerals revenue increased by 60% to $77,000,000 driven by higher sales volumes Higher sales prices across the graphite, antimony and silicon business units that comprise this segment. Gross profit For non recurring items increased by 117% in Q2 and EBITDA more than doubled versus the prior year. Moving on to AMG Critical Materials Technologies on Page 6. This segment comprises our chrome metal, titanium alloys and engineering units. Starting on the top left, you can see that Q2 'twenty one 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 'twenty one gross profit before non recurring items increased by 61 percent to $21,100,000 AMG Critical Materials Technologies Q2 EBITDA more than tripled to $9,600,000 from Q2 last year and has improved sequentially every quarter since Q2 'twenty. Order backlog was $191,000,000 as of June 30, 2021, in line with the $191,000,000 as of the end of March. The company signed $57,300,000 in new orders during Q2 'twenty one, representing a 0.92 book to bill ratio. The quarter benefited from strong orders of remelting and induction furnaces. Turning now to Page 7 of the presentation. On the top left, you can see that AMG's Q2 21 SG and A expenses were $33,000,000 versus $27,000,000 in Q2 'twenty. This increase Was primarily driven by higher incentive payments and increased headcount at Lithium GmbH. AMG's Q2 2021 net finance costs were $4,800,000 compared to $6,300,000 in Q2 2020. This decline was mainly driven by favorable foreign exchange movements. AMG recorded an income tax benefit of $5,600,000 in Q2 'twenty one compared to a benefit of $400,000 in the same period in 2020. This variance was mainly driven by movements in the Brazilian real offset partially by higher pretax income compared to the prior period. The effects of the Brazilian real caused a $12,400,000 non cash deferred tax benefit in the Q2 of 2021 versus a $3,300,000 expense in Q2 2020. Movements in the Brazilian real exchange rate impacts the valuation of the company's net deferred tax position related to our operations in Brazil. AMG paid taxes of $2,500,000 in Q2 2021 compared to a tax refund of $2,400,000 in Q2 2020. This was largely due to international COVID-nineteen 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 $11,700,000 to the environmental provision associated with our decommissioned site in New Jersey, Which decreased net income by $8,800,000 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 $23,000,000 in Q2 'twenty one, an increase of $2,700,000 over the same period in 2020. Moreover, cash from operating activities was $43,000,000 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 twenty twenty one. 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 2021 with $220,000,000 of net debt. This decrease was mainly due to the additional issuance of shares, which generated $119,000,000 of net proceeds, offset by the significant And we are pleased to announce that we are in the quarter, especially in our vanadium expansion in Ohio. As of June 30, 2021, AMG had $341,000,000 of unrestricted cash and total liquidity of $511,000,000 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 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 continued to improve and strengthen in the Q2. 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 today below the 5 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 business are realized with a 2 to 4 month delay. The impact of this is most substantial in spodumene where 3rd quarter prices are likely to be $125 per ton higher than in the 2nd quarter. We are operating this business at full nameplate capacity. Tantalum prices have also increased dramatically in the last few months. However, higher tantalum prices will not be realized until the Q1 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 And they continue to progress as planned in spite of the logistical challenges relating to COVID. The impact of the coronavirus is most significantly felt on AMG Critical Materials Technologies in the market for our aerospace related businesses. However, AMG Critical Materials Technologies delivered 4th quarter in a row of sequentially improved EBITDA 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-twenty 22. Again, operationally, we continue to focus on those parts of the business I would now like to pass the floor to Doctor. Heinz Schimmelbusch, AMG's 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 3 strategic highlights, which illustrate where our value creation efforts coincide with our efforts to continuously upgrade our ESG profile. 1st, 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 BD because it will provide A differentiated and growing end use for the large scale spent catalyst projects It is pursuing in the Middle East. 2nd, again, circular economy and electricity storage. AMG's Engineering is building AMG's 1st industrial battery, A hybrid lithium vanadium 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. 3rd, 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 CAD100 1,000,000 to exceeding $120,000,000 by 20%. Given the current market conditions, we reiterate our confidence in being able to exceed €120,000,000 in EBITDA for the full year of 2021, and we expect to continue to sequentially improve our EBITDA quarter over quarter performance for the remainder of the year. Operator, we would now like to open the line for questions. Certainly. And we'll go first to Martin Dendreiber of ABN ODDO. Yes. Good afternoon, gentlemen and Michel, Martijn and Deiper, Adrian Ambro, Auto. The first question is with regards to the movement in sales and gross profits in 2 divisions. I can't get my head around what's happening in clean energy materials From Q1 and Q2, you've had roughly EUR 20,000,000 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. 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 at face value now. Similar question for Critical Materials Technology. Again, The delta versus Q1, SEK 11,000,000 gross profit before exceptionals, hardly changed. So what's the explanation here that 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 2 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. Yes, but the commercial business has 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 3 projects? And what should we take into account going forward? Is there any change Your guidance with regards to CapEx? No. Yes. So we gave you $180,000,000 We gave you $180,000,000 guidance last quarter. We would increase that maybe to 200, but it really depends because we're busy spending money on our Zanesville 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 Pleasure to say something. It is below €10,000,000 Yes. Okay. Got it. And then on The SLAC remediation in New Jersey, I asked a question, I think it was 1 or 2 quarters ago about that. You at that point said that there was no going to be any more remediation costs. Now it's SEK 11,700,000. 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. 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 order in Hello. That is mainly related to the re melting and induction furnaces. Can you give me an approximate amount of how many orders related to aerospace and related to Turbine blade furnaces are now in your order book, right? Or is that 0 or almost 0 at the moment? In the existing I didn't get it. In the existing order book, how much is aerospace related? Yes. 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 I would say that about half of the order book is related to turbine blade quotas, Which is clearly Aerospace. That is still the case in the current order book. Yes. Overall, this is a very dynamic sector. And the question is difficult to answer because, for example, if you are building 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 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 reverts and for scrap treatment. Okay. And 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 that will be have you how does it look on the potential offtake agreements? And the second question will be on, Yes. I guess you still plan to install, let's say, the first 20 ks ton capacity, Well, you also have the engineering side 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 20 ks? And then I'll ask another question related to lithium. But there was a host of question here. So offtake agreements for the battery free hydrogen? Yes. It is not an industry where you Making off date agreements, unless you have off date agreements, which have subjects where you can And what are the 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 So all laboratories are matched with our optimization of what we will produce. And these are very elaborate procedures ongoing. It's a chemical product. It's not Cop up for London Metal Exchange where you drive 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 felt has to be neatly Fitting into the very high quality standards of the customers and vice versa. As regard to the profitability of the investment To increase our production following production in What is the production? 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 EBITDA, if that multiple is higher than 4, then it doesn't get authorized. So that should give you a guidance for that. But what else was No, that was it, I think. That was it. Okay. That's very clear. Because I mean at the same time, you see a lot of automotive players also this quarter sort of dealing their EV plans and their investment outlay. I mean, you plan to spend about $100,000,000 of CapEx on this project in the next 2 years. And at the same time, I think investors are also asking Where do you get the spodumene supply, because there's a lot of spodumene needed to already for this first 20 ks. So When do we get when is the plan that we do get the results? 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 And we are confident too to be very successful in that We have 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 financings of import streams into Germany. So I don't think that is a bottleneck. Okay. Thank you for that color. My last question will be Follow-up on Martijn's question on the environmental expense in the P and L. And just For my idea, it was not very clear to me. Is that also already embedded in the cash flow statement? Or Is it the provision now? And when will we see that cash out of $11,000,000 or $12,000,000 almost $12,000,000 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 financing. So the cash out will be over the next 18 months. The decision was between Doing it year by year, we decided to accelerate and get it behind us. Right. That's clear. Thank And we'll now go to Martin Verbeck from the idea. Good evening. It's Martin from DIAA. 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 of how many years? And what kind of objectives you have to grasp? What's part of the market you intend to grasp? Yes. That is an interesting question. We had 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 When the ARC is closing, the electricity demand shoots up, I don't know, 5 times or 8 times or whatever. When you have the hot gas mill, same thing. That is penalized by the utility Because the utility favors when they have the right to interrupt delivery, But we penalize you when you interrupt their continuous delivery profile. So you have high cost when you have such a buffer. The traditional way of Dealing with that is to build a standby power plant. And the classic way to have that done It's a diesel engine island standby power plant. That exactly was the Proposition of 1 of our operating unit management. And in thinking about that through our laboratories and through AMG Engineering, we came to the conclusion that This is a much better solution is a lithium vanadium hybrid battery. Why? The vanadium battery is low cost and easy to handle. However, it has a slow Discharge. Lithium discharges in milliseconds. So the result was Since such a hot gas mill or such electrical up 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 saves 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 we 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? I said, we wouldn't invest if it's not if it's Exceeding 4 times the ratio between investments and annualized, in this case, savings, Normalized savings. It's very profitable because the penalties are very high for such erratic profiles. So it's The safe electricity cost 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 Q2 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.