AMG Critical Materials N.V. (AMG) Earnings Call Transcript & Summary

Good day, everyone, and welcome to today's AMG Q2 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the Question-and-Answer Session. [Operator Instructions]. It is now my pleasure to turn the conference over to Ms. Michele Fischer, VP of Investor Relations. Please go ahead, ma'am.

Welcome to AMG's Second Quarter 2023 Earnings Call. Joining me on this call are Dr. Heinz Schimmelbusch, the Chairman of the Management Board and Chief Executive Officer; Mr. Jackson Dunckel, the Chief Financial Officer; and Mr. Eric Jackson, the Chief Operating Officer. AMG's Second Quarter 2023 Earnings Press Release issued yesterday is on AMG's website. Today's call will begin with a review of the second quarter 2023 business highlights by Dr. Schimmelbusch. Mr. Dunckel 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 expressly refer you to our statement on the 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 at our website in all connection with this earnings call. I will now pass the floor to Dr. Schimmelbusch, AMG's Chairman of the Management Board and Chief Executive Officer.

Thank you, Michele. This is the fourth straight quarter in which AMG has exceeded $100 million of EBITDA. This 32% EBITDA increase over the second quarter in '22 was driven largely by our Clean Energy Materials segment, specifically AMG Lithium's Brazilian operation, with an EBITDA contribution of $$89 million. AMG's liquidity as of June 30, '23, was $586 million. The $391 million of unrestricted cash and $195 million of revolving credit availability. The company will pay an interim dividend [indiscernible] of $0.40 per ordinary share on or around August 9, '23, to shareholders of record on August 9, '23. AMG Engineering signed $167 million in new orders during the second quarter of '23, driven by strong orders of the remelting and induction furnaces representing a 2.48x book-to-bill ratio. AMG's order backlog was $337 million as of Q2 '23, which is the highest in AMG history, which is 15-year history. This is largely driven by the U.S. aerospace market. Our Q2 '23 U.S. order intake is essentially doubled from our second quarter '22 U.S. order intake. We continue to drive our lithium strategy forward and are pleased to announce that we have signed a mandate letter with Germany's KfW IPEX-Bank and with Citi Group to structure and arrange the financing for the construction of our proposed technical-grade lithium chemical plant in Brazil. This capital expenditure is presently estimated to be close to $300 million. The financing structure is expected to cover all the funding requirements and be supported by Euler Helmes, I'm sorry, which means the government-backed program backed by the German government for projects which deliver critical materials into Germany. This proposed financing is a cornerstone of our lithium strategy to be the premier supplier of battery-grade lithium hydroxide in Europe and another important step towards an independent and sustainable lithium supply chain in Europe. In addition, the project conforms with AMG's Brazil's commitment to upgrade its operations to produce a higher value product by significantly contributing to CO2 emissions -- to the reduction of CO2 emissions by lowering total volumes shipped materially. Our expansion projects remain on track. The lithium concentrate expansion project in Brazil is progressing as planned. And our hydroxide refinery in Bitterfeld, Germany, is expected to start commissioning for the first 20,000-ton module in the fourth quarter of '23. This will be the first European Hydroxide refinery. AMG is working on a variety of lithium resource projects. Following our principles, we will only comment publicly on those as signatures have happened. We are very satisfied with our project development work, which is difficult for feeding additional modules of our hydroxide refinery complex in Bitterfeld, Germany. The new spent catalyst decycling facility in Zanesville, Ohio, AMG's largest investment project to date, is currently turning at full capacity -- is running at full capacity and targeting full run-rate production for the second half of '23. AMG's LIVA battery projects for industrial power management applications outlined at our Capital Markets Day are under various stages of construction. Shell & AMG Recycling B.V. otic development in the Middle East is progressing. The so-called Supercenter project in the Kingdom of Saudi Arabia is completing the FEL3 feasibility study later this year. SARBV, Shell & AMG Recycling B.V. activities have already led to material deliveries of spent patents to hire from overseas. I will now pass the floor to Jackson Dunckel, AMG's Chief Financial Officer. Jackson?

Thank you, Heinz. I'll be referring to the second quarter 2023 investor presentation posted yesterday on our website. Starting on Page 3. This shows an overview of the financial highlights of the quarter. Revenue for the quarter increased by 4% to $439 million. Q2 '23 EBITDA was $107 million, a 32% increase versus the prior year. This increase was primarily driven by a strong performance from our Clean Energy Materials segment and, in particular, driven by AMG Lithium and its Brazil operation, which generated $89 million of EBITDA. Net income to shareholders increased substantially versus Q2 '22 to $43 million for the second quarter of '23, yielding $1.28 of diluted earnings per share compared to $0.91 in the same period last year. Now I'm going to review our 3 segments and starting with AMG Clean Energy Materials, which is shown on Page 4 of our presentation. On the top left, you can see that Q2 '23 revenues increased 30% versus Q2 '22 to $208 million. This increase was driven mainly by increased sales volumes and increased prices of lithium concentrate. Q2 '23, EBITDA increased to $96 million from $58 million in the second quarter of '22 due to higher revenue and profitability in our lithium business, offset by lower profitability in our vanadium business, which was due to lower volumes as a result of a defected fan of our Zanesville facility that Eric will discuss further in his remarks. Our mine in Brazil produced a total of 29,000 dry metric tons of lithium concentrate in Q2 '23. This sales volume is well in excess of our average quarterly sales of 22,000 tons and was due to shipping schedule variances, which will negatively impact the third quarter. The average realized sales price was $3,633 per ton, CIF China, for Q2 '23, while the average cost per ton, again, CIF China, was $547 per ton. This cost per tonne is higher than the first quarter of '23 due to lower volumes and pricing in tantalum concentrate. As discussed previously, lower tantalum revenue reduces the cost offset in calculating our net cost of spodumene production. And finally, the quarterly CapEx shown on the bottom left of $23 million mainly reflects our investment into a battery-grade lithium hydroxide plant in Bitterfeld, Germany as well as the expansion of our Spotamene capacity in Brazil. Turning now to Page 5 of our presentation, which shows critical minerals. AMG Critical Minerals' revenue for the quarter decreased 45% to $57 million compared to Q2 '22 due to lower volumes across the segment, largely driven by the silicon metal plant operating 1 furnace during the quarter. Q3 '23 EBITDA decreased 83% compared to Q2 '22 to $1.5 million, largely due to lower volumes across all 3 businesses. The lower volumes in antimony and graphite were caused by a slowdown in their end-use markets, primarily the housing, industrial, and automotive markets. In terms of silicon, we currently plan to continue running one furnace in order to satisfy outstanding customer contracts. Moving on to AMG Critical Materials Technologies on Page 6. Starting on the top left, you can see that Q2 '23 revenue increased by $13 million or 8% versus Q2 '22. This improvement was driven by higher revenues in our engineering unit as well as higher sales volumes of titanium alloys and chrome metal, partially offset by lower chrome metal pricing. EBITDA was $10 million during the quarter compared to $14 million in Q2 '22. The decrease was primarily due to lower chrome prices in the second quarter of '23, partially offset by higher profitability in our Engineering and titanium businesses. As Dr. Schimmelbusch mentioned, we had a very strong order intake in Q2, with AMG Engineering signing $167 million in new orders during Q2 '23, representing a 2.48x book-to-bill ratio. Turning now to Page 7 of the presentation. On the top left, you can see that AMG's Q2 '23 SG&A expenses were $49 million versus $37 million in Q2 '22. The increase was attributable to higher personnel costs driven by increased hiring in our lithium, engineering, and LIVA businesses. It was also driven by a one-time pension expense of $6.7 million due to the restructuring of executive employee benefit plans. AMG's net finance cost in Q2 '23 was $7 million compared to $12 million in Q2 '22. This variance was mainly driven by higher interest income earned as well as foreign exchange losses in the prior period. In today's rising rate environment, AMG continues to benefit from its low-cost, fixed-rate debt facilities and has an average interest rate charge across its 2 main debt instruments of 5%. AMG recorded an income tax expense of $27 million in the second quarter of '23, compared to $23 million in the same period of '22. This variance was mainly driven by higher profitability in AMG Lithium at its Brazil operation, offset by U.S. tax expense and movements in the Brazi real. The effects of the Brazilian real caused a $2 million tax benefit in the second quarter of '23 compared to a $4 million tax expense in the same period in '22. The fluctuations in the Brazilian real exchange rate impact the valuation of the company's net deferred tax positions related to our operations in Brazil. AMG paid taxes of $35 million in the second quarter of '23 compared to tax payments of $9 million in the second quarter of '22. The higher cash taxes in the current quarter were a result of tax payments tracking a consistent upward trend in Brazil's results. Turning to Page 8 of the presentation. You can see that on the top left, cash from operating activities was $60 million in Q2 '23 compared to $40 million in the same period in '22. AMG's annualized return on capital employed for the first 6 months of '23 was 35.7% compared to 25.5% achieved in the same period in '22. AMG ended the quarter with $280 million of net debt with a decrease versus year-end '22 due to higher cash balances from our strong operating cash flow. As of June 30, 2023, the company had $391 million in unrestricted cash and cash equivalents and total liquidity of $586 million. That concludes my remarks. Eric?

Thank you, Jackson. In addition to safety, our operating priorities are to maximize cash flow, increase operating efficiencies, manage price risk and deliver our strategic projects on time and on budget. AMG Vanadium's second quarter performance was negatively impacted by the failure of [indiscernible] in our sales law facility. The root cause has been identified as a supplier design loss. That has been re-engineered [indiscernible] and our on-site ordering roots and operations we started without interruption. AMG has commenced an arbitration claim seeking compensatory damages, including costs and loss of profits [indiscernible]. As Schimmelbusch mentioned, both Cambridge and Zanesville are now operating at full capacity and targeting to operate at full capacity for the second half of 2023. Additionally, the [indiscernible] has shown a significant productivity improvement over the past number of weeks, much of it due to increasing operator experience. It's also worth doing that AMG provision has successfully extended its sourcing spend catalysts outside of North America. This is, in many ways, a pride of our excellent relationship with Shell and Catalyst Technologies and the SARBV [indiscernible]. As previously communicated, the lithium concentrated expansion budget in Brazil is planning a temporary shutdown in the third quarter to integrate and complete the expansion from 90,000 tons to 130,000 tons of sport. This will result in reduced production in the third quarter. We believe a net of co-product credits in our edge or near the bottom of the global lithium concentrate cost cut. And it's worth restating that 100% of our capital on concentrate production is sold at market prices under the terms of our joint [indiscernible]. In January '23, we announced approval for vanadium electrolyte plant expansion [indiscernible] target asset is 6,000 cubic meters of anatimetrolite per annum produced from secondary stocks. Construction has started, and commissioning and production are expected to start [indiscernible]. AMG Silicon operated 1 of 4 furnaces throughout the second quarter, and we'll operate 1 furnace for the remainder of 2023. We will continue to review the operational parameters of the silicon business on a point basis. In terms of our Critical Materials Technologies segment, AMG Engineering [indiscernible] the second quarter, resulting in their book-to-bill of 2.48% tension in an order backlog of $337 million as of January 1. We're also seeing similar improvement in the end markets of our aerospace-related critical materials, specifically to [indiscernible]. We continue to focus on safety, operational improvements, risk management, and successful delivery of our strategic projects on time and on budget. Our pre-pricing objective in all of our businesses is to be the low-cost, high-quality, and most environmentally responsible producer. I would now like to pass the over to Dr. Schimmelbusch, AMG's Chief Executive officer.

Thank you, Eric. Given the global economic uncertainty and the slowdown in China, current spot prices across AMG's critical materials portfolio are significantly below the prices we expected when we announced the initial guidance for '23. in November 22, the price of lithium concentrate in November 22, the date of our $400 million EBITDA guidance as exceeding [indiscernible] has now almost halved, and our other relevant portfolio prices are down in an average of more than 25%. Therefore, we have changed our full EBITDA guidance for '23 from growth exceeding $400 million in EBITDA to "a range between $350 million and $380 million in EBITDA." And EBITDA in this range represents the highest EBITDA in the history of AMG. As previously disclosed, third-quarter profitability will be negatively impacted by lower volumes associated with the bottoming expansion project. Volumes will recover in the fourth quarter as the project begins to ramp up. Regarding our long-term guidance, we are extremely pleased with the advancement of our strategic projects. We are moving forward with our lithium concentrate expansion on [indiscernible]. We have signed a mandate letter to fund the chemical upgrader in Brazil, as mentioned in our lithium hydroxide refinery in Bitterfeld under construction, with commissioning for the first 20,000-ton module expected in the fourth quarter of '23. The transformational projects in Lithium, our newly complete ferominadium spent catalyst steeling facility in Ohio, and the continued ramp-up of AMG's critical materials technology segment will drive increased volumes across the Clean Energy Materials segment and confirm our confidence in our long-term guidance. Our long-term guidance, therefore, remains unchanged at an EBITDA level of $650 million or more in 5 years or less. Operator, we would now like to open the line for questions.

Thank you. [Operator Instructions] We'll take our first question from the line of Martijn den Drijver with ABN AMRO.

I have 3 questions, please. With regards to your revised guidance, can you share with us what you've baked into that as assumptions for contributions roughly, obviously for Cambridge II and the scaling up of SP1 and SP1+? So in other words, should we assume 50% of Cambridge during Q3 and 100% in Q4? And with regards to the scaling up of SP1 and SP1+, should we assume full production in Q4, which is roughly 32,000 metric tons? Or should it be assuming maybe perhaps scaling up is taking a little bit more time? That's question one. I'll do one more, please.

So we want to remind you that the process by which -- is not one case. It's not one scenario. It is a group of scenarios that, therefore, leads to a range. And there are various assumptions discussed and run through models, and then it also leads to decision-making about the range, but it's more or less a given process. And therefore, it is very difficult to comment on the various assumptions running in the various scenarios behind those pads. But essentially, you are on the right track with that question.

Okay. So it's better to assume scaling up of Cambridge II towards normal EBITDA contribution in the second half and a gradual scaling up after completion of SP1+ during Q3 and into Q4 that will be divided in about…

I would repeat. You are on the right track, but I'm not commenting on one particular scenario now.

And we'll take our next question from the line of Stijn Demeester with ING.

My first question is on vanadium. Eric had a bit of a bad line. So apologies if this has already been answered in his message. But if you deduct lithium EBITDA from the Clean Energy Materials EBITDA, we see a start decline from Q2 versus Q1. I think non-lithium EBITDA of about $7 million in Q2 versus $14 million in Q1. So we drive these low results, as I'm assuming Zanesville didn't have a meaningful contribution in Q1 either, and prices of Vanadium were relatively stable quarter-over-quarter. So yes, what is this, is this extra cost tied to the issues you had in Zanesville, or are there some other elements that you can flag?

No, Stijn, you've got it. It's mainly the defective fan. So it's a loss of volume plus incremental costs.

Okay. Understood. Then the second question is on the ramp-up schedule of SP1+. Can you be a bit more specific on maybe what kind of weeks of downtime we could see in Q3 because I'm assuming you would ship something at least? So yes, any sort of message you can give here on what kind of volumes we should pencil in, in the second half and in Q3 versus Q4?

You will appreciate that changeover from one flow sheet, which is a 90,000-tonne flow sheet, to another flowsheet, which is a 130,000-tonne flow sheet while minimizing the shutdown of the change -- implied by the changeover is an extremely challenging environment. It is very well planned and will be executed. But there is, of course, certain uncertainties associated with this trait make us very hesitant to comment on the details here. The third quarter will be, therefore, reduced as our -- and that will be compensated in our assumptions of working compensated in the fourth quarter. If respectfully, I might remark the details of the borderline between the third quarter and the fourth quarter in this changeover process is meaningless as regard to value when you consider the entry side of the year, it is very difficult to detail answer the quarter like here to discuss the quarter and also regarding shipments and the changeover implications.

Okay. Understood. My final question, then, is on the timing of the guidance downgrade. And I'm basically puzzled why you waited until Q2 as Chinese lithium prices have already recovered since the end of April. So I would say the uncertainty on prices was higher in Q1 than it currently is at Q2. So I'm a bit puzzled hearing your thinking and yes, on why you didn't sort of caution at Q1 and waited until now [indiscernible] have already cleared up.

Yes. You'll hear from me from eagerness to answer that we don't wait with changing our guidance. We have a continuous process of monitoring the assumptions of our guidance. And I don't know how many days ago, but there was accumulation of news as regard to listing price forecasts, et cetera, in China and the quantities involved, which led us to review our guidance and we expand through the process, which I had mentioned earlier led to this range, which is a little bit lower than the previous guidance. So my main point is we didn't wait. Of course, in this continuous process of the revisions of guidances, the fourth quarter stands out because we, of course, know that there will be a public event, and therefore, the intensity of scrutinizing the assumptions of such guidance is increasing prior to the quarter. So my comments here to your statement is mainly on your growth waiting, we don't wait.

Okay. Maybe if you allow me one follow-up. What explains the difference in volumes of tantalum versus lithium per quarter, as I'm assuming since you have these offtakes?

So as regards to qualities, these -- as an executive and as a shareholder, I'm very at the comfort of the fact that 100% of the quantities produced by the clean energy materials sector are sold under long-term contracts, 100% are sold on long-term contracts. Therefore, whether you have a shipment in the boundary of one quarter to the other or months or it's completely meaningless. It's very rare to analyze the company where 100% of the sales -- the quantities behind the sales are secured by long-term contracts.

I understand that, but I'm simply asking why tantalum volumes and lithium volumes don't track comparatively so that they are co-produced.

That's due to shipments, Stijn. So the tantalum shipments make their way from Brazil to Germany. The lithium shipments make their way from Brazil to China. In both cases, we recognize the revenue when they land, and our ability to control when they land and how many shipments go per quarter is difficult. So it's a constant production, but what we're reporting is sales.

And we'll take a follow-up question from the line of Martijn den Drijver with ABN AMRO.

One question left. On the FID of the Brazil conversion plant. I didn't quite catch what Eric said. Is the plan still to have that plant fully completed, constructed at the end of 2025, and commercially in operation in 2026? And is the CapEx still estimated to be $250 million?

No, we are expecting a final investment decision of the carbonate plant. I think that's what you are talking about later this year. And that is estimated to be below $300 million both in the investment more or less fully financed by the special financing structure, which I have commented on. And so for us to talk about the startup when the investment decision is expected to be later this year is a little premature.