Nabaltec : Financial Statements 2023 *





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Annual Financial Statements 2023

A n n u a l R e p o r t 2 0 2 3   ◆ ◆ ◆ ◆ N A B A L T E C A G 

Nabaltec AG, Schwandorf

MANAGEMENT REPORT OF NABALTEC AG FOR FINANCIAL YEAR 20231

1. DESCRIPTION OF THE COMPANY

1.1 THE COMPANY'S BUSINESS MODEL

Business Operations

Nabaltec AG develops, manufactures and distributes environmentally friendly and simultaneously highly specialized products based on mineral raw materials. Nabaltec is one of the world's leading suppliers of functional fillers and specialty alumina on the basis of aluminum hydroxide (ATH) and aluminum oxide. Annual production capacity of all Group companies is currently around 265,000 tons.

The range of applications of Nabaltec products is highly diversified:

• flame-retardantfilling material for the plastics industry used e.g. for cabling in tunnels, airports, high-rises and electronic equipment;
• fillers and additives, e.g. as separator coating in lithium-ion batteries, as an all-natural barrier layer in foil or in gap fillers to improve heat conductivity;
• ceramic raw materials applied in the refractory industry, in technical ceramics and abrasives industry;
• highly specialized ceramic raw materials for ballistics, microelectronics and ceramic filters.

Whenever applications require a high degree of quality, safety, environmental friendliness and product duration, Nabaltec products are always preferred. This combination of critical properties is the basis for excellent growth prospects. The main drivers are the globally increased environmental consciousness, comprehensive international and national regulations and the industry's self-imposed obligation to use more eco-friendly products. The demand for flame protection within the plastics and cable & wire industry will continue to grow dynamically in the years to come, which is supported by market research studies. In order to benefit from this development, production capacities for environmentally friendly, flame-retardant fillers were specifically expanded in the "Functional Fillers" product segment. Today, Nabaltec is one of the world's leading suppliers in this area. Nabaltec's still new battery market segment for e-mobility applications serves a market which will post strong growth in the coming years, despite currently moving sideways. Nabaltec sees itself as one of the world's major manufacturers of boehmite-based coating material.

In the "Specialty Alumina" product segment as well, Nabaltec sees sound long-term growth potential for Nabaltec products thanks to a wide range of applications and relevant target markets, particularly for reactive aluminum oxides, due to stricter quality requirements in the refractory industry.

Nabaltec maintains very close contacts with customers through its sales team and its technical support staff. This proximity to our clients is fundamental for the concerted development of our products with a focus on market needs and applications.

1 All figures below have been rounded to the nearest million euro. This may result in apparent differences when adding or subtracting.

Corporate Structure

Nabaltec AG, based in Schwandorf, Germany, was formed in 1994 and, in 1995, acquired the specialty alumina division of VAW aluminum AG. In September 2006, the company was converted into a German joint stock corporation (Aktiengesellschaft). Nabaltec AG shares have been listed in the Open Market division of the Frankfurt stock exchange since November 2006 and have consistently been traded in high-quality segments of the exchange, including the Scale segment as of March 2017.

Since its initial public offering in 2006, Nabaltec has had intact access to the capital market. This is proven by the bond offering in 2010 as well as the loans against borrower's note in 2013, 2015 and 2022 and the capital increase in 2017. This market access, maintained by transparent and reliable communications at all times, secures Nabaltec AG a balanced and largely independent means of financing.

Nabaltec AG holds a 100% interest in Nashtec LLC (USA) and Naprotec LLC (USA) through Nabaltec USA Corporation, which was formed in 2018. In addition to administrative functions, sales activities for the Nabaltec Group in North America are also concentrated in Nabaltec USA Corporation. Nashtec LLC and Naprotec LLC are strictly production companies, primarily for products in the halogen-free flame retardant application area.

Nabaltec (Shanghai) Trading Co., Ltd., based in Shanghai, China, was formed in 2018. This company is a wholly-owned subsidiary of Nabaltec AG and maintains an in-country warehouse, allowing it to offer shorter delivery times and invoicing in the national currency.

No further participations or subsidiaries currently exist.

Reflecting the characteristics of the target and buyers' markets, Nabaltec's operations are divided into two product segments, each in turn comprised of market segments.

PRODUCT SEGMENT	PRODUCT SEGMENT
"FUNCTIONAL FILLERS"	"SPECIALTY ALUMINA"
Market segments:	Market segments:
-	Wire & Cable	-	Refractory
- Resins, Dispersions & Adhesives	-	Technical Ceramics
-	Battery	-	Polishing
-	Rubber & Elastomers	-	Adsorbents & Catalysts

1.2 OBJECTIVES AND STRATEGIES

1. Optimizing customer benefits by continuously improving production processes and product quality

Through continuous exchange with customers, Nabaltec optimizes its own products and processes and aligns them with customer-specific requirements. Product improvements and upscaling take place in close consultation with customers. Particularly in the e-mobility segment, Nabaltec will face new challenges requiring it to continually adapt its processes in order to meet the requirements of this market. In addition, Nabaltec pursues a global release and provision policy for equivalent products from different locations for customers worldwide. This approach makes use of standardized release and change management processes, ensuring a further improvement in customer benefits while at the same time optimizing internal processes.

Nabaltec continuously invests in internal research and development departments, the analysis center, its own testing facility and a pilot plant. Nabaltec has also been collaborating with various research institutions for years, as well as taking part in research consortia. Optimizing processes includes efficient energy consumption as well as comprehensive environmental protection. Both aspects represent key competitive factors. Nabaltec has taken extensive measures in order to reduce energy consumption, operate with virtually no waste water and minimize emissions. By introducing packaging with recycled content, Nabaltec is closing material cycles.

Nabaltec has repeatedly been recognized by the independent internationally recognized sustainability rating agency EcoVadis for its performance in the area of Environmental, Social

• Governance (ESG). The assessment takes into account international sustainability standards such as the Global Reporting Initiative, the United Nations Global Compact and ISO 26000. ESG aspects are recognizably playing an increasingly important role in customers' procurement decisions.

2. Systematic expansion of our product range

Nabaltec currently develops its own product portfolio along three dimensions:

• through development of new products, often in close collaboration with key customers. One example is the development of new ceramifying flame retardants for heat barriers, for example for battery housings in electric vehicles;
• through focused development of existing products with a view towards improving performance, which is generally designed to meet specific customer requirements. The GRANALOX® product family is an example of this;
• through further development of existing products for entirely new applications, such as thermally conductive plastics.

Thanks to its own testing facility at the Schwandorf site, Nabaltec is optimally equipped to transition newly developed products from its laboratories and testing centers into sample production on a scale of up to several hundred tons. As a result, the pilot plant can serve as the basis for industrial product launches in addition to its role in process development.

3. Strategic expansion and extension of boehmite production capacity and viscosity-optimized aluminum hydroxide

In order to continue to meet and consistently follow the sharply increasing growth in the market for lithium-ion batteries, which is financially significant for Nabaltec, production capacity will be increased from the current 10,000 metric tons per year to 20,000 metric tons per year by the end of 2024. In addition, viscosity-optimized aluminum hydroxides are being developed to meet the rapidly growing demand in the thermal management segment. Production capacity for this product range is to increase from the current 20,000 to 50,000 metric tons per year by mid-2025 through investment measures.

4. Flexible and quick adaption of capacities and cost structures thanks to high- resolution controlling processes

Nabaltec pursues a margin-oriented capacity policy. Fluctuations in demand and changes in batch size have to be taken into account as soon as possible if production processes are to remain profitable, since production processes in the specialty chemicals sector cannot be varied without inherent delays. Therefore, Nabaltec has developed a fast-acting and highly differentiated controlling system, so that it has at its disposal the appropriate instruments so as to align costs to a large extent with fluctuations in demand and batch size.

5. Securing future investments through a strong financing base

In order to take full advantage of market potential relating to both product segments, further investments are necessary. This investment activity, along with possession of the necessary know-how, are at the same time a high market entry barrier for potential new suppliers. In order to ensure that the required investment capital will be available, Nabaltec relies on a financing base consisting of a balanced mix of equity and debt.

1.3 CONTROLLING

Nabaltec AG has implemented for the entire company and subsidiaries an incentive scheme, assigning responsibilities and defining specific objectives even for the smallest units of the company. Comprehensive earnings, cost and performance forecasts facilitate analysis for achievement of the company's objectives. Comparisons of estimates against results are available online, indicating a need for action at an early stage and promoting the process of agreement on targets. Comparisons of estimates against results are conducted on a monthly basis for all cost centers and cost units.

"Microsoft Dynamics 365 Business Central" ERP software is used in all commercial departments. All cost accounting at Nabaltec, including earnings statements, are presented based on the "macs Complete" controlling software. Revenues and EBIT margin are the key control parameters which are used as a basis for business decisions.

1.4 BASICS OF THE REMUNERATION SYSTEM FOR CORPORATE OFFICERS

Management Board

The remuneration of Management Board members includes fixed and variable components; the latter are based on annual business performance on a recurring basis and are capped relative to the member's fixed annual salary. This remuneration covers all activities of the individual Management Board members for the company and its subsidiaries and holdings.

The assessment basis for the variable compensation is calculated as follows: The Management Board Chairman receives a profit share equal to 4%, and each other member receives 2%, of the amount by which the positive pre-tax consolidated result in accordance with IFRS, adjusted for non-controlling interests and subtracting losses carried forward from the year before, exceeds EUR 4.2 million. Variable compensation is capped at 100% of the fixed annual salary.

As a part of the fixed compensation component, the company provides Management Board members with ancillary benefits in addition to the fixed salary, such as use of a company car, accident insurance, health and long-term care insurance subsidies which conform to the statutory rules for employees and continued payment of wages for a limited time in case of illness and death. The Management Board Chairman also receives a pension upon retirement amounting to up to 67%, and all other Management Board members receive a pension of up to 50% of their last fixed gross salary. Moreover, surviving spouses are entitled to up to 75% of the pension as a widow's pension in the case of the Management Board Chairman and up to 60% in the case of all other Management Board members.

Management Board members are covered by a D&O insurance policy with an insured sum of EUR 25.0 million, with a deductible amounting to 10% of the claim, as required by law, up to one and half times the amount of their fixed annual compensation. Insurance premiums are paid by the company.

Supervisory Board

The members of the Supervisory Board each receive fixed compensation of EUR 18,000.00 per financial year, payable after the end of the financial year, and an attendance fee of

EUR 1,500.00 per Supervisory Board meeting. The Chairman of the Supervisory Board receives fixed remuneration of EUR 27,000.00 per financial year, payable after the end of the financial year, and an attendance fee of EUR 2,250.00 per Supervisory Board meeting. If the term of a Supervisory Board member begins or ends over the course of a financial year, the member is entitled to fixed remuneration on a prorated basis.

The members of the Supervisory Board are included (unchanged since 1 January 2020) in a pecuniary loss liability insurance policy taken out by the company in the interests of the company for directors and other officers of the company and its affiliated companies (D&O insurance) with an insured sum of up to EUR 25.0 million without any deductible for the insured members of the Supervisory Board. Insurance premiums are paid by the company.

In addition, the members of the Supervisory Board receive reimbursement of their expenses and any statutory value-added tax payable on the Supervisory Board remuneration.

1.5 RESEARCH AND DEVELOPMENT

Research and development activities play a central role within the context of Nabaltec AG's overall strategy. A key element of the research and development strategy is close collaboration and joint development efforts with customers. In all product segments, the focus is on providing customers with an optimal product and helping them achieve a competitive advantage. As a leading supplier of highly specialized products, Nabaltec considers research and development to be one of its central core competencies. Research and development expenses accounted for 2.4% of revenues in 2023.

The results from the cooperation with customers flow directly into the development work of the technical areas of application technology, process development and production. This is true both for the optimization of established products and for the development of new products.

In order to ensure continued success in a global market, the optimization of production processes is also a high priority for R&D work. Energy and resource efficiency have always been key drivers here and will be given additional weight in future ESG reporting.

Nabaltec works intensively with universities and institutes. Currently, two public-funded industrial collective research projects are being worked on by Nabaltec employees through project committees. The research partners include the Chemnitz University of Technology, the Feuerfest Research Society and the PTS Technical Paper Foundation in Heidenau. The cooperation with the Eastern Bavarian College of Applied Sciences (OTH) Amberg-Weiden in the form of a membership in the PartnerCircle is new. In addition to joint research projects, the partnership agreement aims at intensive cooperation through lectures, excursions, regular events and a company presence in the lecture hall via digital media.

In addition to the effort to work out new ideas for products, processes and applications and to start corresponding new developments, Nabaltec AG's research and development activities are also aimed at further developing and refining existing products and processes.

As part of the strategy development process, interdisciplinary teams comprised of employees from development, sales, plant and process development, depending on the product and application, analyze market data in light of identified trends. This ensures that new applications, processes and products are implemented in a timely manner, in conformance with the strategy.

Research and development in the 2023 Financial Year was once again sharply marked by challenges relating to e-mobility, especially battery development.

The commissioning of a coating system for the laboratory in 2023 was an important milestone for the application of Nabaltec boehmites. It enables Nabaltec to replicate its customers' processes even better. The next generation of lithium-ion battery cells with increased energy densities and thus higher storage capacities requires separator films with ever thinner coatings. This requires the development of extremely fine and yet easily dispersible boehmites. The first customer approvals were based on pilot productions. The first production batches are scheduled to be manufactured at the start of 2024.

Electrode coating (especially cathode edge coating) has gained importance due to the development of further battery cell factories in Europe. Based on the companies' work on the application performance of Nabaltec boehmites, several European and global customers had already been acquired for release processes in 2022. In 2023, these processes are well advanced and the final phase of industrial release has started for some of the customers.

In addition, activities also focused on process engineering and production-related developments in connection with the ongoing capacity expansions for boehmite. The focus was on projects to optimize processes, costs and quality.

In addition to boehmite applications in battery cells, thermal management and flame retardancy in battery systems are key areas of e-mobility development where Nabaltec is active.

Given the demand for significantly faster charging times and due to the dense network of rapid charging stations, the issue of thermally conductive materials is becoming increasingly important. This is because rapid charging in particular generates heat that must be dissipated from the battery to prevent it from being damaged. Nabaltec aluminum hydroxides of the APYRAL® HC series are used to produce thermally conductive materials that can dissipate this heat. Thermal Interface Materials (TIMs) or so-called "gap fillers" contain very high fill levels of APYRAL® HC products and are inserted between the individual battery cells and the aluminum heat conducting plate. APYRAL® HC is also produced at Naprotec's Chattanooga site in the US, guaranteeing international customers a high level of supply reliability. Materials filled with APYRAL® HC increase the service life of a battery in daily use and also offer a high level of flame protection.

To prevent flames from spreading to the entire vehicle on ignition, the battery housing must also provide an appropriate barrier function. Nabaltec has developed flame retardants for this application, which were introduced in 2023 under the name ACTILOX® HTB. The aim of this application is to form a mechanically stable barrier in the event of flame impingement, protecting the battery cover from burning out without the need for additional barrier plates.

Nabaltec's innovative and environmentally friendly flame retardant products are the guarantors of its long-term growth. Developments in the areas of recycling and circularity are becoming increasingly important. Nabaltec has therefore joined a consortium project entitled "Tailoring the HFFR Performance of Recyclates," in which eight industrial partners want to demonstrate the upgrading of post-consumer and industrial plastic recyclates to halogen-freeflame-retardant specialty compounds for electrical and electronic applications using selected waste streams as examples. The project is being carried out at the Fraunhofer Institute for Structural Durability and System Reliability in Darmstadt.

For years, the company has been seeing a trend in the refractory industry towards increased use of highly reactive aluminum oxides. Nabaltec AG has therefore focused its development activities in the refractory application area on expanding its reactive alumina product portfolio. In 2023, NABALOX® NO 550 P was introduced as a new product demonstrating sound flowability in very low-water refractory concretes.

2. FINANCIAL REPORT

2.1 MACROECONOMIC AND INDUSTRY-RELATED CONDITIONS

2.1.1 MACROECONOMIC SITUATION

The International Monetary Fund estimates that economic growth in the second half of 2023 will be stronger than expected in the United States and in several major emerging and developing countries. Government and private spending often contributed to the upturn, with real disposable income growth supporting consumption while labor markets remained tight - albeit easing - and households reduced their savings accumulated during the pandemic. There was also an expansion on the supply side, which was reflected in a broad increase in the labor participation rate, the resolution of supply chain problems from the pandemic period and a shortening of delivery times. However, the increasing momentum was not felt everywhere. Growth in the eurozone was significantly subdued due to subdued consumer sentiment, the ongoing impact of high energy prices and the weakness of the interest rate sensitive manufacturing sector and corporate investment. Overall, the IMF puts global economic growth at 3.1% after 3.5% the year before.2

With economic growth of -0.3%, Germany will be below the eurozone average of 0.5% in 2023. Over the course of 2023, economic output in Germany essentially moved sideways, with the small increases from the first half of the year being eroded by the downward trend in the second half. The economic weakness was mainly due to declining consumption and a sluggish export business. Construction activity also continued to trend downwards. However, inflation in Germany fell in 2023 with an inflation rate of 5.9%, after 6.9% in 2022. According to the Kiel Institute for the World Economy, the high inflation phase is over, with inflation rates for the next two years falling further to 2.3% (2024) and 1.8% (2025).3

2.1.2 INDUSTRY SITUATION

The German Chemical Industry Association (VCI) reports that industry revenues fell by 12% in 2023 compared to the previous year, with a particularly sharp decline in Germany.

1. IMF - World Economic Outlook, January 2024
2. Kiel Economic Report No. 110 (2023/04), German economy in winter 2023

Production in the sector fell by 8% from the previous year. If the pharmaceuticals business is excluded, this decline increases to around 11%. The VCI member survey revealed that declining sales, falling sales prices and high production costs put considerable pressure on companies' profits: Almost 40% of member companies complained of a significant drop in profits; around 15% of companies were already in the red.4

The long-term trend of growing demand for non-halogenated flame retardant fillers, and aluminum hydroxide in particular, remains intact, however. Independent market forecasts call for average annual global demand growth of 4.3% through 2027 (ATH-based, source: MarketsandMarkets, 2022).5 Market growth is stimulated above all by the growing public awareness as to the need for fire safety as well as the ongoing replacement of potentially hazardous flame retardants with eco-friendly,halogen-free aluminum hydroxide. This trend has had a particularly positive effect on the fine precipitated hydroxide product range. With a wide variety of applications, above all in e-mobility, the long-term outlook for boehmite continues to be excellent, in the estimation of Nabaltec, even though a temporary slump in demand has come about in this area. Nabaltec expects a significant increase in the volume of lithium-ion batteries produced in Europe in the coming years. As a result, the potential for boehmite in Europe will be gradually increased, alongside the Asian market.

In the "Specialty Alumina" product segment, the refractory market is shaped by demand from the steel industry. The trend towards high-quality refractory products and wear-resistant ceramics is continuing. Market experts estimate that the market for refractory products will grow at a rate of 4.3% and that of technical ceramics at a rate of 6.5% per year through 2028 (Source: IMARC Group, 2023).6

2.2 COURSE OF BUSINESS

2023 started with a very solid first quarter of 2023, characterized by revenue growth. This was exclusively price-driven: After 2022, Nabaltec raised its prices again at the start of 2023. The second quarter of 2023 already displayed a significant slowdown in industrial momentum that continued throughout the rest of 2023. Looking at 2023 as a whole, sales volumes fell in almost all product ranges in both the "Functional Fillers" and "Specialty Alumina" product segments. A continued focus on low stock levels and increasingly short-term and erratic ordering behavior on the part of customers were clearly noticeable throughout the year. Given the overall situation on the markets, no further price policy levers could be used. Nabaltec AG's revenues amounted to EUR 200.0 million in 2023, down from

EUR 218.9 million the year before (-8.6%). This was the second-highest revenue in Nabaltec's history, after the record year 2022.

Nabaltec earned operating profit (EBT) of EUR 14.6 million in 2023, compared to EUR 26.6 million in the previous year (-45.1%).

1. Press release VCI, annual balance sheet 2023, 15 December 2023
2. MarketsandMarkets, "Flame Retardants Market, Global Forecast to 2027" study from 2022
3. IMARC Group, Study "Aluminum Oxide Market: Global Industry Trends, Share, Size, Growth, Opportunity and Forecast 2023-2028"from 2023