Al Jazeera Steel Products Company SAOG (ATMI) Earnings Call Transcript & Summary

[Foreign Language] Welcome, dear shareholders, investors to our half of the year sitting. And please be feel free, if you have any doubt, anything, any question, we are ready to answer any things, if you have any suggestion there. And now we have Mr. Venkat, the CEO of the company. He will start this meeting. Please, Mr. Venkat.

Thank you, Mr. Yousuf. Good afternoon to all gentlemen and ladies if there are any. Welcome to the half yearly results discussion on MSX. Bejoy, can you just put up the slides, please. Can you put it on a slideshow mode?

Yes.

First of all, thank you, gentlemen, for all of you being present on this call. We really appreciate that. We'll give a small presentation and then open the floor for questions. It's a very brief presentation. Go ahead. Bejoy.

Yes. Can you see the presentation?

Yes, yes. Go to the next slide. So unless anybody wants, I will not go through these slides in detail because it's just an introduction. As you all know, Jazeera was established in 1996. Today, we are in another 1 year from the date of establishment, we will be almost 30 years. We operate 2 business divisions, namely tube mill and merchant bar mill. We manufacture various types of steel products, including black pipes, galvanized pipes, hollow sections, merchant bar mill products and rebars. Our products have diverse applications including construction, scaffolding, irrigation, agriculture, engineering, fencing, steam and gas facilities. It's also used for firefighting, water and sanitation pipes in gas and oil carrying pipelines. Please go ahead. Go to the next slide, please. Yes. Between the 2 mills, the tube mill and the merchant bar mill, we have a combined capacity of 600,000 tonnes. Apart from Oman, Al Jazeera's key markets are UAE, Saudi Arabia and North America. Both the manufacturing facilities are based close to SOHAR port, providing a competitive advantage in terms of logistics and access to key markets, okay? I suppose this, you're all aware, but I'll still repeat it for the sake of listing. Al Jazeera Oman steel products. The parent company holds -- the parent company has the following subsidiaries. One in Saudi Arabia, which is called Al Jazeera Oman Steel Products Company Saudi Arabia, where the parent company holds 100% shares. The parent company acquired 51% shareholding in the subsidiary on 15 June 2015, and acquired the remaining 49% on 31st March 2017. The other company subsidiaries, Al Jazeera Steel Products Company LLC, where the parent company holds 80% shares. The subsidiary company is setting up a 450,000 metric tons per annum state-of-the-art section mill in Khalifa Economic Zone, KEZAD. The subsidiary was incorporated in 4th October 2022. Can we go to the next slide, please? So in terms of highlights for H1 2025, we've -- had a good half year. We will come to the financials later, but some of the other soft achievements, as you call. We successfully completed the first API resurveillance audit. Jazeera Steel is now fully capable to produce API pipes for line pipe applications. And as I speak today, we have been formally approved by PDO for supplies to PDO. Successfully produced -- and we also successfully produced API line pipes for the Canadian market, and we are shipping -- in the process of shipping it. So in a way, this is absolutely transformational for the tube mill in terms of movement from commodity to value-added pipes. We have successfully produced and marketed new products after the upgrade of the merchant bar mill. When I mean new products, I mean I and X-sections and different kinds of angles and channels. So this incrementally moves up the value chain, helps us move up the value chain incrementally. We continue to maintain a strong presence in the retail segment through our yards constituting about 18% of our overall volumes. So we have 3 yards as of now, one in [ Sajaa ] in UAE, 1 in Ma'abilah in Oman and one in Riyadh in Saudi Arabia. Please go to the next slide, please. So not resting on what we are doing. We constantly work on our marketing -- no, no, marketing, both for the current plant and for the subsidiary in UAE. Jazeera was an exhibitor in Algeria Steel Trade Fair in the first half, where the Sultanate of Oman was the guest of owner. The President of Algeria, along with the Minister of Commerce also visited our stand. In terms of -- because the Saudi market is very important for us, we are gradually expanding our presence in terms of our distribution center there, which we call as the yard. So we have built a new -- we have established a new yard which is bigger than the previous yard and is now completed and operational. Jazeera in its quest for operational excellence has initiated the implementation of total productive maintenance, which is -- well, you can call a Japanese quality tool. This is a 3-year long journey for reaching the TPM excellence award from Japanese Institute of Plant Maintenance. Why we mentioned this is, as a company, we feel we are already -- in terms of performance, we are right at the top quartile of performance in terms of steel plants, but then we need to constantly keep innovating and moving forward the value chain and in terms of efficiency. And that's why we have targeted this. This is not an easy process. It's a 3-year tenant for the company, but we are working on it. Okay. Thank you. Please go ahead. Bejoy, I will leave you to handle the financials. So gentlemen, once Bejoy completes the financials, I will be available for questions, okay? Thank you.

Thank you, sir. Good afternoon, ladies and gentlemen. Here, I'm going to give the presentation of the high performance -- high level performance for the H1, the snapshots and we can discuss in detail in the coming slides. The revenue increased for the H1 for the first 6 months compared to the previous 6 months from OMR 69.6 million to OMR 75.8 million due to various reasons. In the next slides, we will go in more detail about this one. Earnings before interest and tax increased by 47%, from OMR 3.8 million, increased to OMR 5.6 million. Similarly, profit after tax increased by 70%. Last year, same time, same period OMR 2.5 million. This period for 6 months, we achieved OMR 4.28 million. And return on asset, this is an annualized figure, it's a 8.2%. The net profit ratio is 5.6%. The last year, same period was 3.6%. These are the financials in detail when compared -- first half when compared to the previous first half and with the variance. The quantity, there is an increase of almost like 17%, which is [ OMR 37,678 ]. There is an increase. This increase is mainly last year, if you remember, we have already discussed in the meeting almost both merchant bar mill and our tube mill, in one of the major lines in our tube mill also got disrupted for almost 35 days due to the expansions and the modifications we were doing. So when compared to the last period last year, almost like instead of 6 months, we got only 5 months of production. So that is the main reason actually the sale, the quantity, we are able to increase it to third... Of course, plus we build certain levels of inventory. But you know that at this time, we are able to get a good market in the first 6 months. So the demand was quite good. So that is the reason we are able to achieve 17% increase. Similarly, revenue also increased by OMR 6 million when compared to OMR 69 million, we achieved OMR 75 million. Cost of sales increased by only 6%, which is the main reason, which has resulted in a higher net profit. Gross profit increased by OMR 2.7 million, which is 33 percentage. Other income, which is basically nothing, the scrap sale. It's almost like a 1% increase. Selling and distribution expenses increased by 10%, which is similarly which we can -- it is in line with the increase in the volume. Then general and administration expenses increased by 20% due to a lot of recruitment we did in this for the API and for the additions and the expenses, what we are making. Then other operating expenses, it's a small amount. Then there is a loss of bad debts written-off, which is around OMR 100,000. Interest expenses, you can see there is a substantial saving from [ 846 to 518 ]. There is a saving of almost like 39%. This is because of the -- due to the better negotiations done by the team members. The net profit increased by 70%, last year 2.5. This year, 4.28,and increase of 70%. Similarly, EPS from 20 baisa has gone to 34 baisa, an increase of 70%. Now here, we are going to discuss about the important ratios. Inventory turnover ratio. I hope that [indiscernible] you can see the slides, right?

Yes.

Yes. The inventory turnover ratio from 3.8 to 5.3, this is a substantial improvement in the ratio from a number of days from 96 days to 68. This is due to a very strict inventory planning we are making. Right now, we are doing a DDMRP, demand-driven material planning, which is basically reflecting this inventory savings. Then that is turnover ratio of 4.3. It's almost same. We are almost choose and basically, debtors turnover in days is almost like 84 and 85, not much improvement. We are trying to further control it. Market scenario, it is tough. Then creditors turnover ratio. There is a slight depletion happened from 24 days to 17 days. But you can see the overall operating cycle in days improved from 156 to 136, an improvement of almost 20 days, which is a kind of a substantial improvement. Current ratio and quick ratio are almost not much big differences there, not big changes there. Capital employed ratio is almost 2.5%, 2.5%. Return on asset, there is a substantial increases there from 5.1, compared to the last 6 months to 8.2, which is mainly due to the increase in the profit. There is a 70% increase in the profit. The net profit ratio also on sales, last period was 3.6%. Now it is 5.6%. So here, now the floor is open to the shareholders. Can I stop sharing?

Yes, I think.

Excuse me, Mr. Bejoy. Excuse me. Sorry, before we start that question. Again, we are request the name of the person and from which company or personnel. Sometimes, we know the person very well. But because the meeting on recording, still we are request the name of the person or which company. Please.

Sure. Sure.

Thank you. Any questions, please?

Any questions, please? Yes, Mr. Shaoor.

This is Shaoor. I'm from Vision Capital. Congratulations on beautiful numbers. I just had a couple of questions, starting with your capital expenditure requirements. We can see that you guys have incurred OMR 11 million -- OMR 11.5 million capital expenditure this half year. What is the pace of capital expenditures going forward, if you could guide us, please?

See. Sir, can I answer this one?

Please, please.

Yes. See, what you're talking about -- you are seeing in the financials, the fixed asset changes, right?

Yes, sir, the purchase of property, plant and equipment.

This is investment in subsidiaries. You know that we are having an investment in our Abu Dhabi plant, which is that right now, it's in the capital work in progress. And this will be commissioned by Q1 of -- by mid- or end of Q1 2026.

Right. This is a 450,000 capacity?

Yes, correct. And you know that again last year, we have a massive expansion plant in our SOHAR plant. We have our API land added and MBM, Merchant Bar Mill, also, we added, which is almost like around OMR 25 million. And we have capitalized most of the things. So that is what actually it is reflecting here, the increase in the CapEx.

Right. And regarding that additional capacity, are there any more capital expenditures planned or?

Definitely, going forward, there will be a lot of -- because it is almost like a 70% completion or maybe that time, 30th of June, the percentage of completion was in the range of around 65%. So going forward, once it is completed, more CapEx -- the CapEx figure will be more because once the consolidation comes, it will on the higher side.

Right. And do you plan on funding this capital expenditure with debt?

Yes.

The balance sheet is already leveraged, so...

Yes. Yes. It is by debt only.

Okay. So do you expect any strain on your free cash flows available for distribution? Obviously, because this additional capital expenditure would also result in additional interest payments. So do you expect that your free cash flows are to be impacted with this?

Definitely, there will be tightness in the free cash flow because when we are going for a massive expansions, any company, there will be a kind of -- we are effectively managing it.

Okay. And would you be able to give us an idea of what is the additional capital expenditure that is expected until the completion of the -- in Q1 2026?

That we will be getting a more clarity in our next quarterly review because we'll be very near at that point of time by project completion. Then in the next quarter, maybe in October when we'll be having this same kind of a meeting I'll be giving -- I'll be able to give a kind of a more clarity on that one.

Perfect. I just had one more question regarding the overall business. So we have seen that you guys have been maintaining very good margins of close to 15% on a gross level. Now obviously, in a commodity business with very limited value addition, what is your view? Do you think that these margins are sustainable? Are there any threats from the competition? And obviously, on the new capacity being added, do you feel that you guys will be able to maintain a similar level of margins?

Sir, Venkat, sir. I request you to try.

First of all, let's face one fact. The world is in a flux because of all the discussions on tariffs and others. I don't want to name anybody, but you understand this thing. But we have -- our mainstay is our domestic market, which is the GCC, which is Oman, UAE, Saudi and others. And one of the reasons why we went in on this API modification. First of all, we have not increased our capacity, okay? Maybe in merchant bar mill, we have marginally increased the capacity. In tube mill, we have augmented the capacity by moving from commodity to API pipes. One of the reasons for doing it is that our dependence on export has to reduce gradually. It can't be closed on day 1, but we will gradually reduce our dependence and focus more on the domestic market. So obviously, going into the second half, if the trade war worsens or anything, there could be some impact on margins. But honestly, we have been through a lot in the last 6 months. You know what are the geopolitical issues we faced. But as a company, we have -- I would give credit to my team that they have managed it smartly. So we hope to manage it smartly. Of course, being a commodity business, we are but hostages to the situation worldwide. So it's a question of how well we manage. And in fact, Bejoy briefly touched upon it. One of the measures of efficiency is how well we turn around the inventory. And we have been able to do a lot of good work in that by implementing tools such as DDMRP, which effectively improves our utilization of the material we buy and it improves the utilization of the working capital we deploy. So that you buy material which you need and you buy it just in time and you're able to buy it at the best price possible so that the residence time of the material is less and output to the factory has increased. So a lot of things have been done. Going ahead, we are very confident with the sort of construction market in the Gulf. Our products will continue to have a good market. Margins will always be up in the air, which we have to manage smartly by approaching the right kind of customers, right kind of segments who value quality and delivery. Today, if you look at the pricing from China as compared to our prices, our prices are far higher, but still people buy because of our quality and service bundle, which we offer to the customer. So that's how we are working this.

Great. Great, sir. And is there any -- are there any regulations that limit these low-quality imports in the region? Do you have any competition from those?

To be honest, we are working on it with various other large steel manufacturers in the region. So I don't want to take their names on the MSX call, but we are actively working with them to build measures so that under tolerance material, bad quality material does not reach the market. There are also some measures in terms of tariffs we are trying to do, but I don't know how successful we will be there. But certainly, nontariff barriers to avoid unscrupulous competition is something we are working on, both even with our own ministries, and we are looking forward to their support.

Right, sir. And you mentioned that you will now be focusing more on the local market and the region. You, obviously, if my numbers are correct, your capacity utilization currently stands around close to 80%. So you think that this capacity will be absorbed by the market quite easily given the size of the market?

Sir, you're on mute.

Again, I'm saying we're not trying to increase our capacity by a huge number. What we are trying to do is, as you correct -- you mentioned, how are you going to manage margins? The way to manage margins is to sell to your geographically proximate markets, which are more under your control. So how do I do that? By not selling more of the same product, but by selling more products in the same market, okay? So give a diversification to the product segmentation you have so that you have better handle on your margins. That is why we approached PDO locally. And to be honest, they were very supportive, very, very supportive. Of course, the team had to -- it was one of the toughest audits I have seen in my last more than 3.5 decades of service to the steel industry. I've not seen a tougher audit. It's a fantastic thing. It was a great learning for us. But I know that when there is such a tough audit, it also creates a barrier for entry of other people. So we target products where the technological barrier for entry is high. Yes, I hope I have clarified that, Mr. Shaoor.

Yes, sir. Yes, sir. And probably the last question from my side is, obviously, you mentioned these contracts that you guys have been awarded. My question is, if there is a substantial change in the commodity market internationally, the prices of HRC or the prices of billets go up or down significantly. Would this impact your margins directly based on the negotiations? Or are you able to 100% pass on any movements in the raw material?

Obviously, if there are very wild fluctuations, we will be impacted. Suppose we have a lot of material in stock and suddenly, the prices go up for no reason. Then obviously, we will make a windfall profit. Suppose the other happens, we will struggle for margins. This is the reality of the market. But in my view, prices from China are already at a bottom, find out whether they can go unless there is a structural collapse or something in some of the markets, I don't see the door opening and the price further falling down. I don't see that happening. So I don't see any very big red flags, but we have to be constantly on the vigil.

Any further queries, please. Yes, please.

Good afternoon, Mr. Bejoy. So this is Shaheen, I'm from United Securities. And I had a question on the slide that you had just presented, Mr. Bejoy. You mentioned that there was a 17% increase in the quantity vis-a-vis last year compared to a specific opportunity you referred to. Now, is this sustainable for the second half of the year as well?

I clearly mentioned why we are able to get this 17% is 2 reasons. The main reason is that last year, the first half, the -- our plants were shutdown for almost 35 days. So there is automatically, when the plant is shut down for expansion because we spent CapEx expansion in our merchant bar mill. Merchant bar mill was precisely 38 days, the plant was totally shutdown. And in our 2 mill, we were -- in our -- one of the largest mill was also on shutdown due to modification for this API for almost like 25 days. So there was a dip in the tonnages last year, first half. So we were able to -- because this year, continuously going, there was no shutdown, everything must go in smoothly. So automatically, the sales and the production moved up. So you cannot expect the same kind of a 17% in the second half. If we aim, but you know that it may not be possible also.

Understood. Also, the steel industry is subjected to a very strong tariff rates. 50% is what is indicated. How do you plan for your -- for the future with these kind of punitive tariffs and the kind of markets that you're really looking at?

See, let me take this question. That is why, see, our main exports is only in the tube mill and that too to the Americas. So obviously, it's not very healthy when you have to depend a lot on exports. So that's why we have strategically moved to upgrading the mill to produce API so that we can handle line pipe requirements in various markets, especially in the domestic markets. So obviously, we are trying to wean away ourselves from reliance on exports to reliance on domestic market, but different segment of the market. Right now, 100% of our market is commodity pipes. We will move from commodity pipes to the same extent, which we will reduce from our exports. So obviously, the tariff regime is tough. But as of now, the customers are still buying at a higher tariff. But we don't want to be pushing the boundary on that. We want to be looking at what we can do within our domestic market, retain our volumes and markets. Does that answer your question?

Yes, Mr. Venkat. Your management report also states that you've seen a healthy robust growth in the construction and a construction pipeline of about $420 billion in the region. Where do you see this growth amongst the GCC countries and specifically currently where we are really challenged with the oil price holding at these current levels? Do you see the growth for the next -- where do you see it for the next 6 months?

Look, I wish I had a crystal ball with me, but the reality is these markets are completely dependent on oil revenue. But I would assume that out of the pipeline of projects, almost 30% to 50%, I can safely say are committed projects. So in the next 3 to 4 years, I don't see, for example, especially UAE, I don't see an issue. I don't see an issue in Saudi at all. And the Oman is not even on the cusp. They have a long way to go. So there's a lot of -- you have Sultan Haitham City. So many other things in the [indiscernible]. And all these economies honestly need to provide opportunities for their young citizens. So every government is trying to push in terms of either manufacturing or in terms of construction or in terms of affordable housing. So if it is not as good as what it was in the past, it will surely not be any worse. Anybody else with any questions, please? Is that all? Mr. Shetty?

Congrats on a great set of results. My question is on the new mill, which is expected to be commissioned next year in the first quarter, as you mentioned. So I wanted to like understand what would be the impact on the gross margins once it has commissioned? Like on the group's gross margins and the working capital over the first 2 years of your operation, like post -- like once it starts operating?

Sorry, Mr. Shetty. You are from?

Yes, I'm from Ubhar Capital.

Yes, please.

Sir, should I answer all?

Yes, please.

Mr. Shetty, regarding the working capital, we'll be getting a separate line of facility from the bank for the working capital once the commercial production starts. And definitely, a similar kind of it. Initially, you know, any mill, when it is getting stabilized initially first 1 or 2 years, it may be difficult, even though we aim a similar kind of margins, it may be difficult for us to achieve those markets due to various reasons. You know that our market, our product needs to get stabilized, the acceptance from the customer side. All those things, it will take a couple of quarters or maybe half -- 6 months to 9 months' time. Once it is steadily -- once we develop all the products and the market acceptance comes, then we are confident that a similar kind of margins we can achieve. Venkat, sir, if you want to add further on that one, you can add.

No. I don't see that, as Bejoy mentioned, there will be a ramp-up of the mill because it's a state-of-the-art mill. It's going to take 3 to 4 quarters to stabilize the mill and ramp up the volume and get approvals from various bodies and then move ahead. So there might be a struggle in the first 9 months or so, but slowly, the thing will build up and move forward with us. And technically, the product which we have in the subsidiary is slightly higher up in the value chain as compared to the merchant bar mill. So going ahead, we should see the same or better margins as we go ahead.

Any other queries from the team members?

Mr. Borcelis, Mr. Jitin, Mr. Yahya, Mr. Ammar, Mr. Muhammad. Any questions, please? Mr Alan Taha. Any questions, please? Otherwise, we'll say thank you to all of you. Thank you, gentlemen and ladies. Thanks a lot, and we appreciate your support as always. Mr. Ammar?

Congratulations on a great first half of the year. This is Ammar. I'm a personal investor. And I just need a few more details about the ramp-up in Abu Dhabi. Like what is your expectations? You said the first 9 months -- the first 9 months might be difficult. But moving forward, what would the utilization be like? And are you guys trying to enter new markets or just meet local demands through the Abu Dhabi plant location?

Obviously, the prime target will be GCC market and then other export markets. So we are planning after the initial performance guarantee tests and everything is done, we should be targeting about -- just hold on. Sorry gentlemen, that was an urgent message. I'm very sorry. My apologies. So we are looking at -- what I told you as a 9-month, 9 to maximum 12 months of ramp up. After the first 3 to 6 months, we would be going at a rate of -- the first year, we plan to do about 180,000 to 200,000 tonnes. Second year, we will go -- increase it to around 250,000 tonnes. And then going ahead will be 350,000 tonnes and beyond. So we should be in good shape if things go as per -- the advantage is it's almost a very similar kind of operational philosophy to our merchant bar mill. So for us, it is not a new facility in terms of the new technology, internal technology of rolling. So I think we'll be in good shape.

Okay. So just so I understand, so it's -- the products that will be manufactured in Abu Dhabi are similar to the ones that are manufactured here in Oman or is it the new product?

It's a bunch of new products. It's a bunch of new products. For example, the merchant bar mills produces small sections, small angles, small channels. The medium section will produce higher sized I-Sections and H-Sections, which are load-bearing members. So in a way, they are similar. In a way, they are very different, okay? So the idea was to move up the value chain. And that's why we have a joint with -- even with Emirates Steel of UAE, they produce the much bigger sections. So we fit into the range between the sizes in Oman and the sizes being produced locally. So we have a good movement into the market. There is no other question, gentlemen. Thank you. Thanks a lot, and thanks for all your support, ladies and gentlemen. We really appreciate and we hope the second half is as good. We will certainly make our efforts, but let's pray to God and be happy about this. Thank you. Yousuf, do you want to say something?

No. Thank you, sir. Thank you. Thank you. [Foreign Language].