Alro S.A. (ALR) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I am Mina, your Chorus Call operator. Welcome, and thank you for joining the ALRO SA Conference Call and Live Webcast to present and discuss the Full Year 2022 Financial Consolidated and Separate Results. [Operator Instructions] At this time, I would like to turn the conference over to Ana-Maria Imbrea, Investor and Corporate Relations, ALRO. Mrs. Imbrea, you may now proceed.

Thank you very much, Mina. Good morning, everyone. And on behalf of ALRO's team, thank you for your participation. As you probably already know from our previous conferences, today's conference call includes 2 main sections. The first one refers to a formal presentation, which will last around 40 minutes, and the second one is dedicated to the question and answers -- your questions and answers. As mentioned in the invitation sent to you this presentation is available also on our website in English and Romanian within the Investor Relations area, section Presentation. Let me summarize in a few words, the structure of today's presentation and introduce ALRO's management team. As you know, we usually started with Mr. Marian Nastase, ALRO's Chairman. Unfortunately, he has some health problems and he is not able to join our call today. He is very sorry about this situation and sent his apologize. Thus, Mr. Gheorghe Dobra, ALRO's Chief Executive Officer, will start today's presentation with the overview section. Afterwards, Mr. Dobra will guide you through the main operational highlights for the reported period with a focus on sales and production of all segments, aluminum, alumina and bauxite. Last but not least, Mr. Dobra will give you also some insights regarding the evolution of the aluminum industry and the most recent international and local developments within the market outlook section. We will continue and end our today's presentation with Mrs. Genoveva Nastase, ALRO's Chief Financial Officer, who will guide you through the section dedicated to financials for both ALRO consolidated and stand-alone figures as of 31st of December 2022. I will now hand over the floor to Mr. Dobra for the first section overview. Thank you.

Good morning. And I apologize for Mr. Nastase because he has COVID and practically need some investigation. He's in a hospital now. And also is not at home or somewhere so he can speak. And I will start with overview. 2022 main highlight for us last year was a very difficult year, very challenging year. And practically, if the LME increase with 9% practically, we reduced electrolytical production 61%. Liquid aluminium production is 39%. Primarily aluminium production is 35%. Processed aluminium production is 20% and also alumina production is 78% and also bauxite production is 35%. All this happened because we have been forced in the first quarter of the last year to suspend the electrolytic aluminium in 3 potsroom from 5 and even today it reached only 2 pots in operation. Consequently, we reduced the alumina production in the end of the June, beginning of the July, we suspend also the alumina production because the volume decrease and practically was not competitive and efficient to produce this alumina. But in the same time, the price of gas was in the sky. And just like example, the cost of alumina, only the cost of gas per tonne was more expensive than 2 tonnes of alumina imported. In the -- but also we have some good news for the last year. Sales increases 2% in RON. EBITDA increased 124% and also the margin increased with 120%. The net result was much higher. We have RON 409 million compared with RON 26 million in 2021, and the adjusted net result was RON 454 million compared with RON 91 million. Last year, in the first 3 months of 2022, the LME increased the price of forming, increased also the premia increased. But starting with the second quarter of the last year, the start -- the pricing started to decrease. Also in 2022 although we come to the government decision part of the compensation measure for indirect emissions costs embedded in the energy price basis of this compensation already received RON 367 million for 2021, when we received in December 2022. In P&L, in 2022 the group and the company also recognized an amount of RON 804 million because also we recognized the income will be paid in 2022 -- in 2023 because also the government issued a decision to also pay this money in this year. In 2022, the high value-added products increased to 70% compared with 48% in 2021. And also this reflects our strategy to increase the production to products with much more rated value products. And also it was a very difficult year because we reduced the production in Slatina, in ALRO and also we suspended the production in alumina plant. And for example, in last year, the LME spend increase is 9%, but also in 2022, the group continued the program for improving the energy efficiency of its expand and technological process and ALRO relined 20 pots with a new technology AP12LE energy consumption and also Vimetco extrusion. ALRO subsidiary is controlled 100% by ALRO. The commissioning new start new extrusion press state-of-the-art for 7 inches, who give us the possibility to increase the volume of excluded products close to 35,000, 36,000 tonnes in this year. In 2022, ALRO was declared a selected investor following -- by public tender organized by Complexul Energetic Oltenia to build together a natural gas generation plant in Isalnita. This partnership will offer to ALRO the opportunity to diversify its business model and also to secure the energy, and I hope also to find the solution to reincrease the production to the level cost in 2021. In January 2023, ALRO confirmed its industry-leading sustainability and responsibly business practice by successfully achieving the prestigious Aluminium Stewardship Initiative certification after an extensive work of the company's sustainability performance. This certificate is the first issued in the Europe based of ASI performance Standard Version 3, the latest version available published in May 2022. Also, ALRO was evaluated at an international level by research platform, Global ECG Monitor, that assessed the ESG transparency of the global and Romanian listed companies based on more than 180 criteria, achieving the score of 73 out from 100, which means a high degree of ESG transparency. At the same time, ALRO's score overcomes Europe's average of 66. Operational highlights. If there are some questions regarding the operational highlights, practical lower level of production in its ranging world, the environment, practically compared with previous year in 2021. In 2021, primary aluminum production in tonnes was 293, last year 191. Also produced electrolytic aluminium is 61% year-to-year lower to a temporary suspension of 3 potsroom. The primary aluminium production decreased by 35% year-over-year, mainly because of the lower output of wire rod 53% of these products become unprofitable due to the electrolytic aluminum cost very high. Regarding the processed aluminum. In [indiscernible] 113,000 tonnes. In 2021, 91,000 tonnes. Production decrease is 20%. Vimetco Extrusion fortunately increased by 6%. If the first 6 months of the last year was very good, regarding the federal products, the second part of the year come with lower demand and also decreasing the premium. Regarding the sales, the primary aluminium sales compared with 2021 was 124,000 tonnes in 2021 and 60,000 tonnes in 2022. Practically, sales and volume was 51% lower year-to-year because this [indiscernible] energy price increase in value terms, the primary aluminium sales were 42% lower compared to 2021 to the lower volume of aluminium wire rod sold. Overall, this produced only for the primary metal and practically, we need to adjust the production because here, we cannot use scraps sales. So process products in volume terms decreased by 20% and practically in the volume decreased by 27% year-to-year, the lower activity and decline in demand in the European market and due to slowing demand for industrial application in automotive. In value, hence the sale of processed products increased by 47% year-to-year, mainly to the plate and excluded products, the group's highest value product and due to the higher price in 2022. Processed aluminium sales was 111,000 tonnes last year -- in 2021 and close to 90% in 2022. Practically also did the change in the volume, also the structure of the production has been changed. For example, the plate is most profitable and very high value products. The increase in total sales compared to 2021 from 27% to 43%. The sheet decreased from 7.6% to 5%. The coils from 6.2% to 4.9%, the wire rod from 34% to 15.4%. And also the billets remain constant around 11% and also the extruded products from 12.8% increase to 21%. Alumina and bauxite. Practically, the bauxite and the alumina plant, if we reduce the -- suspend the production in alumina plant starting with 1 August. Also, the bauxite production has been reduced but not in the same range with alumina products because we succeed to sell to the third party some quantities. For example, in 2021, bauxite production reached to around 1.4 million tonnes and last year, 910,000 tonnes. And also regarding the alumina production, this decrease is around 78% and also the volume in RON decreased from RON 800,000 million to RON 561 million to which 2 external clients decreased from RON 156 million to RON 52 million, but intercompany also decreased. Regarding the market. Practically, sometimes some people are very lucky and practically want to start -- guide them. I think last year was total unlucky year and really this was like a study case. All the wrong things running in the same direction. Practically, it was very challenging environment showing and alumina demand contracting through 2022. The local and worldwide market were affected by energy prices. Practically last year, the price of energy starting to increase. We're starting in the second part of 2021, the energy and gas price starting to increase and particularly last year achieved unbelievable limit, very high. Also, about this, not about this, together with this, once the pressure to decarbonize and the cost of decarbonized mechanisms have been transferred to the energy price and including the gas price. And at the same time, the [indiscernible] of COVID-19 pandemic, were less and less visible for the European operation. The negative impact in record high was in the cost and also practically affected our business. At the same time, we had in European Union, we have antidumping taxes to export some products in the United States, but also in the first part of the year, was the antidumping taxes against China have been lifted. And also here, the [indiscernible] and also the metal center [indiscernible] distributor increase the inventories high with a low price imported from China till July last year. And also after this, the market has been affected, starting to decrease the orders, but also at the same time, the stocks start to delivery from the inventory to reduce and practically the market was very difficult affected. Revenue started to decrease in the second part of the year. and also for the primary products was no liquidity in the spot market for billets. And in the way I already explained because we reduced also the production because it was high cost, but also was good performance on [indiscernible] and excluded products is a good sign from the automotive and aerospace sectors. Last year, I hope this year will be finalized because on top of this crisis, basis of COVID, basis of the energy high price, decarbonization and also as the war between Russia and Ukraine after the Russian invaded Ukraine, the market -- the energy market started to decrease and also was much more chaotic in the European Union. But basically of the low demand and also energy price in 2022, the primary aluminium production has been reducing 50%. And many smelters have been closed and also they kept only few pots to keep the rectifiers or -- and also, [indiscernible] because in Romania has big implemented in retention cost compensation scheme. And in December 2022, the compensation for 2021 was granted to eligible companies based on an Emergency Ordinance #138/2022. And also according to the rest of this game, the fund for compensation comes from the auctions of greenhouse gas emission allowance allocated to Romania by the EU. Consequently, applying the support scheme has no impact in the energy cost incurred by the rest of the Romanian customers -- consumers. Regarding the year-end dynamics, practically last year was a peak from around [indiscernible] in April, but also the very challenging price, $2,713 and starting this April -- practically in March, the LME starting to decrease and continue but the average price was $2,713 per tonne. LME inventories, aluminium holdings in the London Metal Exchange warehouse showed a downward trend towards 2022 with a maximum level 824,000 tonnes at the end of February. Moreover, sign or shrinking were visibly starting June, which continued from the rest of 2022. Practically, the aluminium reported was to the very low level was in August 2022, 277,000 tonnes [indiscernible] in my opinion is very, very small. But this is -- and practically is not in accordance with the level of LME because this is a consumption just for today. Okay.

Thank you very much, Mr. Dobra. Thank you very much for your extensive presentation today. And I was mentioning in the beginning we will continue now with the financial section, and I invite Mrs. Genoveva Nastase, ALRO's Chief Financial Officer, to take over the floor. Thank you.

Thank you, Ana. Good morning, everybody. Let me guide you now through the financial performance of ALRO Group for 2022. I would say that from a financial perspective, we had a good year benefiting from the government ordinance #138, which allow us to recover partially the cost with the energies through the embedded indirect emission, which are in the price of the energy. And thus, practically in our 2022 results, we have the compensation for 2 years, for 2021 and for 2022 because the legislation was put in place in October 2022, but the scheme started with -- to be valid for 2021. So looking specifically to the figures, we can see that in 2022, we had an increase in revenues of 2% compared with last year, which is despite the fact that the volumes of our production was lower as Mr. Dobra mentioned in his presentation, we succeeded to have a higher turnover on the back of the LME, which was higher and on the back of the premiums, which were at a historical highest value. However, the cost of goods sold increased as well at a higher percentage, 9% and that was due to the increase in cost of utilities and the raw materials worldwide. However, if we wouldn't close the 3 out of the 5 potrooms would have the cost of the electricity much, much higher compared with what we registered in our accounts. The growth results margin was as such, 8% in 2022 compared with 14% in 2021. And in -- we had -- in this year, we registered an impairment of goodwill, which is coming from Sierra. Practically, at this point, we do not have any goodwill in our accounts from Sierra Leone. We also have, as I said, in other operating income in we have RON 803 million, which are registered as a compensation for indirect emission for both years 2021 and 2022. And in other operating expenses, minus RON 99 million, which includes the depreciation of idle plants of RON 28 million. related to the suspension of the 3 electrolysis halls. And some expenses recognized by ALUM as one-off when they suspended the production. And some RON 12 million also registered by ALUM as the provision for the CO2 certificate needed to be acquired in 2022. As you know, this quota of CO2 certificate, has to be fulfilled in the first quarter of 2023, but the expense in itself has to be registered in the year for which it applies. Going forward on the next slide, we have the interest expense, if you can see increase with 124% year-on-year due to the increase of the LIBOR and ROBOR reference rates and also due to the balance of the loans, which increased during this year due to the fact that the working capital needs of the company increased a lot during this period especially due to the prices of the energy and the gas but not only. And as such, the consolidated operating result in 2022 was a profit of RON 684 million compared with RON 228 million in 2021. So we -- the result for the year, it's RON 409 million. compared with RON 26 million in 2021, while the EBITDA in 2022 was RON 863 million, much higher compared with last year. On the next slide, Slide 18, we have the waterfall evolution of the net result. And practically, you can see here which are the factors which influenced during the year, the net result. And we had the influence from primary products, which were lower in volume. So that's why we had a decrease and this impact of RON 600 million. While for process, we have a plus of RON 784 million. and some other small impact coming from bauxite, from alumina, other revenues in the range of RON 100 million , some other raw materials, smaller with RON 319 million. And you can see here the energy cost compensation as a big bar of RON 800 million. And the impact in the income tax. And in the end, all this added up to RON 409 million as the result of the net result of the group for 2022. On the next slide, Slide 19. We have a few facts in relation with the ALRO stand-alone evolution. And we -- the most important information is related to the premia for primary products, which increased by 119% compared with previous year, while the flat-rolled products, the premia for flat rolled products increased by 148% year-on-year in USD terms compared with the similar period of last year. The gross result -- the gross -- the margin of ALRO are all on plus at the end of 2022. We have the gross result margin decrease compared to the previous period to 4% from 11% in 2021. EBITDA margin, however, increased to 25% from 10%. And adjusted net result margin increased to 14% from 3% in 2021. On the next slide, Slide 20, we have the evolution of EBITDA, which is correlated with the LME and FX. We have the increase of 151%. Of course, here, we have the impact of the compensation, which was good for 2 years, as I mentioned. Out of this 2 compensation only one was the cashed in by the company in December 2022 in the amount of RON 366 million. And we are expecting an amount of RON 436 million to be cashed in somewhere in the mid of the year of 2023. And this one is related with the compensation of 2022. Looking to the cost of Electrolytic aluminium, in absolute terms, the cost increase a few times compared with 2021. However, looking to the percentage inside the cost, there are changes in the weight of the energy with 7% compared with the previous year. And alumina decreased with 28% compared with the previous year. However, I mean all elements of the electrolytic aluminium increased during this period. And that's why we had to take dramatic steps for -- in order to find solutions to go further with the company. In respect with the bauxite, they face the situation of cancellation of their contract in the sense that ALUM was the one who was buying most of the production of SMHL. And somewhere in the mid of the year, they were faced with the situation to have the contract, the main contract canceled. And they had to find solution to sell the bauxite on the market. Of course, it's not easy. And however, they had a portfolio of clients, which were activated at that moment. And they are starting to find solutions to place their bauxite. However, that's a process. And that's why at the end of 2022, looking to the whole year, the performance was not so well established in the sense that their EBITDA was a minus of RON 36 million. And for alumina, the sales decreased by 30%. And due to the same situation when starting with August. We are obliged to temporarily suspend the production of our refinery. And their EBITDA in 2022 was around RON 35 million. On the next slide, Slide 22, we are coming back to the performance of ALRO Group. And I would mention here the property, plant and equipment evolution. When we spent during the year especially for the acquisition of assets focused on recycling capacity of ALRO’s Eco-Recycling Facility in Slatina, with the aim to increase the capacity from 35,000 tpa, which was at the beginning of 2022 to 85,000 tpa by mid-2023. However, at the end of 2022, the capacity was close to 45 million tonnes. We also completed the installation of a new state-of-the-art press -- extrusion press of RON 44 million were expensed for this project. And additional RON 13 million in 2021. I also mentioned the value of the inventories, which increased at the end of 2022. And that was due to the fact that the value of our finished products increased they were more valuable in absolute terms compared to the price which are on the market. And we had to reevaluate the value of the finished products, which were on stock. I wouldn't say that was an increase in volume terms is only small increases. The main reason for the increase of the total inventories related with the value of the product. In other current financial assets, we have the RON 436 million which are for the indirect compensation for 2022. Which is expected, as I said, to be cashed in somewhere in mid-2023 after we will file -- submit the file for the period. On the next slide, on Slide 23, we see the situation of the equity and liabilities. And what is here to be mentioned that we have an increase in our position of current liabilities. We have RON 1 billion on our current position due to the fact that the majority of our loans -- in fact, the working capital facility with the syndicate of banks will expire in November 2023. It's less than 12 months till the maturity of this loan, and that's why we had to register this amount on the current liabilities. However, we started the discussion with some of the lenders, which are involved in this working capital facilities. And there are good signs for the prolongation of this facility, as the intention is to prolong the current facility with at least 3 years. On the next slide, on Slide 24, we have the cash flow summary. And here, we can see that the net cash generated by the operating activity was RON 83 million, which includes also the cashed amount from indirect emissions. We also see an increase in our net cash used in investing activities RON 235 million compared to RON 155 million in 2022. And we also in the financing activities, you can see the proceeds from the loans which were drawn in 2022 in order to cover the -- our working capital needs, especially in the first part of the year. However, at the end of the period, we had a strong cash position, RON 630 million. almost double compared with RON 328 million at the end of 2021. As I said, the debt increased, and we can see on the Slide 25, the net debt increased by 20% on 31st December 2022 versus 2021, there is also a change in the structure in the sense that the RON part increased compared with the previous position. And now we have 41% in dollar and only 12% in euro. And on the last slide, Slide 26, we have the ALRO Group CapEx and key projects. And as I also mentioned on the financial situation slide. It was the CapEx amounted to USD 33 million, which represent around RON 155 million, which is down from USD 39 million expensed in 2021. And out of this USD 16 million were for ALRO, a significant part being redirected to develop the scrap remelting capacity in the eco-recycling facility. The extrusion press of RON 44 million. And also the new investment project, which started to be implemented which is aimed to improve the efficiency and production capacity at Vimetco Extrusion. I think these were the main changes and the main developments of ALRO Group in 2022. Ana, back to you. Thank you.

Thank you very much, Mrs. Nastase, for your comprehensive presentation, and we have now reached the second section of today's presentation due on dedicated to your questions. I invite Mina to take over the floor.

[Operator Instructions] The first question is from the line of Ciopraga, Iuliana with Wood & Company.

And I have a couple of questions. First, if you could help with the formula for the calculation of the compensation for indirect emissions for 2023 and what you infer in the budget. If you could provide all the elements that are included in the formula and how that amount was reached? And secondly, if you could provide an update regarding Isalnita the new power plant at Isalnita? If you expect any CapEx for that? A more color on the project would be very helpful. And third, looking in the budget, I see that you project a decline in gross profit for 2023. If you could give us any color on that? Why you expect a decline in the gross margin?

I think you now speaking to -- I will answer to the -- is much more simple to the question number 2. Regarding the Isalnita project, this is in the line with schedule and practically till now, we are not any delay or something, and we cannot say much more about this project than the public information. The full budget is today EUR 504 million and 50% the money come from PNRR. Regarding...

But -- have you taken a final investment decision on the project? Or how does it work? That's the bit that I'm missing. I mean what do you expect, if I could...

I want to say sorry, I want to say about and not more than public. Yes, we take the decision. I mean today, we are in discussions [indiscernible] this is a very serious issue for Romania. It's a PNRR and practically cannot be delayed because Romania lose a sizable amount of money. The budget is for EUR 504 million, 50% from this money are European funds [indiscernible] from PNRR and the balance was to be put by the investors. And to avoid other questions tracking to the estimated time to produce the commissioning is 2026.

Okay. If I may intervene expect the first question. I mean the formula for calculation of the indirect compensation is exactly as it is written in the Emergency Ordinance 138/2022 that's the formula, which is the public one, we just applied to our case. The majority of the factors are already known because they are published in the ordinance. However, what I would draw the attention to the fact that the emergency ordinance this time provides for cap for the total amount for each year. So despite the fact that based on our calculation, we would be entitled to a higher amount of indirect emission we cannot register in our accounts a higher amount because we have this gap of RON 150 million, which applies to the whole amount paid during 1 year. So based on the historical figures, we saw that we are somewhere 60% of this total amount. So this -- our need being higher than the 60%, in the end, we registered in our accounts, only 60% of the total amount. Okay.

And there is -- and this is for -- sorry, just to clarify. So this is for 2022, for 2023 or for both?

No, I understood that the question was for 2023.

Okay. But in 2022, you already had the number that you booked already, yes, is it -- that one is clear.

what we booked for 2022 applies, I mean, what I explained you previous, it goes hand-in-hand with 2022 as well?

And formula remain unchanged, speaking the validity of the merchants. So is unchanged.

Can you provide again the number for the Emergency Ordinance?

138.

In 2022.

Okay. In respect to the decline in profit for the budget 2023, please look to the main assumptions of the budget. I mean, we are using lower LME compared to what we experienced in 2022. And I would say that's one of the reason for this growth margin decrease. And another one is the fact that the premiums which we experienced in 2022 or at the historical high levels. However, they were not sustainable in time in the sense that you cannot have such a big premia for your product. I mean it was absolutely highest level. And this value now are coming down step by step. And this trend started this year. even in the third quarter of 2022 and continued in the fourth quarter of 2022. In line with the fact that the demand for some of the products decreased. And I remember that we discussed about this at our conferences of last year. And we said at that time that probably this trend will continue in the first quarter of 2023, and we'll see signs of improvement only in the second quarter and seems to be that what we said at that time will -- I mean it's happening and we also see signs of improvement only recently for the period to come. So these are the...

Any premiums for both primary and processed?