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

Ladies and gentlemen, thank you for standing by. I am [ Gary ], your Chorus Call operator. Welcome, and thank you for joining the ALRO SA conference call and live webcast to present and discuss the third quarter 2023 financial results. [Operator Instructions] And the conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Marian Nastase, Chairman of the Board of Directors, ALRO; Mr. Gheorghe Dobra, Chief Executive Officer; and Mrs. Genoveva Nastase, Chief Financial Officer. Mr. Nastase, you may now proceed.

Thank you. I'll speak. Let me open the presentation in English in order to be more -- the overview for ALRO Group. Good morning, ladies and gentlemen. First of all, in this year, it is a year which on one side, we had strong repatriations of the energy crisis last year as well as -- that we believe and we hope that is the last episode of the consequences of the -- such a long pandemia, which actually pushed the aluminum pricing at one of the lowest levels in the recent period. The aluminum price contracted in Q3 2023, and also in the 9-month period of 2023, it lost 19% year-on-year on the 9-month period of 2023 and 7% only in Q3 2023 with impact on sales revenues. The current price is largely stable after a downward correction following March 2022 when it registered record level of $3,968 per tonne. You know that we are facing various geopolitical crises, which had various impacts across the industries from various angles. Liquid aluminum production increased by 70% in Q1, Q3 of 2023 as compared with the same period of 2022 and by 635% in Q3 2023 versus Q3 of 2022, thus proving the success of the latest investment of Alro in its Eco-Recycling facility, which is, as you know, and as we discussed before, an efficient alternative to the electrolytic aluminum production. The bottom line result is affected by high cost but also by the accounting adjustment in Q3 2023 of the compensation for electricity cost for 2022. So we need to -- I kindly ask you to look on this topic in order to fully understand the treatment. Received -- this is related to the compensation received by the group in our amount than estimated last year. We'll have more details in the following presentation. Also, the main events -- main highlights. We have income from compensation. In September 2023, the group received RON 359 million as compensation for 2022 indirect emissions cost, resulting in a lower amount than the one registered by the group as an estimate of 31st of December 2022 by about RON 77.6 million, which impacted the 2023 result. The main explanation for this difference is linked to the pro rata allocation of the capped budget of EUR 150 million to all beneficiaries of the scheme correlated with the reduced level of 2022 production of Alro compared to 2021. Energy legislation law 2006/2023 (sic) [ 206/2023 ] issued in July regarding the measures applicable to final customers in the electricity and natural gas market in the period April 1, 2022 to 31st of March 2023. The group expects a positive future impact on its financial results coming from the implementation of this law, but is yet currently unable to make a certain estimation of the financial outcome. Strategic investment. You know from our previous presentations about our project with the CO Isalnita. On 18th of September 2023, the company, CCGT Power Isalnita SA registered in which ALRO SA holds 40.1% of the shareholding with the difference of 59.9% being held by Complexul Energetic Oltenia. The aim is to develop a gas-fired power production capacity of a total installed power of 850 megawatts. Divesting. On 31 May of 2023, Alum publicly announced the convenience of the Extraordinary General Meeting for the approval of the sale100% of the share capital of Global Aluminum, what we call briefly GAL Group. The sale of GAL was completed in September 2023, and therefore, the sale of GAL Group was presenting financial statements as discontinued operations in accordance with IFRS requirements. Refinancing status at the date when this interim financial statements were authorized for issue, all the creditors have already approved the extension of working capital facilities for a period of 3 years. The closing of the transaction is imminent. Targeting high-value markets, In October 2023, ALRO signed a new multiyear agreement with Airbus to supply best quality aluminum plates for the aerospace industry. The production of this plates is part of ALRO strategy to diversify production of high and very high value-added aluminum and was possible, thanks to constant investment in sophisticated technology. International presence. We are using this period intensively to expand our portfolio of clients, end users. At the end of September 2023, ALRO officials met the Turin Industrial Union representatives at an event organized by them together with the Embassy of Romania in Italy and the General Consulate of Romania in Turin. Given the consolidation of Turin importance as the hub for the Italian aerospace industry as well as the already solid relations of the Turin entrepreneurial system with the Romanian industrial environment, it was an excellent opportunity for ALRO to present the company's vision products and business development strategy in front of Italian leaders in industrial sectors such as Leonardo Group Stellantis, Prysmian, Altec Space, Ansaldo. Thank you. Back to you.

Thank you. The next Thank you, the next speaker is Mr. Gheorghe Dobra.

Hello, everybody. Thank you very much. I will discuss about operational highlights in production. The production volume slightly lower for 9 months 2023 -- better for quarters. In the primary division, the production tonnes was lower compared with 9 months 2023 compared with 2022 who is around 9,000 tonnes. Production volume contraction in 2023, the versus 2022's normal consequence of the temporary shutdown of the electrolysis in 2022. In exchange, in third quarter 2023, performed significantly better than third quarter 2022 we almost 40% production of primary aluminium, especially in slabs and in wire rod at full production not on tolling. Regarding the lateral production also clearly have a contraction production is around 4,000 tonnes for the year, 2022 was marked by a slowdown in process aluminum demand, but still ALRO managed to produce a good volume of sales products, 43,000 tonnes, and its extruded volumes 27,000 tonnes compared to 54,000 tonnes in FRP in 9 months and 20,000 tonnes in extruded the -- respectively in the same period of the last year. Here, the production in third quarter 2023 was significantly higher than the production third quarter 2022, 79% and nearly at the same level in the prior quarter in second quarter of 2023. The sales level -- include in the third quarter 2023 having the new volume challenges. Sales of primary aluminum in 9 months 2023. So we have 50,000 tonnes compared with 48,000 tonnes. And sales to processed aluminum was 70,000 tonnes compared to 74,000 tonnes. So primary aluminum was higher in 9 months 2023 compared to 2022 by 3% in volume terms, proving value commitment to each clients in effort to keep up its market share even in reduced electrolysis capacity. However, to the lower LME by $500 lower in 2023 compared to the record high values registered in 9 months 2022 and the global markets were shaken by the outburst of the Ukrainian conflict. The revenue from sales of primary aluminum were down by 7% when compared quarter Q3 2023 proved to be better third quarter 2022. In that, the sales of primary products were up 28% mainly the wire rod. The sales were flat in third quarter 2023 compared with the previous quarter. Processed aluminium, even in a very difficult marked by low demand in most of the industrial sector, except for automotive and aerospace. The group managed to sell notable quantities of high value-added products with decrease of only 5% in volume terms compared to the same period of the last year, 79,000 tonnes compared with 74,000 tonnes in the same period in 2022. But the abundance of the metal in Europe warehouse and strong competition, significant pressure on the price for federal product, in such a way that value-wise the turnover from processed products was lower by the 24%. The processed aluminium occupies a significant share in the group sales aluminium 69% in 2023 and 72% in 9 months '22. The Plates remain main driving with 33% in our total sales for aERO primary and several products for also 20% and also extruded products 26%.

Back to Mr. Marian Nastase.

Thank you. In respect of the market outlook, we are -- as I mentioned, we are facing still a sluggish demand. In Q3 2023, demand in China started to recover, but was not strong enough to contract weak demand ex-China, especially in Europe. Demand put pressure on both LME aluminum quotations and product premia. We may see some year-on-year increase in demand in Q4, however -- this year, however, mainly due to very low base. Macro tension remains on the implications of higher in rates and dollar stronger over Q4 is still the biggest, near-term bearish risk for base metal prices. However, improving economic momentum in China over Q4 should continue to insulate base metal prices from a sustained decline. Aluminium primary market is expected to show some surplus globally in 2023 overall. Although outside of China, factory restarts seems to progress slower than expected, not only demand, but also production dropped significantly in Europe this year, but it was offset globally by increases in China and other Asian countries, for example, Indonesia and Latin America, still Chinese primary market is expected to remain in slight deficit this year and the next. For European FRP, conversion fee minus ingot premium have been broadly stable in recent months, indicating a slowly bottoming market. In China, there was no significant recovery in FRP demand. On the positives, in the U.S., FRP shipments grew year-on-year in September for the first time this year. For FRP global demand is forecasted to be slightly positive in Q4 2023. As for the key markets, commercial aerospace sector seems to be strengthening according to CRU coating, Kaiser. Demand from automotive slowdown in Q3, but remains above prior year levels. Packaging sector is rather weak globally. Recovery is expected to come strong in the can market in 2024. Building and construction and industrial, unfortunately, were down sharply in Europe, very weak in China as well. Modest recovery of -- '24. European demand for extrusions remained weak in Q3. We still managed to increase volumes sold by focusing on segments with robust growth, for example, solar. Most expectations are for rebound evolution of LME quotations, over the coming 6 months, followed by a more consistent recovery later in 2024. Mainly about macro in China, the beginning of rate cutting cycles in '24, most likely in H2 in '24 will start to alleviate the negative effect on construction manufacturing. The interest rates basically had a massive impact on these two sectors. But an alleviation on this will support the recovery in demand ex-China. Low stock levels in China and improving demand should act as a positive even on the short run when restocking may be done to take advantage of price dips. In respect with the LME dynamics and inventories, LME evolution due to -- we saw a weak demand, as we mentioned, especially outside of China. LME aluminum quotations continue to move sideways in Q3. Average 3-month seller LME quotation for the quarter was $2,200 per tonne, down 7% year-on-year or approximately $157 per tonne and 4% down quarter-on-quarter versus Q2 2023. After reaching the bottom in August, LME quotation is now on a modest upward trend, but expectations are that the rage-bound evolution may continue and a more consistent increase will be seen only in '24. In respect of inventories, Aluminum Holdings in the London metal Exchange warehouses remains at lows in Q3 compared to the historical levels as indicated by the almost flat graph over the period of analysis. If demand starts to recover, this level of inventory should become price supportive. Unfortunately, for the time being, we didn't see any action from European Union, but 76% from the inventories existing at the LME warehouses are consisting in Russian metal. Thank you. Back to you.

And now the floor goes to Mr. Genoveva Nastase. Thank you.

Thank you. Good morning, everybody. We are now looking to the financial highlights of the period, first quarter until third quarter 2023. Probably it's one of the worst period from financial perspective, looking to the results. But I -- going through the figures, I will try to make you understand that despite the challenges through which we're going in this period, there are good signs in the business. And we tried to take the most out of these factors, which affected us during the period. And I will start with the revenue from our contracts with customers. We have indeed, a decrease. We have a decrease in the value of the revenues. But as explained by Mr. Dobra before, in fact, the tonnage on the primary side, for example, it was higher. So we succeeded to sell more. So that's a good sign. On the processed product, we've succeeded -- sorry, we succeeded to sell more extruded products. We succeeded to sell more coils, more sheets. It was only one category, which was linked to the plates, which is related to the fact that in Europe, but not only in Europe, the demand for this kind of product decreased during this period. However, we sell -- we sold more than 70%, 80% of what we expected to have during this period. We had a decrease of the LME, which is a fact figure. I mean, it's a stone fact and stone. It's a decrease of $500 in the LME. But if we look to the price of the LME, which we currently have, and if we look to the average LME for the period, $2,300 is a very good price for aluminum industry. Yes, it was an increase in 2022. We had, at that time, almost $4,000 per tonne, but that was an exceptional situation. Having now $2,300, $2,200, it's a very good price for the aluminum but, indeed, it was a decrease. There also -- it was also a decrease in the premiums. And -- but we expected -- until a certain point, we expect this decrease because, as you know, not only in aluminum, but in all industries, in 2022, it was an explosion in the prices. And it's absolutely normal to have, at a certain point, a correction of the prices. And if we look in perspective, it's important to see that at the level which are currently today, we are higher than the point at which the prices started to increase. So I would not look to this decrease through a very negative perspective. Looking to the cost of goods sold, we have here a decrease. But it was not in line with the decrease of the revenues. And the main factors are related at the cost of the energy and gas which, despite the fact that the government took some measures to keep the prices fixed, and to give in this respect a support for consumers, household, but also industrial consumers, we were sticked in some contracts, which we concluded in 2022 for the full year 2023, which were above the prices which the government fixed of [ 454 March ] platform, and unable to take out this -- to extract ourselves from this contract. But this is -- the best thing is that this contract will end in December 2023. And we have new opportunities for 2024, and we are confident that we'll secure the energy much better prices compared with what we have had this year. Another factor, which is important to be mentioned, it was also mentioned by my colleagues in the previous presentation is related with the other operating income which now at 9 months 2023, we have registered RON 241 million. And here, practically, we have the registration of the compensation for indirect emissions for 2023, but we also had a correction of 2022 because in September 2023, so 2 months ago, we received the cash for 2022. And we received RON 359 million, which was less compared with the amount which we estimated in the end of 2022 for that year. So we are obliged to take this amount to take it into account in 2023 because it was a change in the estimate. And it was quite an important amount. We are discussing here about RON 77 million, which is a one-off. And this amount affected practically the result of 2023. And in addition to that, we also had some different registration for 2023 compensation based on the previous algorithm, based on the previous methodology. And we described this methodology in details in our financial statements, which are published on the website. I will not go here into the details. But if you feel the need to find more details about this, please read the note, which is quite comprehensive for the operating income. So that's why we had [ 2041 ]. Otherwise, the results should have been much better if we'd have only the compensation for 2023 and not from the previous year. In respect to the interest expenses, yes, we also had some higher amounts here, which are linked to the base rates. You know very well that the base rates, every EURIBOR LIBOR and also ROBOR increased during this period. And -- but we also had some loans, which we paid these loans. I'm referring to a loan of RON 160 million, which was paid during this year. So practically, we'll not have the interest for this loan anymore in the next period. However, what is very important to be said is that we succeeded to prolong the working capital facilities -- all working capital facility, which we had. They were maturing at the end of November. I mean, close in the next few days, they were reaching the maturity. And we discussed with the banks. And practically, our facilities were oversubscribed and were succeeded to sign the prolongation of the working capital facility for the next 3 years. So we have the next 3 years of stability from banking perspective. So that's a very good sign. I would also mention the fact that we have some discontinued operation due to the fact that we Alum sold its participation in Sierra mineral. And starting with September 2023, we have this operation as discontinued operation. And we have this impact in our financial statement of RON 102 million. So the net result is RON 394 million. But I would look to this as, at least, partially as a one-off impact, which had to be taken to account in this period. I think that we can go directly to the Page 17, thank you. So we have here the translation of the net result from 2022 until 2023, end of September. And we had presented in this graph the impact of each item. We had, for the revenues, minus RON 587 million for the reasons which I explained to you before. And -- but on the COGS side, we have only a decrease of only RON 97 million. However, as you can see, the energy, water and gas had a positive impact, but this is related with the volume of the energy. More or less, it's -- the majority of the amount is related to the volume of the energy, which we consumed less in 2023 compared with 2022 because in the previous year, we closed the port, but we didn't close them instantly on the 1st January. So we had the first quarter higher consumption of the energy. So all -- the rest are small impact. We have the energy cost compensation, as you can see, RON 198 million with positive impact. And in the end, RON 394 million. On the stand-alone, we have a decrease in the premium, as I said. It was a correction. And here, you can clearly see what I meant, looking to the trend. And you can see that starting with 2020, the level of the premiums are -- which we're currently facing, are higher compared to the point from which the energy started to increase. And all these changes started to appear. On the right side of the slide, the profit margin evolution, which are all on minus, which is -- I mean, it reflects exactly the figures from the P&L. On the next slide, we have the stand-alone EBITDA, which was affected by the correction of the compensation which I mentioned before, otherwise would be one plus. On the cost of electrolytic aluminum, we have smaller portion for alumina, and this practically visually justified, but not only visually. But you can see here in the graph that we bought -- you know very well that we bought alumina from the market. And as such, we made a good thing that this alumina was acquired the best -- better prices compared with what we had in 2022. We have the energy, 55% in the total. But as I said, it's not a question of the unit price. It's a question of the volume in total. So -- and we also have an increase in Anodes of 13%, which practically is standing on the cost of coke and bleach. As we presented also in our previous presentation, the value of the eco tax is paid in 9 months 2023 was RON 8.9 million. And since 2010, when this scheme for support the eco taxes, ALRO registered and paid over RON 1.1 billion for these eco taxes. On the next slide, in our Alumina segment, they do not have any production of alumina, as you know. However, they're helping the group by assuring the alumina from third parties, from imports. And we also noticed here the disposal of the investment in Sierra Leone, which practically we have to have an impairment for this investment. But this impairment was -- the majority of this impairment was already registered between 6 months 2023. Going to the next slide, the statement of financial position. It's important to be said that we continue to invest. We continue to invest in eco recycling. We increased the capacity of the Eco-recycling facility to provide the molten metal required for the production of flat-rolled products. And we have -- as you know, we put in function, the first part of the facility in June 2023. We continue with our program AP12LE to repair the potrooms with the new technology. And we refurbished this '24, electrolysis pot. It's good to see that the inventories decreased, consistently decreased, compared with the previous period. And that is linked the price of the alumina, that is linked with the fact that we succeeded to sell out of the stock, wire rod and extruded products. And also to the fact that we produced at a smaller cost compared with the previous period when we evaluated the products. In the other current financial assets, we have here -- at September 2023, we have the -- there is a decrease compared with the year. But think that this compensation, which is included the compensation for indirect emission, which is included here related with 9 months compared with 12 months, which are in December 2022, on one side. And on the other side, as I explained, we have a different methodology to estimate the revenue, which is less compared with what we did in 2022 based on the percentage, which we received in the last 3 years, practically 2019, 2020 and 2021. For us, it was enough to give us a rule. However, it seems that this rule is not working anymore. And we developed -- as I said, we developed a new methodology. In respect to the banks, I already mentioned to you the most important facts related with this. I would go directly to the cash flow, Slide 23. And we have a positive effect on the working capital because we decreased the finished goods products. And we have, of course, a significant positive impact from receiving the compensation for indirect emission in amount of RON 359 million which happened in September 2023. No other important deviation or changes in cash flow. In -- on the next slide, on Slide 24, I would underline the fact that the net debt decreased, which is another good way to look to these figures, decreased by 7% at September 2023 versus December 2022 and by 29% versus 30 September 2022. The structure of the group loans in currencies remain nearly the same. So there are no significant changes. And on the last slide, on the CapEx, I already mentioned the most important investments, which are related to the eco-recycling. So we'll have a production of 94,000 tonnes of liquid aluminum at the end of 2023. This is the capacity of liquid aluminum, which we can use further. And of course, this will support our strategy to reduce the dependence on electricity supply. And we also continued the investments in value-added products by developing new capacities of cutting plate and compact sheet packages while also Vimetco extrusion continued investing in the product, lower automation. They invest RON 1.3 million for an automatic packing line and expansion of the product portfolio. So that's it from my side.

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