Aluminium Bahrain B.S.C. (ALBH) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Aluminium Bahrain Q2 and 1H 2023 Results Conference and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Anoop Fernandes. Please go ahead.

Hello, everyone. I'm Anoop Fernandes. And on behalf of SICO, I would like to welcome you all to Alba's 2Q and 1H '23 Earnings Conference Call. We have with us today Alba's management; Ali Al Baqali, the CEO; Eline Hilal, Director, Investor Relations; and Ahmed A. Qader , Manager of Finance. With further ado -- without further ado, let me hand over the call to Eline.

Thank you, Anoop and everyone many thanks as well for everyone who connected through this webcast and the call. And without further ado if we get straight into Page #3 of the IR presentation, which I hope you are able to see it in front of you. So as usual, I will be covering the Industry highlights and Alba's highlights for Q2 of this year. Post that our finance manager, Ahmed Abdulqader, who will be covering and will give you further details on Alba's performance for the second quarter of this year. Post which, our Chief Executive Officer will end the presentation with the last four section. One of the -- one section on -- section number 4 actually about the industry perspective for the remainder of the year followed by Alba's priorities for this year and after. And of course, in the last section of the presentation, which is appendix, number 6, we have provided you with Alba's financial performance for the first half of 2023. So if we can please proceed to the industry highlights. The industry highlights for those who are new into the call. These insights are not Alba's opinions, these news are taken out from CRU Market Intelligence. So if you have any subscription to CRU, you will be able to stop that whatever we have mentioned over here is actually taken from them. So if we can please move to Page #5 of the presentation, and we will start with the consumption, the consumption part. So as of today, we have noted that there is weak demand due to the economic uncertainty and as a result, the consumption of this metal or the aluminum have went up by 2% year-over-year. And that has been on the back of the various factors that we have seen in the second quarter of this year, a progress or a continuation of the economic uncertainty, which we have seen started earlier this year and amidst bearish manufacturing activity and the ongoing interest rate hikes by the U.S. Federal Reserve and the European Central Bank with the latest increase of 25 basis points. As Chinese government has set up their monetary easing measures, we have seen consumption in China going up by 6% year-over-year. With respect to the demand in the Middle East, it has been almost flat and plus 1% year-over-year. With regards to Europe or the Eurozone, we have noted a visible recession on the back of high inflation and a sluggish consumer spending while the U.S. consumption continues to be weak owing to slow manufacturing activity. And as a result, the demand in Euro has dropped by 8% year-over-year and in the U.S. by 7% year-over-year, respectively. And with that in mind, we move into the production slide, which is on Page #6. So as noted earlier, the consumption grew up by 2% year-over-year, while the world market supplies have almost been flat plus 1% year-over-year. That has led into -- since the production is moving or progressing at a slower pace versus the world consumption, the world market deficit and the world market is in deficit with China, minus 0.35 million metric tonnes, while in surplus without China, plus 0.07 million metric tonnes. If we move further into more insights on the production aspects, despite the recent smelter cuts in Yunnan province, China has increased its production plus 1% year-over-year versus 6% increased consumption as noted in the previous slide. Europe is leading the world excluding China with its output cuts minus 5% year-over-year, owing to high energy prices. Recently, we have seen the curtailed capacity restarts are challenged in the world excluding China as energy prices remain expensive and no significant new projects are ramping up in 2023 as of now. With regards to supply in the Middle East, it has been down by 1% year-over-year. With respect to what we have seen with regards to the Russian metal, we have seen that it is slowing or it continues to flow to China while the Russian exports to EU and the U.S. have dropped by 30% year-over-year and 91% year-over-year respectively. Moving on to the LME and Premium price. As you have clearly seen from our results, the LME price has under severe pressure in the second quarter, and that was thanks to bearish market sentiment as it dominated the trading activity. As a result, the LME-cash averaged $2,263 in the second quarter, which was down by 21% year-over-year. For the LME inventories, they were seen at the lowest level at close to 0.5 million metric tonnes. These -- they were up by 45% year-over-year and with growing inventories of the Russian metal flowing into the LME-registered warehouses, and that is causing a major concern for investors. For the Premium, we have seen the Premium, if you will check in the bottom chart, the premium prices have been on the swing. So the U.S. Midwest Premium have dropped while the major Japanese ports and DDP Rotterdam prices have improved towards the quarter. And with that, we move into the alumina price. As you know, the alumina is one of our major raw materials. For every 1 tonne of aluminium, we need about 1.28 tonnes of alumina to be able to produce 1 tonne of aluminum. And the alumina price was 17% of the LME price. If you see this quarter-over-quarter last -- the first quarter of this year, the alumina price was 16% of the alumina prices. To date, the alumina price is 17% of the LME price, which translated to $374 per tonne. And this -- if you divide it by the average LME price of $2,263 per tonne and you will get the 17%. And with that, we finished from -- the industry highlights for this particular quarter. And then we'll move forward to Alba's highlights for Q2 of this year. All of our -- all our disclosures in this section are based on public information. So you might have seen some of the news published by Alba, but if not we can jog your memory as we speak in this section. So for those who also do not know, we always talk about safety as a first part within this section. We truly believe that safety and productivity are mutually inclusive and we are providing you a snippet about our safety performance for this quarter. So for Q2 of this year, we have two recordable injuries. We have one LTI and we have spoken about that in our call on the 4th of -- following our call for Q1 2023 of this year. We have had an unfortunate LTI on the 15th of April of 2023. However, we're coming back stronger. We have had different campaigns in the last couple of months with the recent one being held as the major one. We can talk more about this for Q3 results because it was held in July. But what we can tell you is that today we have stepped up again. And we have just achieved 5 million safe working hours. The 4 million safe working hours was achieved on the 12th of July. And recently, we have hit the 5 million and we're growing stronger as we move to achieve bigger milestone when it comes to safety. In terms of the ESG highlights, you know that ESG is a very hot topic and Alba has been leading on that front, specifically in terms of our disclosure and what we will be giving you here are some of the news that we have published or if not something which we will be publishing -- which we are actually mentioning for the first time. So we have recently accelerated our transformation to Industry 4.0. This is a very important topic for the CEO, in line with Alba's objective for this year and that was done with the completion of the online performance monitoring system in our power stations in Alba. We have also commissioned recently 3 solar charging stations that are next to Power Station 3. And that will cater to the electric vehicles and solar-electric powered industrial Personnel Carriers. And this is the first industrial company to have adopted this kind of vehicles. We have received recently the Aluminium Stewardship Initiative Chain of Custody. It's called the CoC Standard Certification. And this is for our responsible production and speaks a lot about our, what we do with our supply chain, specifically vis-a-vis the raw material tenders and the suppliers -- our suppliers. We have also been the recipient of the 2023 International Safety Award with Merit from the British Safety Council on back of what we have achieved in the year of 2022. We have also won the RoSPA President Award following 10 consecutive Gold Awards for the Safety and Health Excellence. We have also been the first industrial company in the region as well as Bahrain to achieve or complete the ISO 18788:2015 Edition Certification. And as noted in the previous slide, we have achieved 4 million safe working hours on the 12th July of this year. And last week, we have also completed 5 million safe working hours. This is a different visual for our ESG road map. So this is only like a pipeline for whatever we have seen here, it's actually everything we have started doing since Q1 of 2022. So this is a very high level and news, which you can always track either in our press releases or in our IR presentation quarter-over-quarter. Moving on into the operational highlights for this quarter. We have had excellent operational performance. This operational performance was translated with a higher production. Our production has reached above 406,000 metric tonnes, up by 2% year-over-year. While our sales volume topped 392,000 metric tonnes, up by 1% year-over-year. If we look at our value-added sales, we have had 272,944 metric tonnes in the second quarter versus 270,000 tonnes in Q2 of last year, and that was 70% of the total shipments. If you remember in Alba's priorities, we always stated that we also increased our value added product, which is the mandate of our Board and we trust that we will be able to meet this objective. The third bullet point, this is about the natural gas price. As you know, the existing gas price formula expired on the 31st of March of this year. So the Alba continues to pay $4 per MMBTU until further notice, while our senior management is in full discussion with the government to review the gas price contracts. Our Line 6, which we have commissioned back in November 2019, its Nameplate Capacity has jumped from 540,000 metric tonnes to 560,000 metric tonnes by increasing the current or the -- from 460 kA to 478 kA. We have this -- we have held actually a Reverse Insurance Roadshow, the first company who has ever done that in the GCC and the Middle East as well as in Europe except for one company in the U.K. We have had Reverse Insurance Roadshow where we advice our major insurers and reinsurers on site to spend 2 days with the management and in the plant before we ask them to provide us their underwriting commitment for the upcoming insurance cover. We have also won the Metals & Mining Deal of the year by Bonds, Loans & Sukuk Middle East Awards. And this is on the back of our latest refinancing, the Green Refinancing, which was achieved last year. We have also completed Independent Limited Assurance on 3 KPIs of selected sustainability performance indicators related to the green refinancing for the syndicated loan facility. The assurance opinion is actually posted on the website. And because we have achieved, if you remember, previously in our communication, Alba will receive a discount if we are able to achieve the target of each of these KPIs and Alba have successfully achieved this target and maybe Ahmed can tell us more about that in his section. We have also completed the asset's valuation exercise for insurance purposes. Alba has undergrown this fine network back in 2008. AL HASSALAH top up, we want to sustain the achieved savings, which we have achieved for 2021 and 2022, with $115 million for this year. So that's our mandate, that is in line with our objective for 2023. With regards to the financial key performance indicators, I will speak about that very briefly before I leave the stage, to Ahmed Abdulqader. So as noted in the previous slide, we have had a very strong performance in terms of our sales volume and production. However, this did not translate into higher EBITDA as previously because we had a big drop in the LME price and the Premium. So forth, the first half of this year, we had $433 million. For Q2, we had $205 million. With respect to net income, of course, net income or profit is mainly driven by EBITDA. And since EBITDA has dropped, the profit also has dropped for the first half, it was $206 million while in Q2 it was $80 million. With regards to the free cash flow, it was impacted by major working capital changes. For the first half, it was about $210 million, while for Q2, it was $133 million. And as you might be aware, our Board of Directors have recommended last Thursday -- last Wednesday on the 9th of August to pay 13.28 fils per share as an interim cash dividend to Alba shareholders as of the record date on 17 August of this year. This notice for 28 fils actually corresponds to about $50 million as interim cash dividend. And with that, I will hand over to Ahmed Abdulqader, who will take us in detail into Section #3 for the Q2 2023 results.

Thank you, Eline. Good morning, good afternoon, everyone. So taking you through the financial result for our quarter 2 2023 and starting at Page 16, looking at the metal sales bridge for quarter 2 '22 comparing to quarter 2 '23. And as we see in the chart that there is a drop in the turnover by around $300 million. And this is typically due to the drop in the LME prices as well as the drop in the Premium, but we have offset that implication with our high metal sales volume during the quarter in the year 2023. We move on to the next Page 17 and looking at the sales volume, our sales volume for this year has increased by around 8 -- by over [ 5000 ] metric tonne and the contributor of this in the liquid metal and as well as in the value-added product. The premium average for the year record at $327 per metric tonne in comparison to last year when it was $542 per metric tonne, a drop of 40%. And again, this is mainly due to the index prices in the market, which have witnessed a drop throughout the period. Moving on Page 18 and looking at the cost. The direct cost has slightly increased general leases due to our high production volume and the sales volume. So this is the main magnitude. But when we look at the individual outcome, we witnessed a drop in the major raw material prices by the end of quarter 2 in this year. And as well as there is even efficiency benefit in our operation. So this contributed favorably by around $15 million. On the other side of the dilemma, there are some sort of -- because of the -- our production volume increase, that's why the plant spending and the other aspect has increased accordingly. If we move on to see our EBITDA position. So for quarter 2 '23, we recorded $204 million and comparing it to $540 -- $554 million in 2022. And as we highlighted in the previous slide, the major reason is due to the LME pricing that has a significant part in the calculation. When we look at Page 20 and the cash-flow bridge. So our cash balance continued to be healthy to sustain our cash level. So by quarter 2 '23, our cash balance was $332 million. So the movement from Q1 '23 to Q2, so we have the cash flow from operation favorably by $212 million, the working capital negatively at 41%. Then the general CapEx spending, we have at $38 million during the year. Block 4 related spending, it is $14 million to quarter 2, and net debt service $132 million. So this would make our cash balance in quarter 2 2023 at $332 million. So looking at the final slide, the final slide in my section, the summary highlights and looking at everything at one page . So as we highlighted, a significant drop when it comes to LME prices from over $3,000 per metric tonne, today we're witnessing at $2,200. Today the LME prices are around $2,100. The alumina price has even it is highlighted in the previous slide, it has also witnessed significant drop from last year to $374 as an average for quarter 2 2023. So this makes our revenue at this margin. We have the EBITDA for the quarter 2 as $204 million. So for the first half of the year, our EBITDA record as $433 million. Our net profitability at $206 million and even the adjusted income is at $206 million. This is end from my part, and I will hand it over to our CEO, Ali Al Baqali to continue on the final slides.

Thank you, Ahmed. Thank you, Eline, for highlighting our performance and industry highlights and Alba highlights in the beginning of the presentation. However, despite the challenges in the market, as you see that we have a good result in quarter 2 compared to the quarter 1. And this mainly -- if you look at, we are increasing the production, we are increasing sales and even the value-added product also was increased. And the main drop was due to LME, as Ahmed explained. There was more than $600 decline in the LME cash average compared to quarter 2 2023 versus quarter 2 2022. And as Ahmed also mentioned 40% drop in the value premium. Also, the Carbon Border Adjustment Mechanism, the trial reporting mechanism will start from 1st of October this year. It will take around one year to evaluate that the reporting, then they are proposing the effective carbon tax will start from 2027, this will be subject to the changes based on the CBAM regulation. Also, there will be some challenges for the people who are not achieving the reduction in the carbon intensity. However just for your information, anybody produce aluminium using the hydropower, generally they are producing 4 -- or emitting 4 tonne of carbon dioxide per metric tonne of aluminum. Anybody who use natural gas like Alba and relatively on the GCC smelter, they are emitting around 8 tonne of carbon. And anybody using coal is producing above -- from 8 to 20 to 25 tonne -- per metric tonne of aluminium. This is a big challenge for us. We have still not set the floor for the carbon intensity to be implemented. This is still in discussion with the CBAM Regulation. Overall, we are seeing the market till the end of the year as uncertain and with time especially in the LME price. And we are estimating or forecasting the LME price within the range as to the price between $2100 to $2,200 maybe closest to $2,300, if there is something unexpected in the market. Moving to the raw material price trend. For quarter 2 till the end of the year, Alumina spot price, which is almost stable or stay within the level of $345 to $340. This is for the [indiscernible] of few weeks. And we are expecting this will continue because there's no major development in alumina market. For the rest of the major raw material like aluminum fluoride, also the price we see is declining and stable at the same level for GPC, CPC and even if someone purchase the Anodes. The price is also stable similar to the quarter 1 this year. Only one of the major raw materials still the price is not decreasing or stable, which is the liquid pitch because majority of the liquid pitch supply comes from China. And because China, they put -- they forced some of the producers to cut the production, that's why the scale or direct of having less supply of this material let the price to increase in the market. Section 5, Alba Priorities in 2023. As Eline mentioned that we are continue to push our safety by having our recent safety campaign which is [indiscernible] Safety is our Operating License. We are targeting the mindset of our employees and led it to think for the 5 seconds to stop, think and act safely for any activities they are doing. The feedback was very good. And as Eline mentioned that, we already crossed the 5 million hours, and [Foreign Language] in few weeks if something and if we continue with the same safety improvement and safety awareness, [Foreign Language] we are targeting 6 million hours without LTI. We are maintaining our savings on a [indiscernible] for this year. And [Foreign Language], we are going to introduce a new saving scheme by next year. We are going to announce more details about it in the coming months. Also for the Upstream we are still continuing exploring the market to secure 1/3 of alumina requirement by engaging or having a minority joint venture with one-off reliable refinery award. And still, we addressed a few proposals, but still there is no progress on this. As Eline mentioned also, last week, we had our final audit on ASI certifications. We are already recommended to be justified for the coming 3 years without any major observation. The progress on the Block 4 in the power station is on target and on time. Also, our project for the Solar Farm also is on target and on budget. For Line 7, we are expecting to receive the Feasibility Study by end of September. Then based on the outcome of this study, we are going to recommend it for the Board to go ahead or not maybe in -- by the end of the year. And as Eline also mentioned, we published our 7th Edition of Alba's Sustainability Report. It's already published and posted. We are going to post it [Foreign Language] soon in our [ roadside ]. And you can see a journey, it's a new version and it shows all our initiatives and achievement for 2022. By this, I'm ending the -- our presentation. And Section 6 is an appendix to cover H1 2023 in a few slides. But now I will leave the floor for Eline. If you have any questions, we can address them. Thank you very much.

Thank you, what was said. If we can go back for the questions. So I'm not sure, can you take me back to the other conference that's on [ hold ]. Sandra, did you receive any questions?

Not so far. [Operator Instructions]

Yes. As I think as we wait to receive more questions, we do have two questions from -- one from Tellimer, another is from [ Yousef ]. I'll read this and accordingly we will address. Actually, it's more than one question, there are three questions in total or actually 5. What is the scope -- more actually. What's the scope to raise production capacity from the existing operations? And what would be the CapEx need for such a growth? Any update on Line 7 Feasibility Study. When can we expect the formal announcement? I'm assuming this is the announcement on Line 7 -- on Line 7, whether to proceed or not to proceed? Do we have any visibility on the gas price and for how long we will be using $4 per MMBTU for the natural gas price?

Yes. For the scope to raise the production, actually, we have two things to mention. One is to increase the production by increasing the kA, which is [indiscernible] increase the product line to be -- with more efficient process in order to get more metal. This is one. The second, we are starting now to raise the cost to increase our value-added product, and this is part of our strategic objectives to have a green aluminum [Foreign Language] in the future. The second question about Line 7 Feasibility Study, as I mentioned, by end of September, we are going to receive the final study from Bechtel. And after seeing the IRR and net present value and other parameters, we are going to present it to the Board for final approval. Then the visibility of the gas. Yes, about the gas, I -- we mentioned that from upsell, we are using $4 per MMBTU as a metric. However, we are now in the final negotiation stage with the government. We are expecting maybe by end of this week to get the final approval from the government on the price and the supply.

And we will, of course notify you...

We will notify. Definitely, we are going to do a press release once we receive the notification from the government. We are going to do an official press release in the all -- and the statement in all newspaper and media.

I think with that, we can move to Nour Eldin Sherif, the financial analyst from Arqaam Capital. Can you please explain why the cash costs remain elevated in the second quarter compared to last year with 5 lower alumina prices year-over-year?

Okay. So answering this question, Nour. There are a couple of things that need to be considered. At first, when it comes to the cost comparing it to last year, the first aspect we have is the gas price. So in 2022, the gas price in the first quarter was not $4, it was $3.75 as per the contract, as per the invoices that has been submitted by the government. So this is in comparison to 2023. So for the full period, the gas prices is at $4. So this is one aspect when it comes to the cost. Second aspect when it comes to the cost to keep in mind, especially when it comes to the raw material price as we have highlighted about the alumina prices. We have booked our inventory value based on the average prices of the one. So although the prices that we have witnessed them to decrease in the last quarter, I mean in the last month of quarter 2, but because of the decrease this will impact [indiscernible] the inventory valuation, will have unfavorable sort of impact to our P&L. So this is like an accounting sort of valuation on the inventory, but the expectation at the upcoming costs [indiscernible] the margin should improve because of the drop in the raw material prices. So this is generally seen as a major factor. Of course, we have other factor, which is the interest rate hike by Federal Reserve. All this will have an implication when it comes to the cost. So Eline...

I would like to add one more thing here for the attention of Nour Eldin Sherif. If you are -- I'm actually going into my -- the IR presentation for Q2 of last year. In addition to what Ahmed has stated, the alumina price -- the average alumina price for Q2 of last year was $465 per metric tonne, which if you divide it over $2,882, it will give you 16% as an average of the LME price. So you please note that the LME price has dropped significantly 21% from $2,882 to $2,263 for the second quarter. And the alumina, the average alumina price has dropped from $465 to $374. So it almost went down by $100. So it's true that the alumina price went lower on absolute terms versus Q2 of last year. But do not forget that the LME price has also dropped by more than 21% in this quarter versus last quarter. Now if I move into Yousef Husseini from EFG-Hermes. "I just had one question on the raw material costs. All the benchmarks that I have found for alumina prices have shown weakening prices in the second quarter versus Q1." Actually, this is not really correct Yousef because for the first quarter of this year, alumina prices have averaged 16% out of $2,399 per metric tonne. However, in the presentation, we are showing a $20 increase per cost in alumina price in second quarter [indiscernible] benchmark. So I want to address Yousef Husseini's question. The API -- it's actually a benchmark of 3 market intelligence. And this is the average. So we are not following only CRU, HARBOR -- CRU, Platts, and Fastmarkets. So this is an average. So we look at the alumina price given by Platts, by HARBOR, and -- by Platts, HARBOR and the Fastmarkets and we give you the average. What you are seeing on Bloomberg is actually, if I am not mistaken [indiscernible] Bloomberg function with respect to alumina pricing. So this is why what you see over the year is actually what we are following ourselves and it's actually what -- this is how we look at the pricing for alumina. So there is no reason actually for any discrepancy because you are following Bloomberg benchmark while we are providing you with average pricing index, which is taken from HARBOR, from Platts and from Fastmarkets. And these are -- by the way this feature is available if you are having a subscription to this market and then you will be able to calculate it yourself. Another question from Yousef Husseini about our conservation of the new gas supply and -- new gas fronts and supply agreement from the government by the end of this week. Just wanted o make sure I did not mishear that. No, your hearing is working perfectly. So 100%...

We are already done with the negotiation and we're expecting a confirmation by end of this week [Foreign Language]. And within a few days, we are going to receive...

Yousef, you are very young, so don't worry. You have asked correctly. [ Bilal Saba ] this is our shareholder. How should we think about the dividend payouts for the full year? What I can tell you, Bilal, of course, if I made since now that the CEO is with us, usually, I address Bilal Saba's question. We have had a call, actually last Thursday. So for the dividend as long as the company is generating profit, we will be able to pay dividends. Historically speaking we almost paid dividends, except for when the company embarks on an expansion project. So we try to reduce a little bit the dividend by instead of let's say paying just an example, $50 million we may go for $20 million, so that the $20 million is actually paid from us to finance -- to self finance the project CapEx that we undergo. But if you look historically, and we always paid dividend. Of course, the absolute amount will be different based upon how much is the LME. So today, the interim was $50 million versus $120 million for the previous year. And this is, of course, subject to the LME price. If you check the LME price quarter in Q2 was $2,882 while today it's $2,263. So you will see you have a drop in the LME price of more than $600, that will ultimately impact our bottom line -- top line revenues and will ultimately also impact our bottom line. But as a rule of thumb, Alba will continue to pay dividends as Alba's are generating profits and provided also our Board of Directors recommend or proposed to pay dividend total -- to the shareholder, which has been the case as you might be aware in the last year. Sandra, do we have any questions? Did you receive any questions?

There are no questions on the phone line. Please continue.

Okay. Thank you very much. Thank you. That was quite quick. We were embracing ourselves to stay longer. So I think I would like to thank each and everyone for spending about one hour with us over this webcast and call. If you have any additional questions, which we did not address, please feel free to drop us an e-mail with your question. Otherwise, at the minutes of meeting of this call you will be launched on to the regulator website by tomorrow morning. Again, thank you, and I hope we will connect virtually again in November, following the release of our Q3 financials.

That does conclude our conference for today. Thank you for participating. You may now disconnect.