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

Good afternoon, everyone, and good morning for those who are based in the U.K. This is Eline Hilal, Director of Investor Relations. This call will be led by our Chief Executive Officer, Mr. Ali Baqali; and my colleague, Mr. Ahmed Abdulqader, acting CFO. I would like to take this opportunity today to thank my colleague, Ahmed Abdulqader, for doing a fantastic job over the last couple of months. As many of you is aware, he has been with during the last couple of conference calls, and he has been acting as CFO for the last couple of months. And I also take the opportunity to welcome virtually the new CFO who will be coming to Alba starting his first day tomorrow on the 15th of August. And without further ado, we will be walking you through the IR presentation today as always. Usually, I cover myself the first 2 section of the IR presentation, where I give you a brief about the major highlights for the aluminum industry that has happened in the second quarter of the year. For switch, I put some insights on what Alba has done in terms of our operational highlights. Then my colleague, Ahmed, will be providing us more detailed insights about Alba's financial performance for the second quarter, post which the last 2 sections about what we should be expecting with regards to the aluminum industry outlook as well as Alba's priorities for the remainder of the year. And without further ado, we look first at Slide #5 for the industry highlights. Just to note that the following few slides are extracted from CRU market intelligence. So everything you see here is actually from market intelligence sources, and it's not -- it doesn't represent Alba's views. If you check the title for the first slide, it's about what has happened with regard to the aluminum consumption. The consumption was up by 2% year-over-year, not too much. And we have noted that the demand has recovered amid lots of macroeconomic challenges worldwide, notably persistent inflation, geopolitical tensions as well as supply chain disruptions. We all know what's happening in the Red Sea. All of them have collectively contributed to a passive demand environment. With regards to China, despite the government stimulus efforts, the consumption has moderated to 3% year-over-year, indicating a lack of robust demand momentum in the country. With regards to the East, the middle East region has registered a modest growth in consumption, about 2% year-over-year. And while for Eurozone, as you know, the economic uncertainty still persists and is marked by an uneven pace of recovery with the demand being down by 4% year-over-year. With regards to the United States as a continent, we see that the service sector continues to outperform the manufacturing activity, and that was underpinned by healthy consumer spending. However, weak building and construction activity in the U.S. has weighed on the aluminum demand, resulting in the 1% year-over-year decline in primary demand. With that, we move to the global aluminum supply. The aluminum supply for the second quarter was up by 3% year-over-year versus 2% for the aluminum consumption. And despite the weak demand, the construction rose due to higher output in China, Europe as well as the Middle East. The Chinese supply was up by 4% year-over-year, while for the European zone, it edged up by only 1% due to economic uncertainty. Middle East supply was up by 1%. North American supply is down by 2%, mainly due to a 15% drop in the U.S. production. As Chinese production is growing at a slower pace of consumption, as we have seen in the previous slide, China continues to hold its 45 million tonne target annually. The world market is in deficit with China, minus 0.4 million tonne. As a result, China is still in deficit, minus 0.3 million metric tons. Moving now to Slide #7 with regards to LME price and premiums. The LME price for this quarter averaged about $2,520 per metric ton, up by 11% year-over-year. The prices have fluctuated between a low of $2,320 on the 2nd of April and a high of $2,695 on 29th of May. LME inventories have jumped from about 600,000 tonnes in Q1 of this year to 1 million tonnes in Q2, and this is fueled by the growing stockpile of the Russian metal in the LME warehouses. With regards to the premium, as you see in the below chart, the U.S. Midwest has edged higher from Q1 2024 to Q2 2024, while the DDP Rotterdam also has factored also the same, additional about $72 per metric ton. And for major Japanese ports, it also edged at about $150 per metric ton. And these increases in the premiums have been up and driven by the U.S. and the U.K. sanctions on the Russian metal in April and the persistent supply chain bottleneck in the Red Sea. And as stated in the second bullet point on this slide, the LME inventories jumped by 88% year-over-year, and that maybe translates to the increase that we have seen in the premium in the bottom chart. With regards to the alumina, this is a complete story, different story. The alumina price for Q2 2024 is average $392. Today, the alumina Price, the API is about $480 per tonne. The LME price, as stated in the previous slide, averaged $2,519. That represents 16%. So alumina, it's 16% of the LME price for the second quarter of this year. So this is a very high-level sneak peek about what has happened into the aluminum industry in general in terms of demand and supply as well as the LNG price and the premium and alumina, which are the lead indicators of Alba's performance. Moving now into Alba's highlights. For this section, do note that some of these highlights have been made publicly before. We're just reiterating them over here for the sake of disclosure. We start with the first slide in this section with Alba's safety performance. As you have seen, we have been doing good in the last couple of years. So we're giving you a trend for 2019 until today, year-to-date, June 30, 2024, where Alba had 10 recordable injuries with 2 -- 10 total injuries, 2 recordable injuries and 0 LTI. And you can do the math for this performance as of Q2 2024 and for the first 6 months of the company. We have also recently achieved 22 million safe working hours without LTI on the 6th of August. And we are on course to continue hopefully the same momentum as we close the hot summer months in Bahrain. If we move further into what Alba has done in terms of its environment, social and government achievement and our plans for the future. We have been the recipient of 4 safety awards from the National Safety Council. That has been made public [indiscernible]. We have also signed cooperation protocol with the company's 2 trade unions. That has been also done over the course of the second quarter. And 24 national employees of our workforce advanced in their Mechanical Engineering Programme and the University of Huddersfield. It's worth noting that these employees are sponsored by the company. So that was part of our social commitment. Leading the way, sustainable aluminum production. This is more on the environment aspect. So we have achieved the first fire of state-of-the-art gas turbine for the Power Station 5 Block 4 Project. And we're very happy to say that this project is in progress as planned. We have soared as well to top 1% globally with EcoVadis Platinum Sustainability Rating. This is the first time Alba received the Platinum rating from EcoVadis. That has also been made public before. We have also unveiled a new low-carbon aluminum metal. We call this EternAl, which is eternity. That goes for eternity with 2 initial variants, EternAl-30 and EternAl-15 with 30% and 15% recycled content. We're also happy to say that we have also sold this variant to one of our customers in Australia, Capral. And the qualifications, we have passed the qualifications and the trial, and the customer is very pleased with this new aluminum metal from Alba. And this goes in line with Alba's ESG road map, specifically when it comes to recycling and secondary LME. In relation to community impact, this is also on the social aspect. We have a robotic unit to Nasser Vocational Training Center engineering program to enhance the students' learning and skill development. Building for tomorrow, as stated earlier, Block 4 is in progress as planned. And the solar farm, which we have previously announced that has the capacity to produce about 6.5 megawatts, is progressing as per schedule. In this slide, this is just a nice photo which we wanted you to see, how we have formed EternAl for Capral. So this is the stamp as you see on the ingots that you see in front of you. And that -- this batch has went to Capral, one of our customers in Australia. This slide, Page 13, really, there is nothing -- nothing has changed from before. It's just to reiterate our initiatives when it comes to our ESG journey by 2035 in line with the Kingdom of Bahrain's objective. So I will not go through it, but happy to take any questions you might have during the Q&A questions. With respect to our operations and highlights for the second quarter, we're very happy -- we're pleased to inform you that our sales volume topped about 398,000 metric tons, up by 1% year-over-year, while production for the quarter was almost flat, down by 0.5% year-over-year to reach about 404,000 metric tons. On this note, just for your reference, for the first half of this year, our production is ahead by about 6,000 tonnes versus the first half of last year. Value-added sales accounted for 73% of total sales' shipments. This is the first time in Alba's history that we topped 70% into value-added products. We have inked recently an agreement with SAP, a market leader in enterprise application software, to upgrade our enterprise resource planning solution, ERP, to SAP's latest software S/4HANA Cloud. This is in line with the company's digitization efforts. And last, we're quite proud and happy that our CEO, who's next to me on my right, has been appointed the Chairman of the International Aluminium Institute. This is the institute that covers all the aluminum value chain in the world. With respect to our e-Al Hassalah Programme, so as you know, for those who are actually quite loyal to the company and has been looking at our performance over the last couple of years, we pride ourselves with our cost restructuring program that help us streamline our cost structure. e-Al Hassalah is the digital program that we have adopted at the beginning of this year. The purpose of this program is to streamline our cost by additional $60 million for the year of 2024. So that's the target. And we're very pleased to confirm that we have an achieved savings of $35 million versus $60 million for the target for 2024. It's worth noting that the program is intended to achieve $150 million in total savings, which is spread over the course of 2024, 2025 and 2026. Moving further into the financial KPIs. So this is a sneak peek into our major KPIs. Our colleague, Ahmed Abdulqader, will be giving you more insights into why we have -- the reason for achieving this performance. What I can tell you, in general, our EBITDA was primarily driven by a higher LME price and lower premiums. For Q2 of this year, we have had $184 million EBITDA, while for the net income, we have $182 million. Net income up by about 129% year-over-year. Of course, net income is driven or boosted by the higher EBITDA, as you have seen or noted in our financials. For the free cash flow, it was impacted by changes in the working capital. For Q2, it was $145 million, while for H1, $245 million. This performance, as stated by our Chairman of the Board in his quote yesterday in our press release, has enabled us to declare $70 million dividend to our shareholders as at record date. This $70 million represents BHD 0.1859 per share for every shareholder who will have -- who will be holding share as at the record date. And without further ado, I will leave the floor to Ahmed to share his insights on Alba's financial performance and give us the reasons or the rationale behind each of the KPI figures.

Thank you, Eline, and good morning, good afternoon to all. And I'm very pleased to announce our quarter 2 results for the year 2024. So going to first on Slide 18 and looking at our metal sales bridge between the quarter and 2023 compared to 2024. So total turnover in Q2, we have achieved around $1071 billion, slightly higher than the last year's quarter by around $50 million. And this is mainly due to the favorable movement in the LME price overall and also favorably when it comes to our sales volume overall. This was offset against the impact in the premium market prices and which in the following side, we'll give a bit more light on the movement of our sales volume and premium. So Page 19. And when it comes to our sales volume in total for quarter 2, we have achieved total sales of 398,000 metric tons. We have significantly managed to increase our value-added product sales of around -- this contributed around 16,000. So when we look at our VAP percentage, as Eline has highlighted, we have exceeded the 70% level and this year where it was around 68% and 67% in the year 2023. On the right-hand side, looking at the average premium. It has -- was dropped by 21% despite the increase in our sales volume for the VAP product and specifically because the market premium has dropped in the markets. So we averaged in the quarter for '24 at $257 per metric ton. Now if we look at Page 20 on the cost -- the direct cost side. There has been a favorable movement between the quarters. So we have improved our cost by around $30 million. And this is mainly due to the drop in the raw material prices. So we are witnessing this year that the inflation has been stabilized. So this has benefited our operation spending activity overall. And when it comes to the other spending, generally because of our high production year-to-date, so generally some of the cost component will decrease in that direction. Moving on to 21, looking at our EBITDA. Our EBITDA percentage margin has improved way up to 27% from 20%. And as we have highlighted in the previous slide, a major contribution, positive, is our metal sales volume, high, our VAP sales in this quarter and the growth overall over the quarter and that our favorable position, our direct cost generally because of our e-Al Hassalah initiatives and specific on this pace of consumption but when it comes to even other elements that we have managed to achieve overall. Now on the cash flow bridge and looking at our cash position. We continue to sustain our healthy cash position. So we ended the quarter with cash on hand of $249 million. So the component would be our cash from our operation activities, $295 million. There has been unfavorable changes in working capital. When it comes to general CapEx, we have spent $51 million. CapEx in relation to our project of Block 4 has been $10 million and servicing of debt in total is $102 million. The final slide and the financial highlights, looking at summary of our key performance indicators. So overall, year-to-date, we have generally boosted our EBITDA position. So our EBITDA for the first half of the year recorded at $469 million, our net profit record at $247 million, and our turnover in total is $1.9 million. So by here, I end our part in the financial highlight. And I will hand it over to our CEO, Ali Al Baqali, to continue the rest of the slides.

Thank you, Ahmed, very much. Good morning, good afternoon, everybody. We are on the Slide #24, the industry perspective in 2024. The current market outlook revolved around 2 main factors actually. One is volatility and the other one is uncertainty. Due to the lack of interest rate cut by the Fed, the demand outlook in the building and construction and automotive industry remain weak as the consumers are on a wait-and-see on the basis with the expectation that an interest rate cut is imminent to the next Fed meeting. LME has reduced from its peak this year as a result of a weak physical demand and reduced inventory and risk curve or interest rate. Moreover, the conflict at the Red Sea has an impact in all industries and for the consumers to artificially increase their orders as a result on the long lead time despite demand not improving. Accordingly, typical premiums have reached their peak for the year as a result of the issues, as I said. Going forward, I think the last quarter of this year, the premiums are expected to be stabilized on the back of lower expected interest rates, which should address driving the demand to improve. And we are estimating or forecasting the LME price will be -- by the end of the year to be anticipated within the average between $2,200 to $2,400. Moving to Slide 26. The industry perspective for the major raw materials. Actually, for the last few months, the Alumina Price Index, API, was operated or indexed at the higher range, which is representing between 16% to 17% to the LME price. And this is mainly because of the production disruptions in Australia and definitely the Chinese bauxite sourcing mechanism. I think the API will remain high in end of this year. And this is definitely what I can see from the price, the API to not go less than maybe $470 to $460 by the end of the year. However, for the rest of other major raw materials like GPC, CPC, aluminum fluoride, I think the prices will be stabilized and will be operated at the same trend of the first quarter and second quarter. However, maybe the liquid pitch is due to the challenges in the oil prices. I think maybe the price will go a little bit up. For Alba priorities on the Page 27, actually safety is the top priority for us. And we are off with considering safety as a top objective for us, and we believe that if our operation is safe, definitely this will reflect directly on our production and our employee morale and on our profitability. That's why we just finished our safety campaigns, and the main aim for that safety campaign is to be [indiscernible]. Maybe someone of you following Alba Instagrams or Alba social media. You will see employees are posting their pictures, their clips, and they are showing their [indiscernible] belonging to Alba in terms of following the basic things in terms of go back to basics and always to think that before doing any activity, they should stop for a while, think for a second and act for a safe operation. This is important. The second, in terms of the operations, we are on target or on track to achieve our yearly production plan to achieve 1.62 million tonnes and above. We had a challenge over the summer. You know this summer is very challenging in terms of humidity and heat. However, we are pushing and going on the shop floors all the time in order to lead by example to achieve for this summer, inshallah, as everything goes as well. We'll be achieving 0 heat stroke and 0 heat exhaustion for the eighth year consecutive. And this is a well-regarded benchmark for Alba. I think this is in industry worldwide. However, also last week, we achieved 22 million hours without lost time entry. And this is also -- I would like to take this opportunity to thank all our employees, all the management for driving this to make Alba and to make all Alba employees safe all the time. In terms of efficiency, we are working hard in order to achieve the completion of Block 4 in Power Station 5. This will enhance our efficiency, and it will reduce our carbon emissions also. And the full benefit hopefully for everyone to get by next year. But definitely, once we start the commissioning and the handover from the contractor definitely, it will show -- get some benefit, inshallah, this year for the last few months. The feasibility study for the new replacement line, it is ongoing. And we are planning, inshallah, to present the final study in the next Board meeting, which is planned in September this year. By this, we are ending our presentation, and I will leave the floor for any questions. Thank you, Eline. Thank you, Ahmed.

[Operator Instructions] And now we'll take the first question over the phone, and it comes from the line of Shashi Shekhar from Citi.

I have 3 questions. First one is how much cash reserve do you want to maintain on your balance sheet in the medium term? My second question is on value-added product. This increased to 73% compared to -- I mean previously, it used to be around 70%. Just wanted to understand the reason behind it. And is this number sustainable going forward, 73%? And my third question is on your CapEx. What is your medium-term CapEx guidance? And does it include the CapEx which will be required in the new replacement line?

For the cash, actually, we are always maintaining a minimum of $150 million. This is our target. I know we have cash. That's why we are also distributing dividend of $70 million this quarter as an interim. In terms of VAP, actually, we are exceeding the 73% VAP because there is a strong demand on the VAP, especially on the automotive sectors in the first quarter and second quarter. But from what I see from the market, the gap will be lower by 2% or 1% because we see now because of the -- what's happening in geopolitical issues and the tension in the area, a lot of customers are hesitating to book for the full quantity and they are asking us to defer some of the VAP to later stage. What was your last question?

CapEx.

Yes. The maintenance CapEx actually after publishing Line 6, we are keeping around -- for the maintenance around $100 million as a maintenance CapEx, between $100 million to $120 million. This is the maintenance CapEx. However, there are some major relining for the potlines due to the age of the pot. You will see some CapEx will go up again.

Okay. And between $100 million and $120 million, it doesn't include new replacement CapEx that will be needed for new replacement line, right?

No, no. Yes, you're right. The new replacement line is still not approved by the Board. It's still under feasibility study. Once we approve the new line, then definitely, it will be allocated in new CapEx for it on the technical study forecast.

[Operator Instructions] At this moment, there are no further questions on audio line. Nishit, over to you for any written questions.

Yes. We have a few questions on the webcast, and I will ask to the management on their behalf. First one is from [ Abhishek Sukatme ]. He is asking, what are the factors that are driving the premium in the LME prices currently?

So I will be answering this question. So generally, what drives the premium, it will fall back into the fundamental demand-supply in each specific region. So as we have highlighted in the beginning of our presentation, we have the MJP covering the Asia. We have the Rotterdam covering Europe. And we have as well the Midwest covering the Americas, the North and South America. So typically, what would influence is the demand and supply. And it depends on each sovereign entity, what they introduced in the market over there. So there's data tariff. So this also will have some sort of influence. But the majority and typically what's going to drive is the demand and the supply in each those jurisdiction.

Okay. We have our next question from Nour Eldin from Arqaam. He's asking, do you expect alumina prices to normalize by fourth quarter 2024? And also, is there any update on the dual listing for Alba?

For the alumina price, as I mentioned earlier, it will be soft a little bit. But the problem because the index is illiquid because the price is on a very few cargoes, I don't see any appetite for the alumina price or the API to go below that level. So I'm assuming that because a few trades will happen in the coming few months, I don't think it will be a dramatic decrease in the alumina price. I think -- my expectations or my forecast, I think by the end of the year, maybe the average will be between $450 per metric ton. For the cross listings, we already announced that initiative. We explored that in the past, but we are just waiting for the right moment in order to -- if it is feasible for us. And there's some requirement also to do in-house in order to be eligible to do the dual listing.

Okay. The next question comes from [ Naif Al Decarie ]. He is asking, from which countries do you -- does Alba source alumina? And is there any adverse impact in either the sourcing or from the pricing of alumina? Is Alba facing any adverse impact?

For the countries, actually, we are sourcing from a different region to diversify our risk. The majority of our supplies comes from Australia and from Brazil and some cargoes also from India. We don't have any issue or challenges in sourcing the alumina because we have long-term supply agreements, mid-term supply agreements that are covered. And even with the issue of the challenges in Australia and China, it was not a major impact on us.

Okay. Now the next question comes from Mohamed Al Araifi from BBK. He has 2 questions. The first on the drivers of -- what is driving the slowdown in sales in America -- in Americas? And the second question is on the interest rate swap. Is there any plan to revise the swap if the rates fall lower, maybe to pay floating?

I think the slowdown in America and mainly also in Europe, I think the automotive sectors, they are slowed down. In terms of the interest swap, we don't have any plan now at this stage to do any revised swap exercise.

Okay. The next question comes from Aditya Dugar from BNH. He's asking, can you share some financial details on the recently announced Daiki Aluminium processing plant project? How much CapEx is planned for it? And when is the construction expected to start?

Yes. For the Daiki, we just announced our cooperation or our partner with Daiki. At this stage, we cannot announce or disclose the financial detail because it's still under discussion. But this project, actually, it will help Alba to recover the aluminum withdrawals and will have a sustainable environmental solutions. And it will be the first kind in the Middle East. But this -- it will be -- once we are progressing on the financial details, basically, we are going to announce it to all.

Okay. And another question again from Aditya. He is asking, which raw materials had contributed to lower cost of sales year-on-year in this quarter, second quarter?

So as we have highlighted, and this is moving in the same direction with the inflation globally. So we have seen the stabilization in inflation. So typically, this will be applicable to all our raw -- other raw material prices. So the drop of those raw -- other raw material prices has contributed positively in our cost position.

Okay. So we have no more questions on the webcast as well as on the Q&A for now. Until then, I'll just ask 2 questions. One on -- you mentioned that the replacement project feasibility would be submitted in September. So should we expect a decision to be made on the replacement project by end of September and more clarity on it?

Actually, the new replacement line, yes, it's a plan to be discussed in September Board meeting. But it depends on the Board, if they are satisfied with the feasibility study conducted by Bechtel. However, there is also another challenge we have in new replacement line, which is to occupy the land. Because the land, we don't have the land. The land is -- this is to Alba or near to Alba, and there are some companies occupying that. We are negotiating with them to occupy them and to make the land free for the new replacement line.

Okay. And also on the Block 4 power project, you mentioned the fourth quarter. So should we expect, say, around October, November, this would be commissioned, the power project of...

You're absolutely right. We are now at the final stage to commissioning the Block 4. And we are expecting, yes, by mid of October, early November, we are going to have it at full in operation, inshallah.

Okay. Thank you. We don't have any more questions in the webcast or on the Q&A. So do you want to wait for some time?

[Operator Instructions] There are no further questions on audio lines or the webcast. Dear speakers, I would now like to hand over to yourself for any closing remarks.

Thank you very much, Nadia. Thank you, everyone, for those who attended today's call. We hope we answered your questions, and we hope we catch up for the second quarter. Have a lovely day and we'll stay connected. Thank you.