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

Good day, and thank you for standing by. Welcome to the Aluminium Bahrain Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Eline Hilal. Please go ahead.

Thank you very much, Sonia. And I also take the opportunity to thank Anoop Fernandes from SICO for hosting our call. It's a pleasure to be with you here today to walk you through our financial performance for the third quarter and the 9 months of this year. This call will be shared by the Chief Executive Officer, Ali Baqali; and with our Chief Financial Officer, who joined Alba on the 15th of August, Ricardo Santana and myself. Also in attendance with us, we have the full investor relation team as well as our finance manager, Ahmed Abdulqader. And without further ado, I would like to start -- on Page 3. Just as a reminder for everyone, the presentation has 5 major sections. The first one is about the global demand and supply dynamics of the aluminium industry, and I will be covering this myself. In addition to that, we will take you through a deep dive into what Alba has done over the last quarter of this year. As for the third section about the financial performance. This will be covered in detail by our Chief Financial Officer, Ricardo Santana. And last, but not least, our Chief Executive Officer, Ali Baqali will walk us through industry perspective for the remainder of 2024 and the new term of 2025 as well as Alba's priorities for the rest of this year. And of course, in the appendix, we do have the financial performance for the third quarter of Alba. We can leave that to you if you have any questions at all, you are very welcome to ask us any questions you have by e-mail. And with that, I will jump into Page 5 of the IR presentation, which I hope you can all see in front of you. Just as a note in this section, which is section #1, all details that we will be providing you insights as on or actually from CRU market intelligence. So we note in the last quarter -- in the third quarter of this year that the demand has been slow, and it has been slowly recovering, specifically amidst the macroeconomic challenges in the market that has seen the consumption grow up by plus 1% year-over-year. And as we all know, in the last couple of months, we see a gradual recovery in the global economy that was boosted by the positive market sentiment following the U.S. Federal Reserve's interest rate cut as well as China's stimulus measures. However, the geopolitical tensions and the trade value remain significant risks to the near-term outlook of the aluminum industry. And for the Middle East, we've seen the demand growing up by 5% year-over-year, supported by higher consumption in the Kingdom of Saudi Arabia and Bahrain. As for North America, the demand rose by 4% year-over-year, and the U.S. economy settled into a sustainable growth pace besides passive manufacturing and housing activity, while Packaging segment continues to recover. In China, the consumption was flat with uneven economic recovery necessitating further government support, manufacturing and export outperformed, while property market downturn continue to persist. While for Europe, the economy remains uncertain, with uneven growth and weak consumption, leading to a 1% year-over-year contraction in the aluminum consumption. And with that, we move into the world market supply. So the supply has grown by 0.5% year-over-year, and that translated into a deficit of about 0.03 million metric tonnes with China, and in the whole month it was in surplus of about 0.5 million tonne without China. In China itself, the production was up by 1% year-over-year, stabilizing after the Yunnan ramp-up. However, Yunnan, Honghe continues to operate below full capacity. With that in mind, China is about to reach its production capacity cap of 45 million metrics tonnes by the end of this year, making any significant net supply growth from China unlikely. With regards to the Europe continent, the supply increased by 2% year-over-year driven by Germany and Russia, while production in North America contracted by 2% year-over-year, primarily due to a 12% decline in the United States. As for the Middle East, the supply remained almost flat. And with that, we move to Page 7 of the presentation in front of you. The LME price averaged $2,383 per tonne in the third quarter, up by about 11% year-over-year. With regards to the LME inventory, the LME -- the inventories reached about 800,000 metric tonnes down from about 1 million tonnes by June 2024, and that performance was up by about 62% year-over-year. In respect to the physical premium, the European premiums remained high due to tight supply and disruption, while the U.S. Midwest premiums were down due to limited spot activity and the focus on 2025 negotiation, and in the charts in the bottom you can see the performance of each regional premiums by quarter. Moving on into Page 8, the last page of this section. So we're providing you with the Alumina Price Index average for the quarter versus the LME price trend per quarter. Today or actually by Q3 2024, the alumina price index averaged $471 per tonne, which is 20% of the LME price. Just to note, alumina today is about $720 per metric tonne as of today 13 November. And with that, we move into Alba's highlights for Q3 of this year. So we start Alba's highlight with the safety in numbers. So a good news announce that just 10 days ago, Alba has hit EUR 26 million safe working hours result LTI. This is a performance that has been accumulating for the last 2 years. And you can see that in the chart on your left. So if you look at our performance year-to-date 2024, we have 0 LTI, we have 3 recordable injuries, and we have 13 total injuries. Then moving into Page 11, which is Alba's ESG journey. So nothing has changed into this slide. If you have any questions, we'll be more than happy to take it forward during the Q&A. Moving on into Page 12 of the presentation. So this is Alba's achievement in respect to ESG. So the first bullet point is about safety, our CEO [indiscernible] says that safety first, safety always comes before everything we do in Alba. So in the beginning of the summer, we have launched our official Summer Safety and Health campaign, and it was -- the theme of that campaign was Safety Reflection for Family's Protection. We have also a bit the recipient of the British Safety Council International Safety Award with Merit. With regard to the social aspect in Alba, we have partnered with National Vocational Training Center, research and development are to upskill our employees with artificial intelligence knowledge. 95 of our people have completed the Lean Six Sigma and Kaizen courses. Alba's virtual reality and AR training applications was recognized with the -- by Brandon Hall Group Excellence Award. In terms of our recycling initiatives in line with our ESG road map. If you remember we have mentioned in the last quarter that Alba has produced its first ever recycled metal. It's called EternAl that has 2 variants 15 and 30 recycle content. While we have announced that before, we are very pleased to have one of our customers, which is Capral Aluminum, it's a customer base out of Australia. And we have been the first customer who buy from us EternAl, which is the low-carbon aluminium. We have also formed a strategic partnership with Nike Daiki Aluminium to establish a sustainable aluminum dross processing plant in Bahrain and Alba will be the first company in the GCC to have such established at nearby plant. With regards to Community, we have partnered with INJAZ Bahrain, innovation camp and job shadow program to train and upscale our people and university students. We have also expanded our OJT program by OJT remain on the job, training program to provider hand on experience to more than 215 students within Bahrain. In terms of what we are doing tomorrow, these are 2 regular updates. So our power station 5 block 4 project is improved as planned with the commissioning date to be within this quarter within this year. In terms of our solar farm, it's progressing as per schedule and it's due to be fully commissioned also hopefully within this quarter. This slide is about the contemplated merger between Alba and Ma'aden strategic business units. Many of you have been aware that on the 16th of September, Alba has announced a nonbinding agreement with Ma'aden 2 programs [indiscernible] towards a potential business combination with segments of Ma'aden aluminium strategic units and these segments are Ma'aden bauxite Alumina company and Ma'aden aluminum company. This partnership will be creating a larger integrated global champion with significant synergies offering advantages such as expanded production capacity, enhanced global presence, improved ESG performance, greater energy security as well as significant shareholder value creation. And later in October, Alba has appointed advisers to guide due diligence process as we explore this potential with the combination with Ma'aden. For more updates. As you please, you may check the Bahrain Bourse website. So for any update in line with the local regulations, a monthly update will be launched with the regulator. And with that, I will move into the operational highlights for the Q3 and the 9 months. I will not spend much time on the third quarter, but we were very pleased to report that Alba has exceeded -- Alba's production has exceeded 1,212,000 metric tonnes. For our sales volume, we've also hit almost 1,192 million metric tonne as for value -- our value-added sales, we have topped 72% VAS versus 67% for the 9 months of 2023. Last but not least, from my end. This is a regular update on e-Al Hassalah, which is on Page 15. So e-Al Hassalah it's a 3-year program with the intention to -- we're able to achieve $150 million by the end of 2026, that's started, and we provide our achieved savings on a quarterly basis so they e-Al Hassalah has achieved as of 30 December, $51.24 million against the target of 2024 of $60 million. Moving into the last slide in this section. So these are the main KPIs of Alba. I will focus on the 9 months. And for more details, the CFO will be providing more insights and [indiscernible] performance. So for the 9 months, we have exceeded $730 million for EBITDA. For profit, we hit $392 million, as for the free cash flow, we have about $305 million, which was down by about 23% year-over-year. And I will let the good insights and the good performance to be shared by our CFO for the 9 months of this year. Ricardo, the stage is yours.

Thank you very much, Eline. I'm very pleased to interact with Alba's investor community. I'm looking forward to meet you all. Well, it's very good to start with a strong quarter and this is to start with this type of quarter and 9 months results. Our first slide will be Page 18 and we'll be talking about our sales revenues. In summary, we increased our sales revenues in around 1% compared to previous years -- previous year, $35 million and that mainly as a consequence of stronger revenue around $100 above last year's revenue. This was partially offset by the price impact of lower premiums as a consequence of lower demand in U.S. and in the global automotive industry. And with a positive impact on product mix remaining volume, where 10 additional -- 10,000 additional tonnes impacted our results positively in $25 million. Moving to the next slide. We provide another view on this slide of the improved sales performance compared to previous year to 10,000 additional tonnes as I mentioned before. This tonne will basically migrate from commodity to value added to the increase that we have seen over this period of 58 additional value-added tonnes against 48 decreasing commodity tonnes, which takes us to 72% of VAT sales for the period. Looking at the right side of the slide, you can see that the premium has gone down, as I mentioned, as a consequence of U.S. and the global automatic industry change. Moving to the next slide, Page 23. Also good results in terms of direct costs. So basically, we are improving our direct cost $18 million. We have [indiscernible] all the market some pressures in terms of price in alumina. When you see the raw material price $80 million, the main impact is alumina. And it's important to mention that this alumina impact is something that it continue at this stage and that we have a 2 months lagging effect. So we might see part of the heat of the higher alumina price. So at the end of this quarter and the beginning of the next quarter and it is mainly related to supply chain disruption. On the next item, we see a positive impact of $146 million in the other raw materials. That is mainly a combination of price and consumption -- of price and consumption positive trends. And we see also the impact of alumina sales cost of $30 million in cost. But when we see the whole results of Alba, this impact is basically 0 as we also have the impact on sales. Plant spending impacted mainly for different accruals compared to previous years and also [indiscernible] effect happened in 2023. Moving to the next slide, looking at the EBITDA. So the EBITDA in 2023 was $601 million, and we are going to -- we are facing $732 million in the year-to-date figures for 2024. As explained on the first [indiscernible], the main impact comes from initial metal sales, $35 million. We see the net impact on other sales of alumina, loan position that we had over the year $30 million, offsetting the impact that we presented before in the cost and/or the $80 million that we described it on the previous slide. Finally, a slightly improvement on selling expenses for the period we can see as well. Going to the next slide, Slide #22. We started group [indiscernible] on the left part of the slide, we started with a cash balance of $159 million, this cash we generated for the period from operations $736 million. We were challenging in terms of the price impact on working capital, mainly because of alumina and [ alumi ] as we mentioned before. So that has an impact on our working capital of $156 million. And we also faced $107 million of working capital change as a result of inventories, the higher inventories as a consequence of this Red Sea challenges mainly. We have capital spending around $169 million. This is basically normal maintenance and additional relining on the normal cycle of [indiscernible] Block 4 CapEx and also net debt servicing of $129 million and payments to shareholders in the less range of the previous year, around $60 million and a recent payment of the initial tranche for this year of $70 million. That with a short cash balance of $180 million. When we look at the right side of the slide, we see that our free cash flow generation was a bit below compared to the previous year, and that's mainly as a consequence of the challenge in terms of price and working capital little bit higher CapEx compared to previous year. If we move to the slide, Page 23. We talked about it a good result in terms of our performance. What was our comments during this period. So improved revenues both in the quarter and the year-to-date. EBITDA with a good margin, so strong and resilient at 23%, profits going up in the quarter by $100 million, gain/loss gain on unrealized derivatives that's mainly based on our strategic hedge results marginal, giving us an adjusted profit of $143 million for the quarter, EUR 390 million for the year-to-date periods. And that is basically high impact for commodity prices on average cash LME, where we faced this year to an average of 2,267. That's basically $100 above last year as the immediate at the same period. Our average API 408 for 9 months against 362 from previously years. Thank you very much, Eline. Now we will listen to you to CEO, Mr. Ali Al Baqali.

Thank you, Ricardo. Good morning, good afternoon, everybody. Let's go to Page 25, the aluminium market outlook. Actually, the market uncertain due to several reasons, one of them is the cut of the U.S. Fed rate, which has impacted the market. At the same time, everybody was waiting for the U.S. election. We know that the Trump have been selected, but there is an uncertainty on the tariff either to be increase of decrease, nobody knows, but probably, it will be on the negative side, it will be increased, and the rumor says maybe it will [indiscernible]. This is one negative news. On the demand side, actually, what we're noticing normally in every year. The quarter 4 will be having a weak demand, but in quarter 1, this will affect lately in the quarter 1, but quarter 2, quarter 3 at the market intelligence report it will go up based on the -- a lot of improvement in the market. And definitely, what happened in -- from the supply side, since there is no additional capacity injected in the market. This also it will limit the supply and the demand increased in the coming quarter, definitely, it will be having good impact on the premium as well as the renew price. The premium, we noticed that the quarter 2 and quarter 3 is increasing a little bit. This is all because of the supply chain disturbance, which is called in the increase in the freight and insurance as well as the readiness of the CBAM, if there's anything because definitely it will be embedded in the premium later on. We are forecasting or the net forecasting the average LME will be till the end of the year, it will be between 2,400 to 2,500 to lead LME price at 2,530 and we see a lot of uncertainties of fluctuation in the LME price for the last few weeks. Moving to Page 26, in this perspective in terms of the feedstock supply, the most important raw material, which is alumina. Alumina, if you notice that the price was doubed on the price year-to-date on a serious supply disruptions, mainly the last 2 announcements, one of them is Guinea. They are -- the custom authorities suspend the bauxite export, which affect the market directly. And most of these people will depend on Guinea, they are purchasing spot cargoes from the market, which inflate the price. At the same time, just before 1 week, I think, Alcoa also declared a force majeure on bauxite shipment from Brazil. This all will effect on the -- in the alumina price. And today, what we see $720 per metric tonnes is really heating the smelters cost. From the other hand, the carbon materials what we can see from the market, the price is stabilizing, and it is at the same level. And I think this will be till the end of the year. In terms of other raw material like aluminum fluoride, price is still on the higher side because the demand on aluminum fluoride is increased because of the other alumina also demand. These are almost like parallel effect for both of them. If we move to Alba priorities, till the end of the year on page 27 or 28. Definitely, as Eline she mentioned in the beginning of the presentation, we are very proud to achieve more than 26.5 million hours without a lost time injuries till now. This is a remarkable achievement in our journey towards 0 harm for our employees. And the good news also that this year, it counts like the 8 years -- consecutive years without having any heat stress in the plant, which is -- this is a remarkable achievement in terms of keeping our employees always safe all the time. We are targeting to produce or to achieve the finished product by the end of the year, slightly either -- a slight increase than last year. This is without injecting any major CapEx, just we are doing some efficiency and decreasing some leases from the port. And the e-Al Hassalah, we are targeting the $60 million in 2024. The capacity expansion in terms of efficiency, we are almost in the final stage of commissioning the power station to look for. This, it will add additional megawatt is around 680 megawatt, and it will reduce our carbon emissions. And then that will be more efficient by next year, will increase the efficiency. And once we increase the efficiency in the power station means that we are using less or we consume less natural gas, which reflect directly on our savings on the gas consumption. As Eline mentioned, we signed an unbinding MoU with Ma'aden. The work is on progress. We assigned our consultants, and we are expecting the outcome of the decision to go or not to go by quarter 1 2025. In terms of ESG, we are going to publish the 8 editions Inshallah in the quarter 4 this year. By this, I'm ending the presentation, and we'll leave the floor for any questions from your side. Thank you very much.

[Operator Instructions]

The first question, can we expect a dual listing on Alba on this Saudi Exchange once the merger is complete? Actually, this is part of the discussions. We are too early to announce this. But dual listing and either the merger happened or not happened in our strategic initiatives for the way forward for Alba. Then will the merger have an effect on the plan for the Europe business line? The new replacement line, actually, it is not a new capacity is to replace the existing unefficient capacity, which is an old line for the last 55 years. We need to upgrade this and modernize this line. And as we said last time, there is no lines [indiscernible] anymore because the plant has shifted to build the new line on the land of Line 1, 2, 3. Where do we see the main positive coming from the merger given regulation dilution to come for Alba shareholders? Actually, I think there's a lot of positive things. There will be no -- given the shares will be diluted by the shareholders. But as a one company will be bigger, will be like leasing aluminium smelter globally will be -- we will maintain our position as the largest single site smelter outside China and will be #6 or 7 globally. And with the growth from Alba and the growth from Ma'aden definitely will be the first or the largest smelters in the region. At the same time, this -- it will add a lot of advantage -- and advantage for both companies. In Alba side, for example, we have an access to upstream, the bauxite mining and the alumina refinery, this will improve in the future our ESG initiatives that we combine as one entity. For Ma'aden [indiscernible] a lot of advantage or benefit. But one of their advantage, they will be having like a good asset in Bahrain, like dual assets, they can benefit from our efficiency, productivity and the skill. And definitely, the know-how from Alba for the last 50 plus years, it will add a lot of value and definitely, the benefit from the consolidation in their financial statement also. What is the other question?

I want to understand how Alba is going to benefit if the conflict in the Middle East, including Israel and or this scenario has no impact on Alba at all?

This actually is subject because it's not related to our directly, as it related to all the industry and there is a conflict in the Middle East, it will affect everybody. But from our side, what we see in the demand of the aluminium is progressing and encouraging. And I think especially what we see from the meeting season with the customers, the demand is there and almost we book for almost 90%, which is the good.

How much alumina from Anchor from [ Santa ] Capital? And how much alumina do you source on spot prices versus alumina price as a percentage of aluminum prices.

Actually, we don't do any spot cargo at the moment because all our contract is a long-term contract, which is a price and API. And we don't have any percentage to LME because that it will be -- this is a product we had to use almost by the trader and all the producer using API for pricing Alumina. Why was the rolling mill, not included in the yield. Actually, this is a good question. I think you should ask the counterparty on that. But from our side as an Alba, we also experienced in running our rolling mill of the downstream.

Regarding the fire that broke -- regarding the fire that broke out at one of the reduction line today, what is the latest update, when do you expect the production to retain to normal given the improvement in efficiency of Aluminium technology in the last several decades. Do you expect that the replacement line was -- this is many questions, one question, but I will answer the first question about, yes, we have, unfortunately, today, we have a fire on one of our [indiscernible] in power station, which is feed directly Line 1, a reduction line. We safely managed to contain the fire safely without any harm or without any injury to our employee, which is very good. Now we are working ahead to stabilize the line. And hopefully, it's not a major impact. That's what we are expecting. But really, if you look at how the team in Alba, they manage the situation, it's very professional, it's the longest power or power disturbance in this line, but really, I think this should be like a Harvard case study to be written on how we are handling the case. On the new replacement line, this is -- maybe I understand maybe it's not related to what happened today. Nothing to do -- it's the second question. What is the third question?

Third question given improvement in the efficiency of the aluminum technology in the last several decades. Do you expect that the new replacement line would be able to more aluminium with the same gas power capacity?

Definitely. Yes, definitely, we are looking at the technologies. There are the 2 technologies in the market like Chinese technologies [indiscernible] and there is also EGA Technology, the [indiscernible]. And definitely, also the [indiscernible] also they have their own [ AV6 ] technology. Definitely, part of our feasibility study is to consider the best technology available in the market, which in the same length of the line 1, 2, 3 will produce more tonnage at the same time consumer gas. This is the latest technology on the selection of which technology we are going to select. How much minimum maintenance CapEx do you need to do each year to sustain the production? What is the CapEx guidance for 2025? Normally, we want to maintain the maintenance CapEx. We are using around on a yearly basis, $100 billion to $150 million and the guidance for 2025, it will be a roll over same. This is what we are projecting for the time, and it will be there, yes depends on maintenance activities done on that year. How many months of inventory do you see for Alumina? I hope to keep many months. And you ask long asnwer, but yes, normally, we are keeping less than 1 month inventory because of the working capital. We are too efficient like approximately, if I say from 22 to 23 days, we are keeping. And definitely, we have a long-term contract. That gives us the rest from exposing to the market at the last moment in order not to just the price in the alumina market. Other question.

I don't think we have any questions on the webcast. Sonia, do you mind sharing with us, if you have received any questions for the call.

We have one question on the call. We will take it now. And your question comes from Akash Tomar from [ CECO ].

Congratulations on the great results. I have 2 questions. First is on the margin deal, the potential deal. So in terms of operations, what kind of synergies are you expecting from this deal? So given our understanding is that margin doesn't have a lot of spare alumina that you can use. So what are the potential synergies that you are looking at currently? And second is, if I compare the third quarter of 2024 with last year's third quarter, your volumes are still the same and your spreads are also the same. So basically, alumina cost has gone up, but you were still able to maintain the same cost of goods sold. So does that mean that there was a lower cost for other materials like coke and bridge or maybe some more color on this?

For margin, I will take it. And for the alumina or the raw material, I will leave my CFO to take that point. In terms of synergy, actually, we are now working with the consultant to identify and to explore the real synergies, which will come from an unbinding agreement with margin. We have a high-level synergies, what I highlighted before. But the real work, it will come now from the consultants and from our side when we are visiting and discussing each other.

Yes. And from a cost perspective, you're absolutely right. So higher aluminum costs, they were offset by the impact of high -- lower prices in other raw materials, mainly coke.

We have no further questions on the phone. I would now like to hand back to the room for any further questions on the webcast.

Thank you, Sonia. I don't think we have any other questions on the webcast. I would like to thank everyone who have participated today in this webcast and call. I trust you found the presentation insightful, and we managed to answer any question you have tabled in front of us. In the event you have additional questions, please feel free and drop us a note on [email protected], and we would be more than happy to address that. Also, for any update on the compensated projects between -- mergers between Alba and Ma'den. Please make sure you visit Bahrain Bourse website in the last week of every month, for any further updates and progress because we will be filing a disclosure in line with the takeover and the merger acquisition, the rulebook of Central Bank of Bahrain, one disclosure per month, and it happens to be in the last week of every month. Okay. And with that, on behalf of the Alba management, I thank -- and I thank you all. And we trust we will catch up again probably within a Valentine's Day, Valentine next year. Meanwhile, I wish you a very happy ending for the year of 2024.

Okay. Thank you Eline. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.