Elvalhalcor Hellenic Copper and Aluminium Industry S.A. (ELHA) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I am Geli, your Chorus Call operator. Welcome, and thank you for joining the Elvalhalcor Conference Call and Live Webcast to present and discuss the first half 2023 financial results. At this time, I would like to turn the conference over to Mr. Spyros Kokkolis, Chief Financial Officer. Mr. Kokkolis, you may now proceed.

Thank you, Geli. Good afternoon, everyone. Thank you for joining us for the presentation of the financial results for the first half of 2023. We will start with a short video about the company. And then I'm going to give you an overview of our performance. And after that, we will hold the Q&A session during which I will do my best to answer any questions you might have about our company and our financial performance. As usual, the presentation and Q&A will be later uploaded to our website. Let's start with a short corporate video. [Presentation]

After our outstanding performance of 2022, we had a big challenge ahead of us to try to match as close as possible, the excellent results of that year. But it was obvious even before the year started that this would be a tough task, inflationary pressures, rising interest rates, all this affected investments and consumer spending, Europe entering technical recession. Demand softened gradually in most markets, all remain suppressed in segments where the effects were obvious, even right from the start of the second half of 2022. Now under these conditions, our sales volume dropped slightly by 3.2% to 290,000 tons, even growing in key segments and still well over the 2021 figures. Our adjusted EBITDA was EUR 131 million, 18% lower than last year, but still 54% higher than 2021. Our net debt to adjusted EBITDA improved at 3.7x, which is better by 0.6x over the first half of '22. And our net debt decreased significantly at the level of EUR 885 million, which is EUR 163 million lower than last year. We reached another landmark during this year, which is the completion of installation of our new lacquering line and this marked the end of a current major investment project in the aluminum segment. And this means that lower investments allows for our net debt to decrease. Working capital was also a very important factor in the decrease of net debt. And this reduction of net debt was on variable rate debt. Now 54% of our debt is on a fixed rate, and this is helping us to mitigate any effects of the interest rates rising. Now let's move into more detail into all the main factors that affected our company's performance and its development during the year. Many of you are already familiar with the standard pricing mechanisms in the nonferrous industry. LME prices are fully passed on to the market. Sales and processes are fully hedged. They create no cash flow effect from the fluctuations of LME. But LME prices do affect working capital and do affect reported profitability due to accounting metal results, which are generated by the method of valuation. In the beginning of the year, we saw both aluminum and copper price starting to recover. This recovery was short-lived, however, a slow but steady decline followed. This is a sign of a global situation and the lack of overall demand. Average prices, this were much lower than 2022 with no signs of recovering. This helped our working capital, of course, but also resulted in accounting metal losses. Let's look about natural gas. Natural gas was the positive surprise this year, declining steadily during the whole year and returning to more affordable levels, still much higher levels than pre-pandemic. And the same thing happened with electricity, both gas and electricity, there is more reasonable levels, more reasonable, yes, but still over 50% higher, not what we have considered normal. During the period, we renegotiated our contract for our domestic plants with the PPC, of course, at different market conditions and increased costs. Now inflation, inflation had already started to decline, first in the U.S. and then in Europe, but not as fast or as much as the central banks would like, especially core inflation, it remains high and the banks keep increasing the rates, and we'll see what happens today as well. As we have explained in the past, we are not primary metal producers. We are fabricators. We are not as generally intensive as primary producers. We use mainly natural gas in order to melt the metal and mainly electricity in order to process it. In terms of gigawatt hours, about 2/3 of our needs are covered by natural gas and the remainder, 1/3 by electricity. Let's take a look at our 2023 cost breakdown and also compare it with 2022. Now on this pie chart, we exclude the value of the metals since we're passing them full to the market like aluminum, copper, zinc, et cetera. As you can see on the chart, energy was around 17% of our costs in the first half of '22. This was already very elevated from the '21 or prior year levels. Historically, it ran to around 11% to 13% of our total costs. Now it's clear from the chart that other types of expenses are more or equally as important. In 2023, electricity increased to 18%, which was exact same percentage for the full '22 year. In effect, the lower natural gas prices were countered by higher electricity prices. Inflation affected all other type of expenses, such as employee costs. And overall, there are some movements between the types of expenses, but nothing significant, no change in cost structure. The main drivers of our profitability are good volumes and good conversion prices. Turnover, which is affected by metals prices, it's not a good guide as metal prices fluctuate significantly. Let's look at the next slide, the volume of sales evolution. And let me briefly remind you of how 2022 unfolds it. Demand in the first half in both segments was overwhelming. We are struggling with capacity in order to meet demand. In the copper segment, the drop in demand furthered in the third quarter and continued in the fourth. Both of these quarters, they were better for aluminum segment. We had increased our capacity and demand was holding much better. Now let's see how this year is evolving. Despite our increased capacity, growth has gradually faded in the aluminum segment. However, if we take out the effect of deconsolidating [ TAM ] then sales volume grew by 1% in the whole period. Given the situation, we consider this an accomplishment or the versatility and agility in both products and markets allowed us to counter the effect of the significant slowdown of demand in key markets. In the copper segment, we still face the same conditions like in the last 2 quarters of the month, lower demand -- last 2 quarters of last year, sorry -- lower demand, which affected mostly brass rods and secondarily copper tubes and on the other hand, continued strong demand for the products of our subsidiary, Sofia Med, despite the market conditions. And there, we managed to increase productivity and volumes and mitigating the drop. Let's see now one of the most important metrics of our profitability, which is adjusted EBITDA and how it developed during the year. Again, we'll -- just remember what happened in 2022. The Aluminum segment had impressive figures of growth, more than doubling their adjusted EBITDA in the first 3 quarters. On the other hand, the Copper segment have more and more growth in the first and second quarters, modest but still good growth. And let's see '23 now. We see that this year in the Aluminum segment and in both quarters, profitability is down from '22, but it's still higher than 2021. Now prices. Prices remained at good levels. Volume -- volumes did not drop. What trends to the worst? The answer to that, electricity prices and inflation, this affected our costs and also the spreads of scrap. Due to the low global demand for aluminum premiums for primary aluminum film and this affected the profitability of recycling. Now on the Copper segment, we see a much different story. Despite lower volumes, profitability grew. We managed to contain costs and optimize production where we lost volume and also the extra quantities from Sofia Med will have high value-added products at better electricity cost since Sofia Med did not enjoy our previous domestic electricity contract. One way now to measure our profitability and be able to extrapolate volume into profitability is to look into our adjusted EBITDA per ton. Looking first at the Aluminum segment. In the prior years, we were looking at an adjusted EBITDA per ton of around EUR 300. The market conditions allowed us to double that to around EUR 600 per ton in 2022. And now let me quote myself and what I said in the full year results presentation. Under current conditions, it's possibly not sustainable. However, we do expect higher levels than the average of EUR 300 over the last years, and this is definitely our target. Let's see how we did. And this is exactly what we have achieved, a level of EUR 386 per ton. On the other hand, in the Copper segment, where the growth was not so prominent for 2022, it continued and it will accelerate it in '23, and this is a result of our consistent strategy with the development of our subsidiary, which has paid off. Another important metric is the industrial value added per ton. This is the price that we actually charge over our cost of metal. And so it incorporates conversion prices, transportation and other cost charge to the customer and also our ability to transform scrap into metal and thereby increase our value added. Both segments, both segments managed to successfully increase prices in 2022. But in 2023, the industrial value added of aluminum dropped slightly. It was not conversion prices that affected this, rather, it was the scrap spreads, as I mentioned before, that reduced the benefit from recycling and also increased cost and reduced profit returns that we saw in the previous slide. Scrap spreads on the Copper segment on the other hand increased slightly. Recycling benefit increased, conversion prices remain strong and the continuous shift to high value added products of Sofia Med is helping significantly. Let's see the distribution now of sales by market. And looking into the revenue breakdown by market, we see that we'll continue to increase our sales in the Aluminum segment towards the packaging sector in 2023. This was the main target of our investments. This is a target -- this is a segment that's especially affected by the macro trends and now takes up 59% of our sales. However, even this segment was affected by the slowdown as a result of inflation, consumer disposable income fell, spending fell and actually, we did not reach our targets in sales. Also, the sale of construction has shrunk even further, as you can see on the chart. This is partly due to deconsolidation of [ TAM ] and all the other segments remained at similar levels. In the Copper segment, the Building & Construction segment was the second biggest market. Now it's dropping to third. It's at the same level as Heating, Ventilation and Air Condition. On the other hand, Industrial Applications, Automotive, Power and Energy are continuing to increase their share in the pie. Let's now see the geographical distribution of our sales. Both segments are heavily export oriented with base being a small part of aluminum sales, which is shrinking gradually as sales increase and a very small part of copper sales. Most of our sales, you can see were in Europe this year as well. The U.K. shrank slightly in both segments. And the U.S. has shrunk a bit in '23 in the Aluminum segment. There was a temporary disruption of sales in the U.S. this spring. This was due to the presidential proclamations regarding the aluminum tariffs on Russia. We had to ensure that our sales to the U.S. fully comply with them. We did that and then we resume sales and they pick up to the user levels. Now let's move on to the consolidated key figures slide. We have seen in detail the evolution of our volumes and adjusted EBITDA. Looking at the consolidated figures for the period, they were both higher than '21, but at lower levels than '22. As metal prices were lower, the effect on the revenue and turnover was higher. Now as we said, this year, we had metal losses. The effect of declining metal prices. On the previous year, metals were rising and we had metal profits. This is an accounting, it's not a cash effect. And this is the reason that we always focus more on our adjusted figures. As a result of the metal losses, EBITDA dropped even further to EUR 101 million. EBIT. This was also affected by the metal losses. So we look at adjusted EBIT, which was at EUR 93 million, lower than '22, but still higher than '21. Rising interest rates, this hit our financial results and finance costs increased by 43% despite the drop in net debt and despite the big part that's on fixed rates. And of course, this affected the earnings before tax even further. Now we do not report our adjusted earnings before tax separately, but one can easily do the calculation and calculate the effect of the metal results there as well and see how that affected. Let's look now at the deviation analysis of our profitability. Volume played a very small part on overall profitability. On the price cost mix side, we have already gone through the factors, and let me recap, lower difference between scrap discounts and primary premiums, and this reduced the benefit of recycling, increased cost, mainly because of electricity and inflation and partially better mix and price. These are the factors that have the biggest effect. On the SG&A, inflation took its bite. Now on the financial, rising interest rates affected financial costs and of course, the difference in metal results, turning from profits to losses had the biggest impact. And moving on to the cash flows, we had strong profitability this year. EBITDA was a bit over EUR 100 million. Of course, we had to pay our financial costs. And then working capital, we will see the details in the next slide, improved significantly. And this release EUR 90 million for the period. Investments, this slowed down and all this allowed us to repay loans and of course, paying the dividend, which was double than the year -- than the previous years and they were leaving us with more cash than the beginning of the year. Our working capital is very important, and let's see how we did. There, we can see steady improvement. And we see it both as a percentage of sales, but also as an absolute figure and especially over the midyear of 2022. It has improved by EUR 211 million. Of course, as we said last year, the part of the working capital in the mid of last year was temporary. This was around EUR 40 million of extra inventory for the upgrade of our copper extrusion press. But the rest of the difference is actually low metal [indiscernible] help, but will improved the working capital even more than that. Evidence of that is that we have a decrease as a percentage of sales. Good cash flows allowed us to decrease our debt and meet our target of keeping our net debt to adjusted EBITDA at almost the same levels as at year-end at 3.7%, as you can see from the bottom right chart. Let's move on to that now. As we said before, we managed to decrease debt and the proportion that's on a fixed rate increased to 54% of the total debt, while it was 48% at the end of the year. Most of our debt, you can see that it remains long term. And on the short term, most of it is long-term maturing within 12 months. I believe we're well positioned in order to meet the challenges. Last but not least, capital expenditure. As we have already mentioned, investments have slowed down, especially in the aluminum segment where all major investment projects are now complete. We have slightly accelerated our investments in the copper segment, and in particular, in Sofia Med in order to release more capacity in high value-added products. This period, we spent something over EUR 50 million. Our target was not to exceed EUR 100 million for the full year and still is. This concludes my presentation, and I will now have the Q&A session.

Mr. Kokkolis, there are no audio questions at this time. If you would like to proceed with any written questions. Thank you.

I have a double question for Ms. Maria [indiscernible] regarding the Aluminum sector. If the lower industrial value added drop is common across products of all markets? Or is it just in the packaging sector? No, it's nothing about the drop. Is there a strategy in place to move into more profitable markets than packaging, transportation, renewables, HVAC&R? Okay. Let me answer this question. The packaging sector, yes, it's not the most profitable as in terms of industrial value added. But there are more things than profitability per ton. It's also one of the most able to increase markets that has the largest growth potential. Also, there are other markets, which are more profitable. Yes, we always take advantage of these more profitable markets because we are very flexible, and we managed to sell to all markets that have high profitability, especially when other markets drop. And this is one of the ways that this year, we managed to not lose a lot of industrial value added in the aluminum segment. Our general strategy is to grow on the packaging, but also we always grow on other segments as well where we do not get out of the other segments, and we always try to enter more profitable market segments, which are smaller, of course, and do not maybe have such a huge growth potential. On HVAC&R, this is mainly got to do with copper and not aluminum. Of course, it's a smaller part of aluminum. This is one of the segments that copper is expecting to have a big increase in demand and sales.

Thank you Mr. Kokkolis.

I see no further questions in the web. So I'd like to thank everyone for following this presentation. And we hope to have you again in our next session with us. Thank You.