National Aluminium Products Company SAOG (NAPI) Earnings Call Transcript & Summary

[Foreign Language] I would like to welcome all of you to this discussion meeting. My name is Hamed Ali Al Rashid. I'm the CEO and the Relation Officer. I have with me, Mr. Ihab Mouallem, who is the company's CEO, and I have Mr. Raees Ahmed, who is the CFO. So we'll start the discussion. The agenda is like this, we'll have an introduction. [Foreign Language] I will talk in Arabic because all the slides are in English, but I would accept any question either Arabic or English, there's no problem. Also, this session will be recorded and it will be uploaded in our website for those who had missed coming up or who would like to recommend it for somebody else. So we'll do an introduction of the company, a brief introduction of the company, then we'll [Foreign Language] Mr. Raees, please go ahead. The floor is yours.

Thank you. [Foreign Language] to all, and I would thanks for Mr. Hamed for explaining all those details about the company and such achievements. Before going to the financial numbers, I will just explain some of the major component that we have to be a way to understand the extrusion related thanks the exclusion industry is working. The component of inventory, it's basically related to all the industry, but particularly in the aluminum industry. It's count slow. All the down -- because extrusion industry that we are -- the part of it's basically considered a downstream industry. So in the GCC, they keep normally our stock. Previously, it was a practice of keeping 1 month and 2 months stock because of the fluctuation of the raw material prices in all over the world scenario and the strategies got being changed for all the extrusion related -- is there anything things, or I should continue? Okay? So the thing is that the inventory-related things are very important component, and it basically affects the profitability of the company. Similarly, when the LME that effects, the cost of the inventory in the extrusion, that's its basically considered and counts more into it. And second part in the extrusion industry or other industry would say also -- the margins. Now in -- particularly in our aluminum industry margins play a very vital role. Margins are up and down because of the aluminum prices. Aluminum prices are basically linked with the LME. The factor which is LME is basically London Metal Exchange where the commodity prices are basically determined. So the margins are diluted that we have mentioned in the slide itself because of the LME. When LME goes up, the scrap that is basically a main part of -- I would say the byproduct of the extrusion industry, it gets more price in the market. When LME gets down to remelting is there for some of the industry who has invested in they prefer to remelt and to invest into it. So the margins are basically linked with the crisis also. The third factor is LME. So the current year which we are discussing first half of 2022, the LME price has gone abnormally. It reached to a level in the month of March, somewhere around 4,000 per metric ton, starting from 2,400 per metric ton, which was quite abnormal and the average was in the month of March was 3,500 per metric ton. So year to year if we'll make a comparison for the last year, it was 2,245 and the current year is basically reach or cross 3,074. This is basically a huge impact that the exclusion industry is all over the world basically has faced and suffered. And similarly, the NAPCO has faced the same thing. Now the important component during the pricing is basically selling price. What we do that we buy at LME and we sell at LME. This is something that is basically there. So the LME has multiple -- I mean 3 major components that normally it takes LME -- 3 months means 3 months average, LME 0 means the current month and LME 1 means the previous month average. So normally, which the industry follow and it varies from strategy to strategy, how to play with the market itself, but normally the structure is that normally extrusion industry buy at minus 1 and sell at minus 1. That's basically the normal practice of most of the industry follows. There is -- since the stock market drop is higher than the margin that the downstream companies are suffering. So here, what we have seen in the current results of NAPCO. So because of this abnormal fluctuation where the stocks got at a higher rate, and when the LME start dropping, the rates got down. The overall impact has come to the financials of the company itself. Now the last part is basically NAPCO is basically a high-grade company, and facing some sort of liquidity issue and further pressure that we got from the banks, which are major stakeholders that we got a further drop in the facility by 3 million in this year, which was an important component in our -- the financial result that is reflected in current year. Below there are 2 graphs. One is related to year 2021 and second is year 2022. Now the first graph, if you see that it seems that it's going up and down. But the range, if you would just consider, it started from 2,000 and reached a level of 2,400 and between 2,450. So this was the level of last 6 months openings -- I'm talking about 2021, half year 1. So the LME was between 2,000 and 2,450. So that was basically a range in which the companies can produce and simultaneously get the result out of it. But in year 2022, the things got changed. We have started. The thing the starting point is there is 2,800. That was the starting point. And it reached, as I mentioned in my previous statement that it reached to a level of 4,000. You could see that in the month of March, it reached to a level of 2,000 -- sorry, 4,000. So this has 2 impacts. The first impact was there. The price got up. The aluminum get very high. It has -- and simultaneously, as we have mentioned that we have the reduction in the facilities, it reduces the buying power of NAPCO to buy more material and to produce more material and to sell more material. This was, I would say that the impact that has come over a period of time also that since June, the material that was bought, We were unable to got or whatever the material that we committed with our supplier that came to our ports. We were unable to play on time also because of the high price and subsequently, it went down. So this is something that is reflected in our financial that the buying power reductions and the higher price of a material that has caused the low production and low dispatch in the first half of year 2022 which is there the part of our financials. Hamed, can you show? Yes, please. So what I've explained in the first slide, the negative result of NAPCO in year 2022, because of 2 major reasons there are certain other major reasons such as increase in the petrol prices that has lead to the transportation cost increase and the cost of consumable space and all that. But major the even that we have mentioned is basically the increase in LME, that was 7 -- 37%. And the further bank reduction of 3 million that I have just mentioned, that has reduced the buying power of a company NAPCO to buy more material and to sell more metal into the market itself. Hamed, next slide? Yes. So here are the basically financials that is basically presented. We have reported a RO 12.873 million revenue this year [indiscernible] cost of sales is basically RO 13.2 million we reported and against 14.43% last year. It's basically dropped by 1.23%. It's 9%. Similarly, the gross profit is reduced. It was positive RO 648,000 last year, but this year, it is negative by RO 328,000. The other income, RO 86,000. We have reported RO 307,000, we have reported last year because of certain other income related to our operational activities, which was not there in this year. General admin, basically has slightly increased because of the 2 factors, the legal charges that we have incurred by biggest days in the market, there was delay in the collections from the customer itself due to receivables since we have took the option for getting some sort of consultancy or appointment of a legal companies or firms to get those debts recovered. So this cost has caused general admin to increase selling distribution has gone down significantly because the same thing. It has a part of outward freight costs, which is transportation. When the dispatch is less, obviously, the transportation cost that is not incorporated into it. The allowance for credit loss is basically as per the IFRS this year, whatever the situation that we have including to it. Finance cost is basically slightly increased by RO 10,000. In fact, there is an option that in that finance cost, the bank charges are main component, that is increased by RO 50,000 because we more focused on the LC discounting and discounting to get the liquidity, more liquidity and to get more billets the raw material to run the operation itself. So this was basically the results of the finance-related costs and then we have a loss profit before tax, I would say the loss that we incurred is RO 2.1 million. It was RO 1.2 million last year, and the loss or profit after tax basically in fact its a loss is RO 1.7 million we reported this year -- 1.793. It was [ 1.793 ] this year. [indiscernible] EBITDA is basically RO 557,000 negative. It was last year RO 340,000 positive. Hamed can you move to next slide? Yes. Basically, if you see that the drop in revenue. So I would explain here that what has caused this drop of revenue and resulted a major loss in this particular first half year. We have dispatched 6,357 metric tons as compared to last year 10,573. There is a drop of 4,200 approximately metric tons of the quantities. In terms of revenue, you will see that only a drop of RO 2.2 million. The factor is that the price gone up and similar, the price goes up, then we pass the same price to the customer because we are buying at LME and we are selling at LME plus conversion. So the average [indiscernible] metric ton and it reached to 2025 per metric ton this year. So this is -- the second graph reflects what has happened basically -- due to the price increase, we got a positive variance of RO 3.8 million because the LMEs went up similarly. But because of our quantity droppage of 4,200 metric tons, which we produce less and which we dispatch less, we suffered almost 6. --RO 6 million, I would say, that revenue loss. So in combined, we have suffered revenue loss of RO 2.2 million. So because of these 2 major component that clearly defined that what we are suffering as the extrusion company, we are a capital incentive plus capacity incentive. We produced because the fixed cost of this company is very high. If the capacity utilization is less, the loss far more. So same thing that has basically happened with the NAPCO in this current year. Hamed, can you move to the third slide? Yes. In terms of the product mix, basically, these are our products that we are selling into the market. MF is stand for Mill Finish. Hamed has showed you the slide. So the profile and the types of profile at the start. So MF stand for Mill Finish. It was 57% last year, we changed the net [indiscernible] Hello? Okay. Then we have PC. PC is basically related to the powder coating. That was 34% last year. This year, we have a 30%. Then we have -- WF is basically a Wood Finish. It's almost the same -- it's little less basically, but as the reflection is the same. Then we have Anodized that is 5% and then 6%. Thermal brake, it was 2%. And then -- in this year, we have approved that we have now 6%. With respect to the sector, where we are selling to the sector, which basically can comprise of stockist fabricator and system and industry. We have sold, last year, 49%. This year, we have sold 40%. fabricator basically is 37% last year. We have made this 25%. System was 10%. This is 25%. Industry was 4%. So this year we have improved up to 10%. So if we more focus towards system and industry where we consider that the margins are more within this limitation that we have, as we have mentioned, the related things. And due to the liquidity related things, we were unable to produce a similar quantity and this made a similar quantity and then we have this kind of result that is reflected. Hamed, can you move to the next slide? Yes, this is something related to the history, I would say, that reflect -- basically, we are focusing more on the turnover the capacity because this is the main theme or I would say the main core of any extrusion industry in the GCC cell. Quantity, if you could see that we have started with 19,000, we reached a level of 32,000 in 2019. And in corona time, even that we have done 2022 -- I mean, 2022, 28,000 metric tons. And then it's to 18,000 tons. And this year, we have only done 6,253. The revenue basically started with a RO 25 million, we did in 2018. RO million in 1942. It dropped to RO 28 million now in this year is RO 12 million. The finance cost, if you could see that a major component also that we started with RO 203 with a rate of increase over a period of time, we reached a level of RO 1.4 million and up to 6 months, it's RO 768,000. Similarly, if you will see the borrowing costs down, you will see that we have started with RO 11 million. We reached a level of RO 23 million and RO 24 million in 2020 -- 2018 and [ 29 ]. And in 2021, it was 19 million. As we have mentioned that there is a drop facility in the first 6 months also. So now it's RO 16.4 million. The finance cost is around RO 768. So this is basically the summary that we are just trying to reflect that the company has faced this challenge of abnormal increase in the LME prices in the first 6 months where it has resulted in the reducing purchasing power of the company the company was forced to buy less material, produced less than ultimately because of the capacity constraint or the liquidity constraint, the losses that we have reported this year the first half 2023. So this is what we have the financial side, the future outlook. I would request Ihab, if you could just take the lead on this and just say a few words on it.

Okay. Thank you, Hamed. Thank you, Raees. Future outlook is basically that the whole situation, of course, the commodity, especially companies working with commodities is practically challenging, and it will be still challenging. However, [indiscernible] of the Board has taken some initiatives and working towards some initiatives that are already -- some of them are already in place. Plans are already placed as well. Being effective from August, hoping to that August that this effort will result into a better financial performance of the company by the end of this year. Hamed, back to you.

Yes. Thank you very much, Mr. Ihab, Mr.Raees. I would like to open the floor for questions, please. So please go ahead if you have any questions.

My first question is regarding the capacity utilization and the existing capacity of the company. What's your existing capacity? Because what I understand is you have dismantled one of the plant to be installed in UAE. So if you can provide us some color on what's your Oman capacity? And what's the status of the novel aluminum in UAE, then that would be very much appreciated.

Okay. Let me take this question. In fact, regarding the capacity in Oman as my colleague [indiscernible] after the expansion, NAPCO initially was 2 to extrusion lines. After 2015, there has been an investment to increase to 4 exclusion lines. Now the nominal capacity, which has been installed capacity is high, in fact, it can reach up to 40,000 tons. However, the current capacity, current capacity means that according to the market product mix, so the current capacity is approximately 36,000 tons per year. In 2018, we have reached 33,000. If you can go back to that slide, Hamed, 33,400 or 500. In 2019, yes, 33,500. In 2019, 32,800. As Raees rightfully said, the main reason behind the drop in utilization in fact, is not the market because, as Hamed mentioned as well that our markets are spread all over the world. So the market dropped in a place or in a country doesn't have this big effect on NAPCO. However, the liquidity constraints combined with the increase in the -- increase of [indiscernible] example, 2020, we were talking about 1,800 tons -- $1800 per tons or even $1600 per ton. In 2022. It has reached on 1 day 4,000 on a monthly average, 3,550. So obviously, the purchasing capacity has been reduced. Regarding UAE novel, novel is a subsidiary with where the intention of novel has been already disclosed and the latest disclosure, Hamed, if you can give the date of that disclosure, clarify...

24th of January 2020 this year. We have explained all the steps that have been taken by the Board and by the executive management. You can refer to it, please.

Exactly. And as Raees has well mentioned that it's a step by step and the first step has been already done and we as a company is utilizing that step to the maximum possible.

Any other questions?

Regarding Minova, and your Chairman in your company report, what I understand is it has started operations during this quarter. So what are the -- what's the latest stage of those companies? In January, I understand you were waiting for different levels of approvals and registrations. But what's the status right now?

As we mentioned as well in the presentation, the regulatory requirements were already in progress in the last conference that we have done. We have already disclosed that. And in this conference, we are disclosing that now the AP has been registered. The bank has been registered. So this is why I said and Hamed said that the operations has already started exactly 4 months ago.

Okay. Four months ago the operations have started. So the plant...

There's no production. There's no plant yet. There's no plant -- we're talking about Commercial operations.

Commercial operations. Okay, I understand that. But Mr. Ihab regarding the Oman capacity, you said 36,000 tons. But what's the capacity right now? Because if I understand it correctly, we have stopped production in 1 or 2 lines, isn't it?

Correct. Okay. Just as I told you what we call it in the industry current capacity, the current capacity of 56,000 tons that has been utilized previously more. We have disclosed that we are starting production on 2 lines. So reducing the capacity just simply divide by 2 to 18. Because of the sizes of the presses, you can consider 18,000 to 19,000 tons in between and of course, depending on the product mix. Now the Raees what he has explained even with that reduction and with the constraints on the liquidity, number one, and the increase in raw material costs. From the disclosures that we have made from the -- as well the flash that we have disclosed as well, you can see the percentage utilization from that capacity. Just to explain, just one more thing, as an industrial company, an industrial company worldwide, this is thumb rule, the more that you produce, the less your cost per unit. So obviously, the drop in the production caused by the constraint on liquidities has caused -- has resulted into a higher into a high product cost eventually the negative numbers that we have seen.

Yes. I perfectly understand your proposition there Ihab, because the liquidity is the main concern for NAPCO perfectly understand that. So when do you expect to start production in UAE?

Referring as well to all the disclosures [Joyce] that we have done. If you can please refer to that as my colleague Hamed said, it's still in the progress. And there are -- work is still ongoing between Raees and the consultant as well that is handling the matter. And [Foreign Language] we will disclose once we have any further developments. Of course, we will disclose it, working as always with the transparency method that we are using.

No, I totally appreciate that. But my concern is because we have lower capacity and 2 lines sitting idle. So what's the management's plan to increase the capacity utilization?

Yes, this is what I explained. We are already working towards the plan. If you will monitor August, September, then this will be answered automatically.

Okay. Okay. I understand that. Okay. And regarding the liquidity condition, do we see any further pressure on the banks to reduce the facilities -- facility lines?

I repeat again, [Joyce], we are working towards the plan allow us to disclose any further information any development, working again with the guidelines of transparency under the guidelines from the CMA, allow us to disclose whatever happens, material information to be disclosed through the proper channel with full transparency.

Ihab, I hope this is -- this is an open discussion where I opened to all the investors. So if you can appreciate that this is a public open platform, and it is facilitated by PSX. So it can be considered as a public platform where it is opportunity.

Sorry, let me interrupt you here. Those kind of information will be disclosed when they happen. Okay. Today, we are working towards the plan. When it materializes, for sure, we will disclose it as usual, okay? So allow me not to elaborate more. We cannot talk or disclose anything that did not materialize yet. When things get materialized, of course, we will automatically disclose it to the public.

Okay. Okay. How do you see the trend in your receivables and your working capital management? Because I see that significant reduction in receivables during the course of end year. So do you see further improvement in the receivables levels?

I will certainly address your question that -- and as you have just noticed the reduction in the receivable itself. This is something that we have focused because of market corona, 2020, the liquidity in GCC was very much in a pressure condition. So we diversified our strategy, and we were more focused towards early collections, and that is reflected in our financial results also. Despite having this RO 12.873 million revenue and the collection of RO 17 million, the extra RO 4 million that we have collected, we were unable to achieve that capacity that we were targeting to achieve. So we are very much on the target itself, and that's what we have reflected and we are continuously reducing that receivables as much as possible.

So are you changing your credit terms to the customers? Or is it a collection?

We are using every mean to get our target as, I would say, that will reduce it as much as possible.

Yes, because this is being very much a number of high-value products during the last 6 months. How do you see the response from the -- from your customers in terms of...

Just to clarify on one thing. As Raj mentioned, turnover of 12 million -- RO 12.8 million with the collection of RO 17 million. So this obviously reflects that the conduction happened is for delayed collection that has been started, of course, to be realized this year. So that's number one. Number two, automatically with the market conditions that no need to elaborate more, you know it, I know it, everyone knows it everywhere. Of course, some times and conditions have changed already, as Raees said, in order to secure our receivable. Let me put it this way. The risk appetite of any company before COVID as, again, as Raees said. Before COVID, the risk appetite was different completely than post COVID.

Yes. Perfect. Perfect. That's what I'm trying to understand from the customer point of view is less from your point, your point of view. So that's where -- what's the response of customers to your enhance the collection.

We have certain conditions in order for us to working again with a plan that we have put in place. This has not happened to customers, but whoever is any customers willing to comply to the new terms and conditions, he is a customer. Any customer who is not capable or willing to comply, of course, he will no longer be a customer.

Okay. Got it. Another question that I have is in breach of any of your financial contents right now?

Yes, [Joyce], that is a very -- I mean, reflected from the financials, we are in reach, and we were certainly working with the bank itself just to get this kind of a Waiver on it.

Okay. Okay. And what is the contents interested?

Joyce, you can refer to our financials, which we posted already, everything is mentioned there.

It's better to give the opportunity to the other attendees.

Anybody else would like to have a question before we conclude this session. Any questions from anybody else? If nobody has any questions, I would like to thank you all for coming, and I wish you best of luck. Thank you, and we will end this session.