OM Holdings Limited (OMH) Earnings Call Transcript & Summary

[Audio Gap] And we're delighted to have OM Holdings General Manager, Mr. Adrian Low with us today to provide an overview of the company's recently released financial results for 2021, which will then be followed by a Q&A session. [Operator Instructions] OM Holdings is a company which has undergone significant transformation over recent years to become a leading vertically integrated producer of ferroalloys. Earlier this week, the company announced financial results indicating a substantial increase in reported profit on the 2020 financial year period, with improved financial metrics delivered across the board. Without any further ado, I'll hand over to Adrian for a discussion on the results.

Thanks, [ Corey ]. So yes, thanks, everyone, for taking time this morning to attend full year results presentation. And a big thank you if you were here 2 weeks ago for our 2021 results as well. I think we were just sort of trying out different formats and very, very pleased to see the big turnout 2 weeks ago. So without further ado, I am just going to jump straight to the results. And I guess I'll leave time for questions at the end. So in 2021, we achieved just over AUD 1 billion in revenue and like everyone knows by now, it's really due to the -- off the back of strong commodity prices, especially in the second half and especially after September 2021, with all the changes in China and with [ energy scarcity ] being on the top of everyone's minds. This is notwithstanding the fact that we ran at probably close to 75% capacity utilization for our Sarawak plant for most of last year. And so with this revenue, EBITDA, underlying earnings just over doubled to AUD 200 million, and we achieved a profit after tax attributable to owners of AUD 81.9 million. So this is a master increase from our 2020 performance and I think that's no surprise we're reconsidering that -- I think FY 2020, we were in the aftermath of the global slowdown. There was a trade war going on. And the corona virus pandemic was just beginning in 2020. With this, cash flow generation has been very healthy. We achieved about AUD 100 million in cash. And so we're just very pleased at this point that to announce that we will be resuming dividends. And so strong cash flow, healthy profits, we will be paying a AUD 0.02 dividend per share. So if you look at the earnings per share, that puts out to be about 20%. And we do look forward to always continue paying a sustainable dividend. So I'll talk more about the loan repayment when we get to the slide, but I just wanted to recap sort of the operational performance last year that allowed us to achieve this. So I think from mining, that needs no introduction. It was the last year of mining. We sort of maximized the amount of ore that we could produce. And that helped really to lower fixed costs last year, although freight has always been a drag on the mining business, I think in the last over 12 months now. For ferroalloy production, you can see the numbers in the chart, this is not new. And for the full year '22, we are guiding at about 360,000 tonnes of output for Sarawak. And so I think it's important to note at this point that this is a pure [Technical Difficulty] production. So Chinese production has not been factored into guidance for FY '22, although it has been historically included in the numbers. And the reason for that is because of the uncertainty in the power policy in China, although in a very, very real sense what's sort of negative for China today is good news for us at Sarawak. So again, just very pleased that we ended FY '21 with 12 furnaces, really sort of rode the wave, if you will, in Q4 with the high prices. Although for the longest time, we were thinking that we would go down to maybe 10 furnaces or even less. And so just going to take 2 slides go through the numbers at a very high level. So I've already mentioned the revenue growth in FY '21, we actually recorded very, very high GP margin as well, 26.4% in '21, although I think it's important not to wee too much into this because in a sort of extraordinary with a very high free with the last year of mining and with all the COVID shutdowns allowed these costs just don't appear at the GP level. And when we look at the sort of segment breakdown in the chart below, you can see that FY '21 was really, I think, the year where Smelting kind of stood its own against all the other sectors. So when we look at sort of historical earnings, I think mining has always played a non-trivial part in the scheme of things, especially if you look at FY 2018. So in FY '21, not only was smelting the main driver with a sort of capacity utilization of 75% for the year. Smelting also recorded the highest ever absolute contribution in dollar terms, and it also recorded the highest EBIT margin in the history of the Group. So I think that's something we're very, very proud to deliver. I've already mentioned the negative contribution from mining, and this is a continuation from the first half due to high free costs and also costs associated with the end of mining in FY '21. Similarly, I think we note that the contribution from associates has reduced due to -- for the same reason. Freight has just been very high and by this I'm referring to investment in South Africa and trading more distribution has always contributed a very, very consistent amount. And so with that, with all the performance, we generated about AUD 100 million in operating cash flow. So that's -- you can see that in the chart on the bottom left. We recorded positive cash flow from investing. As usual, this is actually -- this is the dividend from South Africa. So that's usually the case. And it's a positive overall this year given the minimum CapEx we spent in FY '21 as we promised, I think, in early in [ '21 ]. So most of the cash, as we've said, is what's paying down debt. So we paid about AUD 26 million into the Sarawak PF facility. And we also, very early in FY '21, redeemed about AUD 14 million worth of convertible notes that were actually struck at AUD 0.80 and amongst other repayments, for a total of AUD 51 million. And so the other repayments are mainly sort of trade finance lines and sort of raw material financing. So this allowed us to bring the gearing ratio down to 0.67 the lowest we have recorded since this entire Sarawak project began. And I'd just like to remind everyone that, again, a significant amount of borrowings at the Group are really associated with Sarawak, both in terms of project financing and raw material financing. So again, with that, we're just very pleased to declare a dividend of AUD 0.02 to shareholders. And for our shareholders in Bursa, Malaysia, the -- how it's going to work is the exchange rate will be determined on the record date of 8th of April. So with that, we just wanted to show sort of financial highlights over the past 5 years, excluding FY '21. And I think it's important to note that not only was last year, I think, quite remarkable in -- with all the challenges and how we had to sort of pivot strategy throughout the year. It was also remarkable in that it was really the third highest profit attributable to owners. And it was the first -- the highest ever was in 2018, with the second in 2017, and that was really only because of a tax asset that was recognized in 2017. So in a very real sense, I think FY '21 was the second highest contributing here in recent history and especially since the inception of Sarawak. So that is something that is very noteworthy. And so with all of that said and all numbers updated, this is where the company stands today. We have updated debt to -- as debt attributable to shareholders. So this is AUD 329 million for it to be sort of a fair comparison to earnings per share because that is earnings attributable to shareholders. And you will note that as of 22nd September with a share price of AUD 0.90 our PE ratio is 8.1 with EV EBITDA ratio of 4.4. So that's it. And I'm just going to take the last 2 slides to sort of recap where we are on this journey and sort of where we're heading towards. So I think earlier on in one of my very earlier presentations, I think there was another slide that said ferroalloys paradigm shift. And what it showed was the transition of China being a dominant exporter ferroalloys in the world and how that sort of fell away after the GFC 2007, 2008 and the rise of India, especially for silicon manganese. And I think we're not saying that India or China will lose relevance in the ferroalloy markets, but increasingly, I think the case can be made that Southeast Asia, specifically Malaysia or even Sarawak is increasingly a center of industrial production. And we were the first to be there 10 years ago, committed capital, signed up for hydro power, a 20-year agreement and so that's where we are today, and I think it's important to sort of take stock of what would set us on this journey and sort of where we're going from here. And so with the setup of 16 furnaces that we have in Sarawak, we have just been continuously improving the product mix. We started with 16 furnaces and ferro silicon for those that remember, we moved 6 to manganese, that proved to be an incredibly wise decision given the run-up in prices from 2016 to '17. And obviously, I think we're still doing that, and that's probably something we will not stop doing. So the final configuration for now, as we can see on the column on the right, and we are really looking to move into metallic silicon given its strategic value that it's very closely tied to the renewables sort of generation. And that's going to bring us to a combined production of just over 600,000 tonnes per annum hopefully in FY '23. And so now we'll take a look at OM Holdings, again, it's a much simpler story, remove all the other complicating factors. It's really just about the margins and volume. And so margins are really going to come from a very, very basic spread between what we are paying in terms of power and what the rest of the [ world is doing ]. We have security and power. It's locked in for 20 years, no ambiguity and to fully fixed numbers. And the volume just comes from execution and what we've been doing over the last 25 years. So with that, I think the [Technical difficulty] presentation, and we'll just take some questions now. Thank you.

Perfect. Thank you for that, Adrian, for the update. Yes. So I will now move on to the Q&A session. The first question that we received is, is the company fully funded to complete the planned maintenance and conversion of the Sarawak furnaces over the next year or so?

Right. Yes. I'd say that we are, just given earnings from last year and the cash flows from last year. And then how markets play out, we may even be able to fund expansion next year. So I would say, absolutely, yes. The silicon metal conversion, the manganese alloy furnace conversions as well as major maintenance this year, they will be fully funded out of operating cash flows.

Perfect. The next question, it's very pleasing to see the company deliver a AUD 0.02 dividend. Do you think that this dividend is sustainable during the 2022 financial [ dividend ]?

We hope it will be. I think historically, we've always said that cash flow [ penetrating ] with the earnings, we should be paying about 20% on average sort of profit after tax to shareholders. And so we look to continue paying more or less that amount. And I think so to address the first half of the question, I think with prices sort of finding the temporary support for now, I don't see things changing in the medium term, obviously, being sort of commodity prices can swing very wildly. But I think this year, with our output and with prices where they are, I think we should look forward to a meaningful contribution again from Smelting.

Perfect. The next question is, it is well known that Ukraine is a substantial player in the global ferroalloys and manganese all markets. How is the Ukraine and Russian conflict affecting OM Holdings current activities?

Right. So I think Ukraine is both a significant miner as well as the alloy producer. And most of it all that's mined in Ukraine has actually put some consumption. So just to give you a sense of scale, in 2021, I think you Ukraine exported maybe just over 0.5 million tonnes of silicon manganese, while Sarawak obviously exported something like 0.25 million tonnes, 250,000 tonnes, that's mostly us. So they are by no means minor player in the global stage. And so I think we are very sensitive to what's happening in Ukraine at the moment and customers and consumers have begun reaching out to us to sort of secure and stabilize their supply chains. And so we're just working with everyone right now to ensure that they will have that availability of the supply of raw material.

Okay. Perfect. The next question. Can you please advise the current state of progress for the fairness conversion program? Is it on track and on budget? And when do you envisage it will be complete?

Right. So I think this can be broken down into 2 -- sort of 2 different segments. The manganese conversion is fairly straightforward. I think we're familiar with that, having done 6 furnace conversions in second half of 2016. So I think that should be on track and ready to be commissioned in quarter 3 of this year. For the silicon metal furnace conversion, I think that is underway, and we are looking to complete that sometime in Q4 this year. So for now, both of these programs are on track.

Perfect. So from Nick, OM Holdings trades on a low PE multiple compared to peers and also has a light trading volume, what is the company's plan to improve stock liquidity?

Right. I think it's -- this is a sort of a multipronged strategy. At this point, we have done the Bursa listing last year, like we promised for a few years. And so I think the interest from institutional investors on the Malaysia front has been very strong. We have yet to complete a share placement that is in the works. And as everyone knows, it's no secret that we'll have to sort of balance the interest of existing shareholders and not dilute at a sort of unfavorable price. And I think this is probably top on everyone's minds. At the same time, I think activities such as what we're doing today and we look forward to hosting quarterly events, engaging shareholders. And at the same time, I think leading up to any potential placement should the opportunity arise, we will be -- it will be all hands on deck. We'll be engaging all the Malaysian institutional investors and at the same time, I think it's heartening to note that there has been an increase in interest in terms of research coverage. So I think in the weeks or months to come, we look forward to more of that being rolled out.

Perfect. How is the company dealing with COVID related labor shortages and cost inflationary pressures?

Right. I think on the labor front, so this is something we addressed in 2 weeks ago at the webinar. I think at this point in time, we're still running 12 furnaces, and we are still going ahead with major maintenance, we're going ahead with the conversion works. So that will naturally lead to -- we won't need so many workers, that's the long and short of it. And we hope to -- sort of still time that with workers returning for home [ lead ]. And we do note that at this point in time, new workers are slowly starting to come in from China. So I think we're not so concerned looking at the full year guidance. I think that's something that we will be able to achieve. So in a sense, the issue is there, but it's being well managed. I think in terms of sort of cost pressures, obviously, for smelting the largest cost component is the cost of power. So thankfully for us, that's completely fixed. It's not only is it sort of locked in. We can also draw from power in inventory that we're sort of recording in our accounts with Sarawak Energy. And so that really leaves manganese ore and reductants basically, coal -- coke. So that is a well-traded sort of product, and it's a cost, I think, that everyone will face. So if it goes up, everyone is going to be facing the same costs. So I think in terms of the overall cost structure, it doesn't change the net competitiveness of OM Holdings. So we're not really concerned about that.

Okay. Great. From [ Sean ], does the Sarawak power purchase agreements cover the power required for the furnace conversions?

Yes. So absolutely and in a sense, by taking the furnaces down, so you will recall that the PPA that we signed, power purchase agreement was for 350 megawatts of power. There's obviously some flex space there in terms of what we can take below and above that amount. And we have reached out to Sarawak Energy to advise them of these maintenance plans. So actually, what's going to happen is the undrawn power during that period is actually going to be taken into inventory and for future consumption. But I think maybe what you're asking is also what's going to happen when we have 2 new furnaces and bought the 2, 33 MVA manganese alloy furnaces and that will come from a combination of 2 things. I think the early years of that furnace can be fully -- well, not funded, but powered by power and inventory, plus the flex that we get from the 350 contract. In the later years, the plan has always been to sort of be recovery system. So I think a few years ago, we put this out, but it's -- sort of put that on the back burner. It's still in sort of final vision of the Sarawak plant to have heat recovery for all 16 furnaces, and we think that the amount of power generated from that will be enough to power the 2 furnaces.

Okay. So the next question from Greg. Inventories grew from AUD 216 million to AUD 353 million, what is the background for this? Is it a new normal? Or will it return to lower levels?

Sure. Sorry, this was earnings.

Inventories grew...

Inventories, right. Sorry, yes. So yes, no, that's a good question. So inventories increased because of 3 things. One was power inventories. And so related to the question I just answered, we will plan on sort of drawing that down in the years to come. The sort of second factor is just the fact that prices of finished goods have gone up. So the value that held inventory has just gone up mechanically. And likewise, the price of semi-coke metallurgical coke has all gone up compared to, say, 2 years ago. And because of the nature of supply chains today because there are so many sort of pain points where things can just break suddenly at mine site in China, in Tianjin Port and Samalaju Port with, say, a typhoon in Southeast Asia, that sort of thing. We have actually built up a very, very healthy buffer stock of raw material. And so that's actually why the value of inventory has increased as well. And that's really why there is this gap between AUD 100 million cash generated versus AUD 200 million into underlying earnings.

Perfect. Well, that appears to cover the majority of questions from our audience. Thank you, Adrian, for updating the audience today on OM Holdings 2021 financial year performance. We will make a recording of this webinar available via OM Holdings and Corporate Story Time's digital accounts for anyone who wasn't able to join us today. If you have any further questions for Adrian, please forward them to [email protected]. Adrian, do you have any final comments?

Thanks, Corey. And look, thanks, everyone, for joining us today. I think there has been a lot of interest just in the weeks leading up to this Monday, and we have received a lot of e-mails. We will look to addressing these in the coming days. And do feel free to reach out if you have any queries. So if there's any more information you'd like to know. So we look forward to updating everyone again in 3 months' time.

Perfect. Thank you, everyone, for joining today.