OM Holdings Limited (OMH) Earnings Call Transcript & Summary

Good morning, everyone, and thank you very much for attending today's OM Holdings Investor Webinar. My name is Nicola Gosatti. I'm Co-Founder of Investor Relations Consultancy, Corporate Storytime. OM Holdings Limited is a vertically integrated and low-cost manganese ore and ferroalloys producer. And yesterday announced its financial results for the year ended 31st of December 2022. I'm delighted to have OM Holdings Managing Director, Adrian Low with me again today to run through an up-to-date investor presentation, which will then be followed by a Q&A session. So without any further ado, I am pleased to hand over to Adrian, who will present his comprehensive update. Adrian, over to you.

Thanks, Nicola, and thank you, everyone, for dialing in today morning. We're very pleased today to share our numbers for FY '22. So without further ado, I'm just going to jump straight into the numbers and talk everyone through what's happened in the last 12 to 18 months. So for FY '22, we did marginally better than FY '21, recorded about 10% growth in profit after tax to owners arriving at a number of USD 67.8 million. EBITDA also increased in a commensurate manner, and we achieved USD 163 million in FY '22. Having said that, I think what was special about FY '22 was the amount of cash that we generated from operations. So investors and shareholders that have been following the company will note that most of this cash actually was generated in the second half. So I think we've got sort of 2 effects playing in. Here, 1 was just the cash flow being generated from profitable operations, obviously. The second effect came from a sort of decompressing of working capital. So investors that have been following the company, following what we've done through COVID will understand that a lot of cash was being deployed in order to sort of keep our supply chains robust. And this was [Technical Difficulty] of FY '22 and towards the second half, which is why I think you see cash generation coming in higher than what we did for EBITDA. So that's sort of the broad overview of our numbers. I think something to take note of and certainly something that is a question that we're anticipating is the aspect of tax in our numbers for FY '22. So I think in a quarterly webinar a month ago, I shared that we have arrived at a set of conditions with MIDA and the company is confident of satisfying following those conditions before 2026. Having said that, we have provided for tax in FY '22 until we get something in writing from the IRB, the Inland Revenue Bureau, together with MIDA. And if you look at those numbers, I think we've recorded $23 million for FY '22 compared to $2.5 million in the prior year. Most of that gap can be explained by this provision. So that's just something to signal when you look into those numbers. Okay. And so looking at earnings for FY '22, I think you have to see it in the context of price action, right? We did marginally better in FY '22 compared to FY '21. But if you look at the price of the products that we're producing, ferrosilicon and silicomanganese, you will notice that for the calendar year '22, both of these actually declined by about 10% to 11%. And so I think if I can just bring everyone back to how markets were in 2021, sorry, I think we started the year in 2021 with sort of a nascent recovery. Prices started building momentum until they sort of hit a peak. It's September '21 with energy prices in China, India, lots of places soaring and then that came down. And so bulk of the earnings came from the second half of FY '21 and a lot of that was carried over into FY '22 as a result of the actions that the company has taken in order to sort of ride those gains. And so what we're seeing is sort of recovery in first half of '21, good performance in the second half of FY '21 that's carried over into '22. And then with the macro conditions and sort of global demand declining in the second half of FY '22, we see prices decline and particularly earnings decline. Having said that, those numbers were still better than the first half of FY '21, which sort of gives you the results that we're looking at today. So looking at the product markets, I've sort of spoken about this in the last webinar, so I won't go too much in detail. But I think the sort of 2 key highlights would be that ferrosilicon prices have been really flat for over 4 months. These are supported, obviously, by much higher Chinese costs compared to pre-COVID costs and strengthening RMB. For silicomanganese, prices I think, have been declining. And again, what's happening here in the background is supply overhang. But just looking at the price action, I think we're seeing signs of nascent recovery. Having said that, I think if we look at the macro environment and what's happening around us with interest rates, still, we expect interest rates to be elevated for a better part of this year, with demand being curtailed and with what's happening in China and also the war in Ukraine. All these things are still weighing down on global demand and that sort of translates down into still production numbers and consequently down to demand for ferroalloys that will be produced. So I think we're not out of the woods yet, but I think we're seeing sort of optimistic signs in different parts of the market. So I won't talk through all the numbers. I think suffice to say, this year for FY '23, we are guiding production to be more or less the same as FY '22 as a base case. And I think we're still cautiously optimistic about bringing workers back in, into Sarawak to be able to sort of restart more furnaces as these furnaces become available from Q2. So they're not yet available now, but we expect them to be from Q2, and that will be able to sort of give a bump to production from base case. So that's it for general ferroalloy production. I will note at this point that the metallic silicon furnaces are still undergoing hot commissioning. We have been able to produce successfully. I think we see a few questions on that front, but we just haven't been able to achieve the optimal level of daily output that we're targeting for. And hence, the commissioning has not been officially completed yet. Okay. Looking at revenue and sort of GP margins, I think from FY '22 to FY '21, there was a slight bump as a result of contracts flowing over. I won't read too much into GP margin, but I understood to bring everyone's attention to the EBITDA breakdown. So I think this year, for FY '22, we did marginally better than FY '21. Smelting as expected, contributed more or less the same amount in terms of earnings. And I think the one thing to note is that the overhang from mining has been removed, right? So that overhang that we saw in FY '21, the orange region, this is really insignificant in FY '22. And not only that but the share of depreciation and amortization as a share of EBITDA has also come down significantly. And this is because I think we accelerated depreciation of OM's assets in FY '21 as we were preparing and planning for closure of the mine, and this obviously sort of fell away in FY '22. Looking at our debt front and sort of cash generation bulk of -- again, bulk of what we paid last year went towards debt repayment, and so this is excluding the acquisition of the 25% of OM Sarawak but if you exclude that then everything else went to debt repayment, we paid $66 million comprising project loan facilities, trade facilities, shareholders loans and interests. And again, I think we have been stated objectives of the company to bring down a gearing ratio every year, and we managed to lower that again in FY '22. So when you look at the cash flow movements of the company for FY '22, obviously, we generated close to $200 million in cash, $66 million went towards repayment and $120 million went towards the purchase a 25% stake of OM Sarawak from CMS, and that has brought our cash position down to $53 million. And we still think there was a great opportunity to complete the transaction in FY '22. And I think on that note, I'm just going to move on to the last slide. And these are sort of updated numbers based on full year FY '22. And on that note, I'll just talk briefly about the dividend. So we declared dividend of $0.015. I think the company's stated policy has just been released and announced. And so I'll talk about these 2 things together because -- that's the best way to make sense of it. Historically, I think OM Holdings has always tried to pay about 20% of net profit after tax in dividends. And I think after engaging with lots of shareholders, analysts, potential investors, both on the sort of public and retail side, we have finally resolved to declare a dividend policy. So we will, going forward, be paying 10% to 30% of net profit after tax with certain conditions that have to do with cash flow and debt ratios. And so you can read the full document in our release. And I think having sort of resolved to commit to a dividend policy, we are, at the same time, in a position where we have just completed a major acquisition, having paid $120 million for 25% of OM Sarawak. It's with those considerations in mind, that we are declaring $0.015 dividend at this point because of significant cash outflow from the acquisition. But going forward, this new dividend policy will come into play. So that's it for the presentation. I'm just going to leave this one last slide here onscreen, and I sort of talk through our future plans. So for FY '23, again, just to repeat, we are guiding output of more or less what we achieved last year, and we expect to spend $10 million to $15 million in sustaining CapEx. And again, the future is silicon metal, more manganese alloy furnaces, bringing output to close to double to what we are targeting to achieve this year. So thank you very much for listening to the presentation. I am just going to end that slide show and take questions now.

Thank you, Adrian. That's fantastic. I'm just going to reduce my screen. Here we go, thanks for that update. And now I'm going to move on to our Q&A session. Our first question, and you did touch on it during your presentation. What are the actual conditions set by MIDA to be eligible for a second 5-year tax exemption period from the 1st of December 2021 to the 30th of November 2026?

Right, okay. So without going into all the details of the conditions set by MIDA, I will just briefly share about the nature of these conditions. So the first condition relates to the production of silicon metal and investments in Sarawak that will lead to that. So most of this has already been done, considering that we are already tapping silicon metal and we've already spent of the CapEx to achieve that. That's not an issue. The second sort of family or set of conditions related to developing local suppliers. So engaging local suppliers in Sarawak, developing their skill set and sort of contributing to the economy that way that second group second [conditions] And the last one relates to local labor. And so this is a fairly simple condition to me. It's just bringing returns into the company and empowering them and sort of teaching them to skills to succeed in this industry. So those are sort of 3 broad criteria, and I think the company is very confident of achieving them by 2026. The issue is that because the deadline is set as 2026 and there are sort of annual milestones to meet, it's a bit different from the first 5 years where at inception, it's very clear that we've met all conditions because we've actually made the investment to come into Sarawak but because of the nature of the sort of second 5 years, it's a bit strange because we sort of have to prove on an ongoing basis that we are ahead of those targets. And as a result of this, we are reaching out -- we're having this conversation with the IRB to say, can we stop providing for it and only sort of recognize that if we don't meet those targets. And so that's an ongoing conversation, and we expect to have some clarity within this year.

Thank you, Adrian. Our second question, how is the reopening of the Chinese economy impacting on ferroalloy demand currently? And does the reopening have an impact either positive or negative on access to Chinese labor at or in Sarawak?

Yes, so I think you have to look at the reopening in sort of 2 ways. One is border controls, and I think that's been loosened tremendously, and we're quite optimistic about bringing those furnaces on beyond base case, the sort of chief reason being, I've already met a lot of Chinese workers and Chinese colleagues from China, they're traveling freely. And given the programs and initiatives we've done in Sarawak with UNIMAS, with hiring local workers, we've actually reduced the number of Chinese workers we need for these sort of key positions. Second thing relates to the economy, and I think this is where it gets a bit more complex because at the end of the day, Chinese steel is, whether you like it or not, surpass the world's output. And China's domestic policies around infrastructure, real estate will affect steel demand and ferroalloy demand considerably. And I think this is where there may be an opportunity where we see ferrosilicon because ferrosilicon is -- China is sort of the dominant supplier of ferrosilicon in the world, at least in Asia. This is where we'll see an opportunity for ferrosilicon prices to go beyond where it is now at sort of cost. And I think we have been optimistic about the Chinese reopening, but we actually haven't seen that much impact in terms of Chinese steel production at this point.

Thanks, Adrian. Third question, how is the commissioning of the metallic silicon furnace is progressing? Are you close to achieving production for silicon metal 553. How are sales progressing for this new product stream? And what is the outlook for the metallic silicon market. ?

Yes, so Nicola, I think the line was a bit patchy, but I think I got to just have the question. about silicon metal commissioning. So -- and I've had 553, so I'm just going to answer along those lines. We have been able to produce 553 but it's not consistent. So that's the long and short of it. And the 2 targets are keeping 553 and achieving daily output numbers until we achieve both fees consistently, commissioning the furnace will remain in a technically, sort of technical commissioning phase. In terms of sales, I think that's not really an issue at all. We have been able to find customers for everything ranging from obviously 553s as a standard product, all the way down to everything that has left the [indiscernible] from day 1. Anything that's [off spec] or irregular, we have been able to find [Technical Difficulty] customer.

Thanks, Adrian. And there was just a little question at the end of that part. What do you think the outlook is for the metallic silicon market?

So I think it's early to call, Nicola. I think at this point in time, we are still sort of optimizing the marketing effort for silicon metal. And I think if you look at the price spread between the West and Asia, I think there is still considerable premiums in, say, the U.S. or European markets compared to Asia. I think in terms of demand, it's really -- because of the nature of the demand, it's more diversified. It's not tied to a single industry like steel. And so that makes it slightly more difficult to beat. We will have to sort of dive down into each of the grades, 421, 441, 553 to really understand what's driving those dynamics. For now, what we're looking at in terms of demand because also, we just been talking to a lot of consumers for say 90%, that's just below 553. That demand is there. It's steady, will always be there. In terms of other markets, we'll have to see how things go once we achieve those grades.

Okay. Our next question. How is the Ukrainian-Russian conflict currently affecting manganese and ferroalloys market? What are some of the catalysts which may provide upside to ferroalloy markets?

Yes. So that's a great question because something actually just came out in the last 2 days, which is in the U.S. President, Biden signed [indiscernible] an order that covers very, very comprehensive list of metals from Russia. So I think people may be familiar with 200% tariff on aluminum, but there's also a 35% tariff on ferrosilicon, and the U.S. depends a lot on Russian ferrosilicon. I think at the moment, a lot of stockists have over the last 12 months sort of prophylactically stocked a lot of Russian ferrosilicon in the U.S. So we'll see price actions to flow through, I think, in a couple of months' time, but we're optimistic that there's sort of reshuffling of trade flows and trade patterns and that should benefit us. In terms of manganese alloys, Russia is in sort [indiscernible] exporting manganese alloys. But investors will be familiar with the fact that Ukraine is sort of the world's first and second largest, depending on where you look at it, exporter [Technical Difficulty] of manganese. That production, I think, was stopped briefly at the end of last year but has since restarted, although I think it's sort of defining, it's very difficult to bring it back to full capacity, and we expect this to continue indefinitely. And that amount of production loss is equivalent to either 1 Sarawak or 2 Sarawaks. And so that's quite a considerable export figure that's lost now.

Thanks, Adrian. Could you give us an update on the current profit margins for ferrosilicon, silicon manganese and silicon metal production?

Sure. So for silicon metal, I think it's still too early to sort of call it because we are only producing at 1 furnace. The second furnace is yet to commission, and we are seeing sort of lag just purely because raw material hasn't really entered into sort of a normal purchasing cycle. A lot of material was purchased last year, carried forward to this year. And I think things will only normalize in the second half. Between ferrosilicon and the manganese alloys, I would say ferrosilicon margins are still near their sort of historical highs. If you look at, say, pre-COVID 2019 or that sort of first half of 2020, we are sort of way above what margins were at that point in time. Manganese alloy margins have, however, sort of normalized. And I think at this point in time, instantaneously just sort of looked at the January numbers of ferrosilicon, we are doing better on ferrosilicon [Technical Difficulty] compared to manganese. I won't give you the actual number because there's a lot of volatility into month, and that sort of washes out in every 6 months.

Okay, Adrian. Last question for today. Could you provide information on the structure of OM Holdings debt? And how are the repayments being affected by the current rise in interest rates?

Sure. So I think if you look at debt, most of it $200 million or just below USD 200 million is project finance. We are repaying every year between USD 25 million to USD 30 million. And so if you look at the interest payments from FY '21 to FY '22, that bumped up in FY '22 because of the rise in interest rates. I think that will carry on into FY '23, but that will also be sort of offset by the fact that we will be reducing the principal amount again this year. So I think it's difficult to call and that sort of final interest number may be constant from FY '22 to FY '23. The second portion of our debt is the revolving credit line. So that's sort of [indiscernible] facility the purchase of raw materials. And that's sort of very, very spot decision that we can make at any point in time if it becomes too expensive to finance these materials that way. We can always [indiscernible] it means and I think overall, I would expect is if you add those 2 components together for interest expense to remain the same or sort of slightly more for FY '23. So I think maybe just continuing along the stream of thought. I think we have in the past talked about a sort of complete and total restructuring of the project finance facility because we're no longer in a sort of greenfield stage, and that's sort of what [project finance] is designed for. I think it really will depend on [Audio Gap] point whether that's in Q3 or Q4, and we will be engaging sort of exploring a whole different avenues to see how we can completely restructure that and bring these interest expense numbers lower.

Thank you so much, Adrian. We have received a large number of questions today. And if we haven't covered your question during our webinar, we will respond to your queries offline. So if you do have any further questions, you can e-mail us at [email protected]. We will make a recording of this webinar available via OM Holdings and Corporate Storytime social media accounts in the coming days. So this concludes our webinar for today. So thanks to everyone for attending, and thanks to the OM Holdings team and Adrian for the update. Thank you so much, Adrian.

Thanks, Nicola. Thanks, everyone.