OM Holdings Limited (OMH) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for attending OM Holdings webinar this morning. My name is Eugene. I'm the Group Financial Controller of OM Holdings, and I will be hosting this webinar together with [ Ritchie ] from the IR department. OM Holdings is a manganese and silicon smelting company with vertical exposure in mining and trading, and we have just released our first half 2024 results last Wednesday. I'm delighted to have OMH's Managing Director, Adrian Low, with me today. He will run through the key points followed by a Q&A session. [Operator Instructions] If we are unable to present your question to Adrian during the seminar, we'll attempt to address the query post this webinar. So without any further ado, I'm pleased to hand over to Adrian for the presentation. Adrian, over to you.

Thanks, Eugene. Thanks, Ritchie, thank you, everyone, for dialing in this morning. So we're pleased today to present to you our half year results for the first half of 2024. So let's dive into the financial highlights. Thank you. So I think if you look at the top line for the first half of 2024, you have a lot of factors that come into play here. I think if you look at pricing, notwithstanding the blip into the manganese prices that we saw in the first half of this year off the back of suspension of [indiscernible] if you strip that away, look at all the averages, I think in the first half of 2024 across the silicon and the manganese space, prices have still come down. Notwithstanding that, I think we were able to sort of clawback and push back on that to get the revenue number that's not too different from the first half of 2023. So I think if you look at all the factors, the alloy prices are marginally down. Alloy production and consequently sales has notched up. But at the same time, we also recorded lower volumes of manganese ore traded. And again, to remind everyone, traded volumes are basically all that's distributed from investment in South Africa, that should be borne in mind as well as other ores that we are trading as well as for own consumption, okay? So off of that sort of slight fall in revenue. I think you look at our EBITDA number of $46.6 million marginally lower than the first half of 2023, and a profit attributable to owners of $12.8 million. So I think as we've said for a few presentations now, we always expect that cash flow generation should fall in line with EBITDA. Ours is not an unnecessarily complex business. And so we're sort of pleased to see that, that has fallen in line. I think if you look at cash generation at $69 million, is up this year, that's a bit more than EBITDA. And so I think part of that fluctuation is due to working capital changes, and this will come and go, right, depending on the inventory levels of the plant, depending on market conditions, depending on the kind of products that we're chasing. And so this is -- I think this is now fairly normal. So of the cash generated, vast majority of that went into lower repayment and I'll touch on this in one of the later slides. Okay. So I think if you look at the results in the first half and sort of contrast that against the first half of 2023, I think what's maybe more instructive is to look at that relative to what happened in the second half of '23, where we saw -- if you look at the chart, we saw prices declining, obviously, in a sort of monotonically declining price environment, especially in the manganese side, where you are taking the input cost that is very often lagged. That will translate into lower earnings, and that obviously reverses itself and the trend reverses. So I think you see that play out in the red line. Sorry, the chart is squeezed in such a tight space. But that more or less explains the lower earnings especially on the manganese side in the second half of last year. And so now this year, I think we're very pleased that, that trend has reversed itself. So if you compare the first half of this year compared to the 2 distinct halves of last year, you will see that, that cycle has begun to reverse itself, notwithstanding obviously the decline -- overall decline in prices. So I think this is something that we have mentioned to shareholders and analysts and that is repeating that the profitability and the ability of the company to generate cash is not always directly dependent on kind of the top line prices that we see. But obviously, they're very, very correlated. So I think in terms of the market balance on the silicon side, things have not really changed substantially since our last update. On the manganese front, unfortunately, I think the blip has been rather short-lived. And so this goes to show that a lot of the bottlenecks in terms of the supply chain is actually occurring on the ore front and not actually at the smelting, at the processing end. And so you could see that the latest prices for ferrosilicon and manganese alloys, silicomanganese in this case. At the end of August, ferrosilicon closed at $1,325 while silicomanganese closed at $925 and so that has retraced quite substantially. So I think part of -- obviously, part of that [ good ] has been booked in the first half. And I would say that when silicomanganese prices were in sort of the 4-digit territory, $1,100, $1,200, part of that has, obviously, been booked in June, a bit in May, I would say, and with the rest sort of coming in, in July. So you will see that then reflect in second half numbers, at least for July, okay? In terms of production updates, there really has not been any changes. And so I think we're still on track for what we have guided. You can see the numbers below and as well as the last 4 years historical performance. For smelting, I think shareholders have been asking and we have been commissioning the silicon metal furnace from July. And I think that process has not led to any unexpected surprises, I would say. And so we are really in sort of in the midst of fine-tuning what this sort of optimal production parameters should look like, and I think we're close to achieving that. That being said, I think at the end of the day, to have that optionality at those furnaces gives us the power to choose and what we decide to produce, whether that's a sort of bespoked version of ferrosilicon, whether that's regular commodity grade ferrosilicon, whether that's silicon metal or any of the derivative grades, will be market dependent and, obviously, part of the reason why we have spent so much working capital in accumulating various raw materials is to position ourselves to make sure that we're selling into the right market at the right time. Okay. Next slide. And so I think I'll take a couple of slides just to talk through the numbers in the first half. So on the revenue front, as I already explained a couple of factors at play here, lower ore volumes, higher alloy volumes. And at the same time, marginally lower alloy prices were the main contributing factors. And so I think you see a marginal decline in revenue and also a marginal decline in GP margins. In terms of the EBITDA breakdown, I think that sort of flows through from lower revenue and at the same time, kind of recovering profitability, as we saw, as explained earlier, where profitability was higher in the first half of last year came down in the second half, and now we're seeing that kind of recover, notwithstanding obviously, what the price is securing. And the lower contribution mainly came from smelting and there's an increase in contribution from trading. I would say if you look at the last couple of years, trading is really just more or less kind of returning to its traditional normal value. But obviously, in the first half, it was contributed marginally by higher volumes traded specifically for alloys as well where the company also took the opportunity to fulfill customers' orders with alloys that could source or procure from other origins. And in terms of mining, I think I missed that in the previous slide, but the Ultra Fines Plant restart is underway. We are in the process of preparing manpower and also preparing site for that restart. And Q4 is the target for the company for when we'll put everything together and recommission that plant. Okay. So I think the company has talked about the focus on debt repayment and bringing debt down to a sustainable and manageable level. And I think the track record shows that. And I've definitely been saying this for a few years. And so we're very pleased that in the first half of 2024, the gearing ratio has come down to 0.5. And so if you look at the cash flow statement and this sort of simple summary, cash flow movements for the first half, we generated $69.4 million from operations. And the vast majority of that went back into repaying debt. So obviously, this is not all principal. Part of it is a revolving facility that we pay and draw down as we need. And part of that is sort of trade lines, [ TR ], what have you. But the commitment is there to ensure that we are always chipping away at that total debt level and sort of considering cash for distribution for new projects and so on. So that is the gist of what we've done with the cash in the first half of '24. I think in terms of investing activities, in terms of CapEx spending, we have said this before at a few forums, and I think we'll repeat it again. But for this year, 2024, '25 and maybe into '26, we will be focusing on cash management, looking at the optimal capital structure, looking out what our plans should look like in '26 and beyond, what sort of CapEx should we be spending on. And that will -- the actual sort of bigger size CapEx will take a back seat as we [indiscernible] all these things up. And post that, I think we will be able to present shareholders with the plan on what the final sort of growth -- sorry, what the final growth phase of -- should look like. And obviously, I think at this point in time, currently, in each question that we kind of run away from is what is our internal view on the price of carbon. And so this is something that is obviously very, very critical from an environmental perspective. At the same time, also from a cost perspective, as various jurisdictions, banks start talking about carbon pricing and sort of carbon intensive activities. So cannot be understated. I think this is something that the company will be focusing on. And obviously, the key thing is not to spend CapEx preemptively -- too far preemptively before the price is sort of written on the wall. So that's it for this slide. I think in the last slide, really we're just here to recap. So I will give a quick snapshot of the company's performance and sort of its key ratios. And with that, I will end this presentation and leave more time for Q&A.

Thank you, Adrian, for the presentation. We will now move on to the question-and-answer session.

We've received some questions from participants of the webinar. Adrian, the very first question is, what was the group's loan repayment quantum against gross profit for the last 5 years?

Yes. I mean this is a very relevant question, right? I don't have the numbers in front of me. But I think, off the back of my head, that every half year, we got debt paid down. But obviously, as I mentioned just now, that's comprised of trade finance, revolving facilities and so on. But I think if you look at total debts or term loan, what was sort of -- what started out as project financing from the get-go, I think that has been reduced by about $100 million in the last 5 years. So profit numbers, revenue numbers are publicly available. So that gives you a sense roughly of how much of that has gone towards debt repayment.

Thank you, Adrian. The next question is, were there any investor relation forums held by OMH in the last 5 years?

So, yes, I mean, you're absolutely right. I think in the last couple years as I've sort of gone into this IR position, we have instituted the quarterly webinars as well as the one you're on right now half yearly platforms for people to ask questions and plus explain really some of the nuances that might not be picked up because while the business is relatively simple and straightforward, I think there are nuances between the products, between cycles and sometimes you have to look at it and frame it in the right -- from the right angle. Besides that, I think we have taken part in numerous events held by banks, brokers, both in Australia and in Malaysia. And I think if you look at the AGM, given the fact that we are dual listed, I think we try to provide that platform in sort of different countries at different time. So it's been held off the top of my head, last 5 years it's been held in Perth, KL and Singapore to provide access to different shareholders to be present and to ask questions and really engage with management because it won't just be me, but there will be a lot more people. So obviously, there are a lot more events that we can take part in, and that's always something that's on our minds.

Thank you, Adrian, for the insight. The next question we received, what was OMH's record for the last 5 years' dividend against net and gross profit?

So again, I don't have those numbers, but I think it's fair to say that we have more or less paid 10% to 30% of net profit after tax. If you look back at the last couple of years, it might have reached 30%. And this is I think even before we announced the dividend policy, that has been the case. And at the time of announcing the dividend policy, I think we sort of explicitly said that the dividend policy is really formalizing an existing practice. And I think that's not going to change in the near future.

Thank you, Adrian. The next question we received, can management expedite the expansion of the smelter as soon as possible?

So the short answer is no. I don't think we can expedite the expansion of the smelter. Look, I mean, there are various considerations here, right? So if we are going to expand, number one, the selection and choice of product, the type of equipment we're going to choose, the labor intensity of that process. So various considerations. What I will say is that on site, land is available. Substation capacity is available. Our original substation was rated 500 megawatts. And obviously, I think if you were to go out and build a substation like that today in sort of today's cost environment would cost you double of what it cost us 10 years ago. And last but not least, I think most importantly, we had to look at what should we do with cash, right? And I think this was asked maybe a few years ago, and we've said that we try to balance debt repayment against conserving cash growth and distribution to shareholders. And I think that really hasn't changed. If anything, as we pay down debt, as we get that down to a sustainable manageable level, where say most of the debt hypothetically would really be sort of short-term revolving in nature, then obviously, that frees up cash to pursue expansion plans and sort of accelerate that.

Thank you, Adrian. The next question actually has 3 parts to it. So if you need me to repeat any of the questions, please let me know. The first part of the question is, is the midterm gearing target for OMH? The second question, OMH -- is OMH planning to distribute excess free cash flow to shareholders or use for further acquisition or more asset-based and divestments? And the last part being, what's the long-term target?

Okay. So well, I mean, the first question is on gearing ratio, was that right?

Yes, that's correct.

So look, I mean, our gearing ratio now is 0.5, right? So I think there isn't really a target per se. I think it's more along the lines of what sort of debt should we as a business be taking on considering that, one, the business is highly cyclical. And number two, quite a fair bit of working capital is required to run the business in the way that we think it should be run, right? And there are many losses around this. You can run it in a very straightforward way. I just want to produce a single product by the same thing day in and day out. But obviously, we believe that the way we're running it, is more optimal in terms of cash generation, in terms of profit to shareholders and so on. But -- so this is -- sorry, this is not a very clear answer, but I think what we want to do is to bring down the level of debt that may potentially be at risk when market cycle comes around, and really only keep the -- say, debt of revolving nature that can go up and go down as and when the company needs it in the normal course of business. So I think in saying that [ the dances ] has to be lower than where we are now, but maybe not substantially lower. And then I think sort of this goes naturally into the second question, what would the company do once sort of cash is being accumulated? And I think the short answer is that, it has go back to shareholders, right? In what way and form and what shape? I think dividends is the most natural. But at the same time, obviously, there is this competing tension with, what are the future growth projects and we've shared this in the past, right? The future growth projects, potential ones are expansion of production, additional furnaces. How do you reduce your carbon footprint? So there are 2 ways of doing this. One, to reduce its scope the heat recycling power generation is the most natural and this is actually fairly mature, right? So that's something that I've certainly done pre-feasibility work on. And the last thing would be how you lower your Scope 1 emission, which would be how do you replace the metallurgical coke and various forms of coke that we're consuming. And so to do that really is forestry management. You would have to be involved in the production of carbon itself. And so that's something, obviously, that can be done in Sarawak. It's something that we are aware that a lot of our mediators and sort of people in industry are looking again. And naturally, that's something that we'll be looking at strong.

Thank you, Adrian. I think we have time for one final question, but this question also consists of 2 parts. The first part is what is the current status on the 5-year extension to the tax holiday for OM Sarawak? And the second part is, am I correct in thinking OMH have been paying the tax and will receive a refund if the extension is successful?

So it sits with IRB. Unfortunately, there has been no change to this, but absolutely correct that we have been providing for it, and that will be reversed when that's done. So I think if -- just to see what has been provided for you, if you just look at financial statements.

Thank you, Adrian. I think that's all the time that we have today. If any participants do have any further questions post this webinar, please feel free to send us your questions, and we will try to address them as soon as we can after the conclusion of this webinar. With this, thank you, Adrian, for taking us through the numbers for the first half of this year. And thank you, everyone, for attending this webinar on a Wednesday morning. Thank you very much.

Thank you. Thanks, everyone.