Qatar Aluminium Manufacturing Company Q.P.S.C. (QAMC) Earnings Call Transcript & Summary

The line is now open. Mehmet Aksoy, you may begin.

Good afternoon, ladies and gentlemen. This is Mehmet Aksoy from QNB Financial Services. I would like to welcome everyone to Qatar Aluminum Manufacturing Company's Second Quarter 2021 Financial Results Conference Call. On this call from QP Privatized Companies Affairs team, we have Mr. [ Rashid Al-Mohannadi ] who is the senior financial management analyst, and we have Mr. Riaz Khan, who is the Head of IR and Communications. We will conduct this conference call first with brief comments on the presentation followed by the Q&A. I would now turn the call over to Mr. Riaz Khan to get us started. Riaz, please go ahead.

Thank you, Mehmet. Good afternoon, and thank you all for joining us. Hope you're all staying safe. Before we go into the QAMCO's business and performance updates, I would like to mention that this call is purely for the investors of QAMCO and no media representatives should be attending this call. Moreover, please note that this call is subject to QAMCO's disclaimer statements as detailed on Slide #2 of the IR deck. Moving on to the call. On 5th of August, QAMCO published its results for the 6 months period ended 30th of June 2021. And today in this call, we'll go through these results and provide you an update on key financial and operational highlights about the company. We have structured our call as follows: At first, I will provide you with quick insights on QAMCO's ownership structure, its competitive advantages and overall governance structure by covering Slides 5 till 14 and Slides 33 and 34 of the deck. Secondly, Rashid will brief you on QAMCO's key operational and financial performance matrices. Later, I will provide you with more details on JV operations and its CapEx updates. And finally, we will open the floor for the Q&A session. To start with, as detailed on Slide #5 of the IR deck, the ownership structure of QAMCO comprises of Qatar Petroleum with 51% stake and the rest is in the free float held by various corporates and individuals. Qatar Petroleum, being the founding shareholder and the parent company of QAMCO, provides all of the head office functions, services through a service level agreement, while the operations of JV is independently managed by its own Board of Directors, along with the senior management team. QAMCO holds 50% share in Qatar Aluminum Limited, Qatalum, which produces high-quality aluminum of about 650,000 tonnes per year for customers in Asia, Europe and North America. The facilities include our carbon plant, port and storage facilities as well as gas-fired power plant. In terms of competitive strengths, as detailed on Slide 12, QAMCO's joint venture is considered to be one of the world's lowest-cost aluminum smelters with a state-of-the-art production facilities along with a short feedstock supply with an intense focus on HSE, which makes the JV a leader among its peers. As detailed on Slide 14, from a competitive positioning perspective, QAMCO ranks among top-tier companies within the industry at the global scale across most of the profitability metrics. This is a testament to JV's leaner cost base and continued optimization drive, which keeps QAMCO's JV on the lower side of the cost curve among its global peers, resulting in stronger margin evolution. Moreover, the JV's global marketing partnership with the other JV partner provides an access to strategically important markets, which makes the company more competitive in comparison to its peers. In addition, the JV is capable of quickly shifting the product mix that is from value-added products to standard ingots and vice versa, which provides an additional layer of flexibility to the JV in terms of production processes as well as supply chain management, while ensuring optimum production and sales volumes in line with the evolving market dynamics. I will cover further details about the JV and its operational activities, including sales and marketing arrangements later in this call. In terms of governance structure of QAMCO, you may refer to Slides 33 and 34 of the IR deck, which covers various aspects of QAMCO's code of corporate governance in detail. I will now hand over to Rashid.

Thank you, Riaz. Good afternoon, and thank you all for joining us. Starting with the macroeconomic updates. As detailed on Slide 16, prices of aluminum continued to climb on the back of the new global demand, whereby sectors such as construction, automotive industry witnessed a growth as the global economy started to show signs of recovery since the later part of 2020. Furthermore, global climate initiative also providing a structural support to the aluminum market, given its major role in decarbonization and playing a key part in creating supply deficits. All of these factors translated into a sequential growth in prices of primarily aluminum, along with improved margins. As detailed on Slide 19, at QAMCO JV level, the average realized selling prices inclined by 26% versus the first 6 months of 2020 and contributed QAR 292 million positively to the current period net earnings compared to the same period last year. On the other hand, sales volume slightly declined by 4% and contributed QAR 61 million negatively to the net profit for the 6 months period ended 30th of June 2020 versus the same period last year. Although sales volume was marginally lower than last year, but QAMCO JV was successful in selling 100% of value-added products with no sales of standard ingot during the current period. This shift in sales of standard ingot to value-added product supported overall growth of the EBITDA margin. In terms of the bottom line profitability for the 6-month period ended 30th of June 2021, QAMCO recorded a net profit of QAR 288 million as compared to the net profit of QAR 15 million over the same period last year, being the highest half yearly profit since its inception. This was driven by the global growth in aluminum prices on the back of improved macroeconomic dynamics. As detailed on Slide 20, average cash cost remained flat, mainly due to higher raw material costs fully offset by favorable inventory movement, manpower costs, savings on account of lower finance costs and other realized savings. Moreover, due to the overall decline in the interest rate and the one-off unamortized portion of financing costs being written off last year, JV finance cost for 1 half -- for the first half of 2021 declined by 44% versus the first half of 2020 and contributed to QAR 28 million positively to the QAMCO net earnings. In terms of the operational performance, as detailed on Slide 19, the production volume slightly improved on year-on-year basis and remained in line with the management efforts to keep up the production level to ensure optimum utilization. Moving on to the balance sheet in terms of the JV debt position. QAMCO share of the debt stood at QAR 2.2 billion, slightly up by 2% compared to December 2020. QAMCO financial position continued to remain robust with the liquidity position at the end of 30th June 2020, reaching QAR 812 million in form of cash and bank balances. This also includes a proportionate share of cash and bank balances at the JV level. During the current 6-month period, QAMCO JV generated positive share of operating cash flow of QAR 393 million with a free share of cash flow of QAR 276 million. As detailed on Slide 22, the average LME prices improved by 22% on a year-on-year basis due to continued strength from macroeconomic condition. LME premiums and -- also improved during 2021, mainly due to better product mix, as QAMCO JV was successful in selling 100% of the value-added product with no sales of standard ingot during the period. As detailed on Slide 23, QAMCO JV EBITDA margins continues to remain robust and resilient despite volatile aluminum prices since 2019. I will now hand over to Riaz to cover the rest of the IR presentation.

Thank you, Rashid. Moving on to the remaining slides. As mentioned earlier, QAMCO has 50% stake in Qatalum. The other partner of the JV is Hydro, which also acts as a main supplier of alumina to the JV. Moreover, under marketing and offtake agreement, Hydro acts as a JV's representative for marketing aluminum products outside Qatar. This provides the JV an access to important and strategic markets while competing with international players. Whereas, as detailed on Slide 24, Asia remains the main -- the largest market for QAMCO's JV, while its presence in U.S. and Europe continue to be substantial. As detailed on Slide 25, in terms of product mix, extrusion ingots along with foundry alloys remain key products for QAMCO's JV. In terms of JV facilities, as detailed on Slide 9, it is located at Mesaieed, Qatar, with a design nameplate capacity of 575,000 tonnes per annum, but now the JV produces more than 650,000 tonnes per annum of high-quality primary aluminum products. Moreover, Qatalum has a captive power plant with a capacity of approximately 1,350 megawatts. This benefits the JV from the perspective of access to one of the most competitively priced sources of energy. Lastly, as detailed on Slide 29, the 2021 till '25 approved CapEx plan mainly relates to routine operations, such as pot relining and other maintenance activities pertaining to power plant and anode facilities. Here, important point to note that the cash flow forecast for 2021 till '25, as disclosed in this slide, cannot be relied on with absolute certainty, where actual realizations of these cash flows might significantly differ as compared to these projections, subject to the evolving market dynamics. Now we will open the floor for the Q&A session.

[Operator Instructions]

This is from -- this is Mehmet from QNB Financial Services again. Why we are calling for questions, if I can start off with a question on my own. In May, Qatalum signed an agreement with General Electric to provide 5 Advanced Gas Path upgrade sets. I would ask if these upgrades will have an impact on Qatalum's overall production volumes and/or operating costs.

So Qatalum has signed this agreement and the anticipation that this agreement will reduce the consumption of gas and the energy of the power plant within Qatalum. So hence, it will reduce the cost. Also, we expect that it will also reduce the carbon emission accordingly. So there will be a benefit from this project.

Operator, can you open up for questions now, please?

Yes, of course. We'll take our first question from [indiscernible]

This is [indiscernible]. I have a couple of questions. First and foremost, it's about aluminum prices. So as we see that aluminum prices are close to their multiyear highs right now, so what is your view in terms of how sustainable are these prices? Or should we see any sort of a correction in the near term? My other question is about the premiums that we generate over the LME prices. So basically, I'm looking at Slide #22. So the premium, if we compare in Q2, they were higher as compared to Q1. So what are the driving factors for these premiums? These are the 2 questions which I have.

Thank you, [indiscernible]. Yes. So I will start off with basically the aluminum prices and the market dynamics. Here, I will take a step back, and I'll just take you through since last year, what exactly has happened. So last year, we saw the lowest aluminum prices in -- specifically in Q2 of 2020. And then we saw the rebound in the prices. So the sooner the macroeconomic recovery start to become evident, we start to saw the demand picking up. Key sectors who were basically contributing towards this positive trajectory in demand were actually the automotive and the construction sector. So again, starting from this year, so the positive upbeat in the prices and the continued surge in the demand continued sequentially throughout in this first half of 2021, where we saw specifically a demand for primary aluminum products and specifically the value-added products, and that's how we were able to sell or able to produce and sell only the value-added products in this year. And that's what basically translated into very positive -- a strong effect on our premiums -- realized premiums. Going forward, we need to look into 2, 3 aspects. First is the demand, which is pretty much linked with the overall macroeconomic activity and the GDP growth, which looks, considering the overall vaccine campaign being developed across different nations, so we consider and we -- it looks apparently that the demand will continue to prevail. On the supply side, there is a different dynamic actually for the aluminum market, where basically there is new regulations which are related to decarbonization drive, specifically in China, then very recently in Europe. And over and above, there is a very recent export-related levies being enacted in Russia. So there is a lot of supply-side downside story, I would say, which is like creating an imbalance positively towards the upward side for the aluminum prices. So that's how if you see the overall macroeconomic trajectory for the aluminum industry, it will continue. It looks -- it's apparent that it will continue to show the upbeat. As far as we, as QAMCO is concerned we do not give specific outlooks on the prices. So I won't be able to brief you exactly on which price range which we are expecting, but mostly at the time of our budgeting, which we do on a periodic basis, we refer to the Bloomberg consensus, which currently stands at a very positive upbeat.

We will now move on to our next question from [ Anastasios Dalgiannakis ] of Al Faisal Investments.

Basically, I wanted to ask you, if you could tell us how do you rank versus your competitors in terms of the carbon content of your aluminum? And focusing on Europe and the Carbon Border Adjustment Mechanism that will be implemented, do you expect to gain or lose versus competitors with regards to your European exports after the introduction of this mechanism?

Thank you for the question. Yes, so basically, in Europe, the idea what they are coming up with this new regulation is to identify green aluminum and to compare it against the regular day-to-day aluminum. So currently, these regulations will be ending up linking to affect the margins of the producers. So the producers who are doing -- who are producing greener aluminum, they will be getting a benefit or kind of a discount from the governmental side and from the regulator's side, and they will be discouraged -- the regular producers of the aluminum will get discouraged to produce rather on the greener side. So from our perspective, we are in very early stages of this regulation. And if you look at our overall geography, Asia is basically the key market for us where we are selling more than 50% of our product, whereas Europe almost contributes towards the overall -- revenue composition, it's somewhere at a 20% range. So as of now, I would say we are in early stages. We need to get back to our marketing partners to get the exact dynamics about that. But as far as the overall picture is concerned, we don't expect any significant material impacts on our overall evolution of our revenue growth because we have this firm agreement with our another JV partner. So -- which is basically -- the job is to ensure that we keep on selling whatever we produce with a maximization strategy to ensure our premiums remain on the higher side. So whichever geographies we find better arbitrages, we move the products there, depending on the demand in the market as well as the type of the product. So again, we have to look into the exact cost impacts or the financial impact. But on an overall basis, we don't think it will be anything material to disclose or discuss.

I would like also to add 1 point to Riaz -- what Riaz said. As you are aware, Qatalum or QAMCO currently runs the plant with gas and gas is considered to be greener than coal. So I think on the report I've seen so far, the one who will be at thrust of losing the profitability when the new rules are introduced are the coal -- the power coal -- the coal-powered plants. So I think for us, we are better positioned than our competitors who run on coal.

We'll move on to our next question from Nour Sherif of Arqaam Capital.

Congrats for the strong results. I have a couple of questions I can -- I think we can take it one by one. My first question is actually on the balance sheet. So I think that the company mentioned some restructuring of its debt and plans for deleveraging. So can you explain to us where are you guys in terms of this plan? And can you give us a reason behind this to present increase in debt, while we see that the free cash flow is strong in the first half of 2021?

Yes, in terms of the overall funding strategy, if you remember last year, we rescheduled and restructured our facility at the JV level. So that was one of the key milestones which we achieved for our funding strategy. Going forward, we are continuously looking for different options. As you know, the strategy is to optimize the funding structure for us, which we currently even believe that it is at a very good -- in a very good shape. But we are still striving to look for any opportunities, any better options available. So as of now, I cannot say anything on this side that is there any progress being made or not. But currently, we feel, with the milestones which we achieved last year, they were quite positive towards the overall structure of our balance sheet. And going forward, we'll continue to look for better opportunities.

Just to add to Riaz. As you know QAMCO's balance sheet is totally debt-free. It is only the QAMCO's JV which has a debt loan in its balance sheet. So as far as the QAMCO is concerned, our cash flow remains robust. Thank you.

Okay. And can you shed some light regarding the reason behind the 2% increase in the joint venture's debt?

The increase in the 2% debt was mainly to an LC facility we took in place for funding the AGP project. So this LC facility has basically increased our debt margin.

Yes. Okay, clear. And we've seen -- in terms of the cash costs, we've seen 11% increase Q-on-Q. Can you clarify on the reason behind it?

It's basically raw material costs.