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

Good day, and welcome to the Qatar Aluminium Manufacturing Company Q3 2021 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Roy Thomas. Please go ahead, sir.

Hello, everyone. This is Roy Thomas from QNB Financial Services. I want to welcome everyone to Qatar Aluminum Manufacturing Company's third quarter 2021 financial results conference call. On this call from QAMCO, we have Abdulla Yaqoob Al-Hay, the Assistant Manager for Financial Operations; and Riaz Rahman Kan, the Head of Investor Relations and Communications. We will conduct this conference call with management first reviewing the company's results followed by a Q&A. I will turn the call now over to Riaz. Go ahead, Riaz.

Thank you, Roy. Good afternoon, and thank you all for joining us. Hope you're all staying safe. Before we go into 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 participating in 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 24th of October. QAMCO released its results for the 9 months period ended 30th of September 2021. And today in this call, we'll go through these results and provide you an update on key financial and operational aspects of the company. Today on this call, along with me, I have Abdulla Al-Hay, Assistant Manager of Financial Operations. We have restructured our call as follows: at first, I will provide you with quick insights on QAMCO's ownership structure, its competitive strengths and overall governance structure by covering Slides 5 till 14 and Slides 33 and 34 of the IR deck. Secondly, Abdulla will brief you on QAMCO's key operational and financial performance metrics. Later, I will provide you with more details on JV operations and 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 Energy with 51% stake, and the rest is in the free float held by various domestic and international corporates and individuals. Qatar energy being the founding shareholder and the parent company of QAMCO provides all of the head office functions through a service level agreement, while operations of JV is independently managed by its own Board of Directors, along with senior management team. QAMCO holds 50% share in Qatar Aluminum Limited, Qatalum, which produces a high quality aluminum of about 650,000 tons per annum for customers in Asia, Europe and North America. The facilities include a carbon plant, port and storage facilities as well as a 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, assured feed stock supply via long-term agreements, with an intense focus on HEC, which makes the JV a leader among its peers. As detailed on Slide 14, from competitive positioning perspective, QAMCO ranks amongst top-tier companies within the industry at a global scale across most of the profitability matrices. This is a testament to the JV's leaner cost base and continued optimization drive, which keeps the JV on the lower side of the cost curve among its global peers, resulting in a strong 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 are in line with the evolving market dynamics. I will cover further details about the JV and its operational activities and 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 Mr. Abdulla.

[Foreign Language] Thank you, Riaz. Good afternoon, and thank you all for joining us. Starting with macroeconomic updates, as detailed on Slide #16, price for aluminum continued to clamp on the back of renewed global demand, whereby sectors such as construction and automotive industries witnessed growth as the global economies started to show sign of recovery since later part of 2020. Furthermore, the global climate initiatives to reduce carbon footprint is also providing a structural support to aluminum market and playing a key part in creating supply deficit. All of these factors translated and to sequential growth and a price of primary aluminum, along with the improved margins. As detailed on Slide #19, at QAMCO's Joint Venture level, the average realized selling price inclined by 37% versus first 9 months of 2020 and contributed by QAR 597 million positively to the current period net margin, compared to the same period last year. On the other hand, sales volume slightly declined by 3% and contributed by QAR 77 million negatively to the net profit for the 9 months period ended 30 September 2021 versus the same period last year. Although sales volumes were marginally lower than last year, but QAMCO Joint Venture was successfully in -- was successful in selling 100% of value-added product with no sales of standard ingots during the current period. The shift in sales of standard ingots to value-added projects supported the overall evolution of EBITDA margins. In terms of bottom-line profitability for the 9-month period ended 30 September 2021, QAMCO recorded a net of profit of QAR 521 million as compared to the net profit of QAR 12 million for the same period of last year, driven by growth in the global aluminum prices on the back of improved macroeconomic dynamics. As a result, on Slide #21, Joint Venture cost of goods sold for the 9 months of 2021 were higher compared to the same period last year, mainly on account of higher raw material costs, which was partially offset by favorable inventory movement and cost optimization initiatives. On an overall basis, increase in cost of goods sold contributed by QAR 29 million negatively to counter profits for the current 9-month period versus last year. Remaining on the same Slide #21, due to an overall decline in an interest rate and absent of one-off and amortized portion of financial costs being written off last year, the Joint Venture finance cost for the first 9 months 2021 declined by 38% versus the same period of last year and contributed by QAR 32 million positively to the QAMCO's net earnings. Coming onto Joint Venture operation performance, as detailed on Slide #19, production volumes slightly improved by 1% on a year-on-year basis and remained in line with the management effort to keep our production level to ensure optimal utilization. Moving onto balance sheet. In terms of Joint Venture debt position, QAMCO share of debt stood at QAR 2.3 billion, slightly up by 3% compared to December 2020 on account of additional loan facility. QAMCO's financial position continued to remain robust towards a liquidity position at the end of 30th September 2021, reaching QAR 1.1 billion in form of cash and bank balances. This also includes proportionate share of cash and bank balances at the Joint Venture level. During the current 9-month period, QAMCO Joint Venture generated positive share of operating cash flow of QAR 740 million, with a share of a free cash flow of QAR 576 million. As detailed on Slide #22, the average LME price improved by 32% on a year-on-year basis due to the improvement of the macroeconomics, LME premium also improved during 2021, mainly due to better product mix as QAMCO Joint Venture was successful in selling 100% of value-added products with no sales of standard ingots during the period. As detailed on Slide #23, QAMCO Joint Venture's EBITDA margin continues to remain robust and resilient. I will now hand over to Mr. Riaz to cover the rest of the IR presentation.

Thank you, Abdulla. 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 our main supplier of Alumina to the JV. Moreover, under Marketing and Offtake agreement, Hydro acts as 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 remained the largest market for QAMCO's JV, while its presence in North America 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 tons per annum, but now the JV produces more than 650,000 tons per annum of high-quality primary aluminium 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 approved CapEx plan for 2021 till 2025, 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 to '25, as disclosed in this slide cannot be relied on with absolute certainty, where the actual realizations of these cash flows might significantly differ as compared to these projections subject to evolving macroeconomic dynamics. Now we will open the floor for the Q&A session.

[Operator Instructions] And we will take our first question from Nour Sherif with Arqaam Capital.

Congrats for the strong earnings. A couple of questions for me, if you can take it one-by-one. We've seen lately some increase in the Alumina prices globally. So can you guide us on the impact on cash costs of QAMCO?

Yes, Nour, [Foreign Language] I will take care of this question. Yes, you are correct. We have seen the increase in the Alumina, which is the main raw material for the -- our products. However, we also see an increase in the final product price. So it's going to impact the margin, of course. But on the other hand, also, we see an improvement in the financing. So as you are aware, the aluminum market right now is the -- how can I say, it's under exceptional status while the pricing is already booming. I'm not sure of this, the increase in the aluminium will continue. Where we have seen the increase in, the final products are up to 34% compared to aluminum increased during this year, only 10% to 11% compared to last year. So we still -- there is a good margin.

So we should expect in Q4 that higher aluminum prices should absorb the increases in Alumina, right?

Let's hope for a better market situation. However, right now, this -- or this week and last week, we have seen the LME price at the level of QAR 2,800. So we hope the same level will continue during Q4.

And we see globally that there is shortage in magnesium. My question is, is it minimal to QAMCO? I understand that's used in the production of the aluminum alloy, but can you give us a sense about the exposure to magnesium for QAMCO?

Yes. Magnesium is not main raw material for our products. We use some of the magnesium for the -- some of our products, the value-added product, but it's not a major raw material, and it's not going to impact our cost.

And what are you seeing in terms of premium to the global aluminum prices? Are you still seeing that demand is still as resilient as it was and premiums are picking growth in line with Q3?

I believe the premiums are still there, it is improving. How do I see the market? As I just explained, I hope it remain at the same level. This year was an exceptional year. And as you can see, this has been reflected in our financials, where our even net profit improved from QAR 12 million to QAR 520 million. So this is just directly, you can see it on our financial.

And one last question for me. We've seen that sales to production ratio dropped to 91% or sales dropped by 4% Q-on-Q. Can you give us reason behind it? And should we expect this to be higher in Q4?

No. The sales dropped quarter-to-quarter by 4%, basically due to the AMCO terms and the arrangement of the shipment. So just a delay of the recognition of our shipments going to one of our customers. This is why we have not recognized it. However, it will be reflected in the Q4, definitely. So it will be recognized during Q4.