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

Please go ahead.

Thank you, Tracey. Hi. Hello, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Qatar Aluminium Manufacturing Company or QAMCO's Fourth Quarter and Fiscal Year 2021 Results Conference Call. So on this call from QatarEnergy's Privatized Companies Affairs Group, we have Abdulla Al-Hay, who's Assistant Manager in Financial Operations. We have Riaz Khan, who is the Head of Investor Relations and Communications. So as usual, we will conduct this conference with management first reviewing the company's results, followed by a brief Q&A. I would now like to turn the call over to Riaz. Riaz, please go ahead.

Thank you, Bobby. Good afternoon, and thank you all for joining us. Before we go into QAMCO's business performance and 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 3rd of Feb, QAMCO releases results for the year ended 31st of December 2021. And today in this call, we'll go through these results and provide you an update on key financial and operational highlights of the company. We have structured our call as follows: At first, I will provide you with a quick insight into QAMCO's ownership structure, competitive strength, 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 matrix. 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 QatarEnergy with 51% stake and the rest is in the free float held by various domestic and international corporates as well as individuals. QatarEnergy being the founding shareholder and the parent company of QAMCO provides all of the head office functions 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 Aluminium Limited, Qatalum, which produces a high-quality aluminium of about 650,000 tons per year 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 among low-cost smelters with a state-of-the-art production facility, assured feedstock supply via long-term agreements 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 soft tier companies within the industry at a global scale across most of the profitability matrices. This is a testament to JV's leaner cost base and continued optimization drive, which keeps QAMCO JV on the lower side of the cost curve among global peers, resulting in a strong margin evolution. Moreover, the JV's global marketing partnership with the other JV partners provide 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 levels and sales volumes in line with the evolving market dynamics. I will cover into 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 Abdulla.

[Foreign Language] Good afternoon, and thank you all for joining us. Starting with macroeconomic updates, as detailed on Slide #16. Price for aluminium continue to climb on the back of renewed global demand, whereby sectors such as construction and automotive industries witnessed growth as the global economic started to show signs of recovery since later part of 2020. Furthermore, the global climate initiatives to reduce carbon footprint is also providing a structural support to aluminium market and playing a key part and creating supply defects. All of these factors translated into a sequential growth and price of primarily aluminium along with improved margins. As detailed on Slide #19 at QAMCO's joint venture level, the average realized selling price climbed by 42% versus last year and positively contributed QAR 932 million to the current year net earnings compared to last year. On the other hand, sales volume marginally declined by 0.4% and contributed QAR 11 million negatively to the net profit for the current financial year 2021 in comparison to last year. QAMCO's joint venture remains successful in realizing higher production and sales of value-added products and comparison to last year. This strategic production shift since later part of the last year has positively supported the valuation of EBITDA margin for the joint venture. In terms of bottom line profitability, for the year ended 31st December 2021, QAMCO recorded a net profit of QAR 835 million as compared to a net profit of QAR 95 million for the last year, driven by growth in global aluminium prices on the back of improved macroeconomic dynamics. As detailed on Slide #21, joint venture cost of goods sold for the current year were higher compared to 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 and cost of goods sold contributed QAR 179 million negatively to QAMCO net profit for the current year versus last year. Remaining on the same slide, #21, due to an overall decline in interest rate and absence of one-off unamortized portion of finance costs being written off last year, joint venture finance cost for the financial year 2021 declined by 32% versus last year and contributed QAR 33 million positively to QAMCO net earnings. Coming into joint venture operation pro formas, as detailed on Slide #19. Production volume slightly improved by 1% on a year-on-year basis mainly due to higher amperage and production of value-added products. Moving on to the balance sheet in terms of joint venture debt, QAMCO share of debt stood at QAR 3.2 billion, slightly up by 4% compared to December 2020 on account of additional loan facility obtained for AGP gas turbine upgrades. QAMCO's financial position continued to remain robust with the liquidity position at the end of 31st December 2021 reached QAR 1.5 billion in form of cash and bank balances. Let's also include proportionate share of cash and bank balances at the joint venture level. During the current year, QAMCO's joint venture generated positive share of operating cash flow of QAR 917 million with a share of a free cash flow of QAR 693 million. As detailed on Slide #22, the average LME prices improved by 39% on a year-on-year basis. Due to persistent macro strength, LME premium also improved during 2021, mainly due to better product mix as QAMCO's joint venture was successful in selling higher value-added products during the year. As detailed on Slide #23, QAMCO's joint venture EBITDA margin continued to remain robust and resilient. I will now hand it over to 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 the main supplier of alumina to the JV. Moreover, under the marketing and offtake agreement, Hydro acts as a JV representative for marketing aluminium products outside Qatar for the JV. This provides the JV an access to important and strategic markets while competing with international players where, as detailed on Slide 24, Asia remains the main market for QAMCO's JV, while its presence in Europe and North America 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 the 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 2022 until '26 mainly relates to routine operations, such as pot relining and other maintenance activities pertaining to power plant and anode facilities. An important point to note that the cash flow forecast for 2022 until '26, 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 evolving macroeconomic dynamics. I think now we can open the floor for the Q&A session.

[Operator Instructions] We will now take our first question from Jose Levin from AG .

Actually, as the current economic support the aluminium industry, does the company have any plans to expand its production capacity, actually? Is there any plans for new capacity to come into effect?

Okay. Do you have any other questions?

No, that's it.

To answer your question. As you are aware right now, we are at capacity of 660,000 metric tons per year. Any plan for expansion, there is actually no plan for expansion. However, there is a plan to drive our company in more efficient way on applying a newer technology. And this, you can -- you will see it in the next couple of years. Even during this year, there is a 1% increase in our production mainly due to better amperage use and higher efficiencies. So you will see a better and higher production. Also, we have highlighted that the company went into the AGP, which is a new technology for the turbine to improve the efficiency of the facility. So you will see a good 5% during the next 5 years of increasing in production due to the efficiency.

We will now take our next question from Nour Sherif from Arqaam Capital.

Hello, and congrats for the strong results. Just a question on the premiums. So we've seen in 2021 a premium of 9%. Can you give us expectations about what to expect next year given that you are continuously focusing on increasing value-added products?

To be honest, value-added products this year show and give us an excellent result. Basically on the reason of the supply and the demand as well and improvement of the macroeconomics, we see the demand is there. During January, the LME price at average of $3,000. So we are expecting the LME to be at the same level of December. We hope to continue with the same trend in the future. However, for an exact figures, we don't have it as of now, but we are expecting another good quarter let's say.

Yes, it's clear. Okay. And in terms of production, should we expect flat production in 2022?

Less or more?

Flat.

I'm saying flat. Yes.

Flat, I'm expecting a slightly increase of about another 1% during the next year due to the technology that we just have for the better efficiency to the facility.

Can you give us more details about the new technologies that you added?

This is a very technical technology that they are having on the gas turbine. Maybe if we can share -- do you have any idea?

Thank you for this question. Actually, the technology is to have 6 AGPs there. So what gas turbine does is to convert the gas into electric city. So this is an advanced technology, which we are buying or which we are working or collaborating with General Electric. There was a detailed press release, which was done on this topic back in May. So you can go into the nitty gritties of that. In the central idea of that is on one side, you will improve the efficiency. On the other side, this will give you a bit of positives from the sustainability perspective. It's a greener technology. I won't say it's 100% greener, but it's greener compared to the current technology, which we were using. So in summary, you have a sustainability positivity as well as efficiency improvement, which we are expecting. And on our website, you can see the detailed discussion about this technology, which we have already done in the press release back in May.

Yes, amazing. Okay. I will go to it. Just 2 more questions. The first on the dividends. So we've seen the dividend payout ratio of 54%. And I think there could be some more juice here to squeeze. So why we actually, we expected slightly higher dividends. So can you tell us your -- maybe your view on dividend policy going forward?

Yes. I believe when you look at the situation of the QAMCO with the share of debt that it has of QAR 2.2 billion. So I believe it is smart to make a good reserve for the bullet payment that we have announced that we're going to do it in the year of 2025. So 53% or 54% been distributed. I believe, it is generous comparing to the liability that we have. And this would give also the investor the thought of the management that they are planning for the future in order to provide a sustainable level of dividend distribution during even the future year. Keeping in mind, the aluminium industry is very volatile. This year, it is exceptional year, I would say. Especially here, the product price stood at excellent position. I'm expecting the same going to happen in the Q1. However, onward, I don't have any expectation and we are not aware about the market changes. So 53% of the earnings then distributed as, I believe, a generous distribution.