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

Good day, and welcome to the Qatar Aluminium Manufacturing Company Quarter 1 2022 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the call -- conference over to Mr. Bobby Sarkar, QNBFS Head of Research. Please go ahead, sir.

Thank you, operator. 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 First Quarter 2022 Results Conference Call. So on this call, from Qatar Energy's Privatized Companies Affairs Group, we have Rashid Al-Mohannadi, who is the acting Assistant Manager in Financial Operations; and we have Riaz Khan, who is the Head of Investor Relations and Communications. So we will conduct this conference with management first reviewing the company's results followed by a brief Q&A. I would like to turn the call over now 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 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 27th of April, that was yesterday, QAMCO published its results for the 3-month period ended 31st of March 2022. And today in this call, we'll go through these results and provide you an update on key financial and operational highlights. We have structured our call as follows. At first, I will provide you with a quick insight into QAMCO's ownership structure, its competitive strength and overall governance structure by covering Slides 5 to 14 and Slides 34 and 35 of the IR deck. Secondly, Rashid will review 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 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 high-quality aluminum 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 plant. In terms of competitive strengths, as detailed on Slide 12, QAMCO's joint venture is considered to be among low-cost aluminum smelters, with a state-of-the-art production facilities, 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 competitive positioning perspective, QAMCO ranks among top-tier companies within the industry at a 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 global peers, resulting in a strong margin evolution. Moreover, the JV's global marketing partnership with other JV partners 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 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 evolving market dynamics. I will cover further details of 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 34 and 35 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 update, as detailed on Slide 16. Demand for primary aluminum continued to remain firm across key aluminum intensive sectors, like automotive -- automobiles, especially electrical vehicles, construction, renewables energy and packaging. On the other hand, supply remained in deficits given higher energy prices in Europe and dual policy measures by China, leading to widening of inventory deficits. Moreover, with the trade disengagement from Russia among the geopolitical tension, commodity markets are displaying clear signals of scarcity. On overall basis, this supply-demand imbalances has led to a persistently high price trajectory for aluminum throughout the first 3 months of 2022. As detailed on Slide 19, at QAMCO's JV level, the average realized selling price inclined by 51% versus the same period of last year and positively contributed QAR 320 million to the current period net earning compared to the first quarter of the year. On the other hand, sales volume marginally declined by 1% and contributed QAR 8 million negatively to the net profit for the current quarter in comparison to the same quarter of last year. In term of bottom line profitability for the period ended 31st of March 2022, QAMCO remained a net -- recorded a net profit of QAR 240 million as compared to the net profit of QAR 124 million for the first quarter of 2021, driven by growth in global aluminum prices on the back of improved macroeconomic dynamics. As detailed on Slide 21, the JV cost of goods sold for the current period were higher compared to last year, mainly on account of higher raw material costs, which was partially offset by favorable inventory movement. On an overall basis, increase in cost of goods sold contributed QAR 183 million negatively to the [ component ] earning for the current period versus the same period of last year. Coming into the JV operational performance on Slide 19. Production volumes slightly improved by 1% on a year-on-year basis mainly due to the higher amperage. Moving on to the balance sheet. In term of the JV debt position, QAMCO share of debt stood at QAR 2.3 billion and slightly inched higher on account of additional drawdown on the loan facility. QAMCO's financial position continued to remain robust, with liquidity position at the end of 31st of March 2022 reaching QAR 1.2 billion in form of cash and bank balances. This also include proportionate share of cash and bank balance at the JV level. During the current period, QAMCO share on the JV operating cash flow amounted to QAR 219 million, with the share of free cash flow of QAR 148 million. As detailed on Slide 23, the average aluminum prices improved by 41% on a year-on-year basis due to the persistent macro strength. LME premium also improved during 2022 mainly due to the favorable product mix and better global demand for aluminum products. As detailed on Slide 24, QAMCO JV EBITDA margin continued to remain robust and resilient. I now hand over to Riaz to cover the rest of the 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 the 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 25, Asia remained the largest market for QAMCO's JV, while its presence in Europe and North America continued to be substantial. As detailed on Slide 26, in terms of products 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 aluminum. 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 30, the approved CapEx plan for 2022 till '26 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 cash flow forecast for 2022 to '26, as disclosed in this slide, cannot be relied on with absolute certainty, where actual realization 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] We'll take our first question of the day from Nour Sherif of Arqaam Capital.

Just a couple of questions for me, if I may. My first question on the cash cost, why we've seen a jump this quarter? And what should we expect for next quarter?

Yes. I can answer that question. We see that the cash cost has increased mainly for -- it comes to the raw material cost. We've seen that the alloy, the market price has shot up due to the scarcity or the issue for the semiconductors. And that has affected the cost of alloy during this year. Also, alumina prices has increased in comparison to last year. Also, coke has increased as well. So the majority of the increase in the cash cost is basically driven by the raw material. That's the first factor. Second factor is the shipping aspect. We've seen that the shipping cost compared to last year has increased. So that also has contributed to the increase in the cost side. And also, insurance has increased as well. So these are the main factors that lead overall in increasing our total cash cost for year-to-date.

Yes, clear. And regarding expectations for next quarter?

Yes. So in regard to the expectation, it's all -- it depends on the market trend and how the situation will evolve in the future when it comes to the Ukraine-Russia, geopolitical tension, also the COVID situation in China, the supply chain deficits. So it's all driven by all these microeconomic factors. But we expect that the next quarter, the aluminum prices hopefully will support the cost and will continue to have a healthy EBITDA margins.

Clear. Okay. And regarding the sales volume, we've seen a drop this quarter from an exceptionally high quarter in Q4. Can you give us some guidance about volumes in Q2? And if the supply chain issues continue to put pressure on delivering such volumes?

It's valid concern [ of few ], but it's pretty much justifiable because in Q4 last year, we realized selling volume related to Q3. So there was a shipment in particular that was supposed to be delivered in September, but it got delayed to October. So the sales volume got recognized under Q4. So that's why when you compare Q4 sales volume versus Q1, you'll see that there is a decrease. But reality the Q1 sales volume is the normal, and Q4 is the abnormal level of sales volume.

Yes, clear. So we should expect the same deliveries in Q2, right?

Yes, we should. The supply chain or the delivery aspects of aluminum should not be interrupted. We have our own secured supply chains. We have our own strategy when it comes to shipping, so we're mitigated from that aspect.

We'll take our next question of the day from Anoop Fernandes of SICO.

This is Anoop from SICO. Just one on the gas prices. Have you seen any substantial increase in gas prices during 1Q? And if you could just elaborate -- delve a bit into the pricing mechanism. What really -- how is the gas price determined? I mean, is it the base price, the CPI, plus an indexation component? And how does that indexation component work in the case of Qatar Aluminium?

Thank you for your question. I think the way that you can look at it, you can compare our EBITDA margin with other competitors in the market. And you can basically get a gist of how much our cost compares to others. In term of the selling price for gas and the gas mechanism for Qatalum or QAMCO JV, it's confidential based on the agreement that the JV signed with the gas supplier. So we are prohibited from giving any details around the pricing mechanism of the gas. But the indicator -- good indicator to get a feel of the cost of the gas is to compare our EBITDA with others. Because the only fixed -- let's say, the only change or the only difference here is basically the gas price. When it comes to procurement of other raw material, we are at par with others. So if you compare the EBITDA, you can get a feeling of how much is our gas price is and expectation in the future.

No. It's -- so basically, you're saying that the gas prices went up during the quarter, right? I mean you're acknowledging that.

I'm not acknowledging that. All I'm saying that our gas cost, we are not disclosing the cost of our gas. You can compare our EBITDA with our competitors, and you can get a feeling of how much is our gas cost.

No. But your competitors haven't reported sales, so I mean you are the first report. So I mean, what I'm looking at is a sequential drop in the EBITDA margins, right, from, I think, 48 some -- it's a pretty decent drop when actually LME was up. And quite interestingly, your premiums over LME are also up. So even if I look at it on a Y-o-Y basis, so we have maybe about $700 that's coming from the LME and the alumina spread. And you have another $200-odd that's coming from the premium, right? So you have roughly $900 increase and that showed optically on paper, your EBITDA per ton. But when we look at it in terms of your realized EBITDA per ton, that the Y-o-Y increase is just about $300. So I was wondering if the cost, the difference -- I mean I get your point on the alloy elements going up and so on. But that's right. I would assume it's not as significant a cost. So is it -- is the main difference because of gas?

I think it's very significant. You can compare the price for alumina last year to this year. You will see a significant increase. You can compare alloy. The increase in alloy, I think it went from $2,000 to $6,000 level. You can compare also the coke price and the pitch price. There is a huge increase. It's a trend across the whole industry if you look at it. So it's not -- does not primarily pertain to gas price if you look at it this way so.

Just one more point, Anoop, I want to add here. One more dimension, I would say, is about the timing difference. So you must have -- you must be following us historically on these investor calls, and we have been telling that there is a time lag. So how the time lag works? It's like the invoices or the revenue or LME realized prices which we are seeing now, they reflect the aluminum prices almost 1, 1.5 month, almost 2 months old LME market prices because there is a time lag. And then on the alumina side also, you are keeping some inventories on -- in your warehouse to continue the plant up and running. So the inventory days is averaging somewhere 45 to 50, at times, 55 days. So the alumina, if you see the alumina prices, 55 days old prices, they were on a higher side of the curve. The LME prices at that point of time, they were slightly on the lower side of the curve, comparably to what the prices we are seeing now. So that's why this timing difference is also playing a part when you are seeing some kind of a margin squeeze, which you are referring to.

We'll take our next question in line from Abdulelah Hakami of Hassana Investment.

Can you hear me?

Yes, we can hear you.

I just have one question on the current aluminum prices. I'll start off with just highlighting how is the company viewing the current aluminum prices at $3,000-plus? How sustainable the prices are? And given the current gas prices across the globe and margin producers are having they high cash cost, how do you see marginal producer operating? Do you think they have room to come back to add volume into the market? Or that loss volume will last there, and it's going to continue to be lost for quite some time?