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

Hello, everyone. This is Roy Thomas from QNB Financial Services. I want to welcome everyone to Qatar Aluminium Manufacturing Company's Second Quarter 2022 Financial Results Conference Call. On this call from QAMCO, we have Rashid Hamad Al-Mohannadi, the Acting Assistant Manager for Financial Operations; and Riaz Khan, the Investor Relations Officer. We will conduct this conference call with management first reviewing the company's results followed by Q&A. I will turn the call now over to Riaz Khan. Go ahead, Riaz.

Thank you, Roy. 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 seventh of August, that was yesterday, QAMCO published its results for the 6-month period ended 30th of June 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 quick insight into QAMCO's ownership structure, its competitive strengths and overall governance structure by covering Slides 5 to 14 and Slides 34 and 35 of the IR deck. Secondly, Rashid will brief you on QAMCO's key operational and financial performance metrics. 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 QatarEnergy with 51% stake and the rest is in the free float held by various domestic and international corporates and 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 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 power 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 and a short feedstock supply via long-term agreements with an intense focus on HSE, which makes the JV leader among its peers. As detailed on Slide 14 from a competitive positioning perspective, QAMCO ranks among top-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's JV on 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 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, which ensures optimum production as well as 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 the winning 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, everybody, and thank you all for joining. Let's start with the macroeconomic updates as detailed on Slide 16. During the first half of 2022, demand for aluminum continued to remain firm across key aluminum-intensive sector like automobile, especially EV; construction; renewable energy; and packaging. However, China recent COVID-linked lockdown has impacted demand for aluminum in the short term. On the other hand, supply remained in deficits given the higher energy prices, which challenge smelting capacities and led to widening of inventory deficits. Trade disengagement from Russia among the geopolitical tension also created uncertainty in the commodity markets. On overall basis, aluminum prices demonstrated essentially bullish trends during the first quarter of this year among persistent constructive demand and supply shortages. However, during the second quarter of 2022, LME prices softened on account of uncertainty over recessionary fears and limited demand. In terms of bottom line profitability for the 6-month period ended 30th of June 2022, QAMCO recorded a net profit of QAR 611 million as compared to a net profit of QAR 288 million for the first half of 2021 driven by the growth in global aluminum prices on the back of improved macroeconomic dynamics. QAMCO half yearly and quarterly results are the highest since QAMCO inception. Moving on and as detailed on Slide 19, at QAMCO JV level, the average realized selling price inclined by 54% versus the first half of the year and positively contributed QAR 738 million to the current net earnings compared to the first half of last year. Sales also marginally increased by 1% and contributed QAR 15 million positively to the net profit for the current period in comparison to the first half of last year. As detailed on Slide 21, JV cost of goods sold for the current period were higher compared to last year, mainly on account of higher raw material cost. On overall basis, increase in the cost of goods sold contributed QAR 379 million negatively to QAMCO net earning for the current period versus the same period last year. Coming on to the JV operational performance as detailed on Slide 19. Production volume slightly improved by 1% on a year-on-year basis. Moving on to the balance sheet in terms of the JV debt position, QAMCO's share of debt stood at QAR 2.3 billion and slightly declined on account of net movement relating to AGP loan facility. QAMCO financial position continued to remain robust with the liquidity position at the end of 30th June 2022 reaching QAR 1.3 billion in the form of cash and bank balances, which include proportionate share of cash and bank balances at the JV level. During the current period, QAMCO share and JV operating cash flow amounting to QAR 451 million with the share of free cash flow of QAR 307 million. As detailed on Slide 23, the average realized LME prices improved by 47% on a year-on-year basis due to persistent macro strength. LME premium also improved during 2022, mainly due to the favorable product mix and better global demand for the value-added products. As detailed on Slide 24, QAMCO JV EBITDA margin continued to remain robust and resilient. 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 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, where, 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 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 in 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 products. Moreover, Qatalum has a captive power plant with a capacity of approximately 1350 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 the cash flow forecast for 2022 till '26, as disclosed in this slide, cannot be relied on with absolute certainty where the actual realization of these cash flows might significantly differ as compared to these projections, subject to evolving market dynamics. Now we will open the floor for the Q&A session.

[Operator Instructions] We will now take our first question from Jag Pasunoori from NBK Capital.

This is Jag here. Congratulations on a good set of numbers. Can I ask this question on this Page 30, you're assuming operating cash flow of like QAR 1.27 billion. What are the prices assumptions of aluminum here and also for the next few years as well? What are you assuming here aluminum prices to be? Can you hear me?

Yes. Yes, I can hear you. I can answer you, but to be here frank with you, I don't recall the number on top of my head, but this is what basically designed or extrapolated from the budget, which we prepare toward November of last year. I remember the prices for 2022 was $2,800, somewhere in that range. But I don't recall the exact number. But it was basically based on Bloomberg forecast.

We will take our next question from [ Rahul Soni ] from Avalon Global Research.

Yes. Congratulations for good set down numbers. So my first question is I want to understand like do you have long-term agreements with your clients? And what is the lag between the market aluminum prices, which are prevailing currently in the market? And what is your average selling price? So how much time it takes to transfer to your pricing?

Yes. So thank you, [ Rahul ]. Basically, I'll break it into 2 questions. The first one is on the selling activities. So basically, it's for selling activities, we have a long-term agreement with Hydro who is responsible for -- to market the product. So basically, whatever we produce, anything that goes outside Qatar, they are the ones who are responsible for marketing and selling the product. In terms of selling, where and which locations, it's predominantly Asia, followed by Europe and North America. And it's predominantly based on whatever the best netback available in the market. Second question in terms of the lag, which you asked for, we have discussed this point in almost all of our investor calls. The lag is almost 2 months lag. So whatever the LME prices, which you see on the screens, it's basically there is a lag between our realized prices. So we always go with a 2-month lag with the market LME prices. I hope I answered both of your questions.

Okay. Okay. In one of the slides, you have given these aluminum prices and alumina prices. And if I look at the 2 charts of this aluminum and alumina prices, so I can see that aluminum price movement of -- in the aluminum prices is with a lag with the movement in alumina spot prices. So what's your comment on this?

[ Rahul ], firstly, the slide which you're referring is Slide #16. If you go in the sort of this slide, they have been extracted from the Bloomberg. Whatever we are seeing on the Bloomberg screens, they have been shown here. And these are basically the macro updates. The actual realized prices, certainly, there is a difference. So in terms of the selling prices, which we show, there is a 2-month lag with this screen or with this graph, which you're seeing on the aluminum front. Whereas on the other side, the alumina prices, alumina prices are predominantly the market-driven prices because we have to book or we have to record the alumina in our inventories based on as and when it gets out from the door of the supplier. So those are basically predominantly market-driven. Whereas the aluminum prices, there is a lag of 2 months because of the supply chain. We have to deliver the product on the gate of the buyer, and that is, on average, takes 2 months to transit.

We will take our next question from Abdulelah Hakami from Hassana.

Can you hear me?

Yes, we can hear you.

Congratulations on the good set of results. I just have a question on your cost structure. Now we've noted your raw material and energy consumption cost has gone up despite a drop in alumina prices. I'm just wondering what is driving that spike in cost? Is it gas? And if I recall correctly, gas prices are linked to [ CPU ]. So if gas price is high, how sticky that is going forward? So that's my first question. The second question is regarding demand. Are you seeing a recovery in demand from China or demand on that side of the world remains weak?

Thank you, Abdulelah Karim (sic) [ Abdulelah Hakami ]. This is Rashid. I'll take your first question, and I'll hand over the second question to Riaz to answer. Basically, if you look at that graph, the cost of good went up predominantly due to the increase in 3 key raw materials. One is alumina. The price of alumina, we are facing the price of alumina to be higher in this half compared to last year first half. Second factor is alloy, I'm sure a lot of you are aware of that alloys such as magnesium, silicon of high demand and they're fetching 2 or 3x the prices as we speak today. So we are incurring higher alloy cost. Also, we are incurring higher coke cost. So these 3 key raw materials we are facing some increase there. Also, we are facing an increase on the energy side of things, in the gas. But this number is driven basically predominantly by the 3 key raw materials I mentioned.

Yes. Abdulelah, so in terms of the second question on the demand, if we see the second quarter, the prices have contracted to an extent comparative to the first quarter or the fourth quarter of last year. That is predominantly, we can easily blame it on the COVID-linked lockdowns in China, which affected the demand given China is the largest consumer for aluminum. And almost 50% of the overall demand comes from China. So going forward, if the situation persists, I think the demand will get affected. But what we are hearing from the market and what most of the analysts have the consensus on, I think Q3 could linger on with similar price trends going forward. Q4, once the China opens up, you are seeing some light at the end of the tunnel. So presumably, you will get better off on the demand front. As far as supply side is concerned, Europe is still struggling in terms of the capacities. So that's a positive side for the Middle Eastern producers, at least, I can say comfortably, given the very, very high gas prices, which they are facing and then a lot of rationing or gas rationing -- energy rationing is happening at -- in Europe. So presumably, going forward, Q3, the trends could linger on. Q4 could be a positive upside given China coming back fully online after their COVID-linked restrictions. Hopefully, we answered both of your questions.

Yes, very clear. If you allow me just one last question on the outlook. We started the year with a bullish view on aluminum over the mid to -- over the midterm, 3 to 5 years. I'm just wondering if your view on that midterm outlook has changed?

See, if you talk about the mid- to the long term, there is a different dynamics. By the way, these comments, which we gave is just what we see from the market. So this is not the company's position officially because we don't have the specific policy to give the outlook given the commodities where we are in. It's like a roller coaster ride here where things can change upside down on a given instant or a given situation. So long term to -- medium-term to long-term outlooks are still bullish from what the market sees. Still, they are very much expecting demand for -- from the demand perspective. You have 2, 3 themes already available. First is the EVs. The second is the wind turbines. Third is basically the solar panels, where there is a lot of consumption of fresh aluminum is expected going forward. That's what the market expects. So still, the medium-term to long-term demand side is very much positive. When we talk about the supply side, there has been a lot of drive on the green aluminum front, especially from Europe as well as there is a decarbonization drive with China was like putting it on the paper as well as announcing it and going very aggressively on that front. So those 2 regions with the decarbonization drive or greener aluminum, let's say, the supply, we think, that it could remain under pressure. And then with the current situation or current inventory levels where we are sitting into, the markets could remain in the deficit.

We will now take our next question from [ Sujit Prakash ].

Congrats on the good set of results. My question is primarily very much similar to what the previous person had also asked, related to the demand. So in terms of the results, in terms of revenue has been -- even though the revenue has been quite good, it has been largely driven by the increase in selling price and not so much from the selling volume perspective. The volumes have increased by 1%. So we just -- I just wanted to know because the demand -- the aluminum prices are also critical, I also wanted to understand your views on how do you expect the aluminum prices to grow going forward? And also, are there any plans on increasing the volumes in terms of new contracts or anything like that?

Thank you, [ Sujit ]. So, yes. So in terms of the selling prices, we already discussed in detail, Q3, things could remain on -- that's what the market view is. Things in Q3, Q2 could like follow the same route. Q4 could be positive with China coming back online, 100% capacities or 100% requirements of aluminum. Talking about the volumes, we have a nameplate capacity of 575,000 metric tons of liquid metal. Currently, we are producing 650,000 metric tons of liquid metal, thanks to the technology advancements, which we are implementing on a day-to-day basis in collaboration with our JV partner. And with these technology advancements, we are already well above our nameplate capacity. Going forward, as of now we stand there is no such greenfield or brownfield projects in the pipeline, which could affect the quantities very much upside down or significantly. So the volumes, you should like consider in your model remaining intact in a range of 650,000 tons per annum of the liquid metal.

Yes. So to answer the question, we sell whatever we produce.

Yes. So we have marketing and offtake agreement. So we get the requirements. So production is almost going at its limit as well as the sales volumes because whatever we produce, Hydro has the offtake agreement and they have a mandate: sell our products internationally. So in terms of inventory sitting on the ground, it's very, very rare and it's very, very minimal.

[Operator Instructions] We will now take a follow-up question from [ Rahul Soni ] from Avalon Global Research.

Yes. Since you are producing 650,000 tons per annum and your capacity is 575,000, so is it right to assume that you are operating over 100%? And if you don't have any CapEx plan for next 4, 5 years, so from where we can assume any -- it means there is a lack of any long-term growth revenue driver for the company. So please, your comment on the same.

Yes, [ Rahul ], basically, the first question on the utilization front, yes, obviously. Because the nameplate is 575,000, we are producing 650,000, so we are well ahead of our 100% capacity levels. As far as the CapEx plan is concerned, this is what the Board has approved in the start of this year, or let's say, the last year-end. And as of now, there is no specific expansion plans entailed here. So that's how I can answer your questions. Going forward, with no specific CapEx plans linked to expanding the capacities, it predominantly remains -- or the profitability of the company remains in the function of 2 things: one is the market price dynamics, which is basically the LMEs and how the LMEs move. And then your cost optimization programs where we are successfully implementing our programs on an annual basis.

So do you think there is a scope to improve your gross margin further from here?

This is, again, market forces will determine. Major chunk of that comes based on the LME movements. On the cost side, you are implementing your optimization programs where you're trying to curtail down your cost. And I think if we talk about our margins evolution, it's still now we are at almost 45%, 46% margins. And compared to our peers, which are somewhere in 35% to 40% range, still, we are doing well compared to our peers.