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

Good afternoon. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the QAMCO conference call. [Operator Instructions] Thank you. Mr. Bobby Sarkar at QNB Financial Services, you may begin your conference.

Thank you, Abby. 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 Third Quarter 2022 Results Conference Call. So on this call from QatarEnergy's Privatized Companies Affairs Group, we have Abdulla Al-Hay, who is the Acting Manager; we have Rashid Al-Mohannadi, who is the Head of Investor Relations and Communications; we have Saffan Mohamed, who is the Senior Financial Management Analyst; and Riaz Khan, who is the Investor Relations Officer. So we will conduct this conference with management first reviewing the company's results followed by a Q&A. I would like to now turn the call over to Rashid.

Thank you, Bobby. Good afternoon, and thank you all for joining us. Before we go into QAMCO business and performance update, 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 24th of October, during last week, QAMCO published its results for the 9 month period ended 30th of September, 2022. And today, in this call, we'll go through these results and provide you an update on key financial and operational highlights. Today on this call, along with me, I have Abdulla Yaqoob Al-Hay, Acting Manager of our Privatized Companies Affairs; and Saffan Mohamed, Senior Financial Management Analyst. We have structured our call as follows. At first, I will provide you with a quick insight into QAMCO ownership structure, its competitive strength and overall governance structure by covering Slides 5 till 14 and Slide 34 and 35 of the IR deck. Secondly, Saffan will brief you on QAMCO key operational and financial performance metrics. Later, I will provide you with more details on JV operation and CapEx updates. And finally, we will open the floor for a 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 a free float held by various domestic and international corporates and individuals. Qatar Energy being the founding shareholder and the parent of QAMCO provides all the head office functions through a service level agreement, while the operation of the 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 aluminium of about 650,000 tons per annum, against a nameplate capacity of 575,000 tons per annum for customers across the globe in Asia, Europe and North America. The facilities include the carbon plant, port and storage facility as well as a gas-fired power plant. In terms of competitive strength, as detailed on Slide #12, QAMCO joint venture is considered to be among low-cost aluminium smelters with state-of-art production facility, assured feedstock supply via long-term agreement 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 the top-tier companies within the industry at a global scale across most of the profitability matrices. This is a testimony to the JV leaner cost base and continued optimization drive, which keeps QAMCO JV on lower side of the cost curve among global peers, resulting in strong margin evolution. Moreover, the JV 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 from value-added products to standard ingots and vice versa, which provide an additional layer of flexibility to the JV in term of production processes as well as supply chain management, while ensuring optimum production and sales volume in line with evolving market dynamics. I will cover further detail of the JV and operation activities and sales and marketing arrangement later in this call. In terms of the governance structure of QAMCO, you may refer to Slide 34 and Slide 35 of the IR deck, which covers various aspects of QAMCO code of corporate governance in details. I will now hand over to Saffan.

Thank you, Rashid. Good afternoon, and thank you all for joining us. Starting with the macroeconomic updates, as detailed on Slide 16. The macroeconomic environment for the aluminium markets remained volatile throughout the year, especially mostly throughout the first half of the year. Several factors impacted the commodity markets at macro level, which cascaded down to the supply-demand dynamics of aluminium and led to volatilities in prices and supplies. With specific to -- in the last -- in the start of the year, demand for primary aluminium demonstrated strength across key aluminium-intensive sectors such as automobiles, especially electric vehicles, construction, renewable energy and packaging. However, recently, demand for aluminium was impacted predominantly by China's COVID-related lockdowns, coupled with slowdowns in Chinese construction sector. In parallel, higher than expected inflation led to monetary tightening by most of the Central Banks, impacting industrial demand for most of the commodities. On the other hand, exorbitant energy prices in Europe has put most of the European smelters in challenging situation to maintain capacities. Also, as annual contracts are rolled for Western consumers of metals, trade disagreements from Russia amid the geopolitical tensions creating uncertainty in the commodity markets with growing risk of inventory builds. On an overall basis, aluminium prices demonstrated essentially bullish strengths during early parts of '22, amid constructive demand and supply shortages. However, since the mid-year, LME price has softened on account of uncertainties over recessionary fears and limited demand. In terms of bottom line profitability for the 9 months period ended of 30th of September, 2022, QAMCO recorded a net profit of QAR 803 million as compared to a net profit of QAR 521 million for the same period of 2021, driven by growth in global aluminium prices and supply shortages, as discussed earlier. As detailed on Slide 19, at QAMCO's joint venture level, the average realized selling price inclined by 41% versus the same period of last year and positively contributed QAR 887 million to the current period's net earnings compared to last year. Sales volume remained pretty much flattish and contributed only QAR 6 million positively to the net profit for the current period in comparison to the first 9 months of last year. As detailed on Slide 21, JV's cost of goods sold for the current period were higher compared to last year, mainly on account of higher raw material cost. On an overall basis, increase in cost of goods sold contributed QAR 543 million negatively to QAMCO's net earnings for the current period versus the same period of last year. Coming on to 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 debt position, QAMCO's share of debt stood at QAR 2.3 billion, which remained unchanged compared to last year. QAMCO's financial position continued to remain robust with the liquidity position at the end of September 2022, reaching QAR 1.8 billion in form of cash and bank balances, which included proportionate share of cash and bank balances at the joint venture level. During the current period, QAMCO's share of operating cash flows amounted to QAR 959 million with the share of free cash flows of QAR 779 million. As detailed on Slide 23, the average realized LME prices improved by 34% on a year-on-year basis due to persistent macro strength despite volatility noted. LME premiums also improved during 2022 in comparison to last year, mainly due to favorable product mix and better global demand for value-added products. However, on a quarter-on-quarter basis, LME prices as well as premiums declined, mainly on account of global volatilities amid geopolitical tension, significantly higher energy prices, hawkish interest rates and depressed outlook for major economies leading to recessionary fears, negatively affecting global aluminium market. As detailed on Slide 24, QAMCO's EBITDA margins continued to remain robust and resilient. I will now hand over to Rashid to cover rest of the IR presentation.

Thank you, Saffan. 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 a JV representative for marketing aluminium 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 JV, while its presence in Europe and North America continued to be substantial. As detailed on Slide 26, in terms of the product mix, extrusion ingot along with the foundry alloy remained key products for QAMCO JV. In terms of the JV facilities as detailed on Slide 9, it's located in Mesaieed, Qatar, with the design nameplate capacity of 575,000 tons per annum, but now the JV produced more than 650,000 tons per annum of high-quality aluminium products. Moreover, Qatalum has a captive power plant with the capacity of approximately 1,350 megawatts. This benefits the JV from prospective of access to one of the most competitively priced source of energy. Lastly, as detailed on Slide 30, the approved CapEx plan for 2022 till 2026 mainly relates to routine operation, such as pot relining and other maintenance activity pertaining to power plant and anode facilities. Here is a very important point to note that the cash flow forecast for 2022 till 2026, as disclosed in the slide, cannot be relied on with absolute certainty where the actual realization of those cash flows might significantly differ as compared to these projections subject to evolving macroeconomic dynamics. Now we will open the floor for Q&A session.

[Operator Instructions] And your first question comes from the line of Nour Eldin from Arqaam Capital.

Just one question for me. So we've seen that the cash cost return has been flat Q-on-Q despite of 22% lower alumina prices. So we were expecting some normalizing cash cost per ton. So can you explain why it came in flat? And what should we expect for Q4?

Basically, the decrease in alumina price quarter-over-quarter wasn't significant, if you look at Q3 versus Q2, and you can find this information also from other sources such as Bloomberg, et cetera. Also, the impact here is basically due to the favorable inventory movement. We are having less favorable inventory movement in this quarter versus the previous quarter. That's why we are maintaining similar cash costs Q-on-Q.

And on the energy cost of the equation, is it -- because as I recall, it was, to some extent, linked to the selling prices. So it should come down. Should we expect this in Q4?

Unfortunately, we cannot comment on the energy prices given the sensitivity around the agreement and the confidentiality, et cetera. But it's not a contributor when you compare Q-over-Q. It's more or less within the same.

Captive consumption also.

And regarding the rest of the cash costs, should we expect some normalization in Q4?

It depends on how the evolving material -- raw material prices will turn out in the quarter for how the alumina price will move, whether it will reduce further, whether there will be shortage in the market and it will go up. But we are expecting the cost will -- for alumina to be basically following the market trend, steadily growing or decreasing depending on the LME.

Your next question comes from the line of [indiscernible].

I just got a couple of questions. One question is on your capacity utilization in the third quarter, it has come down. Just wanted to have an idea on this. Secondly, in terms of aluminium, per se, I mean, you did mention about China zero COVID policy and other things which has affected. Now going forward, just wanted to get an idea, assuming that a lot of companies or user-based industries for aluminium are seeing the increased tendency of finished goods going up quite considerably, which means that demand is not there. Do you see the possibility that aluminium prices and maybe other factors going to be slowing down in fourth quarter? And lastly, of course, you had mentioned in the investment activity under your 2023, I just noted down that there has been an -- there is going to be an increase in 2023. I just wanted to have a view on that. What is the reason behind that?

Can I -- the answer to your question, the utilization in Q3 did not come down, but the production remained pretty much same, if you look at Slide...

I'm talking about volumes -- the volumes came down.

Yes, sales volume has gone down. That is because of your Incoterms. Sometimes when you ship to Asian markets, sometimes there is -- because of the Incoterms, the sales is recognized when it is received by the customer depending on your sales terms. So there timing of shipment is a function of that. So second quarter sales, sometimes it's on FOB, sometimes it's on CIF depending on the recognition of your volumes. But if you look at production, last quarter, 167,000 versus 168,000, so we produced as per the further capacity. So there is no slowdown in production. The second one is...