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

Hello, and welcome to Qatar Aluminium Manufacturing Company Conference Call. I would like to advise all participants that this call is being recorded. I'd now like to welcome Roy Thomas to begin the conference. Roy, over to you.

Thanks, Kevin. Hello, everyone. This is Roy Thomas from QNB Financial Services. I want to welcome everyone to Qatar Aluminium Manufacturing Company's year-end 2022 financial results conference call. On this call, we have Abdulla Yaqoob Al-Hay, the Acting Manager for Privatized Companies Affairs QatarEnergy; Rashid Hamad Al-Mohannadi, the Head of Investor Relations and Communications, Privatized Companies Affairs QatarEnergy; and Saffan Mohamed, the Senior Financial Management Analyst, Privatized Companies Affairs QatarEnergy. 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 Rashid Hamad Al-Mohannadi. Go ahead, Rashid.

Thank you, Roy. Good afternoon, and thank you all for joining us. Before we go into QAMCO business and performance updates, I would like to mention that this call is purely for the investors of QAMCO. And normally, their representatives should be attending this call. Moreover, please note that this call is subject to QAMCO disclaimer statements as detailed on Slide #2 of the IR deck. Moving on to the call. On 2nd of February, QAMCO published its results for the financial year ended 31st of December 2022. And today, in this call, we'll go through these results and provide you an update on key financial and operational highlights. Today, in this call, along with me, I have Abdulla Yaqoob Al-Hay, Acting Manager for Privatized Companies Affairs; Mr. Saffan Mohamed, Senior Financial Management Analyst; and Riaz Khan as an IRO with us. 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 Slide 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 update. And finally, we'll 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 comprise 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 of QAMCO, provide all the head office function through a service level agreement, while the operation of the JV is independently managed by its own Board of Directors, along with senior management team. QAMCO holds 50% in Qatar Aluminium Limited, Qatalum, which produced a high-quality aluminium of about 650,000 tons per year against a nameplate capacity of 575,000 tons per year for customers across 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 the competitive strength, as detailed on Slide #12, QAMCO joint venture is considered to be among the low-cost aluminium smelters with a state-of-art production facility, assured feedstock supply via long-term agreement with 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 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 strategic important market, 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 ingot 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 the evolving market dynamics. I will cover further details 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 35 of the IR deck, which covers various aspects of QAMCO code of corporate governance in detail. I will now hand over to Saffan.

Thank you, Rashid. Good afternoon, and thank you all for joining us. Starting with macroeconomic updates. As detailed on Slide 16, the macroeconomic environment for the aluminium markets remain volatile throughout 2022. Several factors impacted the commodity markets at the macroeconomic level, which cascaded down to the supply and demand dynamics of aluminium and led to volatility in prices and supplies. Specifically, in the start of 2022, demand for primary aluminium demonstrated strength across key aluminium intensive sectors like automobile, specifically electric vehicles; construction; renewable energy; and packaging. However, recent demand for aluminium was impacted by China's strict COVID-related lockdowns, coupled with slowdown in Chinese construction businesses. 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 have put most of the European smelters in a challenging situation to maintain capacity. Also trade disagreement with Russia, amid geopolitical tensions by the [ investor ] is creating uncertainty in the commodity markets with a growing risk of inventory builds. On overall basis, aluminium prices demonstrated essentially bullish trends during early part of 2022 and with constructive demand and supply shortages. However, since the midyear, LME price has softened on account of uncertainties over recessionary fears and limited demand. In terms of bottom line profitability, for the year ended December 31, 2022, QAMCO recorded a net profit of QAR 919 million as compared to a net profit of at QAR 835 million for 2021, being the highest net earnings since QAMCO's incorporation. This is predominantly driven by growth in global aluminium prices and supply shortages, as discussed earlier. As detailed on Slide #19, at QAMCO JVs level, the average selling prices inclined by 24% versus the last year and positively contributed QAR 748 million to the current year's net earnings compared to the last year. Sales volume increased by 3% and contributed only QAR [ 119 million ] positively to net profits for the current year versus last year. Additionally, on Slide 21, JV's cost of goods sold for the current year were higher compared to last year mainly on account of higher raw material costs and unfavorable inventory movement. On an overall basis, increased cost of goods sold contributed QAR 697 million negatively to QAMCO's net earnings for the current year versus previous year. Coming to JV's operational performance, as detailed on Slide 19, production volumes slightly improved by 1% on a year-on-year basis. Moving to the balance sheet. In terms of JV's debt position, QAMCO's share of debt stood at QAR 2.3 billion, which remained unchanged compared to last year. QAMCO's financial position continue to remain robust, with the liquidity position at the end of December 31 2022, reaching QAR 2.1 billion in the form of cash and bond balances, which is also include proportionate share of cash and bond balance at the joint venture level. During the current year, QAMCO's share in joint venture's operating cash flows amounted to QAR 1.3 billion, with a share of free cash flow amounting to QAR 1.1 billion. As detailed on Slide 23, the average realized; LME prices improved by 19% on a year-on-year basis due to persistent macro trend, despite volatility noted. LME prices also improved during 2022 in comparison to last year mainly due to 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 tensions, along with significantly higher energy prices and hawkish interest rates, with a depressed outlook for major economic -- economies, leading to recessionary fears negatively affecting global aluminium markets. As detailed on Slide 24, QAMCO JV's EBITDA margins continue to remain robust and resilient. I will now hand over to Rashid to cover his [indiscernible].

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 uptake agreement, Hydro acts as a marketing agent for 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 represents largest market for QAMCO JV, while maintaining presence in Europe and North America continue to be substantial. As detailed on Slide 26, in terms of the product mix, extrusion ingots, along with foundry alloys, remains as a key product for QAMCO JV. In terms of our JV facilities, as detailed on Slide #9, it is located in Mesaieed, Qatar with design nameplate capacity of 575,000 tons. But now the JV produce more than 650,000 tons per annum of high-quality aluminium products. Moreover, Qatalum has a captive power plant with a capacity of approximately 1,350 megawatts. This places the JV from prospective -- the prospective of access to one of the most competitively priced sources of energy. Lastly, as detailed on Slide 13, the approved CapEx plan for 2023 until 2027 mainly pertains to routine operations, such as pot relining and other maintenance activities pertaining to power plant and anode plant -- anode facilities. Here is an important point to note that the forecast for 2023 till 2027, as disclosed in this slide, cannot be relied on with absolute certainty, with the actual realization of these cash flows [ might ] significantly defer as compared to these projections, subject to evolving macroeconomic dynamics. Now we can open the floor for the Q&A.

[Operator Instructions] And your first question comes from the line of [indiscernible] of CBFS.

Yes. Thanks for the presentation and for the wonderful numbers for 2022. I've got a few questions pertaining to largely in terms of your volumes. Now in your presentation, you have stated that a good part of your volumes have gone to [ certainly not ] ingot sales. But this is not indicative of how the volumes have increased. I mean, there is a significant increase we have seen in the fourth quarter. Can you throw light on that? Second, in terms of your -- given that there has a slight increase towards your standard alloys and that is affected to your -- I just wanted to where -- know how much your costs have been affected because your margins also has shrank in the fourth quarter quite considerably. And suppose that's the case, because of your standard alloys, there was no other way out in terms of product using structuring towers, your higher margin products, so that your volumes does not go down -- does not go up significantly, but the margins are protected. Also at the same time, I'd like to know in terms of your indication on your aluminium to alumina price differential, I mean, we see that there could be some reduction, which has taken place, which has also affected the margin. Can you throw some light in terms of what could be the share for the margins for this particular reason? And lastly, in terms of the product profile, natural gas actually is now at the lowest for last few weeks. So do you see that supply will again start coming from European based smelters? And any update on the chip shortages, which is affecting the auto industry?

This is a lot for questions. Okay. So regarding the standard ingot sales and why you see that the volume increased -- the sales volume increase, basically, it's related to the Incoterms that we have for the standard ingot. So at the moment that we sell the standard ingots, we have the recognition of that sales immediately reflected in our books. It's not like the value-added products, where we have adjustments Incoterms. Okay? So second question was not clear related to the margin Q3 versus Q4.

Yes. I wanted to know, I mean, there is this update in your gross margins, for example, what you have reported EBITDA margin. So what has been the reason there?

Yes. There is volatility in the raw materials prices, and there is a gap between the purchasing that raw material and the producing and selling that final product. So here, where you can see that such expensive, I would say, inventory related to the raw material [ kick ] where we sell our products during a different period, so you can see that differences on the margin. Saffan wants to highlight something.

Yes. And also the standard ingots are usually, compared with value-added products, have been sold slightly at low prices. So compared -- combination of expensive inventory moving together with the standard ingots usually resulting in lower margin. That's more kind of a cycle.

Okay. I mean, just wanted to know in terms of your overall volumes, actually, even suppose we exist for your third quarter, the reduction -- slight reductions you saw on your normal average run rate, still, it does not explain the huge increase which we saw in fourth quarter in terms of volume. So what has been the driver for this huge increase in volumes?

Basically, you have a 660,000 metric tons of producing plant, right? So usually, you produce 660,000 metric tons [ right there ]. If you look at since 2020 when we start Qatalum Company -- when you look throughout, you produce that volume and you sell that volume. And also going forward, you expect the economy to remain -- 2023, you expect the system to continue. So you need to -- what you produce, you cannot inventorize, so you need to sell. So sometimes, you need to make kind of an economic decision that the [ standard ingot ] or value-added products. So you need to make that decision. So sometimes, as long as you make a margin, sometimes, you sell standard ingots. As what's mentioned during our presentation, we mentioned second half of 2022, the economy remained fairly depressed, so the demand for aluminium industry was tough. The demand for value-added products was also remaining challenging. So one decision that was made there [indiscernible] what we call [ sense ] decision to sell standard ingots. That was one decision -- that was a global decision as well.

And also if you look at the graph in our IR presentation, you can see that there is a dip in the alumina prices. It is not similar to the dip in LME. So that kind of a mismatch has compressed our margins, plus what Abdulla mentioned and Saffan mentioned.

Abdulla was mentioning the cost of goods sold did not fall at the same rate where your product prices fell. So that cyclical impact, there is no lag -- the same lag.

So do we expect any -- yes, go ahead. No. I just wanted to get in again. How much you think so was this contributing to your margins fall? I mean, this particular alumina, aluminium spread, which has -- I mean, what will be the contribution in terms of percentage, can give you us an idea of...

You can refer to Slide #22. You will see the cost of goods sold increased from Q3 to Q4. It's QAR 112 million. So that increase in the cost of goods sold between quarter 3 and quarter 4 gives you an idea. Yes, in quarter 3, we produced more products -- sold more products, but this will give you a rough idea that the raw materials in Q4 was higher compared to Q3. And that raw material will compromise of all kind of aluminium, mostly alumina [ cross bridge ] so this is the increase.

Including your feedstock was stable, that's what you're saying.

Which feedstock?

I'm talking about your feedstock for the aluminium in your power and all -- I mean, that...

It's a problem, basically.

Okay, okay. Yes. And lastly, I just wanted to get an idea in terms of your -- I mean, aluminium prices thankfully has started to react upward. And I mean, it is a good thing, what we are seeing around $400 on the year-to-date in a way. But how we foresee it given the fact that European smelters are likely to come, I mean, given the fact that gas prices are now at the lowest, do you see that forcing that going forward and indirectly supplies will come? At the same time, in terms of auto industry, do you see any chip shortage continuing to go ahead? I mean, is that aluminium should not be a problem, but other factors are affecting it, which indirectly could put pressure on aluminium prices.

Nikhil, this is Riaz here. Yes, so in terms of the outlook, as always, we caveat ourselves before giving any feedback to this discussion or putting some light on the future outlook. This is not the official -- like the comments from the QAMCO's book was the cyclicality of the industry, which we operate in. But from the view what we are seeing from the analysts and from the view what we are seeing from the market is, predominantly, there are 2, 3 factors there, which are factoring into positive trajectory -- slightly positive trajectories of aluminium. It's predominantly the opening up of China. Over and above, the construction sector in China is also getting some sort of support through stimuli from their local government. So that's another factor. Over and above, if you remember, 2, 3 calls back, we were talking about the decarbonization drive of China, where they are trying to cap their aluminium capacities almost to 42 million metric tons per annum basis. So that also, they are trying to aggressively implement those regulations around it, and that is also creating some sort of supply limitation and that is also helping the cause. But the price increase, which we are seeing in Q1, it's not that significant. And you have always -- you need to always remember that when you talk about QAMCO, there is a 2-month lag. So something which you have seen 2 months before will be implementing or will be realizing in the QAMCO's books in that period or given period. That factor, also, I would suggest you to keep an eye on for your modeling purposes.

But on the other hand, we also wanted to [ implement ] tight cost, so can have a slight impact to that.

Your next question comes from the line of Mustafa [indiscernible] from Al Rayan Investment.

I just wanted to get your opinion on the other factors that you've highlighted on Slide 21 regarding higher marketing fee, shipping insurance costs and higher finance costs. How do you see that going forward given that, I think, the higher impact of the rates, the full year impact will be felt this year? Do you expect these to be even higher this year? And the other costs as well as the shipping and insurance costs, do you see them elevated throughout 2023?

Yes. So in terms of like -- if I break your question into 2 bits, the marketing fees, marketing fees, as everybody knows, it's linked to the final invoice value. So that's why you see an increase in there because on an overall year-on-year basis, the LME prices were high and our realized prices were high. As far as the shipping cost is concerned, I think we have gone past the supply chain issues, which were happening in the start of the year and when the shipping cost was severely very high. So I don't think we might be seeing again those kind of situations. Yes. And from the financing costs, again, depending on the LIBOR moves, how the Fed moves so -- and how the LIBOR moves, that will quite pretty much link to that.

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

I've got 2 or 3 questions regarding recognition of revenues and costs. Actually, you mentioned a little bit already. So should I understand that your revenues are recognized with like 2 months lag? It means that an LME high sales should be recognized with 2 months lag, and this premium should be recognized with 2 months lag or a premium is without lag. So that would be question number one.

Yes. As you are aware, we have an offtake agreement related to our final products, and we have a different Incoterms depends on the products that we have. So there is a lag, correct. However, these lags are deferred from the value-added product and the standard ingot. I would say the standard ingot has less time, and we recognize the sales immediately for the standard ingot. So that lag is not -- I would say, is not as similar to the value-added product where it take the 2 months lag. And it depends on the sales that we have and did not -- from customer to customer, we have a different arrangement, we have different agreements.

Okay. Understood. And -- but usually, the final ties, you sell your product consist of 2, let's say, parts. Part #1 is just quotation -- general quotation on financial market, and part 2 is the premium. So should I assume that premium is delayed by 2 months as well? So for example, if premiums will go up to 700 in January, so this should be visible in March.

Yes. The premium is based on the final product price. And the premium, I would say, it is in line with specific sales that we have conducted. It's not separated. This is how we see it. And the premium gap, it's not like -- it is in line with the, I would say, LME final product price.

Okay. Understood. And then the last question would refer to inventory. And you mentioned already that when prices are going down, like quarter-on-quarter, you are still selling like some of the products from higher inventory. So I guess, it works the other way around, when prices are going up, like what is happening right now, so then, at some point, we should expect -- either in Q1 or Q2 or Q3 we should expect, I guess, reversal of this situation. So you should be selling at higher prices from lower inventories -- cheaper, not lower.

I hope so, I hope so. I would like to see that. And I believe we buy the inventory whenever we see that prices are attractive. So hopefully, we see -- we're going to see something like this. I cannot give you a solid comment until we see the final numbers.

Your next question comes from line of Nour Sherif from Arqaam Capital.

I've just joined the call, so apologies if any of the questions that I will mention were previously answered. Just a couple of questions for me. First one on the cash cost, can you give us some color on which specific elements or raw materials that were elevated in Q4? And are you seeing some normalization into the beginning of the year and Feb?