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

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

Thank you, Thierry. Hello, everyone. This is Roy Thomas from QNB Financial Services. I want to welcome everyone to Qatar Aluminium Manufacturing Company's First Quarter 2023 Financial Results Conference Call. On this call from Qatar Aluminium Manufacturing Company, we have Abdulla Yaqoob Al-Hay, the Acting Manager, Privatized Companies Affairs Qatar Energy; Rashid Ahmed Al-Mohannadi, the Head of Investor Relations and Communications Privatized Companies Affairs Qatar Energy; and Saffan Mohamed, the Senior Financial Management Analyst for Privatized Companies Affairs Qatar Energy. 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 Ahmed Al-Mohannadi. Go ahead, Rashid.

Thank you, Roy. Good afternoon, and thank you all for joining us. Before we kick the call kindly note that to participate in the Q&A session you may dial in detail as highlighted in the call invite. The MS link is purely for displaying the presentation on screen. 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 this call is subject to QAMCO disclaimer statement as detailed on Slide #2 of the IR presentation. On Sunday, the 7th of May, QAMCO published its results for the 3-month period ended on 31st of March 2023. 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 for Privatized Company 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 on, I will provide you with more details on the 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 [ compromises ] 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 parent company of QAMCO provides all of 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 senior management team. QAMCO holds 50% share in Qatar Aluminium Limited, Qatalum, which produce high aluminium -- 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 storage facilities as well as gas-fired power plant. In terms of the competitive strength, as detailed on Slide #12, QAMCO joint ventures amongst one of the lowest cost aluminium smelters with a state of art production facility, assured feedstock supplied by a long-term agreement with intense focus on HSE, which makes the JV a leader among its peers. As detailed on Slide #14, from the competitive positioning prospective, QAMCO ranks among top-tier companies within the industry at the global scale across most of the profitability matrices. This is a testimony to QAMCO linear cost base and continued optimization drive, which keep QAMCO JV on the lower side of the cost curve amongst global peers resulting in strong margin evolution. Moreover, the JV global marketing partnership with the other JV partner provides access to strategic 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 ingot 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 in line with the evolving market dynamics. I will cover further detail of the JV's operational activities and sales and marketing arrangement later on the 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 corporate governance in detail. I will now hand over the call to Mr. Saffan.

Thank you, Rashid. Good afternoon, and thank you all for joining the call. Starting with macroeconomic updates as detailed on Slide #16. During the first quarter of 2023, the macroeconomic context for aluminium markets remain volatile. Several factors affected the commodity markets, which cascaded down to the supply-demand dynamics of aluminium and lead to volatilities in the prices. Demand for aluminium was overshadowed by China slow-paced post-COVID recovery phase, coupled with persistent weaknesses in Chinese construction sector. In parallel, high inflation and tightening monetary policies by most of the central banks continue to weigh on industrial demand for most of the commodities, including aluminium. On the other hand, operating rates for European smelters improved following the recent fall in the natural gas prices. However, geopolitical tensions on account of Russia-Ukraine conflict continued bringing additional layer of uncertainty to the commodity markets. On an overall basis, aluminium prices for the first quarter of 2023 demonstrate a declining trend versus the first quarter of 2022 amid macroeconomic headwinds. However, aluminium prices remained essentially stable versus the fourth quarter of 2022. In terms of bottom line profitability for the 3 months period ended 31st of March 2023, QAMCO reported a net income of QAR 93 million compared to QAR 240 million for the same period of 2022. QAMCO's financial results for the current period versus the same period of last year were largely attributable to an overall decline in average selling prices. As detailed on Slide #19, average selling prices witnessed a decline of 18% during 1Q '23 versus 1Q 2022 to reach USD 2,704 per metric ton amid macroeconomic headwinds and impacted QAR 166 million to the net profit for the 3 months period ended 31st March 2023 versus the same period of last year. Sales volumes also declined 6% versus 1Q 2022 due to relatively lower sales volume of added exclusion ingots -- value-added exclusion ingots versus last year. Decline in sales volume impacted QAR 49 million to the net profit for the 3 months period ended 31st March 2023. As detailed on Slide #21, JV's cost of goods sold for the current period declined versus the same period of last year, mainly on account of lower raw material costs, coupled with higher closing inventory as production volumes remained higher than the sales volumes. On an overall basis, the decline in cost of goods sold contributed QAR 60 million positively to the net income for the 3 months period ended 31st March 2023 versus the same period of last year. Coming on to the JV's operational performance and as detailed in Slide #16, production levels slightly inched higher with a 2% increase was noted in the production volumes for the current period versus 1Q 2022. Moving on to the financial position. In terms of JV's debt position and as detailed on Slide #17. QAMCO's share of debt stood at QAR 2.3 billion, which remained unchanged compared to the previous year. During the current period, QAMCO's share in cash share in joint ventures operating cash flows amounted to QAR 290 million with a free cash flow of QAR 245 million. As detailed on Slide #23, average selling price declined versus 1Q 2022 due to persistent macroeconomic headwinds. However, average selling price has stabilized in comparison to 4Q '22 in line with global aluminium prices. LME premiums declined mainly due to negative macroeconomic context paying on the global aluminium markets and affecting underlying supply-demand dynamics for the primary aluminium products. I'll 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 other partner of Qatalum 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. This provides the JV an access to important and strategic markets while competing with international peers. As detailed on Slide #25, Asia remained the largest market for QAMCO JV, while its presence in Europe and North America continue to remain substantial. As detailed on Slide #26 in terms of the product mix, excluding ingots along with foundry allows remain the key product for QAMCO JV. In terms of the JV facilities, as detailed on Slide #9, it's located in [indiscernible] Qatar with a design plate capacity of 575,000 ton per annum. But now the JV produced more than 650,000 ton per year of high-quality primarily aluminium product. Moreover, Qatalum has a captive power plant with a capacity of approximately 1,350 megawatts. This benefits the JV from perspective of access to one of the most competitively priced source of energy. Lastly, as detailed on Slide #30, the approved CapEx plan for 2023 till 2027, mainly related to routine operations such as spot relining and other maintenance activities pertaining to the power plant and anode facilities. Here, important point to note that the cash flow forecast for 2023 to 2027, 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 the evolving macroeconomic dynamics. Now we can open the floor for the Q&A session.

Thierry, you can go ahead and open it for Q&A, please. Thierry, can you Please go ahead and open it for Q&A?

Our next question comes from the line of [ Abdulelah Hakami from Hanasa ].

I just have a couple of questions. The first one is regarding your capital structure. We noted that the debt at the JV level maintained at the same level for almost 2 to 3 years. Is it fair to assume that this is a capital -- the optimized capital structure for the JV going forward? Or is there any plans for deleveraging in the midterm? So that's my first question. The second question is regarding the supply-demand dynamic. Last year, we started off with a very strong ground on -- and bullish view on aluminium on the back of Chinese smelter shutting down. I don't know if that's continued to be the case. And how are you seeing a pickup in demand from interacting with your customer? Are they more positive and you're seeing more placement in terms of the demand volumes?

I'll answer your second question. First question, Mr. Abdulla Yaqoob Al-Hay can answer you. In terms of the demand and how it's evolving, taking into consideration the China effect, we've seen that China is reopening, but the reopening of China has been lower than expected in terms of demand. So we're seeing less -- there is a demand recovery, but still a slower pace recovery. So that will play a role into the future on how the aluminium prices will evolve. Also, the energy prices will play a crucial role in terms of determining the aluminium price in the future. We have seen some smelters going under commercial shutdown towards last year. This quarter, some of the smelter were able to reopen, but some of them were not able to reopen. So there is some capacity curtailment as well, which is affecting the prices for aluminium. There is some demand coming also from the EV sector as well. We are seeing that growing year-over-year. So there are several dynamics that will come into the play also in addition to the increase in the interest rate. The interest rate effect will cascade eventually to the consumer appetite to buy goods and consume those goods. So the recent hike in the interest will have some kind of a fallback in terms of the demand. But hopefully, that can be recovered through the recovery of China, through also the -- if the energy crisis continue, that could have certain curtailment in the capacities. And that could hopefully gradually drain the buildup in the aluminium houses, et cetera. So there are several dynamics that will play in to role. We witnessed this quarter a price that is similar to last quarter and this is in line with the global aluminium prices. And in the future, we hope that the prices will evolve in our favor. However, it does depend on those several macroeconomic factors I just mentioned. I hope I answered your second question. I will hand over to Mr. Abdulla to answer your first question about the optimal debt structure.

Thank you, Rashid. Thank you, Abdulelah, for asking the question. As you mentioned correctly that the debt -- there was no really a movement happened in the debt level that we have. But is it the optimal debt structure for the company? I would say, now, however, in the previous -- during the last 2 years, we wanted to take the advantage of the lower interest rate during the last 2 years. So we were paying the interest and we are keeping the principal at the same level, where right now we are building our reserve on the level of the joint -- at the level of the joint venture. And as we have highlighted earlier that we are planning to reduce the debt to an optimal level that we see in the future. And you can show that the -- our reserve already there, the cash. And we are planning as a first step to build our reserve up to $300 million.

Our next question comes from the line of Mr. Lee Beswick from QNB.

So I just wanted to ask about the -- just a follow-up on the sales volume that was slightly lower in the quarter, the extrusion ingots. What -- can you just repeat, apologies if I missed it, what the reason for the specific reason, not the sort of general macro, everyone knows what the general macro, but why did the sales volume go down, which customer or region or why specifically were you selling less in the quarter than the previous calls?