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

Hello, everyone, and welcome to Qatar Aluminium Third Quarter 2023 Earnings Call. Please note that this session is being recorded. I'd like to hand over to the moderator, Shahan. Shahan, you may now start the call.

Thank you. Hello, everyone. I want to welcome you to QAMCO's Third Quarter 2023 Financial Results Conference Call. So on this call from QP privatized companies, the first speakers are Saffan Mohamed, Senior Financial Management Analysts and Rashid Al-Mohannadi, Head of Investor Relations and Communications. So as usual, we will conduct this call with first, management reviewing the company's results followed by a Q&A session. I will turn the call over now to Rashid. Please go ahead. Thank you.

Thank you. 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 no media representatives should be attending this call. Moreover, please note that this call is subject to QAMCO disclaimer statement as detailed on Slide #2 of our IR deck. Now we can move on to the call. On Monday, 30th of October, QAMCO published its results for the 9 month period ended 30th September 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 Mr. Saffan Mohamed, Senior Financial Management Analyst; and Mr. Saoud Ahmed Saifaldeen, Senior Financial Management Analyst. We have structured our call as follows: at first, I'll provide you with a quick insight into QAMCO ownership structure, its competitive strength and overall government structure by covering Slide 5 till 14 and Slide 34 and 35 of the IR deck; secondly, Saffan will brief you on the macroeconomical environment and update and -- QAMCO results update; later Saoud will provide you with more details on the key financial and performance interests, including JV operation and CapEx updates; and finally, we'll open the floor for the Q&A. To start with, as detailed on Slide #4 of the IR deck, the ownership structure of QAMCO compromises 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, 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 the senior management team. QAMCO holds 50% share in Qatar Aluminum Limited, Qatalum, which produces a high-quality aluminum of about 650,000 tons per annum against a nameplate capacity of 575,000 tons per year for customers across Asia, Europe and North America. The facility includes the carbon plant, [ port ] storage facilities as well as gas furnace power plant. In terms of the competitive strengths detail on Slide 12, QAMCO joint venture is amongst one of the low-cost aluminum smelter with a state-of-the-art production facility, assured feedstock supply via long-term agreement, with intense focus on health, safety and environment, which makes the joint venture a leader amongst its peers. As detailed on Slide #14, from competitive position and perspective, QAMCO ranks among the top-tier companies within the industry at the global scale across most of the metrics. This is a testimony to the JV leaner cost base and continued optimization drive, which keeps the QAMCO's JV on the lower side of the cost curve among the global peers, resulting in a strong margin evolution. Moreover, the JV global marketing partnership with the other JV partners provides an access to a 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 product to standard ingot and vice versa, which provides an additional layer of flexibility to the JV in terms of the production processes as well as supply chain management while ensuring optimal production and sales volume in line with evolving market dynamics. I will cover further -- Saoud will cover further details of the JV and operational activities and sales marketing [ arrangement ] later during this call. In terms of the governance structure of QAMCO, you may refer to Slide 34 and 35 of the IR deck, which cover various aspects of QAMCO's corporate governance in detail. I will now hand over to Saffan.

Thank you, Rashid. [Foreign Language]. Good afternoon, everyone, and thank you for joining us. Starting with macroeconomic companies as detailed on Slide 16, aluminum demand fluctuated in the first 9 months of 2023 due to slower macroeconomic recovery, sluggish demand between the construction sector, muted activity in aluminum-consuming sectors and high interest rates. Despite early disruptions, smelting rates increased, boosting supply and driving down aluminum prices. QAMCO reported a net profit of QAR 354 million for the 9 months ended 30th September 2023 compared to QAR 803 million for the same period of last year with earnings per share of QAR 0.063 versus QAR 0.144 for 9 months of [indiscernible] 2022. As detailed on Slide 18, share of joint venture revenue fell by 20% to QAR 2.4 billion, primarily due to lower product prices on the backdrop of unfavorable macroeconomic backdrop. Sales volumes increased on the backdrop of improved production due to improved operational efficiency. As a result, QAMCO's financial results for the current period versus the same period of last year were primarily -- declined, primarily attributed to a decline in average selling prices with EBITDA declined by 39% to QAR 740 million, while EBITDA margins remained at around 30%. I'll now hand over to Saoud to cover the rest of the presentation.

Thank you, Saffan. Now we can move to Slide 21 to present the net profit variance analysis. As we can see on the screen, the average realized selling price witnessed a decline of 23% during 9 months 2023 versus 9 months 2022 to reach 2,670 per metric ton amid macroeconomic challenges and contributed QAR 745 million to decline in the net profit for the 9 months ended 30 September 2023 versus the same period of last year. Production levels showed a slight uptick with a 2% increase in production volumes for the current period compared to 9 months 2022, driven by improved efficiency within QAMCO JV facility. Sales volume also grew by 6% over the same period of last year on the backdrop of improved production. The shift from value-added product to standard ingots influenced by prevailing market condition also added volume improvement. This increase in sales volume positively impacted our financial performance, contributing QAR 155 million to the net profits for the 9 months ended 30 September 2023 as opposed to the same period of last year. The cost of goods sold for the current 9-month period [ relatively ] declined mainly on account of lower raw material cost despite higher sales volume. Overall, the decline in cost of goods sold contributed QAR 78 million positive to the net profit for the 9 months ended 30 September 2023 versus last year, while sales and G&A added QAR 52 million to QAMCO bottom line profitability. QAMCO's financial performance also was aided by improved finance income. On the other hand, finance expenses shot up due to rising interest rate during the period. Moving to quarterly net profit variance analysis, as you may see on Slide 22, during third quarter of 2023 QAMCO witnessed a 23% decline in net profit compared to the previous quarter. This decline in profitability was primarily due to a decrease in average realized selling prices in line with the global aluminum market. On the other hand, the boost in sales volume was attributed to favorable Incoterms and higher sales of standard ingot sequentially. While this surge in sales positively impacted the bottom line profitability, adding QAR 73 million in the third quarter compared to the previous quarter, it was entirely offset by the lower average selling prices and the elevated cost of sales associated with the recognition of higher volumes. The combined impact of higher COGS and lower average selling prices adversely affected the bottom-line profitability by QAR 109 million compared to the previous quarter. Overall, QAMCO's financial position remains robust, with the liquidity position at the end of 30 September 2023 reaching QAR 1.9 billion in cash and bank balances. During the period, QAMCO's JV generated a share of operating cash flow of QAR 535 million, with a share of free cash flow of positive QAR 371 million after meeting ongoing capital expenditure. Moving on to the remaining slides, I'm pleased to report that QAMCO's JV maintains high efficiency and cost-competitiveness in its production and operation. Health and safety measures remain a top priority, ensuring the reliability of assets while achieving operational excellence, CapEx projects were conducted as planned and in line with operational and reliability requirements. It's important to note that QAMCO has a 50% stake in Qatalum with Hydro as the other partner and main supplier of aluminum. Additionally, under the marketing and offtake agreement, Hydro is the JV's representative for marketing aluminum products outside Qatar, which gives the JV access to important strategic markets, allowing it to compete effectively to international players. As detailed on Slide 25, Asia remained the largest market for QAMCO's JV with Europe and North America also maintaining a substantial presence. As detailed in Slide 26, in terms of product mix, foundry alloy along with extrusion ingots remains essential for QAMCO's JV. However, compared to last year, revenue from standard ingots increased as QAMCO's JV shifted its production to adjust to the prevailing market requirement. Regarding the JV's facilities, as detailed on Slide 9, it's located in Mesaieed, Qatar, with a design nameplate capacity of 575,000 tons per annum. But now the JV produced more than 650,000 tons per annum of high-quality primary aluminum products. Moreover, Qatalum has a captive manpower plant with a capacity power of approximately 1,350 megawatts. This benefits the JV from the perspective of access to one of the most competitively priced energy sources. Lastly, as detailed on Slide 30, the approved CapEx plan for 2023 until 2027 mainly relate to routine operations such as pot relining and other maintenance activities, the power plant and our facility. Now I'll hand over to Rashid.

Thank you, Saoud, thank you, Saffan, for your presentation. I believe this concludes our presentation. And now we can open the floor for our investors to ask questions. Thank you.

[Operator Instructions] We have our first question from Nour Eldin from Arqaam Capital.

Yes. Just a couple of questions for me, if I may. If we can take it one by one. Can you give us more details about the reason behind the drop in the COGS for Q3 and for the rest of the year?

So in terms of the COGS, quarter-over-quarter, we witnessed a drop in the COGS, predominantly due to lower alumina and coke costs, among other raw materials as well. So we're seeing a decline as well, as we already consumed the expensive inventory in Q2. So Q3 realized more of the stabilized level alumina prices.

Yes, it's very clear. And do you think this is sustainable for coke and alumina? It might be at the same level, but for coke, do you think it's sustainable?

I mean in terms of the prices, we have -- or let's say the inventory days -- we are running 45 days in inventory for alumina. And for coke, we're around -- running around 30 days of inventory for coke as well. I think for coke it's been more or less up and down depending on the market trajectory, but I think alumina is witnessing kind of a stabilization. We've seen that Q-over-Q. Yes, there was a decline Q-over-Q, but it's more or less stabilizing with the aluminum prices. As we always discuss, there is always the delay in reaction in the alumina compared to aluminum, so when aluminum goes down, usually alumina takes a bit slower pace to go down with a similar momentum. But right now, we have seen that aluminum price is stabilizing. So we'd assume that both will remain stabilized going forward if the price of aluminum doesn't spike in Q4.

Yes, very clear. And regarding the strong production for Q3 and for the 9 months, do you think this could be the run rate for next year?

Basically, what we've done in Q3, we've consumed -- or let's say, we've sold a good portion of our inventory that was held up with us. So our inventory for finished good, I think, went down significantly. And as we mentioned during our presentation, our Incoterms improved during Q3 as we shifted from value-added products to standard ingot to adjust to the market demand. But reality, if we go back again to value-added product, Q4 we'll have, I would say, you would expect that the Incoterms will be less favorable compared to Q3 as we already established a historical trend, whereby if we are moving to standard ingot, [indiscernible] sales volume higher. And if you realize more value added to Far East destinations, this is when you will have a lag in terms of the sales volume. But if that trend continues, you would expect that it will have a stabilized level as we always reported in last year and the year before that.

Yes, it's clear. And regarding the premium over the global LME prices, so we've seen a strong premium in Q3 despite of more exposure to standard ingots and the lower value-added products. So can you explain how you're able to maintain the strong premiums?

I would explain -- the premium is a function of the product, the destination and where we are shipping the product and to which customer and the terms and condition of the sales of the product. You can see from this slide the premium actually went down by 17% quarter-over-quarter. And that's due to the effect of selling standard ingots. I think in this quarter, we sold somewhere, I think, maybe 16,000 tons or 15,000 tons of standard ingots during this quarter. So due to the impact of having more ingots -- standard ingots in our sales mix in Q3, we witnessed that decline. The premium at the end of day is a function of a lot of things. So it's hard to predict how the premium will work in Q4. But the reason for drop in Q3 is due to that having some element of standard ingots as part of our sales volume.

Clear. All right. And my last question, on debt. Can you give us the plan for -- should we expect further debt repayments and deleveraging going forward?

So we have a debt restructuring plan, we have a certain maturity that if -- as per the original plan, the debt is to be paid out in March 2025, I think Q2, Q1 2025. But the debt market shows a different direction, [ Fed rates ] are changing. So we are looking at various options. Once the options are finalized, we will update the market.

Question comes from Anastasios [indiscernible] from [ Al-Faysal ] Investments.

Yes. So on the 29th of October, in the Financial Times, Hydro issued a warning about the European aluminum market being hit by the importation of Chinese EVs into Europe. So they are quite concerned about the future of aluminum demand in Europe due to this fact. And on top of that, there is also concern about the Chinese increasing their 45 million ton annual production cap. So my question is now 20% of sales go to Europe. In case this warning from Hydro becomes a reality, where you can place these volumes? And what impact would that have in your pricing and calibration of product mix?

So basically, if you look at your product mix, around 58% we are shipping into Asia and Far East, and obviously, another 20% to North America. So obviously you will adjust your business dynamics and your business strategies. Obviously, there is competition, there is evolving dynamics. So you will -- China is obviously our largest competitor and largest sector. Everyone -- not only aluminum business, petrochemicals or fertilizer, any business landscape, you will find China is there. You will find -- or you will need to find different business strategies, decarbonization, your own way of ESG road maps, et cetera, to combat those -- your cost competitiveness, your ESG strategies will play an important role. Being close to Asia in Qatar, compared to Hydro being in Europe, will give you logistical advantages in moving shipments. It will be far closer, shipping from Doha to Asia would be -- logistically, you have been competitively advantaged. So those will pay better advantages to you in combating those challenges. I'm not saying that you are completely ring fenced from Chinese threats. Obviously, you are challenged. You will find ways to overcome. Not only you, it's a systematic risk for all smelters. So you are part of that. So when everybody try to find solutions, a general solution will be found, and you will try to find better solutions as part of this systematic risk.

Just to add on what Saffan has mentioned, we all know that China is one of the biggest producers of aluminum. And the Chinese, they are producing predominantly using coal for their smelters. For us, we are using gas furnaces to power our power plant and then basically produce aluminum. So our aluminum has the lower footprint in terms of the environment. That's number one. Number two, Europe already, I think they were in the scope of developing emission standards for aluminum, and they were putting a lot of restriction. That was before the gas crisis that happened in Europe and before the Ukraine-Russia conflict. But if Europe go back again and reinstate those, let's say, kind of Scope 1 or 2 requirements for smelters, that will put a lot of, I'd say, challenge for China to export. And also the import duty, if they put import duties on China, that could be also a potential thing that will protect the European market. But us sitting in Asia compared to Hydro, it's totally a different game, because Hydro, they're producing in Europe using solar plant, wind power, and their cost is, I would say, is higher than what we've seen in our JV level at a consolidated level. Therefore, for them, it will make sense to sell in Europe in an environment where the product is valued given that it has a lower footprint of carbon, environmentally friendly, et cetera. But when you bring the Chinese element, this is where it will [ pressure ] others in Europe, including us as well, in terms of selling our product. I think us sitting on the lower side of the curve, we'll be able to compete in any market, and that was the case. As you can see from the map, we are in Qatar and we're selling to North America, and we're even selling to Europe, et cetera, and we are being able to compete on those fronts. So we are comfortable, us as QAMCO, having Hydro as our marketing agent, that we can conquer any challenge that could come in the future.

And if I may, on a follow-up and related to this, assuming such a scenario, what sort of pricing do you think you have to go down to compete in terms of the premium to Chinese supply coming?

I'm not sure about the news. I haven't read it myself. I don't know that China commenced this or still under review. But of course, China comes to Europe and they're allowed to sell in the LME, it will affect the LME prices as a baseline. This is level #1. Level #2 is the premium. So the premium also will be challenged as well if you have more product in the market, et cetera, then the premium will be challenged. So I'm not sure how the price would evolve in that scenario. But anyway, China right now, they are ramping up their production based on the report I read in Bloomberg, and they already have sufficient production locally. Previously, they were even importing some aluminum as well. I think in the future, 2024 and onward, they will be self-sufficient, and also they're increasing their production also in China. So I think the threat will be on the longer horizon rather than in the shorter term.

And also the effectively the LME is owned by Hong Kong. So Hong Kong is ultimately controlled by China. So there will be long-term implication on the LME prices that will have a global impact on the overall smelters. So there will be structural changes on the energy prices that need to be managed amongst all smelters. So you need to go for alternative energy, sustainable energy. This is more kind of a long-term issue that need to be addressed by all energy producers, and of course U.S. energy, smelters, et cetera and et cetera.

All [indiscernible].

Yes.

Our next question comes from [indiscernible] from [ Jadwa Investment ].

You spoke a little bit about the supply. I was wondering if you could kind of give us an overview on the global supply/demand balance and how you see it in the aluminum market in 2024. Do you see further constraints on European supply shaping up given that natural gas prices started to move slightly from their lows? And also, how do you see the outlook for demand, and ultimately where do you guys see prices in 2024?

Thank you for your question. I think aluminum is one of the difficult commodity to give a forecast for, even though it's for a single quarter. But from the reports I've read from some research specialists, I've read that the prices for aluminum are witnessing some kind of stabilization in terms of LME. And given that the Q4 could have potentially the gas price shooting up in Europe given the winter season coming up, plus also the effect that it might have on smelter that is going to be producing in Europe, you would expect naturally that will be a slight uptick in Q4. This is what analysts are saying in the market. But again, they also carry -- them also, they carry out themselves that this product is a hugely volatile product and the commodity market for aluminum is volatile, et cetera. I think also, if you look at the expansion that is sanctioned for aluminum, I don't think any expansion or any project will come online during this year to add additional capacity. This is from the report I read. So expecting that there is no additional capacity in the market and expecting that the gas price could shoot up in Q4, and that could have an impact on smelters in Europe, you could see a slight stabilized environment in Q4. But again, this product is hugely volatile, and this does not represent the company view because, as you know, that our product is sold by Hydro as a marketing agent and they're ring fenced in themselves from providing information in terms of their plans to sell product, et cetera. But I think this is more of a global picture or a global outlook you can perhaps consider.

Question comes from Aashish Agarwal from Decimal Point Analytics.

My first question is with respect to the production volumes. I see that you do around 168,000 in terms of production volumes. And in this quarter, you have done 170,000. So I just want to understand what are the driving factors behind this production volume. That is my first question. I will ask my second question [ post this ].

You want me to answer your first question before you jump to your second question?

Yes. That's right.