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

Hello, and welcome to the Qatar Aluminium Manufacturing and Company Year-end Earnings Call. I would like to advise all participants, this call is being recorded. Thank you. I'd now like to welcome Roy Thomas to begin today's conference. Roy, over to you.

Thanks, Kevin. Hello, everyone. This is Roy Thomas from QNB Financial Services. I want to welcome everyone to Qatar Aluminum Manufacturing Company's Fourth Quarter and Year-End 2023 Financial Results Conference Call. On this call from Qatar Aluminium Manufacturing Company, we have Abdulla Yaqoob Al-Hay, the Acting Manager of Privatized Companies Affairs QatarEnergy; Rashid Hamad Al-Mohannadi, the Head of Investor Relations and Communications, Privatized Companies Affairs QatarEnergy; and Saffan Mohammed, 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 no media representative should be attending this call. Moreover, please note that this call is subject to the disclaimer statement as detailed on Slide #2 of the IR deck. Moving on to the call, on Sunday, 4th of February 2024, QAMCO published its results for the year ended 31st December 2023. And today in this call, we'll go through these results and provide you with an update on key financial and operational highlights. Today on this call, along with me, I have Saffan Mohammed, Senior Financial Management Analyst, and [ Saoud Ahmed Saifaldeen, ] 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 government structure by covering Slides 5 through 14, and Slide 34 and 35 of the IR deck. Secondly, Saffan will provide you on key -- QAMCO key operational and financial performance metrics. Later, Saoud will provide you with more details on JV operation and CapEx update. And later, Saffan will conclude with the final note on the proposed dividend distribution. 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 QatarEnergy 51% stake and the rest is in the free float held by various domestic and international corporate and individuals. QatarEnergy being the founding shareholder and parent of QAMCO provides all of the head office functions to service level agreement of all the head office services agreement, while the operation of the JV is independently managed by their own Board of Directors, along with senior management team. QAMCO held 50% share in Qatar Aluminum Company, Qatalum, which produced high-quality aluminum and the access of 650,000 tons per year against a nameplate capacity of [ 575,000 ] tons per year. For customers in Asia, Europe and North America, the facility include a carbon plant, port and storage facility as well as the gas-fire power plant. In terms of the governance strength, a detailed Slide #12 of the IR deck. QAMCO joint venture is among the low-cost aluminium smelter with a state-of-art production facility assured feedstock supply by long-term agreement with an 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 the top-tier companies within the industry at the global scale across most of the profitability metrics. This is a testimony to JV lean cost base and continued optimization drive, which keeps QAMCO JV on the lower side of the cost curve among the global periods resulting in a 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 ingot and vice versa, which provides an additional layer of flexibility to the joint venture internal 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's operational activities and selling and marketing arrangement later on 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. And now I can hand over the call to Saffan.

Thank you, Rashid. Good afternoon, and thank you all for joining us. Starting with macroeconomic updates. The macroeconomic backdrop for the aluminium markets remained subdued for the majority of 2023 following its peak in early 2022 due to the disruption in supply cost by heightened energy in logistics [ profit ] and it's global -- geopolitical conflicts. The prices of primary aluminium started to stabilize us in the latter part of 2022. Throughout the second half of 2022, there was a gradual improvement in global supply and this positive trend continued into 2023, introducing additional supply into the global aluminium supply chain. Access to raw material supplies became more readily available, resulting in a reduction in energy cost for aluminium smelters worldwide. However, demand from major markets for aluminium remain constrained primarily due to factors such as higher inflation and rising interest rates, which weakened demand, especially in key sectors like Construction segment, that was somewhat neutralized by a partial recovery in the Automotive segment. As a result, and that's detailed on Slide 18. QAMCO's Joint Venture realized aluminium prices in 2023 remains significantly lower than the previous year, experiencing an overall decline of 20%. This decline was influenced by subdued demand, increased supplies, heightened interest rates and concerns about a potential economic recession. On a year-on-year basis, QAMCO recorded a net profit of QAR 446 million for the year ended December 2023 as compared to QAR 919 million for the last year with an earnings per share of QAR 0.080 versus QAR 0.165 for the last year. As detailed on Slide 18, the share of Joint Venture's revenue decreased by 21% to reach to QAR 3.15 billion, for the current year as compared to QAR 3.985 billion for the last year. EBITDA reduced by 33% and reached to QAR 974 million in comparison to QAR 1.456 billion for the same period of last year. On Slide 19, you can visualize that QAMCO's financial performance for the current year in comparison to the previous year is mainly impacted by significant decline in average selling prices amidst macroeconomic challenges, decreasing by 20% to USD [ 2,621 ] per metric ton. Additionally, there has been a slight reduction in sales volumes to the previous year -- compared to the previous year, I mean waning demand. On a quarter-on-quarter basis, as you can observe on Slide 22, compared to Q3 '23, QAMCO's net profit for fourth quarter declined by 19%. A key contributor towards this decline in profitability was lower sales volume, which decreased by 12% on a quarter-on-quarter basis due to inco-terms and weaker demand in some segments, amidst challenging market conditions. Additionally, the bottom line profitability was negatively affected by marginal decrease in the average selling prices which is mainly linked to continued macroeconomic headwinds negatively affecting market prices for primary aluminium. Compared to the third quarter of 2023, the financial performance of 4Q was declined by QAR 21 million or 19%. The reduction in sales volume during the fourth quarter was primarily due to lower sales of fund realized and standard ingots compared to the previous quarter, together with lower average selling prices, primarily contributed this adverse variance. The combined effect of lower prices and volumes were partially offset by lower operating costs. As you can witness on Slide 22, the combined impact of lower prices and volumes were partially offset by lower cost of goods sold by approximately QAR 104 million as well as reduction in sales and administration cost and finance costs compared to the previous quarter. On the other hand, there was an increase in other costs, mainly attributable to impairment of noncurrent asset and other costs increased on account of impairment of noncurrent asset during the current quarter. I'll now hand over to Saoud to shed some light on the operational performance updates of the joint venture.

Thank you, Saffan. Good afternoon, and thank you all for joining us. On the operational performance front QAMCO JV remains committed and maintaining high operational efficiency and competitiveness in production and operation. A continued emphasis on health and safety measures reflect a dedication to ensuring asset variability and achieving operational excellence. Notable achievement in health, safety and environment include the absence of any recorded heat-related incidents involving Qatalum employees. The company is recognized for delivering exemplary safety performance within the aluminium industry and continued this unwavering focus on reducing the joint venture energy consumption. During 2023, QAMCO's joint venture almost concluded relining its 3rd generation of pots commenced fourth operation for [ training ] and replaced fluewalls to ensure sustainable operations, while minimization the risk for disruption in production. During the year, QAMCO JV incurred QAR 210 million on account of capital expenditures, which included routine operations such as pot relining and other maintenance pertaining to power plant and anode plant. Program will continue to support JV drive for operational efficiencies while reducing carbon footprint. I leave now the floor for Saffan to conclude with a final note on the proposed [ dividend ]. .

Thank you, Saoud. Good afternoon. After reviewing the current year's robust financial performance with the present and forecast liquidity position and the expected performance of the joint venture and taking the macroeconomic conditions, business outlook, CapEx and long-term repayment plan of the joint venture. The Board of Directors proposed a total annual dividend distribution of QAR 391 million for the year ended 31st December 2023, representing a payout ratio of 88% of the current year's net earnings, a dividend of QAR 0.07 per share, representing 70% of par value, resulting in a dividend yield of 5% on the closing share price of 31 December 2023. I'll now hand over to Rashid to manage the rest of the earnings call.

Thank you, Saffan. Thank you, Saoud. I think this concludes our call, and we can open the floor for Q&A.

[Operator Instructions] Your first question comes from the line of Anoop Fernandes from SICO bank.

I have 3 broad questions. The first is just a refresher on the gas side. Could you please tell us what -- when was the gas supply contract last renewed and when is it up for renewal next? The second question is on alumina. If you could just give us some insight on the supply chain there, where does your supply predominantly come from? And if is there any sort of pricing arrangement you'll have with Norsk Hydro, wherein you are able to secure alumina at some sort of a discounted price versus a market price, some clarity on that. I have another question, but we will come to that after this.

I'll take the first question, and maybe I'll give the second and third question to my colleagues here. I think to answer your first question about the gas arrangement, you may refer to the IPO prospectus, which we mentioned there on the IPO perspective that the gas agreement is secured for 25 years. From the day of the joint venture establishment, which was back into -- if my memory tells me well in 2010 or 2011. So you can count 25 years from that time line that's the length of the gas agreement. In addition, also the gas agreement will extend to the end of the joint venture, which will be in [ 2050 ] but the pricing of that is -- or the arrangement for that is not yet agreed between the parties. This is the first part of your question. I hope I answered it. For the second and third question, I can hand it over to Saffan.

Can you repeat your second question? Is it about on the raw materials?

Yes, its alumina. Yes, basically, your alumina supply chain. I mean where is the alumina coming from and do you have any sort of arrangements with the hydro wherein -- where you have offtake of alumina at a discount to the market price? Or is it at a [indiscernible] do you all buy it at market.

There are 2 sources. One is hydro. There is another supplier. So most of them are pretty much -- there is no favored pricing. So both are pretty much at arms length. So you basically buy pretty much equal quantities from both suppliers and it's based on some alumina indexes pretty much indexed to certain alumina indexes.

And also the agreement is, I think, is long term in nature. So you would expect naturally some, I would say, could be favorable arrangement, but it depends on the cycle of the aluminium market.

Exactly. It's linked to basically LME.

Okay. And with geographies, do these alumina shipments come from? Is it Brazil and Australia?

Yes, to a certain extent, yes.

Which other regions would that be other than Brazil and Australia?

The 2 suppliers are predominantly located in those 2 areas.

Okay. Okay. Okay. My third question is on the future of the JV. I mean, is there any discussion with hydro on acquisition of its stake in Qatalum. I mean, or is it completely off the table?

It's too early now. So still, we have a lot of time. It's up to 2050. So we are in 2024.

Okay. Then why are you holding so much cash actually? I mean your cash balances at QAMCO have gone up massively your -- it's probably at about 150x your annual operating expense. Why does QAMCO you have to hold so much cash. Why not distribute?

Look at last year profit. Last year, we made QAR 920 million, this year it went down to almost QAR 400 million, out of that QAR 400 million, profit from joint ventures, I believe, QAR 391 million. So it's very cyclical, right? Look at this year also, we see disruption also. So the market also there may be a lot of potential fluctuations in LME prices, what we call shipping logistics and all will have a lot of impact. So if it's a bit of volatility there. It's always better to retain reasonable amount of cash in your balance sheet. And at the JV level also, there is around $1.1 billion debt is sitting in their balance sheet. So all these need to be looked in totality, right? That is one of the reason why you are keeping a certain amount of cash in your balance sheet. But still, if you look at dividend as a payout 88% compared to last year. It's a very healthy payout. Last year, we paid, I think, 53%, if I'm not mistaken.

No, that is fine. The thing is -- I can understand that argument at the Qatalum level, but at the QAMCO level, what does -- what matters is actually the free cash flow per share which is actually pretty high compared to the payout that you all are distributing. So there is this excess cash that is going into fixed deposits or it is just sitting on the balance sheet with no real purpose. So at the holding company level, your only expenditure is the operating expense. It's a holding company expense. Why does the company need to have -- QAMCO need to have so much cash? I can understand Qatalum saving up that...

As you see -- and you see the company is only 5 years old, right, at QAMCO level, so it's only at its early growth stage. So the Board can look at various other options after a while, right? It's only unlike IQ, unlike other entities within the privatized world. So it's very embryonic. So it needs time. So there may be other investment strategy potentially going forward. But at this moment, so -- but we do -- we collect dividend, invest and if you look at our investment income also, it's doubled compared to last year. So that money is not idling. It earns active returns compared to passive returns. If you compare with an index or something, it earns good money. So shareholders are not, how do I say, the earnings are relatively good, right. Last year, on average, our earnings versus this year earnings at the parent level, the earnings are considered to be active, right. So as I said, whether it is Qatalum or QAMCO, the industry, the parent, and it's a single loan joint venture, right? Unlike IQ, where you have -- there is diversification benefit between petrochemical fertilizer steel, you don't have that TM. So it's need to be well managed, right? So everything cannot be paid out.

Your next question comes from Zohaib Pervez from Al Rayan Investment.

Thank you gentlemen for the presentation. I've just got one question. How much of your deposits are in Islamic banks?

It's pretty much -- I can't offhand remember the number, but the majority of them are in Islamic banks.

Majority of your deposits are in Islamic banks. Okay.

Yes.

Can I just send an e-mail to you for this for the confirmation to this because this is imperative for our shearer screening?

Yes, you can send an e-mail to us.

Your next question comes from the line of -- apologies, carry on. Your next question comes from the line of Rob Skepper from Ashmore.

Thanks for your time today on the call. Yes, few questions, if I may. I guess following on some of those questions around the cash and the balance sheet structure. In terms of the debt at the JV, could you talk a bit about the maturity profile in the debt at Qatalum and like the rate at which you'll continue to pay down, would you look at like reterming out that debt if interest rates are kind of lower towards the end of this year? Yes, anything around that would be interesting, please.

I think, Rob, first, good to hear your voice here on the call. Essentially, we announced in 2020 or 2021, the maturity of the current debt profile, the maturity would be at the beginning of -- or let's say, first to second quarter of 2025. The structure of that payment will be a bullet payment. Therefore, the -- at the JV level, there is a discussion on how that will be arranged, what kind of payment will be paid and what will be refinanced and what terms, et cetera. So this discussion is going on. And that's why there you'll see a good kind of reserve of cash sitting at the JV level and even at our own level since this discussion is going on between shareholders at that level. So for this current profile -- for the kind of profile, it's expiring in Q1 [ 2024]. In term of the debt repayment on that specific loan, it's linked to LIBOR plus some premium, which is more or less aligned with the state of Qatar plus some premium on top of that as well in terms of pricing. So it's a very competitively priced loan.

Got it. Got it. Okay. And yes, I guess, more kind of on the operating front. Is there anything by way about planned shutdowns or anything that you foresee could impact production for 2024?

Generally, in the aluminum industry, we operate at full capacity because we have certain pots idling that will be basically down for maintenance. And even within the power unit, we have a spare turbine in case of one of the turbines that need to go into maintenance, the spare turbine can be fired up. In case also that spare let's say, turbine is not working. We are connected to the grid, so we can buy from the grid electricity. So all in all, you wouldn't see naturally a deviation or a big deviation in our production. So you can consider that to be continuing with similar production profile.

Got it. Okay. Great. And then last thing just on new projects when there was some kind of murmurings about some carbon neutral capacity either solar powered or maybe other zero carbon fuels. I just wondered if there was an update on kind of any of those discussions.

We tried to do some small projects there through scrap melting to minimize the use of carbon and also we are looking at certain additional projects to minimize few to through carbon capture and et cetera. But there is no -- but how do I say, put it this way. Still no clear capital expenditures, clear funding plan have not been clearly identified. So there are something in pipeline. So going forward, probably second half of this year, we will come out with the clear plan for those. At this point in time, so we have some plans for scrap melting for those projects.

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

Just a couple of questions for me, if I may. First, on the alumina prices, have you seen some spikes recently on supply disruptions in China. If you can give us some color on Q1. And the second one is, on the supply chain. Again, is there any impact from the Red Sea disruptions on the security of alumina or any other raw materials?

Thank you for your questions. I'll answer your first question about the alumina. From the graph that we put in our Investor Relations presentation, you will see the spot price for alumina in the period, let's say, Q4, you'll see that the price is more or less stabilized with a slight upward trajectory. What we realized at the QAMCO level, we regard the stabilized alumina price during that quarter. That's why you see kind of a good benefit coming out of COG when comparing to Q3 to Q4 for bridge. So more or less, the prices of alumina is still, we've seen it stabilizing. In terms of the disruption and the sea -- the Red Sea issue, you can see from our presentation here, the geographical distribution of our products, most of our products is -- it's catered towards the Asian market. 59% is delivered to them. And the rest is basically distributed between North America and Europe. Naturally, we expect that shipments through Europe will be the directly impacted shipments. Although we did not see any raw data that verify this information whether this has directly impacted our cost, et cetera. But at the bottom line, it's a competitive market within Europe. So if you ship, let's say, to Europe, you have to sell with a competitive price. And if it's not the opportunity for us to sell in Europe is less appealing than other regions. Of course, you'll see kind of a slight divergence gradually with time. And hopefully, things will stabilize. And I think Saffan here would like to add another point.

And it is a market risk. So not only us, it will impact all operators as well. And from your question on the supply chain, and since we buy from U.S. and for Brazil and Australia mostly. So the Red Sea disruption will not be very material as well. So from customers, we sell mostly to Asia and the U.S. And from supply chain, we buy from mostly Australia and the U.S. So both would have material effect, but there will be -- some impact will be felt.

Yes. And is there any impact on the freight costs and logistics because this has been significantly up last year -- 2022, lesser extent in 2023. Do you see this continuing? Or do you think these supply disruptions or Red Sea disruptions could impact your freight costs into next year?

Yes. So basically, based on the actual information, we've announced that quarter-over-quarter, we are losing saving over SG&A, about QAR 11 million. But that does not directly give you the answer because we are selling also less sales volume. We have 12% lower sales volume. So we cannot answer your question mathematically, but -- but we'll come to know the answer in the upcoming quarter once the sales volume are more or less stabilizing quarter-over-quarter, and we can see the impact on the selling price as well. If it's stabilizing quarter-over-quarter and sales volume is stabilized in quarter-over-quarter, we'll naturally see the delta whether the impact is felt or not. But Logically, if freight costs will go up because the shippers will technically, to cover their risk, they will increase the freight charges.

Your next question comes from Nikhil Butane from CBFS.

Well, I think a lot of questions have been answered. Just a few ones which could be remaining. I mean, we've just seen your premiums, especially in the fourth quarter related to your -- in LME prices. We're seeing the [ touch signals ] come down a little bit more than what we have seen prevalent over the last few quarters. So just liked to know what you see there in the first quarter. Secondly, in terms of your impairment on your noncurrent assets you mentioned rightly, so that is a loss which is relating to disposal of PE, which you have given in your profit and loss statement. Is it onetime? And lastly, in terms -- which you just mentioned about Europe, competitive market and prices. So do we see that going forward, your sales could revert back? I mean that has been the reason behind your [ C0 ]. And do we see a reverting back to the mean level, which we have seen over the past few quarters.

I'll answer your second part of -- let's say, second question. I mean the -- like Saffan said, it's market dynamics and it's impacting us and other in the market. Basically, if let's say, price of gas goes up, that could mean that there will be curtailments in Europe that could naturally be more import to Europe, and that could mean that more inflow of aluminium will be required to Europe. Let's say, price of gas goes down and stabilized, you'll have less import to Europe. So if you compare our, let's say, graph of this year compared to last year, you'll see that we used to import more or export more aluminium to Europe compared to this year. And it's a natural market, I would say, remapping that happens with all the global producers. So let's wait and see how all the dynamics will evolve over the next year, and that will determine the netback of where we sell our product. However, we are confident. We have hydro as our marketing agents, other partner in Qatar Aluminium Company, which is Qatalum. And we are confident that with their knowledge and with their -- they know-how we'll be able to maximize the netback to our shareholders. I'll hand over for the first question to Mr. Saffan.

Your first question on the impairment, impairment every year-end, they test for certain old fixed assets, which to cast their fair values. And if it's required, they will provide for certain amounts. The disposal also, if it is required. So these are one-offs. These are not what you call recurrent entries in Qatalum's books. And what was your third question?