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

Welcome to the Qatar Aluminium First Quarter 2024 Results Call. Please note that this call is being recorded. I would like to hand over to Roy Thomas from QNB FS to begin the conference. Please go ahead.

Thanks, Paul. Hello, everyone. This is Roy Thomas from QNB Financial Services. I want to welcome everyone to Qatar Aluminium Manufacturing Company's First Quarter 2024 Financial Results Conference Call. On this call from Qatar Aluminium Manufacturing Company, we have Abdulla Yaqoob Al-Hay, Acting Manager of Privatized Companies Affairs, QatarEnergy; Saffan Mohamed, the Senior Financial Management Analyst, Privatized Company's Affairs, QatarEnergy; and Saoud [ Abdulaziz Abdulghani ], the Senior Financial Management Analyst, Privatized Company's Affairs, QatarEnergy. We will conduct this conference call with management first to view the company's results followed by a Q&A. I will turn the call now over to Saffan Mohamed. Go ahead, Saffan.

Thank you, Roy. Good afternoon, and thank you for -- all for joining us. Before we go into the [ Chemicals ] 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's disclaimer statements as detailed on Slide #2 of IR [indiscernible]. Moving on to the call. On Tuesday, 30th April, 2024, QAMCO published its results for the 3 months period ended 31st March, 2024. And in today's call, we will go through these results and provide you an update on key financials and operational highlights. Today on this call, along with me I have Saoud [indiscernible], the Senior Financial Management Analyst, QatarEnergy. We have structured our call as follows. At first, I will provide you with a quick insight into QAMCO's ownership structure, its competitive strength and overall governance structure by covering in Slides 5 until 14 and on Slide 34 and 35 of the IR presentation. I'll also brief you on QAMCO's key operational and financial performance for Q1 2024. Later, my colleague, Saoud will provide you with more details on JV's operations and capital expenditure updates. Finally, we'll 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, with QatarEnergy owning 51% and the rest is in the free float held by various domestic and international investors. QatarEnergy being the founding shareholder and parent company of QAMCO provides all the head office functions through a comprehensive service level agreement, while the operations from the JV is independently managed by its own Board of Directors, along with a senior management team. QAMCO holds 50% share in Qatar Aluminum Limited, Qatalum, which produces high-quality aluminum of about 650,000 metric tons per year against a nameplate capacity of 575,000 metric tons per year for customers in Asia, Europe and North America. The facilities of Qatalum include a carbon plant, a port and the storage facilities as well as a gas-fired power plant. In terms of our competitive strength, as detailed on Slide 12, QAMCO's joint venture is considered to be among one of the lowest -- low-cost aluminum smelters in the world with a state-of-the-art production facility, assured feedstock supply via our long-term agreements with an intense focus on HSE, which makes the JV a leader among EPS. 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 testament to JV's leaner cost base and continued optimization drive, which keeps QAMCO's joint venture on the lower side of the cost curve among its global peers, resulting in a strong margin evolution. Moreover, the JV's global marketing partnership with the other JV partner provides an access to strategically important markets, which makes the company more competitive in comparison to EPS. In addition, the JV is capable of quickly shifting its product mix, i.e., from value-added products to standard ingots and vice versa, which provides an additional flexibility to the JV in terms of its production process as well as supply chain management while ensuring production and sales volumes are in line with the evolving market dynamics. In terms of the governance structure of QAMCO you may refer to Slides 34 and 35 of the IR deck, which covers various aspects of QAMCO's code of corporate governance in detail. Coming back to the performance of Q1 2024 with respect to the macroeconomic update for the current period. During first quarter of 2024, the macroeconomic context for the aluminum markets continue to remain volatile. Several factors affected the commodity markets, which cascaded down to the supply-demand dynamics of primary aluminum and led to price volatilities. The demand for primary aluminum in critical global markets have been significantly constrained by challenging macroeconomic environment with consistent inflationary pressure and heightened interest rates. These challenging macroeconomic factors have led to a marked reduction in demand, especially within crucial sectors, industries such as building and construction. The investment climate in these sectors has notably weakened as financial conditions continue to remain tight. Despite these feedbacks, the gradual recovery in the automotive sector is some positive development for the company. This resurgence is aiding in mitigating the negative impacts on an overall aluminum demand. On an overall basis, aluminum prices for 1Q 2024 demonstrated declining trends versus first half – first Q 2023 and 4Q 2023 amid macroeconomic headwinds. As detailed on Slide 18, QAMCO reported a net profit of QR 86 million for the 3 months period ended 31st March, 2024 as compared to QR 93 million for the same period of the last year with an earnings per share of QR 0.015 versus QR 0.017 for 1Q 2023. As noted from Slide 20, the share of joint venture revenue declined by 13% to reach QR 640 million for the current period as compared to QR 736 million for the first quarter of 2023. EBITDA declined by 1% and reached QR 220 million in comparison to QR 223 million and -- for the same period of last year. However, the EBITDA margin for 1Q 2024 remained at 34% compared to 30% for first quarter of 2023. Net profit for the period was QR 86 million as compared to QR 92 million for the same period of last year. As detailed on Slide 21, QAMCO's financial results for the current period versus the same period of last year was largely affected to an overall decline in average realized selling prices and the sales volumes. As you can note from Slide #19 of the presentation, the average selling prices witnessed a decline of 10% in the current quarter compared to the same period of last year and reached USD 2,423 per metric ton on the background of macroeconomic headwinds and impacted QR 74 million to the net profit for the period ended 31st March, 2024. Additionally, financial results were also impacted by lower sales volume amid the ongoing geopolitical uncertainty and a general slowdown in the market. Sales volume declined by 3% versus the first quarter of 2023 due to relatively lower sales of extrusion ingots versus last year due to lower demand and lag in the shipping time. This was partially offset by higher sales of foundry alloys, supported by the recovery in automotive sector. Decline in sales volume impacted to approximately QR 18 million to the net profit for the 3 months period ended 31st March, 2024 compared to the same period of last year. Operating expenses for the current period declined versus the same period of last year mainly on account of lower raw material costs and favorable inventory changes amid lower sales volumes. On an overall basis, decline in operating costs contributed QR 92 million positively to the net profit for the 3 months period ended 31st March, 2024. As you can witness on Slide 19, production levels slightly inched higher with an increase of 1%, in the production volumes for the current period, driven by stable current efficiencies and improved amperage. I will now hand over to my colleague, Saoud, to continue with the presentation and the discussion.

Thank you, Saffan. Good afternoon, and thank you all for joining us. As detailed on Slide 22, compared to the previous quarter, QAMCO net profit for 1Q 2024 declined by 7%. A key contributor towards this negative movement in profitability was due to lower sales volume reported during the first quarter of 2024 versus the previous quarter, which declined by 10% on a quarter-on-quarter basis and then weaker demand and time of shipments. This decline in sales volume contributed EUR 69 million negatively to the bottom line profitability for the 3 month period ended 31st March, 2024 versus the previous quarter. Selling prices, on the other hand, also witnessed a marginal reduction versus the previous quarter on account of subdued global demand and tough market conditions. Nevertheless, the earnings were positively impacted by lower cost of goods sold reported during the first quarter versus 4Q 2023, mainly linked to favorable inventory movements on account of lower sales volume reporting during the first quarter. This decline in cost of goods sold contributed QR 79 million positively to the bottom line profitability on a quarter-on-quarter basis. QAMCO's financial position continued to remain robust with the liquidity position at the end of the 31st March, 2024 reaching QR 1.8 billion in form of cash and bank balances after paying 2023 dividend of QR 391 million. During the period, QAMCO's dividend [indiscernible] share operating cash flow of QR 140 million with a share of free cash flow of [ QR 54 million ]. On the operational front, QAMCO JV has continuously demonstrated ongoing commitment to maintaining high efficiency and cost competitiveness in its production and operation. The prioritization of health and safety measures underscores education and to ensure both the well-being of its workforce and the liability and integrity of the assets. Moreover, executing CapEx projects as planned and in alignment with the operational requirement showcases strategic foresight and resource management. Through its focus on operational excellence, health and safety and strategic investments, QAMCO JV is well positioned for sustained success in its industry. I'll now hand over to Saffan to [indiscernible] the rest of the [indiscernible].

Thank you, Saoud. Now we can open the floor for question and answers relating to the Q1 performance.

[Operator Instructions] And your first question comes from the line of Lee Beswick from QNB.

In the geographic breakdown on Page 25, you have Asia at 62%. Can you just tell me how much of that is China specifically?

So we don't have that information at present, and we don't generally describe by each country as a practice. So -- but we disclose at the very major market level only. But obviously, China is one of the major markets.

Okay. And do you do you track how much goes to different sectors, whether it's the car sector, construction sector, electrical industries? Do you track any of those? Can you break it down by sector at all?

Yes. Most of the aluminum, the news on the automotive sector and especially for the alloy wheels. This is certainly -- we have noticed that, but we -- as QAMCO we don't attracts these sales of the aluminum, but probably for both construction and the alloy wheels, specifically for the vehicle.

And also to add, we sell to -- basically to the intermediaries, right? Generally, most of the retail customers are not placed by Qatalum or its marketing partner. So what we sell is at the -- very sustained of the value chain. So we don't have -- but only -- but we see the difference between construction industry, which you just -- what you call, extrusion ingots and other one which uses -- foundry alloys. That determines which sector side demand of [indiscernible] -- not in demand.

And just a second question. Are there any planned shutdowns coming up, whether it's Q2 or Q3?

Yes. Aluminum businesses, generally, you don't have shutdowns. Aluminum plants need to operate throughout the period.

Your next question comes from the line of Andrew Brudenell from Ashmore Group.

I'm a little bit new to this one. So I wonder -- and I know that obviously being a commodity-based business, it's very tricky. But I wonder if you could just give me whatever you can in terms of your ability to the extent rather at which you can control margins or your cost per ton? Can you just give us a sense of what you've achieved so far? How much more is it within your control in terms of the margin? When I look at Page 24, I know the EBITDA margin is all over the place. How much of this can you control? How do you -- how does management think about controlling either EBITDA margin or the cost per ton? As I said, I know it's a commodity business. But if you could just give me a little bit of color, please, about how management sort of thinks about this stuff? That would be interesting for me, at least.

Yes. At the beginning of the presentation we gave an overview of QAMCO and its JV compared to its other peers. And maybe this is a demonstration that our -- most of the ratios are very healthy and strong and better than most of the other competitors in the market. Definitely, this is something that we gain due to the initiatives that we took across the previous years, especially that we are one of the most lean company in terms of costing. Maybe Saffan can add something.

Yes. See, if you look at the cost structure, as you mentioned, we are into the commodity business and the raw material is sourced outside, but there are certain agreements contract to optimize the purchases in respect of alumina, coke, pitch and other alloys. Now selling price is driven by market where you are a price taker. So majority of where you gain efficiency is through your capital projects where you try to improve your efficiency. So for example, if you look at QAMCO's current efficiency amperage, was around [ 300 ], say, 5 to 7 years back. Now we have moved to passing [ 330 ]. Now, this shows our CapEx investment, results in efficiency improvement, which reduces your overall cost of production through additional production, through fixed cost reduction and other value-accretive projects.

[Operator Instructions] And your next question comes from the line of Anoop Fernandes from SICO.

I have 3. Let's take them one by one. The first is on the price that Qatalum paid for gas. I know you don't give numbers, but directionally, if we look at 1Q '24 versus 4Q '23, was the price paid higher, lower or was it flat?

No, this is as per the contract, right? So there is a contract. The contract doesn't change on a quarter-on-quarter basis. So if you look at the cost of goods sold, gas is not one of the major cost of goods sold. Therefore, we cannot segregate that, and we cannot give you whether the -- on which direction the operating costs have moved, because it didn't include so many other line elements, like alumina, coke, pitch and -- as well. So there is a contract with QatarEnergy, a long-term contract, which has formula or a price function along with the gas prices [ asset ] [ established ].

So it is similar to IQCD, right? The formula, which is -- whether it's an indexation component?

No. This is different. Unfortunately, we cannot give you more details on the formula, but it's completely different. Because IQCD also there are different, different contracts, not unique to each other.

The second question is on this corporate tax. So there's the speculation going around that Qatar might introduced this in '25. So right now QAMC is exempt from tax, even though Qatalum pays corporate tax. So how do you see this status changing if corporate tax is brought in? Will QAMC still be exempt because of that 2008 directive exempting listed companies? Or do you expect that to change?

You are referring to this organized -- OECD [ comes ] direct to the [ 15% ] taxes?

Yes. Absolutely. Yes.

We don't have any -- yes, it is under assessment. We don't have any further guidance with respect to that. So whether it will be charged at the entity level and whether you will get a tax credit, we don't know. But as right now, the corporate taxes, so the income tax of the group companies, through the MOU we basically consolidated before tax. Basically, we are not taxed.

Okay. Yes, the last question is on potential expansion. So when Qatalum was set up, there was a provision in place for the company to double capacity. I just want to know what are the challenges that you all -- that the company could face in expanding capacity? What are the key constraints? Why that thought has not crossed your mind yet?

Excuse me, what was your reference? Are you referring to the…

No. So if we look at Qatalum, when Qatalum was set up and when the plant was constructed, there was a provision in place to double the capacity. Yes. I just want to know what are the constraints for the company in expanding capacity? What are the challenges here?

I think you are not correct. There is no any news regarding the doubling the capacity. This is...

No. There's no news. No, exactly. There's no news. What I'm saying is when the plant was built, there was a provision in place. So you have the land and infrastructure ready to handle a doubling of capacity, right? So my question is, what are the challenges that you have in terms of expanding capacity? Like maybe land is one, but I don't know, but I just want to hear it from you what are the challenges?

What is your reference to say that when Qatalum was established, there was provision for doubling the capacity? From where did you read this?

Your JV partners, Norsk Hydro. There it's -- I mean it's available in the public domain. And I think -- I'm not sure if it was in your prospectus as well, but I think there is ample reference to it in...

Yes. We would appreciate answer this to our e-mail. And there is no news or no -- even at the earlier stages that we have intent to double the capacity.