Rain Industries Limited (RAIN.BO) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. On behalf of Rain, we welcome all the participants to the Fourth Quarter 2020 Earnings Conference Call of Rain Industries Limited. The speakers on today's call are Mr. Jagan Reddy Nellore, Vice Chairman of Rain Industries Limited; Mr. Gerard Sweeney, President of Rain Carbon Inc.; and Mr. T. Srinivasa Rao, Chief Financial Officer of Rain Industries Limited. [Operator Instructions] Please note that this conference is being recorded. During the conference call, the management will be referencing and discussing a slide show presentation, which is available for viewing on our website at www.rain-industries.com in the Investor Relations section. It is recommended viewing this presentation while listening to the management's discussion. Before we begin, management would like to mention that some of the statements made in today's discussion may be forward-looking in nature that could be affected by certain risks and uncertainties. The company's actual results could differ materially from such forward-looking statements. Now if you could turn to Slide 3, I would request Mr. Jagan Reddy to provide an update on key developments within the Rain Group. Thank you, and over to you, sir.

Thank you, operator. Good evening to everyone. I would imagine that like me, many of you are relieved that 2020 is over and looking forward to getting back to life as it was prior to the coronavirus pandemic. Despite 2020 being a year we all want to forget, it was the safest in the company's history with 13 of our sites completing the year without a recordable incident. In fact, across our organization, we have operated 252 days without a recordable incident. Other than a few weeks nationwide lockdown in India, no other production facilities globally were shut down due to COVID. We overcame significant damage from the strongest hurricane to hit the Louisiana area in the last 150 years and continued to operate our plant safely with only essential operators on site. We also freely executed our plan to cease operations at our Uithoorn facility and optimized production at our Duisburg site, essentially producing the majority of the same products at one site instead of 2. This improved efficiency is one of the reasons we were able to maintain EBITDA in the year that had reduced sales volume and many headwinds. Turning to Slide 4 of the presentation. EBITDA of INR 4.8 billion in the fourth quarter was down 7% from INR 5.17 billion during the previous quarter. This decrease reflects the seasonality of some of our products sold in Europe and North America from our Carbon and Advanced Materials segment, which are not in high demand in cold weather. Revenues for the fourth quarter was INR 26.4 billion compared with INR 25.66 billion in the third quarter. The sequential improvement in light of reduced earnings occurred primarily due to improved volumes and pricing and appreciation of euro against Indian rupees. This was the second consecutive quarter that we have seen an increase in revenues, giving us hope that global economy is returning to normalcy albeit slowly. On the Carbon side of our business, volumes were up about 4% and revenues increased about 7% from the third quarter. This was despite the lingering impact of damage caused by Hurricane Laura on our Lake Charles facility. Although we were able to restart both calcination kilns and electric generation plant, we lost about 1 month of energy income during the current quarter and were not able to produce CPC to capacity due to bottlenecks and other constraints caused by the widespread damage to the plant resulting under-absorption on costs. Our calcination business was also challenged by a continued worsening of global green petroleum coke supply. As we have seen throughout the pandemic, green petroleum coke prices continued to rise due to reduced refining of transportation fuels, which has negatively impacted refinery run rates and green petroleum coke production. On a positive note, bullish demand for aluminum and anodes required for smelting has resulted in higher CPC prices, helping to offset the green petroleum coke cost increases, providing an optimistic view for the coming quarters. During the fourth quarter, we began to prepare to suspend calcination activities at our Robinson, Illinois facility. A range of issues have impacted demand traditionally served from the facility, led by access to cost-effective raw materials. During the current year budgeting process, amid raw material shortages, it became clear that it would be more economical to suspend operations temporarily until the supply-demand situation improves, especially from a green petroleum coke perspective. We will service the Robinson plant sales volume from our Gulf Coast calciners. And in the coming months, we'll continue to evaluate the market for signs of improvement so we can resume calcination at Robinson. On the distillation side of our Carbon business, pitch volumes were lower largely due to the closure of an aluminum smelter and curtailments at an anode producer. On the margin side, we saw price pressure on traditional coal tar supplies as industries look for alternatives for raw materials typically sourced from oil refineries and add demand pressure. In terms of other carbon products, creosote volumes were down slightly due to its seasonality, while volumes of carbon black oil were up about 9% as we sold inventory that had built up from second quarter. Finally, crude naphthalene volumes grew by about 11%, thanks to the increased demand by the construction industry. Turning to Advanced Materials. Fourth quarter saw lower volumes, which resulted in 8% decrease in revenue compared with the third quarter. This was primarily due to a seasonal reduction in engineered product sales, in particular, our sealer-based products, which falls off in the winter months. Our PETRORES sales volume remains strong, which reflects the transition to electrical vehicles in many parts of the world, and sales of our CARBORES specialty binder increased by more than 9% during the quarter as demand from Asian countries rebounded as the impact of crude began to subside. Elsewhere, carbon resins sales were flat with third quarter and sales of our petrol resins increased during fourth quarter. Petrochemical intermediate volumes were up substantially, but pricing changed in line with the benzene quotations. Finally, sales of naphthalene derivatives during the fourth quarter were stronger due to increased demand for phthalic anhydride, [ CNS ] products and refined naphthalene by the construction industry. Regarding naphthalene derivatives. We closed the fourth quarter with the sale of our polymer business, which primarily consisted of our production facility in Candiac, Canada. This downstream business fell outside of our core businesses and had always been run as a stand-alone enterprise with few synergies other than utilizing naphtha oil produced at our distillation facilities. In our Cement business, there was an increase in volumes and revenue by approximately 11% and 2%, respectively, compared with third quarter. The sales volumes have improved across all regions where we operate. Segment EBITDA decreased by INR 252 million compared to third quarter, mainly due to lower realization. With good monsoons in South India, the rural economy should provide strong impetus to increased construction activity and thereby cement demand over the next several quarters. With this business update, I'll now turn over the call to Gerard Sweeney to take you through the industry and other business updates on Slide 5. Gerry?

Thank you, Jagan, and good evening, everyone. It's a pleasure to speak with you all again. Turning to Slide 5. Aluminum demand is now higher than pre-pandemic levels and with the LME prices more than $2,100 a tonne are the highest since late 2018. Also, increased demand is driving pricing as there appears to be a global shortage of scrap and primary aluminum. Amid growing demand and rising prices, an additional 4.7 million tonnes of smelting capacity, 3 million of which will be in China, is expected to come online during 2021 in the form of new plants and restarts of previously idled facilities. At the same time, the decision by the new U.S. administration to continue aluminum tariffs instituted by the outgoing administration and potentially reinstate others that had been lifted, should help to protect U.S. smelters from Chinese imports. These developments bode well for our carbon segment. Increased Chinese aluminum production should result in a decrease of CPC exports out of that country, creating more opportunity for us to serve the rest of the global market. Similarly, there should be less Chinese coal tar pitch exported to places like the Middle East and South Africa, which should be beneficial to us as well. In terms of aluminum pricing, we are now seeing deals in the market for low carbon aluminum. However, in Q4 of 2020, we began seeing companies pay a slight premium for low carbon aluminum. As smelters and anode producers look to capitalize on this emerging sustainability trend, we believe that our engineered anhydrous carbon pellets, or ACP, could be a differentiator in helping aluminum producers reduce their emissions and energy consumption, contributing to the marketability of their low carbon aluminum. Continuing on ACP, let us turn to Slide 6, our major projects. Construction has resumed at our ACP production facility in the United States and will commence in Q2 2021 in India after being halted due to the risk of COVID exposure amongst employees and contractors. Beyond its emissions and energy advantages, ACP will give us the unique ability to maximize our GPC feedstock as the rapid global transition to electric vehicles reduces demand for transportation fuels and the resulting availability of feedstock for our calciners. In a world where pet coke supplies are becoming increasingly tight, the ability to achieve enhanced green petroleum coke utilization rates when we calcine ACP by reducing the consumption loss during calcination could be a differentiator when it comes to production economics, raw material availability and sustainability. Construction on our new vertical-shaft calciner in India is largely completed, and we could begin production within weeks of receiving a satisfactory ruling on the importation of raw material feedstock for the facility. The ability to import the needed raw materials for the shaft calciner is critical because of the shortage of available domestic GPC. Across India, supplies have become even tighter as cokers are producing less pet coke during the pandemic and competition for domestic GPC versus higher cost imports has intensified. Once commissioned, each of these projects and their carbon-extending and emissions-reducing technologies will strengthen our position as a leading, sustainable global producer of essential carbon-based materials. Finally, an update on our new Hydrogenated Hydrocarbon Resins plant in Germany. After spending much of the second half of the year working with customers on product testing and validation, we reached our first sales milestone for our advanced water-white resins in the fourth quarter. The qualification process was understandably impacted by COVID since the pandemic has reduced customers' willingness to conduct testing and introduce new products while working with skeleton crews. Additionally, we continue to work to optimize operations of this plant. It is a highly sophisticated unit, introducing new technology and capabilities to the industry. Looking forward, we will continue to ramp up production and anticipate continually increasing sales volumes in 2021. Before I turn the call over to Srinivas, I would like to congratulate our employees for completing 2020 with a total recordable injury rate of less than 0.14, making it the third year in a row that we have established a new company best for annual safety performance. In any year, that would be a remarkable achievement. But the fact that we finished 2020 with so few recordable injuries is beyond remarkable when you consider that we achieved this while implementing radically new health and safety practices due to COVID as well as starting up our new advanced resins facility, dealing with a significant damage from a hurricane and completing one of the most complex maintenance turnarounds that we have ever attempted. With that, I'll now turn the call over to Srinivas, who will take you through the consolidated financial performance of Rain. Srinivas, over to you?

Thank you, Gerry, and good evening, everyone. It is a pleasure to speak with you today. In the fourth quarter of 2020, Rain achieved consolidated net revenue of INR 26.4 billion compared to INR 28.3 billion in the fourth quarter of 2019, a decrease of INR 1.9 billion or about 6.7% decrease. This resulted from a decrease in revenue of INR 2.34 billion or 12.3% decline from our Carbon business segment and INR 0.25 billion or 3.7% decrease from our Advanced Materials business, offset by an increase of INR 0.7 billion or 31.9% increase from our Cement business segment. Rain's consolidated adjusted EBITDA increased by INR 269 million compared to the prior year. This resulted from an increase in the Advanced Materials segment by INR 367 million and an increase in the Cement segment by INR 389 million, offset by a decrease in the Carbon segment by about INR 487 million. Now turning to the next slide on Carbon segment performance. Revenue from our Carbon segment was INR 16.71 billion for the quarter ended December 31, 2020, compared to INR 19.06 billion for the same period last year. During the year -- during the quarter, the sales volume decreased by 4.2%, primarily driven by lost CPC sales due to Hurricane Laura and reduced demand due to smelter closures. The average blended realization decreased by 8.5%, which was offset, to some extent, by appreciation of U.S. dollar and euro agonist Indian rupee by 3.6% and 11.5%, respectively. Overall, due to the aforesaid reasons, revenue from Carbon segment decreased by 12.3% during Q4 of CY 2020 as compared to Q4 of CY 2019. Adjusted EBITDA of the Carbon segment decreased by INR 487 million due to decline in volumes, majorly on account of Hurricane Laura. Turning to next slide on the performance of Advanced Materials. Revenue from our Advanced Materials segment was INR 6.57 billion for the quarter ended December 31, 2020, as compared to INR 6.82 billion for the same quarter in 2019. During the quarter, there was a 7.6% increase in volumes, driven by improved demand from Asian markets after recovery from COVID-19, improved demand from construction industries, coupled with higher throughput based on improved raw material availability. During fourth quarter of CY 2020, the average blended realization decreased by 10.5%, driven by changes in customer mix and a decline in oil-related prices, which was offset, to some extent, by appreciation of the euro agonist Indian rupee by 11.5%. Due to the aforesaid reasons, revenue from the Advanced Materials segment decreased by 3.7% during Q4 CY 2020 as compared to Q4 CY 2019. Adjusted EBITDA for the Advanced Materials segment increased by INR 367 million due to higher realization in engineered products and volumes in -- increase in volumes in naphthalene derivatives compared to Q4 of 2019, coupled with the appreciation of euro against Indian rupees. Moving on to the next slide, on Cement business. During the fourth quarter of CY 2020, Cement revenue increased by 31.9% compared to Q4 of CY 2019, due to an increase in realizations by 21.2%, along with an increase in volume by 8.8% as compared to last year. Cement EBITDA also increased by INR 389 million due to an increase in realizations, coupled with lower costs. Moving to the next slide, on debt. We ended the quarter with approximately USD 1,212 million of total debt, including approximately USD 77 million of working capital loans. Net debt was USD 932 million and based on LTM, EBITDA of $269 million. We ended the quarter with a net debt-to-EBITDA ratio of 3.5x. We are comfortable at this level as our average borrowing cost stood at 5%, and we expect it to remain stable since the floating rate portion of our long-term debt is tied to the EURIBOR, which is still negative. Referring to our previous discussions, cash outflow on capital expenditure and plant turnaround costs for the year ended 2020 totaled USD 146 million, which was more than expected because of -- because we resumed construction activities during the quarter on our ACP project and incurred expenditure related to Hurricane Laura. Regarding liquidity, we ended the quarter with $280 million of cash on hand and $130 million of undrawn revolver credit facility. The cash balance increased significantly due to proceeds from the sale of our polymers business. While this positions us very comfortably, we do not intend to maintain this position. Given the transaction closed on 31st of December, we are still in the process of evaluating all options available to us to deploy the proceeds efficiently. The primary goal is to reduce debt and reduce interest expense for the group. With that, I will now turn the call over to the operator for a Q&A session. Operator?

[Operator Instructions] The first question is from the line of Viraj Mehta from Equirus Securities.

Congratulations for the numbers. So sir, if we were to normalize for the Hurricane Laura, what kind of volume growth we would have seen in the Carbon segment?

Gerry?

On account of Hurricane Laura, we lost about 34,000 tonnes of CPC volumes.

Yes, that was the impact.

Okay. And so the exit run rate that you mentioned about the CPC business, is it showing traction back to or higher than pre-COVID levels and September quarter as well?

Yes.

Okay. Sir, second thing, we essentially sold the business to repay debt, is what we mentioned in our press release as well. But as we can see in the presentation today, our net debt has also gone up and our net cash has also gone up. I mean on a net debt level, it looks okay, but we are still not repaying debt. When does that start happening?

As you -- as I -- we just explained to you, the sale happened on December 31. So obviously, any reduction of the debt will not appear in the December 31 balance sheet. And second thing is you are able to see that there is an increase in the debt because the exchange rate -- we have about EUR 390 million of debt in Europe, and we are presenting the number in U.S. dollars and the FX rate between USD and euro -- euro has appreciated substantially against U.S. dollar. Last year, it was done at $1.12, and December 31, 2020, it is $1.23. So $437 million of euro debt has got increased to $479 million. About $42 million increase is there only because of exchange rates.

Okay. And in terms of cash flows for this year, is it fair to assume that now that we don't have any major CapEx and normalization of margins is happening, all the cash flows will be utilized to reduce debt this year and onwards as well?

We can't say all cash, but we -- our idea is to reduce the debt in the due course. At an appropriate time, we will be using the cash to reduce the debt.

But your understanding is correct that we want to reduce debt, and we will use all the surplus cash because we don't have major CapEx anymore.

[Operator Instructions] We take the next question from the line of Arvind Kothari from Niveshaay.

Sir, my question was on the up cycle that metals are experiencing. If you look at aluminum prices in China also, they are going up substantially. So in that kind of a scenario, I wanted to understand that we are suspending one of our facilities of Robinson's, and we had already suspended Gramercy calciner a year back maybe. So how are we preparing ourselves for the upside in the requirement of CPC given what the prices today are basically maybe reflecting higher demand going forward?

Gerry?

Essentially, you heard from our comments, we do have spare capacity from the calcination perspective. So we have 1 plant that we've taken down mainly due to both market demand and raw material availability. As the demand strengthens, while we have very strong pricing in aluminum right now, we need more demand, ultimately. So as that comes back, we will return to calcining at Robinson. And if we get a favorable ruling in the high courts in India, we can also start up our shaft calciner. So we're well positioned to feed continued demand growth from the aluminum sector going forward.

So on both, if you can give more color that how much time would it be there that -- once you try to start the Robinson facility, how much time does it take to restart the calciner? And also on the judgment of the Supreme Court, what is the current, you can say, position of the company in terms of when it expects or what is the judgment status right now? If you could elaborate.

See, just to give you an idea -- okay. Please go ahead, Gerry.

Yes. As far as starting up a calciner, it's a matter of weeks. So it's not a very protracted process in order to bring a facility up. So that will not be a gating issue for us as far as meeting demand. As far as anticipated rulings of High Court in India, Jagan, why don't you go ahead and make comments about that?

Yes. Actually, we have approached the government, as a matter of fact, seeking some permission for some job work. And we are actually hoping that we will get a response in the next 2 to 3 or 4 weeks actually. If we get a favorable response, that's fine. Otherwise, we'll actually approach the Honorable Supreme Court because this is one of the very few plants in the world that actually reduces pollution in India and not increases the pollution in India. So we think we can approach with the proper justification. And hopefully -- we are hoping that we should get some better -- favorable response probably, hopefully, in the next 2 months -- 2 to 3 months maybe. And once we have that, we can start the plant. And as Gerry mentioned, it may take about -- to start a rotary kiln calciner, say Robinson, it may take about 3 to 4 weeks. And to start a shaft calciner, it will take about 6 to 8 weeks.

Okay. Great. And another question was on -- if you could give a bit of understanding on what the current dynamics are with -- related to metals, it looks like the metal companies are making greater margins. We being a converter, on the dynamics of both our distillation and calcining business, on the distillation side, what I understand is that the steel up cycle makes the availability of coal tar more easier for us, and that reduces our cost in that business. And basically, the aluminum up cycle gives us the opportunity to price our products higher because in that segment, at least, there are very few plants now which are working around the world, except China. So in that business, if that can increase our margins going forward, the converter margins? And on the calcining side, how are the dynamics, given both GPC and CPC are in a rising maybe environment? Dollar margin maybe going up, but percentage might remain the same. Is that correct?

Yes. The -- as far as the distillation margins, be it coal tar pitch or the related derivatives that we get off of -- the related products that we get off of the coal tar that we distill, look, dealing with -- I want to be very careful in a world where we have not seen full recovery from COVID yet in projecting too much. But your basic philosophy that you've expressed would be correct. So if we deal with the scenario of an improving commodity price for the sake of aluminum and oil price, those are favorable conditions for us from a margin perspective going forward. But we always have to balance supply and demand, the -- how the steel industry goes and demand for steel products affects our raw material supply as well. So we're always playing that spread between our cost for raw material and our finished sales price. But the momentum that's building up in a world where vaccines are being rolled out worldwide, and we are seeing industries return to -- from a pricing and from a volume demand perspective to pre-COVID-type conditions is absolutely bullish, and we are cautiously optimistic about what that can do for us in 2021.

The next question is from the line of [ H.R. Gala ] from Finvest Advisors.

Congratulations to the team for really good operational results, although the selling prices and costs are not in our hands. My question is, looking from the medium-term perspective, how do you see next 4 to 5 years shaping for us? That is my first question, for 3 businesses. And what will be our capital investment plans matching with that objective?

Well, we have spent -- the last several years, we have essentially made the investments to carry the company for the next 4 or 5 years. So your question is very timely. While we are still getting the investments over the last several years up and running, we really will be, we anticipate, ramping those investments up over the next 2 years and essentially getting them fully operational and producing at full rate, which will give us the capacity to carry the company over the next 4 to 5 years. We are also focused on doing this in the most environmentally friendly and sustainable format because that's really the marketplace that we're facing now as a company. We're not just extending -- as you heard Jagan say earlier, we're not just essentially adding capacities in new projects, but we're doing it with an extreme attention to environmental responsibility. And that will be our focus on the next 5 -- 4 to 5 years as a company, really taking advantage of the opportunity in front of us to produce clean, green, environmentally friendly products for the 21st century.

Hello?

Yes, go ahead please?

My second question will be, what kind of capital expenditure we will be requiring every year to sustain the type of growth which we are expecting?

About -- see our normal CapEx is going to be about $65 million to $70 million. And our capital expenditure maybe -- basically maybe for this all -- we are talking about maybe $10 million, $15 million on an average because we are not planning to make any big investments at least for the next 4 -- 3 to 5 years.

The next question is from the line of Rohith Potti from Marshmallow Capital.

Congratulations on exceptional safety performance in such difficult times. Sir, my first question is on CTP business. I mean you've seen the volumes come down steadily. I was just curious to know how do you see that going forward and if you think the graphite electrode rebound that is happening right now can help us going forward.

Yes. Actually, as a matter of fact, we expect strong demand for all our CDAM products going forward. And as a matter of fact, we are seeing that actually, be it our Advanced Materials or in the coal tar and derivatives. We are actually seeing very strong demand for all our products. So we only expect -- and the prices in China also having to be substantial, that will have a good bearing on rest of the world also. So we do expect strong demand going forward, at least in the near future, what we can see.

Understood, sir. That was helpful. Sir, next question is on the strategic nonrecurring expense of INR 55 crores that we have. I mean over the last few quarters, this particular line item is quite -- it's been actually quite recurring. So what is this about? And when can we see this particular line item not affecting us anymore?

This is basically the expenditure incurred for the new expansion project, while the cost incurred for creating an asset will be capitalized. But if any other expenses like operating staff recruited to run the plant or the timing of such expenses, those things are -- will not be capitalized, and it will be taken to the regular expenses, like, operating expenses. So we are adjusting them. Once these CapEx projects are completed, we can [ remove ]. And one more thing is the hurricane expenses, basically, because until such time we get the insurance, we cannot account for it. So we are actually basically expensing all the damage that caused cost due to the hurricane. And once we get the insurance, then basically we will actually add back to the overall revenue stream.

The next question is from the line of Pratiksha Daftari from Aequitas Investment Consultants.

Sir, my first question is on the CPC prices. I think for the last few quarters, we were seeing a declining trend and then a couple of quarters, it remained flat. We are now seeing an upward trend and the presentation says that the realizations have reached $385. I just wanted to understand like what kind of trajectory do we expect given the demand situation we have right now. And also, what kind of spreads do we see given that raw material prices are also increasing?

Yes. The -- on GPC, you're correct, the GPC price trend had been down. That was more reflective of demand. But as we've seen essentially less raw material available, that trend has reversed itself. And that's bolstered a -- that's bolstered essentially the price recovery that you've seen in the marketplace. That's going to continue as long as global refiners are in their reduced run rate due to COVID. That's mainly due to the global lack of demand for transportation fuels due to the interruption that's taken place. So most of that price increase that you're seeing is related to, again, the shortage of raw materials and rising prices for raw materials driving the finished product price. And the second part of your question I didn't get. If you can repeat it, please.

I I was talking about the price -- increase in price that we are seeing in CPC and the spreads. What kind of spreads do we see between GPC and PPC going ahead? Do we see the spreads expanding?