Rain Industries Limited (500339) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. In just a moment, we will take you through the performance for an Rain Industries Limited during the second quarter of 2021. Presenters today are Mr. Jagan Reddy Nellore, Vice Chairman of Rain Industries Limited; Mr. Gerard Sweeney, President of Rain Carbon Incorporated; and Mr. T. Srinivasa Rao, Chief Financial Officer of Rain Industries Limited. Before we begin, management would like to mention that some of the statements made in today's discussion may be forward-looking in nature, and they could be affected by certain risks and uncertainties. The company's actual results could differ materially from such forward-looking statements. Now if you can turn to Slide 3, Mr. Jagan Reddy will provide an update on key developments within the Rain Group. Thank you. And over to you, Jagan.

Thank you, Alan. Good evening, everyone. As in much of the world, as more and more COVID vaccines are being administered, life is likely slowly returning to normal. Notwithstanding the most recent threat from the new Delta variant, after a year of a lockdowns, different manufacturing activities and the drastic altered way of life economic activity has rebounded. As a result of pent-up demand, we entered the second quarter fully expecting to see an increase in the cost of raw materials that we require for our cancellation, distribution and advanced materials businesses. What we were uncertain of was whether the selling prices for our products would keep pace. Turning to Slide 3 of the presentation. I am pleased to report that we were able to maintain our margins still in the second quarter despite higher raw material costs. And as a result of our EBITDA of INR 6.86 billion, was up slightly compared with INR 6.35 billion during the previous quarter. Demand on our products is reasonably strong, and we expect it to remain so for the rest of the year, barring a new COVID wave that disrupts the global economic recovery. While we expect to be challenged by raw material costs and availability during the coming quarters, increased refinery activity and steel production should improve our access to green petroleum coke and coal tar and possibly moderate the increases we have seen in raw material costs during the first half of the year. That combined with the good demand for our products that I mentioned earlier, gives us reason to be cautiously optimistic that our slow return to historically normal EBITDA levels during the past 2 quarters will continue. At the same time, we also know that there is additional growth by improving the performance of our calcination business and are working to further reduce costs so it can achieve normalized margins and EBITDA. Turning to our Carbon segment. It continues to benefit from robust demand by the aluminum industry but calcined petroleum coke and coal-tar pitch as smelters around the world are capitalizing on the pent-up demand that I mentioned earlier, which has pushed aluminum prices well above the pre COVID levels. As the business smelters around the world are enjoying the high utilization rates for a very existing capacity and the resulting profitability has prompted a number of expansions and restarts of idle capacity. All of the acts are to increase demand for our key products, CPC and CTP. CPC demand for titanium dioxide also remained strong during the quarter, driven by home construction and high pigment demand for paints resulting in increased in [indiscernible] capacities. Our calcination business also benefited from improved raw material supplies from U.S. refinery production increases as demand from automobile and a aeroplane traffic draw productions of gasoline and aviation fuels. During the first week in July, U.S. refining capacity utilization stood at approximately 92%, up from 84% in early April. While the many U.S. requirements are returning to full operation, other parts of the world, including Europe and Asia are still lagging and therefore, impacting the broader availability of GPC. The distribution side of our Carbon segment demonstrated our residents as they converted during the second quarter as raw material challenges margin [indiscernible] rising cost was successfully managed and largely passed through. Moreover, our cost position was further strengthened by extending and diversifying on raw material supply as well as ongoing cost controls and operational reliability. During the quarter, coal-tar pitch sales remained strong, driven by robust demand by the aluminum and graphite sectors. Moving on to other carbon products, our distillates continue to be largely sold out due to strong seasonal demand as well as renewed consumer purchase of the countless tools and include our distillation products as essential ingredients. In terms of our seasonal [indiscernible], volumes were up more than 40% differentially and more than 60% year-over-year, a clear indication that the impact of COVID is diminishing. Carbon black oil volumes also continue to recover with increased demand from the carbon black industry, primarily driven by increased demand for the time industry. Looking ahead, global demand for our distillation products is expected to remain strong. As with the availability of GPC per calcination, coal tar availability for distillation also remains tight, and pricing is a challenge. Nonetheless, we remain confident that the rebound in global steel production, coupled with our aggressive sourcing activities, will enable us to engage in sufficient and cost effective supply of raw materials to enable our facilities to manage capacity and run in a cost effective manner. Turning to our Advanced Materials segment. The business continues to see healthy demand across the product portfolio. In terms of our integrated products, volume of carbons used in refractory and graphite products continues to increase as more industries seek environment friendly alternatives. Demand for our PETRORES specialty coating for lithium ion batteries also remained strong due to the increase in sales of electric vehicles around the world. I'm pleased to report that in June, we delivered our 500th (sic) [ 500,000th ] ton of these unique products since we began production in 2002. Finally, sales of our sealer-based products were exceptionally strong compared to the previous quarter due to their seasonable -- seasonality and favorable weather conditions. Moving on to chemical intermediates, BTX volumes during the quarter were down, as we took a conservative approach in procuring raw materials to build inventory that was offset by our significant increase in selling prices. Phthalic anhydride volumes are slightly lower than previous quarter, but considerably higher on a year-over-year basis due to the decline in demand of COVID -- impact of COVID on manufacturing. Finally, demand for refined naphthalene continues to increase, and we are selling nearly all that we can produce. In terms of hydrocarbon Resins & Modifiers, we began the quarter by setting a monthly sales record in April, and we ended the first half of the year by selling nearly 24,000 tons of these resins again, company best. Aromatic Chemicals volumes were driven by improved overall demand, but this was offset by reduced sales of [ 3.5 PMP, ] which is used in the disinfectants that was an extremely high demand during the first 9 months of the pandemic. Moving on to the Hydrogenated Hydrocarbon Resins, or HHCR of water-white products sales volume that we have tripled than what they were during the first quarter. We are extremely pleased by the strong demand for this advanced business and our progress in working with customers within product testing and [indiscernible] or [indiscernible]. Looking ahead at this segment, we anticipate continued healthy demand for our Advanced Materials products the coming months, and we are hopeful that the settling of oil-related raw material prices will allow us to record pricing on some of our forward-priced products such as resins and CARBORES. At the same time, global logistics and supply chains continue to be a significant challenge to the segment, and the situation has been accelerated in the near term by the recent flooding in Germany and Belgium. But also I like to say that the cement demand in the states of South India, especially in Andhra Pradesh, Telangana and Tamil Nadu and Karnataka remains very strong, and we have seen an uptick in demand compared to the previous year at the same as previous -- year-on-year basis. We expect -- although during monsoons there will be reduced demand for cement, but we expect the increased demand to continue once the monsoon is over, [indiscernible] as we are having good monsoon period and the rural economy should improve. With this business update, I will now turn over the presentation to Gerry to take you to the industry and other business updates on Slide 4. Gerry?

Thank you, Jagan. Good morning, everyone. It's a pleasure to discuss the industry trends during June 2021 quarter. Turning to Slide 4. Aluminum demand remains strong, pushing LME prices to the $2,500 per ton range. With increased demand and profitability, as we pointed out during our last call, the global aluminum industry is expected to add approximately 4.7 million metric tons of smelting capacity and expansions and restarts from late 2020 through 2021. We are clearly seeing that elevated aluminum prices and record smelting profitability continue to incentivize additional primary aluminum production in China. Recent restarts totaled nearly 800,000 tons of smelting capacity, and China's production alone is expected to expand by around 2 million tons in 2021. The question is, has aluminum pricing peaked and what does that mean for demand? Since reaching a peak of $2,577 per ton in May, aluminum prices have consistently retreated every time they challenge $2,500. We are of the view that the smelters are comfortable with the current levels and believe this sector should remain strong for the foreseeable future, a resurgence of COVID notwithstanding. That said, since the global economy began to awaken from its COVID slumber in late 2020, manufacturing activity around the world in June decelerated to a 3-month low. In addition, U.S. manufacturing activity grew by the slowest rate in 5 months, and China and Japan cooled to 4-month lows. We will be closely watching to see if LME prices will begin to weaken along in tandem with reduced post-COVID economic growth, and we will be managing our global activities accordingly. Finally, while we are on the subject of aluminum, I am sure many of you have been monitoring the industry's pursuit of green and low carbon aluminum. We are also acutely interested and know we have an important role to play in helping our customers attain their sustainability goals. For instance, we believe that our calcine anhydrous carbon pellets, once commercialized and used in anodes, will offer smelters energy savings and productivity benefits, not to mention improve our CPC -- I'm sorry, GPC conversion efficiency and decrease overall emissions of smelters. That's just 1 example. If you saw our July 14 press release, you also know that we are working on a detailed carbon footprint analysis with 1 of our aluminum smelting customers and 2 raw material suppliers to better quantify cradle-to-gate emissions in producing low carbon aluminum. We hope to publish those results by the end of this year. Now let's turn to Slide 5, major projects. As I mentioned earlier, we continue to ramp up our capacity and sales in water-white resins, and we are continuously working to improve the reliability of the plant and achieve premium quality output. In the coming months, we will be focused on building on our progress driving down costs and optimizing production to meet market demand. In the United States, we will be commissioning the first production facility for anhydrous carbon pellets, or ACP, in Louisiana during the fourth quarter of 2021. We have begun functional testing of the ACP plant equipment and expect to introduce raw material into the plant in the coming weeks. While we're excited about the market potential for ACP to increase our raw material utilization and offer environmental and energy benefits, we are also working to ensure that this value added and proprietary product will be cost competitive, when we are ready to introduce it and provide us with an alternative calcine product that we can share with anode customers for testing. Finally, turning to India, the start-up of our new Vertical Shaft Calciner project remains on standby as we await clarity from Indian authorities on our ability to import feedstock for the plant. As we informed you in our last call, we could begin production within weeks of receiving a satisfactory ruling on the importation of raw material feedstock for the facility. Once operational, the new plant will be one of the most environmentally friendly calcination facilities in the world with sustainable practices that include generation of electricity through waste heat recovery, indirectly contributing to lower greenhouse gas emissions in India as well as state-of-the-art ammonia scrubbing system that will virtually eliminate sulfur dioxide emissions and upscale the SO2 into valuable fertilizer. Most importantly, once the requisite approvals are received, the new plant will not only meet the need of the aluminum smelters for high-density CPC, it will also start to generate a return on investment made. With that, I'll now turn the presentation to Srinivas, who will take you through the consolidated financial performance of Rain. Srinivas, over to you.

Thank you, Gerry. Good evening, everyone. It is a pleasure to present our financial performance during the June 2021 quarter. In the second quarter of 2021, Rain achieved consolidated net revenue of INR 36.22 billion, compared to INR 23.43 billion in the second quarter of 2020, an increase of INR 12.79 billion, resulted from an increase in revenue of INR 7.95 billion from our Carbon segment, an increase of INR 3.05 billion from our Advanced Materials segment and an increase of INR 1.79 billion from our Cement business segment. Rain's consolidated adjusted EBITDA increased by INR 2,519 million compared to the prior year. This resulted from an increase in the Carbon segment by INR 1,928 million, an increase in the Advanced Materials segment by INR 21 million, an increase in the Cement segment by INR 570 million. Now turning to the next slide on Carbon segment performance. Revenue from Carbon segment was INR 23.31 billion for the quarter ended June 30, 2021, as compared to INR 15.35 billion for the same period last year. During the quarter, sales volume increased by 11.4%, primarily driven by increase in demand from traditional customers, offset with a one-off shipment with non traditional market in the prior year quarter. Further, the average blended realization increased by 36.3% driven by changes in the demand and supply mix and higher market quotations. Further, there was an appreciation of euro against Indian rupee by 6.5% and depreciation of U.S. dollar against Indian rupee by 2.8%, respectively. Overall, due to the aforesaid reasons, revenue from Carbon segment increased by 51.8% in second quarter of 2021 as compared to second quarter of 2020. Adjusted EBITDA of Carbon segment increased by INR 1,928 million compared to Q2 of CY 2020, due to improved volumes and pricing for certain products, coupled with cost discipline and the depreciation of euro against Indian rupee. Turning to next slide on performance of Advanced Materials. Revenue from Advanced Materials segment was INR 9.07 billion for the quarter ended June 30, 2021, as compared to INR 6.01 billion for the same quarter in 2020. During June 2021, there was a 9.3% increase in volumes, primarily driven by improved performance of all the units and increased demand from steel and lithium ion battery customers. During Q2 of CY '21, the average blended realization increased by 38%, primarily due to changes in oil-related prices and an appreciation of euro against Indian rupee by 6.5%. Due to the aforesaid reasons, revenue from Advanced Materials segment increased by 50.8% during June 2021 as compared to June 2020. Adjusted EBITDA for the Advanced Materials segment increased by INR 21 million due to improved volumes and realizations as well as appreciation of euro against the Indian rupee, offset by incremental operating cost of new HHCR plant and divestment of Superplasticizer business. Moving on to the next slide on the Cement business. During the second quarter of CY '21, cement revenue increased by 86.7% compared to June 2020. The increase is primarily driven by increase in the volumes by 82.3% coupled with increase in the realizations by 2.4%. The volumes in June 2020 quarter were lower on account of shutdown of cement plants in April and May of 2020 due to COVID-19. Cement EBITDA increased by INR 570 million due to an increase in volumes and margins. Moving to our next slide on debt. We ended the quarter with approximately USD 1,141 million of total debt, including approximately $25 million of working capital and other debts. Net debt was USD 918 million, and based on NPM EBITDA of USD 350 million, we ended the quarter with a net debt-to-EBITDA ratio of 2.9x. We are comfortable at this level as our average blend -- average borrowing cost stood at around 5%, and we expect it to remain stable since the floating rate portion of our long-term debt is tied to EURIBOR, which is still negative. With the cash proceeds from the sale of Superplasticizers business in December 2020, we reduced the working capital debt substantially. As you can see, our consolidated working capital debt reduced from USD 77 million as of December 31, 2020, to USD 25 million as of June 30, 2021, apart from the reduction of USD 4.5 million of senior secured notes upon buyback. With increasing prices for most of our products, there is an increase in the working capital requirement for the business. Even with higher requirement of funds for working capital, we generated cash of $4,577 million, approximately USD 62 million during the first half of 2021. As discussed earlier, our requirement for expansion capital projects would be minimal going forward after the completion of the verticals up in CPC plant and the 2 ACP plants. Accordingly, we will be focusing on debt reduction once the expansion projects are completed fully. With that, I will now turn the presentation to Mr. Jagan for giving closing remarks.

Thank you, Srinivas. As we informed you during our previous call, we entered 2021 with a combination of apprehension and cautious optimism. 2 months into the quarter -- into the year, optimism is overtaking apprehension, although we are maintaining a watchful eye on the Delta variant, many signs point to a broad strengthening of the global economy. From aluminum to tiers to construction materials and beyond, production in so many sectors is returning to pre-COVID levels, and we stand with kind of benefits since our carbon-based products are key ingredients in complex goods that are [indiscernible] cycling in demand. As always, though, we are taking nothing for granted, especially the health and safety of our production personnel so that we remain strongly in the global supply chain, cost discipline also remains our priority, and we are working hard to expand our access to available, affordable and high-quality raw materials. We are also working aggressively to bring our new advances [indiscernible] plan to profitability at the commission, our ACP production plant in the United States and the long-awaited Vertical Shaft Calciner in India. And all the while, we are intensely focused on making meaningful progress on our sustainability journey because we know that nothing will have a greater impact on the success of our business than our sustainability efforts and the ability to meet the related needs of our customers. Thank you for your continued interest in Rain Industries Limited, and we look forward to next quarter's presentation. Thank you.