Rain Industries Limited (500339) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. This is Alan Chapple. Director of Corporate Communications of Rain Carbon Inc. Welcome to Rain Industries Limited's earnings discussion for the September 21, 2021 quarter. With me on the call today 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. Along with the earnings presentation, we also released management commentary on Saturday, October 30, 2021. Since then, we have been receiving questions from certain investors regarding industry developments and the status of our expansion projects, Accordingly, Rain management will be addressing the investors' questions. Before beginning, 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.

With that, we will now out begin the discussion. The first set of questions is for Gerry Sweeney. Gerry, what is your take on the aluminum industry dynamics going forward? There are many dynamics at play, China cutting down on production, higher energy prices in Europe, magnesium shortages, some smelters ramping up in the U.S. because of higher demand and higher LME prices. In addition, how do you see the profitability and production levels of aluminum going forward, especially with a significant rise in raw material prices?

Thanks, Alan. I think natural gas pricing could impact smelting in both China and Europe. We've already seen this take place. Russia has, however, started to signal some increased gas supplies to Europe, and we've seen prices decline. Additionally, stocks will need to be built up during the winter months. Given the LME price range, we still expect some global production of aluminum to be higher in 2021 than in 2020, given that smelter startups and restarts are still outpacing any smelter closures or reduction. We've also seen the shortages of several key raw materials that are blended with aluminum to create alloys such as magnesium, silicon metal and others. The shortage of these alloy materials has forced some Chinese aluminum smelters to reduce production. But we have not seen the same impact outside of China.

Thanks, Gerry. Transitioning to resins. We're seeing prices going up for a lot of resins around the world. Can you describe the type of resins that we make and what is currently happening with their prices in the industries that use them?

Sorry, guys. I just dropped off. Rain produces 3 primary ranges of resins, hydrocarbon, pure monomer, and hydrogenated hydrocarbon resins. These resins are primarily sold to the rubber, coatings and adhesive industries. In general, demand for the products remains strong. But we have seen some weakness related to reduced automobile sales because of chip shortages where a majority of resins ultimately end up.

Okay. Thanks, Gerry. Now can you talk about the potential impact of a slowdown or recession in China, what it could have on the company as well as the rationing of a lot of industrial output due to the power crisis?

During the past 6 to 12 months, there's been a strong decline in export quantities and a strong increase in market price for the products traditionally exported from China, which ultimately compete with Rain's products in the global markets. A recession in the Chinese domestic market would likely drive Chinese producers to return to their export market strategies as they seek to continue operating at high levels. More Chinese exports could cause more price competition and perhaps lower prices for our products. However, we would similarly expect to see a return to the export market of Chinese raw materials that have been consumed within China itself recently, but which traditionally were exported and consumed by us. This would lead to a decline in the cost of our basket of raw materials allowing us to preserve our usual converter margins. With regards to the power situation in China, CPC and CTP production within China are aren't directly dependent on power. However, the primary consumer of these products, the aluminum industry is dependent on power. Reduced aluminum production in China could lead to increased exports and have a similar impact on as mentioned, with regards to a recession.

Thanks, Gerry. Ever since coal, ever since calcined petroleum coke blending in India was prohibited. Our CPC sales volumes have ranged between 1.4 million and 1.6 million tons, implying a 70% capacity utilization on a total capacity of 2.1 million tons. What has been the main hindrance in increasing sales volumes other than the Supreme Court ban? Also, with aluminum prices increasing, one would have assumed that CPC volume -- volumes would have gone up in 2021. In addition, CPC volume of 330,000 metric tons during the third quarter was the lowest in the past 4 years. Considering the improvement in GPC supply globally, why was our CPC volume lower than even in 2002 when we had 353,000 metric tons of volume?

Well, first and foremost, in 2021's third quarter, the biggest impact on our volumes was the hurricane that hit the U.S. during the quarter. We had a similar one also in 2020 during the third quarter. Beyond that, obviously, COVID-driven market demand declines had a major impact on CPC markets and aluminum demand overall. Outside of that, we have seen essentially a reduction in overall demand for aluminum outside of these periods over the last couple of years, which did affect demand for our products and limited our production resulting in us having idled some capacity at both our Robinson and Gramercy plants.

Okay. Thanks, Gerry. Moving on, are we facing more of a demand side issue or a raw material supply side issue for CPC? And how do we plan to manage that?

We are definitely seeing the shortage of quality raw materials in the marketplace, which has really had the function of driving up costs. In addition, the outages in the U.S. Gulf refiners due to recent Hurricane Ida during the third quarter have placed additional stress on our overall global supply chain. However, we have long-term contracts and relationships with our suppliers. So outside of these extreme circumstances, we are able to continue to secure the quantities of our raw materials needed for our production. The restrictions in India that allowed only smelters to import CPC has impacted our strategy to blend CPC produced in our calciners with CPC produced in our Vizag calciner in India. This has prohibited us from meeting the demand requirements in the marketplace overall over the period.

Okay. Thanks, Gerry. Next question is Chinese CPC prices are hovering around $670 to $700 because of winter stocking before pollution controls are implemented there. How is that helping in getting a better spread for our CPC products?

Historically speaking, very little Chinese CPC is being imported, well, at the moment due to increased demand for CPC within China itself and growing aluminum smelting industry for the most part. Any export tons from China are priced at levels that are so high that several of China's key long-term CPC export customers are at least for the moment, turning down offers for 2022 Chinese CPC supplies. Ultimately, though, as far as we're concerned and our spread, we're a converter. And at the end of the day, the main goal is for us to maintain our margins. Sometimes we do realize opportunity margin, but overall pricing impact are only temporary as we realign.

Okay. Thanks, Gerry. Now let's turn to coal-tar pitch. What's the outlook in 2022, especially considering the situation in Europe, will we be able to maintain the high utilization in this segment? And how is the company and our customer, how are we dealing with the increased energy prices in Europe?

Overall, Rain continues to see increased demand and high capacity utilization of our carbon distillation plants. Most of our smelter customers in Europe use hydroelectricity. So they are not impacted by the current high energy costs in Europe as their suppliers are. The increased energy prices are a concern for sure, and are a major discussion topic with all customers at this time. Based on our contractual terms, we are increasing prices, and we are also working on initiatives to reduce our own energy consumption. But those will take us a bit longer to have a positive impact on our results.

Okay. Thanks, Gerry. Do we have any plans to use our sustainability-related activities to seek premium pricing for any of our products similar to what we're seeing for green aluminum that is being marketed?

Rain remains a committed leader in sustainability at reducing the environmental impacts that we have in all of our business segments. This includes installing solar power capacity in India using flue gas desulfurization systems to reduce SO2 emissions at our calcination facilities and capturing the waste heat generated by our production processes on all continents where we operate into reduced energy consumption overall. In addition, once commercialized, our ACP or anhydrous carbon pellets should contribute to lower emissions and reduced energy consumption by our smelter customers. That said, it is too early to see any environmental premium for our carbon products, but it is something that we'll keep an eye on for the future.

All right. Thanks, Gerry. In terms of shipping logistics and labor supply, is Rain seeing any material headwinds in those areas?

Most of the headwinds we are seeing in the news about shipping logistics and labor shortages are related to sectors were goods moving containers. From a total volume point of view, Rain ships relatively little tonnage in containers. However, certain Rain raw materials and products are seeing some headwinds. At the same time, we are also experiencing some tailwinds where our production sites are located in the same geographic market as our customers, which gives us the advantage of having a shorter supply chain than competitors located outside of the region.

Okay. Next question, Gerry. Can the current issues -- can the current issues lead to more aluminum production moving to the Middle East. If so, how would that impact Rain and what steps can the company take to protect its revenues and profits?

Aluminum smelters in the Middle East have in recent years been predominantly consuming coal-tar pitch and calcined petroleum coke produced in China. However, during the global pandemic and now again, with recent high prices for material shipped from China, there has been a noticeable shift to sourcing more raw materials from alternative locations. With our locations and logistically flexible terminals, we remain well positioned in order to supply the Middle East market moving forward.

Thanks, Gerry. We now have a few questions for Jagan. Jagan can we expect higher utilization levels and production going forward for our cement plants? And has the company taken any cost increases for cement business?

Thank you, Alan. As already mentioned in our press release dated October 15, 2021, we have completed the upgrades at our current cement plant Unit 2 in the Kurnool District of Andhra Pradesh, allowing our company grinding capacity to increase from 2.03 million tons to 2.795 million tons per annum. Gross realization improved 4% compared to previous quarter. Freight cost has increased by 6%. So the majority of the cost increases have been passed on.

Okay. The next question relates to the comments in our management commentary for at the end of Q3 that mentioned a multiyear high in capacity utilization. The question is, why were quarterly CPC volumes at multiyear lows given the high capacity utilization?