Rain Industries Limited (500339) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. This is Alan Chapple, Director of Corporate Communications at Rain Carbon Inc.. Welcome to Rain Industries Limited Earnings Discussion for the December 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 Friday, February 25. We have been receiving questions from certain investors and analysts regarding industry developments and the status of our expansion projects. Accordingly, Rain management will be addressing those questions. 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.

We'll now start the discussion. Let's begin with a couple of questions for Gerry related to our Advanced Materials segment. First Gerry, does the increase in PETRORES capacity ensure that we can run our coal distillation planes at optimal capacity, even if there's some geopolitical disruption or reduction of smelting capacity in Europe?

Thanks, Alan. Actually, we are not announcing an increase in our PETRORES capacity. Rather, we altered the existing capacity that we have to produce additional PETRORES product. And as for the second part of the question, PETRORES is not produced from coal tar. So demand for PETRORES does not impact the utilization of our coal tar pitch plants.

Okay. Thanks, Gerry. Given the robust demand for CARBORES and PETRORES, are we considering adding additional capacity for production? And if so, how quickly can that be accomplished?

As we've mentioned in our Q4 2021 management commentary, we already altered existing production capacity at our plant in Poland so that it can now produce PETRORES as well as CARBORES, giving us greater flexibility to meet the demand for each product depending on that demand. Once our production capacity for PETRORES and CARBORES is fully utilized in the future, we'll then evaluate further CapEx investments in this area.

Okay. Thanks, Gerry. I have a couple of questions now for Jagan, related to Advanced Materials. Are we developing any new products in that segment that might bear fruit in the short to midterm?

We are constantly researching and developing new products and improving our existing products. However, there are no new products in the short to medium term in the pipeline that we expect to have a material impact on earnings.

Okay. Thanks, Jagan. Another investor wants to know about the declining EBITDA margin that appears to be happening in the Advanced Materials sector during the past couple of years. What has been driving this trend? And do you expect CARBORES, PETRORES and are white water resins to help reverse this?

Thanks, Alan. Actually, EBITDA margins in Advanced Materials have improved in the recent years. It is important to remember that the end of 2020, we divested our Superplasticizers business, which used to contribute about $8 million annually to this segment. Unfortunately, in 2021, segment margins were impacted by an unprecedented increase in energy prices, which we are working to pass through to our customers; as well as cost to stabilize and optimize the HHCR plant; and the time lag in passing along increasing raw material costs to our customers. We believe these issues will be addressed going forward and are looking to a stronger 2022 for this part of our business.

Thanks, Jagan. Turning to CapEx. The first question is whether our investments are achieving tangible results. Specifically, when does management believe that our recent CapEx projects will generate returns and put the company on a path to higher earnings?

As mentioned in the management commentary, we have invested approximately $225 million over the past few years on growth projects and product portfolio modernization. We expect to achieve writtens from the current year on these CapEx investments.

Okay. Thanks, Jagan. Srinivasa, I have a CapEx question for you. Can you provide us with our plans for 2020 and 2023? How much of this is for maintenance capital expenditure? And how much of this is -- how much of this will be for growth CapEx?

Thanks, Alan. As mentioned in our recent management commentary, there's no major CapEx spending in the pipeline, except to new CapEx for solar power plants in our cement business. Instead, we are focusing on optimizing the returns from the investments we already made. In general, we incurred maintenance CapEx of about $70 million per year. However, due to delays in completion of certain maintenance projects in 2021, as a result of supply chain disruptions and COVID-related labor issues at all our plants, we expect spending in 2022 to be around USD 90 million. And we will be back to around $70 million thereafter.

Thanks, Srinivasa. Now, let's turn to the Carbon business segment. Jagan, what is the likely capacity utilization for the calcination operations in 2022, specifically for the new vertical shaft calciner? Also, are we contemplating selling -- complying to sell the production from a new vertical shop calciner in India or we're going to export?

During 2021, our calciners operated at about 75%, and given the robust demand by the aluminum industry, we expect utilization to be at a similar level, a tad bit higher level in 2022. As for the shaft calciners, we are looking to operate the plant at approximately 40% to 50% capacity. And if we receive relief from the petroleum coke import restrictions, that would increase -- and the majority of the production from the shaft [ cals ] will be exported.

Thanks, Jagan. How many tons of green petroleum coke are we resourcing from domestic refiners in India? And is that number likely to increase in the coming year?

We are currently sourcing about 50,000 to 60,000 tons domestically in India and expect that'll increase to about 100,000 tons in 2022. Depending on the evaluation of the DGFT allocations for imports, the domestic procurement may vary slightly.

Gerry, turning to the U.S. situation. Do we -- are we going to be able to source enough GPC for our U.S. calcination plants, considering the permanent closures of some refineries? And will we be able to run all of our U.S. calcination plants at optimal capacity?

Yes. We have long-term relationships with our refinery suppliers. And we're also, in most cases, strategically placed to preferably receive their GPC production. So we don't foresee any major issues in sourcing the GPC volumes we require to optimally operate our portfolio of U.S. plants. Also, once the U.S. ACP production facility is fully operational, it will give us even more flexibility to receive a wider palette of raw material specifications, resulting in further improved availability for our plants.

Okay, Gerry, speaking of the U.S. ACP plant, what is the anticipated capacity utilization of that facility in 2022? And to what extent can it help mitigate the GPC sourcing issues?

We're currently evaluating various operating scenarios for our U.S. ACP plant, including where optimum capacity utilization will be in the longer term. Obviously, we just started this plant up in December of last year. Ultimately, this will be determined by balancing product performance at varying blend ratios, as well as GPC market forces and the capacity optimization of our calciners. Given all of that, it's too early, really, at this point to project ACP capacity utilization for 2022.

Okay. Thanks, Gerry. In recent calls, we talked about the challenge of getting GPC supply. Have we found new suppliers over the past couple of years? And have we entered into any new long-term agreements with them?

Yes, we have indeed found many new supply sources for GPC, both from already existing and new start-up GPC production sources. They're geographically diversified, and their availability has proved especially beneficial to Rain when increasing volumes of Chinese GPC supplies were consumed within its domestic market during COVID. In addition to securing additional GPC supplies, there is an ongoing effort to strengthen our relationship with them, build new and more efficient logistical supply chains for their materials. In short, we don't foresee any major issue in sourcing GPC we need going forward.

Okay. Thanks, Gerry. Is there a risk of GPC costs increasing more sharply than calcine petroleum coke prices in the coming months? And how confident are we in our ability to pass along those cost increases to our customers?

Yes. GPC and CPC prices have increased dramatically, with the resurgence in demand. And as we've explained in the past, we are a converter and have the ability to pass on the increased costs that we incur to customers. The only thing that I would like to point out is that some -- at some points, we do have a lag in passing that cost along, but that's not been the case of late. Given the current market conditions, with increased demand for all commodities, we don't see any medium to short-term risk in passing our costs along to the end consumers.

Okay. Thanks, Gerry. Another investor is asking if there has been any reduction in CPC capacity globally due to the shortage of GPC or environmental concerns? There are news articles about European and Chinese calciners having to reduce their operations. Is this helping us secure more GPC in any meaningful way?

One major European calciner supposedly did experience operational issues, and we understand that several Chinese calciners were curtailed before enduring the Winter Olympics as part of an overall drive to reduce industrial emissions. These factors did temporarily reduce the global capacity utilization of the calcining industry. However, there was also a reduction in throughput in some Chinese coking refineries. So many extra GPC that became available during that period should be seen as temporary and nothing on a long-standing basis.

Okay. Thanks, Gerry. Now, we have a couple of questions dealing with pricing. First, with high aluminum prices, can we expect a similar increase in CPC and coal tar pitch pricing, along with corresponding positive impact on our margins?

Yes. It's hard to predict the future, but we don't see a lot of upward opportunity still remaining since we're pretty much record high levels in our products to this point. But again, I'd like to emphasize that we are generally considered as a converter and that gives us the ability to maintain rather stable margins regardless of price level. That said, at any particular time, margins could be higher or lower than average due to -- as the aforementioned time lag with the resetting of finished product prices against raw material prices. Overall, though, in the long run, we maintain a pretty consistent margin for our products.

Thanks Gerry. What is the price outlook for calcine petroleum coke and coal tar pitch? And how are the prices determined?

Yes. As I referenced in the last question, like most commodity prices, we're trading at multiyear highs on a lot of our products. We expect the trend to continue for at least a few more quarters because we've not seen prices top out yet. Apart from the prices of raw materials, change in the supply/demand also influence the prices of our finished product, which ultimately, as I said, wash through for us as a converter.

Okay. Thanks, Gerry. Now, we have a couple of questions related to coal tar. How comfortably -- how comfortable are we in our ability to secure coal tar to run our operations at optimum levels? And have we been able to increase our supplier base during the last couple of years?