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

Good day, ladies and gentlemen. This is Alan Chapple, Director of Corporate Communications at Rain Carbon Inc. Welcome to the Rain Industries Limited earnings discussion for the first quarter of 2022. 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 the morning of May 5, 2022. We've been receiving questions from certain investors and analysts regarding industry developments and the status of our expansion project. Accordingly, Rain management will be addressing those questions in today'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 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, let's begin. Our first question is for Gerry. Gerry, could you please provide insights about the impact on Rain due to the ongoing conflict between Russia and Ukraine?

Thank you, Alan. As mentioned in our fourth quarter earnings presentation, Russia contributes approximately 8% of the group's total revenue. The vast majority of that site sales and raw material procurements are within Russia. So we have seen no material impact to our operations at this time. We are continuing to operate as per the requirements of all applicable law and international sanctions while closely watching to see how the conflict evolves. And if there are any additional sanctions, we will comply with them as needed.

Thanks, Gerry. Is Rain dependent upon the cash flows from the Russian operations? And how is management planning to distribute cash from those operations?

Our Russian operations are self-sufficient, not dependent on support from other group entities outside of Russia. Similarly, our operations outside of Russia are not dependent on cash flows from our Russian operations to meet their obligations. Prior to the start of the conflict, we were receiving regular dividends from the Russian operations. While the funds aren't being currently accumulated, we are not expecting any dividends in the near future. We are closely monitoring the situation and complying with all local and international sanctions under the guidance of external counsel.

The next question is, with a lot of sanctions already in place and even more expected to come, how is management planning to handle this?

Well, the situation is too fluid to really make any specific comments at this time, and it really is literally changing daily. I can assure you that our company is fully compliant with all regulations, and we are continually working with our external advisers to evaluate and comply all evolving regulations.

Given the current geopolitical issues and the inflationary environment that we're in, what is your sense on aluminum, on the aluminum market in the United States, India, Europe and China? And also how does this translate to the outlook for Rain Industries?

Well, worldwide, there's an increased usage of aluminum across various products, spanning from automobile to construction, to electric or electronic appliances to food and beverages. And certainly, that increased usage is driven by the 4 markets that were proposed in the question. There's a scope for a substantial increase in per capita consumption of aluminum in certain countries. Again, in reaction to a cleaner, greener, more responsible and sustainable society that demands it. For example, the per capita consumption of aluminum in India is about 2.5 kgs as compared to a global average of about 11 kgs. Accordingly, we do expect the primary -- the production of primary aluminum will continue to increase in the near future, albeit it could be at a lower rate, considering that we're now at a base production or capacity of 66 to 67 million tonnes of production per year. Even at a lower rate of 2% to 3% of increased demand going forward, there'll be an incremental production of 1.5 million to 2 million tonnes of aluminum per year. We could see, given what's happening globally, a temporary fall in production due to high energy prices, inflationary trends or pandemic-related disturbances, but the outlook is very positive for the near term.

Okay. Thanks, Gerry. Obviously, we were happy to see the rebound in the performance of our Advanced Materials segment during Q1. Can you provide any guidance on how much of the segment's performance can be attributed to the advanced resins now being produced at our new HHCR plant in Germany? And can we expect the segment to continue to perform as it did in the first quarter going forward? Also during the fourth quarter, energy prices had a significant impact on our margins. However, during Q1, things seem to be back to normal. Can we expect this trend in the future?

Yes. We don't provide product line information due to the sensitivity and competitiveness of our businesses. But during the earnings call, we specified that the business was able to overcome certain onetime events in the fourth quarter. And apart from the improved reliability of HHCR operations, our production there is anticipated to grow throughout the year. As far as the energy cost, we did see substantial energy price rises and volatility during the fourth quarter, which impacted us greatly to the tune of probably $25 million. While we've also seen rises in volatility during the first quarter, our efforts to reduce our consumption, look at alternative fuels to natural gas and also change our pricing habits to monthly, and put in adjusters have really helped us drive and overcome that impact that we've seen.

Okay. Thanks, Gerry. Our next few questions are for Jagan. First, can you address the reasons for shutting down one of the rotary kilns at the Vizag plant? Also, what is kilns capacity? And can you provide any details about the expected loss in EBITDA due to this?

Thank you, Alan. As mentioned in the earnings call, due to the reduced allocation to Rain by the DGFT authorities of imported GPC to the existing plant compared to last year, we were forced to shut down one of our 2 rotary kilns in Vizag. This was not an easy decision, but one that we were forced to take to ensure the longetivity of both the existing rotary kilns and new vertical shaft kilns plants. We continue to work with the Indian authorities to secure the GPC allocation specific to the new calciner. But until then, we will need to allocate the tonnage.

Thanks, Jagan. Next, investors are wondering why there has not been an update on our follow-up with GGFT for enhancing our GPC import limits. During the last few quarters, we've said that we expect that the situation will be resolved within the next few months. What is the alternative plan if we don't hear from the authorities? Are we planning to shut down the second kiln at Vizag in the near future or continue with one rotary kiln and then also run the new vertical shaft calciner?

While the math is subject in the court. At the same time, we are also continuing to pursue with the government about to get the approval for importing GPC and CPC by our new Vizag plant, which is the most environmentally friendly calciner plant in the world with implementation of various sustainability measures, including ammonia scrubbing that recovers more than 98% of sulfur dioxide. And generates clean energy through recovery of waste heat, and also produces ammonium sulfate that can be used as fertilizer. While the company is continuously following up the matter, the same is not yet resolved. We are continuing to procure GPC from domestic sources to the extent available to partially offset the GPC shortfall. The vertical shaft kiln is operating at a reduced capacity by processing domestic GPC and by carrying our job work for converting the GPC into CPC. This overall has resulted in partial shutdown of the plant.

Okay. Thanks, Jagan. The next question is how much power revenue are we losing due to the shutdown of 1 Vizag plant?

The company has a cogeneration facility within energy generation capacity of approximately 40 megawatts at our Vizag domestic tariff area plant. After our internal consumption of energy, we make up to anywhere between $14 million to $15 million in revenue from the sale of this green energy per annum in Vizag. With the shutdown of one of its kilns, we might lose up to 50% of the energy revenue from the plant.

Okay. Could you shed some light on Gerry's comments during the earnings call regarding a shipment of calcine ACP to one of the major aluminum smelters? In addition, are we seeing any benefit in the conversion factor on yield? And what is the additional cost to make ACP from GCP?

We are in the initial stage of producing calcining and trialing ACP on a commercial scale and are waiting for feedback from major aluminum customers. As such, we cannot comment at this point of time on the costs and benefits of this new deal. However, as we have mentioned before, we expect that the plant of GPC and ACP will result in an improved conversion factor in our operation, and increased density compared to traditional calcine GPC.

Okay. Sticking with ACP. What is the status of the project in India? Referring to your comments in the previous call, that we have the ability to use low-quality GPC to produce ACP. If that's the case, should the completion of the ACP plant in India be a priority since the ACP could be used as a feedstock of the vertical shaft calciner, which would allow some of the GPC being toll calcined at shaft plant to stay in Vizag so that we could restart the second kiln.

Once the ACP technology is refined at the existing plant in the U.S., we will then be able to focus on the Indian facility. We want to use the lessons learned in the U.S. to ensure that the plant in India is built to operate to the best of our abilities. Additionally, this will give us time to work with the major smelters to receive their feedback on this new material as well. We can complete the construction of the ACP plant in about 6 months from the time the technology is refined, and the go ahead to commence construction is received for the construction of the India ACP plant.

Okay. Finally, one last question about ACP. What does the expected revenue contribution from the plants in the United States and India during calendar year 2022?

There will be no revenue from ACP plant as it will be a cost center, and the entire ACP produced will be used as raw material internally. However, it should result in an overall reduction of raw material costs for the calcination business.

Okay. Thanks, Jagan. And Gerry, our next question is for you. Contrary to initial estimates, the Chinese economy continues to be disrupted by the pandemic and markets remain turbulent. In this light and from the comments in our previous conference call, our Chinese aluminum capacities and GPC demand impacting our operations, what is the current situation? And what do we see going forward?

Thanks, Alan. That's a good question. The Chinese economy, well, disrupted certainly with the lockdowns that they've seen. And the resurgence in COVID, really, to this point, has not had any material impact on our markets. With the exception of our PETRORES and CARBORES distribution in that country. But again, that's been more logistic oriented with our warehouses and not had a material impact on us in any real way. If it persists, it certainly could have more of an impact. The materiality which is hard to say, but it more involves around those products and perhaps if it affects some of the refining activities in the long run. But really, we'll have to see, as I said, a minimum effect to this point. And going forward, if they continue or worsen, we could see some impact, but I don't see it having a major, major impact on us.