Good day, ladies and gentlemen. This is Alan Chappell, Director of Corporate Communications of Rain Carbon Incorporated. This is Rain Industries Limited's earnings discussion for the September 21, 2021 quarter. With me on the call today are Mr. Jagan Mohan 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. 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, and the company's actual results could differ materially from such forward-looking statements. With that, we will now 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 the significant rise in raw material prices?
Thanks, Alan. 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. 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 the prices in the industries that use them?
Sorry, guys. They just dropped off. Rain produces three primary ranges of resins: aromatic hydrocarbon , pure monomer resins, and hydrogenated hydrocarbon resins. These resins are primarily sold to the rubber, coatings, and adhesive industries. In general, demand for our 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 a recession in China? What it would have on the company, as well as the rationing of a lot of industrial output due to the power crisis?
During the past 6-12 months, there's been a strong decline in export commodities and a strong increase in market price for products traditionally exported from China, which ultimately compete with Rain's products in the global markets. 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 not 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 calcined petroleum coke blending in India was prohibited, our CPC sales volumes have ranged between 1.4 million tons-1.6 million tons, implying 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 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 four 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 the 2021 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, you know, 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 raw material supply side issue for CPC? And how do we plan to manage that?
We have definitely seen the shortage of quality raw materials in the marketplace, which has really had the function of driving up costs. In addition, the outages of 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 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-$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 at the moment due to increased demand for CPC within China itself, a 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. At the end of the day, the main goal is for us to maintain our margins. Sometimes we do realize opportunity margin. Overall pricing impacts are only temporary as we realign.
Thanks. Thanks, Gerry. Now let's turn the call to our 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 are we dealing with the increased energy prices in Europe?
Overall, RAIN continues to see increased demand and high capacity utilizations of our carbon distillation plants. Most of our smelter customers in Europe use hydroelectricity. 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 our 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. 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's 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 and to reduce 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 seek 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 where goods move in 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 tailwind wins, 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 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, 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, Jerry. We now have a few questions for Jagan. Jagan, can we expect higher utilization levels and production going forward for our cement plants? Has the company taken any cost increases for the 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 two in the Kurnool district of Andhra Pradesh, allowing our company grinding capacity to increase from 2.62 million tons to 2.795 million tons per annum. Gross realization improved 4% compared to previous quarter. Freight cost has increased by 6%. The majority of the cost increases have been passed on.
Okay, thanks, Jagan. The next question relates to the comments in our management commentary for, you know, at the end of Q3. You mentioned a multi-year high in capacity utilization. The question is, why were quarterly CPC volumes at a multi-year lows given the high capacity utilization?
Carbon capacity utilization was about 90%. However, the sales volume of CPC were lower due to a combination of timing of shipment loadings and the impact of Hurricane Ida in the U.S. By comparison, our advanced material capacity utilization was at about 97%, the highest in the last two years.
Okay, thanks, Jagan. The next is a three-part question. First, when can we expect ACP or the Anhydrous Carbon Pellets to meaningfully help raw material availability both in the United States and India? Also, to what extent will it help increase CPC capacity utilization, assuming the Supreme Court ban in India continues? And finally, are you considering a blending strategy in the United States where we would be utilizing the ACP produced from the new plant? And if so, how much additional volume could we expect going forward?
The U.S. ACP plant should see meaningful production volumes in 2022. We anticipate the Indian ACP plant will be completed in sometime mid-2022, but it is too early to comment on the volumes we expect. The ACP plant should widen Rain's CPC raw material basket to include certain materials that had not previously been deemed usable in calcination in large percentages. Additionally, ACP will reduce the loss of GPC in the conversion process, which will increase volumes and therefore improve capacity utilization. The new ACP plant located within our Chalmette location in Louisiana, the electricity generation and deep water terminal location is ideal set up with the ability to blend raw materials and finished goods at that plant.
Thanks, Jagan. The next question has to do with our hydrogenated hydrocarbon resins. What was the pipeline contribution for this quarter, and how do the margins look, both today and in the future? Also, why is the ramp-up of HHCR taking so much time? And finally, what are the current margins of the product, and what will the eventual margins look like with new developments in the resin prices?
We do not provide revenue for individual products or plants, so I cannot comment on revenue. After its full first year of operation, the HHCR unit is nearing a 10% market share in Europe. Various bottlenecks related to the introduction of the new technology were resolved, and key qualities were introduced to main customers and have been qualified. Three grades are also FDA-approved. Margins have been steady, raw material increases being passed on to clients. We expect margins to expand as demand remains strong and the growth of capacity declines.
Thanks, Jagan. Let's turn to the Vertical Shaft Calciner in India. Why did we heat up one line of kilns there, even though the Supreme Court verdict is not yet out? Also, what is the likely capacity utilization from this facility in 2020, assuming that the Supreme Court ban continues?
While operations have already begun partially at our new Shaft Calciner plant in India using domestic GPC. We plan in 2022 to continue to work on alternative raw material approaches to be able to run this new plant effectively, including the continued use of domestic Indian GPC sources, where volumes are not subject to any restrictions. By completing construction of our Indian ACP plant, which would expand our basket of usable raw materials.
Okay. Continuing on the Shaft Calciner. We've received the State Pollution Control Board certification for the plant, as reported in earlier quarters. As such, what has been the response from the central government departments?
DGFT has not considered our new capacity added in the SEZ in its allocation of GPC. Although the new vertical shaft kiln is the most environmentally friendly CPC plant in the world, that in fact reduces the pollution in India on a net basis through its sustainable process such as ammonia scrubbing and cogeneration of electricity through waste heat recovery. Unfortunately, no GPC was allocated to the new CPC plant in the SEZ. We are awaiting the formation of emission norms by the Ministry of Environment as directed by the Honorable Supreme Court of India in September 2019. Once emission norms are set up by the Ministry of Environment, we expect there will be better clarity regarding the availability of GPC to the new SEZ plant.
Thanks, Jagan. Continuing in India, we've not seen any request being made to the Supreme Court for granting permission on GPC imports or increasing the quota limit. What's the plan going ahead?
Rain Industries has a pending request in the Honorable Supreme Court of India seeking announcement of emission norms for the calciner operations in India by the Ministry of Environment, Forest and Climate Change. This process has been delayed by about 18 months, it is critical for any allocation of GPC for Rain Industries's two Indian calciners, which are the only calcination plants in India currently operating using the best available emission scrubbing technology and carbon footprint-lowering waste heat power generation units. We are expecting that the Honorable Supreme Court will soon announce the green bench that will hear the environmental matters, and it should be heard in due course.
Thanks, Jagan. Before we conclude. I'm sorry?
Keep going.
Okay. Thank you, Jagan. Before we conclude, we have a few final questions for Srinivas. The first is regarding the statement of our second quarter question and answer about potentially higher EBITDA and EBITDA margins for Advanced Materials for the second half of 2021. What led to the lower profitability in the third quarter? And as a follow-up question, when can we expect to reach the $100 million mark in EBITDA from this segment?
Thank you, Alan. Energy costs in Europe increased by 125% in one quarter, which had an impact on the profitability, not just in our Advanced Materials segment, but also in our Carbon segment. Both of which have heavy presence in Europe and require varying level of natural gas to heat processing units. While we don't provide any guidance on future performance, the performance of the Advanced Materials segment is expected to improve based on stabilization of the operations of the newly constructed HHCR plant and passing on the increased energy prices to the customers.
Thanks, Srinivas. Next question is, what should be the sustainable range of EBITDA margins that we can expect from the carbon business segment?
With improved capacity utilization and higher demand for products, our operating margins in the carbon segment will improve. As the prices have been increasing quarter on quarter, there are inventory gains to a certain extent, which will come down as prices reset. Remember, we are a converter of products, and we will see timing delays when finished goods and raw material prices reset. Over time, our margin percentage will be maintained despite fluctuations due to the time lag.
Thanks, Srinivas. Next question regards calcined petroleum coke and coal tar price, coal tar pitch prices. They've increased around 30%-40% quarter-over-quarter. Still, our realizations have increased only 12% quarter-over-quarter. What is the reason for that?
This is due to unprecedented rapid increase in the cost of our coal tar and GPC raw materials, as well as the transportation required to move them to our sites and the energy required to process them once they arrive. As mentioned, we are a converter, so as our finished product prices increase, so will our raw material prices also follow the same trend.
Okay, thanks, Srinivas. The next question is regarding our bonds. Do we plan to buy back additional bonds in the quarter, or are we waiting until March 2022 to refinance?
We are closely monitoring the debt markets as well as the commodity prices. Our priority is to ensure that the business has the funds required to continue the operations uninterrupted. As you saw, we have spent a significant amount of cash on working capital requirements this year, and at an opportunistic time, we will be considering reduction of the debts or buyback of the bonds.
Okay, thanks, Srinivas. Looking at current gas prices, what is RAIN's exposure to natural gas as an energy source? Is it material? Also, does RAIN have a hedging policy for that? If so, when does it run off? Also, is there any exposure to carbon dioxide pricing?
RAIN is a consumer of natural gas, mostly in the European operations. It does make up a significant portion of our operating costs, but it is not a material amount on a consolidated basis. RAIN has historically been naturally hedged when it comes to its energy costs. However, due to the volatile movements in Europe caused by political forces, the natural gas prices have exceeded the off-peak term. As far as the carbon dioxide is concerned, RAIN is allocated annual, carbon dioxide certificate based on its historical consumption. At this time, there is not a material cost to these certificates, but it is something the team watches closely as governments look to modify their programs.
Thanks, Srinivas. That concludes the management question and answer session for the September quarter of 2021. Thanks, everyone, for joining us, and we look forward to doing this again after Rain's fourth quarter results are announced.