Earnings Call: Q2 2021

Jul 31, 2021

Quarterly report

Good evening, ladies and gentlemen. In just a moment, we will take you through the performance of Rain Industries Limited during the second quarter of 2021. Presenters today are Mr. Jagan Mohan 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. 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 could turn to Slide 3, Mr. Jagan Reddy will provide an update on key developments within the Rain Group. Thank you, over to you, Jagan. Thank you, Alan. Good evening, everyone. Around much of the world, as more and more COVID vaccines are administered, life is slowly returning to normal, notwithstanding the most recent threat from the new Delta variant. After a year of lockdowns, depressed manufacturing activities, and a drastically 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 calcination, distillation, 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 during the second quarter despite higher raw material costs. 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 for our products is reasonably strong, and we expect it will 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 two quarters will continue. At the same time, we also know that there is additional room for 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 for calcined petroleum coke and coal tar pitch, as smelters around the world are capitalizing on that pent-up demand that I mentioned earlier, which has pushed LME aluminum prices well above their pre-COVID levels. As a result, smelters around the world are enjoying high utilization rates for their existing capacity, and the resulting profitability has prompted a number of expansions and restarts of idle capacity. All of that adds up to increased 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 utilization of our capacities. Our calcination business also benefited from improved raw material supplies from U.S. refinery production increases as demand from automobile and airplane traffic drove up 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 many U.S. refiners 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 distillation side of our carbon segment demonstrated our resilience as it converted during the second quarter as raw material challenges, margin pressure, and rising costs were successfully managed and largely passed through. Moreover, our cost position was further strengthened by extending and diversifying our 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 purchases of the countless goods that include our distillation products as essential ingredients. In terms of our seasonal creosote sales, volumes were up more than 40% sequentially 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 tire industry. Looking ahead, global demand for our distillation products is expected to remain strong. As with the availability of GPC for calcination, coal tar availability for distillation also remains tight, and pricing is a challenge. Nonetheless, we remain confident that a rebound in global steel production, coupled with our aggressive sourcing activities, will enable us to maintain a sufficient and cost-effective supply of raw materials to enable our facilities to maximize 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 engineered products, volume of CARBORES used in refractory and graphite products continues to increase as more industries seek environmentally friendly alternatives. Demand for our PETRORES specialty coating for lithium-ion batteries also remains 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 ton of these unique products since we began production in 2002. Finally, sales of our sealer-based products were exceptionally strong compared with the previous quarter due to their seasonality and favorable weather conditions. Moving on to chemical intermediates. PTX volumes during the quarter were down as we took a conservative approach in procuring raw materials to build inventory. That was offset, however, by a significant increase in selling prices. Phthalic anhydride volumes were slightly lower than the previous quarter, but considerably higher on a year-over-year basis due to the 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 and 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, a company best. Our aromatic chemicals volumes were driven by improved overall demand, but this was offset by reduced sales of 3.5 TMP, which is used in the disinfectants that were in extremely high demand during the first nine months of the pandemic. Moving on to the hydrogenated hydrocarbon resins, or HCHR, our water-white products sales volume were nearly triple than what they were during the first quarter. We are extremely pleased by the strong demand for these advanced resins and our progress in working with customers during the product testing and acceptance phase of HCHR scorecard. Looking ahead at this segment, we anticipate continued healthy demand for our advanced materials products the coming months, and we are hopeful that a settling of oil-related raw material prices will allow us to recover pricing for 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 that situation has been exacerbated in the near term by the recent flooding in Germany and Belgium. Would also like to say that the cement demand in states in South India, especially in Andhra Pradesh, Telangana, and Tamil Nadu, and Karnataka remains very strong. We have seen an uptick in the demand compared to previous year, the same as previous year on year basis. Although during monsoons there will be reduced demand for cement, we expect the increased demand to continue once the monsoon is over, especially 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 Jerry to take you through industry and other business updates on slide 4. Jerry? 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 in 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 total 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 calcined anhydrous carbon pellets, once commercialized and used in anodes, will offer smelters energy savings and productivity benefits, not to mention improve our GPC conversion efficiency and decrease overall emissions of smelters. That's just one example. If you saw our July 14 press release, you also know that we are working on a detailed carbon footprint analysis with one of our aluminum smelting customers and two 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. 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 U.S., 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 startup 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 will now turn the presentation to Srinivas, who will take you through the consolidated financial performance of Rain. Srinivas, over to you. Thank you, Jerry. Good evening, everyone. It is 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. This 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 Material 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, and an increase in the Cement Segment by INR 570 million. Now turn to the next slide on Carbon Segment performance. Revenue from carbon segment was INR 23.31 billion for the quarter ended June 30th, 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 increased demand from traditional customers, offset with a one-off shipment to a non-traditional market in prior year quarter. The average blended realization increased by 36.3%, driven by changes in the demand and supply mix and higher market quotations. There was an appreciation of euro against Indian rupee by 6.5% and depreciation of US 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 ₹1,928 million compared to Q2 of CY 2020 due to improved volumes and pricing for certain products, coupled with cost discipline and appreciation of euro against Indian rupee. Turning to next slide on performance of advanced materials. Revenue from advanced material segment was INR 9.07 billion for the quarter ended June 30th, 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 material 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 HCHR plant and divestment of superplasticizer business. Moving on the next slide on the cement business. During the second quarter of CY 2021, 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 on next slide on debt. We ended the quarter with approximately $1.141 million of total debt, including approximately $25 million of working capital and other debts. Net debt was $918 million. Based on LTM EBITDA of $315 million, we ended the quarter with a net debt to EBITDA ratio of 2.9x. We are comfortable at this level as our average borrowing cost to debt 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 superplasticizer business in December 2020, we reduced working capital debt substantially. As you can see, our consolidated working capital debt reduced from $77 million as on December 31st, 2020 to $25 million as on June 30th, 2021. Apart from the reduction of $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 INR 4,577 million, approximately INR 62 million, during the first half of 2021. As discussed earlier, our requirement for expansion capital projects would be minimal going forward after completion of the vertical shaft kiln CPC plant and the two ACP plants. Accordingly, we would 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 quarters 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 tires to construction materials and beyond, production in so many sectors is returning to pre-COVID levels, and we stand to benefit since our carbon-based products are key ingredients in complex goods that are once again in demand. As always, though, we are taking nothing for granted, especially the health and safety of our production personnel, so that we remain a strong link in the global supply chain. Cost discipline also remains a priority. We are working harder than ever to expand our access to available, affordable, and high-quality raw materials. We are also working aggressively to bring our new advanced resins plant to profitability and commission our ACP production plant in the U.S. and the long-awaited vertical shaft calciner in India. 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 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.