Rain Industries Ltd

NSE:RAIN

Earnings Call Transcript

[Alan Chapple, executive]

Hello, ladies and gentlemen. This is Alan Chapple, Director of Corporate Communications and Public Relations for Rain Carbon Inc. In just a moment, we will take you through the performance of Rain Industries Limited during the first quarter of 2023. Presenters 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.

Before we begin, management would like to mention that some of the statements made in today's discussion may be forward-looking in nature that 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 in the Rain Group during the first quarter of 2023. Thank you, and over to you, Jagan.

[N. Jagan Reddy, executive]

Thank you, Alan. Good evening, everyone. On Slide 3 of the presentation, it can be noted that we finished the first quarter 2023 with an adjusted EBITDA of INR 6.85 billion. This is in line with our fourth quarter 2022, EBITDA of INR 6.9 billion and within our historically normal range. Given the challenges posed by continued high energy costs in Europe, reduced discretionary spending by our customers and the fact that Q1 results are typically lower given the seasonality of some of our products, we are reasonably comfortable with our quarterly performance.

Moreover, our results during the first during the past 2 quarters confirm that the inflated post-COVID demand and opportunity margins that we enjoyed during the second and third quarters of 2022 have come to an end. In reverting to the old normal, we are experiencing the margin comparison that we typically see in this stage of the pricing cycle. When finished product prices come down ahead of raw material costs.

However, the steepness of the falloff in finished good prices, which occurred at the end of the quarter was unexpected and not typical. As a result of this, we were forced to make a net realizable value adjustment on inventories of about USD 21 million during the quarter. It is also worth noting that as a global company with operations across 3 continents, these fluctuations are happening sequentially around the world, and we'll be working through them during the second quarter as well if prices soften further.

We have successfully navigated these cycles before and are confident that we can effectively manage our current inventories and maintain margins during this downward movement. Looking ahead, we anticipate that our near-term performance will remain within the typical operating range we have guided to in the past. Of course, recession fears remain worldwide and the energy situation in Europe is still unpredictable.

In addition, while China is open for business now falling COVID lockdowns, its near-term resilience remains a question mark. Turning to Slide 4. The LME aluminum prices spent most of the first quarter, hovering between USD 2,200 and USD 2,400 per tonne. As we have said in previous calls, smelters generally consider USD 2,300 as a healthy price for continued production and possible expansion.

The good news, especially for those smelters in Europe without access to low-cost hydropower is that energy prices have come down partially since this fight in late 2022. If LME prices improve a bit and energy costs hold steady or continue to decline, that could avoid any additional curtailments and might even motivate some European smelters to considering starting idle plants.

Similarly, in the United States, there has been talk of a major smelter coming back online once energy costs come down. As a long-term customer of ours, this smelter restarting could be beneficial for us. It is also worth reminding everyone that aluminum remains the metal of choice for a growing range of products, which translates to continued strong demand for the years to come. We all know about its increased use in automobiles as manufacturers work to lighten the vehicles to improve fuel economy as well as aluminum growing popular as a building material given its strength and corrosion-resistant nature.

It is interesting to note that aluminum is quickly replacing plastic and steel in the electronic devices that have become an essential part of our lives. Smartphones, tablets, laptops and flat screen TVs are being made with an increasing amount of aluminum since it is stronger and tougher than plastic and lighter than steel. Aluminum also allows heat to dissipate quickly, helping to prevent electronic devices from overheating.

Therefore, with aluminum becoming more and more ubiquitous, we are confident in the long-term need for our calcined petroleum coke and coal tar pitch, both of which are critical ingredients and the anodes required to manufacture aluminum, especially considering that there are no known credible substitutes for these raw materials.

Regarding the petroleum coke import restrictions for our Indian carbon business, we are awaiting the government's GPC import restriction -- import allocations for '23, '24 fiscal year as well as finalization of the long-awaited emission regulations for the calcining industry as audited by the India Honorable Supreme Court in 2019.

We also continue to pursue relief from regulatory authorities relating to petroleum coke import restrictions for our new vertical shaft calciner in the Andhra Pradesh special economic zone, which we believe should not be subject to the import restrictions since it was developed to cater to export markets.

Given the superior bulk density of the CPC produced in the shaft calciners and the growing customer interest in this product, we will continue to optimize India operations until such time the shaft calcining facility received the requisite relief.

Regarding the cement business, demand continues to be reasonably strong in South India, although the first quarter performance has been negatively impacted due to the high cost of fuel. The good news is that the fuel costs are coming down, perspicuously, which should positively impact the cement operations in the coming quarters. With this business update, I will now turn over the presentation to Gerard Sweeney to take you through the industry and other business updates on Slide 5. Gerry?

[Gerard Sweeney, executive]

Thank you, Jagan. Hello, everyone. Pleasure to discuss the industry trends during the first quarter of 2023 with you. Turning to Slide 5. In our Carbon segment. During the first quarter, we continued to see good demand for calcined petroleum coke and a slight decline in coal tar pitch volumes. On the calcination side of our carbon business, CPC volumes for the quarter were essentially flat compared to the previous quarter. While the demand remained reasonably strong, as mentioned earlier, the opportunity margins that we enjoyed during much of 2022 have eroded. This has led in large part by falling prices for the CPC exported by China.

How quickly we can match raw material costs with finished CPC prices will be the key to maintaining stable margins in the near term. Continuing with carbon calcination -- during the quarter, we executed some engineering work on our Anhydrous Carbon or ACP pellet facility in the United States to reach the scale of production required for the desired profitability of the plant.

In parallel, we continue to work with customers on product testing of batches of calcine ACP. While all of this is a process, we remain confident in the potential of ACP as a commercial product, thanks to the energy savings, it will offer smelters. Moreover, it will improve our GPC raw material yield by reducing the fines burned during calcination thus lowering carbon and sulfur dioxide emissions while also better positioning us to help customers achieve their goal of producing low-carbon aluminum, all part of our commitment to becoming a more sustainable company.

Moving on to the distillation side of our carbon segment. Coal tar pitch volumes were down about 3% in the first quarter as the smelter curtailments in Europe continue to chip away at our pitch sales. The larger near-term issue, however, is margin compression, much like we are seeing in our calcination business. At the same time, I'm happy to report that the partial decline in energy prices in Europe helped to reduce our production costs, preventing even higher margin erosion.

In our other carbon products category, volumes increased 13%. That was primarily driven by the steep increase in sales of carbon black oil due to strong demand. This was somewhat offset by reduced volumes of seasonal creosote and crude naphthalene. On a positive note, pricing or accrued naphthalene was better compared to the fourth quarter.

Looking ahead, total sales of our carbon distillation products in Europe are expected to remain soft due to weak customer sentiment, driven by the continued impact of energy costs and inflation. In turn, we expect lower European demand and pricing to squeeze raw material demand and pricing. In coming quarters, we will need to carefully manage our costs, quickly using up existing inventories and taking advantage of falling energy costs to preserve our margins until the pricing for raw materials and finished goods are once again in sync.

Turning to our Advanced Materials segment. EBITDA, as expected, was again positive after consecutive negative quarters. This was driven by a combination of factors, including reduced energy costs and the fact that we had no planned outages during the first quarter. Sales volumes of nearly all of our advanced materials were higher in Q1 compared to the previous quarter, though significantly lower than a year ago when the global economy was still running on all cylinders. In the subsegment of engineered products, demand for our CARBORES which is used as a binding product in refractory materials by steel plants was up quarter-on-quarter.

We also saw a slight decline in demand for our PETRORES specialty coatings as much of China's manufacturing economy, including its lithium-ion battery sector continues to limp along despite the end of zero COVID lockdown. Finally, we had limited sales of our seasonal asphalt sealer products as is usual for the first quarter.

Looking at our chemical intermediates subsegment. Our BTX volumes were up marginally compared with the prior quarter, while phthalic anhydride volumes increased substantially compared to the prior quarter, which included a lengthy maintenance shutdown. Sales of our modifiers continue to decline due to the economic slowdown in Europe, while volumes of refined naphthalene were nearly double that of fourth quarter, due in part to increased construction in China using naphthalene containing building materials.

Moving on to resins and downstream materials. We saw a nice increase in sales of hydrocarbon resins after a seasonal decline in the fourth quarter. That said, demand is still slower than it was early -- in earlier quarters before consumers began to cut back on discretionary spending and purchases of things like automobiles and furniture that include our resins.

Finally, during the fourth quarter, we sold the remaining inventory of our aromatic chemicals that was left after we closed the production facility in the second half of 2022. Looking ahead at our Advanced Materials segment, we expect some near-term challenges given the continued decline in demand, which is undercutting prices for our products, while our raw material costs are falling at a slower rate as with our carbon distillation business. The decline in energy prices in Europe has helped us offset the overall impact to our margins.

Just as important, those lower prices have enabled us to start energy-intensive to restart energy-intensive production units in the first quarter that have been idle in the third and fourth quarters. This should have a positive impact on the second quarter performance of our Advanced Materials segment. In addition, we expect to benefit during the spring and summer months from the usual increase in sales of our seasonal products such as Sealer base and creosote.

Perhaps the biggest near-term challenge is the unpredictable status of the Chinese economy. During the first quarter, Chinese economy grew 4%, but much of the recent production has been for inventory building rather than as current sales to customers. This indicates continued low market demand and has a negative influence on pricing. At the same time, with these slow sales domestically, we have seen a significant decline in prices for many products coming out of China in addition to an increase in exported volumes, pushing down global product prices even further.

The big question for the next couple of quarters is whether this heavy export behavior is permanent or if Chinese domestic consumption and pricing will recover. With all of that in mind, we do anticipate a rebound from China during the second half of the year. Speaking of challenges, if you followed our company for a while, you know that we regard workplace safety as paramount, and we are proud that our performance during the past 3 years ranks us among the best in class in our industry.

In the spirit of full disclosure, however, we experienced 3 recordable injuries during the first quarter, which is higher than what we had in previous quarters. While some of the recent cases such as slips, trips and falls, could be attributed to wet working conditions, I see dark winter conditions as well.

We continue to emphasize the importance of occupational and process safety. In response, we have implemented a series of corrective actions and safety training and are committed to getting back to a situation where our performance is based on safe behaviors and having every employee fully invested in our safety program and ultimately, their safety. With that, I'll now turn the presentation to Srinivas, who will take you through the consolidated financial performance of Rain on Slide 6. Srinivas, over to you.

[T. Rao, executive]

Thank you, Gerry. Hello, everyone. It is a pleasure to present our financial performance during the March 2023 quarter. In the first quarter of 2023, Rain achieved consolidated net revenue of INR 52.10 billion compared to INR 44.09 billion in the first quarter of 2022, an increase of INR 8 billion. This resulted from an increase in revenue of INR 9.73 billion from our Carbon segment, offset by a decrease of INR 1.65 billion from our Advanced Materials segment and INR 0.08 billion from our Cement segment.

Rain's consolidated adjusted EBITDA decreased by INR 1,502 million compared to the prior year. This resulted from a decrease in the Carbon segment by INR 582 million, a decrease in the Advanced Materials segment by INR 574 million and a decrease in the Cement segment by INR 346 million.

Now turning to the next slide on Carbon segment performance. Revenue from our Carbon segment was INR 40.7 2 billion for the quarter ended March 31, 2023, as compared to INR 30.99 billion for the same period last year. During the quarter, sales volume increased by 2% compared to Q1 of 2022, driven by higher throughputs.

The average blended realization increased by 28.7%, driven by market conditions, increased raw material prices across all the regions and the change in the product mix. There was an appreciation of euro against Indian rupee by 4.6% and an appreciation of U.S. dollar against Indian rupee by 9.4%. Overall due to the effort and reasons, revenue from Carbon segment increased by 31.4% during Q1 2023 as compared to Q1 2022.

Adjusted EBITDA of the Carbon segment decreased by $582 million as compared to Q1 of 2022 due to increased raw material prices, partly offset by increased volumes, realizations and the appreciation of USD and euro against Indian rupees.

Turning to the next slide on performance of Advanced Materials. Revenue from our Advanced Materials segment was INR 7.6 billion for the quarter ended March 31, 2023, as compared to INR 9.25 billion for the same quarter in 2022. During the current quarter, there was a decrease in volumes by 26.5%, driven by lower production on an account of maintenance shutdowns and closure of the aromatic chemicals business.

During Q1 of 2023, the average blended realization increased by 11.8%, primarily due to higher oil-related quotations and raw material quotations and the appreciation of euro against Indian rupees, by 4.6%. Due to the aforesaid reasons, revenue from Advanced Materials segment decreased by 17.8% during Q1 of 2023 as compared to Q1 of 2022.

Adjusted EBITDA for the Advanced Materials segment decreased by INR 574 million due to a decrease in volumes on account of the temporary shutdown of facilities, partly offset by an increase in realizations and appreciation of USD and euro against Indian rupees.

Moving on to the next slide and our cement performance. During the first quarter of 2023, cement revenue decreased by 2% compared to first quarter of 2022. The decrease was primarily due to a decrease in volumes by 1.4% and decrease in realizations by about 0.6%. Cement EBITDA decreased by INR 346 million due to higher operating costs by decreasing the sales volumes.

Moving to the next slide on debt. We ended the quarter with a total debt of USD 1,183 million, including working capital net of USD 146 million. Our net debt was about USD 890 million. And based on the LTM EBITDA of USD 452 million, we ended the quarter with a net debt-to-EBITDA ratio of 2x. We are comfortable at this level as our average borrowing cost stood at 6.3%.

We incurred USD 22 million towards various capital projects during the quarter. With that, I will now turn the presentation to Mr. Jagan for giving closing remarks. Over to you, sir.

[N. Jagan Reddy, executive]

Thank you, Srinivas. After a year of abnormally high demand and margins for our products, we are coming back to the world normal. At the same time, the end of the commodity super cycle and Chinese economy that remains sluggish and reduced consumer demand around the world has resulted in a downward pricing reset for many of our finished products.

Unfortunately, our raw material costs are falling at a slower rate. As a result, our primary challenge in the near term will be to carefully manage our costs, to minimize margin compression until the selling price for our products and our raw material costs are back in sync. The good news is that we have successfully navigated these cycles in the past, and we are committed to doing so again during the current cycle. In parallel, we are determined to regain our footing when it comes to safety.

We are acutely aware of the grave consecration that can occur in our industry when there is a breakdown in occupational process safety, and we are committed to restoring our company's best-in-class safety status.

Finally, if you are not aware, we issued our first publicly available sustainability report last month, and you can view it in the Sustainability section of our subsidiary Rain Carbon website. This report outlines our commitment to a sustainable environment and maintaining the ecological, social and economic well-being of our future generations.

I believe that we have a lot to be proud of, and I hope you agree after reading the report. At the same time, we also realize that much work remains. As I have said before, we know that nothing will have a greater impact on success of our business than our sustainability efforts and ability to meet the related needs of our customers and society in general. Thank you very much for your continued interest in Rain Industries Limited, and we look forward to next quarter's presentation.