Rain Industries Ltd

NSE:RAIN

Earnings Call Transcript

[U. Saranga Pani, executive]

Good evenings to everyone. A warm welcome to you all for today's management presentation from Rain Industries Limited. My name is Sarang Pani, and I serve as General Manager of Corporate Reporting and Investor Relations at Rain Industries Limited.

Earlier today, we have released our results for the quarter and half year ended June 30, 2024, and the same is also posted on our website. Shortly, we will guide you through the performance highlights of Rain Industries Limited for the second quarter of 2024. The speakers for 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.

Before we proceed, the management would like to note that during this management discussion, forward-looking statements may be discussed that include various subjects such as trends, targets and strategic directions. These statements rely on our current projections and are subject to risks and uncertainties that could cause actual results to vary materially from those suggested by these forward-looking statements. There are certain risk factors that could lead to results different significantly from our predictions. The discussion today contains certain non-GAAP financial measures. The related non-GAAP reconciliations are provided in the accompanying slides. Please turn to Slide 3 at this time, where Mr. Jagan Reddy will offer insight into the key developments at the Rain Group during the second quarter of 2024. Thank you. And I now hand it over to Mr. Jagan.

[N. Jagan Reddy, executive]

Thank you, Saranga, and greetings to all. As we turn our attention to Slide 3. let us start with the focus on safety. At the end of second quarter, our Carbon and Advanced Materials segments reported a year-to-date total recordable incident rate or TRIR of 0.22 as per OSHA guidelines. During the second quarter, these segments encountered only a single recordable incident involving -- involving a muzzle strain due to manual labor with 1 of our facilities. Such incidents are regrettably common, highlighting the risks associated with physical overexertion and the importance of our program to continue to retrain our colleagues on the importance of prioritizing their physical wellbeing. Consistent with our prior discussions, our dedication to safety is steadfast. Our safety programs are being continuously refined to meet the changing patterns observed in our operations and the wider industry.

During the course of 2024, we are also pleased to announce that we are implementing OSHA reporting guidelines to our Cement segment so that all 3 of Rain's segments will be able to report common global safety statistics very soon. Regarding financials, the second quarter concluded with an EBITDA of INR 4.9 billion, marking progress towards more normalized levels of earnings despite being below the average historical performance. The improvement was unexpected and due in part to customers accelerating certain shipments, particularly within our distillation sector, thus shifting sales from the third quarter into the second quarter. Initially, this suggested a possibility of increased demand and subsequent order growth for the remainder of the year. However, this does not seem to be the case. There has been no uptick in orders for the second half of the year. Essentially, the accelerated second quarter shipments have merely [pre-pawn] revenue ahead of the third quarter.

In line with the previous projections, we continue to expect gradual recovery towards normalized earnings, but do not foresee achieving this until the first quarter of 2025. In the second quarter, we saw welcome progress with the restoration of our margins in the Carbon segment. We are now approaching the margin levels we have historically achieved for 2 of our primary carbon products, calcined petroleum coke, or CPC, and coal tar pitch, or CTP, after a sustained period where margins have narrowed. This shift is encouraging and results from 2 main developments. Initially, the margin contraction that affected CPC and CTP has leveled out. Despite a face of improved realizations throughout 2021 and 2022, the decline began in the second quarter of 2023, which presented substantial challenges to maintain stable prices for our products.

Prices have now largely equalized after persistently navigating through pricing arbitrage, exceeding $100 over several financial quarters. The second notable factor aiding in the stabilization of margins is related to the cost of our raw materials. We have succeeded in aligning our raw material expenses more closely with the selling price of CPC and CTP, our major products in the Carbon segment. Our most significant challenge going forward is increasing the volumes of our key carbon segments -- products, CPC and CTP. While this effort will require time, it underpins why we are projecting a time line continuing into the first quarter of 2025 to regain our historical range of earnings within this business sector.

Despite ongoing challenges with volumes in our Carbon segment, we observed an EBITDA margin of approximately 12% to 14% in the second quarter, approaching our usual range and enhancement from the second -- first -- from the first quarter's EBITDA margin range of 8% to 10%. The pricing in the CPC market within the Carbon segment is undergoing continued downward pressure. However, we anticipate that any additional price declines will be offset by decreases in the cost of raw materials. We are also pleased to inform you that the regulatory authorities in India have allowed import of green petroleum coke, or GPC, in line with the order of the Honorable Commission for Air Quality Management, or CAQM, which was passed under the directions of the Honorable Supreme Court of India for our Special Economic Zone unit in Jaipatna.

This will enable us to increase production at our Special Economic Zone or SEZ unit to its full capacity by the end of calendar year 2024. However, we are still awaiting the permission of the regulatory authorities for import of CPC into our SEZ unit for blending it in accordance with the import permission, which was granted by CAQM in their orders.

Importantly, our sales volume of CPC in the second quarter of 2024 marked a substantial rise compared to both the preceding quarter and the same quarter of the previous year. Our efforts remain concentrated on further expanding our global sales volumes of CPC, which have already rebounded in India during the second quarter, in line with our expectations. Global aluminum industry forecasts continue to be strong, with aluminum prices are up -- around the $2,500 level, supported by relatively low energy costs and discussions of a robust worldwide economy throughout the rest of the year.

Regarding our Carbon segment's distillation operations, product prices reached a point of stability during this quarter, even as supply volume pressures escalated. Current trends in aluminum prices, coupled with the recent previously mentioned advantageous [ decisions ] in India, which favor improvements in our CPC capacity utilization there, are contributing to an increased market confidence in our wider Carbon segment markets. As we progress into the latter half of 2024, our improved margin performance institutes confidence the projected resumption of normalized margin in the forthcoming quarters.

This potential upswing contrasts with the past 3.5 years of waning global industrial activities. Our Advanced Materials segment has shown consecutive quarters of increased volumes and profitability, propelled by declining natural gas costs and surging demand, especially in our HHCR business based in Europe. We are exceptionally satisfied with these developments, which stem in part from shipping complications in the Red Sea. These disruptions have led many European customers to reconsider the long-term consistency and dependability of their historical supply chains floated in Asia. Consequently, we are not only expanding our sales in Europe, but also broadening our customer base -- or customer network.

Globally, economic indicators remain largely positive until date. However, we have seen recent declines in certain aspects of the markets. In the United States, economic resilience persists despite recent inflationary pressures, reflecting continued reasonably better spending on goods and housing. Europe has seen a reduction in energy prices approaching those before the conflict in Ukraine, coupled with the recovery indicators in the industrial sector. China recently conducted its central convention to its -- set its economic directors for the next 5 years. It is premature for concrete conclusions, but it is expected that some physical stimulus measures are planned. We remain optimistic that Rain has the capability to navigate through difficulties in this segment and capitalize on new prospects.

Regarding our Cement segment, the industry in India has experienced modest growth of 2% to 3% this quarter due to a slowdown in construction activities during the general elections. Nonetheless, external reports forecast a 7% to 8% annual increase in cement volumes for the fiscal year 2024-2025, fueled by consistent demand from infrastructure and housing sectors. Post elections, the government's allocation of significant development funds for infrastructure approval of more housing schemes, along with the industrial expansion throughout India, especially given the government stability in Andhra Pradesh, which is keen on developing and constructing its state capital, should enhance cement demand in Southern India. Recent industry analysis predicts that between 63 million to 70 million tonnes of new production capacity will be added to the cement industry in India over the fiscal years 2024-2025 and 2025-2026.

About 30 million to 35 million tonnes of which is anticipated in fiscal year 2024-'25 itself. Capacity [indiscernible] which is also projected to increase to 71% in fiscal '24-'25, up from 70% in fiscal year '23-'24, propelled by rising cement volumes. Considering these circumstances, we are hopeful about Rain's ability to manage any challenges ahead of our Cement segment and leverage potential opportunities. Now I will hand over the presentation to Gerry, who will provide further updates on the industry and our business on Slide 4. Gerry?

[Gerard Sweeney, executive]

Thank you, Jagan. Hello, everyone. It's a pleasure to speak with you all again. Proceeding to Slide 4, industry reports are predicting a favorable trend for aluminum's market performance, countering the previously observed decline in prices and customer demand. Projections indicate that the worldwide production of aluminum is expected to strengthen over the next 5 years, surpassing the total production of the last 5 years.

As we look at Slide 5, in terms of key commodity price improvements and their impact on our business for the second quarter of 2024, we noticed an increase particularly in benzene prices. This rise benefited portions of our liquid businesses in our Advanced Materials segment and the Other Carbon Products category of our Carbon segment. Our Carbon segment experienced a 20% surge in volume growth during the second quarter, although prices for that segment's calcined petroleum coke and coal tar pitch remained relatively stable or saw slight declines.

In the CPC market, there was a rebound in both demand in India and the U.S., recovering from what we missed in the first quarter. Regarding CPC pricing, we observed a drop in raw material costs that aligned with declining CPC prices. Interestingly, this was the first occurrence since the peak of CPC prices.

Moving to the distillation part of our Carbon segment. CTP volumes stayed unchanged from the first quarter, while CTP prices witnessed a 6% decrease in the quarter as well, which followed a 10% decrease in the first quarter due to substantial resistance to pricing. Our coal tar raw material prices showed minor change during the same period. In other areas of our carbon products, specifically within our other carbon products category, we saw a marginal increase in both volumes and pricing when compared to the previous quarter. We're also happy to announce that our Advanced Materials segment maintained its strong EBITDA performance into the -- into the second quarter, making it now consecutive quarters of strong EBITDA performance, with volumes exceeding our expectations.

Following an optimistic start in the first quarter, we continue to see an upward trajectory in both pricing and volumes in Advanced Materials. In the engineered products category of our Advanced Materials sector, the quantities of both CARBORES and also petroleum-derived PETRORES remain comparatively unchanged following a significant uptick in the first quarter, with prices also remaining steady. Within the chemical intermediates category of this segment, our BTX products experienced stable volumes with an uptick in prices, whereas the volumes for phthalic anhydride declined as prices rose.

Turning our attention to the resins and downstream materials category within the Advanced Materials segment. There was a minor change in both volume and price compared to the previous quarter. Although the disruptions in the Red Sea shipping routes adversely affected the volumes of products from our engineered products category, the same adverse events have conversely been advantageous for our resins and downstream materials category in Europe. The region has shown increased demand for our HHCR materials regarded as made in Europe. Clients in Europe and the Mediterranean are recognizing the dependability advantage of sourcing from Rain's local production of HHCR, especially following another supply chain issue affecting alternative supplies from Asia.

On Slide 6, which focuses on revenue distribution by end industry, you will see that the aluminum sector accounted for approximately 42% of our total consolidated revenues on an LTM basis as of June 2024. This marks a 6% decline from calendar year 2023, mainly due to diminished volumes in our carbon calcination business in the first quarter of this year. We anticipate a rebound in the usual range of 43%, 44% by the close of 2024. Our remaining revenue streams come from various industries, including the important construction and carbon black sectors. I'll now hand over the presentation to Srinivasa, who will discuss Rain's consolidated financial performance on Slide 7. Srinivasa, the floor is yours.

[T. Rao, executive]

Thank you, Gerry, and hello, everyone. During the second quarter of 2024, Rain reported a consolidated net revenue of INR 40.56 billion, making a INR 5.65 billion reduction from INR 46.21 billion during the same period in 2023. The downturn was primarily due to a INR 5.58 billion revenue fall in our Carbon segment and a INR 0.53 billion drop in our Cement segment, partially mitigated by a INR 0.46 billion rise in our Advanced Materials segment. Furthermore, Rain experienced a decrease in consolidated adjusted EBITDA by INR 1.85 billion compared to the previous year, attributed to a INR 1.78 billion reduction in the Carbon segment, a INR 0.06 billion reduction in the Cement segment and a INR 0.01 billion decline in the Advanced Materials segment.

Moving to Slide 8. We can see that for the quarter ending June 30, 2024, our Carbon segment reported revenue of INR 27.95 billion, a decrease from INR 33.53 billion during the same period in the previous year. This quarter's increase in sales volume, however, was mostly attributed to a rise in our CPC volumes. Customers from Asia and the Middle East restocked this quarter following a destocking period in the first quarter of 2024. And some shipments slated for the third quarter were brought forward into the current quarter. However, in the second quarter of 2024, there was a 24.1% reduction in average blended realization during due to lower market prices across all geographical areas. Currency fluctuations [indiscernible] euro appreciated by 0.4%, and the U.S. dollar by 1.5%, both against the Indian rupee. Consequently, revenues from the Carbon segment saw a 16.6% year-over-year decline in the second quarter of 2024 for the reasons mentioned.

The adjusted EBITDA for the Carbon segment fell by INR 1,779 million compared to the second quarter of the previous calendar year. The primary causes were delays in adjusting raw material costs to align with the drop in finished good prices. This impact was partially mitigated by higher volumes and strengthening of both the U.S. dollar and the euro against the Indian rupee.

Moving to Slide 9. We can see the Advanced Materials segment's performance. During the quarter ending June 30, 2024, our Advanced Materials segment ended revenues totaling INR 9.4 billion, which is an increase from INR 8.94 billion generated during the same period last year. The uptick in our BTX sales stuck to the expected quarterly patterns, with the additional boost in this segment coming from elevated HHCR sales volume. These were due to the previously mentioned supply chain interruptions of many European and Mediterranean customers in their historical Asian supplies caused by the Red Sea crisis.

Our consistent and reliable HHCR production volumes in our European plant underpinned and supported the increased sales demand from customers for our HHCR materials. In the second quarter of 2024, despite a 16.1% drop in the average selling prices, revenue growth in this segment was partially mitigated by the euro appreciating against the Indian rupee by approximately 0.4%. Consequently, revenues for the Advanced Materials sector saw an approximate rise of 5.2% in the second quarter of 2024 in comparison to the same quarter in the previous year. Adjusted EBITDA fell by INR 9 million in contrast to the second quarter of 2023 as lower average selling prices were somewhat compensated by higher volume sales and in strengthening of the euro related to the Indian rupees.

Moving to Slide 10, we can look at our Cement segment, which experienced a 14.3% decline in revenue in the second quarter of 2024 compared to the same period in 2023, attributable to 8% fall in realizations and a 6.8% reduction in volumes. The adjusted EBITDA for our Cement segment saw a downturn of INR 59 million, as lower realizations were compounded by rising operating expenses.

Moving on the next slide on debt. The second quarter concluded with a gross debt of USD 970 million, which includes working capital debt of $117 million. The net debt stood at $747 million and with an LTM EBITDA of $177 million, our net debt-to-EBITDA ratio was 4.2x. For the next few quarters, as performance improves and debt are paid down, we anticipate this leverage ratio to gradually approach 3.0x.

During the span of past 6 months, our euro-denominated term loans saw a reduction by USD 48 million, driven by $35 million in repayments and the remaining $13 million ascribed to the foreign exchange impact due to U.S. dollar euro fluctuations. In terms of liquidity, we closed the quarter with $432 million compared to -- comprised of USD 206 million cash balance and USD 226 million available in undrawn credit facilities. The group allocated roughly $35 million for maintenance, capital expenditure and planned turnarounds in the first quarter of 2024. I will now pass over the presentation to Mr. Jagan for his concluding remarks.

[N. Jagan Reddy, executive]

Thank you, Srinivasa. Reflecting on the first half of 2024, we have observed sustained margin pressures in our Carbon segment continuing from 2023. Nonetheless, signs of recovery emerged within this quarter. We predict that margin pressures will diminish in the latter half of the year, and we foresee margins normalizing in the first half 2025. Our margin -- our management team is also strategically working towards boosting our CPC volumes in the second half of 2024 due to the Honorable Commission for Air Quality Management Order, having raised the total green petroleum coke material import quota into India from 1.4 million tonnes per annum to 1.9 million tonnes per annum. This is encouraging, especially given that our domestic tariff area plant in India is already back to operating at full capacity.

Additionally, with the recent approval for Rain to import green petroleum coke to our SEZ unit in India during the current quarter, we expect increased capacity utilization rates there by the end of 2024. We are currently awaiting permission to import CPC at our SEZ facility as stipulated by the honorable CAQM's order, which will then further enhance operations at our global calcined plants and expand our market presence in Asia and the Middle East.

Regarding our Advanced Materials segment, the stable margins noted over the past 2 quarters signal a continuation of this trend in the subsequent quarters. And regarding our Cement segment, as previously stated in our opening remarks, we expect a rise in demand over the next few quarters due to Indian government's increased emphasis on infrastructure spending and decreasing operational expenses, which should aid in margin enhancement. As iterated in our previous quarter's call, while market conditions are beyond our control, cost management remains within our purview. We have begun putting into place significant cost reduction strategies across all regions, with the anticipation of realizing their positive impact in subsequent quarters. One example of this savings can be seen in the adjustments to our EBITDA in our earnings report, which includes provisions for severance costs in Germany.

To conclude, my heartfelt thanks to go out to our committed employees for their exceptional efforts during these trying times. Their dedication and tenacity are crucial for steering our company through this period of adversity. Although the past year has been fraught with obstacles, our resolution towards Rain's long-term prosperity has not wavered. We are optimistic that our strategic measures will forge a path towards a fortified and resilient establishment. We appreciate your ongoing support for Rain Industries Limited and eagerly anticipate sharing further updates in the upcoming quarterly presentation. Thank you very much.