Advanced Petrochemical Company (2330) Earnings Call Transcript & Summary

Ladies and gentlemen, my name is Muhammad and I would like to welcome you all to Advanced Petrochemical Company earnings call for the first quarter of 2024. Please note, this call is recorded and will be published into our APC's website at advancedpetrochem.com. Before we proceed, I need to read the following statements. Statements or comments made on this conference call may be forward-looking statements. Forward-looking statements may include, but are not necessarily limited to financial projections, other statements of the company's plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties. The company's actual results may differ significantly from those projected or suggested and any forward-looking statements due to a variety of factors, which are announced and uploaded in the Saudi Exchange website. Today's call will be led by APC President and CEO, Mr. Fahad bin Al-Matrafi and joined by the CFO, Mr. Abdulaziz Al-Ardhi. At Advanced, we are dedicated to enhancing relationships with all stakeholders by upholding our vision, mission and values. As you know, Advanced has been in the business of manufacturing and selling of polypropylene since 2005, and its facility is in Jubail Industrial City, Saudi Arabia. For today's call, we will start with the ESG and responsible care update, followed by the company performance highlights. Then we will share updates about our projects and growth plans. Lastly, we will have an open Q&A session to address all of your questions. For the first item of today's agenda, we hand over the mic to our CEO, Mr. Fahad.

Thank you, Muhammad. I would like to again welcome all the audience, and thank you [ RLSNB ] for hosting this earnings call. Just to give a brief introduction, this must be the first time we are presenting or sharing a presentation. I believe my colleague here, they are trying to really adapt the best practice by bringing a new approach which is -- I'm very much supporting. And just to divide the presentation into different segmentation, one part is by the IR and one part by me and one part by the CFO. But eventually, once we are done, you will be most welcome to ask a question, and we'll have our usual Q&A and interactions together. Just to touch base on the ESG and Responsible care, we have completed 25 million safe man hours without any lost time injury. As you know, in first quarter, we had our major turnaround, Hamdullah was completed safely without any issue, despite of the big really workers has reached to almost 4,000 workers during the peak time during our maintenance activity. But eventually, I think it was managed very well from a safety and environmental point of view. In fact, we have recycled almost 93% of our waste, which is something always we are aiming to do more by exploring ways and means along with the Royal Commission and other companies to recycle the waste. Also, we have a 0 noncompliance to any regulatory requirements, which is something that we are we proud and we value as we go. I think, Muhammad, you will take us for next slide.

As for the company's financial performance, we hand over the mic to our CFO, Mr. Abdulaziz.

Thank you, Muhammad, and welcome everyone joining us today. I'm glad to meet with you and discuss our latest financial results that we have announced for quarter 1, 2024. As you know that we have recorded net losses of SAR 58 million compared to SAR 23 million for quarter 4 2023 and around SAR 43 million compared to similar quarter of last year, mainly due to reduction in the sales volume from 43% to 45% resulting from conducting the turnaround for 2024 in quarter 1 as well as an increase in SK Advanced losses of around SAR 12 million that resulted from the reduction of the spread risk at times as well as having the turnaround for SK Advanced plant and also on polypropylene. And this resulted and impacted on liquid performance of, we can say most of the petrochemicals impacted by the results starting in quarter 4, 2022 then this continue with us in 2023 as well as in quarter 1, 2024. Of course, after completing the turnaround, we expected the result would be a problem in 2023 and in quarter 2, quarter 3 and quarter 4. But we are working together intently with the management to complement so many programs to optimize the cost for the company. Moving to the next slide Muhammad, this reduction in the sales volume and sales of price impacted our revenue, gross profit and net profit, as I mentioned, and this is a slide, and we can see compared to all the quarters in 2023. And here, as we can see that on our balance sheet in quarter 1, 2024 and Q4 2023, our asset, we can see increased due to asset under construction for APOC and we will have strength balance sheet, you can see after APOC start commercial operation, which will improve the profitability for Advanced overall. This is the result for SK Advanced and also on polypropylene, as I mentioned in the previous slide, the results have been impacted by the reduction in the spread as well as having the turnaround, the stated turnaround in quarter 1 in 2024. Just to share with you the progress on the PDH and PP-Plant APOC project, Hamdullah, we have reached around 93% as a progress. Already, we are into precommissioning activities, already started impact the precommissioning activities in some of the systems in terms of blowing, in terms of blushing, making some system ready, especially in addition to electricity is the cooling water system and the other utility system. Boiler will be fired by hopefully in due time in the first 10 days, 2 weeks from now. We had a plan with Samsung in the right time because we need just to look for an integration also with Tecnimont on the other side for our readiness of a common utility system together. That's why there was a bit or a couple of weeks delay in firing, but this will not impact our schedule. This will be helping for blowing of the steam system and also other required systems. Also, at the same time, we are pushing -- completing other operational and maintenance activity readiness hand-in-hand with Tecnimont and Samsung, trying also to set up a planned control room almost ready now and will be ready soon. Already the council arrived and the reduction it will be ready soon, so in the coming months, functional tests and load tests will be started and we will be ready, inshallah, for the start up. We are getting very close. I believe now working with Samsung and Tecnimont to make the seamless start-up and the pre-commissioning activity without a major issues, inshallah. Most of the utilities even from the external resources are ready, lined up, and we are, I think, moving in the right direction. So basically, the second half of the year will be a real -- ready for startup to make sure -- and startup to make sure things are rolling in the right direction. There are always some challenges here and there. But I think the team, they are already putting a lot of effort, pressure trying to move, inshallah, within the end of the year and the second half for both PDH and PP. For an IPA, as you know, that's already creating an impact, already started. Contract has been awarded in 17th of February this year, moving in the right direction. So we are expecting, inshallah, to the ability for commissioning as of land by end of 2026. We are working in different aspects in terms of preparing other marketing agreements and other aspects, which we have a good time to work it out. Already, in fact, we have a potential of takers, part of them is, in fact, is [indiscernible of takers, they are ready and they are willing because they are marketing the same products. So things are moving, inshallah, in the right direction. Regarding the methionine project, as you know, that we have signed with Shareek and we are closely working with a foreign investor. We had, in fact -- our team they had several discussions on the JV discussions, and they have already completed a very high percentage in terms of our progress in the key terms and conditions, almost there. And hopefully, third quarter should be -- this is our internal target, even with the foreign partner to get it done and completed. So we are moving in this aspect. So no issue as such. Next for the Cracker project, as we have discussed last time, it is under configuration with a consultant and we are just waiting. We have -- we've started to receive in fact, a short list of the products, which we are reviewing internally, in fact next week we're supposed to have a meeting with the consultants to review a short list of the products. So basically, once we complete the cocreation because this will be an input to the financial model as well. So this will give us clarity on what would be the potential project and the co-cooperation and the financial model. So we'll have a better understanding on the -- also estimated CapEx and the path forward on the cracker. We are working closely also with the Ministry to facilitate some of the coordination with a potential from partners in this aspect. So we are also getting closer, hopefully inshallah, with the support of the Ministry, we can work out something that will be compounding and we are evaluating as we go, how the discussion would move since then, now the Ministry is supporting of that aspect. This, in brief, I believe, just to touch base on -- and I think in more organized manner compared to what we used to have -- just a parable update. I think trying to enhance our IR and trying to bring a material that would be shared. I believe also my colleagues will put this material, they will upload it on the website so it can be a referenced if you would like to look at it. We are always welcoming of any comments or any feedback. So by this, I would like to leave the floor to you if you have any questions, and we are ready.

[Operator Instructions] The first question comes from Andy [indiscernible].

I'll start with the -- of course, the capital work in progress. Based on my rough calculation, I think you might have capital work in progress SAR 8 billion plus right now. So basically, just wanted to understand how much it could be transferred when the project -- the PV project transferred this year, like when the commercial production starts. So we just want to understand how much -- or will it be like a significant amount of this will be transferred to PP&E and then potential depreciation amount and also the borrowing cost. What could be the borrow -- expected borrowing cost and the depreciation amount that will be charged to the P&L during second half? This is my first question. The second question, of course, I still want to just understand the strategic holding of Tasnee. Of course, first quarter, you had a nice boost from the market. Of course, you recorded in the comprehensive income, around [ SAR 50 million ] gain. But now it seems like you wiped off that gain right now. Of course, it came down sharply again. So what is your basically strategy on the Tasnee holding? Will it be utilized to fund in the future project. Those are my 2 questions, if you can answer that.

Let me answer the second question, and I will leave the first question to my colleagues to answer it. Basically, for Tasnee, as we -- as you know, and as we mentioned, definitely it is an option that is available also to any finance whatever -- our projects in [indiscernible] we need to see and we need to evaluate from time to time. Once we have at least an appreciation of the share price and to assess the level where we can really make the right decision at the right time. We are reviewing with our Board on a regular basis. And definitely, the decision will be made timely and the right time. So definitely, it is part of our radar screen that we evaluate when to offload and at what price, and it will serve what. So it is an option that is available, but we need to select and to make the right decision at the right time. This is regarding Tasnee.

For the first question about -- the percentage and I wanted also to touch base on Tasnee once you mentioned that we have a comprehensive income or profit more than 53%. There's not an indication for the, we can say, a real profit. While this represents only the movement in the share price of Tasnee, one quarter, yes on the quarter basis. And for the increase in the depreciation of financing cost, of course, once -- if you say start the commercial operation, this, of course, will increase the cost, but also we need to consider we expect to have an increase also in our revenue. But for the capital project maybe I will leave the floor to Mr. Fahad. He can further elaborate on the capital projects.

I think the first question was that how much cost will be transferred to -- from capital work in progress to PP&E once we start to capitalize the plant. See, we have basically 3 units. We have PDH, we have PP and we have IPA. So IPA will be -- at the end of the year, will be still under construction. So we will capitalize PDH, PP plus utility portion plus [indiscernible] portion basically. So we can say almost between $2.5 billion to $2.6 billion will be capitalized, will be part of PP&E when we start commercial operations. Now depreciation, how much of the depreciation we can say based on the useful life of different equipment will be different. It gets to between SAR 300 million to SAR 350 million will be additional depreciation when we start commercial operation for APOC. For interest cost, again, it depends on the interest rates because we expect the interest rate to come down. But if you assume today's interest rate, it will be between SAR 350 million to SAR 400 million annual interest cost. But we expect this to be coming down because of two reasons. One is interest rate, we expect to be coming down in the next few months. And plus, once we start making the repayments, the interest costs will come down.

Yes. And it was [indiscernible], I mean, yesterday, I believe it was announced by the Canadian Central Bank, a reduction of 25 basis points and also Europe, they might follow. And I think this decision would be made today or tomorrow. So things -- there's the expectation also from [indiscernible] that by sometime in the third quarter, we might see [indiscernible]. So there will be a potential reduction in the interest rate. At the same time, the impact will be after the commercial operation, which will be sometime towards the end of the year.

We can say 100 basis points will impact SAR 250 million interest cost. So we expect that there will be some good interest reduction in the next few months, then we start commercial operation for '25, which will reduce interest costs for us, I think so.

Structure APOC commercial operation will have different, we can say financial statement in terms of any cost, profitability as well as balance sheet.

If I may just quickly follow up on the commercial operation of our PDH plant. I mean, considering the current prices and the margin levels, maybe your projections for previously like a high level of prices could be like a maybe breakeven point within maybe a couple of quarters. But what is your expectation right now to break even this additional unit given that current prices and the higher expenditure on especially depreciation and borrowing cost?

I see currently, we know it's lower side, and we expect the prices to improve in the next few quarters. But if you even take today's number, I'm sure it will be more than breakeven, correct me [indiscernible].

So we have good contribution margins here. And we expect the prices would be [indiscernible] in '25.

I think most important from our side will be to make sure that we should capitalize much as we can produce in number of units, okay. The market is market. We can't impact the market. Our job is to make sure we produce as much as we can produce, we should convert as much of propane available to polypropylene and go to the market. This is our job, basically. The market is market.

Is that what you're saying is whatever the number of quantities you produce, you can sell these quantities at a given price?

Absolutely. This is one of the key objectives and tasks that [indiscernible] working closely with off-takers and also with the other potential direct converters to be ready for the new boiler [indiscernible] plant from APOC.

The next question comes from the line of [ Akaresh Tomar ].

So in terms of new plant, I just wanted to get an idea if I'm thinking about this in the right way. So you've already spent roughly in your total CapEx since 2021. You've already spent close to SAR 8 billion or SAR 7.8 billion. And in your CapEx commitments, you already have roughly close to SAR 2.78 billion. So even if we remove like your maintenance CapEx, if -- even if I think about SAR 600 million it comes -- your new plant comes close to SAR 10 billion. So which is like way higher than the announced cost of SAR 6.75 billion. So am I right in this? Or is there something that I'm missing? This is the first question. And second question is if you can comment on how the plant operations are in Asian territory, considering current spreads, are you seeing any closures? And what is the strategy for SK Advance? How long are they planning to continue running the plant at this negative impact?

Just -- I may just to clarify one point. If you recall, whatever we have announced at that time it was not as bad as what we are doing right now. We did answer several times. Just to refresh on the same point, what we have announced [indiscernible] designed capacity it was 750,000 tons and what we are working right now is 843,000 tons okay? This is one aspect. Second aspect, the infrastructure, it was not really included at that time. The infrastructure even for the Cracker project. So we had a site in Jubail too, so it was decided to go to build the infrastructure or to make it ready that would be to cater for the Cracker project. So it would be cheaper for us to do it this time rather than to wait for the next time. Second point, IPA was not part of it at that time, so which we have also added. Third point -- fourth point also the [ OSPL ] it was not part of it. [ OSPL ] it was not part of APC. It was out. So the announced APC, if you will recall on April 2021, it was excluding an [indiscernible]. And after 2 months from our announcement, there was an escalation under construction costs. And we have heard about some projects, almost 30% there was an escalation of the prices. So we were really any -- we came in the right time to the market. So there was an exposure and that was -- in terms of an escalation on the prices. But this is compared to the main, the bulk, which is the PDH, PP and also -- we talk about almost USD 1.6 billion, I think this is minimal compared to -- I mean, less compared to the major. Just to have a good also reference and the benchmark. If you could see the recent announced project, you will see how much is the difference. And if you can share it exactly, cost per ton as of today, the announcement and with the capacity, you will see a major difference. You will see a major difference. So these are the factors created the difference between what we have announced at that time versus what we had. [indiscernible]

Just want to comment on this contingency and commitment number you mentioned that the commitment we announced in March 2024 is SAR 2.7 billion, including IPA of SAR 700 million. So remove IPA out of it, we are talking about SAR 2 billion. So basically currently spending, plus SAR 2 billion. This is the number I gave you SAR 2.5 billion to SAR 2.6 billion is in line with what we will see this month.

Sure. Fair enough. Just one follow-up on this. So you mentioned that it also includes the CapEx for a Cracker project. Can you comment how much that would be, like if you can give us an idea.

No, it's an infrastructure. For instance, for the cool water system, what about the system that you would just [indiscernible] you need just to expand and staff. You don't need to really go for excavations and putting new systems under the ground. So we thought let us just cover it. And just to give you an example for the boilers. Boilers we have the plant now 4 boilers. And we have left a space and with whatever facilities that -- even foundation are ready just put the boiler and to hook up and to connect. So I don't need to again put cables, put lines, put everything is available. And this will be charged at a later stage, [indiscernible], exactly. So for us at that time, we did a sort of an evaluation. If we need to do it at that time when we made the decision versus to do with a later stage, I think it would be much, much cheaper to do it one time rather than to take it in 2 phases. And the site is one. So if you need to do a building to do it one time, it doesn't take us to do it twice.

Fair enough. If you can just comment on the SK Advanced question also.

SK Advanced, this is one of the hot topics that eventually, we are discussing with our Board. I believe we have explored all options that would really minimize the back and also trying to minimize any losses. Definitely, if there is any material development in that aspect will be disclosed. But as we speak, we have a detailed dive deep evaluation with all shareholders, not only SK Advanced shareholders, but SK Advanced, including [indiscernible] SK Gas and also U PP as well. And we have -- 1 of the actions we have assigned -- we have requested them to assign a consultant to really help and turn around the performance of SK Advanced and U PP, I believe we could do a lot. Honestly speaking, we are working with them closely to optimize even the propylene cost by exploring the [indiscernible], I think we have progressed very well. And this is -- despite of these losses, there are a lot of efforts being done to it, it could be even more, just to minimize the market impact by also optimizing a cheaper source for propylene -- sorry, for propane. Besides also exploring U PP different markets already, there was an agreement and already started to perform what they call it an operational advisory committee, which will review also details of the sales plan, production plan and also sales by region, trying to push for a [indiscernible]. So collectively, I believe, there was a good result to minimize the losses. And otherwise, it could be even higher, this is one part. Second part -- it's no secret. I think you might of heard about -- and there was an announcement on [indiscernible] sometimes, I think, 17th of May, the South Korean Government, they are trying to restructure -- to come up with a restructured approach to help the petchem industry in South Korea. Some of them did start to close to moth ball and some of them, they started to sell assets. I think the government, they have announced they will step in to bring sort of a program which we are waiting for. They have formed a task force committee just to look after what could be the potential approach to really help the petchem industry in South Korea. A representation from the petchem industry in South Korea as well as led by -- also supported by a technical adviser, KevMG to help them with this activity. And there's been an announcement that they are expecting to complete exercise by end of June this month. And by early in July, sometime in July, they would announce their plan. So this is another support that we are counting on. We had a meeting on 26th of May with the shareholders. And we have discussed in addition to whatever optimization plan and other issues regarding the losses of SK Advanced program. So it is in our radar screen, and we are looking after. And hopefully, we can hear something positive and a way to support SK Advanced and U PP. So we are waiting to end of June, early July to hear the outcome.

And as explained by our CEO and communicated by our Chairman, by end of Q4 2023 that the shareholders currently working together to minimize the losses, and we agreed on certain action to be executed in 2024. But as we mentioned in quarter 1 2024, SK Advanced and U PP had their turnaround, which we can see -- give us -- required for more time to see the result of this action plan. We expect Q3, Q4 to see the favorable impact of these actions capitalized, inshallah and consultant effort as well as the coding to support since they are going to have to communicate short term support, and long term, as mentioned by the CEO. But we are working closely with the shareholders to minimize the losses.

The next question comes from the line of Alex.