Borouge plc (BOROUGE) Earnings Call Transcript & Summary

Hello, everybody, and welcome to the Borouge second quarter earnings call. My name is Sam, and I'll be coordinating your call today. [Operator Instructions] I'll now hand you over to your host, Ed Senior, Head of Relational to begin. Ed, please go ahead.

Great. Good morning. Thank you, everyone. Thank you for taking the time to join us today. As a quick introduction, my name is Ed Senior. I'm the interim Head of IR for Borouge Plc. Delighted to have you with us for this -- our first presentation as a listed company. With me, I have Hazeem Suwaidi, our CEO; Rainer Hoefling, our Chief Marketing Officer; Louis Desal, our COO; and Saeed Al Dhaheri, our CFO. Before I start, I want to draw your attention to the disclaimer accompanying this material and also a note on our disclosed financials. As you will note, Borouge plc was only formally established a few months ago in May 2022. And as such, our statutory financials, which we published today only cover 1 month from April until June. To assist analysis, we have also prepared pro forma accounts showing the combination that forms the current business as if it had been in operation for all of the first half of 2020 and first half of '21 by comparison. Those have been separately disclosed. They've been released to the ADX and you can also find those numbers on the company's IR web page. So we'll be talking to those numbers rather than the statutory financials during the course of this call. Thanks for that. I will now hand you over to Hazeem to talk you through the key highlights and strategic overview for the first half of 2022.

Thank you, Ed, and thanks, everyone, for joining us today. Today marks our first set of results as a listed entity, following our successful IPO on ADX in June 2022. I'm very pleased to share that Borouge has recorded a strong financial operational performance in the first -- financial and operational performance in the first half of this year. This is relating a resilience against challenging market and conditions in line with our strategic priorities. Our commitment to operational excellence and our differentiation, customer proposition has translated into revenue of over USD 3.4 billion, a 16% increase year-on-year and an EBITDA margin of 44%. The strong financial performance and significant cash flow generation in the period representing a cash conversion rate of 94% enables us to reconfirm the outlook and dividend commitment made at the time of IPO. Now I will hand over to Rainer to take you through the market dynamics.

Hello, welcome from my side. Thank you very much, Hazeem. So some good news here from my side. In the second quarter, we have experienced a tailwind from quite strong pricing environment driven by robust demand in our regions and the high level of crude feedstock prices. The good pricing environment also incorporates, of course, and also higher logistic costs, which in the maturity we pass on to our customers, right? The underlying polyethylene, polypropylene benchmark prices, both compressed in Q2 versus Q1 right, based on the slower but now improving demand in China due to lockdown situations, but remaining at an elevated levels when you compare it to midterm history. The current price levels reflect the global demand and supply situation and the industry-wide feedstock prices observed in the period. However, if you look at this slide, however, we continue really to achieve the premium over benchmark pricing, reflecting our differentiated product mix, how we approach the market. And with this, our capability and ability to capture regional price opportunities. And if you look at the premium during the quarter, the increase in polyethylene and polypropylene towards USD 436 for PE and the USD 318 per tonne for polypropylene, respectively, this is a fantastic result. And that is reflecting higher premium compared to last year, the quarter 1, '22 and the midterm guidance. So Louis will then now talk through the operational highlights from the first half of the year.

Thank you, Rainer, and a warm welcome from my time as well. I will cover the production-related information over the past period. And then I will hand over back to Rainer to discuss the sales performance. The slide is representing the sales volumes. So at a high level in the first half of this year, our overall production has grown both year-on-year as well as quarter-on-quarter as we ramped up PP5 and completed the turnaround of Borouge1. As you will remember from earlier communication, our Borouge1 assets went through a planned turnaround during the first quarter, which is a recurring activity every 5 years, and this was now completed, and we are back on stream with all the units. We want to highlight that in quarter 2, we were able to manage an ongoing propylene feedstock challenge brought on by constraints in ADNOC Refining. We did this through internally producing significantly higher internal volumes of propylene converting ethylene via our olefin conversion units, which ran at near 100% utilization in the period. As you will remember from earlier presentations, we consider our flexibility to internally optimize feedstock production in circumstances such as these to be a key competitive advantage of Borouge. Availability of propylene from ADNOC Refining has resumed during the course of July, and propylene availability in quarter 3 of this year is anticipated to be unconstrained. We also want to note that our LDPE unit, one of the 16 production units is -- of the 16 in total production units in Ruwais, that went into an unplanned shutdown in the quarter. As a result of this, we have excess ethylene, which, as you recall, is based on significantly cost-advantaged ethane. We have been able to redirect this ethylene to the olefin conversion unit for conversion into propylene as mentioned earlier. And this internally produced propylene is cheaper, even at conversion expenses than purchased propylene at current market price. This internal propylene production positively impacts overall feedstock costs in quarter 2. I would like to hand over back to you now, Rainer for the sales discussion.

Yes, thank you very much, Louis. Let's stay on the same page, and I would like to talk to you briefly around the shape of our sales for the period. Hazeem mentioned already that we have achieved revenue growth of 16% year-on-year, driven by robust sales volume and good price levels. And looking to this quarter, quarter 2, the revenue growth of 18%. This was roughly, let's say, 2/3 attributed by the volume and 1/3 by pricing. And in terms of volume, we had a very strong sales month in June, the largest volume sold in a month ever, right, in the history of Borouge. And in terms of sales mix, important to highlight that the infrastructure, right, grew as a percentage of our sales in the half year we just passed it now makes up to 46% of our sales versus 38% of the half -- first half of last year. So it's evidence so that we move forward with our differentiated product mix. And in particular, we made significant sales volume of PE100 during quarter 2, but also quarter 1 was very strong, which is a key product in our infrastructure application and the premium product based on a very good production and a good market approach. We will talk about outlook later. Hazeem will walk you through this, but it's important to know that economic activity in our core markets, Asia and Middle East were relatively robust compared to other developed economies. And as a reminder, 60% of our sales go into Asia Pacific and 32% into the Middle East. And now I hand over to Saeed, who will talk you through our financial performance during the period.

Thank you, Rainer. As you can see, strong performance over the first 6 months reflect Borouge's undifferentiated positions. The resilient volume growth has led us to robust revenues and EBITDA profile over the period and strong cash flow generation. Revenue grew, as mentioned earlier, 16.4% to USD 3.6 billion in the first half, primarily driven by the volume and strong pricing environment. Quarter-on-quarter revenues increased 18% to USD 1.87 billion. Q1 had some interesting element in the cost base, which I will speak about in a minute. But for now, we think Q2 is more a comparable period for the analysts to look at. EBITDA margin in the first half was 44%, a decrease on the same period last year, but expanded to 46% from 40% on quarter-on-quarter. Taking more a detailed look at our cost. Total cost of sales increased 24% year-on 7% quarter-on-quarter when we drilled into it. It is important to look at the 2 components of cost of goods which are the feedstock and other variable costs separately. First, when the feedstock prices grew only by 6% in the first half of 2022 versus first half of 2021. This has reflected our relatively fixed retail stock price -- feedstock price with a cost here largely tracked volumes. For the second quarter, you will notice that more significant raise on the feedstock expense, this is largely volume driven as in Q1, we did not have Borouge1 online, and therefore, there is a ramp-up effect on the cost of the feedstock on the spirit. The second component of cost of goods sold is our other variable and fixed production costs. While this has looked like first half of 2022 was high relative to the prior year, much of this is driven by the costs we incur in the Q1 2022 and which you could see a fall as a percentage of sales in Q2 2022. Within these costs, we have utility catalysts and additives that inflated on the cost, but not as much as sales and this has contributed positively to the margin growth. More importantly, through this cost line, we also have the cost impact of inventory movement. This was in Q1. That's largely reversed into the credit in Q2 as we sold down inventories. This was drive the high overall cost of H1 versus the prior year, but also explain the return to more trend margin in Q2 versus Q1. Sales and distribution costs were up 8% over the previous quarter, but significantly higher year-over-year, reflecting the higher global sea rate where costs have been tripled on many rates. General and administrative costs decreased 31% in -- on quarterly basis owing to the Borouge4 carved out, but increasing 20% year-on-year due to the one-off expense related to the IPO. We are also continuing to achieve savings and that our internal profit improvement monogram, which is aimed to optimize discretionary spending. Moving on to the CapEx and the cash flow. As you can see on the slide, CapEx decreased 30% year-on-year following the completion of PP5 and the carved-out of Borouge4 in Q2. We actually had a negative CapEx in Q1 as a result of the carve-out. Working capital was a source of cash in the period as we reduced inventory level back to the level in line with our midterm guidance. Cash flow generation remained strong with an operating free cash flow, defined as adjusted EBITDA less CapEx at USD 1.42 billion for the first 6 months of the year and $914 million in Q2, reflecting a cash conversion rate of 94% and 105%, respectively. As noted during our IPO process, Borouge generated a substantial free cash flow in time. This has been supported by high profitability, as highlighted in the previous slides, decreasing growth CapEx as a result of the PP5 construction completion and limited maintenance CapEx reflecting our modern asset base. This strong cash flow generation support our attractive dividend policy communicated at the IPO, which will be distributing to the shareholder $975 million for the financial year and at least $1.3 billion for 2023. I will hand back to Hazeem to comment on the outlook. Hazeem?

Thank you, Saeed. And now looking ahead, as you'll see, our core IPO guidance around our dividend remains unchanged. We recognized signs of slowing economy or economic activities in developed markets. Our economic activity in our core Asia Pacific and Middle East markets remain robust with economic growth rates in excess of developed economics. We remain able to place our volumes and be tactical about the markets we adverse in response to changes in demand. While underlying benchmark prices for PE and PP have softened slightly, analyst pricing expectations currently anticipate a strengthening into the year-end, reflecting a presumed resumption of economic activity in China, in particular. In the midterm, we forecast premiums to remain above our midterm guidance of over $200 per ton for polyethylene and over $140 per ton for polypropylene. For volume, as mentioned earlier, higher sales in this quarter were driven by utilizing our inventory by capturing market opportunities. However, going into Q3, we anticipate the sales volume will align more with production volume. Within our cost base, ethylene costs will remain essentially fixed and under our long-term pricing agreements with ADNOC, which provides us with significant long-term visibility, a key competitive advantage. Propylene cost broadly attract oil prices, which have fallen at the start of Q3, but remain elevated. We anticipate continuing to run our OCU at high level of utilization in the coming quarter. Generating cost attractive property feedstock for our PP production. We anticipate logistics costs would continue to be elevated in Q3. Finally, as a side note, you will all know that Borouge4 was carved out of the company before the IPO. We are continuing to make good progress on early works and site. And we look forward to keeping you informed of developments ahead. So in summary, Q2 and first half of this year represents a good start for Borouge as a listed company. We have delivered a strong set of financial results and demonstrated operational excellence in spite of the broader macro challenges. We reported strong sales growth and maintained robust EBITDA margins, reflecting our dry volume growth, leveraging our feedstock base and continue to achieve premiums for our differentiated products. The turnaround of Borouge1 is now completed, and we are ramping up production at PP5, putting us on a strong footing going into Q3. We remain a highly cash flow-generative business with ample dividend capacity for our shareholders. We are confident in the outlook, and we remain focused on delivering value for all our shareholders. And with this, I will pass it to our operator, and we are happy to take any questions.

[Operator Instructions] Our first question comes from the line of Charlie Webb of Morgan Stanley.

Brilliant. Just one topic and maybe a few questions from it, but can you just help us understand how the kind of the cost to feedstocks variable costs kind of evolved through the first half, obviously, flagging you managed feedstocks to your advantage because you using the OCU. But how -- was there any benefit or was there a benefit also from selling down from inventory as if some of the inventory, obviously, was kind of build at lower cost versus what would be today. And therefore, that had obviously a positive effect as we think of kind of selling prices versus the cost of production of that inventory from last year. So that's kind of the first part to it. And second part, just on other variable costs. At the time of Q1, you expected other variable costs non-feedstock related to be higher year-on-year 2022 versus 2021, is that still your expectation? Because it feels like the kind of some of the cost step-ups you flagged in Q1 haven't yet really meaningfully materialized in the first half. So just wondering just the kind of non-feedstock-related cost should we think they're more like 2021 now versus the kind of raise guidance you gave at the time of the first quarter.

I think on the first question was related to the feedstock cost. Can you repeat the question, sir? If you don't mind, the first one? And the second one can be taken by [indiscernible].

Yes. The first one is just trying to understand was there a benefit on feedstock costs or the spreads, sorry, of feedstock costs relative to where they are today, given you sold a greater proportion out of inventory. So being that you build that inventory at a time when your feedstock costs, propene prices, whatever, were lower a year ago -- or not a year ago, but let's say, end of last year, 2021, when you built that inventory and you were selling it now. It was the comparable feedstock cost of that inventory lower than it would be today as in -- is there an advantage from a feedstock perspective that you were selling a higher degree out of inventory in the first half of the year?

Yes. Perhaps Rainer and Louis can answer the first question.

I think before, Rainer, I think let me take it -- I'll take it and Ed, you could complement here. Basically, I mean, the feedstock is, as you could see that it's driven by volume, not driven by prices, almost -- we have almost constant prices here. So what's different here? We took more feedstock here because B1 is zooming and PP5 is just added to this year. That's basically what happened here on year. Ed, anything is from your end?

Yes. Just to answer your question specifically, Charlie, we book inventory at average prices. So there is not kind of old dated stock getting sold and benefiting margin story here. It's -- and remember, this is not long-dated stock, so it doesn't spend years sitting on the shelf. It's much quicker turnaround than that sort of production there in sales. So that's not the driver. And as Saeed said, there's -- the feedstock cost has actually been relatively fixed for us through the year other than volume impacts.

And the selling out of a stock prep from a market perspective, we saw a very good opportunity in June, right, because lockdown situation is a bit in China, either there was a good logistics availability and customers across our regions, they started to refill the inventories. The inventories were relatively low and that there was a good opportunity. And I think we made a great job still for relatively good prices, right and then selling across the board, our product mix and across all our regions. And I think we were just faster than competitors and sold it and sold of crew something out of the inventory also and made them the best -- at least the best volume month ever in Borouge. So it was taking a market opportunity. And this is what I also said in previous guidance calls and analyst investor calls, I think we have a good capability, right? That's also how our setup is to manage these opportunities in the market because we have enough power on the field, and this is the result out of it.

Yes. So if you allow me to add maybe just one element from the operational part. What we have also seen, and that is a key advantage that we have as a Borouge being part of the integrated network with the other ADNOC Group companies at the site is we have seen a very good availability of ethane feedstock for our crackers. We have been running our crackers at elevated rates, and we see that we can benefit from that to produce really low so cost advantaged ethylene, which enables us then also, together with the other elements, which we refer to, to run our OCU at maximum rate throughout the period. So we are seeing here the real benefit of all the elements as we have been discussing before. The flexibility of course, you do the integration with the feedstock supplier and of course, the feedstock advantage cost positioning.

No, that's helpful. And just on other variable costs. In Q1, you were kind of citing that there will be a meaningful set up year-on-year in other variable costs, non-feedstock related, plus a few of the other fixed cost lines. How are we tracking on that first half, second half versus the guidance you gave in Q1?

Yes. I mean related to the second half of your question related to the other cost. I mean we are living in high inflation area of the world, and we are witnessing some price to be higher in terms of the utility additives and catalysts. Going forward, to see that the interest rate has been rise just to control the inflations here. On the other side of the shipping, I mean, we -- it was elevated earlier, but we see a stabilization still high than before, but we still -- we see a stabilization there in the market on the term of the shipping and we think it's going to be remaining, I mean, flat prices, it may go down a little bit at the end of the development of the global economy if they are going to go into a recession as a mild recession or hard recession until now, we still navigate through. But in terms of the other uses, the utility and the editors will be shipping that's going to be stabilizing.

[Operator Instructions] Our next question comes from Dalal Darwich from Goldman Sachs.

Yes. I'm Dalal from Goldman Sachs. I'm calling on behalf of Faisal Al Azmeh, who wasn't able to join the call. I just want to ask a couple of questions on his behalf and would appreciate [indiscernible]. So just a couple of things. How has the lockdowns impacted the premium over the past month? And in July, have you faced any issues in [indiscernible] and on LDPE shutdown, can you talk a bit about what is causing this? And does this impact your guidance on utilization rates from the IPO period.

I'll take the premium part. Did it have -- does the lockdown have an impact on our premium. I think, yes, the premium was ramping up, if I can say it like this. I think Borouge as such, if you look at the commodity market and the demand slowing down, you also saw the prices coming down. So the benchmark price you have seen, specifically in quarter 2, right in the second and third month was coming down. While we in Borouge in this particular month, we were even increasing our prices versus the benchmark prices and achieved quite significant premiums. So overall, I think Borouge is well and best positioned in a soft global environment. And what I explained already in previous calls, we are predominantly working in differentiated markets. So 80% of our products are differentiated markets, which are then also less volatile on the pricing side and are then a bit deeper coupled from commodities when they are coming down. It's based on technology, the Booster technology. And you have seen in the infrastructure. But as I said, we were ramping up our sales to 46% in infrastructure versus we have been last year, 30%, 38% on this. We collaborate directly with the value chain partners and have a good access to this and combined with a good service levels in logistics, what we specifically captured as in June, delivering significant volume, right? There we deliver also sustainable premium. And I think we can keep it on and above the midterm guidance, what we gave already. And I could give you a number of examples where we also launched new products or 20% of our products are new products. We had a project with cable, XLPE cables in a power plant in Abu Dhabi, right, where we can provide now clean energy for 90,000 individuals, which generates premium. We have an example on the circular economy where we made, again, a mono-material solution, fully recyclable with our Antero. And also here, we achieved versus the commodities quite a significant premium. So this is a continuous process. So this is how we achieved then also the premium in slowing down market.

Very clear. And on the LDPE issue, does it impact your guidance on utilization.

Yes. So on the LDPE shutdown, as I mentioned, we have an unplanned stop of the unit and the -- what we are -- I mean, the overall -- it's one of the 16 assets. The overall utilization of our assets is not impacted besides, of course, the LDPE shutdown. So there's no impact on our crackers. There's no impact on the other units. What the impact is on the OCU, as I mentioned is that we are utilizing the OCU to the maximum to redirect the ethylene, which is not consumed by the LDPE unit to benefit from this cost advantage to produce ethylene, to produce propylene at significantly lower cost than the propylene, which we are purchasing through ADNOC refining. And that -- in that way, we are evaluating the available ethylene, and we are benefiting from the flexibility and the network. The LDPE unit itself had, as I mentioned, unplanned stop with the technical failure, which was happening. The anticipated -- original startup was anticipated to be in July. It will take longer to start up the unit. It will take the rest of the year to reinstate the asset to be able to produce again. However, we are also in the network together with Borealis looking to the possibility to benefit from the availability of feedstock through Borealis. So overall impact on our assets besides the LDPE is that OCU reverent 100% over the rest of the period. And there's no impact on the way we are maximizing the crackers and taking maximum benefit from the cost advantage feedstock.

[Operator Instructions] And there are no further questions. So I'd like to hand the call back to Ed for any closing remarks.

Great. Thank you all very much. I appreciate the time we spent with us today, and I look forward to catching up with many of you in our upcoming investor guidance, investor meetings in the coming days. We're also going to be attending the EFG conference in Dubai and the Citi Conference in the U.S., both in course of September and look forward to publishing our Q3 results in the course of late October. Thank you all. And if you have any questions, please wish out to me directly and I'll be happy to [indiscernible]. Thanks very much.

Thank you.

Thank you.