Borouge plc (BOROUGE) Earnings Call Transcript & Summary

Hello, and welcome to today's Borouge fourth quarter and full-year 2022 conference call. My name is Bailey, and I'll be the moderator for today's call. [Operator Instructions] I would now like to pass the conference over to our host, Samar Khan, Vice President of Investor Relations. Please go ahead.

A warm welcome to everyone, and thank you for taking the time to join us today. By way of introduction, my name is Samar Khan, and I am the Vice President of Investor Relations at Borouge. With me today I have Hazeem Al-Suwaidi, our CEO; Rainer Hoefling, Chief Marketing Office; Jan-Martin Nufer, Chief Financial Officer; and Louis Desal, Chief Operating Officer. Before we start, I would like to draw your attention to the disclaimer accompanying these presentation materials. Also, a note on our disclosed financials. Borouge Plc was formally established on 28 April '22, and as such, our statutory published financials only cover the period from 28 April '22 to year-end. To assist analysis, we have prepared pro forma accounts showing the combination that forms the current business as if it had been in operation for the full-year '22 and the full-year '21. These are the numbers we will be working with in the following pages, and these numbers are also available on our website. I will now hand over to Hazeem to talk you through the strategic highlights for the full-year and Q4 '22. Over to you, Hazeem.

Thank you, Samar, and welcome to all those on today's call. As you know, the Q4 period was characterized by softer olefin pricing level and a challenging global economic environment. Against this backdrop, however, I am pleased to report that Borouge recorded strong revenue growth during the full-year 2022, up by 8% year-on-year, primarily driven by higher sales volumes, which grew by 15%, year-on-year for the 12-month period, and by 24% year-on-year for Q4. Net profit for the year was USD 1.4 billion, in line with the market expectations. A very good result in a prevailing market environment. Higher-volume sales were primarily attributed to our new facility, PP5, which has been ramping up during this year. Despite a compression and average selling prices, we continued to realize strong premia over product benchmark prices, demonstrating the differentiated nature of our offering. Our cash conversions remain strong, and supports our commitment to pay USD 975 million in post IPO dividends to shareholders for 2022. And we are committed to paying at least USD 1.3 billion for 2023. At the same time, we are always looking for ways to further future-proof our business, to achieve growth, and create long-term value for our shareholders. Today, we have announced USD 400 million value-enhanced program, focused on driving cost efficiencies and revenue enhancements across the business. Our key strategic growth project, Borouge 4, is progressing on schedule, and as planned. Further, we have been mandated by our board to explore international growth and expansion opportunities. These will be focused on geographies and markets that support the company's existing strategic priorities. Our ability to perform and position the company for future growth, even in challenging conditions, is a testament to our resilience and ability to deliver value and quality to our customers. I will now hand over to Rainer to discuss the markets.

Thank you, Hazeem. As Hazeem mentioned, Q4 was characterized by a challenging market environment, driven by global inflationary pressures, industry-wide softening of polyolefin prices, and volatility in oil and feedstock markets. Borouge, however, is well-positioned to navigate these dynamic market conditions. We are proactively anticipating market needs and can tactically place volumes between geographies to address changes in customer demand. Our diversified portfolio of premium products is addressing global market trends, such as the growing demand for energy transition infrastructure, or popularity of electrical vehicles, and the acute need for water access and sanitation products. Further, we are serving high-growth markets, with the majority of global polyolefin demand coming from Borouge's core markets. These markets are obviously expected to drive global demand growth going forward. Notably, the long-term industry environment for polyethylene specifically continues to be very robust, with demand additions expected to outpace significantly supply additions over the next two years. In the fourth quarter, we experienced some premia compression, with our selling prices for the quarter softening, which is an industry-wide challenge in the current environment. Current softer pricing levels reflect the global demand and supply situation and feedstock prices observed during the period, with benchmark prices for PE and PP coming down across the regions. Still, Borouge pricing premia for 2022 was robust, remaining above the over-the-cycle guidance. For 2022, premia for polyethylene and polypropylene were USD 311 and USD 208 per ton, respectively. In the fourth quarter, premia for polyethylene and polypropylene were USD 217 and USD 117 per ton, respectively. Moving forward, we expect to continue to realize healthy premia. And we reiterate our over-the-cycle guidance of USD 200 per ton for polyethylene and USD 140 U.S. per ton for polypropylene. Our core markets of Asia Pacific and the Middle East continue to record relatively stronger economic activity and healthier product demand, as compared to the global average, allowing us to sustain our sales volume momentum. I will now hand over to Louis to take us through the operational highlights from the year.

Thank you, Rainer. I would like to take this opportunity to cover production volumes before handing back to Rainer, who will discuss sales performance. While not pictured here, in the fourth quarter, overall production capacity grew by 10%, year-on-year, owing, to a large extent, to the ramp-up of our new PP5 unit, a key milestone achieved in the year. Since the third quarter, we started to introduce differentiated grades into the PP5 production mix. By way of update on the LDPE unit, which is one of our 16 units at our Ruwais production complex, we have made good progress on preparations for a restart and expect to resume operations in the first quarter of 2023. In order to mitigate the interim LDPE volume loss impact, we have and will continue to internally produce significant volumes of propylene by maximizing the flexibility of our olefin conversion unit operations, which is one of our competitive advantages, and thus converting cost-advantage ethylene to propylene. We are able to mitigate the financial impact of the LDPE by reducing the externally resourced propylene feedstock supply needs. Lastly, the planned maintenance turnaround of Borouge 2, which is part of the five-yearly cycle is underway, and it is expected to run until March 2023. The volume impact of this scheduled turnaround is approximately 200 kilotons during quarter 1 of 2023. During this turnaround, several important maintenance activities and improvement projects are being implemented, ensuring maximum long-term asset reliability. Finally, just to emphasize, at Borouge, we operate a young and well-maintained asset base with limited maintenance capital expenditure levels, which further enhances our production capacity. We remain committed to operational and commercial excellence, with a detailed efficiency enhancement strategy focused on safety, plant reliability, and integrity, and cash flow optimization. Back to you, Rainer.

Thank you, Louis. Let's talk briefly about our sales volumes. Fourth quarter sales volumes grew by 6%, versus the prior quarter, and 24% year-on-year. Sales volumes were higher for polypropylene due to the production ramp-up of PP5. Sales volumes from energy and infrastructure solutions represent 45% (sic) [ 44% ] of total polyolefin sales volumes in 2022 versus 38% in 2021. This is representing a year-on-year growth in segment volumes of 27%. This is part of our strategy to focus on durable products for industrial applications. Specifically, sales volumes of PE100, a key premium product used in infrastructure applications, have contributed positively to the overall sales mix outcome. The Asia Pacific market continues to be the largest destination for sales. I will now hand over to Jan-Martin, who will talk through our financial performance for the period.

Thank you, Rainer. As previously mentioned, we are pleased to note that our full year revenue is up 8% to $6.7 billion, driven by significant sales volume growth of 15%. For the fourth quarter, performance was impacted by an overall weak market environment, resulting in a 5% decline in revenue versus the previous quarter, primarily due to a 12% decline in average selling prices. However, this was partially offset by sales volume growth of 6%. Adjusted EBITDA for the full year decreased by 2.9% to $2.6 billion, primarily due to industry challenges and pricing pressures experienced in the second half of the year. For the fourth quarter adjusted EBITDA was flat at USD 541 million versus the prior year and down 9% quarter on quarter. Net profit for the year was $1.4 billion, in line with market expectation, which is a very good result in a challenging market and the industry environment. Further I would like to add as a post period event, that in light of a significant $1 billion plus cash balance at year end, we repaid USD 500 million of our USD 3.65 billion commercial term facility. This being part of the total USD 4 billion financing brought in place end of 2021. This results in interest cost savings and an updated balance of USD 3.15 billion for the facility. We will continue to prudently manage our debt in response to the current market environment, optimizing costs and further strengthening our balance sheet. This anticipation of growth and ensuring future dividend capacity. Now moving on to costs. Looking more closely at our expenses, our cost base remained flat in Q4, despite higher production volumes owing to a reduction in cost per ton. Cost of sales increased slightly by 1.2% in the fourth quarter, versus the previous period, in both absolute terms and as a percentage of revenue. Feedstock expenses declined by 3% quarter on quarter. With our cost base, ethane costs mine essentially fixed under our long-term Pricing Agreements with ADNOC which provides us with significant long-term cost visibility and supplier security and is a key competitive advantage to Borouge. Overall costs per ton were down 3% in the fourth quarter versus the previous quarter, primarily driven by lowest selling and distribution costs. As you will recall, in the previous quarter, we were experiencing higher selling and distribution costs, particularly due to higher sea freight rates brought on by disruptions in the global shipping market. We saw some cost relief as these began to come down in the fourth quarter, and we expect them to remain at lower levels, which will be supportive of our margins. Looking ahead, we’re placing significant focus on overall cost management and revenue enhancement, which I will explain on the next slide. To further enhance our competitive positioning and support further growth opportunities, Borouge has announced a USD 400 million Value Enhancement Program. With an industry wide cost escalation and economic headwinds, we're taking meaningful steps to optimize our costs in the long term. With the implementation of our Value Enhancement Program, we will focus on high impact cost efficiency initiatives associated with conversion and logistics variable costs, fixed costs, as well as revenue optimization. The program is expected to result in a positive USD 400 million or 15% impact to be realized at EBITDA level mainly by year end 2023. The Value Enhancement Program will be counteracting the impact of the macroeconomic challenges and pricing pressures referred to earlier. Most of this is expected to be achieved during the second half of 2023. Thereafter, we expect to sustain the 15% positive EBITDA impact from 2024 onwards versus the 2022 baseline. Most of the program value relates to -- on the cost side to savings in logistic variable costs, the remainder in conversion variable and fixed cost, as well as a significant revenue enhancement initiative. Moving on to CapEx and cash flow, with adjusted operating cash flow of USD 2.457 billion in full year 2022 and USD 465 million in the fourth quarter. Cash Flow conversion in Q4 remained strong at 86% versus 95 % in the previous quarter. This variance reflected higher investment activity in the fourth quarter into operation expenses related to LDPE and the B2 turnarounds. Net debt remains stable in the period at approximately 1.1x net debt- to-EBITDA ratio. We will still record relatively low maintenance CapEx reflecting the quality of our modern asset base. I now hand back to Hazeem to discuss outlook and conclude our presentation.

Looking ahead, we are confident about 2023 as activity in our core markets of Asia Pacific and the Middle East remains relatively strong versus the global average. And with China reopening, we expect demand growth and support for polyolefin prices, we reiterate our over-the-cycle product premium guidance of $200 per tons for PE and $140 per ton for PP. Finally, we will continue to run our OCU at a high level of utilization, leveraging our ability to generate cost effective propylene feedstock for PP production. And I see towards the end of Q3 with shipping costs expect to moderate we expect logistics costs to further come down and further cost efficiencies to be realized as part of our Value Enhancement Program. I would like to provide a quick update on Borouge 4. As you are aware, Borouge 4 was carved out at the time of our listing to eliminate constructions risk for investors and to optimize our capital structure and cash flows. Borouge 4 is our major growth project for the near term, which will be fully integrated into our existing plants and ruins, as you can see from the map on the page. The APC phase is currently ongoing, and Borouge 4 is on track to be completed as scheduled in 2025. Borouge 4 will include a 1.5 million tons ethane cracker, two Borstar PE units, and an XLPE unit. This will allow us to produce 1.4 polyolefins, bringing Borouge total production capacity to 6.4 million tons. Based on third generation Borstar technology, Borouge 4 will enable high value sustainable plastics applications and help us meet the increasing demand from the Asia Pacific and Middle East regions. Financially, Borouge 4 will contribute to higher margins, thanks to the competitive long-term feedstock agreement with ADNOC for ethane. The initial EBITDA margins are expected to be above Borouge current levels. Finally, through this mega project will be directly contributing to UAE economy actively thanks to the creation of additional jobs, while helping the UAE affirm to global leadership in petrochemicals. To summarize the key highlights, Borouge's distinct competitive advantage, and our operational and financial discipline enabled us to deliver a resilient performance in 2022 despite a challenging second half of the year. We continue to achieve premium pricing and reiterate our existing over-the-cycle of the premium guidance. We also launched our Value Enhancement Program, which will help us drive sustainable growth through high impact cost efficiency and revenue optimization. We continue to have ample dividend capacity and remain focused on delivering value for our shareholders. We affirm our dividend commitment for 2023 to pay out at least USD 1.3 billion to our shareholders. Looking ahead, Borouge 4, our key strategic growth project is progressing as planned, and we will continue to provide regular progress updates. Further we will be exploring international growth and expansion opportunities focused on geographies and markets that support the company's existing strategic priorities. With that, we conclude our presentation. I would like to open the floor for questions.

[Operator Instructions] The first question today comes from the line of Faisal Al Azmeh from Goldman Sachs.

This is Faisal Al Azmeh from Goldman Sachs. Just a few questions on my end. Just looking at the premia achieved in Q4. Obviously, the numbers were quite strong generally, in terms of what you've managed to realize this year and into Q4. But when looking at particularly for polypropylene, you've went below your long-term guidance. Maybe just trying to understand what drove that and how do we think about the current run rates this quarter? Are you back towards the [ 114 ] level? Or is that kind of just exceptional for Q4, or this is something that will continue to take place in the first half of this year? My second question relates to strategic initiatives. So, you've mentioned you're looking or you're planning to look at international growth opportunities. How do you balance between acquiring the Borouge 4, maintaining a $1.3 billion dividend, and also looking at international assets? Are you looking more at the M&A side or in Greenfield expansions? And what value chains are you looking at? If you can provide some more color on that, that would be quite helpful. Thank you.

Yes, perhaps. Rainer, here. I'll take the first question. We're all on the premium side. What we say, we maintain our over the cycle guidance, right over $200 PE and $140 on polypropylene. But I always said that this is guidance over a full business cycle. I've always said that it can happen but when there's bit compression in the market and you get a bit headwind, this can go at the bottom or the other corridors are bit below. But over the cycle, we remain -- its showing the differentiation what we have. So, while the prices in '22 were lower than in '21, around [ $100 ], we remain the strong premium on the -- if you look at over the full year there where it was reflecting a bit of kind of cycle, we delivered quite strong premiums of USD 311 and also USD 208 in polypropylene, which reflects the differentiation about what we have. Looking forward to this on the polyethylene side, specifically, on the pipe side, we had 27% growth. On the durable side, the 45% of our products, what we are selling is in durable products meanwhile, and this is significant. And when you look then on polypropylene, this is also the way we are going forward. So, we will introduce more infrastructure products also in our new PP5. But it was launched at the beginning of last year. And with this movement, we bring the premium differentiation up. And we've been -- have also with this the possibility to make space in another plant to produce more differentiated products, we call them block copolymers to specific segments where we achieve also USD 50 to USD 80 per ton higher premium that we have in standard products. We launched also a new random copolymer for this [indiscernible] context kind of products where we're bringing a differentiation in. So, we’re doing a number of things mitigating this already. What we see generally in the market and finishing with this, if you look at the market sentiment towards quarter one, there's a number of maintenance things going on propylene and propane prices are coming up. There are some outages also in the first quarter now in the U.S. and on production, which gives a bit of sentiment there. So, fundamentally in our region, a relatively stable growth where analysts come also to the conclusion that there's options for price uplift in polyethylene, but specifically also in polypropylene to get this again in a better shape on the overall price performance of the market. So we are working in that direction so that we are coming back to our guidance of USD 140 also on polypropylene.

And maybe if I can take the question on the international expansion, the balance sheet capacity and the assessment of what we would consider in that respect. I think we're very excited that we have essentially mandated to look into growth opportunities through international expansion that can go in various ways. We are coming from very strong financials and the healthy cash generation also in the period where there has been price compression, as we have been setting out. We're starting essentially, the journey right now, with a net debt to EBITDA of 1.1x, which we consider to be low and considerate of the current situation. We have also, as mentioned, just to recap now recently repaid already the USD 500 million under the existing financing with the commercial banks. And essentially, we'll make sure that we have adequate headroom to look into all the opportunities that might arise. We think we have the flexibility and asset, wants to take all options open but continue our conservative financial approach to this matter.

So, just also to build on what just Jan-Martin mentioned, when it comes to the international expansions and M&A, definitely for us, we will explore growth opportunities through international expansion, as mandated by the board of directors. We are open to the right opportunities, provided they are very accretive to the business and fit within our discipline capital allocation policy and are complementary to our organic growth program. And any expansions through new or existing assets will be focused on geographies and markets that support the company's existing strategies and priorities.

I mean, maybe if I can follow up with that. I mean, the UAE has quite ambitious plans to expand natural gas production over the coming years. Wouldn't you argue that maybe expanding Borouge locally and adding additional capacity domestically would also be an attractive proposition versus going internationally? Or do you have any strong feelings about international opportunities at the moment versus potentially adding let's say a B6 or PP6 or a B5?

We are exploring. Yeah, we are exploring all opportunities.

Our next question today comes from the line of Prateek Chandra, from HSBC.

Thanks for taking my question. I have two. The first one is on China. So, are you seeing any signs, early signs of a demand pick up in China with the Chinese New Year and the COVID? That's the first question. Second is on Borouge 4. Have you or do you plan to do an early assessment of what the fair value might be? Might look under the current environment? Is it what you could doing that exercise in 2025? Or you would be doing this continuously till the plant is ready? And if yes, then what will -- what's your current assessment of the value?

Unfortunately Prateek we are unable to hear you, the line is quite unclear. If you could redial in and then we can take your questions in a moment.

But perhaps I summarize the question and how I understood it if question was how we see China for the time being and the market picks up or how is the market sentiment is as such. Perhaps I explore a little bit on a this. So, let's say on the market overall either 2022 and looking forward to 2023 global not only China, but globally. Because the industry has seen some headwinds and then they expected to continue also in 2023. But globally, we have seen the economic slowdown and geopolitical tensions, inflationary environment, I think this will not go away overnight either see also the oversight operation rates in '23, '22 coming down that put a bit the pressure also on the prices. But on the other hand, if you look at the scale now where we are working in the territories, it is reconfirmed first of all, the biggest consumption is in these regions. This is above 65%. And I will -- I always said the growth happening in this region this [ 86% ] I would say, I would guess in 2023, even the proportion will be higher, because Europe and the U.S. will be a little bit lower. So, we think there will be a continuous, good demand. But we also saw that -- that we saw already in the fourth quarter in December last year when China opened up, it changed the sentiment already in the market when it was coming to pricing. But when it's coming also to demand, and we expect that China you have seen GDP growth estimates are going up also towards 5%, with a gradually increase, but we see already more activity coming from China also on the infrastructure side. And we expect that the China is growing in a, let's say, 4-plus percentages and keeps a good sentiment in other regions. And the sales in other regions also, if you look at India, I think India, we expect growth rates in polypropylene in double digit, either we expecting polypropylene growth rates of 7%, we expect in the Middle East, Africa growth rates, which are 4%. China on top of it. So, I think we will live in an environment where there is growth possible, and where we have all opportunities with our set up being agile from region to region to place our differentiated products are pretty good. So, we are positive from that sentiment.