Borouge plc (BOROUGE) Earnings Call Transcript & Summary

Good morning, and welcome to the Borouge Quarter 2 2023 Earnings Call. My name is Carla, and I will be the operator of today's call. [Operator Instructions]. I would now like to pass the conference over to our host, Samar Kan, VP of Investor Relations, to begin. Please go ahead when you're ready.

A warm welcome to everyone, and thank you for joining us today. My name is Samar Khan, and I'm the Vice President of Investor Relations at Borouge. With me today, I have Hazeem Al Suwaidi, our CEO; Rainer Hoefling, Chief Marketing Officer; Jan-Martin Nufer, Chief Financial Officer; and Dr. Hasan Karam, Chief Operating Officer. We will now begin with a short presentation by the management team in respect to performance for the period as well as our outlook for the second half of '23. We will then open the call to your questions. I'll hand over to Hazeem, our CEO, to discuss highlights from Q2 and the first half of the year.

Thank you, Samar, and thank you all for joining us today. Q2 has been a challenging quarter. Yet Borouge has managed to deliver a resilient performance supported by healthy sales volumes, premium above management guidance and a strong impact from the value enhancement program. Borouge reported a net profit of $251 million in Q2, representing an increase of 16% quarter-on-quarter. On a year-on-year basis, net profit was down 53%. The primarily because of a 25% decline in average selling prices over the period. On a half yearly basis, revenue is down 19% to $2.8 billion in the first second half of 2023, versus $3.5 billion in the first half of 2022, primarily due to a 22% decline in prices during this period. The value enhancement program continues to perform strongly. Having contributed $253 million in the first half of 2023 and is well positioned to achieve its $400 million target by the year-end. Strong cash conversion and robust balance sheet support our commitment to pay $1.3 billion dividends for 2023. The Board has recommended an interim dividend of $650 million expected to be paid in the second half of 2023. I'll now hand over to Rainer to discuss the market and provide an update on pricing and premium.

Thank you, Hazeem, and good afternoon, everyone. Average selling prices across Polyethylene and Polypropylene were down 25% from the exceptionally high price levels in quarter 2 2022. On a quarter-on-quarter basis, average selling prices were down only 3%. Despite this challenging environment, Borouge was able to command healthy premium over benchmark prices, reflecting the company's strong market positioning in key segments. In quarter 2, premium were maintained above the over-the-cycle guidance for both polyethylene and polypropylene. The premium for polyethylene was USD 249 per tonne, down 6% on a quarter-on-quarter basis, premium for polypropylene was USD 150 per ton, up 9% on a quarter-on-quarter basis. The outlook for polyolefins for the remainder of 2023 remains cautious and market analysts anticipate a narrow band of price volatility during this period. Global economic uncertainty remains and the slow recovery in Chinese and Asian market expected. We reaffirm the existing through-the-cycle guidance for premium of USD 200 per tonne for polyethylene and USD 140 per tonne for polypropylene. Which is made possible by our differentiated product mix and our ability to capture tactical and regional pricing opportunities. I will now briefly discuss sales for the period before I ask Hasan to take us through some operational highlights from the second quarter. Quarter 2 2023, Sales volumes are up by 4% versus the prior quarter following the completion of the Borouge 2 plant turnaround. Our sales volumes from Energy and Infrastructure Solutions represent 40% of polyolefin sales volumes in quarter 2. This is part of Borouge's strategy to focus on durable products for industrial applications. Specifically, sales volumes of PE100 and XLPE, key premium products used in pipe and wire and cable applications have contributed positively to the overall sales mix outcome. The Asia Pacific market continues to be the largest destination for sales with 66% of total sales volume followed by the Middle East and Africa with 27%. I hand over to you, Hasan, now.

Thank you, Rainer, and good afternoon to everyone. Quarter 2023, production operated at very high utilization rate of 110% and 99% for both PE and PP. Following the successful completion of our Borouge 2 [ turnaround ], which was being conducted in quarter 1. However, the Olefin conversion unit, which allow Borouge to internally produce a large amount of the propylene from ethylene but also operated at high utilization rates in quarter 2. Ethylene is typically [indiscernible] or used in maximizing the PE production and the additional quantity are sent to [indiscernible]. I will now hand over to Jan-Martin to discuss our financials.

Thank you, Hasan, and good afternoon, everyone. I'll be brief on this slide because we have already covered the main reasons for the impacts across our income statement metrics. As Hazeem mentioned, Q2 revenue increased by 2.5% quarter-on-quarter to USD 1.4 billion and declined on a year-on-year basis by 24%. Net income stood at USD 231 million in the second quarter, increasing by 16% versus Q1 but decreased by 53% compared to Q2 2022. On a half yearly basis, revenue is down 19% to USD 2.8 billion in the first half year of 2023 versus USD 3.5 billion in the first half year 2022, primarily due to a 22% decline in prices during this period. While top and bottom line performance in Q2 experienced pressure on a year-on-year basis due to significantly lower comparative market pricing, we delivered a healthy EBITDA margin in Q2 of 37%, up 10% from Q1, reflecting improved operational efficiencies. Pressures created by market weakness were partially offset by the positive impact of the value enhancement program. We will delve deeper into that in the upcoming slides as well as by healthy sales volumes and the resilience of our pricing premium versus product benchmarks. On to the next Slide then. We will now look at our cost, an area where we have made important and material progress. Our overall cost base declined by 9% as compared to Q2 2022. The cost of sales declined on both a quarterly and yearly basis. Despite higher volumes, we have been successful in reducing our selling and distribution expenses in Q2, recording a decline of 44% year-on-year primarily because of lower freight costs. General and administrative expenses increased quarter-on-quarter, mainly attributable to one-off nonrecurring items. Borouge's first quartile position on the cost curve is an important component that's when combined with improved premia against benchmarks, supports a strong margin profile. I'm happy now to discuss the progress on our value enhancement program. As we have communicated in the beginning of the year, we have introduced a very significant USD 400 million value enhancement program to support future growth opportunities. Enhance our competitive positioning and to offset the impact of macroeconomic challenges and pricing pressures. In light of the current challenging market conditions, our focus is on managing proactively conversion, logistics and fixed costs as well as revenue optimization. I'm pleased to report that we have achieved a total EBITDA contribution of $253 million in the first half year of 2023. In terms of the areas where this has been realized, over 1/2 has been realized through the reduction of logistics variable costs, almost 1/3 from revenue optimization and the remaining from reductions to fixed cost and conversion variable costs. This has been an excellent start of our highly ambitious program, and we look forward to providing you with further updates on the progress during the coming quarters. On to CapEx and cash flow. Cash conversion in Q2 increased to 96% versus 82% in Q1 due to lower maintenance CapEx following the successful completion of the Borouge 2 turnaround in quarter 1. Net debt, as of the 30th of June 2023 stood at USD 3.167 million versus USD 3.277 million as of the 31st of March 2023. I'm also pleased to share that Borouge 4, which is being built by the company's major shareholders, ADNOC and Borealis has reached an important milestone in completing the project funding through a combination of equity shareholder loans and the recently finalized long-term [ ECA ] financing. I will now hand over to Hazeem to summarize and conclude.

Thank you, Jan-Martin. As mentioned earlier we are currently navigating a challenging market environment. We expect positional pricing to experience some continued volatility looking ahead as a reminder of 2023. Despite this, we are well positioned to maintain premia in our markets. As such, we reiterate our over-the-cycle premia guidance of $200 per tonne for PE and $140 per tonne for PP. We expect strong results from our value enhancement program to continue for the remainder of the year. We remain focused on our differentiated product mix, which is one of our key competitive advantages. An important value driver. We expect production volumes to remain at high utilization levels, and the OCU will be maintained at a high capacity to continue to support our margin enhancements. As our results have shown, our business continues to be resilient with a challenging operating environment. Our ambitious value enhancer program is [ working ] ahead of schedule, delivering strong cost savings and supporting efficiencies and margins. Our commitment to product innovations and differentiation continues to enable sustained premia over benchmark despite a weaker pricing environment. We are pleased to reframe our dividend commitment of $1.3 billion for 2023. We have an interim dividend of $650 million recommended by the Board for payments in the second half of 2023. I would like to refer to the recent report that our majority shareholders have entered into formal negotiations regarding a potential measure of Borouge and Borealis. Borouge will make the desire disclosures to the market, if and when required, in full compliance with regulatory obligations. Any final decisions will be subject to the governance processes of Borouge and other relevant parties involved. With that, we'll open the floor for any questions.

Thank you. [Operator Instructions] Our first question comes from Waleed Jimma from Goldman Sachs. Please go ahead.

Hello, and thank you for your presentation. I just have a couple of questions that I would like to ask on behalf of Faisal. First, we noticed that second quarter sales volumes were lower versus expectations. Our understanding that during the first quarter of 2023, there was a 200,000 tonne negative impact on volumes due to the B2 turnaround. But it seems that this was not fully reversed during Q2. Do you mind sharing some color on this? And how do you think we should look at volumes looking into Q3 and Q4? That's for my first question. As for the second the company's value enhancement program contributed $253 million in EBITDA during the first half of 2023 versus $400 million expected for the full year. Do you expect any upside potential to this full year target given that it's already running ahead of schedule, as mentioned during the presentation?

Thank you for the question. I would like Rainer to answer the first question, please, and then Rainer sorry, first one is Rainer. The second one is Jan-Martin please.

So on the volume side, I think, first of all, when you talk about volume, when we talk about polyolefin volumes, right? The polyolefin volumes ramped up accordingly to the presentation from quarter 1 to quarter 2 after the turnaround. So here, we are fully on plan where we want to be. And going forward, we expect, nevertheless, the market is difficult, and it's a tough sales process for the time being. But that we can keep the volumes stable in quarter 3 and quarter 4. So that we are going to sell also -- targeting to produce. But on the ethylene side, this went down because [ views ] and the ethylene, of course, for our production. Because it is not in our intention to sell ethylene right only when something is less. The focus is on the polyolefin side, but here, stable sales.

And maybe just from my side, a couple of words to the question related to the value enhancement program. Indeed, I think we very pleased that we have, first of all, started the program very early with some immediate measures and $253 million contribution just for this year is already a very good start. So the categories that we have been looking into for the controllable OpEx are progressing well. So indeed, I think there is a good chance that we reach and overachieved the target of $400 million that we have been setting. It's a work obviously in a large number of projects in the subcategories that we're having in terms of the logistics cost, conversion cost and the fixed cost. But as I said, the program is running very well, and we're going to continue to keep updates on a regular basis, well on track to achieve or overachieve towards the end of the year.

Our next question comes from Ricardo Rezende from Morgan Stanley.

My first question, and I don't want to be sound too repetitive as I made the same question on the first quarter call. It's related to the premia, and we've you seen quite a health product premium even though the overall market remains quite challenging. So if you could please elaborate a little bit more on why do we keep seeing such a good premia even though the benchmark prices are still struggling? And how should we think about the relationship between the premia and the benchmark prices? And then the second question is a follow-up just on the Ethylene volumes. And when we see that you mentioned that we should continue to see the plants running at a very high utilization rates for the rest of the year. Does that mean that probably you won't have a lot of ethylene volumes to be sold to the third parties?

Okay i suggest the first question go to Rainer and the second one to Dr. Hasan, our Chief Operating Officer. Go ahead, Rainer.

Yes. Okay. Thank you very much for the question. But first of all, there is the benchmark prices. I have to refer to the most common grade produced and transacted in the market. In Asia North, right? And what you see that we can maintain over the cycle guidance, the $200 and $140 on polypropylene and $200 on polyethylene but it was good in quarter 2 with [ $950 ] and even polypropylene and went a little bit up. There are several reasons for this, why we can give also this guidance. There's -- but it is, of course, so no guarantee that it is on a month-on-month basis, always over the guidance is the guidance over the cycle. But there is different reasons, right? What we elaborated already several times, it's the technology. We have a good technology [indiscernible] technology. That we can produce differentiated products. So we have a good innovation capability. And in the differentiated products. We're going into markets. I mean we said the durable market, it's around 40% of the sales, which is pipe, and it's also the wire and cable business. And in the packaging, you go in agriculture, health care and these elements, we try to differentiate so that these products don't go so fast down with the market as the commodity prices go down. On the other hand, when the price goes up. Also, these products go a little bit slowly up than perhaps the commodity prices, they are not so volatile. And this is the reason why over the cycle, we can also keep these premia available. The second is we are also on our innovation portfolio in 2022. And now looking forward, '23, around 20% to 25% of our products are new products. To when product at this end of life, we come with the new innovation, right? Sometimes it's incremental improvement, sometimes a step change improvement just to keep this differentiation higher. Then you have the regional setup. We can also [ discuss ] a little bit tactically in which regions we are shipping our material where we get the higher price levels. And there with this development and based on the technology based on how we go into the market with the direct sales and the logistic capabilities then at the end, what we have we can achieve these premiums. And you look a little bit in quarter 3, I have to say now there are the prices coming up a little bit on the commodity side, you will see a little bit of compression on the premium in this time because we need to then catch up also on the prices on the differentiated and the specialty prices. That takes a little bit longer than to catch up again. But over the cycle, we can keep this premium.

Thank you, Rainer, I think for the second question with regard to the green exportation versus the sending it to the [ industry ]. I think we are believing that we are margin and value driven. So whatever the ethylene molecules are available our target to maximize towards the PE and PPs. And looking to our reliability enhancement program where we can be proven that in quarter 2 that both PE and PP are at 110% and 99%, respectively. Our aim is to maximize it all the ethylene molecules to all the PE and PP. That can generate more value and can generate more margin rather than a sporting. Looking to the coming quarters with the very successful completion of our recent Borouge 2, I think -- and I believe that our PE and PP downstream can sustain the higher liability, which can convert all the ethylene molecules to the PEs and PPs. Thank you.