Borouge plc (BOROUGE) Earnings Call Transcript & Summary

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, CEO; Rainer Hoefling, Chief Marketing Officer; Dr. Hasan Karam, Chief Operating Officer; and Jan-Martin Nufer, Chief Financial Officer. We will begin with a short presentation by the management team in respect to performance for the fourth quarter and full year 2023 period as well as our outlook for 2024. We will then open the call to your questions. I will now hand over to Hazeem to present highlights from the fourth quarter and the full year '23.

Thank you, Samar, and thank you all for joining us today. Borouge has delivered a strong operational and financial performance for the fourth quarter and the full year of 2023, despite the challenging market environment. Performance was driven by strong production rates, high sales volumes and disciplined cost management. Borouge reported a net profit of $288 million in Q4, representing an increase of 16% on a year-on-year basis, driven by strong sales volumes. Full year 2023 net profit stood at $1 billion, a decline of 29%, primarily due to a 16% drop in average selling prices over the year. Adjusted EBITDA in Q4 increased 11% versus the same period last year to $600 million, and $2.2 billion for the full year 2023. The value enhancement program delivered $607 million, positive impact for 2023, significantly outperforming its initial and revised targets of $400 million and $500 million, respectively. Strong cash conversion, high margins and robust balance sheet supported our commitment to maintain 2024 dividend of $1.3 billion. This reflects our commitment to deliver superior shareholder value through market cycles. I'll now hand over to Rainer to discuss the market and provide an update on pricing and premia.

Thank you, Hazeem, and good afternoon, everyone. As just mentioned, we continue to operate in a challenging market environment. In 2023, average selling prices across polyethylene and polypropylene were down 16% from the very high levels achieved in 2022. For quarter 4, average selling prices were down 3% on a year-on-year basis and flat on a quarter-on-quarter basis. In quarter 4, benchmark prices for both polyethylene and polypropylene are down by 1% and 2%, respectively, on a year-on-year basis. For the full year, benchmark prices for polyethylene and polypropylene were down 9% and 12% from the previous years. Despite this challenging environment, Borouge was able to command healthy premia over benchmark prices, reflecting the company's strong market position in key segments. In quarter 4 2023, the premia for PE and PP were both up 7% and 4%, respectively, versus quarter 3 2023. Premium for polyethylene was USD 187 per tonne versus USD 217 per ton last year. And for polypropylene, was USD 111 per ton versus USD 117 per tonne during the same period last year. On a full year basis, we recorded a healthy overall premium for polyethylene of USD 215 per tonne, and for polypropylene of USD 125 per tonne. The polyolefins market remains challenging in 2024. Against the backdrop of macroeconomic and geopolitical uncertainty, short-term polyolefin capacity increases and muted global demand. Market analysts anticipate a soft pricing environment to continue until a delayed recovery materializes. We expect a slight price uplift in quarter 1, 2024 versus quarter 4 2023, price levels achieved for both PE and PP. That said, Borouge remains well positioned versus industry peers and is expected to continue to deliver product premia over benchmarks due to its strategic focus on differentiated and durable products. I will now briefly discuss sales volumes for the period before I ask Hasan to take us through some operational highlights from the fourth quarter. Quarter 4 2023 sales volumes remain very strong at 1.359 million tonnes despite substitute global demand, reflecting the strength of Borouge's extensive international distribution sales network, and our ability to tactically move volumes in difficult market conditions. Sales volumes for PE were up by 3%, and for polypropylene, were down by 5%, respectively. On a full year basis, sales volumes were strong at 5.116 million tonnes, up 1% on a year-on-year basis. Our sales volumes from Energy and Infrastructure Solutions represent 36% of our overall sales volumes in quarter 4 and 39% for the full year. This is part of Borouge's strategy to focus on durable products for industrial applications. Further progress was made in the year towards the circular economy, with more than 18 new [ riskless ] partnerships to explore sustainable applications. We also launched 2 new mobility grids made from up to 70% recycled material, and the company maintains its focus on innovation with more than 20% of Borouge's annual sales volume comprised of new products and 8 new products launched in 2023. The 2024 product pipeline includes new applications, including also the introduction of health care grids. The Asia Pacific market continues to be the largest destination for sales, with 63% of total sales volumes, followed by the Middle East and Africa with 30%. Other regions represent 7%. Over to Hasan.

Thank you, Rainer, and good afternoon, everyone. In 2023, Borouge continued to focus on a safe and reliable operations while maximizing production, and achieving some of the highest ever utilization rate. Growth in scale has been achieved while maintaining industry-leading level of asset reliability and operation excellence. This underscore Borouge's commitment to operational excellence and ambitions, future growth and is the testament to our Borouge capability. During 2023, we secured the highest product quality while producing a significant volume of a new advanced and [indiscernible] to support Borouge's strategy focus on delivering high value-added and differentiated products. We remain committed to operational and commercial excellence with a detailed efficiency, enhancement strategy focused on [indiscernible], plant reliability and integrity and also OpEx optimization. In Q4, production operated at utilization rate of 112% and 99% for PE and PP, respectively. For the full year, utilization rates for PE and PP were 101% and 97%, respectively. This allowed us to produce over 4.9 million tonnes of polyolefins, above the nameplate in 2023, despite the Borouge [indiscernible] in the year. Access to stable feedstock quantity of ethylene and propylene, and our track reliability and PE and PP reliability all support our ability to sustain this high utilization rate. The olefin conversion unit, which allows Borouge to internally produce large amount of propylene from ethylene, also operated at high utilization rate in Q4 of 92%. As you are aware, ethylene is typically prioritized for use in maximizing the PE production and the additional quantity are sent to the OCU. [indiscernible] for Borouge 3 plus and feedstock-related operation is scheduled for 2024, with a total volume impact of 500 Kt in the year. This will take place in 2 phases, as follows: in Q1, there will be an approximately 170 Kt of propylene volume reduction from a feedstock related to operational stock. In Q4, there will be at approximately 330 Kt of ethylene volume reduction due to the Borouge 3 plant shutdown. This is a part of a Borouge regular plant maintenance, which keeps the company world-class asset base, will maintain and support industry-leading asset reliability and efficient and safe operations. I will now hand over to Jan-Martin to discuss our financials.

Thank you, Hasan, and good afternoon, everyone. Overall, we are pleased to report a strong USD 1 billion net profit for the year in a very challenging environment, which saw a significant price decrease versus the previous year. USD 288 million net profit was achieved in the fourth quarter, increasing by 16% on a year-on-year basis and up by 2% compared to Q3 2023. Quarter 4 revenue remained flat on a quarter-on-quarter basis at USD 1.5 billion, a 6% decline on a year-on-year basis. On a full year basis, revenue is down 14% to $5.8 billion versus $6.7 billion in 2022. This is primarily due to a 16% decline in average selling prices during the same period. While top and bottom line performance in 2023 experienced pressure versus the previous year due to significantly lower comparative market pricing, we delivered a healthy EBITDA margin in Q4 2023 of 40% versus 34% in Q4 2022. This is reflecting our improved operational efficiencies. Market weakness was counteracted by the positive impact of the value enhancement program, and we will delve deeper into that in the upcoming slides, and healthy sales volume. On to the next slide. We will now look at costs scenario where we have made remarkable progress. In quarter 4 2023, our overall cost base declined by [ 13% ] as compared to Q4 2022. Feedstock costs increased by 1%, while other variable and fixed production costs decreased by 21% on a year-on-year basis. Our selling and distribution expenses in Q4 2023 recorded a decline of 33% year-on-year, primarily due to lower freight costs. General and admin expenses in Q4 2023 decreased by 23%, from USD 59 million to USD 46 million on a year-on-year basis. On a full year basis, cost of goods sold, excluding depreciation and amortization, decreased by 5%, supported by a 14% decline in other variable and fixed costs despite the higher volumes. Selling and distribution expenses were significantly down by 43%, strongly supported by the cost reductions for logistics, while general and admin expenses remained flat on a year-on-year basis. Borouge's first quartile position in the PE and PP cost curve is an important component that when combined with the premia against benchmarks supports a strong margin profile. I'll now discuss the progress on our ambitious value enhancement program. At the end of 2022, we introduced a targeted value enhancement program to counter the anticipated market impact, support future growth opportunities and overall enhance our competitive position in 2023. In light of the challenging market conditions, our focus was on managing logistics, conversion and fixed costs as well as on our revenue optimization. Following the strong progress reported in the previous quarters, I'm pleased to report that the value enhancement program achieved USD 607 million, positive impact in 2023, significantly outperforming our initial and revised targets of USD 400 million and USD 500 million, respectively. The significant contribution of our program of more than USD 600 million was key in counteracting the sharp decline in polyolefin prices versus exceptionally high levels in 2022, and position the company successfully for the future, CapEx and cash flow. Adjusted operating free cash flow in Q4 was USD 526 million and USD 1.97 billion for the full year. Cash conversion in Q4 was 88%. Net debt stood at USD 2.96 billion at the period, and imply a ratio of 1.4x net debt-to-EBITDA on an LTM basis. Throughout 2023, Borouge has managed to repay $850 million debt under the commercial facility. Cash and cash equivalents stand at USD 354 million. The company disposes furthermore of USD 500 million revolving credit facility, which was fully undrawn at the 31st of December 2023. Two dividend payments of USD 650 million each were distributed in 2023, amounting to USD 1.3 billion. Borouge intends to maintain a USD 1.3 billion dividend for 2024. Borouge's unique operating model plays a key role in achieving premia above benchmark prices over the cycle, which ultimately contributes to strong operating free cash flows and high dividend paying capacity. I will hand over to Hazeem to summarize and conclude.

Thank you, Jan-Martin. As mentioned earlier, we are currently navigating a challenging market environment characterized by subdued global demand, geopolitically uncertainty and short-term polyolefin capacity increase. We expect pricing in Q1 2024 to be slightly higher than the Q4 2023 levels achieved for both PE and PP. The company will continue to focus on its core strategy in the high value-added segments and regional optimization. Planned maintenance operations in the year will impact 2024 production volumes by 500 kilotonnes. Borouge is well positioned from an overall cost basis going into 2024, following the successful implementation of the value enhancement program in 2023. Despite a challenging market, Borouge's performance continued to be resilient, supported by higher production and sales volumes and a culture of cost discipline. Borouge remains committed to a strategic focus on differentiated and durable products and strives to be a leader in speciality and value-added segments. Product innovation and differentiation enable us to achieve premia over product benchmarks. The company is well positioned on an overall cost basis going to 2024, having realized significant efficiencies in 2023. The Borouge 4 project has crossed the halfway construction phase and expected to be completed by the end of 2025. With the recontribution of Borouge 4, Borouge's production capacity will increase by 1.4 million tonnes per annum to 6.4 million tonnes per annum. Additional growth is being explored through international expansion opportunities as mandated by the Board. I am pleased to announce that we intend to pay $1.3 billion in dividends for 2024. Since the IPO, Borouge has paid dividends of $1.63 billion, this is a testament to the resilience of our operating model that support high cash generation and our ability to drive shareholder value through the cycle. With that, we will open the floor for your questions.

[Operator Instructions] Our first question today comes from the line of Ricardo Rezende from Morgan Stanley.

I do have a question on the CapEx for 2024. How should we think about it given the turnaround on Borouge 3? And then a question on Borouge 4, and you mentioned that 2024 should still be a challenging year globally for the sector. How do you see the timing of Borouge 4 starting within the global supply and demand for polyethylene?

This question, Dr. Hasan, perhaps maybe Jan-Martin can start and then maybe Dr. Hasan also catch it.

Yes. Sure. Ricardo. Thanks for the question. I think how you can look at the CapEx for 2024. Obviously, it takes into consideration the planned turnaround. It will hence be elevated across what you would see as the average that we're normally showing, but it will be not significantly over that mark.

From the Borouge 3 [indiscernible] and Borouge strategy in terms of ensuring the integrity and reliability of our assets and to ensure that we will have a good, reliable assets, we are going to plan as mentioned as in Q4 2024 for 47 days of the cracker 3 [indiscernible]. And that associated with around 330 kt of the -- both polyolefins and the -- polyolefins products.

Okay. And the market side, Rainer?

On the market side, I think the Borouge 4 is coming in the right time. So 2024, of course, will be still difficult specifically on polyethylene investments, are coming down significantly, right, from 2025 onwards. So the utilization rates will go up. And there's a lot of infrastructure projects going on in our regions. We also recently launched a new office in Kenya, to penetrate more and more [indiscernible] in East Africa, which gives additional potential. So I'm very confident that the Borouge 4 is coming at the right time. But -- and we are waiting for it and prepare for it.

One thing also maybe to add on what Rainer just mentioned, Borouge 4 would be polyethylene, 2 big lines of polyethylene, focusing on differentiated product building on the success and the great, let's say, unique products we have in infrastructure, specifically in water and gas applications. We have been pioneering and working very closely with our partners in different regions, developing this important segment where we see also that we are realizing better [indiscernible] for the company. Borouge 4 really will complement our strategy toward bringing more differentiation in the market.

The next question today comes from the line of a Afaq Nathani from International Securities.

Just a couple of things from my side. One, on the volume front, we've seen consistently impressive utilization this year, how should we see it going forward? Do you think a level over 100% is sustainable and something that we could built into our assumptions going forward, of course, accounting for -- after accounting for the turnarounds that have been communicated. That's one. Second, with regards to Borouge 4 and how the financing of that would work? Because it appears that the company is looking to distribute most of the funds that will be generated from the current operations. Is it fair to assume that Borouge 4 will be largely debt funded? And lastly, a little bit on your value enhancement program, which we've seen has outperformed the initial guidance and the revised guidance. But lately, we've seen shipping costs going up after the problems in the Red Sea. Do we -- is it fair to estimate -- is it fair to assume that some portion of it might be reversed in the coming quarters or so?

First question on the production utilization to Dr. Hasan, our Chief Operation Officer; and then the second on Borouge 4 and the value enhanced program to Jan-Martin. And perhaps also Rainer, you can just give a short statement around the shipping cost, because we have also quite good contracts in place already that will go through '24. So things are under control on cost. Dr. Hasan, go ahead.

Okay. We'll continue the same spirit in maximizing and we think our asset to the maximum utilization as we did in 2023. And looking to the -- what we mentioned about the turnaround of Borouge 3, that will give us more assurance that our asset reliability and utilization will be maximized during the 2024.

And on to the second question on the Borouge financing. Indeed, the intention that it will be primarily debt financed. Let me recap a little bit the structure that was set up for the financing for Borouge 4, and the plans for the financing at the recontribution point in time. Borouge 4 has achieved a long-term funding of one of the export credit agencies, which is securing a large portion of the CapEx that we're looking for. This loan is then set up to be transferred to Borouge plc at the point in time when a recontribution will happen. And for the rest, disposals of a very strong balance sheet, which you can see from the net debt-to-EBITDA ratio that we're displaying so that we're well prepared for the recontribution of Borouge 4. You mentioned around the dividend distribution. This is correct. We have also made a clear statement now around the dividend for 2024. Bear in mind, as I mentioned in the short presentation that Borouge has also managed to repay USD 850 million of debt throughout the year 2023, which is, I think, a very good testimony to the excellent credit standing of Borouge. Onto the value enhancement program. Indeed, we're extremely pleased that we had such an enormous outcome of the value enhancement program. We have a couple of levers. And to go to your question around what is sustained and what potentially could be reversed in light of the current shipping rates, let's just look a little bit into the levers that we have been looking at. One, approximately 50% of the program was based on the logistics variable cost, there you have been seeing also from the reduction in the sales and distribution cost by 40%, 43%, an enormous decrease. So that's testimony to the good work, they are being done. Now the task for us is to maintain most of the savings in 2024, and the good achievements in here. We're migrating the program into a continuous improvement initiative, which we will be looking at on a constant basis. It's clear that probably not everything can be maintained. I would then hand over to Rainer to talk a little bit about the current situation on the logistics side represented in the current market situation on the Red Sea. But overall, the target remains that the company is focused on having a conscious and very clear cost focus also in 2024.

On the logistics side, as Jan-Martin said there, first of all, was a great job done in 2023, to bring the cost significantly down as a contribution to the value enhancement program and to get also more resilient towards volatility that it was much more than just the sea freight. When you look at the current situation, specifically also for Borouge, you have to understand that not our full business is impacted on this. So it's roughly 15% to 20% is impacted by the Red Sea issue. So that relates to a bit longer lead time towards customers. The availability of vessels and containers is still there. So also there is no big disruptive process going on. What's happening, they have some forces surcharges on the cost side, which we need to digest, but this is this is manageable by also pricing in the higher cost into the polyolefin prices, because such a thing gives also an economic opportunity because the trade flow of polyolefin changed a little bit, so less polyethylene from the U.S. is coming into Asia, and the less propylene coming from Asia into the Middle East and Mediterranean region. So with our setup, right, we can take the opportunity, right, to lift the prices up, and that is what we are doing in quarter 1 and take the opportunity. And with our setup, we have the agility also to move a little bit volume where the opportunities are. The rest of 80% of our business and logistics is not impacted at all. I had last -- this week, the meetings with all big shipping lines and they confirm the availability and the strong focus on Borouge as one of the biggest customer worldwide for them.

[Operator Instructions] Our next question today comes from the line of Faisal Azmeh from Goldman Sachs.

Congratulations on the strong set of numbers. Maybe just looking at or going back to some of the commentary that you provided on the premia generally, we're still below the kind of medium-term guidance. So how should we think about the trajectory to going back to that higher level that you've achieved before or in the first half of last year? Would it take some time? Or do you expect to get there at some point in the second half of this year? That is my first question. My second question relates to the mix in terms of the shutdown in Q4. So how much of that will be polyethylene and how much of that would be polypropylene. If you can shed some color there? And then finally, any update on the Borouge Borealis stocks, in terms of kind of when should we expect to hear something on that front?

Yes. I...

Go ahead, Rainer.

Perhaps I started with the premium. First of all, to understand the premium also, this is a benchmark price versus commodity price in China. So what you have to know is the -- based on this business environment where we are, this is a down cycle environment. The premium will be achieved are excellent, right, versus our competitors. So in polyethylene, we are above the guidance over the year with more than $200, then in polypropylene, we are not too far away from the guidance of $140. But you also have to know is we had, in this year, a record production volumes with record sales volumes, we were selling 5.1 million tonnes, we were selling significantly more volume on polypropylene in the market, where we had also acquired some volumes into a little bit more packaging and commoditized areas, but generating additional margins. That brings the premium a little bit down, but the margin is up. So if you look at the 2024 around similar market sentiment, I would say, as we have in 2023, right? We have a little bit, perhaps less polypropylene to sell due to the turnaround. So that gives some options to lift up a little bit the premium. You would see this already in quarter 1. So we're getting closer to the guidance. But overall, we continue to focus on this differentiated segment, infrastructure segments, by and [indiscernible] segments. For example, we had the highest high-voltage sales ever in 2023, right? And this high-voltage sales that delivers premium of USD 1,500 per tonne. So we are going in that direction. We launched a new product in the infrastructure segment on polypropylene. So we had 8 new product launches. We have 7 new product launches in 2024, just elevating also the differentiation level. So it will be around the guidance, right, also in 2024. But in a relatively slow, a bit subdued market, but we have shown that we can manage the market pretty well.

And back to your question with regard to the to the PEs, to the PPs. As we mentioned that the whole 500 kt will have the visit in 2024, 170 kt will be Q1, and that's because of the propylene totally shutdown and the feedstock. And the other is the Q4 2024, which would be related to the Borouge 3 later on. However, as I mentioned, that we are having a good journey of the operation excellence and also reliability program, which we can enhance whatever the deficit that we did in 2024, with a great sort of the program that we are having in operation excellence, it will maximize our utilization and availability of our asset in 2024.

Just on -- also the Borouge Borealis discussions, I just would like to also make this clear. These discussions are still currently being carried out by -- between our major shareholders, ADNOC and Borealis and OMV. So -- and Borouge will make the necessary disclosures to the market, if and when required, the full compliance with this regulatory applications and any final decision will be subject to the governance processes of Borouge and other relevant parties involved. And I just would like to also reiterate our international expansion and growth, we continue in Borouge to explore growth opportunities through international expansion as mandated by our Board of Directors. We are exploring accretive growth accretive growth opportunities within the UAE and beyond, specifically in geographies that end market that support the company existing strategies and priorities, where we are open to the right opportunities provided they are value accretive to the business and are complementary to our organic growth program.

The next question today comes from the line of Shadab Ashfaq Al Ramz Capital.

Congratulations for the good set of results. I have 2 questions. So what is the full year production guidance for Borouge, so like for that around 10% of the capacity is currently out of maintenance. You're leaving 4,500 kilotonnes operational. So are we likely to see the production level close to this remaining capacity or the company has a plan to operate at higher utilization rate? Furthermore, is there a correlation between the high utilization and increased maintenance costs that the company needs to consider? And my second question is how does the decline in plastic imports in China attributed to the local production affecting the market for Borouge?

I think on the first question, if I hear it clearly, it's around also the turnaround of Borouge 3 and the total...?

So turnaround -- Yes. So like turnaround is 500 kilotonnes. So like the guidance will be around near 4,500 kt for the full year? Or like we can see higher utilization?

So it would be in the tune of 4.750 kt as a total business plan for -- 4.750 as a total, if I understand your question that you need to subtract 500 from the [indiscernible], and you will have the, what you call, the difference.

Okay. So if the company is going for high utilization, so does it include the higher maintenance cost also?

No, not necessarily, because whatever in the scope of the Borouge [indiscernible] already been calculated and factor in.

Okay. Okay. And the Chinese imports like decreasing, so is it affecting the market for Borouge?

Rainer?

The Chinese market?

Yes. So like, if you see the imports in the China.

Let's say it like this. So the 2024 will not change towards 2023, rather we always discussed in our calls that the market is oversupplied, but in an oversupplied market, we were selling record sales volumes. So this means we were able to move in these markets. You saw that the prices are a bit more depressed, that you -- this will remain in 2024, but with our setup, we can achieve excellent premium. But we have, based on the innovation what we have, we can place our products well. So I always said that more than 20% of our products are new products, right? And you can position them excellent into the market. As said, we recently developed new 8 products, high-voltage sales record. So we are looking into still into markets where we see also the growth and where we can differentiate versus the competitors. I also said that there is an energy transformation going on. So there is still a lot of projects going on into the energy market, where we can supply wire and cable, where we can go also with the pipe material. There is a concern of not enough access to water. So you need to have water projects going on, and it's everywhere. It's a lot on being sustained also in food production. So we see a lot of greenhouse projects going on across our regions, India, recently also in Egypt, where we introduced a new pipe with a 2.6 meter diameter to transport water into these regions, and combined with the setup what we have in the most growing market. So 86% of the growth is happening in our region, and it represents nearly 70% of the global market. And when you have then a good marketing and sales setup, combined with excellent production with a high quality, the customers they like our product, right, because it's a high quality and the innovative product, then you are able to maneuver yourself through these cycles. But is the price level, the absolute at the level we wish to have? The answer is no. But compared to our competitors, we are maneuvering quite well. And this is the reason why we are confident for 2024, but also cautious, right? So because it's still a difficult market environment, and we are alert, but we have the right setup and the right strategy to manage it.

[Operator Instructions] There are no additional questions waiting at this time. So I'd like to pass the call back over to the CEO for any closing remarks.

I would like to thank you for your valuable time to be with us and looking forward to track and engage with you directly, [Foreign Language]. Thank you.