Borouge plc (BOROUGE) Earnings Call Transcript & Summary

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

Thank you, Samar, and thank you all for joining us today. I'm pleased to announce that Borouge has delivered yet another outstanding set of results. During the second quarter, we achieved the highest ever quarterly production volumes, strong sales volumes and healthy pricing premia, while maintaining cost discipline and continuing to drive efficiencies throughout the business. Borouge reported a net profit of $308 million in Q2, representing an increase of 33% on a year-on-year basis. On a half year basis, Net profit increased by a significant 55% year-on-year to $581 million. On the next slide, I want to cover Borouge's excellent track record since its IPO. I would like to strongly emphasize 2 main messages. First, the Borouge has delivered resilient results and outpeformed experience and market expectations in a very challenging polyolefins market. Borouge's abilities to maintain industry-leading profitability margins stems from it's robust business model and management proactively and navigating dynamic markets and driving efficiencies. As a result, the company benefits from high cash generation and a strong balance sheet, which enables the distribution of a substantial dividend, contributing to the highest surface shareholder returns amongst our industry peers since the IPO. The second key message is that Borouge is well positioned both strategically and financially to pursue accelerated growth. As you are aware, we are pursuing several growth initiatives, and I will cover this topic in the later part of the presentation. With that, I would now like to hand over to Rainer to provide a commercial update.

Thank you, Hazeem, and good afternoon, everyone. In Quarter 2, 2024, blended average selling price across polyethylene and polypropylene were relatively flat versus the previous quarter and down 2% year-on-year. In Quarter 2 benchmark prices for both polyethylene and polypropylene improved slightly by 2% and 4%, respectively. And while on a year-on-year basis, benchmark prices for polyethylene remained flat and for polypropylene increased by 4%. During the quarter, Borouge was able to achieve premia above benchmark prices for both polethylene and polypropylene in line with management's over-the-cycle premia guidance of USD 200 per tonne for polyethylene and USD 140 per tonne for polypropylene. On a half yearly basis, premia for both polyethylene and polypropylene remained above management guidance at USD 209 per tonne and USD 149 per tonne, respectively. Polyolefins prices remained stable during Quarter 2, 2024 due to upbeat crude oil prices. generally low operating rates at marginal producer and various logistics-related constraints. In quarter 3, we expect polyethylene prices to remain within a narrow band supported by ongoing global logistic bottlenecks and elevated feedstock costs. That said, Borouge remains well positioned versus industry peers and confirms to deliver product premia above benchmarks over the cycle, based on a strategic focus on differentiated and durable products, geographic optimization and its agility to manage current and upcoming market challenges. I will now discuss sales volumes for the period before I ask Dr. Hasan to take us through some operational highlights from the second quarter. Quarter 2, 2024 sales volumes remained healthy at 1,311 kilo tonnes, up 16% versus the previous quarter and 9% on a year-on-year basis. Sales volumes for polyethylene were up by 9% and for polypropylene were up by 25%, respectively, on a quarter-on-quarter basis. Our sales volumes for Energy & Infrastructure Solutions represent 41% of our overall sales volumes in quarter 2. This is part of Peru's strategy to focus on durable and high value-add products and where we can realize higher pricing premium. Borouge remains committed in its focus on innovation and strives to generate at least 20% of annual sales volumes from new products. The 2024 product pipeline includes new products offering differentiated solutions to our customers. The Asia Pacific market continues to be the largest destination for sales in Quarter 2 with 66% of total sales volume, followed by the Middle East and Africa 29%. Other regions represent 6%. Finally, I would like to add to what Hazeem was earlier saying in relation to delivering on the equity story, in particular, Borouge's commercial excellence has been demonstrated very consistently in the final performance of the company. In a challenging environment, moving sales volumes between markets with better margins, while keeping costs in check and innovation at a high pace is a unique feature of Borouge business model. This is the result of company-wide collaboration driven by the tremendous efforts and commitment of our talented people. With that, I will hand over to Dr. Hasan.

Thank you, Rainer, and good afternoon, everyone. I would like to begin with a few words on our continued leadership and safety performance, which is one of the foundation of our successful and sustainable business. Year-to-date, Borouge has recorded a TRI rate of 0.08. Our safety metrics continue to hold a leading position in our industry. And I want to congratulate our team for their outstanding safety performance. On operational KPIs, I am happy to share that in Q2, we achieved the highest ever quarterly production volume of 1,355 kilo tonnes from utilization rate of PE and PP of 114% and 103%, respectively. At the same time, we are able to maintain an industry-leading asset reliability of 97%. The Olefin Conversion Unit operated at high capacity utilization rate during the quarter. As a part of our leading operation expense program, we are constantly striving to optimize resources, improve efficiency and create incremental value by challenging capital expenditure plan, including [indiscernible]. The Borouge [indiscernible], which was previously planned for Q4 2024 with an estimated 320 kilo tonnes production volume impact will now take this in Q2 2025. This is driven by the opportunity to optimize the feedstock supply and create on top of the shift effect from 2024 into 2025, an incremental value of USD 20 million to USD 40 million in EBITDA above our plan. This is a great demonstration of value creation in our operations business, in addition to the ongoing cost and capital deployment optimization. Our planned operational maintenance turnaround are a key part of Borouge's regular asset management, which keeps the company world-class asset base well maintained and support our high utilization rate, industry leading asset ability and efficient and safe operations. I will now hand over to Jan-Martin to discuss our financials.

Thank you, Hasan, and good afternoon, everyone. We are excited to report a very strong net profit of USD 308 million for the second quarter, representing a 33% increase from the previous year and a 13% increase on a quarter-on-quarter basis. Q2 revenue was recorded at USD 1.5 billion, a 6% increase on a year-on-year basis and a 15% increase from the previous quarter. Strong top line was supported by healthy sales volumes enabled by our outstanding operations performance and stable average selling prices during the quarter. As highlighted before, Borouge delivered another exceptional EBITDA margin in the quarter of 41%. This reflects our ongoing operational efficiencies. On a half year basis, revenue remained flat at USD 2.8 billion, focused cost discipline helped in delivering a strong adjusted EBITDA of USD 1.2 billion and the net profit of USD 581 million, which is up 21% and 35%, respectively, versus the same period last year. On to the next slide. We will now look at costs, an area where we continue to make progress after the very successful completion of our ambitious value enhancement program in 2023 that delivered USD 607 million through revenue optimization and strategic cost management. In Q2, our overall cost base, excluding depreciation and amortization, remained flat as compared to the same period last year, and increased 21% from the previous quarter due to increased production and sales volumes during the quarter. Total cost of goods sold, excluding depreciation and amortization, decreased by 1% on a year-on-year basis and increased 24% versus the previous quarter due to higher production following a successfully completed feedstock-related maintenance in Q1. Our overall selling and distribution expenses in Q2 remained flat on a year-on-year basis, despite a 9% increase in sales volumes during the same period. General and administrative expenses in Q2 increased by 10% from USD 49 million to USD 54 million on a year-on-year basis due to one-off items. In the first half year, total cost base, excluding depreciation and amortization, declined 11% despite higher production and sales volume. Borouge's first quartile position in the PE and PP cost curves, when combined with its ability to command premia against benchmarks supports a very strong margin profile that ultimately enables exceptional shareholder returns. On to CapEx and cash flow. Adjusted operating free cash flow in Q2 was recorded at USD 581 million, representing a substantial increase of 17% on a year-on-year basis. Cash conversion was strong at 95%. Net debt-to-EBITDA ratio stood at 1.2x as of the 30th of June 2024. With the additional prepayment of USD 100 million under the commercial facility end of June, the successful management of the financing cost could be continued. Borouge maintained successfully premia above benchmark prices over the cycle in a challenging environment, which contributes to strong operating free cash flows and the very significant through-the-cycle dividend paying capacity. The company will make an interim dividend payment of USD 650 million in September 2024, in line with management's commitment to pay USD 1.3 billion dividend for the fiscal year 2024. I will hand over to Hazeem to summarize and conclude.

Thank you, Jan-Martin. On Slide 11, I would like to spend a moment on our growth agenda. As you are aware, we have announced several strategic investment projects at various stages of progress. I would like to explain how these projects fit together to form a comprehensive approach to creating value for Borouge shareholders. Aligned with our existing business model, our growth projects focuse on the production of differentiated and specialty polyolefins at scale. This is being executed through substantial organic capacity expansion, as well as the geographic diversification of our production footprint, creating proximity to our core markets. Last week, Borouge signed a project collaboration agreement which aims to establish a complex in China to produce 1.6 million tonnes of specialty polyolefins per annum, a project, which is currently at the feasibility stage and also [indiscernible] will further expand production capacity and enhance our access to the fastest-growing markets in the Asia Pacific region. Our flagship project. Borouge 4 is progressing well and is scheduled to be completed by Q4 2025. Once complete, it will increase our polyethylene production capacity by 28% or 1.4 million tonnes per annum. Borouge 4 is being based with next-generation Borstar technology and will further offer differentiated projects. Lastly, we continue to assess options for capacity optimizations within our existing assets. In this regard, we announced the AU2 [indiscernible] revamp which will contribute over 250 kilo tonnes of new capacity after full ramp-up by 2028. We are in advanced stages of assessing revamps across other assets and we'll provide those updates in due course. I'm confident that these investments, coupled with polyethylene's market recovery will position Borouge for significant value-accretive growth and exceptional shareholder returns. Allow me to summarize the second quarter and our outlook for the remainder of the year, we expect a stable macro environment and Borouge's core markets. in the second half of the year with expectations of Chinese demand increase following stimulus efforts, we intend to maintain high utilization rates to maximize our production volumes while keeping our asset base efficient and well maintained. The Borouge 3 plant has been moved from Q4 2024 to Q2 2025. Oil license prices are expected to remain stable and within [indiscernible] band for the rest of the year due to logistics bottlenecks and low operating rates and our addressable markets. The company will continue to maintain a strategic focus on high-value added products. Borouge is well positioned from an overall cost basis for the rest of 2024 and we continue to monitor the various geopolitical situations and to proactively manage and mitigate any [indiscernible] and impacts to our business. We expect to pay our 2024 interim dividend of $650 million in September. Finally, we wanted to invite you to our first Capital Markets Day in Abu Dhabi, on the 30th of October. Further details will be shared by the Investor Relations team. Now with that, we are pleased to take your questions.

[Operator Instructions] We will now take our first question from Ricardo Rezende from Morgan Stanley.

I guess the first question is to Hasan. We've seen another quarter where utilization rates have been very strong and above 100%. So I just wanted to check whether those rates are sustainable and we should continue to assume that rates to be above 100%? Or there might be even a chance that you announced that your capacity is actually higher than what we assume in the current moment? And then 2 follow-up questions that I have on the new projects. The first one in the Chinese cracker, would you be able to give us some color on the breakdown between the final product on polyethylene and polypropylene? And the final question on the issue of revamp [indiscernible] studies?

Thank you, also the first part from the utilization point of view, we are the Borouge, an operation, we have a very clear liability program strategy. We are sustaining the high utilization and I'm confident also in the 2024 on this great sort of reliability and a [indiscernible] to the plant, we will continue the highest transition. At the same time, we did some sort of the detailed due diligence for our proponents of our industries around. And we found that the cracker in the industrial units will sustain or the high utilization this year and Borouge.

I can take the questions on -- on a breakdown on the announcement we made in China. So, I would like to just give a brief on this project. As we have been continuously communicated -- our growth strategy in Borouge will always be value accretive to the business. Beside, Borouge 4 getting closer and closer. The Borouge 4 mega project 70% over completed now, and it's due on Q4 2025. We have been -- as we have communicated, we have been evaluating very carefully options and accessing a key markets in our international growth that has been mandated by our Board. And therefore, we have been assessing different options and giving our long track record, our successful long track record in China, in particular, with the great technology that we have together from Borealis, our Borstar technology, we will make sure the products mix that will be produced in this project, it gives us the highest premium. I understand the dynamics and the challenges around China, but we see China as a great opportunity for us. China for us has been great in terms also market size. It's a key market, and we see there are still a lot of great opportunities for future growth. China represents 40% in total of polyolefins globally in demand. And therefore, we as Borouge -- we are well positioned in key specific applications to grow further with our partners in China. And therefore, the announcements of $1.6 million has been evaluated very carefully. We are at an advanced stage for our visibility study. And we will be communicating more details of this project in due time.

We will now take our next question from Faisal Azmeh from Goldman Sachs.

Maybe just to follow up on the project in China. I guess maybe, obviously, we've seen significant capacity additions in the market over there and a slowdown generally in demand and consumption as the country tackles different issues related to economy. I guess maybe the question that I have is, at this stage, do you still see direction of the kind of the -- Hello. Can you hear me?

Yes. Go ahead, if you can just speak up just...

Yes. So I was just saying that effectively, do you still see China as a as a good place to place more capital in the long term versus what you could have potentially here or maybe, for example, in other cost advantageous market like the U.S. That's my first question. And then my second question relates to the delay in the outage or the shutdown that you're planning in Q4. You've mentioned $20 million to $50 million of EBITDA. So maybe you can talk a bit about that because that wasn't very clear to me in terms of what that $20 million to $50 million EBITDA mean.

I just maybe could comment on China, then you can -- and also elaborate further also on Borouge 3 as well. As I said, for us, at Borouge, we have been very actively developing our capabilities in terms of -- together with the market in China. China represents 40% of the global demand would come from polyolefins, we have been also I would say, realizing premium in our products in China with clearly -- also differentiated products that we continue to sell in China. Therefore, these projects, as I said, we will be communicating more details. However, we understand the challenges and certain, I would say, let me put it that way, polymer types and so on. However, in Borouge we'll make sure that as we are going through a visibility study, this project really make a clear value. And that's part of our operating model at Borouge is ensuring that we bring a clear tangible value accretive to our shareholders. So we will be providing more details. We have -- besides, I would say, all -- around all the challenges issues that we hear on macro level and so on in China, we see the polyethylene business and particularly with our technology, the Borouge stop technology we have in a very specific, I would say, specific applications we see clear value for long term for our shareholders, and we will be providing more detailed design.

And if I may comment quickly on your question with respect to the clarification of the impact of the Borouge 3 turnaround move. So in essence, we have been looking at the optimal timing for the turnaround to happen. We will have 2 effects. The one effect is the pure move effect of the 320 kt, which would have been in '24 into '25. In addition, supporting the decision to optimize, we found that we can optimize the feedstock supply. And by this generate an EBITDA, an additional EBITDA above our plan in the range of USD 20 million to USD 40 million. This together has then taken the basis for our decision to optimize and move the turnaround into 2025.

Just to also elaborate on Borouge 3, I think Mr. Hasan wanted to ask something, has been us for us. Part of our accelerate for growth journey also in Borouge maximizing unlocking value across all value chain. And we have assessed the situation for Borouge 3 postponements, and we believe we are unlocking value within this decision, ensuring the, of course, the safety and reliability of our operations and ensure that we continue full utilization for this year, and therefore, also not bringing just unlocking value for this year but also for next year given the alignments on feedstock and so on. Mr.Hasan, maybee you want to elaborate?

Yes. So as you mentioned, I said we have an operation, we unlocked the value by looking to the high utilization this year in 2024, and that was deciding after the very due diligence and the assessment for postponement of the turnaround to Q2 2025, and that's reflected in creating a value of USD 20 million to USD 40 million extra in terms of the EBITDA. That give us the clear mindset that will not keep any stone un-flipped, looking to all the aspects in order to create more value to our shareholders [indiscernible].

And we are expecting to have a history record of production this year toward the year-end [Foreign Language]

We will now take our next question from Prateek Bhatnagar from HSBC.

I have 2. The first is that we are seeing sales rates increasing in the industry, but it hasn't impacted you from now selling and distribution expenses are flat year-on-year. So how you guys are managing it and whether we should expect an increase in these expenses with a delay for you? That's the first question. The second question is on the B4, in terms of CapEx costs. Is it still tracking your initial estimate of $6.5 million? Could you give some color? And when you say that the plant will start by the end of 2025, or complete by the end of 2025, do you mean mechanical completion or commercial operations will begin by the end of 2025? Could you give any details around that?