Engro Polymer and Chemicals Limited (EPCL) Earnings Call Transcript & Summary

[Foreign Language] Welcome to Engro Polymer's First Half Annual -- First Half Corporate Briefing for analysts regarding the first half results. I think everybody has joined. We can move ahead to the next slide. A quick look at the agenda and now onwards to the macroeconomic overview. Over the first half of 2026, if you look at the macroeconomic indicators of the country, you'll see everyone probably knows already that real GDP for Pakistan grew by around 3.7% in FY '26. Last year, this number was around 3.2%. Inflation rose to 11.1% year-on-year in June '26. There was a hike in energy prices, which I'm sure everybody has felt the pain of, which led to a surge in fuel cost and resulted in higher freight, higher logistic costs, which the entire industry is struggling with. Policy rate increased by 100 bps this quarter for the first time since June 2023. And exchange rate averaged around PKR 279 a dollar, closed at PKR 278. Last year, this was, I believe, around PKR 280, PKR 281 a dollar. So very, very low, stable exchange rate, very low and very, very gradual revaluation, if at all, you can call it that. But stable exchange rate is always good for business. If we can move on to the next slide. So where do we stand in terms of our market? So a global market overview for all of you to look at. In this quarter, PVC prices peaked in March following the start of the U.S.-Iran war. But over the course of the quarter as tensions reduced, PVC prices also went down fairly rapidly. So if you look at the graph on the top, PVC prices have come down almost to pre-war levels, slightly trending upwards, but coming down pretty drastically post, I think, May -- April, May [Foreign Language], they have started coming down. They've also been helped on their way downwards by Chinese carbide-based and U.S.-based producers whose operating rates increased to take advantage of the higher cost, higher pricing post the start of the war. And with supply going up, there was downward pressure on PVC prices globally. A temporary duty waiver from -- in India also triggered some demand, but that has slowed following the expiry of that waiver in July. And with the monsoon season starting in [Foreign Language] India during the monsoon season, the demand center as such goes down. In terms of ethylene prices, they rose 35% over the quarter. And that was -- when you compare it to the 18% increase in PVC prices, you'll realize that there was constriction of margins on a net-net basis because of the cost price squeeze. Core delta reduced to $273 per tonne in Q2. So last year, the average core delta was around, I think, $275 per tonne. And this first half, the comparative core delta is around $300 per tonne. So better than last year, but the equation is a little different because ethylene prices have been much higher in the second quarter. PVC prices, for example, last year were $725 per tonne on average in the first half and this year, they were around $815, $820 [Foreign Language] was your average PVC prices in the first half this year. Caustic -- global caustic prices are returning to the pre-war levels and the supply gap that was created by the Middle East conflict has been partially filled by the U.S. and European producers. But again, caustic prices are not very, very strong and primarily that's because of Chinese oversupply, which is exerting downward pressure. Hydrogen peroxide, global HPO prices softened post the war, but they still remain above the pre-war levels. So the recovery has not completely gone back to pre-war. And one major player in this has been the higher freight costs, which have added upward pressure in the import prices. Bangladeshi producers operate at 60%, 70% of their capacity even now, despite the energy crisis and they are benefiting from lower energy prices. Despite higher global energy prices, the energy cost in Bangladesh for industry remains lower. Next. A quick look at the financial highlights for the business. Revenue up 4% versus same period last year, so PKR 39 billion versus PKR 37.5 billion last year. Gross profit significantly better around PKR 1.2 billion was last year's gross profit, so 282%. Profitability also significantly better this year. EPS, a function of profitability was also PKR 1.79 versus minus PKR 3.55 last year. Market cap, I think around a couple of billion rupee increase versus last year, primarily with the market moving as they have recently. Safe man-hours, something we are very proud of. Engro Polymer as an institution has completed 50 million safe man-hours, which is a huge achievement, especially for a company operating in such a complex manufacturing environment, handling so many volatile and difficult chemicals. Total employees remain about the same and so do total assets. Next. A quick material variance in the P&L items before we move ahead to the business numbers. Our revenue was up 4%, as we just discussed. And primarily, this is on the back of PVC. So I had mentioned earlier that PVC business revenue, I think, was -- sorry, this is primarily on the back of the HPO business coming in, high global PVC prices. And HPO business, if you will recall, we commissioned it in February of last year and first half, we had sold around 3 kt as opposed to this year, we've sold around, I think, 10 kt, 11 kt. So HPO business gradually firming up. We are building our reputation in the market. And able to deliver quality product to our customers and satisfy their needs. So PVC price, one impact was due to PVC revenue because of global prices going up and the other was HPO primarily. In terms of cost of sales, which also resulted in the gross profit increase of 282%, there were a few interventions that have been made in the last year, which are -- they are showing results now. One is the HTDC commissioning, the project -- HTDC project, which was commissioned, I think, April, May of last year. And we have seen significant efficiencies from the HTDC project. So around PKR 0.6 billion is the savings we see from the HTDC project, primarily in gas consumption. Other than this, Zero Gap membranes continue to show returns. Again, an investment on the manufacturing side in the caustic business -- so around, I think, PKR 200 million is the positive impact of the Zero Gap membranes in the caustic plant. Other than this, post the gross profit, if you come below the line, we did record around PKR 1.3 billion of remeasurement gain on SIDC and also an increase in investment income from short-term investments versus last year. Around PKR 15 billion to PKR 16 billion in cash we hold as we had discussed for our power project investment, et cetera, and we have invested it, which is resulting in some interest income. Finance costs increased 23% because last year -- end of last year in 2025 December, we had picked up around PKR 28 billion, PKR 30 billion of long-term debt to finance our power project and also we optimized our balance sheet structure. So finance cost is up 23% due to an increase in long-term borrowings while KIBOR remained consistent. And tax, minus 44% in credit. Prior year income and the impact of the super tax discussion, a reduction from 10% to 8% on the deferred tax liabilities has resulted in this number. Overall, profitability increased 1.5x. So the loss has converted to profit this quarter -- this half year. In terms of where we stand on revenue, I've already talked about it, PKR 39.3 billion, of which PKR 1 billion comes from the new HPO business finally making its mark and higher PVC prices. In terms of EBITDA, 282x increase -- or 5x increase, sorry, is primarily on the back of efficiencies in the business, so primarily margin is what we are talking about here. PKR 1.2 billion [Foreign Language] that is related to SIDC and around PKR 0.6 billion, PKR 0.8 billion of this is also from interest income on our short-term investments. If I put that aside, around PKR 3.4 billion we see has come from plant efficiencies, higher premiums, global pricing as well as the impacts of the Zero Gap and HTDC project. And if I look at the PAT, I think the trajectory is very clear. We've talked about this in the past also that core delta [Foreign Language] Core delta is improving, and we see business also improving on the back of that commodity cycle increase. Next. A quick look at the segment-wise performance. So broadly, PVC remains at 78% market share -- sorry, 78% of our revenue is from -- top line is from the PVC business, down 2% where HPO has taken some -- eaten away some of the share of PVC in our total portfolio as envisaged when HPO was set up. In terms of PAT, the PVC business shows PAT of around PKR 700 million, caustic PKR 1 billion and HPO slightly in the red still. Next. Where we see PVC sales marginally, the sales volume was the same as last year, no major change. But as a whole, the PVC market is strengthening. Our sales were 4% lower versus last year, primarily with uncertainty surrounding global prices, which resulted in weak offtake in the second quarter. If you recall, in the first quarter, we had record high sales almost. Market size is slightly smaller compared to first half of last year. But broadly, the PVC business is strong, and we expect to close at a strong volume at the end of this year. In terms of production, business is doing well. We have -- even with our plant shutdown recently taken in April, we produced around 116 kt of PVC and around 116 kt of VCM also. Outlook for 2H remains optimistic. Government measures are expected to be taken to stimulate the housing and construction sector. And with our -- in the recent quarter, we have also gotten provisional antidumping duties imposed -- have been imposed on U.S. and Indonesia following our applications. So we saw last year significant dumping of PVC from various countries, which were resulting in eating away and creating a very negative sentiment because of unfair trade practices in the local market, which the NTC has taken due notice of. Next. In terms of the Chlor-Alkali business, caustic soda sales remain steady. Market shares remain largely the same, supported by stable demand from key industries and a well-balanced domestic supply environment. Our sales are primarily concentrated in the South. And where we have seen relief in the caustic business has been on the cost side. Captive gas levy, as many of you are aware, was -- the formula for captive gas levy was revised in March, following industry lobbying of the Ministry of Petroleum and the Ministry of Energy, which has resulted in the levies being reduced from PKR 1,406 per MMBtu in January to now PKR 365 per MMBtu in May. So in terms of cash flows and in terms of bottom line, this is around PKR 3 billion to PKR 4 billion impact -- positive impact on the P&L of the business or it gives enough impetus to the business if the levy is calculated on a weighted average grid pricing basis. Global prices, like we said, have returned to pre-war levels, but there are limited export opportunities currently at these prices. The business remains focused on cost efficiency and deeper value chain integration. Especially for the caustic business, our aim is to protect profitability with the fluctuating energy conditions and also to just manage our market share and ensure business remains smooth. In terms of the hydrogen peroxide business, we move from strength to strength in the local HPO market. Our product is able to convert customers based on the quality and sales are primarily concentrated in the southern region. So imports from Bangladesh did go down in the second quarter with higher freight and -- but they continue to remain a challenge for the industry with the fair competition in the domestic market. So higher import prices provided some support to domestic pricing. Finally, the plant operated reliably for caustic, hydrogen peroxide with stable production and the best demonstrated production ratios. Next. I've talked quite a bit about gas. So I'll do a quick update on gas. And so gas cost, as you can see, so we'll take it from last year. I believe the levy was imposed in March of 2025, the PKR 238 per MMBtu number. And you can see the red line is the impact -- the levy cost as it was billed, and it went up all the way to PKR 1,406 per MMBtu in January of this year. In January and December, the billing was on 15% of the differential between the grid and captive gas power production. The number in March post the revision of the levy calculation formula went down to PKR 323 per MMBtu and has stayed around that number since then. In July, this number did -- was billed at 20%, which as per the captive gas ordinance is -- was where it was supposed to go. It was supposed to be billed at -- sorry, 15% post February and at 20% post July, August, and that's what the trend we are following. And the number remains within the range of 450 to 500 as we stand. In March, with the correction, we've already talked about this. Proactive measures are underway. We have a [indiscernible] on the repayments because of the calculation mechanism and no RLNG has been charged to EPCL since April, primarily, I'm sure on the back of not having received any LNG cargoes for the industry. We have also this month, completed our 2-megawatt solar project, which has cemented our entry into the renewable energy for our industrial production phase of our energy history -- energy story actually, not history. Next. Looking ahead, so where do we see the business going in the coming half year? We're not one to rest on laurels while the first half has been significantly positive. We do see both headwinds and positives in the coming 6 months. First half, we will continue to operate with a strong safety culture, focused on proactive risk mitigation behavioral reinforcement. We are committed to the 50 million man-hours -- safe man-hours moving ahead with that target to bigger [indiscernible]. Macroeconomic factors such as inflation policy rate, exchange rate will affect the company's cost structure and future capital commitments. So we are actively reviewing our dollar liabilities and our cash flows where they might have an impact. However, we don't see -- we don't forecast many major -- any major swing in devaluation or interest rates in the coming near future. Raw material availability will be a challenge. So the geopolitical conflict and the cessation and renewal of hostilities in the Gulf have created disruption in ethylene and EDC supply chain and resulted in feedstock unavailability and shipping disruption. I believe in April, we talked about the fact that while we were covered for our ethylene and EDC shipments at that time, we did envision some disruptions because while EDC can be sourced from Europe, it has a longer voyage time. And historically, we sourced most of our EDC, around 70-odd percent from the Gulf via the Strait of Hormuz. EDC, we have largely managed to ensure availability of. Pricing has been higher. Obviously, in case of conflict, that is to be expected, which will eat into margins in the coming 6 months as inventory is converted into sales. Ethylene also, we have -- while we usually source our ethylene from Northeast Asia, we had talked in the last analyst meeting about the fact that most of those -- that ethylene that we get from Northeast Asia also uses naphtha, which is sourced from the Middle East. And naphtha unavailability can impact ethylene availability. Again, ethylene largely remains available, but at higher prices, which again will impact margins. We have had some delays in feedstock and some shipping disruptions as well as certain unavailability for short periods of time, which result in load disruptions, et cetera, at the plant. But largely, we intend to sell as per our plan and service our market to the best of our ability. We don't anticipate any shortages in inventory to meet our market demands in China, in the coming 6 months. In terms of PVC, decline in PVC prices impacts our core delta, of course, and that's a negative impact. We don't foresee major declines in PVC prices in the coming future -- in the recent future -- in the near future. But domestic PVC demand is expected to remain robust with a focus on market development activities in-house to increase our offtake. Caustic [Foreign Language] the levy on captive gas price has eased pressure on our margins, significantly eased pressure and given us some space to operate. We are looking to drive further margin expansion through cost optimization, efficiency gains primarily to leveraging the gas consumption and working to make it better in the future. The investment of Zero Gap membranes in the recent turnaround, which was -- which completes Engro Polymer's journey to move to Zero Gap membrane technology will result in major savings on the energy efficiency front in the caustic business. Hydrogen peroxide, we expect import pressure from Bangladesh to weigh on our HPO financials, especially our sales. But our focus continues to be on expanding our market presence and retaining our existing customers while working on the regulatory front to promote fair competition and tackle unfair trade practices resulting in importing trucks. Energy grid power is being strongly evaluated as a viable option alongside our renewable initiatives. And yes, finally, we are a business in -- which is a commodity business and a cyclical business, and we continue to focus on cash conservation measures, disciplined working capital management, cost optimization and strategic financing. So while we had a significant amount of finished goods inventory on our books during Q2, sales in August -- July and August have been robust, and we see inventory evening out on a YTD basis. Next. I think we are done now. We can open the floor for questions. If there are any questions -- I think we can remove the slide.

Yes, [indiscernible].

[Foreign Language] I just had a question on your volume outlook. First quarter volumes were higher at 66 kt, while second quarter volumes were relatively lower. And we understand that there were more [indiscernible] in the second quarter due to [indiscernible] fall in the same quarter. So I mean you did say that volumes were robust in July and August. But what's your outlook for third and fourth quarter for the construction sector in general and PVC demand in particular? Could we see volumes rebounding in the third quarter, I mean, touching 65 kt, 70 kt per quarter?

So we have already seen most of the backlog. So when you say like the first quarter, first half, we were around 4 kt behind last year, for example. But where we stand right now post July, August is a rebound. So we are ahead of last year in terms of sales volumes. And we do expect to close as Engro Polymer [Foreign Language] at a higher sales volume for the year. We are looking to challenge ourselves and producing at optimal levels as long as feedstock is available. And we aim to service our market as per their requirement. And demand, by the way, has not decreased as such. They have a seasonal influxes. April was slow, May was slow, but sales had picked up and the market had picked up in June and July. Also in April and May, when we sold less, imports were definitely there. So Engro Polymer may have sold less, but there was a lot of imported products in the market, which was also sold. So market itself has remained fairly robust. [ Sulaiman ]?

Okay. Just another quick comment. If you can share, please share an update on proposed acquisition by Lotte Chemical if you guys have an update?

So I wouldn't have an update on that. That is probably a query best suited for Engro Holdings. That falls in the ambit of holdings. [ Sulaiman ]?

[Foreign Language] So what I want to ask you is, if I look at your numbers, I just wanted to understand you have a PKR 40 billion debt, right, on your book, if I'm not wrong. And then you have a PKR 15 billion, PKR 16 billion cash position. Previously, you had like PKR 25 billion, PKR 26 billion cash. So why do you need to like have such a high cash position? Why don't you try to further reduce the total amount of debt on your books? Is there -- what is the fundamental reason behind it?

This is primarily for strategic reasons, [ Sulaiman ]. We have a plan in place, which we are now currently in the middle of executing, which involves primarily -- power has been our major, I would say, pain point in the last year or so, especially post the imposition of the captive gas levy. Most of the funds that you see on our balance sheet, around PKR 10-odd billion of those PKR 15 billion that you see are -- we are holding them for the power project, which we expect -- which we are in the final stages of, and we expect to put into play at some point in the coming 3 to 6 months. And that actually has very short payback because the grid is -- looks like a very, very good alternative as we stand right now, especially with captive gas levy and other inefficiencies in the pricing -- power pricing in the country. So primarily, the cash you see on our balance sheet is held for that reason. The debt was also acquired for certain projects. So running down long-term debt doesn't make sense. So that debt was primarily for projects which will result in future efficiencies.

Sure. Coming to your slide on hydrogen peroxide side, you stated over here that Bangladesh producers operated at 60% to 70% utilization while benefiting from lower energy costs despite higher LNG prices. So can you explain, I mean, what do you mean by this?

So what we have noticed is that Bangladesh has -- Bangladesh producers, by and large, have cheaper energy cost compared to Pakistan. And we know for a fact that Bangladesh industry does get subsidies for industrial energy. We had assumed when the war started that with the LNG crisis and with the energy crisis, which did hit Bangladesh also, that energy prices for industry in Bangladesh would rise. But analysis indicates that, that has not happened. And energy prices in Bangladesh for the industry continue to remain subsidized.

No. So have you seen the LNG prices delivered in Bangladesh ports, have you seen an increase in that?

I believe so. And also, they have also experienced some supply disruptions for LNG, just like the rest of the region.

So why don't you submit an application to NTC to put additional duty on Bangladesh imports?

In terms of antidumping?

Yes.

Of course -- so [ Sulaiman ], it's not a case of a one-to-one. And it's not a wish list, right? NTC also looks at a lot of data. Not on what Bangladesh is being charged in terms of cost, but in terms of what they're selling at in Pakistan. And yes, the regulatory front is very much an open front. As you must be aware, there is antidumping duty on 7 countries imports of 5 years last year or beginning of this year by NTC in the hydrogen peroxide industry. So...

Okay. So what I want to understand is that generally, what I've seen is that industry has actually become more not proactive, but slightly like reactive into these situations, right? Whereas when you see industries in India, industrialists in India, Bangladesh, some of the other countries, the moment something hits, they are the ones who actually like test their NTCs or their tariff commissions to do this. So obviously, we have a very difficult situation right now with the gas situation and the global oil prices the way they are. So I think as an association as well, it would seem fair enough for everyone to have the NTC now actually stepping in and making sure that bad practices or when our manufacturers are put against not direct competition, but against competition, which -- where you cannot really compete, then you will have a faster time frame of replies from them rather than what historically they have -- the time period it has taken them to give their determinations. Would that be the case right now?

As industry, [ Sulaiman ], I would like to disagree. NTC is a very professional organization, and they do respond very timely. I did talk about the PVC antidumping duty on U.S. and Indonesia, which is a huge chunk of our portfolio, by the way, first time ever. Clear dumping was evaluated and established by the NTC and duties provisionally have been administered within a quarter or 4, 5 months. So there is no very long lead times to it. Again, I will say, we stand against unfair trade practices just like industry does. Descon and Engro have strongly pursued antidumping cases in NTC, and NTC has also fairly evaluated them. Last year, when we did file for a sunset, dumping in the preceding period could not be established. But if we do find a case of dumping, we will take it to the NTC. And we do expect in case of a fair request, a fair hearing from NTC also.

Okay. Coming to your solar power, can we see further increase in the solar power potential? Or do you think you are going to be maxed out at this level?

So 2 megawatt, [ Sulaiman ], you have to understand, we are operating a little bit. We are in island mode. So we are primarily on captive gas generation. Until we get a grid connection in for the Engro Polymer facility, 2, 3, 4 megawatts is as high as Engro Polymer's facility will go primarily to service admin blocks and warehousing and other plants. The process plant itself requires very stringent conditions for energy availability, not much variability. Actually, very little tolerance for energy variability at the process plant, which means the grid connection is essential before we expand our renewable footprint. So I think I got the history and the future and the story words mixed up, but this is the first step in Engro Polymer's story on renewables, the first chapter that we have written. And post the grid connection, we look for further expansions, whether they are in wind or solar.

Sure. Just 2 last questions. Today, there is a ruling by the FCC, which is the Federal Constitutional Court with regards to actually where companies have paid super tax in prior years and they have had these credits available, then they can potentially knock it off. So would it impact you? Have you guys seen the impact on your company?

I've read the news, but I haven't seen the valuation. But [indiscernible], if you can answer in the chat window for [ Sulaiman ] and for everybody else in the general chat window, it should help us. I believe we have paid upfront [Foreign Language] guarantee in cash with you, so I don't think much impact for us.

No, no. But then you can actually knock off your future tax, right? Because you already have some tax credits in prior years.

[Foreign Language].

Yes, yes. Okay.

Because of our losses. But yes, absolutely for profitable companies that is.

No, but then you still account for the tax on income, which you have -- the tax on income on your investments, right? You can still knock that off.

Yes, but quantum is not comparable, but absolutely, you can.

Okay. Just last question with regards to -- so Engro -- sorry, Lotte has stated that, let's say, if -- obviously, I understand that management right now does not really have an idea, et cetera, what's going to happen. No one knows what's going to happen. But what I want to understand is they are saying that if they give a grid connection to you guys, then there is an effective saving of like PKR 7 billion to PKR 8 billion on the whole with regards to if you shift to grid, let's say. So can you give us a quantum of what that impact is?

So I'm not at liberty, obviously, like I said to [indiscernible] also to speak about the transaction.

No. My question is not on transaction. My question is...

What I will tell you is that the PKR 7 billion, PKR 8 billion number was probably more valid when the gas levy was PKR 1,400 per MMBtu. There is still a huge, huge advantage.

So what is the current number which you think you will have?

I'll have to check, but around, I would say, PKR 2 billion to PKR 3 billion is still very much intact, maybe more. And the reason I say I'll have to check is [Foreign Language] do I cap it at PKR 600, do I cap it at PKR 500 or PKR 400 makes a difference in the savings. But regardless, [ Sulaiman ], connecting to the grid is very viable for industry and Engro Polymer as the captive gas levy and the gas market stand right now. And the sooner you connect and the more longer you can take advantage of the Prime Minister's incentive pricing, the bigger the benefit.

What is the IRR which you are expecting with the potential investment in your power plant?

I can't say. That's not public. When it does come out, once...

So it's going to be -- is it going to be above that 20% threshold or within that?

Once we talk about it, we'll make that public when we do. So you will know. Haider?

[Foreign Language] Am I audible?