Industries Qatar Q.P.S.C. (IQCD) Earnings Call Transcript & Summary

Good day, and welcome to the Industries Qatar Q4 2019 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Bobby Sarkar. Please go ahead, sir.

Thank you, operator. Hi, hello, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Industries Qatar's Fiscal Year 2019 Results Conference Call. So on this call from QP's Privatized Companies Affairs Group, we have Mohammed Al-Sulaiti, who is the Manager of the Privatized Companies Affairs Group; [ Abdulla Al-He ], who is Assistant Manager of Financial Operations; and Riaz Khan, who is the Head of Investor Relations and Communications. So as usual, we'll conduct the call with first management reviewing the company's results followed by a brief Q&A. I will now turn the call over to Riaz. Riaz, please go ahead.

Thank you, Bobby. Good afternoon, and thank you all for joining us. Before we go into the business and performance updates, I would like to mention that this call is purely for investors of IQ, and no media representatives should be participating in this call. Moreover, please note that this call is subject to -- okay, subject to the IQ disclaimer as detailed on Slide #2 of the IR deck. Moving on to the call. On Feb 10, IQ released its results for the financial year 2019. And today in this call, we'll go through these results and provide you an update on key financial and operational highlights of IQ. Today on this call, along with me, I have Mr. Mohammed Al-Sulaiti and Mr. [ Abdul ]. We have structured our call as follows: at first, I will provide you a quick insight on IQ's ownership structure, competitive advantages, overall governance and BOD structure by covering Slides 4 to 7 and Slides 35 and 36. Secondly, Mr. Mohammed Al-Sulaiti will brief you on IQ's key operational and financial performance metrics. Later, I will provide you with insights on segmental performance and CapEx updates. And finally, we will open the floor for the Q&A session. To start with, as detailed on Slide #5 of the IR deck, the ownership structure of IQ comprises of Qatar Petroleum with 51% stake and GRSIA with being the second largest shareholder with 21% ownership. As detailed on Slide #4, IQ is credit rated by S&P with A+ and Moody's with A1 credit rating with a stable outlook. Qatar Petroleum, being the main shareholder of IQ, provides most of the head office functions through service level agreement. The operations of IQ subsidiary and joint ventures is independently managed by its respective Board of Directors along with the senior management team. The BOD structure is detailed on Slide #6 of the IR presentation. In terms of competitive advantages, as detailed on Slide #7, all of the IQ's group companies are strategically placed in terms of a short feedstock supply, solid liquidity position with a strong cash flow generation capability and the presence of most reputed JV partners. In terms of governance structure of IQ, you may refer to Slides 35 and 36 of the IR deck, which covers various aspects of IQ's code of corporate governance in detail. I will now hand over to Mr. Mohammed Al-Sulaiti.

Thank you, Riaz. Firstly, good afternoon, everyone, and thank you all for joining us today. Just to start off with the 2019 business performance. So IQ was mainly affected by the macroeconomic conditions during the year, which was challenging and well reflected in our results, which were -- which witnessed a 49% decline in terms of the bottom line profitability in comparison to last year. As reflected on Slide #12, the financial performance was impacted by uncontrollable external factors, such as the slowdown in global economies, volatility and commodity prices, excess capacity, sanctions on certain countries as well as ongoing trade conflicts. These factors directly translated to increased pressure on commodity prices and created an imbalance in the supply-demand dynamics for petrochemicals as well as fertilizers and steel products. At the group level, the blended selling prices declined by 14% during the year in comparison to last year, 2018, and contributed to a QAR 2 billion decrease and group's earnings in 2019, as you can see on Slide 13. As detailed on the 12th slide, the sales volumes at the group level declined by 2% compared to last year and contributed a decrease of QAR 641 million in group earnings. The sales volumes were also affected by the overall macroeconomic situation, causing an imbalance between supply and demand, coupled with an overall decline in production levels amid maintenance shutdowns. The group's production levels are marginally down on 2019 by -- 2018 by 1%, which was mainly attributed to the planned and unplanned shutdowns. Such shutdowns are in line with the group's commitment in enhancing health and safety, plant life, quality assurance and reliability, which would ultimately lead to improved operational efficiencies in the long term. Moving on to the quarterly performance. The total group revenue declined by 2% in Q4 to reach QAR 3.5 billion compared to third quarter of 2019, while net profit declined by 7% compared in the third quarter to reach only QAR 539 million, all [ related ] to the deteriorating macroeconomic conditions, which led to a decline of 11% in group's average selling price. The decline in profitability was slightly offset by impairment reversal. And in Q4 reversal -- impairment reversals in Q4 from an investment in an associated company. The sales volumes remained resilient in the fourth quarter as compared to the third quarter with an increase of 10%. The production levels declined by 3% due to maintenance shutdowns. Moving on to the balance sheet. That's remained healthy with liquidity at the end of December 2019 remaining robust with no debt on the group's balance sheet, including QAR 12.4 billion in cash and bank balances at the group level. The group's total assets and total equity reached QAR 35.9 billion and QAR 34.2 billion, respectively, as of December 31, 2019. Before we move on to the segmental update, I'd like to highlight that this year, although challenged by harsh macroeconomic conditions, IQ businesses and segments initiated a series of cost optimization, efficiency programs that further maintained their operational revenues. Despite the macroeconomic headwinds, the business continued to deliver a sustained operation and the resilient financial performance while relentlessly focusing on our core values, which are cost efficiencies, operational excellence and unwavering commitment to HSE. The best case strategy will continue to focus on market development, focusing on capturing new markets, creating market arbitrages, bringing logistical cost savings to the group. We will also continue to focus on productivity and efficiency via the ongoing cost optimization programs across the group. I'll now hand over the mic back to Mr. Riaz Khan, who's going to take us over the segmental performance.

Thank you, Mohammed. Firstly, I would like to start by briefing you about various segments of the group. As mentioned on Slide 5, IQ operations operates in 3 business segments, that is pet chems, fertilizers and steel via various JVs and a subsidiary. All of the JVs of the group are with international partners having state-of-the-art technical expertise in their respective field of operations. Now let's analyze segment-wise performance. Starting with petrochemicals, as detailed on Slide #21, the overall profitability of this segment has remained under pressure with an overall decline in the bottom line earnings of 47% year-on-year basis. This was mainly due to softening demand for petrochemical products in key markets, excess capacities combined with trade conflicts, which pressured the prices throughout the year. The black [Audio Gap] last year due to periodic planned and unplanned shutdowns aimed at improving health, safety and environmental standards, while also focusing on enhancing the performance and efficiency of assets. Coming to the quarterly performance. The net profit seen a decline of 9% compared to the third quarter of 2019. This was mainly due to declining selling prices. In terms of segment revenue by geography, as detailed on Slide 22, Asia remains the main market for PE and MTBE, whereas Indian subcontinent remains a key market for methanol and PE. Moving on to Fertilizers segment. As discussed on Slide 26, the bottom line profitability declined by 37% year-on-year basis on the back of overall decline in revenues. The decline in revenues of 9% was mainly due to overall decline in selling prices, which also declined by 9% due to the supply-demand imbalances. In contrast, the group maintained sales volumes at 2018 levels despite pressure from both demand and supply sides. Production remains stable with an increase of 2% in overall volumes compared to the last year, and a new production record was reached for ammonia and near-record production levels were achieved for urea. Based on quarter-on-quarter analysis, the profitability increased by 66% compared to the third quarter of 2019 due to decline in operating cost and increase in revenues. In terms of segment revenue by geography, as detailed on Slide 27, Asia remained a main market along with Indian Subcontinent and Americas. Now let's discuss the Steel business, which you may refer to Slides 29 until 32. During 2019, the overall performance of the Steel segment was affected by softer domestic demand as majority of large infrastructure projects are at near completion stage. However, near to medium-term prospects remain encouraging. Also, demand for steel in international markets has remained limited due to increased competition from relatively low-cost producers from emerging markets that compete on low-cost metrics compared to high-quality and high price metrics that group adopt. The aggressive competition on international front, coupled with weaker local demand, has adversely affected net profits and the decline of 95% is noted when compared to the last year. The selling prices declined by 12%, which was slightly offset by marginal increase in sales volume of 1% compared to 2018. The segment revenue was down by 9% year-on-year basis, although the decline in profitability was partially offset by a recovery in share of income from associates during the year. The production levels for the year increased by 2%, although affected by periodic client maintenance and unplanned shutdowns. Based on quarter-on-quarter analysis, the selling prices remained low with a decline of 10% compared to third quarter of 2019 due to the same reasons as discussed earlier. So overall revenue was down by 2% on the back of declining prices. In terms of profitability, our decline was noted due to increased operating costs on account of reduced inventory levels. Moving on to Slide 33. As per 2020 approved budget business plan, the total planned CapEx of IQ until 2024 amounts to QAR 4.6 billion. A detailed breakdown of the CapEx projects has been disclosed on Slide 33 of the IR deck. The CapEx and cash flow figures will be continuously reviewed and updated based on the BOD's view on the market expectations, appetite for risk and other relevant considerations. Now we will open the floor for the Q&A session.

[Operator Instructions] We will now get the first question.

This is Bobby Sarkar. Guys, it's Bobby. Can I just get started with a question of my own before we start taking questions from the queue? I just have a question about the Steel segment. We see the margins, the gross margins and the cash basis dipping into a negative for the first time as far as I can remember this quarter. And given the overall challenged demand outlook, what do you foresee in terms of near to intermediate term? What do you think could benefit the segment? [Technical Difficulty]

This is the operator. Sorry, Mr. Bobby, I think Riaz's line -- Mr. Riaz's line has disconnected. I'll try to connect them. Hello, Mr. Riaz, you're in the conference.

Yes. Sorry, we got disconnected. So let's open the floor for the Q&A session.

Mr. Bobby, can you go ahead with the question?

Yes. I just had a quick question. We were -- I was asking a question about the Steel segment. Given the fact that I see that gross margins on a cash basis have declined, they've become negative, actually, in the first time that I can remember. And given the overall challenge and subdued outlook, what do you foresee in terms of near to intermediate term? Any fundamental drivers that could benefit this business?

Yes. Thank you. Yes, you're correct. Like the Steel business, if we look at 2019, there were a few challenges, I'd say, on demand, supply, generally globally. If we look at the domestic market, which was our main focus, our main strength over the historical years, we used to have a good portion of our sales going domestically. So at, I guess, some point beyond, or about 70% of our total supply was absorbed locally. If we take last year, 2018 around -- anywhere between 50% and 55% was sold locally. This year, however, 2019, the year that we're talking about, we've seen around 25% of the total output being sold locally. So the main pressure was from the output or the sales that we're going outside of Qatar, ex Qatar. A big chunk of the production capacity was going to Asian markets, which did not necessarily give a good netback or a positive netback to Qatar Steel and IQ. So that's been reviewed throughout the year. We've been looking into ways of enhancing our cost base. Of course, there are challenges around supply and other cheaper steel mills in the region, whether that's Turkish mills or Asian mills competing in major markets that we sold at internationally. So we're currently reviewing several strategies for Qatar Steel. So how can we basically reduce our costs? One, increase our flexibility. Two, in terms of reducing capacities to focus domestically, regionally rather than internationally, given that steel is a different ball game when compared to the other sectors that IQ are involved in, and that's petrochemical and fertilizer, and especially given the competitive advantage that others have that we may not necessarily have, which is mainly the reliance on scrap versus iron ore and our product mix, basically, our raw material mix, which is slightly more expensive. So I think there's much to be done domestically. We still maintain 90% of the local market share in terms of the rebars and billets being sold here locally to other steel mills. I think there's some good prospects in 2020. So we believe whatever we've sold locally in 2019, there's a 20% or 25% anywhere in that range, which is 21% to be the exact. And 2019 could be enhanced slightly, while the rest could be sold regionally in regional markets where competition is less aggressive. So I hope that answers the question. However, we are reviewing this. The Qatar Steel performance 2019 was a concern for IQ, and we continue to address this hopefully in the near future.

We take our next question from Faisal Al Azmeh from Goldman Sachs.

I just have a -- the first question I have is on the raw material cost, and how we think about it going forward. So where are the different assets on the cost curve today, particularly fertilizers and chemicals? I mean a while back, we did have some clarity on the formula, on the pricing formula for natural gas and ethane and butane in Qatar. But at the moment, it's a bit unclear. So maybe if you can just give us some sort of direction with relation to the net income bridge that you have this year reported on, I think, one of the slides on the presentation, and how we think about raw material movement next year, whether there's any potential for raw material prices to move higher or lower. Any clarity on how to think about that maybe as well in the long term would be quite helpful. The second question is really about that cash balance. I mean the company is quite cash rich. How do you think about deployment of capital over the coming years? Is there a room to raise the payout ratio above EPS, particularly as free cash flow generation is actually quite healthy?

I'll start with the dividend answer, which is easier for me to answer. So the dividend, basically, I think the 94% payout this year was, I'd say, a generous payout given like -- generally when compared to the historical payout ratio, which is one of the highest, if not the highest, in IQ's history. Yes, I understand the concern, and that's a major question that we always get asked with regards to the cash balance, and why do we retain so much cash amongst the group and at the head office level and what are our plans in terms of utilizing that cash and our basically strategies of investing it. So we have a slide on CapEx over the next 5 years, which basically highlights that all our major CapEx or approved CapEx currently are mainly focused on maintenance and the reliability of the plants. As you see projects mainly as well as some shutdowns. So those are the main turnaround projects, which is around QAR 4.6 billion across the planning period. If we look at investments, we are reviewing several opportunities across the group. So there are different levels of reviewing. Of course, that some or one of the reasons why we retain some cash to those projects may reach FID. Another reason why we keep cash is just to -- was for 2 main reasons. One is the -- basically, the dividend policy. So we need to ensure that we always have a sufficient cash to have a decent payout, a decent absolute dividend throughout the year is to have a consistent dividend payout ratio to our shareholders. Another reason is to make sure that we have a good buffer to meet any requirements in our JV levels, whether those are unplanned shutdowns, which we've seen and witnessed in 2019. So some of our assets would require to have a good working capital or cash buffer at their level to meet any sort of unnecessary or unexpected shutdowns. So whether we're going to pay a payout that exceeds EPS, currently, I don't think I can -- it's too early to answer that question. I think it's reviewed year-on-year based on what do we expect for the following years as well as the planning period. So depending on how 2020 performances goes and how we see things evolve during the year based on the current challenges that we see in the market and based on what projects mature and get basically the nod to proceed with, that would be very dependent on how are -- how do we manage our cash and whether we continue to keep the excess cash at the head office level. In terms of raw materials, of course, each company or each asset has a different feedstock arrangements. They're all long-term feedstock arrangements with Qatar Petroleum, whether that's butane or ethane or even methanol -- no, methanol, sorry, like an ethane, methane or butane. So they have different arrangements depending on the JV life of the assets. Those formulas, of course, are not disclosed but -- to the shareholders. And the average, if you take us -- we have it here on the slide, the average -- what is the average? Yes, so the average for 2019 in terms of feedstock and raw material was $3.20 per MMBTU. That's across the board. However, unfortunately, we are unable to disclose asset [ base ] of business. In terms of...

And maybe without that kind of little of disclosure, when we're thinking about 2020, would that move higher or likely to be flat, just in terms of when we think about that bridge into next year?

Some of those raw material arrangements or feedstock arrangements are linked to the final selling price. So given our assumptions, and where we see prices today, that could likely go down rather than go up, but it will be very dependent on how the prices and how the commodity prices react during the year.

We take our next question from Sashank Lanka from Bank of America.

My question is related to your CapEx plan. I recollect on the 3Q earnings presentation, you spoke about almost QAR 2.5 million related to the Ammonia 7 plant. You did give us a cash flow split as well. I don't see that in here. Is that -- are you still going ahead with that project because this presentation only has maintenance CapEx when it comes to QAFCO.