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

Good day, and welcome to the Industries Qatar IQCD Q3 2020 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. Hi, hello, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Industries Qatar's Third Quarter and 9 Months 2020 Results Conference Call. So on this call from QP's Privatized Companies Affairs Group, we have Abdulla Al-Hay, who's the Assistant Manager in Financial Operations; Riaz Khan, who is the Head of Investor Relations and Communications. Like usual, we will conduct this conference with management first reviewing the company's results followed by a brief Q&A. I would like to turn the call over now to Riaz. Riaz, please go ahead.

Thank you, Bobby. Good afternoon, and thank you all for joining us. Hope you're all staying safe. Before we go into the business and performance updates, I would like to mention that this call is purely for the investors of IQ and no media representatives should be participating in this call. Moreover, please note that this call is subject to IQ's disclaimer statements as detailed on Slide #2 of the IR deck. Moving on to the call. On October 27, IQ released its results for the third quarter of 2020. 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. Abdulla Al-Hay, Assistant Manager, Financial Operations. 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. Secondly, Mr. Abdulla Al-Hay 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 being the second-largest shareholder with more than 21% stake. As detailed on Slide #4, IQ is credit-rated by S&P with A+ and Moody's with A1 credit rating, both with a stable outlook. QP, being the main shareholder of IQ, provides most of the head office functions through a service level agreement. The operations of IQ group companies are independently managed by its respective Board of Directors, along with 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 47 and 48 of the IR deck, which covers various aspects of IQ's Code of Corporate Governance in detail. I will now hand over to Mr. Abdulla Al-Hay.

[Foreign Language] Thank you, Riaz. Good afternoon, and thank you all for joining us. To start with, IQ business performance for the first 9 months of 2020 is a pure reflection of challenging macroeconomic transitions, where an overall decline of 48% in terms of bottom line profitability was noted in comparison to the same period last year as reflected on Slide #13. Here, before we go to deep dive into our financial results, I would like to mention that the profitability and all the financial results discussed here are normalized after considering 25% profit from QAFCO, whereas in line with the requirement of IFRS, the 25% of QAFCO net profit has been reported as part of retained earnings in the published financial statement for the period ended 30 September 2020. The financial performance was impacted by uncontrollable external factors continued from 2019, such as slowdown in the global economies, limited GDP growth, along with the unprecedented threat of the COVID-19 pandemic and the ongoing volatility in the oil price. All of these factors directly translated to an increased pressure on commodity price for our products. At the group level, the blended selling price declined by 10% year-on-year basis and contributed to a QAR 900 million decline in the group earnings for the 9 months of 2020 as you can see on Slide #14. As detailed on Slide #12, the sales volume at the group level declined by 20% compared to the 9 months of 2019. The decline in sales volume was mainly due to the changing in QAFCO train 1 to 4 gas and sales operating agreements and mothballing of certain steel facilities, starting from Q2 2020. The group production level were down on 9 months of 2019 by 6%. This decline was mainly attributed to the periodic planned maintenance and a plant shutdown and mothballing of certain steel facilities, although this was partially offset by an increase in volume related to QAFCO 25% stake acquisition effective from 1 January 2020. In addition, as detailed on Slide #14, profitability was negatively impacted due to recognition of one-off impairment losses of QAR 1.2 billion related to steel segment's mothballing of certain facilities in Qatar and by QAR 153 million of impairment losses in the QMC. This was mainly offset on recognition of one-off fair value gain of QAR 1.2 billion of revaluation of 75% in Qatar Fertiliser Company on account of QAFCO acquisition. As detailed on Slide #42 until 45, in response to containing the threat of COVID-19, measures were taken to monitor the fluctuating business condition and threats posed by this threat of COVID-19 with a specific focus on protecting employees, assets and operations. Production volume was not affected by COVID-19 as there were no plant stoppage due to any demand-related reasons and COVID-19 threat, except for the planned shutdown of MTBE facility for a short period during Q2 2020 for 57 days due to commercial reasons. The MTBE facility is now back in operations, where the impact to the group in relation to the temporary shutdown of MTBE facility has remained immaterial, considering its overall contribution to the group volume. Also, on the current distressed situation, with relentless effort of our sales and marketing partner, the group ensured that all the steel contracts are efficiently and effectively secured and minimized the disruptions of marketing, warehousing and logistics. Moving into quarterly performance. Compared to the second quarter of 2020, the group revenue, normalized net profit increased by 22% and 50%, respectively. The recovery was mainly attributed to the improved product price in the current quarter. This sequential increase in the price across key products was noted on the back of a crude price recovery, supply shortage due to back-to-back hurricanes in U.S. causing disruption for many producers and an overall deferral of new capacity additions and uncertainties as a result of this threat of COVID-19 pandemic. On the demand side, recent recoveries were evident amid continuous, unprecedented stimulus and lifting of lockdown in major markets. Operating costs also have generally declined in line with the optimization initiatives implemented across the group. Production volume also improved during the quarter as there were no major shutdown during the quarter. Moving to the balance sheet. That remains healthy with liquidity at the end of September 2020 remaining robust with no debt to the group balance sheet, including QAR 8.8 billion in cash and bank balances. Despite the challenging macroeconomic conditions, IQ free cash flow generation capability remains robust. And the group generated QAR 2.1 billion in terms of free cash flow for the 9-month period ended September 2020 as detailed on Slide #13 of the IR deck. Before we go into the segmental update, I would like to highlight some of the key initiatives, as detailed on Slide 40, which the group has taken to ensure our resilience in these challenging macroeconomic situations. These measures, including optimization of human resource structure; reducing direct costs in relation to utilities and maintenance; reducing non-production-related expenditures, including sales, marketing, corporate and administrative expenses. Similarly, the group reviewed its CapEx program across all the segments and identified CapEx items that can be either be avoided or deferred without affecting the overall quality, safety, environmental aspects and reliability of the operations. On an overall basis, our best case strategy will continue to focus on market development, focusing on capturing the new markets, creating market arbitrages and bring logistical cost savings to the group. We will also continue to focus on productivity and efficiency gains via ongoing cost optimization program. Now I will hand over to Riaz Khan to cover the segmental performance.

Thank you, Abdulla. I will start with petrochemicals segment. As detailed on Slide 24, the overall profitability of the segment has remained under pressure with an overall decline in the bottom line earnings of 38% compared to the 9 months of 2019. This was mainly due to the softening demand for petrochemical products in key markets, excess capacities, combined with unprecedented dual headwinds of COVID-19 outbreak and oil price decline. Because of these external factors, the blended prices in the petchem segment declined by 20% and mainly led to a decline in the segment revenues, which declined by 18% compared to 9 months of 2019. Sales volumes marginally increased by 2% compared to the same period last year. Production volumes slightly increased by 2% as the segment had lesser number of shutdowns during the year 2020 compared to the last year. In terms of segment revenue by geography, as detailed on Slide 25, Asia remains the main market for PE and MTBE products, whereas Indian subcontinent remains a key market for methanol and PE. Moving on to the fertilizer segment. As detailed on Slide #29, the bottom line profitability declined by 25% year-on-year basis on the back of overall decline in revenues and impairment provisions booked for QMC. The decline in revenue of 6% was mainly due to the overall decline in selling prices and change in revenue recognition methodology due to a temporary sales and operating arrangement for QAFCO trains 1 to 4 until 31st of July 2020. Before we go further, I must update you that during the period, the group successfully completed the acquisition of 25% stake in QAFCO at a purchase consideration of USD 1 billion with effect from 1st of January 2020. With this acquisition, IQ now controls QAFCO with 100% ownership. For the 9 months period ended 30 September 2020, the additional 25% stake in QAFCO added QAR 111 million and QAR 313.5 million to the group's normalized net earnings and free cash flows, respectively. As part of the bundled deal with effect from 1st of August 2020, QAFCO has entered into a new GSPA with Qatar Petroleum for a period until 31st of December 2035, covering the gas requirements of QAFCO trains 1 to 6 and QMC. In addition, as part of the same transaction, QAFCO acquired QP's 40% stake in QMC effective 1st of July 2020 for a purchase consideration of QAR 109 million. The new GSPA has more favorable and flexible terms when compared to the old agreements. It is expected that the new GSPA would support QAFCO during lower economic cycles and bring additional financial benefits to the group, driven by improved profitability margins. In terms of segment revenue by geography, as detailed on Slide 30, North and South Americas remain the main market for our fertilizer segment, along with Indian subcontinent in Asia. Now let's discuss steel segment, where you may refer to Slides 32 until 36. During 2020, the steel segment reported a net loss of QAR 1.37 billion for the 9 months of 30 September 2020, compared to a net profit of QAR 158 million for the same period of 2019. Selling prices remained flat compared to the 9 months of 2019, whereas sales volumes have declined against a backdrop of softened local demand as many large infrastructure projects in Qatar neared or reached completion stage. This was coupled with management's decision of mothballing certain facilities in Qatar with an intention to cater local sector demand as against the international demand amid higher competition and declining margins internationally. Nevertheless, near- to medium-term prospects of the steel segment remain domestically encouraging. The operating costs remained higher as the segment sold some of the expensive inventories carried forward from the previous periods. This was offset by OpEx savings on account of facility mothballing and optimization initiatives recently implemented. The overall revenue was down by 37% on the back of decline in volumes, sales volumes. In terms of quarter-on-quarter profitability within the segment, a recovery of 134% was noted when excluding the effect of one-off impairments from Q2 '20 results. This was mainly due to better margins available in the local market with management's decision to concentrate in local market, along with the realizations on account of new optimization initiatives started since Q2 '20. In terms of segment revenue by geography, as detailed on Slide 33, Qatar, along with Asia and Middle East, remains the key market for the segment. Moving on to the Slide 38 relating to CapEx. An important point to note here that cash flow and CapEx figures for the year 2020 until '24 are based on 2020 approved budget and business plan, which was based on expectations of the market conditions and commodity prices prevailing in the start of the year. With current market conditions and commodity price trends, the forecasted details on the slide cannot be relied on with absolute certainty, where the actual realizations of these figures might significantly differ as compared to these projections. Now we will open the floor for the Q&A session.

[Operator Instructions]

This is Bobby Sarkar again. While we are waiting for questions from the audience, can I just get started with a few small questions of my own? I have four. For the QMC Qatar melamine, I see that you paid QAR 109 million and you promptly wrote down QAR 153 million. So what is the current book value for QMC? Or is that substantially impaired? That's my question one. Should I go through my questions? Or would you prefer to answer one-by-one?

Yes. I can take your question of the QMC. Actually, the acquisition of QMC of QAR 109 million was based on the deal that we're going to buy the QMC based on the book value. So the book value was QAR 109 million at that time. And this is recent -- this is based on 1st of August.

Okay. So the book value is currently QAR 109 million.

Yes.

Okay. For QAFCO, I see -- I was kind of surprised to see that the 25% still being reflected in your equity account and not in your P&L for the third quarter. Do we expect to see a similar trend in the fourth quarter? When are we going to see the 100% of QAFCO net income being reflected in your P&L?

To be honest, we are in discussion with our internal auditor because we have discussed both options, and we got an opinion from the international office of the internal auditor regarding this matter. So during year-end is that we're going to see the 100% reflection of QAFCO in the P&L account. Otherwise, the 25% profit will be reflected in the retained earnings. We're still negotiating these 2 options with the auditor -- with our auditor.

Okay. I just have a couple more questions. I see there's no other -- no further revaluation gain for QAFCO, the 25% purchase. I was under the impression there would be some gains to be recorded. Is that still coming in the fourth quarter? Or is that it? And finally, for the steel segment, we keep hearing about this high price inventories flowing through the P&L. Can you give me a sense of how much of this cost inventory is still left in your books yet to be recorded, please?

With regard to the gain value, that's already recognized in our book of QAR 1.2 billion. I did not [indiscernible] there will be any adjustment to that. Maybe we're going to see it during the Q4 at the year-end. However, the gain value recognized is QAR 1.2 billion. With regards to the steel products, which is -- has a high cost, to be honest, we started to get rid of this high cost inventory, where right now, after the mothballing, we started to sell from our recent project on the steel segment. So hopefully, during Q4, you will not see this high cost of product in the steel.

Okay. Great. Thank you, Abdulla. Operator, we can open up the call for Q&A.

[Operator Instructions] Our first question today comes from Belal Sabbah from Jadwa Investment.

Two questions from my end, please. You've mentioned that the acquisition of the 25% stake in QAFCO increased free cash flows for the 9 months by QAR 313 million. Could you please give us a bit more granularity on that? Could you give us the breakdown in that free cash flow calculation? And I just want to understand, this is actual free cash flow that's been calculated retroactively? Or is this an estimate for what it would have been if the acquisition had taken place from the start of the year? My second question, please, would be on the steel segment. You've done a lot of efforts to mothball the international capacity and focus on local sales. And you've mentioned some cost efficiency initiatives. Are there more cost efficiency initiatives to be taking place going forward? Can we expect more cost savings beyond the -- or is it just the change in the sales mix towards local sales?

With regard to the mothballing of the steel, I will start with your second question regarding additional initiatives. Of course, we will be looking at optimizing our costs. Maybe we're going to look at our different costs so that -- like if we can enhance our costing of feedstock. However, the mothballing itself made a big difference in our costing calculation. So we're going to be in an ongoing situation where we try to improve our costing. With regard to your first question regarding the acquisition, are you referring to a slide in our IR presentation of this QAR 300 million? So -- or it's based on...

Yes, I believe that -- I believe it's on Slide 15.

Yes. Abdulla, if you want me to jump in here. So basically, these free cash flow relates to the period from 1st of January 2020 until 30th of September 2020. And this is an estimate which we calculated based on the profitability of the 25% stake in QAFCO from the inception, that is 1st of January 2020. So the free cash flows of QAR 313.5 million represents 9 months period. Major ingredient here, it's basically again your profitability, which we already disclosed in the IR deck. It's almost QAR 111 million for first 9 months. And then there is a big chunk of depreciation, which gets loaded back towards the cash flow generation calculations.

[Operator Instructions] Our next question comes from Faisal Al Azmeh from Goldman Sachs.

Three questions, if I may. Maybe firstly, when looking at Slide 17, QAFCO utilization rates declined to 92% in the third quarter versus almost 100% when you look at the average in Q1 and Q2. Just trying to understand what drove this decline in Q3. And then maybe when moving on to Slide 31 and when looking at the potential volumes that you -- that QAFCO is likely to set on a quarterly basis, is it safe to assume that the healthy run rates for QAFCO could be closer to 1.4 million or 1.5 million tons a quarter compared to the 1,043,000 tons that you've sold in Q3? And then finally, if you can share the quarter's average blended natural gas price for the group compared to where it was last year.

Okay. I will start with your last question. Previously, we were announcing that the average blended feedstock gas price were around $3.2. Right now, after we have this new gas agreement, that affected our average and it went down to $2.6. This $2.6 rate is reflected during our Q2 and Q3. With regard to your first question, I believe you have mixed between QAFCO and Qatar Steel Rebar. So are you sure that you looked at QAFCO one, the green one? Because the utilization is almost the same. However, if you are referring to Qatar...

Yes. So if you're looking at QAFCO Q3 numbers, it's 91.8%. You look at QAFCO in Q1 and Q2, it's 103% and 98%. So I'm just wondering what drove the utilization rate lower to 91.8% in Q3? And then my final question...

I'm not following you in the same slide. I know -- I don't know if you are on the same slide. You are on Slide #17? QAFCO for the Q.

Yes, slide 17. Yes, that one in green was 100 -- yes, in Q1 '20 and Q2 '20, it was 103% and it was 98%. Then it went down to 91.80%.

Yes. So it's not a big difference, to be honest. And there will be like a planned or unplanned shutdown related to maintenance, so this is...

And which leads me to my final question on Slide 31. If we look at how much volumes you've sold in Q3, which is 1,043,000 tons, I'm guessing with the higher ownership and if you operate at 100%, is it safe to assume that you'd be able to achieve 1.4 million tons a quarter or 1.5 million tons a quarter? Is that something that could be targeted for Q4 and on average next year for urea?

Q3 here is what we have presented. This is -- when you see the Q3 for the urea, this is 100% of the consideration of the QAFCO. Are we expecting to sell more? We are running on the almost 100% of our utilization and we sell whatever we sold. So I don't know if we will be able to sell like 1.5 million on the next quarter.

Well, I mean, you have 6 million tons of urea capacity, which is -- which should put you at a quarterly rate of 1.4 million to 1.5 million. So my question is, are we -- should we expect a meaningful improvement in volumes sold on average next year?

Hopefully because we have owned an additional 25% and we usually sell all of our products. So hopefully, this number will get improved.

[Operator Instructions] Our next question comes from Sashank Lanka from Bank of America.

I have three questions. First question is on the steel segment. When I look at Slide 17, you operated at an average utilization rate of 86.8% during 3Q '20. I think in 2Q, you were close to 61%. So I'm just trying to understand, is this like-for-like numbers that we are looking at in Q2 and Q3? And how does the Q3 operating rate compare versus Q3 '19, assuming the same capacity, that is post the mothballing that took place? That's my first question.

Okay. So the Q2 '20 is reflecting the mothballing of the -- so the capacity went down. And in Q3, we consider the current utilization as 100%. Riaz, you can also jump in whenever you want.

Yes. Basically, in terms of 61.4%, when you compare 61.4% with 87% in Q3, the uplift is because there was a shutdown, a plant shutdown in Q2 happened, along with the mothballing, which we are discussing everywhere. So that decline was one-off, the 61.4% which you are seeing. So -- and the numbers, I have mentioned it here on the slide, starting from Q2, we are considering the capacities after cutting off the mothballing effect.