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

Good day, and welcome to the Industries Qatar Q4 2020 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Bobby Sarkar. Please go ahead, sir.

Hi. Hello, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Industries Qatar's Fourth Quarter and Fiscal Year 2020 Results Conference Call. So on this call from QP's Privatized Company Affairs Group, we have Mohammed Al-Sulaiti, who is the Manager in Privatized Affairs; Abdulla Al-Hay, who's the Assistant Manager in Financial Operations; and Riaz Khan, who is the Head of Investor Relations and Communications. So we will conduct this conference with, first, management briefly reviewing the company's results followed by a 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 are 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 Feb 8, IQ released its results for the year ended December 31, 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. Mohammed Al-Sulaiti, Manager, Privatized Companies Affairs QP; and Mr. Abdulla Al-Hay, Assistant Manager, Financial Operations. We have structured our call as follows. At first, I will provide you with a quick insight on IQ's ownership structure, competitive advantages, overall governance and BOD structure. Secondly, Mr. Abdulla will brief you on IQ's key operational and financial performance metrics. And 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 higher debt, 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 with a stable outlook. Qatar Petroleum, 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 as detailed on Slide #6 of the IR presentation. In terms of competitive advantages, as detailed on Slide #7, the group is well positioned with several competitive advantages. It possesses strategically, operationally as well as financially. These competitive advantages includes: an efficient and well-maintained asset base; a qualified and highly trained workforce; assured feedstock supply, along with competitively priced energy contracts; lower operating cost; a dedicated marketing team in form of Muntajat to market the group's petrochemicals and fertilizers products; and most importantly, a well-experienced senior management team. These competitive advantages are not only aiding the group to mitigate the threats enforced by the depressed macroeconomic conditions, but also keeps us well ahead of the competition and assures IQ's resilience in these difficult economic times while maintaining healthy EBITDA margins and generating strong free cash flows. In terms of governance structure of IQ, you may refer to Slides 42 and 43 of the IR deck, which covers various aspects of IQ's code of corporate governance in detail. I will now hand over to Abdulla.

Salaam-Alaikum. Thank you, Riaz. Good afternoon, and thank you all for joining us. To start with, IQ business performance for the financial year 2020 is a pure reflection of the challenging macroeconomic condition where an overall decline of 19% in term of bottom line profitability was noted in comparison to the same period last year as detailed on Slide #13. Here, before we go deep dive into our 2020 financial results, I would like to mention that 2020 profitability and all the financial results discussed here are normalized after considering 25% profit from QAFCO for the first 9 months period ended 30 September 2020 amounting to QAR 113 million, whereas the same was considered as part of retained earnings directly within the statement of change in equity in 2020 published financial statements prepared in line with the required of IFRS. The financial performance was impacted by uncontrollable external factors carried forward from last year, such as slowdown in the global economy, limited GDP growth and continued trade tensions. These macroeconomic adversities were further augmented in dual macro headwinds in form of unprecedented spread of COVID-19 pandemic, which affected our products' demand due to geographic lockdown and ongoing volatilities in oil prices. All of these external factors directly translated to an increase in pressure on competitive prices for our products. At the group level, the blended selling price declined by 7% year-on-year basis and contributed to a QAR 622 million decline in the group net earning for the year 2020 as you can see on the Slide #14. As detailed on Slide #12, sales volume at the group level also declined by 17% compared to last year. The decline in sales volume was mainly attributed to the changes in QAFCO train 1 to 4 gas sales and operating agreement and net borrowings of certain steel facility starting from Q2 2020. Also, the decline was attributed to the lower production level and PE and MTBE facilities due to maintenance shutdowns. There was partial offset due to increased volume related to QAFCO 25% acquisition. The decline in sales volume contributed QAR 2.5 billion decline in the group net earnings for the year 2020 as you can see on Slide #14. The group production level were down on 2019 by 8%. This decline was mainly attributed to the periodic plant maintenance and a planned shutdown and mothballing of certain steel facilities, this was partially offset by an increase volumes related to QAFCO 25% stake acquisition effective from January 1, 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 mothballing of certain facility in Qatar and 133 -- QAR 153 million of impairment losses in QMC. This was mainly offset on recognition of one-off fair value and bargain purchase gain of QAR 1.4 billion, which have been booked in line with the requirement of IFRS when accounting for the effects of transition from equity accounting to consolidation of QAFCO 100% stake and completion of the acquisition of 25% minority stake in QAFCO. In response to certain -- the spread of COVID-19, measures were taken to monitor the fluctuating business conditions and the threat post COVID discovered of COVID-19 was a specific focus on protecting employees, assets and operations. The group remained successfully in implementing these measures as there were no plant stoppage due to any demand-related reasons associated with COVID-19 pandemic, except for a planned shutdown of MTBE facilities for a certain period during Q2 and Q4 2020 due to commercial reasons. The impact of the growth in relation to these temporary shutdown of MTBE facility has remained immaterial considering its overall contribution to the group volumes. Also in the current distressed situation, with the relentless effort of our sales and marketing partner, the group ensured that all the sale contracted are effectively and efficiently secured and minimized the disruptions to the marketing, warehousing and logistics. Move into the quarterly performance. Compared to the third quarter of 2020, the group revenue has normalized net profit increased by 27% and 112%, respectively. The recovery was mainly due to continued positive crude price trajectory, supply shortage and demand recoveries and further easing of lockdown along with the vaccine optimism. The profit improvement was also contributed by the recognition of the additional fair value bargain purchase gain amounted to QAR 246 million after recognizing an initial gain of QAR 1.16 billion in the previous 9 months, which was partially offset by an additional depreciation charges of QAR 199 million on account of QAFCO purchase price allocation exercise. Moving on the balance sheet that remained healthy with liquidity at the end of December 2020, remain robust with no long-term debt on the group's balance sheet, including QAR 9.8 billion in cash and bank financing. Despite the challenging macroeconomic condition, IQ free cash flow generation capability remained robust, and the group generated QAR 2.8 billion in term of free cash flow for the financial year 2020 as detailed on Slide #15 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 #14, which the group taken to ensure our resilience in challenging macroeconomic situation. These measures, including optimizing human resources structure, reducing direct costs in relation to utilities and maintenance, reducing non projects -- reducing nonproduction-related expenditure, including sale, marketing, corporate and administrative expenses, similarly, the group reviewed that CapEx program across all the segments and identified CapEx item that can either be avoided or deferred without affecting overall quality, safety, environmental aspects and reliability of the operations. For the year 2020, the group managed to further reduce the overall controllable fixed operating expenditure by 2%. On overall basis, our base case strategy will continue to focus on market development, focusing on capturing new markets, creating market arbitrages and the bank logistic cost savings in the group. We will also continue to focus on productivity and efficiency gained via the long ongoing cost optimization program. I will now 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 bottom line earnings by 19% compared to last year. This was mainly due to softening demand for petrochemical products in key markets, excess capacities, combined with unprecedented dual headwinds in form of COVID-19 outbreak and oil price decline. Because of these external factors, the blended product prices in the petchem segment declined by 12% and mainly led to a decline in segmental revenues by 9% compared to last year. The sales volumes were marginally up by 3% compared to last year, mainly on the back of production volumes, which also increased by 4% as the segment had less number of shutdowns during the year. On a quarter-on-quarter basis, the segment reported a net profit of QAR 441 million for the fourth quarter of 2020 with a significant uplift of 40% versus third quarter of 2020. This increase was predominantly driven by notable increase in product prices, especially polyethylene prices. Specifically, LDPE and LLDPE have recovered significantly due to elevated macroeconomic sentiments with notable optimism. Sales volumes for the fourth quarter have also improved against a backdrop of renewed demand and increased by 4%. In terms of segment revenue by geography as detailed on Slide #25, Asia remains the main market for PE and MTBE. Whereas Indian subcontinent remains a key market for methanol and PE. Moving on to the Fertilizers segment as detailed on Slide 29. The bottom line profitability on a normalized basis improved by 3% year-on-year, mainly due to the effect of acquisition of QAFCO's 25% stake with effect from January 1, 2020. The segment profitability was also impacted due to an impairment loss booked amounting to QAR 153 million in relation to QMC facilities. Average selling prices were down on last year by 6% due to weak seasonal demand, which outweighed the gradual easing of supply-side bottlenecks. Sales volumes were down by 7% due to the temporary gas processing arrangement for QAFCO trains 1 to 4, which remained enacted until July 31, 2020, wherein the related sales volumes were not recorded as part of the segmental volumes. Additionally, the sales volumes were also affected due to unplanned maintenance shutdowns during the year. This reduction was partially offset by additional volumes booked due to the acquisition of 25% stake in QAFCO and booking of 100% sales volumes for QAFCO trains 1 to 4, starting from first of August 1, 2020 under the new GSPA. Segmental revenue reached QAR 4.4 billion, up by 3% compared to 2019, mainly due to booking of revenues from QAFCO at 100% with effect from January 1, 2020. This was offset by decline in selling prices and change in revenue recognition methodology due to temporary gas processing arrangement of QAFCO trains 1 to 4 applicable for the first 7 months of 2020. Production volumes, significantly up by 34% versus 2019 as a result of additional volumes relating to 25% stake in QAFCO. Production, excluding the impact of acquisition, remained flat despite the segment experienced some interruptions in terms of unplanned maintenance shutdowns during second half of 2020. Net profit for the fourth quarter of 2020 reached QAR 444 million, significantly increased compared to the third quarter of 2020. This increase was primarily driven by improved fertilizer price levels in Q4, together with marked uplift in the sales volumes. While booking of QMC-related impairment losses in Q3 also contributed positively towards the overall growth in profits for Q4. Selling price pickup was against a backdrop of limited supply in China due to winter supply cuts as well as demand pickup in U.S. ahead of its spring season while the demand from India remained on a higher side throughout the year. Sales volumes, on the other hand, grew by 44% versus the previous quarter as the full effect of the new GSPA contributed positively towards the volume growth, along with the increased operating rates and a general uplift in the fertilizer demand also played a part. In terms of segment revenue by geography, as detailed on Slide 30, North and South America remains the main market for fertilizer segment, along with Indian subcontinent and Asia. Now let's discuss the steel segment where you may refer to Slides 32 till 36. During 2020, the steel segment reported a net loss of QAR 1.3 billion for the financial year 2020 compared to a net profit of QAR 36 million for the last year. Selling prices improved by 6% in 2020 compared to last year due to management's decision to predominantly cater local demand from the start of Q2 as the prices of steel tend to be higher in the domestic market than internationally. Sales volumes have also declined due to management's decision of mothballing certain facilities and reduce the nameplate capacity from 1.8 million metric tons of rebars per annum to 800,000 metric tons of rebar per annum. The operating cost 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. On an overall basis, segment revenue was down by 41% on the back of decline in sales volumes. The segment reported a net profit of QAR 49.6 million for the fourth quarter of 2020, an increase of 90% versus the third quarter of 2020. This improvement was driven by a combined effect of significant increase in sales volumes and selling prices. Sales volumes have improved by 22% on Q3 while average selling prices have marginally improved by 1% versus the previous quarter. In terms of segment revenue by geography as detailed on Slide #33. Qatar, along with Asia and Middle East, are the key markets for the segment. Moving on to the Slide 38. An important point to note here that cash flow and CapEx figures for the years 2021 till '25 are based on latest budgets and business plans approved, which was based on the expectations of the market conditions and commodity prices prevailing at the time of finalizing these budgets. With current market conditions and fluctuation -- fluctuating commodity price trends, the forecast as detailed on this slide cannot be relied on with absolute certainty, where the actual realizations might significantly differ as compared to these projections. Now we will open the floor for the Q&A session.

[Operator Instructions] We'll take our first question from Mohammed Al-Thunayan from Jadwa Investment.

Yes. First of all, congratulations on the set of results that you announced in the fourth quarter and the full year of 2020 despite several challenges witnessed during the year. I have 3 main questions. The first one is regarding I think please explain the QAR 199 million in additional depreciation during the fourth quarter, which was related to the PPAE advance cap. And more importantly, should we treat this as a onetime? Or will this significantly increase next year's depreciation? And if you could share the approximate depreciation figure for next year versus this year, that would be appreciated.

Okay. You want to go question by question?

Yes. After this, we can take this question.

Okay. This QAR 199 million, basically do -- when we conducted the purchase price allocation exercise and we completed the acquisition of the minority stake of 25% stake due to the deal terms of the assets depreciation for this minority need to be booked at the head office level. And this depreciation will be continued until the term of the acquisition for the next 16 years. So it will be something continued.

So we should expect an increase in depreciation by QAR 199 million a year going forward?

This one for 2020. I cannot give you a exact figure for the next year. However, the depreciation will be continuing. I just note that here, if you have a particular number in mind for future years?

Not really. No [indiscernible].

This will continue for the term period around that number would be there but we cannot give the exact number. It depends upon the moment in the asset also.

Okay. Okay. Clear.

Should we expect any further revaluation of the assets going forward?

We don't expect any further revaluation of the assets and if something different happens in the market related to the product price or something else. However, as of now, we are satisfied with this evaluation.

Sure. We note that CapEx as there in the presentation for 2021 till 2025 is approximately QAR 5.2 billion. While the company has significantly more cash on the balance sheet, QAR 8.8 billion as at the end of 2020. Are there any CapEx or expansion plans going forward? Or the company will qualify dividends going forward for the excess cash that we generate?

Every year, we are reviewing our budget and business plan where we do see an opportunity for any CapEx projects. However, due to the macroeconomic situation as of now, all the CapEx that we have seen, which was the recent approved CapEx, we've then very carefully selected our CapEx item, just -- and we have deferred all the unnecessary CapEx project that does not -- and in consideration without comprising to the aim of safety and environment.

Maybe just to add just to add on to just answer. There are several say CapEx-related investments that are under review. Those are related to possibly what your question was referring to is if there are any capacity increases or any potential investments beyond the current asset base of IQ and its joint ventures and subsidiaries. So there are several investment opportunities. They're all in preliminary phases of review. So what we show in front of you on this page is the approved plan of capital expenditure, which is purely limited to maintenance, CapEx and environmental-related CapEx.

Okay. Can we know which thinking behind [indiscernible] contingency loan in terms of these possible or potential expansion?

Sorry, we cannot hear you very well.

In all segments that you're focusing on in terms of these potential or possible expansion, whether it is in petrochemical, steel or fertilizers?

Well, the only, I'd say, investment now that's on the surfaces and on the table is the first deal of fertilizer.

And Deal Qatar?

Pardon me?

Deal Qatar?

[Foreign Language].

It is a domestic deal, yes.

[Foreign Language].

Sorry?

My last question, which is related to the CapEx that you've shown, we see a significant amount of CapEx will be spent during 2021 and 2022 around QAR 1.5 billion to QAR 1.8 billion. Can you please share with us [indiscernible].

[indiscernible] Okay. Sorry.

Can you share with us...

Guys please, whoever is talking, please mute so we can hear the questions clearly.

Should I repeat the question?

No, no, sorry, but some people are un-muted and that's why we cannot hear you very well.

Yes, sure. Understood. Planned shutdown schedule for 2021 and 2022.

Well, I don't -- I can't really hear the question very well. I'm really sorry for that. But if you can just repeat yourself.

So can you hear me now?