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

Good day, and welcome to the Industries Qatar Q1 2021 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.

Thanks, Diane. Hi. Hello, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Industries Qatar first quarter 2021 results conference call. So on this call from Qatar Petroleum's Privatized Companies Affairs group, we have Abdulla Al-Hay, who is the Assistant Manager for financial operations. And Riaz Khan, who is the Head of Investor Relations and Communications. So as usual, we will conduct this conference with first management in the company's results, followed by a brief Q&A. I would like to turn the call over 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 26th of April, IQ released its results for the 3 months period ended 31st March, 2021. 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 with a quick insight on IQ's ownership and structure, competitive advantages or in overall governance and BOD structure. Secondly, Abdulla will brief you on IQ's key operation and financial performance metrics. Later, I will provide you with updates on segmental performance. 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% ownership. As detailed on Slide #4, IQ is credit rated by S&P with A+ plus 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 is detailed on Slide #6 of the IR deck. In terms of competitive advantages, as detailed on Slide #7, the group is well positioned with several competitive advantages, it possesses a strategically, operationally as well as financially. These competitive advantages include an efficient and well maintained asset base, a qualified, a highly trained workforce, a short supply of feedstock and competitively priced energy contracts, lower operating cost, a dedicated marketing team in form of Muntajat to market group's petrochemicals and fertilizer products, and most importantly, a well experienced senior management team. In terms of governance structure of IQ, you may refer to slides 43 and 44 of the IR deck, which covers various aspects of IQ's code of corporate governance in detail. I will now hand over to Abdulla.

Thank you, Riaz, as-salaam-alaikum. Good afternoon, and thank you all for joining us. During the first quarter of 2021, the group benefited from a strong economic recovery, clubbed with supply constraints resulted in improved price level, which translated into an improved set of financial results. For the 3 months period ended March 31, 2021, the group recorded a net profit of QAR 1.5 billion as compared to QAR 0.3 billion for Q1 2020, up by 478% as detailed on Slide #13. Group improved financial performance for Q1 2020 versus Q1 '20 was largely attributed to the improved product price, which was, on average, inclined by 21% compared to Q1 '20 and translated into -- and increase of QAR 1 billion and they grew bottom line earnings, as you can see on Slide #14. Sales volume were also furthered by 16% versus Q1 2020, mainly driven by sales volume relating to QAFCO trains 1-4 were reported as of Q1 2020 volumes, which was not the case in the Q1 2020 as QAFCO was operating under temporarily gas processing arrangement and did not recognize sales volume in relation to QAFCO trains 1-4 for the first 7 months for the financial year of 2020. Nevertheless, the improvement in the sales volume were offset to an extent by the reduction of volume during Q1 2020 due to the mothballing of steel facilities, commercial shutdown and fuel additives facility and the planned shutdown of certain facilities and fertilizer segments. As you can see on Slide #14, the overall growth and sales volume contributed by QAR 200 million positively to the current period bottom line earning versus Q1 2020. The overall growth in selling costs and sales volume lift to on overall growth and revenue for the group which increased by 28% in Q1 2020 versus Q1 2020 to reach to QAR 4.2 billion. As the sales on Slide #12, the group production levels were down on Q1 2020 by 20%. This decline was mainly attributed to the mothballing of certain steel facility which was started since mid of 2020, periodic maintenance shutdown at certain QAFCO Facility, train 1-4 and commercial shutdown at MTBE facility. Moving on quarter-on-quarter performance compared to the first quarter of 2020, the group revenue improved by 27%, while the net profit improved by 43%. The key contributor towards the growth was the overall increase in average selling price, which continued its positive trajectory on the back of improved macroeconomic sentiment and supply challenges. Selling prices increased by 27% in Q1 2020 versus the Q4 '20. Sales volume on the other hand, remained the flat versus yes last quarter. Our robust business model and the strength of our global supply chain continues to leverage our resilience and provide flexibility to our operations whereas our continued positive of being a low-cost operator ensured our competitor edge and added to generate one of the strongest quarterly performance over the last 5 years. Moreover, as detailed on Slide #16. IQ's EBITDA margin continued remained robust. This is testament to the group cost management and cash consultation capabilities with an ability to maintain its cash flows despite volatile current and commodity prices. Also, we continued to build our strong financial positions with improved cash flow generation capability as the group generated QAR 1.8 billion, in term of the free cash flow for the Quarter 1, 2021, as detailed on Slide #15 of the IR deck. On overall basis, our base case strategy will continue to focus on market development, focusing on capturing new markets, creating the market are the projects and the brand logistic cost saving to the group. We will also continue to focus on productivity and efficiency gains by ongoing cost optimization program. I will now hand over to Mr. Riaz to cover the segmental performance.

Thank you, Abdulla. I will start with Petrochemicals segment. As detailed on Slide 24. Performance of the petchem segment improved with a net profit of QAR 608 million for Q1 '21, with an increase of almost 400% versus Q1 '21 -- Q1 '20. This notable increase in profits was primarily driven by improved product prices on the back of improved demand for petrochemical products due to better macroeconomic conditions, while supply remained constrained throughout the period. Segment's blended product prices rose by 41% versus Q1 '20, while sales volumes were marginally up by 2%, compared to the same period last year. The growth in product prices, coupled with sales volumes led to an overall rise in revenues by 45% within the segment to reach QAR 1.4 billion for the current period. Production volumes were up on Q1 '20 as the segment had higher operating days during the current quarter compared to that of the last year's. As detailed on Slide 25, segment's EBITDA margins continue to remain on a positive trajectory. 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 30, the segment reported a net profit of QAR 595 million for Q1 21 with more than 200% increase versus last year. This increase was mainly driven by growth in revenues, which increased by 55% in the current quarter versus last year to reach QAR 1.6 billion. Selling prices also improved by 39% versus Q1 '20, which reflected positively on the segmental performance. Sales volumes increased by 55% in comparison to Q1 '20. On the other hand, production volumes within the segment were down by 10% versus Q1 '20 as QAFCO trains 1-4 underwent higher number of days of maintenance shutdowns during the period as compared to the same period last year. As detailed on Slide #31, segments, EBITDA margins continue to remain robust. In terms of segment revenue by geography, as detailed on Slide 32, North and South Americas remain main market for fertilizer segment, along with Indian subcontinent and Asia. Now let's discuss the Steel segment, and you may refer to slides 34 till 39. During the quarter, the Steel segment continued its profit-making trajectory after having a difficult first half of 2020. And following the strategic restructuring initiatives implemented. The net profit for the current period amounted to QAR 259 million versus a net loss of QAR 88 million in Q1 '20. On overall basis, segmental revenues was moderately down by 6%, mainly on the back of decline in sales volumes, which declined by 23% due to management's decision to mothball certain steel facilities. On the other hand, selling prices improved by 20% during the current period versus Q1 '20 due to increase in demand, along with higher raw material costs internationally. Mothballing of certain steel facilities, along with the segments, allowed the segment to primarily focus on profitable domestic market, which led to adjust its cost base. Moreover, due to improvement in international prices, the segment was also able to sell some of the quantities outside the domestic market. Furthermore, by changing raw material mix, the segment reduced its cost without affecting the quality of the final product. All of this led to a strong sequential recovery in EBITDA margins as detailed on Slide 37. Now we will open the floor for the Q&A session.

[Operator Instructions] We will take our first question from Belal Sabbah with Jadwa Investment.

Congratulations on a strong set of results. I was wondering if you can give us a bit more clarity on the Steel segment? Was there steel being sold to international markets? And what's the current difference between international prices versus local? And does the current environment making you consider recommissioning the mothballed plans?

You want to ask another question or this is your only question?

One more question, please, if you can give some feedback on the specific shutdowns that happened during the quarter. Specifically in which segments or trains did it happened? And is there any update on the shutdown plans for the remainder of the year?

Regarding the Steel segment. As you are aware, we have taken the decision last year to mothball our facility and to focus on only local sales. To be honest, this decision was -- are really excellent position -- decision where we have shifted our unit from making losses, so at end of that generate profit. Selling on a local price right now, this is what we are looking for. However, during the last 2 months of the Q1 we have seen also an improvement of the steel price in the GCC countries. We have sold some of our products in the Kuwait and Oman, where the pricing was attractive. However, our main focus in local prices. Our local prices was much more better than the international prices. However, right now, with the improvement and the growth in the macroeconomic, the -- we started to have very competitive price with the international prices, which is also improved by 20% as we have shown in our presentation where also the pricing in the GCC countries improved as well. So we have sold some of our steel products to Kuwait and Oman. I hope I have answered your question regarding to the steel. You have the second also -- you have the second part, if we are going to go back to our full capacity, maybe. Right now, at this time and at this stage, we are not looking for -- to go for a full capacity until we have a clarity on the macroeconomic situation. Still there is uncertainty with what's ongoing on in regards to the COVID situation. However, we see there is a growth. We see there is some of the potential projects is happening in Saudi Arabia. We are willing to cater their need as well. So if we see there is an opportunity to go back to our full capacity, we are not going to stay back. We're going to go. However, we need to make sure our decision is based on -- on a basis. We don't want to hurry right now to take the decision when something is happening, which lead to change the macroeconomic right now, we are satisfied with the result that came from the Steel segment. We reported an excellent positive number, and we are catering all the local sales, okay? In term of -- I hope it is clear to you. I don't know if you want to ask further question...

We can move to the maintenance shutdowns piece.

At this time, we have a planned shutdown in Fertilizer segment due to the normal routine maintenance activity and the train 1-4 only, this is a planned one. So we are doing the planned shutdown on a regular basis. And if you want, I have some of the information related to the even future quarters. We're going to continue having a shutdown during Q2 or Q3 and Q4. However, major of the shutdown can be happening during Q1 and the Q4. Q4 can be exactly on the same level of Q1 shutdown. That's only 38 days in ammonia facility and 34 days in urea facility. Total planned shutdown for both facilities around 210 days, which is not much, to be honest. If you look at QAFCO, for example, the fuel additive. We are conducting a shutdown on MTBE facility due to the commercial requirement where we don't see that the MTBE prices are very low. And took the decision to stop producing the MTBE just to avoid any losses in the QAFCO. And if you compare QAFCO or the fuel additive performance compared to last quarter, also, we are much more improving our performance compared to last year. This is all what I have in terms of shutdowns and fertilizer and fuel additives.

So no shutdowns planned for the petchem segment?

There is a planned shutdown on petchem, very minimal during Q1. We have also shut down in the next fourth quarter, full planned shutdown related to maintenance. Total shutdown will be around 300 days for different facility, the total of shutdowns, which is, again, mainly to the routine maintenance. However, during Q1, we have only about 27 days of planned shutdown with 0 unplanned shutdown.

Yes. Sorry, could you repeat that? So it's -- how many days were in Q1 and how much was the total for the year?

Yes, around -- for total for the year, around 300 days. Q1 right now, we have about 200 and -- Q1, we have about 27 days or 28 days. But number of days here based on facilities, and each facility has where each -- like petrochemical, they have many trains, each train, we calculated their shutdown on that basis selectively.

And we will now take the next question from Meet Bhatt with Axience.

I have 3 questions. The first is with regards to the gas price structure. So I believe, as per the new agreement, what are the terms of the gas prices, which IQ will receive? And what will -- what could be the expected impact on the margins? My another question is with regards to the -- is there any update on the 20% stake buyout of QAFCO? Any color on that? And my last question is with regards to the future outlook in terms of product demand. So right now, India and the subcontinent is facing COVID issues. So do you foresee any slowdown in the demand, at least in the near term?

Regarding the gas price structure, I believe that each and every earning call, we have the same caution. Our gas price structure is the same. We have a fixed number, and we have a formula that linked to the final product price. So fixed plus the variable, which is linked to the final product price as the price is going up, it will go up. As the price is going down, it will go down. There is a [ cat ] in the up and down terms. What is the expected improvement or impact based on the new gas treatment? As you can see, we have an excellent arrangement right now when we have done the -- when we renew the gas agreement, according to fertilizer, our margin improved. So basically, we have an excellent rate right now. Regarding the 20% of QAFCO. To be honest, as we have highlighted before, we have the appetite to look at the investment. However, nothing happened. Still we have the Total as a shareholder, we are -- we don't have any information if Total can continue after the ending of the GBA, which is happening in 2024 or maybe Qatar Petroleum may take this stake or it will -- we don't know if it's going to be offered for sale. However if this 20% going to be offer for sale, we will be interested into that. A future outlook on demand, I can see a that there is a demand, we know the impact of corona is -- that is there. However, the real impact already happened in 2020. So right now, all the business units, all the government and this topic, they know how to deal with this pandemic. So I believe there is a demand. This will not stop our operation. This will not stop the demand and I believe there is a strong demand as well in all of our segments.

[Operator Instructions] We will now take our next question from Faisal Azmeh with Goldman Sachs.

Congratulations on the numbers. Just 2 questions on my end. The first relates to the payout structure. When looking at the payout structure from last year and the year before, it's been quite high. Should we expect that trend to continue this year, given where earnings are? You've had quite a leap in Q1 numbers. And so far, indications are that net income will be substantially higher than last year. Should we think about that high payout ratio as something that can be expected this year? My second question relates to CapEx. When looking at Q1 CapEx, it's -- if you annualize the number, it's well below the budgeted CapEx for the year. Does that mean that you're kind of achieving lower-than-expected CapEx? or should we expect more of that later on in the year?

Faisal, happy Ramzan to you. First question regarding the payout ratio and it's all depends on the performance. Last time in the first quarter, we see a good result. We were also -- we see that there is an improvement in the price. I understand 2020, IQ was very generous. Just we paid you 100% of our earnings. This was for the first time from IQ to pay 100% of their earnings. To be honest, the disposition, it came on the time of the -- when the Board is meeting. They will make the decision based on the market based, on the macroeconomic as well. So I cannot comment on any percentage in this regard. However, what can I comment on, that IQ always looking to increase the value for their shareholder. IQ always looking to take the best decision for their shareholders. Regarding the Q1 CapEx, the way we have presented here, when we budget for all our CapEx requirement, we just take the cost of CapEx, and we just divide it based on 12 months. So maybe there is capital expenditures that may happen in the Q3 or Q4. However, their cost is then allocated during the full year just for reporting purposes. However, there is no CapEx that can defend or -- and it's everything as per the plan.

As there are no further questions at this time. So I would like to turn the conference back to our speakers for any additional or closing remarks.

This is Bobby again. If there are no further questions, I just want to jump in with one question of my own, if I may. Just -- can you just go over in the Steel segment, I see a significant uptick in volume on a quarter-over-quarter basis. What was the reason behind the significant 70%, 80% increase in sales volume from 4Q to 1Q? And then the EBITDA margins are extremely strong. Do you kind of expect a similar trend in EBITDA margins for the rest of the year? Or is this a sustainable EBITDA margin is what am I right to ask for the Steel segment?

If we are talking about the sales volume and the improvement in sales volume, as you are aware, last year, we have different gas processing agreement for the Fertilizer segment. This time, we have a new gas arrangement. So we started to book our sales in Fertilizer. So this is the difference. Last year, we were not recording -- we're not reporting the sales for Fertilizer since the QAFCO were acting as an agent for QP where there is now a different arrangement. This time, we have a new gas processing agreement where we have recorded through the sales.

No. Sorry, just a clarification.

The Fertilizer or which segment?

No, I was talking about steel sales volumes are up 76% quarter-over-quarter.

Steel?

Yes, please.

Okay. Steel sales segment quarter-to-quarter. Let me look at it, from where you get this information from? Okay.

It's 76% from Q4 '20.

Yes.

Yes. So one of the chunk, which I can just add and Abdulla will also confirm this point. That when we were talking about there is some international sales have been made. So that was some portions, which was there in the inventories which we sold. Then that was not only on the rebar side, which is our main product. It was in addition to rebars. We sold DRIs and some billets also. So that also get added in the math from the maths perspective to your sales volumes. So all in all, that's why you see a significant increase in the sales volume number.

And just a follow-up. The EBITDA margin 24% for this quarter. Is this something you think it's sustainable considering the level of prices in iron ore prices? Is this something that we can consider as a base or something to work off?

Bobby, it all depends on the final product price. As you are aware, our production are very lean. We are optimizing all our [indiscernible]. The product price are improving, we'll be maintaining the same level of EBITDA or more. And the price is going down, we will be having a pressure on the EBITDA. However, we see that the prices will maintain at the same level for the next quarter.

Okay. Great. Diane, are there any further questions?

No. There are no further questions over the phone.

Yes. If there are no further questions -- this is Bobby again. If there's no further questions, we can stop the call for this quarter, at this time. I want to thank Abdulla. I want to thank Riaz for taking the time to answer our questions. And we will pick up this again next quarter. Thank you so much.

Thank you.

Thank you all. Thank you for joining us. Thank you all.

This concludes today's call. Thank you for your participation. You may now disconnect.