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

Hi, hello, everyone. Thanks. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Industries Qatar's Second Quarter 2021 Results Conference Call. So on this call from QP's Privatized Companies Affairs Group, we have Mohammed Al-Sulaiti, who is the Manager in Privatized Companies Affairs. We have Saffan Mohammed, who is acting 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're all staying safe. Before we go into the business and performance updates of IQ. I would like to mention that this call is purely for the investors of IQ, and no media representatives should be attending 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 5th of August, IQ published its results for the 6 months period ended 30th of June 2021. And today in this call, we'll go through these results and provide you an update on key financial and operational highlights. We have structured our call as follows: at first, I will provide you with a quick insight on IQ's ownership structure, competitive advantages and overall governance structure; secondly, Saffan will brief you on IQ's key operational and financial performance metrics; later, I will provide you with an update on latest segmental for performance. And finally, we will open the floor for the Q&A session. To start with, as detailed on Slide 5, the ownership structure of IQ comprises of Qatar Petroleum with 51% stake and the rest is in the free float held by various corporates and individuals. IQ is credit rated by S&P's 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. In terms of competitive strengths, as detailed on Slide 8, the group is well positioned with several competitive advantages it possesses strategically, operationally as well as financially. These strengths include an efficient and well-maintained asset base, a qualified and 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 groups, petrochemicals and fertilizer products, and most importantly, a well experienced senior management team. As detailed on Slide 10, from a competitive positioning perspective, IQ ranks among top-tier companies within the regional downstream space across most of the metrics. In terms of governance structure of IQ, you may refer to Slides 48 and 49 of the IR deck, which covers various aspects of IQ's code of corporate governance in detail. I will now hand over to Saffan.

Thank you, Riaz, and I welcome all of you all for this call. Now for the first 6 months of 2021, IQ reported 1 of the very strong financial performance. We reported QAR 3.5 billion in terms of net profit, which is around almost 400% higher than that of last year, as reported or as detailed in Slide #16 of our presentation deck. Now this improved financial performance was primarily driven by improved selling price, which contributed around QAR 3.1 billion to the bottom line or 35% increase compared in terms of price improvement, in terms of price increase compared to the previous year. The sales volume also furthered by 40%, primarily driven by the return of QAFCO 1 to 4 trains, which was reported as sales volume this year, which was not in the case as last year. Last year, QAFCO 1 to 4 was not part of our sales as it was considered or it was reported as gentle -- a GPA, which was gas processing agreement. And part of the sales was offset by -- we have [indiscernible] part of Qatar Steel's steel facilities in the current year, which was partly offset the benefit we gained from QAFCO trains 1 to 4. As shown in Slide #17, the overall growth in sales volume contributed QAR 1.3 billion positively to the current period's bottom line. So on a net-net basis, price variance contributed QAR 3.1 billion to the bottom line as well as QAR 1.3 billion contribution coming from sales volume. Both selling price and the sales volume resulted in the revenue growing by 69% and reaching to QAR 9.2 billion compared to last year, which had bringing an additional 69% revenue compared to last year. As detailed in Slide #15, the group production levels have marginally declined by 6%. The decline was primarily due to our decision to [indiscernible] certain steel facilities in mid of 2020 and the periodic maintenance shutdown at certain QAFCO facilities, specifically for Train 1 to 4 and commercial shutdown at MTBE facilities during Q1 of this year. Now comparing -- moving into quarter-on-quarter performance, the quarter-on-quarter performance, if you look at the revenue have improved by 17%, while the net profits have improved by 42%. The primary contributors for the improved performance, again, if the prices have improved significantly on the backdrop of improved macroeconomical tailwind that is coming from the -- that has started from the second half of 2020 that had been continuing into the first half of 2021 as well. Sales volumes have marginally improved on the backdrop of improved production as we had minimal shutdown during the second quarter of 2021. Our robust business models and the strength of our global supply chains continue to leverage our resilience and provided flexibility to our operations. And we continue to position as being one of the low-cost operators, which has been evidenced in our profitability margins. So as you can see from our Slide #19, our EBITDA margins continue to remain robust. And as we always -- as you can always see our cash conversion ratios and the cash positions remain very robust. And that has been reflected in our cash positions, and we have generated an operating cash flow of QAR 1.8 billion, which you can note from Slide #18. On an overall basis, our base case strategy will continue to focus on market development, focusing on capturing new markets, creating market arbitrages and bringing logistical cost savings to the group. We'll also continue to focus on productivity and efficiency gains via the ongoing cost optimization programs. And now I will hand over to Riaz to cover the segmental performance.

Thank you, Saffan. I will start with Petrochemicals segment. As detailed on Slide 25, performance of Petchem segment improve with a net profit of QAR 1.5 billion for the first half of 2020 with an increase of 383% versus last year. 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. Segments blended product prices rose by 69% versus same period last year, while sales volumes were up by 8% compared to the same period last year. The growth in product prices, coupled with sales volumes, led to an overall rise in revenues by 83% within the segment to reach QAR 3.1 billion for the current period. Production volumes were also up on last year as the segment had higher operating days during the current 6-month period compared to that of last year. As detailed on Slide 26, segment's EBITDA margins continue to remain on a positive trajectory. In terms of segment revenue by geography, as detailed on Slide 27, Asia remains the main market for PE and MTBE, whereas Indian subcontinent remains a key market for methanol and PE products. Moving on to the Fertilizer segment. As detailed on Slide 31, the segment reported a net profit of QAR 1.5 billion for the first 6 months of 2021 with an increase of 314% versus last year. This increase was mainly driven by growth in revenues, which increased by 99% during the current period versus last year to reach QAR 3.8 billion. Selling prices also improved by 55% versus same period last year, which reflected positively on the segmental performance. Sales volumes increased by 85% in comparison to first half of 2020. On the other hand, production volumes within the segment declined by 3% versus last year as QAFCO trains 1 to 4 underwent higher number of days of maintenance shutdowns during the current period versus the same period of last year. As detailed on Slide 32, segment's EBITDA margins continue to remain robust. In terms of segment revenue by geography, as detailed on Slide 33, North and South America remain main market for fertilizers along with Indian subcontinent and Asia. Now finally, let's discuss the Steel segment. As you may refer to Slide 35 till 40. During the latest 6 months period, Steel segment continued its profit-making trajectory after having a difficult first half of last year and following strategic restructuring initiatives implemented. Net profit for the current period amounted to QAR 496 million versus a net loss of QAR 1.4 billion during first 6 months of last year. On overall basis, segment revenue was up by 23%, mainly on the back of increasing selling prices, which increased by 27% on a year-on-year basis. The growth in selling prices was offset by a decline in sales volumes to an extent and declined by 23%. Mothballing of certain steel facilities allowed the segment to primarily focus on profitable domestic markets, which led to adjusted cost base. Moreover, due to improvement in international prices, the segment was also able to sell some of the quantities outside the domestic market. Also by changing the raw material mix, the segment reduced its production cost without affecting quality of the final product. All of this led to a strong sequential recovery in EBITDA margins for the segment as detailed on Slide 38. Now I think we can open the floor for the Q&A session.

[Operator Instructions]

Operator, this is Bobby Sarkar. I just wanted to get started with a couple of questions. of mine, while we are polling for questions from outside. If you could just -- given the strong performance in the first half, especially in the second quarter and what we are seeing on the pricing front in Petchems and some softening? And in light of -- I believe there is a major maintenance shutdown or turnaround expected in QAFCO in the third and fourth quarter. Do you still expect, generally speaking, a similar level of profitability in the second half versus the first half?

So yes, correct. We've noticed at the end of the first half, a bit of softening in the Petrochemical space with regards to prices. We still see positive movements in Steel as well as Fertilizers. So we expect that to be fully offset. And as you rightly mentioned, we do have a major turnaround at QAFCO, which is ongoing as we speak, on plan, and we expect it to be as well over as per the schedule. But in general, our forecast for prices is, for the remainder of the year, we expect it to continue to remain solid and strong. So we expect the second half performance to be pretty much in the range of the first half.

Okay. Great. Thank you, Mohammed. Operator, we can open up for external questions, please.

[Operator Instructions] We'll now take our first question. It comes from [ Abdulrahman Al Baqai ] from Jadwa Investment.

I have a few questions, if you don't mind. Firstly, what are the scheduled shutdowns during the second half of 2021? And what's the expected CapEx for the remainder of the year?

Saffan, you can take that question?

Yes. The major shutdown as we speak comes from QAFCO, which is basically in -- primarily in Q4, the plant shutdown or the general shutdown, which is happening after a quite long period. This is the prime of the main shutdown, primarily the general shutdown for the entire QAFCO plant. Other than that, the rest of the 1 QAFCO, the fertilizer plant, the shutdown -- the facility, the shutdown was over in Q1, Q2. So the primary shutdown is in QAFCO. Other than that, unless otherwise there are unplanned shutdown happening, we are not expecting any major shutdowns. In terms of capital expenditure, there aren't any major capital expenditure other than we made capital expenditure associated with the QAFCO's GSD turnaround, which we have -- which is in the investor relation presentation, correct? In which slide?

Yes. 42.

Slide #42, we have given the breakdown of that the shutdown expenditure, the capital expenditure, Abdulrehman.

Okay. And just a few more questions, if you don't mind? How are the operating rates for the MTBE plant? And how is the pricing environment in terms of profitability?

So the MTBE plant, as you know, we had a commercial shutdown in Q1, primarily due to the spring was not that great. So we had a commercial shutdown because the spring was negative, was almost not great. So now we have -- the prices have recovered very well. So the plant is operating, and now the margins are quite positive, and we are making good returns on them. So that's what we have started operating the plant from Q2. Now the margins are quite viable and the MTBE prices are quite impressive and the plant is with Petchem prices and the oil has recovered, which is -- MTBE is the product that is very much correlated to oil and which is doing very well. So plant is continue to be operated, and it is operating almost at full capacity. Your question was on MTBE, correct?

Yes, the MTBE plant.