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

Good day, ladies and gentlemen, and welcome to the Industries Qatar Fourth Quarter 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to Mr. Bobby Sarkar. Please go ahead, sir.

Thank you, Elaine. Hi, hello, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Industry Qatar's Fourth Quarter and Fiscal Year 2021 Results Conference Call. So on this call from Qatar Energy's Privatized Companies Affairs Group, we have Mohammed Al-Sulaiti, who is the Manager in Privatized Companies Affairs; Abdulla Al-Hay, who's Assistant Manager in Financial Operations; and Riaz Khan, who is the Head of Investor Relations and Communications. So we will conduct this conference with management first 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 doing great. 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 7th of Feb, IQ published its results for the year ended 31st of December 2021. And today, in this call, we'll go through these results and provide you an update on key financial and operational highlights for 2021. We have structured our call as follows: at first, I will provide you a quick insight on IQ's ownership structure, competitive advantages and overall governance structure. Secondly, Abdulla will brief you on IQ's key operational and financial performance metrics. Later, I will provide you with an update on latest segmental 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 Energy with 51% stake and the rest is in the free float held by various domestic and international corporates and individuals. IQ is credit rated by S&P with A+ and Moody's with A1 credit rating, with a stable outlook. Qatar Energy, 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 their 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 as it possesses strategically, operationally as well as financially. These strengths include an efficient and well-maintained asset base, a qualified and highly trained workforce, assured supply of feedstock and competitively priced energy contracts, lower operating costs, a dedicated marketing team in the form of Muntajat, to market group's 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 with -- 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 Abdulla.

Thank you, Riaz. [Foreign Language] .Good afternoon, and thank you all for joining us. During the current financial year, the group benefited from a strong economic recovery covered with supply constraints resulted and improved price level which translated and to an improved set of financial results. For the year ended 31st December, 2021, the group recorded a net profit of QAR 8.1 billion as compared to QAR 1.9 billion for the last year, up by 321% as detailed on Slide #16. The group improved financial performance for the year was largely attributed to the improved product price, which, on an average, inclined by 58% and translated into an increase of QAR 8.5 billion and grow bottom line earnings as you can see on Slide #17. Sales volume increased by 20% versus last year, mainly driven by the sales volume related to QAFCO train 1 to 4, which were fully reported as part of 2021 volumes, and which was not the case in the last year, where QAFCO was operating under a temporary gas processing arrangement for the first 7 months of the 2020. Nevertheless, improvement in sales volume was partially offset by a reduction in volume during the current year due to mothballing of steel facilities, commercial shutdown in the fuel additive facilities, and a planned and unplanned shutdown at certain fertilizer facilities. As shown on Slide #17, the overall growth and sales volume contributed QAR 1.2 billion positively to the current year bottom line earnings versus last year. The overall growth in selling price and sales volume led to an overall growth and revenue for the group, which increased by 77% during the year to reach QAR 2.2 billion. As detailed on Slide #15, the group production level were down on last year by 3%. This decline was mainly attributed to the mothballing of certain steel facilities, which started since mid of 2020, periodic planned and unplanned maintenance shutdown at certain QAFCO and QAPCO facilities and a commercial shutdown at MTBE facilities. Moving on quarter-on-quarter performance, compared to third quarter of 2021, group revenue and net profit improved sharply versus last quarter. The benefits gained from improved selling price were more than adequate to offset sales volume lost due to the planned maintenance and unplanned shutdowns. Our robust business model and the strength of our global supply chain continued to leverage our resilience and provided flexibility to our operations, whereas our continued positioning of being a low-cost operator ensures our competitive edge and aided to generate one of the strongest yearly results. Moreover, as detailed on Slide #19, IQ's EBITDA margin continued to remain robust. This is a testament to the group cost management and cash conservation capabilities with an ability to maintain its cash flow despite volatile trend in commodity prices. Also, we continue to build our strong financial position with improved cash flow generation capabilities and the group generated QAR 8.1 billion in terms of free cash flow during the current year as detailed on Slide #18. I will now hand over to Mr. Riaz to cover the segmental performance.

Thank you, Abdulla. I will start with the Petrochemicals segment. As detailed on Slide 25, performance of petchems segment improved with a net profit of QAR 2.5 billion for the current financial year, with an increase of 133% versus last year. This notable increase in profitability was primarily driven by improved product prices on the back of better demand for petrochemical products due to healthier macroeconomic conditions, while supply remains constrained. Segment's blended product prices is pushed by... Hello? Operator?

Please go ahead, sir.

Yes. Segment's blended product prices rose by 55% on a year-on-year basis, while sales volumes slightly declined by 3%. Segmental revenue for the year reached QAR 6 billion, with an improvement of 51% versus last year, mainly due to improved product pricing environment. Production volumes declined on last year by 3% due to a large scale plant turnaround conducted at QAPCO facilities and a commercial shutdown at MTBE facilities. As detailed on Slide 26, segment's EBITDA margin continued to remain strong. In terms of segment revenue by geography, as detailed on Slide 27, Asia remains a main market for PE and MTBE products, whereas Indian subcontinent remains a key market for methanol and polyethylene. Moving on to the fertilizer segment, as detailed on Slide 31, the segment reported a net profit of QAR 4.7 billion for the current financial year with an increase of 544% versus last year. This increase was mainly driven by growth in revenues, which increased by 133% during the current year to reach QAR 10.3 billion. Selling prices improved by 100% versus last year, while sales volumes increased by 38%. On the other hand, production volumes marginally declined by 1% versus 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 our fertilizers along with Indian subcontinent and Asia. Now lastly, let's discuss steel segment, and you may refer to Slide 35 until 40, during the current year, Steel segment continued its profit-making trajectory after having a difficult first half of last year and following strategic restructuring initiatives implemented last year. Net profit for the current year amounted to QAR 716 million versus a net loss of QAR 1.3 billion last year. On overall basis, segment revenue was up by 30%, mainly on the back of increased selling prices, which actually increased by 31% on a year-on-year basis. The growth in selling prices was offset by a decline in sales volumes to an extent, and declined -- actually declined by 2%. Mothballing of certain steel facilities 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 quantities outside the domestic market. All of this led to a strong sequential recovery in EBITDA margins on a year-on-year basis, which is detailed on Slide #38. Now we will open the floor for the Q&A session.

[Operator Instructions]

This is Bobby again from QNBFS. While we are getting started with other questions, can I just get -- start things up with a question of my own? A couple of questions actually. If you could just talk a little bit about QAFCO 7, which you have detailed on your Slide 42, and what kind of impact we would see in terms of ammonia and urea production and volumes? And what would be the time line of this coming through? And will this be replacing something existing, or is this something new and would add on additional volumes? And then secondly, generally speaking, given the fact that we are -- major maintenance shutdowns in QAPCO, et cetera, are behind us, do you expect to see some growth in production sales volumes in 2022?

Yes, Bobby. As you are aware, QAFCO has 60 trains. 1 and 2 trains are very old assets. So the project we called it on the slide as QAFCO 7, is basically total place the train 1 and 2 by a train -- by a single train, which will have the same capacity of the 1 and 2 plus 400,000 metric tons per year as a difference. So -- of ammonia. This new train will be more efficient in term of consuming the feedstock and will be more efficient in term also of production, with a difference of 400,000 metric ton improvement. We are currently at very early stages of deciding either to go with the project or not to go. No contract has been awarded yet. So if there is any update, we'll let you know. However, we consider it as a part of our budget and business plan for the next 5 years. I hope I answered this question. What's the second question?

The second question was just generally on sales and production volumes for this year, given the fact your major maintenance shutdowns in QAPCO, et cetera, are behind you in 2021, if you could just give us a sense?

Yes. As you are aware, a lot of activity taking place this year. There are planned shutdown for our routine maintenance, there were unplanned shutdown, and there is mothballing. So this is why our production has been slightly impacted by 3%. However, the major shutdown took place at QAFCO during the fourth quarter. Our production during the first quarter were impacted. However, due to the very high price of the product during the fourth quarter, we get compensated. So in terms of -- financially, there were no a big impact and a general shutdown took place only during the Q4 for QAFCO.

Okay. So we can assume that -- this year that given all the shutdowns are behind us, that you will see some moderate growth in sales volume, yes?

We are planning for at least a better production during this year. However, we still have some planned shutdowns taking place at most of the segment, except the fuel additive. The fuel additive, we are not pretending to have any planned set down during the year. However, there is a shutdown in the Petrochemical, fertilizer as well and steel. But it's not a major shutdown, so routine.

Okay. Great. Elaine, we can open up the question and answers to the general audience please now.

Our first question today comes from Alex Comer of JPMorgan.

Yes. I mean I think Bobby asked some very good questions there. But just a couple of follow-ups for me. Just if I look at the fertilizer business and I look at the products sold in Q4 versus your production. It also suggests that you've got some stock there to sell in Q1. So just -- maybe you could talk a little bit about Q1 volumes in Fertilizers. That's the first thing. And then just in terms of outages, you talked a little bit about there would be some in Fertilizer and petchem. Just wondering if you could give us some idea of when those might occur in the year. And then back to this QAFCO 7 project. I mean you sort of said that you haven't -- or you indicated you've made FID on this. But you've got kind of QAR 800 million of CapEx coming out in 2022. So clearly, you must be quite close to a decision there. So maybe you could let us know when we might hear for certain on that. And then also, you talked about efficiency and improving on QAFCO 1 and 2. Just any indication on what the feedstock gas price might be on that project. Those are my questions.

I will start from your last question, if you allow me. So in terms of the -- just to correct one information, train 1 and 2 will be replaced by QAFCO 7. So there will not be any assets for 1 and 2. Maybe we're going to hear about a decision to award the contract, hopefully, by the first half of the year, 2022. And if there is any update prior to that, we're going to announce it to the market. The other question, maybe it can be handled by Riaz.

Yes. So in terms of the Fertilizer volumes, as we mentioned in our press release, there were certain operational obstacles or operational delays in terms of the variance, which you are seeing between the production volumes and the sales volumes. So hopefully, these delays will be catered in Q1, and we'll be getting back to business as usual, sales volumes starting from Q1. Then in terms of the shutdowns for 2022, most of the shutdowns are predominantly allocated evenly across the board. Specifically, if I talk about the QAPCO's facilities, there is a very nominal level of shutdowns, averaging somewhere 20 to 25 days per quarter basis. Then in terms of Fertilizer business, there will be slightly higher number of days of shutdown in Q1 of 2022 compared to the rest of the 3 quarters. In terms of the steel, again, we are pretty much evenly placed across the quarters. Again, they are not very significant, quite similar in terms of number of days as what we saw in 2021.

We move to our next question from Faisal Al Azmeh of Goldman Sachs.

Just a few on my end, if you don't mind. Maybe just starting off with the dividend announcement. How should we think about the real per share that you've announced for the year? Is this something that you feel that is sustainable, and that we should look at this policy as something that should be recurring? Obviously, in terms of the percentage of free cash flow, it's still well covered. And even when you look at the payout ratio, it's at 75%. So do you feel that if prices do moderate this year, this is something that you can sustain in 2022? So that's my first question. My second question relates to QAFCO 7. Should you decide to go ahead with this project, would you consider adding some debt around it, similar to how you've done with previous projects? So should we think about this in the context of 70% project finance? Or would you look at it differently? And then, thirdly, and just my final question is on steel. And if you can just tell us a bit more about what to expect in terms of how to think about generally profitability in the first half of the year? I remember last year, you told that there was some form of seasonality aspects, which led to the weakening volume in the second half. Do you feel that this first half volume should recover?

Abdulla, Riaz, I'll take on these questions. So thanks for the questions. I'll start off the dividend. So yes, in our view, if you look at the historical average payout that IQ has adopted ever since inception, it's close to 70%. We've gone with more aggressive, closer to 100% last year, 2020, I mean, where we've paid out 100% of earnings. In other years, I think we've consistently, in the past 4, 5 years, paid a generous payout. So dividends, I know we've discussed this on maybe every call and with every meeting with the shareholders, it really depends on a few elements, which, of course, is also driven by the financial performance of the given year. It also depends on our outlook for the future year as well as the business plan period. So at the time of announcing the results of 2021, and at the time of discussion at the Board level with regards to the dividends for 2021, it was supported by: firstly, the financial performance of the year 2021. It was supported by the outlook and the projections of the prices of 2022, and we started off the year, I'd say, stronger than how 2021 has started, and we have a reasonable belief that prices are going to continue to be solid for a good part of this year as well. So yes, to answer your question directly, I think the dividend in terms of payout remains to be something that we can consistently distribute to the shareholders, knowing our free cash flow capabilities, our free cash flow generation capabilities, knowing our -- basically adhere that situation and knowing our basically CapEx programs are predominantly related to maintenance and environment-related projects. Moving on to QAFCO 7 and the plan of funding that project. So as part of the package that is being prepared for FID, we're also assessing different funding strategies and looking at the economics of each one. So it would really depend on how the economics look like. It's no secret that IQ as well has a lot of cash at the group level, so does QAFCO. So funding at equity is not something that would not be a possibility, but it really depend on the economics of adding on debt to the project. And how that looks and what we're going to do with the cash that IQ has. So whether we're going to distribute more in the future, and therefore, adapt a more, I'd say, more debt onto that project or whether we're going to rely on the cash that we have at the group level. So that's yet to be decided, and that's part of the FID package that would be presented to the Board, hopefully, in the first half of this year. Steel, so steel prices continue to be, I'd say, strong in the region. As you know, the decision to cut production starting the second quarter of 2021 was driven with a strategy to focus on the regional market, mainly domestic as well as regional. So that strategy still continues to be in place. We still did sell small quantities internationally beyond the region opportunistically depending on how prices are. And we started the year -- January results were excellent. So we as well accept -- expect that similar performance is going to continue in the year, and we expect that steel performance should be as good as 2021. So we have no reason to believe that it's going to be a challenging year as the year that was experienced in 2019.

Thank you. Rene Selouan of Jadwa Investment has our next question.

So I was wondering in the Fertilizer segment, your production quarter-on-quarter was up 2%. And I think, if I recall correctly, you had mentioned that you are planning a shutdown in the fourth quarter, similar to the first quarter of 2021. So has that shutdown and pushed into the first quarter, that's what you're telling us? And also, I noticed that the average selling price was about $100 -- let's say, $70 to $100 less than what our price would suggest for the quarter. Is that because, towards the end of the quarter, that sale that you missed was at higher prices? And that means that it will be sold in the first Q. Is that correct?

Well, I can answer the question on the shutdowns because my understanding is that there were planned and unplanned shutdowns for QAPCO 1 to 4 in the fourth quarter of last year. So I do not expect that they have any planned shutdowns for QAPCO 1 to 4. I'm not sure about 5 and 6, but maybe Abdulla and Riaz can comment on that. As for the price realization, Again, I'll refer back to Riaz and Abdulla to clarify in a better way.

Yes. So in terms of the quarter-on-quarter slight increase in the production volumes was actually the operating base on overall basis were higher. Because if you remember, in Q3, we had a small unplanned shutdown, which affected the operating days of Q3. In Q4, we had a planned shutdown, but that was on one of the train, and that was on a holistic basis. If you see the production volumes, they were -- they ended up becoming higher compared to the Q3 of 2021. In terms of the selling prices, as what you mentioned, there has been what you call a discord between the production volumes for Q4 and the sales volumes of Q4. Sales volumes actually declined and production volumes remained quite like similar-ish or maybe 2% up. So the idea was -- or the reason behind this was there were some delays on operational and supply chain side where there are some contracts with certain specific customers, some big customers, they were getting in process of being renewed. That is -- hopefully will be completed in this month, and we'll be back online with those customers. And that's why you are seeing a lag in terms of the pricing because the market prices, which you see on Bloomberg, they are live prices. The prices which we are showing here, they are the realized prices, means based on which the invoices have been issued.

Yes. Usually, they're very similar, like $10 to $20 different.

Yes. So just because there has been a lag behind between the production and the sales volumes. So there were some sales, which were supposed to be made in Q4. Now they have moved to the next quarter. So again, the realization of those prices will come in the forthcoming quarters.

Okay. And you mentioned that there is a shutdown in the first quarter similar to the first quarter of '21, is that correct?

The shutdown for 2022, you were asking, right?

Yes. Yes, first quarter 2022.

Yes. So if you compare Q1 of 2021 versus Q1 of 2022 in terms of the number of days shutdowns, I can see quite similar numbers except for there is no MTBE's commercial shutdown, which was the case in 2021. There is no commercial shutdown planned. And other than that, the business as usual, planned shutdowns are quite similar to the ones which you saw in the Q1 of 2021.

Okay. Very clear. And I was just wondering, in your presentation, you have, at the beginning, a price chart for products. And the steel price is extremely low going into 2022. Plus your EBITDA margin for the steel segment was extremely low in the fourth quarter. So I'm wondering how can you expect that 2022 would be similar to '21 in the steel?

What I can answer you on the EBITDA margins. If you see on Slide #38, we did mention that there has been a decline in trend in last 2 quarters for the EBITDA margins, which is predominantly linked to high-priced feedstock, iron ore, which we bought in Q1 and Q2. Because if you remember, the iron ore prices were really high and they were like at their peak back in Q2, especially of 2021. And that was the same iron ore, which we used in Q3 and Q4, and that had like basically a cascading effect on our margins and that's we margins are showing a declining trend.

So you expect that to reverse, that's what you're saying?

Yes, because the iron -- if you see the iron ore price trends, they peaked in Q2 and then they started to dilute or adjust themselves to the normality. So right now, they are in $100 to $120 range, $120 per metric ton range. So presumably, that's how we expect that there will be some kind of a smoothning effect on the EBITDA margins rather than a declining one.

We take our next question from [ Hakami Abdulelah ] of [ Hassana Investment Company ].

Congratulations on the great results in 2021. I just have -- the majority of my questions have been addressed by different analysts. So I just have a couple of questions, one regarding the Fertilizer, one regarding the Petrochemical. So for the Fertilizer business, I was just wondering if you guys are seeing a weakness on demand given the high urea prices? Or has demand been robust despite these higher prices? And what's your view on the demand in the midterm? Do you expect it to be as strong as what we've seen or softening going forward? So that's one question. The second question is around QAPCO and a QAFAC. Just wondering if the management has any plans to acquire the minority shareholders' interest on these assets. And then, if so, could you give us a hint on the purchasing price? Would they be closer to book value similarly to what we've seen in QAPCO?

Yes. Thank you for your question. Related to the demand in relation to the fertilizer products, we believe there is still a strong demand that we see. January results shows still there is an excellent demand for the fertilizers product with a similar higher price trend. And we are -- we have the expectation of the demand during the full year. So the demand is there. The price, we -- at least for the first quarter, we would say it will stay at the same level, which is an excellent indicator so far. Related to QAPCO and QAFAC, shares the minority shares there. And if we're going to purchase these shares -- last year, when we did the investment in QAFCO, and when we bought the 25% of that shares from Qatar Energy, we had, in the same announcement that we are willing. We have the intention to buy the minority share if they are willing to sell it. If the founder of that facility, which is Qatar Energy, they are willing to sell it, we are -- might consider the opportunity. We have a 20% in QAFCO, and we have other 50% at QAFAC. And it is still at very early stages on how we're going to purchase it, is it based on valuation or based on book value. As you are aware, QAFAC will end in 2024...

2024.

And QAFCO joint venture will end at 2029. So however, since we are having the cash, and as per our announcement earlier, we are willing to take the share if it's offered for us. I hope we answered your questions.

We have a question from Nitin Garg of SICO.

Just wanted to know...

Your voice is very low, can you...

Yes, I just wanted to know the capacity of train 1 and train 2 and how old are these 2 trains? QAFCO. I'm talking about QAFCO since you said that QAFCO 7 is to replace the train 1 and train 2. So capacity of train 1 and train 2 and how old are these 2 trains?

Offhand, we can't remember the capacities of those 2 trains, but rather we can tell you the additional capacity, as told by Abdulla, the 3 -- it was commissioned in 1978, I believe -- 1974. So those are technically almost 45 years plus. Train 1 was commissions in 1974, '75. So those are old trains given the -- very high energy consumption, consuming very high energy in terms of natural gas. So I think it's around...

Sorry. please go ahead.

Yes. So basically, the extension in terms of production, addition in terms of ammonia would be around roughly 400.

So in terms of gas price, can we assume that the same gas price mechanism will be there for this expansion?

No, the issue is not the gas price. The Qatar Energy will supply the required gas to produce whatever the quantity of ammonia the new train would produce, the formula would remain predominantly the same. So only benefit what we're going to -- going to be benefiting is the same amount of gas the Qatar energy would supply, we would be able to produce more ammonia because the trains are going to be efficient. For example, the old train consumes 50 MMBtu of gas to produce 1 ton of ammonia, the new train would take around 30 MMBtu. So because of this efficiency, you produce more ammonia, that's where the benefit comes in.

Okay. Very clear. Just 1 more follow-up I have. For the QAPCO shutdowns, the Petrochemical one, Mr. Riaz told -- I just wanted to make sure if I understood correctly that the shutdown is will be equivalent 20, 25 days per quarter. So is it per quarter or per year? I mean 20, 25 days per quarter looks very high.

Per quarter, yes, but you have multiple trains within the QAPCO facilities. So when we report...

Do not forget that there may be other shutdowns can creep in because these are all machines, right? Large industrial machines. But what we have told you is the planned shutdowns, correct?

Yes.

So technically, when you try to restart the machine, you can always have a couple of additional unplanned shutdowns. But we are sold as per the business plan, the planned number of shutdown days which are in line with the average numbers as per the current business plan, which is approved by the respective board.

So this is 22 to 25 days per quarter?

And you have to always count the total number of operating days. They don't work like 90 working days divided by 25, because it's like -- there are trains there within the facility.

For example, if you have 3 trains, so 3 multiplied by 90, So the shutdown days are all additive.

We have no further questions at this time.

This is Bobby Sarkar again. So if we have no further questions, I would like to thank management for taking the time to answer our questions. I want to thank Mohammed, Abdulla and Riaz, and we will pick this up next quarter. Thank you very much.

Thank you, all. Thank you for joining us.

Thanks a lot. Thank you.

Thank you.

Thank you, ladies and gentlemen. That will conclude today's conference call. Thank you for your participation. You may now disconnect.