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

Thank you, Saskia. Hi, hello, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Industries Qatar's second quarter 2022 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; [ Saffan, Mohammed ], who is Acting Assistant Manager in Financial Operations; Rashid Al-Mohannadi, who is the Senior Financial Management Analyst; and Riaz Khan, who is the Investor Relations Officer. So we will conduct this conference with management first briefly reviewing the company's results followed by a Q&A session. I would like to now 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 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 7 of August, IQ published its results for the 6-months period ended 30 of June 2022. 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 quick insights on IQ's ownership structure, its 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 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 QatarEnergy with 51% stake, and the rest is in the free float held by various domestic and international corporates and individuals. IQ is credited by S&P with A+ and Moody's with A1 credit rating with a stable outlook. QatarEnergy 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, and a dedicated marketing team in form of Muntajat, to market group's petrochemicals and fertilizer products and finally, most importantly, a well-experienced senior management team. As detailed on Slide 10 from competitive positioning perspective, IQ ranks among top-tier companies within the regional downstream space across most of the matrices. 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. Good afternoon, and thank you all for joining the call. Starting with macroeconomic environment, which remained uneven during the first 6 months of 2022, where demand for most of the downstream products slightly inched downward, mainly due to China's COVID-linked lockdowns and cautious approach from our buyers. On the other hand, supply side was affected by Russia and Ukraine conflict enforcing sharp rises in energy prices, challenging plant economics, especially for the European producers where gas prices significantly went up. On an overall basis, commodity prices were essentially balanced to bearish during the first quarter of 2022, whereas during the second quarter of 2022, despite uncertainties over recessionary fears, price has slightly improved on back of persistent higher energy prices and supply side constraints. Moving on to the financial performance for the first 6 months of 2022. As detailed on Slide #16 of the IR deck, the group reported a net profit of QAR 5.4 billion as compared to a net profit of QAR 3.5 billion for the same period of last year, showing a growth of 57 percentage versus last year. Group's improved financial performance versus last year was largely attributable to improved product prices, which on average inclined by 51% and translated into an increase of QAR 5 billion in group's bottom line earnings as you can see from Slide #17 of the IR deck. Sales volume increased by 3% versus first half of 2021, primarily driven by higher plant operating rates leading into improved production volumes and contributing QAR 209 million positively to the current period's profitability versus the first half of 2021. The overall growth in selling prices and sales volumes led to an overall growth in revenue for the group, which increased by 56% during the first half of 2022 and reached QAR 14.3 billion. As detailed on Slide 15, group's production levels were up on last year by 5%. There were a few reasons for that. Restart of previously mothballed DR-2 facility with a larger capacity together with higher plant operating base noted within [indiscernible] segment contributed towards the overall increase in production volumes in the current year. Moving on to quarter-on-quarter performance. Compared to the first quarter of 2022, group revenue and net profit remained flat. The growth in selling prices were almost offset by lower sales volumes. Decline in sales volumes was mainly linked to lower fertilizer sales volumes during the second quarter of 2022 as QAFCO's first quarter sales volumes were boosted by additional volumes on account of timing of shipments carried forward from the fourth quarter of 2022. Prices slightly improved on backlog persistent higher energy prices and supply side constraints despite recent demand-related concerns. Our robust business models and the strength of our global supply chains continued to leverage our resilience and provided flexibility to our operations, whereas our continued positioning of a low-cost operator ensured our competitive edge. Moreover, as detailed on Slide 19, IQ's EBITDA margins continue to remain robust. Also, we continue to build our strong financial position with improved cash flow generation capabilities and the group generated QAR 4.6 billion in terms of free cash flows during the current period as detailed on Slide 18. Now I will hand over to Riaz to cover the segmental performance of the group. Riaz?

Thank you, [ Saffan ]. I will start with the Petrochemicals segment as detailed on Slide 25. Performance of pet chem segment improved with a net profit of QAR 1.5 billion for the first 6 months of 2022 with an increase of 1% versus the same period for the last year. Improvement in segmental revenue was mainly offset by higher OpEx. Segment's blended product prices rose by 17% on a year-on-year basis, while sales volumes increased by 6%. Segmental revenue for the period reached QAR 3.86 billion, with an improvement of 24% versus the same period of last year. 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 the main market for PE and MTBE, 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 3.3 billion for the current period, with an increase of 115% versus the first half of last year. This increase was mainly driven by growth in revenues which increased by 107% to reach QAR 7.95 billion. Selling prices improved by 100% versus the same period of last year, while sales volumes increased by 4%. On the other hand, production volumes slightly declined versus the last year. As detailed on Slide 32, segment's EBITDA margins continued to remain robust. In terms of segment revenue by geography, as detailed on Slide 33, North and South Americas remain main market for fertilizers along with Indian subcontinent in Asia. Now let's discuss the Steel segment, and you may refer to Slides 35 till 40. Steel segment reported a net profit of QAR 621 million, up by 25% versus first half of 2021. Improved segmental profits was mainly driven by higher revenues, which increased by 11% versus first half of 2021. Additionally, segment's associate that produces iron oxide pellets, Foulath Holding, reported commendable financial results against the backdrop of improved operations. Growth in revenue was mainly driven by higher selling prices, which increased by 13% on an average on a year-on-year basis, mainly driven by higher steel and iron ore prices prevailing internationally. Sales volumes remained relatively flat against the backdrop of softening domestic demand. Moving on to Slide 38. Segment's EBITDA margin continued to remain robust following the mothballing decision. Now we will open the floor for the Q&A session.

Hi, operator. Can you open up the call for Q&A, please?

[Operator Instructions] Our first question comes from Alex Comer of JPMorgan.

Can you just talk me through what drove the cost savings in the Steel business and whether that's sustainable going forward? That's my first question. And similarly, when we look at the fertilizer business, the cost in the second quarter, is that roughly what we should expect going forward?

Alex, answer to your question on the Steel segment, basically, what has happened on the Steel segment, on the Steel segment, if you look at the production in the second quarter, or put it the other way, the sales volume in the second quarter was higher than -- or it's lower than the production. So which means we are holding some inventory, so most of your -- part of your cost is sitting in your inventory. So that is why you see your -- there's a improved EBITDA margin. So that will get normalized going forward. So once your sales get normalized, part of your operating cost will move into your cost of goods sold. So in the second quarter, because your production -- every production has not moved into cost of goods sold, part of your fixed cost, part of your production costs have not moved into inventory. So you see a hike in your EBITDA margin. So that is why you see lower operating cost or higher profitability in Steel. So that will get normalized and you will see historical profitability in the Steel. Coming into Fertilizer. Fertilizer, what had happened, in the second quarter, we had unplanned shutdowns. So when you have unplanned shutdowns, the unplanned cost, the cost associated with unplanned shutdowns are not capitalized, and they moved into your profit and loss accounts. So therefore, obviously, your OpEx increases and your margins generally goes down compared to a normalized margin. So that's why you see fertilizer margins are lower than the previous quarter.

Just on the unplanned shutdown, am I right in thinking that actual production levels were up on the quarter if sales were down a little bit? So I mean how much did you lose from a production perspective? And also, could you just talk us through how you expect fertilizer volumes to play out in the second half?

In the second half -- the second quarter, we had a little bit of planned shutdown and unplanned shutdown. The production was very marginally down around 3%. Now as per our expectations, we don't expect -- other than unless there is unplanned shutdown, we don't materially expect any production losses or any production to be lost in the second half of the year. So we expect operations to be pretty much normal unless here and there few operating days to be for normal shutdowns. But other than that, we don't expect any major shutdowns like we had for the major [ GST ] for QAFCO on the fourth quarter of last year. So we are not going to have -- we are not expecting any of those major shutdowns. So operation is going to be normal.

We now move on to our next question from Sashank Lanka of Bank of America.

I have 3 questions. The first one is on the Fertilizer segment. We do see that your EBITDA margins fell from 50% to 46% in Q2, and you did highlight that this was due to the OpEx increase due to the unplanned shutdown. I'm just wondering how the feedstock costs played out in Q2. Because if I look at your presentation, prices of urea were up slightly quarter-on-quarter on the realized prices you had. So is it fair to assume that most of the margin drop was mainly because of the OpEx cost increase due to the shutdown and feedstock prices kind of remained constant? That's the first question.

Sashank, you are right. Basically, what happens usually with the feedstock supplier, generally, you have a take-or-pay agreement. So in case even if you don't -- you have a committed arrangement to take your feedstock, so what happens if the shutdown is a planned shutdown, as per your accounting policy, you will capitalize it. If it as an unplanned shutdown, you will charge into your P&L. So in this case, this feedstock plus any other costs associated with your shutdown will go through your P&L. So that's what happened here. So it's an accounting adjustment, so it's charged to your P&L.

So [ Saffan ], it's fair to assume that your feedstock prices for QAFCO are kind of constant or stable Q-on-Q Q2 vs Q1?

As long as the prices remain stable, yes, it is.

Okay. Great. Then my second question is just on this acquisition, the melamine business, right, where you acquired 100%, can you talk about what impact that will have on your profitability going forward?

So technically, there were no acquisition. Acquisition was concluded in August 2020. It was just integration. The acquisition was concluded when we acquired QAFCO's 25% was done. This is only an operational integration. So here, this will bring some operational and financial synergies. So this acquisition, if you recall, when we acquired the 25% of -- QAFCO's 25% in July-August 2020, along with that, QAFCO acquired the 40% of QatarEnergy's share in Qatar Melamine Company. So at that time itself, the shareholding in QMC was 100% owned by QAFCO. Now what had happened, the integration -- now the integration is completed. So meaning to say the operational integration now more or less is the management control, the operational -- it's more or less fully operated by QAFCO. That's what it's meant to say.

And the last question is, is there any guidance you can give us on shutdowns across all your segments for the second half of the year?

I have already answered for Alex Comer's question. It's basically in the second half of the year, there won't be any major shutdowns as we know, unless otherwise, we have any unplanned shutdown, which we cannot predict anything. The year is -- the second half of the year expected to be stable as we at this moment of the time as we know.