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

Ladies and gentlemen, thank you for standing by, and welcome to the Industries Qatar Third Quarter 2022 Earnings Call. I would now like to turn the call over to Bobby Sarkar.

Okay. Thank you, Mandeep. Hello, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Industries Qatar's third quarter 2022 results conference call. So on this call from Qatar Energy's Privatized Companies Affairs Group, we have Abdulla Al-Hay, who's Acting Manager. We have Rashid Al-Mohannadi, who is the Head of IR and Communications; Saffan Mohammed, who's the Senior Financial Management Analyst; and Riaz Khan, who is the IR Officer. We will conduct this conference with management first reviewing the company's results followed by a brief Q&A. I would like to turn the call over to now to Rashid. Rashid, please go ahead.

Thank you, Bobby. Good afternoon, and thank you all for joining us. Hope you are doing great. Before we go into IQ's business and performance update, I would like to mention that this call is purely for IQ's investors, and no media representatives should be attending this call. Moreover, please note that this call is subject to the disclaimer statement as detailed on Slide #2 of the IR deck. On 26th of October, IQ published its financial results for the 9-month period ended 30th of September, 2022. And today, in this call, we'll go through these results and provide you an update on key financial and operational highlights. Today in this call, along with me, I have Abdulla Yagoob Al-Hay, our Acting Manager for Privatized Company Cffairs; I have Saffan Mohammed, Acting Assistant Manager for Financial Operation; and I have Riaz Khan, Investor Relations Officer. We have structured our call as follows. At first, I'll provide you with a quick insight on IQ ownership structure, competitive advantages and overall governance structure. Secondly, Abdulla will brief you on IQ's key operational and financial performance metrics. Later, Saffan will provide you with an update on latest segmental performance. And finally, we will open the floor for the Q&A. To start with, as detailed on Slide #5, IQ's ownership structure compromises of QatarEnergy with a 51% stake, and the rest is in the free float, held by various domestic and international corporates and individuals. IQ is a credit rated entity by S&P with A+ rating, and Moody's with A1 credit rating. With a stable outlook, QatarEnergy being the main shareholder of IQ, provides the most of the head office functions through a service level agreement. IQ Group companies' operations are independently managed by its respective Board of Directors, along with senior management team. In terms of competitive strength, as detailed on Slide #8, the group is well positioned with several competitive advantages within its own domain 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 sources, lower operating cost, a dedicated team in form of Muntajat, to market the group, Petrochemical and Fertilizer groups, our [indiscernible] joint venture partners, and most importantly, our well-experienced senior management team. As detailed on Slide #10, from a competitive positioning perspective, IQ rank among top-tier competitors within the regional downstream space, across most of the matrices. In terms of IQ governance structure, you may refer to Slide 50 and 51 of the IR deck, which covers various aspects of IQ's code of corporate governance and further details. I will now hand over to Abdulla.

[Foreign Language]. Thank you, Rashid. Good afternoon, and thank you all for joining us. Starting with macroeconomic environment as detailed on Slide #12. The macroeconomic environment remained volatile mostly throughout the year, as a result of geopolitical uncertainty and recessionary [ reviews ] on account of inflationary pressure and how cash stands on interest rates by most of the central banks. Also, high energy price in Europe are persistently weighing on most of the European producers. Additionally, Chinese strict Zero-COVID policy and related lockdowns, coupled with the slowdown in Chinese construction sector, as being a further -- is bringing further uncertainties to the markets. On an overall basis, market [ supplies ] across the group basket of products have declined sequentially due to the continuous consumer demand on -- cautious consumer demand on account of macro headwinds, coupled with comparatively lower crude prices. However, product prices remained strong versus last year on account of post-pandemic recovery fees. Moving on the financial performance of the first 9-months of 2022, as detailed on Slide #16 of the IR deck. The group reported a net profit of QAR 7 billion as compared to the net profit of QAR 5.5 billion for the same period of last year, with a growth of 28% on a year-on-year basis. This improved financial performance versus same period of last year, was largely attributed to the improved product price, which, on average, declined by 35% and translated to an increase of QAR 5.2 billion in the group bottom line earnings, as you can see on the Slide #17. Sales volume increased by 6% versus first 9-months of 2021, primarily driven by higher planned operating rates, leading to improved production volumes and contributed QAR 977 million positively to the current period bottom line earnings versus the first 9 months of 2021. The overall growth in selling price and sales volume led to an overall growth in revenue for the group, which increased by 42% during the first 9 months of 2022, to reach QAR 20.1 billion. As detailed on Slide #15, the group production levels were up on last year by 6%. Restart of the previously mothballed DR-2 facility, having a larger capacity together with higher planned operating days, noted within the fuel additive segment, contributed towards an overall increase in production volume during the current period. Moving on a quarter-on-quarter performance. As detailed on Slide #16, compared to the second quarter of 2022, the group revenue and net profit declined notably due to the declining and selling prices. Decline in selling prices was mainly linked to softened demand and lower crude oil prices and the macroeconomic uncertainties. Sales volume, on the other hand, increased by 5%, mainly on the best growth of noted production volumes. Our robust business model and the strength of our global supply chain continues to leverage our resilience and provide flexibility to our operations, whereas continued positioning of being a low-cost operator ensured our competitive edge. Moreover, as detailed on Slide #19, IQ's EBITDA margin continued to remain robust. Also, we continue to build our strong financial position with improved cash flow generation capabilities. And the group generated QAR 6.9 billion in terms of free cash flow during the first 9 months of 2022, as detailed on Slide #18. I will now hand over to [ Saffan ] to cover the segmental performance.

Thank you, Abdulla. I'll start with the Petrochemical segment. As detailed on Slide #25, net profit for Petrochemical segment marginally declined by 5% versus the same period of last year. This marginal decrease was mainly due to a slight decline in gross margins as growth in segmental revenues being almost offset against high operating costs. Segment's blended product prices rose by 9% on a year-on-year basis, while the sales volumes increased by 7%. Segmental revenue for the period reached QAR 5.5 billion with an improved -- improvement of 17% versus the same period of last year. As detailed on Slide #26, segment's EBITDA margins continue to remain strong. In terms of segment's revenue by geography, as detailed on Slide 27, Asia remains a main market for polyethylenes and MTBE, whereas Indian subcontinent remains a key market for methanol and polyethylenes. Fertilizers -- moving on to fertilizer segment. As detailed on Slide 31, the segment reported a net profit of QAR 4.2 billion for the current financial period, with an increase of 48% versus the first 9 months of last year. This increase was mainly driven by growth in revenues, which increased by 70% to reach QAR 11.1 billion. Selling prices improved by 67% versus the same period of last year, while sales volumes increased by 2%. On the other hand, production volumes remained flat versus the same period of last year. As detailed on Slide 32, segment's EBITDA margin continued to remain robust in terms of segment revenue by geography. As detailed on Slide 33, North and South America -- Americas remain the main market for fertilizers, along with Indian subcontinent, and Asia. Steel -- now let's look at steel segment, and you may refer to Slides 35 to 40. Steel segment reported a net profit of QAR 774 million, up 23% versus first 9 months of last year. Improved segmental profits were mainly driven by higher revenues, which increased by 21%. Additionally, segment's associate that primarily produces and sells iron oxide pellets, Foulath Holding, reported commendable financial results on account of improved operations. Growth in revenues was primarily driven by improved sales volumes of 19% due to higher production. Selling prices on average only increased marginally by 2%, mainly due to softening domestic demand, coupled with slowdown in international steel prices. Moving on to Slide 38. Segment's EBITDA margin continued to remain robust following the mothballing decision. I'll now hand over to Rashid.

Thank you, Abdulla and [ Saffan, ] for presenting the financial and operational segmental updates. We will now open the floor for the Q&A.

[Operator Instructions] Our first question comes from Sashank Lanka from Bank of America.

I have a couple of questions. The first one is on the Fertilizer segment. If I look at the EBITDA margins in the quarter, I think they are at 35%. They're probably the lowest we've seen in a few -- in a couple of years. So just wondering what drove this? Obviously, prices declined, but any indication you can give us on gas prices? Because our understanding is that the gas prices are indexed to urea prices in the beginning of the year. Just wondering if prices are -- for gas can fall in line with urea prices? That's the first question. And the second question is more on the demand side of steel. Now with the World Cup soon approaching, just wondering here how we should be looking at demand? Because if I look at the steel segment as well, it does seem like EBITDA margins were pretty weak in the third quarter. And we also saw a decrease in volumes there in Q3 versus Q2.

Regarding the first question related to the EBITDA margin, as you are aware, the product price improved during the first and second quarter where it arise to its peak. However, in the third quarter, you noticed the final product price were under pressure and went down to the range of around [ QAR 600 million ]. This is the main driver of the feedstock costing that we have. Just to look, that we have a feedstock formula where it's captures the year-to-date average selling prices. It has a link to it. So year-to-date versus only the third quarter, you can see the margin is really impacted for that reason. If you want to say anything, [ Saffan, ] related to this?

Basically, if you look at the third quarter itself, the price is around $531, Sashank, compared to year-to-date urea price of plus $600. Now your feedstock price is calculated on the year-to-date price, which is around $600, whereas Q3 margin is based on $531. So margin is -- the respective contest margin is on a lower price than a feedstock is from the year-to-date price. So obviously, that is the reason why on -- that quarter's margin is lower. So you might have an opposite situation whereas your quarter's pricing may be higher, whereas your feedstock may be calculated on a lower price, both ways it could work.

We can move to the second phase related to the steel demand. As you have mentioned that most of the World Cup facility and assets has been really completed. I would like to inform you that the entire World Cup assets then already completed for the last 11-months. So exactly the current year performance and sales, and production was not impacted of the completion of the FIFA assets. However, in the state of Qatar, we still have a construction activities related to a different projects. We have the -- actually the new Qatar economic zone. We have the development of Lusail city, and we have the Al Wa'ab city that is still under construction. And in addition to that, the Northfield expansion would also contributed in the demand of the steel. So basically, the 2022 World Cup facility, they are there for the last 11-months. So this year, what you see right now for the first 3 quarter production and sales of the steel has not been impacted by the completion of that [indiscernible] .

Our next question comes from Faisal Azmeh from Goldman Sachs.

My first question is really on the realized prices in the fertilizer segment. We've noticed that it's somewhat lower than what we're seeing with other companies. Maybe if you can shed some color on why it's low er than the benchmarks that we track. And maybe if you can also give us some color in terms of how to think about the margin framework into next year. I guess if you have a repetition in terms of the pricing dynamics where you have a strong first half versus a weak second half, should we expect margins for 2023 to be somewhat in line with what we saw this year?

Related to the -- our Fertilizer segment where the pricing you see, that's not in line with what you track. We believe that our product been sold in the market based on the market prices. And as you can see, our product's been sold in different regions. And we believe different regions have a different pricing. Europe is different from Asia, and it's different from the North America. So maybe if you are following a certain [ anticipation ], it does not mean that we are way far from that. However, we always target to sell a premium geographic locations, which is reflected in our margin and it's reflected in our… The second part maybe of the question, we just answered that the margins and the feedstock things are always has a relationship between that, how we see it in the next year. Next year, we're going to have the same relationship, I would say. It depends on the final product price.

Maybe if I can squeeze in another question just on -- in terms of the growth prospects of the business, do you feel that there is more potential for feedstock allocation from the government on the petrochemical side, and that's what we saw with the new ammonia project. Do you think QAPCO could also see something similar?

We are always looking to see the opportunities. As of now -- we have not seen anything coming to us from the QatarEnergy as additional quantity. However, when we have something on our hand, and we are sure about it. Of course, we're going to announce it to the market. However, you can see that we have announced 2 projects so far, the Blue Ammonia, which we are expecting an additional feedstock coming to us. And we have the PVC projects. So in case we have any other availability of the new feedstock we're going to announce it to the market.

That does conclude today's questions. I would now like to turn the call over to Bobby Sarkar for closing remarks.

Yes. So if we're done with the questions for today, we can end the call. I want to thank Abdulla, Rashid and Saffan and Riaz, for taking the time to answer our questions. And we will pick this up next quarter. Thank you very much.

Thank you so much. Thanks a lot. I really would like you to go on to the full deck of our presentation. If you have any questions, you can approach our team. We have Rashid, Riaz. We are here always to help you. Thank you.

Ladies and gentlemen, this does conclude today's call. Thank you for your participation. You may now disconnect.