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

Hello, and welcome to the Industries Qatar conference call. I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Bobby Sarkar from QNBFS to begin the conference. Bobby, over to you.

Okay. Thank you, Paulie. This is Bobby Sarkar, Head of Research at QNB Financial Services. I want to welcome everyone to Industries Qatar's Fourth Quarter and Fiscal Year-end 2022 results conference call. So on this call from QatarEnergy's Privatized Affairs Group, we have Abdulla Al-Hay, who's acting manager; Rashid Al-Mohannadi, who is the Head of IR; and Saffan Mohammed, who's the senior financial management analyst; and Riaz Khan, who is the IR Officer. So we will conduct this conference with first management reviewing the company's results followed by Q&A. I would now like to turn the call over 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 the IQ business and performance updates, I would like to mention that this call is purely for IQ investors and no media representatives should be attending this call. Moreover, please note that this call is subject to the disclaimer statements as detailed on Slide 2 of the Investor Relations presentation. Now we can move on to the call. On Thursday, the 9th of February, IQ published financial results of year ended 31st December 2022. And today, in this call, we will 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 Al-Hay, Acting Manager for Privatized Company Affairs; Saffan Mohammed, Senior Financial Management Analyst; Riaz Khan, Investor Relations Officer. We have structured our call as follows: at first, I will provide you with a quick insight on IQ ownership structure, competitive advantages and overall governance structure. Secondly, Saffan will brief you on IQ key operational and financial performance matrices. Later Riaz will provide you with an update on latest segmental performance. And finally, we'll open the floor for the Q&A. To start with, as detailed on Slide #5, IQ ownership structure compromises of QatarEnergy with 51% stake and the rest is in the free float held by various domestic and international corporate individuals. IQ is a credit rated entity by S&P with A+ and Moody with A1 credit rating, both are with a stable outlook. QatarEnergy being the main shareholder of IQ provides most of the head office functions through our service level agreement. IQ Group companies' operations are independently managed by its respective Board of Directors, along with senior management team. In terms of their competitive advantages, as detailed on Slide 8, the group is well positioned with several competitive advantages within its domain strategically, operationally as well as financially. These strengths include efficient and well-maintained asset base, a qualified and highly trained workforce, assured supply of feedstock and competitively priced energy resources, lower operating cost, a dedicated marketing team in the form of [indiscernible] to market the group petrochemical and fertilizer product and well-known JV partners and most importantly, our experienced senior management team. As detailed on Slide 10, from a competitive positioning perspective, IQ ranks among the top-tier companies with the regional downstream space across most of the metrics. In terms of the IQ governance structure, you may refer to Slide 51 and 52 of the IR deck, which covers various aspects of IQ code of corporate governance in further detail. I will now hand over to Saffan to cover IQ operational and financial performance matrices.

Thank you, Rashid. Good afternoon, and thank you all for joining the call. Starting with macroeconomic environment, as detailed on Slide #12, the macroeconomic environment remains volatile mostly throughout the year. As a result of geopolitical uncertainty, along with recessionary fears on account of inflationary pressures and hawkish stance on interest rates by most of the central banks. Also, exceptionally high energy prices in the Europe are persistently weighing on most of the European producers. Additionally, China's 0 COVID policy and related lockdowns, coupled with slowdown in Chinese construction sector remained key catalyst for volatile global economic context during 2022. On the domestic steel market front, recently contoured activities related to FIFA '22 World Cup waited on the domestic steel demand amid muted construction activity that led to lower price trajectories. On an overall basis, product prices across the group basket of products softened during the fourth quarter of 2022 versus third quarter due to cautious consumer demand on account of macro headwinds coupled with comparatively lower crude prices. However, on a year-on-year basis, product prices trends remained positive on account of post-pandemic recovery phase despite macroeconomic fundamentals remain mostly unstable throughout the year. Moving on to the financial performance for the year 2022, as detailed on Slide #16 of the IR presentation, the group reported a net profit of QAR 8.8 billion as compared to a net profit of QAR 8.1 billion for the last year with a growth of 9% on a year-on-year basis. This record financial performance versus last year was largely attributable to the improved product prices, which on average inclined by 18% and translated into an increase of QAR 3.7 billion in group's bottom line earnings. As you can see on Slide #17, sales volume increased by 8% versus last year, primarily driven by higher plant operating rates leading into improved operating rates, leading into improved production volumes, along with restarting of certain production facilities. The growth in sales volume contributed QAR 2.1 billion positively to the current year's bottom line earnings versus last year. The overall growth in selling prices and sales volumes led to an overall growth in revenues for the group, which increased by 28% during the financial year 2022 to reach to QAR 25.8 billion. As detailed on Slide 15, the group production level were up on last year by 9%, we start up previously not bold DR2 facility, having a larger capacity together with higher plant operating days noted with the petrochemical segment, mainly contributed positively towards an overall increase in production volumes during the current period. Moving on to quarter-on-quarter performance. As detailed on Slide 16, the group revenue marginally declined due to slightly lower sales volume, while the average selling prices remained relatively flat despite global economic context remained under stress due to recessionary fears and continuing geopolitical tension. This kept most of the macroeconomic indicators volatile during the latter part of 2022. On the other hand, net profit improved by 10% due to lower operating costs, partially offset by lower sales volumes. 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 ensured our competitive advantage -- competitive advantage. 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 8.8 billion, in terms of free cash flows during the financial year, as detailed on Slide 18. I'll now hand over to Riaz to cover the segmental performance.

Thank you, Saffan. I will start with the petrochemical segment. As detailed on Slide 25, Petrochemicals segment reported a net profit of QAR 2.5 billion for the year ended 31st of December 2022, marginally down by 1% versus last year. This marginal decrease was mainly due to a slight decline in gross margins as growth in segmental revenue being almost offset against higher operating costs. Blended product prices for the segment improved by 2% versus last year as a result of recovery of demand following post-pandemic recovery. Higher energy prices, coupled with supply bottlenecks. Sales volumes also improved by 14% compared to the last year, in line with the growth in production volumes against the backdrop of higher facility availability. Growth in selling prices, combined with higher sales volumes led to the overall growth in the segmental revenue and reached QAR 7.0 billion for the current year with an improvement of 17% versus last year. On a year-on-year basis, production volumes increased by 15% as the segment's polyethylene segment was on a periodic large-scale maintenance shutdown during the fourth quarter of 2021 while segment's fuel additive operations were on a commercial shutdown during early parts of last year, which affected the last year's production volumes on an overall basis. As detailed on Slide 26, segment's EBITDA margins continued to remain strong. In terms of segment revenue by geography, as detailed on Slide 27, Asia remains the main market for the 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 5.3 billion for the year ended 31st of December 2022 with an increase of 5% versus 2021. This increase was primarily driven by growth in segmental revenue where segmental revenue grew by 41% for the year 2022 versus the last year. This was primarily due to higher selling prices. Again, restricted supply from key exporting regions together with inflationary pressures, due to higher core prices, along with higher energy prices and geopolitical conflicts remained the key factors for an elevated year-on-year price trajectories for the nitrogen-based fertilizers. Sales volumes also increased during the year, mainly due to timing of shipments and marginally improved production levels. Production within the segment improved marginally as segment strains were available for higher operating days due to lower maintenance during the current year. As detailed on Slide #32, segment's EBITDA margins continue to remain robust. In terms of segmental revenue by geography, as detailed on Slide #33, Asia remains the main market for fertilizers during the year 2022 along with Indian subcontinent and North America and South America. Now let's discuss the steel segment, and you may refer to slides 35 until 41. Steel segment reported a net profit of QAR 888 million, up by 24% versus last year. Improved segmental earnings were mainly driven by higher revenues, which increased by 10% versus 2021. Additionally, segment's one of the associates that primarily produces and sells iron oxide pellets Foulath Holdings reported commendable financial results against a backdrop of improved financial operations. Qatar Steel's share of net earnings in Foulath increased by threefold versus last year and reached almost QAR 0.5 billion for the year ended 31st of December 2022. Growth in revenue was primarily driven by improved sales volumes, which increased by 14% and was mainly linked to higher production volumes. Production also ramped up during this year as the segment restarted DR2 facility, a relatively larger facility that was previously mothballed and has been decided to shift the production from the DR1 facility. Restarting of DR2 allowed the segment to have a greater operational flexibility and improved output optimization. Selling prices, on average, marginally decreased by 4%, mainly due to softening demand coupled with slowdown in international steel prices. Moving on to Slide 38. Segment's EBITDA margins continue to remain robust following the mothballing decision back in 2020. I will now hand over to Rashid.

Thank you, team, for comparatively covering the financial operational segment update. I think we can now open the floor for the Q&A.

[Operator Instructions] And your first question comes from the line of Anoop Fernandes from SICO.

Congrats on a great year. My question is on the gas price. Is there any change in the gas price formula this year that you're expecting? And if there isn't any change, do you expect the gas pricing in the fertilizer business to be substantially lower Y-o-Y in the first quarter given that urea prices have corrected so deeply?

Thank you for asking. I believe this year, a special year, we achieved a great net income of QAR 8.8 billion. We also proposed a great dividend proposal of 1.1. So thank you for congratulating us on such great results. Going into the gas prices, there is no changes took place this year related to the gas prices. That is exactly similar to the previous years. And we are not anticipating any changes in the future.

Yes. Just to clarify, I mean, based on the -- what you've guided in the past, can we expect the gas prices to be substantially lower in the first quarter given that the indexation component would be a lot lower because urea prices have fallen so much?

As you are aware, the gas prices is linked to our formula, which is market-linked as well. So it has the flexibility of the rate to be changed, while the end product prices are changing. And we have explained this mechanism earlier, and I believe you are aware of the such mechanics.

Okay. So just to clarify, I mean the -- the formula gets reset at the start of the year, right?

Yes.

So from the 1st of January 23, we again go back to the base price plus whatever the indexation is it starts of fresh?

Exactly, and it is an accumulative formula.

Yes, I understood. Just to confirm.

[Operator Instructions] And your next question comes from the line of Sashank Lanka from Bank of America.

Again, congratulations on a strong set of results again, in 2022. I have 2 questions on my side. The first 1 is on the blue ammonia project that was announced last year. We understand the startup is Q1 2026. The CapEx for the project is around $1 billion, which seems quite low when you look at other similar projects globally. So just wanted to understand the backdrop for this? And what the agreement with QVRS is, which I understand will be supplying the renewable energy for this project. So any details there will be highly appreciated. That's the first question. And the second question is just on your dividend. If I look at dividend payment year-on-year. I think it was kind of flat. Your net cash position is at QAR 19 billion, which is, I think, at record high levels. if you look at some of your peers, they did increase dividends and also paid special dividends in the region. So just wondering if there's more headroom for you to pay higher dividends given the substantial amount of cash you have on your balance sheet.

Thank you for asking us these questions. Going to the blue ammonia project, we need to make to separate, there are 2 projects there. There is the blue ammonia train, which is the cost of around $1 billion. And there is the carbon capture facility, which is QatarEnergy projects. This is why you are seeing that such project is, I would say, a lower project than the other. So the carbon capture facility is the facility provided by QatarEnergy. And as we have announced and disclosed earlier, there will be a fees -- a minimal fees for the carbon capture storage at the facility. So I hope this is clear to you right now.

Sashank, so the CCS will be built and operated by Qatar energy renewable solution, for which, fee will be charged from the capital -- the fertilizer business.

Okay. And I mean, just in terms of -- I know this is probably a question that's maybe premature, but just in terms of pricing, how this would work for blue ammonia versus traditional ammonia? Is that already stated in the contract?

It's too early because still there is no established market for blue ammonia, even other operators like whoever -- who only 1 test -- a couple of test shipments have been done, right? So no 1 has clear visibility on blue ammonia as a product. Most of the people are using it for energy, right? Instead carrying hydrogen, they carry ammonia as energy, right? So still a lot of test marketing has been done. So we can see when everybody comes into real operations, any other name [indiscernible], still no real sales taking place. So once that done only, we can see how much premium the customers are willing to pay. A lot of hype is there, but no real premiums have been seen. Discussions are people are saying it can be 200, 150, 250, nothing is seen.

Okay. And just in terms of the fees, how is this going to be based on that you will be paying QatarEnergy? Is it based on your volumes? Or is it cost plus basis? How does that work?

Still under discussion. Nothing has been there will be principal agreement agreed based on which it will be both win-win situation for both parties. Nothing has been agreed upon in the discussion.

So moving to your next question related to the cash position that we have. I agree with you, we have a strong cash position of QAR 19.2 billion. IQ has been generous as usual, every year, of paying the dividend. This year, the dividend yield, if you take it, it's more than 7.7%. So it even give you more than what the bank gives you for the fixed deposit, I would say. I'm not expecting for a different proposal that will come more than 1.1. That is the highest in the history. Previously, IQ paid the same amount. And right now, due to the strong financial, we paid the same. Also, we need to consider that the blue ammonia project is a self-financed projects, we need to build the reserve for it. Also, we need to consider PVC projects that also IQ projects self-funded. Also, we have announced in the previous year that in case of any foreigner shareholder in our group are willing to have their share for sale, we are willing to enter into a negotiation. So we reserve that cash for the future strategy and future requirements.

One more point, the industry which we are operating is very cyclical. Urea was $700 last year in January. Now this year, it is below $400. So the majority of our cash flows are very cyclical. So we need to keep some buffer as well.

Okay. I appreciate the color.

Your next question comes from the line of [indiscernible] from Ashmore Investments.

Two questions, please. The first 1 just goes back to the dividend. Could I take the 2 consecutive years of a sort of similar payout ratio as the start of a formal policy on that dividend? And then the second question was just to try and understand the economics of the blue ammonia project as opposed to conventional and then understand the sort of greener credentials in that. But just in however you can describe it where 1 would see a sort of benefit from this that isn't necessarily related to obviously, environmental impacts or -- so just to get a picture.

Okay. Regarding the dividend and is it like a policy that we are following? I will answer that question to it's not a policy. Every year, the Board of Industries Qatar are meeting and discussing the dividend proposal, depends on the current performance and the future requirement of the group companies. Luckily, for the last 2 years, the Industries Qatar are performing very well. Last year, net profit of QAR 8.1 billion almost. This year, our net profit of QAR 8.8 billion or QAR 8.9 billion, amazing results. So I believe the Board also taken in consideration the improvement in the net profit. This is why last year, the dividend was at exactly QAR 1 and this year of QAR 1.1. So I hope this is very clear to you. What was the second question?

Blue ammonia like more kind of economics...

Economics. Definitely. We believe that the blue ammonia will bring additional value being -- we are seeing the blue ammonia as a value-added product. And it will also improve the sustainability position of the fertilizer segment. So it's not only about being a value-added product, but also it will be adding a value for the group being moving toward more sustainability and environmental friendly.

Can I just throw in 1 quick follow-up relating to the blue ammonia? Was -- when you -- did you consider the carbon capture yourselves at some point and then opted for this sort of agreement as it stands? And just trying to understand why you didn't go and do the whole thing yourselves if you had the choice?

No, no. I believe the QatarEnergy, the asset owner, they are the ones also taking the lead of such projects related to the environment. And this is purely came from QatarEnergy in line with our project of the blue ammonia. So we have, I would say, both of the group companies like the fertilizer segment and QatarEnergy, they talk to each other, then they come to that proposal for QAFCO to build the train for the blue ammonia and QatarEnergy to have the carbon capture storage facility as well.

Your next question comes from the line of [indiscernible] from Avalon Global Research.

Congratulations for great set of numbers. I just want to ask you 2 questions. One is as a CEO income statement, I see and income from investment of QAR 476,000 -- so QAR 476 million. So I just want to know what exactly it is. Secondly, yes, I see strong increase in the general admin and selling expenses. Can you just help give me like what exactly -- what is the thing which is to get the higher G&A expenses?

Can you give us a second while open the financial. I think for the first part, on your question about the 400-odd number income, this basically comes from our associate, Foulath. As we mentioned that at the beginning of the call that we -- our Foulath associate made a commendable performance and this is where the QAR 400 million outcomes. For the G&A question, just give us -- I think Saffan can take it over.

Yes, G&A has declined for your information from QAR 712 million to QAR 679 million, but if you combine the selling and distribution, it remained pretty much flat, but still decline. Your answer to share of results has increased because of our associated investment in train. Income from investment, obviously, it has increased for a couple of reasons. Number one, our bank deposits have increased in terms of absolute number and the rate of return, fixed deposit rates have substantially increased compared to 2021. So that had brought fairly large absolute return. I hope answered your question.

Can I have 1 more follow-up question. The steel prices -- hello.

Go ahead, please.

On the steel segment, if you look at the fourth quarter numbers, the price has declined and across all key products. So can we expect some revival in the prices in the first quarter or maybe in second quarter? If you can give us some guidance on the same?

Basically, during fourth quarter or the second half of 2022, they have a slowdown due to PFI activities. So once PFI [indiscernible], we are expecting a recovery. So definitely, the prices will recover, but it will be recovering at a slower pace. So Q1, Q2, we expect recovery in the domestic market. There are new projects coming up. So that will help the market to recover in the domestic front.

On the international front, if you look into the steel dynamics -- there are some discussions going on with the recent earthquake in Turkey in the Southern region where there was most of the steel facilities were located. It is yet to be noted how the overall supply will get impacted with that. So that also 1 point because, ultimately, what happens is in the international steel markets that gets cascaded to an extent to the local markets. So it's like 2 aspects. One is the local new demand, which is post World Cup, and then on the international front, the steel prices. So international front in a short-term basis, slightly the prices have gone up in recent 2, 3 weeks since 31st of December. And 1 of the key reasons for that is the Turkish earthquakes because there are some facilities located there and yet the market needs to see -- wait and see that how things will turn out on those affecting the prices.

They are also 1 of the major suppliers of steel.

I hope we answered your question.

Your next question comes from the line of Rene Selouan from Jadwa Investment.

My question is in regards to the fourth quarter urea price. It came in higher than the third quarter. That's number one. And number two, given that the price was higher in the fourth quarter, 1 would have assumed that maybe margins should have been quite similar to the third quarter, given that gas price is linked to the urea price. So if you could explain the higher price quarter-on-quarter and the much higher margin quarter-on-quarter -- EBITDA margin.

Yes. So firstly, basically, I'll take it in the reverse order, your question. In terms of the EBITDA margin, that's true. We got uplift in terms of EBITDA margins. One reason for that is basically the year-to-date pricing formula because we consider the year-to-date prices. Until the third quarter, the year-to-date price was higher and the Q4 price was on a lower side. So on the top line, that is the revenue you were making less revenue versus the cost side where you were charging or you were ending up paying a higher price for the gas because the urea price -- year-to-date urea price was higher. Now reaching to the year-end, the prices were like basically in the latter part of the year, the prices for urea was on a downward trajectory compared to the first half of the year. So when we reach to the year-end, the prices -- the year-to-date prices, mathematically slightly declined, and that really helped the cause in increasing your basically overall margins. This is the first point. And obviously, the overall prices which we achieved in Q4 versus Q3, that also helped the cause. And that is predominantly basically the Muntajat mandate where they tend to ensure the best netbacks available in the markets based on their relationships and their presence in multiple geographies at the same time. And that is like a credit to them, basically that we achieved better prices even despite in depressed markets. And like overall, mathematically, your year-to-date pricings were on a downward side. And that's why your cost also reduced comparatively. So hopefully, I answered both your questions.

There are no further questions at this time. I would like to turn the call back over to Bobby for closing remarks.

Thank you, Paulie. So if there are no further questions, we can end the call today. I want to thank QatarEnergy management for taking the time to answer our questions, and we will pick this up again next quarter. Thank you so much guys.

Thank you, Bobby. Thanks, everybody, for being with us on this call.

This concludes today's conference call. You may now disconnect.