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. I'd now like to welcome Bobby Sarkar to begin the conference. Bobby, over to you.

Okay. Thank you, Sherri. Hello, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Industry Qatar's First Quarter 2023 Results Conference Call. So on this call from QatarEnergy's Privatized Affairs Group, we have Abdulla Al-Hay, who is the acting Manager; Rashid Al-Mohannadi, who is the Head of IR and Communications; and Saffan Mohammed, who is the Senior Financial Management Analyst. So we will conduct this conference with management first reviewing the company's results, and then we will follow it up to the Q&A. I will 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. Kindly note that [ MS Link ] is only for displaying the presentation on the screen. In case you want to ask questions at the end, you may dial in on the number displayed on the invitation shared with you. 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 disclaimer statements as detailed on Slide #2 of the Investor Relations presentation. Now we can move on to the call. Yesterday, on the Sunday -- on Sunday 7 May, IQ published its financial results for the 3-month period ended 31 March 2023. And today, in this call, we will go through these results and provide you an update on key financial and operational highlights. Today, on this call, along with me, I have Abdulla Yaqoob Al-Hay, Acting Manager for Privatized Companies Affairs; and Saffan Mohammed, Senior Financial Management Analyst. We have structured our call as follows: at first, I will provide you with a quick insight on IQ ownership structure and competitive advantages, and overall governance structure; secondly, Abdulla will brief you on IQ's key operational and financial performance metrics; and later on Saffan will provide you an update on quarterly results and the latest segmental performance. And finally, we'll open the floor for the Q&A session. To start with, as detailed on Slide #5, IQ ownership structure compromised of QatarEnergy with 51% stake and the rest is in the free float helped by various domestic and international corporates and individuals. IQ is a credit-rated entity by S&P with A+ and Moody's with A1 credit rating, both with a stable outlook. QatarEnergy being the main shareholder of IQ, provides 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 the competitive advantage, 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: an efficient and well-maintained asset base; a qualified and highly trained workforce; assured supply of feedstock and competitively priced energy sources; lower operating costs; a dedicated marketing team in the form of Muntajat to market the group's petrochemical and fertilizer projects; strong liquidity position and reputable JV partners; and most importantly, our well experienced senior management team. As detailed on Slide #10 from competitive positioning perspective, IQ ranks among the top-tier companies within the regional downstream space across most of the matrices. 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 and further detail. I will now hand over to Abdulla to cover IQ key operational and financial performance matrices.

Thank you, Rashid. [Foreign Language] Good afternoon, and thank you all for joining us. Starting with the macroeconomic environment, as detailed on Slide #12, the macroeconomic environment continues to remain challenging during the first quarter 2023 because of the geopolitical uncertainty in the Russian-Ukrainian conflict, reduced demand for most of the commodities with recessionary fears on account of inflationary pressure and hawkish monetary policies stance by most of the central banks. Especially also the fertilizer sector and contrast to the first quarter of 2022 when fertilizer prices hit decade highs, the price continued to fall during the first quarter 2023. This occurred amidst downward pressure of grain, energy, other commodity prices, and general inflation. Also, some European fertilizer production came back online following the capacity curtailments during the fall of 2022 owing to the energy crisis and easing of supply and logistic issues in Brazil during the half year of 2022. Similarly, the performance of the petrochemicals industry in the first quarter 2023 was influenced by market sentiments around China's reopening, oil price volatility and the global macroeconomic uncertainty. Although some petrochemical prices improved slightly compared to the fourth quarter of the year 2022 due to better supply-demand dynamics, mainly on the back of the relatively better supply-demand dynamics. Steel sector remained somewhat resilient internationally, as China's slow paced post-COVID recovery phase started to take shape. However, sluggish phase on the Chinese construction sector continued since last year. The domestic steel market showed signs of recovery following the muted construction activities since latter part of 2022. Moving on the financial performance for the 3-month period ended 31 March 2023, as detailed on Slide #16 of the IR deck. The group reported a net profit of QAR 1.2 billion as compared to a net profit of QAR 2.7 billion for the last year with a decline of 57% on a year-on-year basis. Additionally, group revenue of first quarter of 2023 declined by 32% to reach QAR 4.8 billion as compared to QAR 7.1 billion reported for the first quarter 2022. This negative financial performance versus last year was largely attributed to the lower product price, which on average declined by 35% and translated a decrease of QAR 2.6 billion in the group's bottom line earnings, as you can see on Slide #17. On other contrary, sales volume increased by 3% versus the same period of last year, primarily driven by higher plant operating rates. This growth in sales volume contributed QAR 199 million positively to the current period bottom line earnings versus the same period of last year. As detailed on Slide #15, the group production level were up on the first quarter of 2022 by 14%. This improvement in production was largely driven by higher operating rates and better plant availability across all [ the units ]. I will now hand over to Saffan to cover the quarterly results and segmental performance.

Thank you, Abdulla. Moving on to quarter-on-quarter performance, as detailed on Slide 16, the group revenue, mainly due to -- revenue declined mainly due to lower selling prices, which declined by 22% versus fourth quarter of 2022, and the global economic context remained under stress due to recessionary fears and continued geopolitical tensions and resulted in downward price trajectory for most of the commodities. On the other hand, sales volume increased by 10% linked to better production achieved on a quarter-on-quarter basis, primarily in the steel segment being partially offset by lower volumes reported for petchem. Our robust models -- our robust models 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 low-cost operator ensured our competitive advantage. Moreover, as detailed on Slide #19, IQ's EBITDA margins continued to remain robust. Also, we continue to build our strong financial position with improved cash flow generation capabilities and the group generated QAR 0.8 billion in terms of free cash flow during the first quarter of 2023, as detailed on Slide #18. We move to segmented performance. In petrochemical segment, moving on to the segmental performance. Petchem segment reported a net income of QAR 382 million for the first quarter of 2023, significantly down by 43% versus the same period of last year of Q1 2022. The decrease was mainly linked to decline in product prices, which was -- decline of segmental revenue, which has declined by 26%, which was affected by lower blended selling prices versus the same period of last year. Blended product prices for the segment declined by 23% versus last year as a result of general decline in petchem prices at the macro level due to combined effect of decline in crude and weaker consumer demand against the backdrop of deteriorating macroeconomic fundamentals and a general decline in demand due to, again, recessionary fears. Sales volume also declined compared to the first quarter of 2022. However, production volumes on the other hand, improved against the backdrop of higher facility availability. As, if you all recall, we had fairly large shutdowns during the previous years. On a quarter-on-quarter basis, segment net earnings declined by 2%, being predominantly linked to segmental revenue, which declined by 8% versus the fourth quarter of 2022. The decline in segmental revenue was primarily linked to lower volumes, reported amidst lower production. However, on the other hand, selling prices improved sequentially by 4% on the backdrop of relatively better supply-demand dynamics within the polyethylene segment. Moving on to fertilizer segment. Fertilizer segment reported a net profit of QAR 510 million for the first quarter of 2023, with a decline of 71% versus the same period of last year. This decline was primarily driven by lower segmental revenue. Segmental revenue was decreased by 44% for the first quarter of 2023 versus the same period of last year due to lower selling prices. Selling prices declined by 45% amid macroeconomic pressures affecting fertilizer markets. Sales volume marginally increased by 3% during the first quarter of 2023 on account of improved production levels, which increased by 11% on a year-on-year basis amidst relatively the shutdown days reported for the current quarter versus same quarter of last year. On a quarter-on-quarter basis, segmental revenue decreased by 35% versus the previous quarter, owing to lower selling prices. Selling prices declined by 38% versus previous quarter and with continued weakness in the fertilizer markets, and challenging the supply-demand economic dynamics. On the other hand, sales volumes improved and the growth of 6% was noted in sales volumes on a quarter-on-quarter basis. Segment's net profit for the current quarter decreased by 57%, mainly due to comparatively lower prices realized during first quarter of 2023 versus the previous quarter, as well as the segment reported higher operating costs on account of unfavorable inventory movement lead to higher sales volumes. On the steel segment, steel segment reported a net profit of QAR 134 million, down 49% versus last year. Lower segmental earnings were mainly driven by lower revenues, which has decreased by 6% versus Q1 of 2022. Additionally, the earnings were also impacted by higher volume-related operating expenses and marginally reduced by other operating income. Decline in revenue was primarily driven by lower selling prices, which declined by 16% year-on-year basis. This was partially offset by higher sales volume, which was increased by 12%, mainly linked to higher production volumes. On a quarter-on-quarter basis, segmental profit improved by 17% versus fourth quarter, mainly on account of higher revenues. Segment revenue increased by 64%, mainly due to higher sales volume, which increased by 55% as demand returned to normal levels as domestic construction activities are gradually returning to mid-'22 levels. Also, selling prices improved sequentially by 6%, mainly due to constructive supply-demand dynamics within the steel markets, both domestically and internationally. I'll now hand over to Rashid.

Thank you, and thank you, everyone, for presenting the financial, operational and segmental update. I think we can now open the floor for the Q&A with the current dial-in number. Currently, the MS link is purely for displaying the presentation. And if you have any questions, you might ask a question on the dial-in number. Thank you.

[Operator Instructions] Our first question comes from the line of Ricardo Rezende from Morgan Stanley.

I guess, the first question is on the outlook for fertilizers for this year. I understand that you have some of the benefits on the cost side throughout the year. But if you could give us a color on how you're looking at on the fertilizer segment for 2023? And then the second question is on dividends. For the past couple of years, given the strong performance, you've been paying about 75% of your net income as dividends. And if given the current outlook, it's looking like that 2023 should be a little bit weaker compared to the past few years. So how should we think about this in payment or the payout for 2023, given a weaker outlook, but at the same time, you're having a very strong cash balance position?

Thank you for asking these 2 questions. Related to the outlook, we usually does not discuss any outlook results. We discuss our historical performance. However, for the fertilizer, we see that the market right now -- as of now are stable. However, the prices got impacted for the following 3 quarters of the year, we hope the prices to stabilize, but it's not going to be as strong as 2022 when the prices achieved the highest historical record. For the year-end dividend proposal, if you compare it to last year or based on the historical data that you can see in our presentation slide, you will notice that Industries Qatar been very generous in paying dividends, especially during half time of COVID, where Industries Qatar paid 100% of their net income as dividend. The dividend payout ratios or the dividend decision usually came at the year-end where all the Board members discuss the market situation and discuss the company requirements for their all future capital expenditure, plus the routine maintenance, then they decide on a dividend that would be meeting the expectation of the market. I hope I answered your question.

Our next question comes from the line of Anoop Fernandes from CICO (sic) [ SICO ].

This is Anoop from SICO. I have 2 questions related to your fertilizers business. So if I look at the first quarter '23 EBITDA margin, and I compare that with 1Q '21, so we were at 35% in 1Q '23. And in 1Q '21, we were at 53%. But if I look at the urea prices, they are broadly comparable. And in fact, the volumes in 1Q '23 were higher than 1Q '21. So just trying to understand why is there such a big difference in the EBITDA margin profile if the urea prices have been sort of comparable? That's question one. And the second question is, your urea assets now have been running at a pretty high utilization rate above 100%. Are you expecting any or planning for any shutdowns over the course of this year?

Okay. The answer to that question number 1 is quite easy. Can you look at -- if you're comparing your 2021 versus 2023, you need to compare also Q4 2020 and Q4 2022 urea price as well. Now, the natural gas prices are also linked to urea prices, correct? Now, the Q4 urea prices was around $600 on average, whereas Q4 2020 urea prices was around $250, if I recall correctly. Correct, if you look at your historical numbers? Now, our feedstock valuation or feedstock pricing is linked to urea prices, right? Now -- right? So if you look at those prices, now in this quarter, now our Q1 part of the urea that has been sold coming from the fourth quarter of 2022. So our inventory that has been sold in Q1 are valued at the inventory that is coming from the previous quarter, which has been valued at very high valuation, the feedstock that has been valued using very high feedstock, which is linked to high urea prices. Whereas in 2021, the urea prices were valued at very low prices, using around $250, $270 levels of urea. So obviously, the margins are high.

Yes. So yes, I mean, I had a sense that this might be the case, but is it fair to assume that in the second quarter, we will see the gaps drop significantly?

Obviously, basically, usually, the FIFO inventory valuation has been used. So obviously, the quarter 1 inventory will be sold in quarter 2 going forward, the urea price is maintained and/or improved. So obviously, Q1 production will be sold in the next quarter. So we are expecting the margin to be improved, unless some other [indiscernible] don't happen. The second question, usually, we have 6 pairs of [ trains ], 6 pair of the ammonia, urea [ trains ]. Obviously, every year one pair of train will go to a shutdown. So obviously, we will have a shutdown maybe in the second half of the year. During the first quarter, we did not have a shutdown. So that's why you have a fairly large or very high utilization. So there will be some shutdowns which we -- probably in the second half of the year.

Next question comes from the line of Nitin Garg from SICO.

My question is similar to the previous question asked by Anoop. So if we look at second quarter of '21 -- 2021, the urea price was $360. And this quarter also, the urea price is around $355 So -- but the gas cost in the second quarter of '21 was $1 billion, but the gas cost in this quarter is $1.5 billion. So I mean, is it the same explanation, I mean, the inventory thing for this quarter, I mean, the gas cost is linked to the previous quarter, when the urea price is $580 for the last quarter, fourth quarter of '22?

Are you referring to this particular slide, Nitin? Slide number...

No, no. I'm comparing this thing. Again, in line with what Anoop asked, the -- in second quarter of 2021, the urea price was $360. And this quarter also, the urea price is $360, but the margins in this quarter are much lower.

That again, basically, if you look at Q4 urea prices were in the range of $600 year-to-date prices because that -- your valuation of your inventory -- your feedstock, which is primarily the key component of your inventory is valued at that price. Obviously, that moved into this quarter, obviously -- or 70% or 65% of your custom will comes from that. So that has been moved into our Q1 sales. Obviously, you have a very high gas cost is there.

Okay. So just a follow-up. I mean, how you pay the gas price? Is it like a monthly thing or a quarterly thing?

So that is between QatarEnergy and QAFCO. The movement whether it is sitting -- in your P&L, whether it is -- but it's moving to cost of goods sold, it's nothing to do -- that's a cash flow statement thing. So that is not part of your P&L. So payment is between QatarEnergy and QAFCO. So they have terms. Sometimes it's 45 days, sometimes it is 60 days, it depends. So anyways, but we discuss in the P&L on the cash flow statement, correct?

No, no. What I'm...

You try to understand. So that is relevant to this question. What we try to look at here, if our cost of goods sold, the EBITDA margin has increased because in Q4 because of we had very high urea price, our gas costs have increased. That gas -- that increased inventory has been sold in Q1 because of the FIFO valuation. Now, the inventory that had been produced in Q1 will be gradually sold in the subsequent quarters, right? Whether QAFCO pays in 1 month or 2 months, that is between QatarEnergy and QAFCO. That has nothing to be part of this whole equation, I believe.

Okay. So how much lag we should assume? Like say, for every quarter, it would be like, as you said, around 60% to 70% would be from the previous quarter.

No. That again depends on demand [Technical Difficulty] in the quarter, if previous quarter's inventory plus the current quarter's production had all been sold, the margin would have been improved, right? It all -- if you read our speaker notes, we have mentioned clearly, there is demand and supply issues. That's what the price was also down, right? Now had the demand had been more, the urea prices would have been around $400 plus.

Okay. Any update on your expansion?

QAFCO 7? It's going as progress -- as planned.

Our next question comes from the line of Sashank Lanka from Bank of America.