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

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

Okay. Thank you, operator. Hello, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I want to welcome everyone to Industry Qatar's Second Quarter 2023 Financial 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 followed by a Q&A session. I would like to turn the call over now to Rashid. Rashid, please go ahead.

Thank you, Bobby. Good afternoon, and thank you all for joining us. Before we go into the IQ business and performance update, I would like to mention that this call is purely for IQ's investor 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 IR deck. Moving on with the call. On Tuesday, 8 of August, IQ published its financial results for the 6-month period ended 30th June 2023. And today in this call, we'll go through these results and provide you an update on key financial and operational highlights. Today on this call, along with me, I have Mr. Abdulla Yaqoob Al-Hay, acting Manager of Privatized Company Affairs; alongside Saffan Mohammed, who is the Senior Financial Management analyst. We have [indiscernible] of the call as [indiscernible] into IQ ownership structure, competitive advantages and overall government structure. Secondly, Abdulla and Saffan will brief you on IQ's key operational and financial performance metrics. Later Saffan will provide you with an update on the latest segmental performance. And finally, we can open the floor for the Q&A. To start with, as detailed on Slide #5, IQ ownership structure compromises of QatarEnergy was 51% stake and the rest is in the free float and by various domestic and international corporates and individuals. IQ is credit rated entity by S&P with AA minus with a stable outlook and move with A1 to credit rating with a positive outlook. QatarEnergy being the main shareholder of IQ provides most of the head office functions through a service level agreement. IQ Group company's operations are independently managed by its respective Board of Directors along with senior management team. As detailed on Slide #10, from a competitive position in prospective, IQ ranks among the top-tier companies within the regional downstream space across most of the [ nexuses ]. In terms of the IQ government structure, you may refer to Slide 50 and 52 of the IR deck, which covers various aspects of IQ code of corporate governance and further detail. I will now turn over the call to Abdulla to cover IQ key operational and financial performance matrices.

Thank you, Rashid. [Foreign Language], and thank you all for joining us. I am pleased to share several significant updates at the group level. Firstly, I would like to inform you about a development that stems from collaborations with various authorities in Qatar. As you can see on the Slide #5, footnote. With essential support from our shareholders and the subsequent approval by Council of Ministers on October 12, 2022, regarding amendment to our Article of Association and the Industries Qatar has diligently engaged with relevant authorities. Today, I am proud to announce that the forum ownership limit has been successfully raised to 100%. This move reflects our commitment, and we appreciate ongoing trust of our stakeholders. Secondly, in line with our official press release on June 25, 2023, Industries Qatar Board of Directors has granted preliminary approval of a potential acquisitions of 100% stake of Al Qataria Steel. This strategic move is anticipated to be executed through our wholly owned subsidiary Qatar Steel. It is important to note that the successful completion of this transaction is subject upon securing the regulatory clearance and diligently addressing all potential considerations. Once this transaction is completed, we will be disclosing further details for those who -- to dive deeper into a specific of the target company, which is Al Qataria Steel. They are welcome to visit their website at www.qsteel.qa. Moving on with the macroeconomic environment as detailed on Slide #12. The macroeconomic environment remained challenging during the first half of 2023, as geopolitical uncertainty persisted along with recessionary fears amongst most of consumer linked to how cash monetary policy by money, policymaker resulting in subsidy demand for most commodities. Concerning performance within the petrochemical segment, a slower-than-expected recovery in the global economy oil product volatility and uncertainty in the global macroeconomic outlook negatively weighted on petrochemical segment performance in the first half of the year. On the other hand, buyer cautious approach, mainly linked to monetary policy driven by recessionary fears continue to challenge an already oversupplied market. On fertilizer front, prices have been on a downward trajectory, primarily driven by a cautious approach from buyers along with high inventory levels and key markets. The easing of supply interruption from the challenging phase in 2022 has contributed to this trend. Moreover, this is a broader impact on declining grain, energy and other commodity prices, along with general inflation adding to the prevailing market pressure. Moving to the steel segment. Demand for the domestic still continued to recover following a muted demand during the later part of 2022, on the backdrop of restricted construction activities. On the global front, the steel price remained waved with Chinese slow paced post-COVID recovery is starting to take shape on one side. Subsidizing by the sluggish sales in the construction sector affecting mainly by a high interest rate environment. As a result, this places several burden on the construction sector. Moving to the group performance. The group reported a consolidated net profit of QAR 2.1 billion for the 6 months ended 30th June 2023, with a decline of 62% versus last year. Earnings per share for the first half was QAR 0.35 versus QAR 0.90 for the last year. Growth revenue for the first half 2023 declined by 38% to reach to QAR 8.9 billion as compared to QAR 14.3 billion reported for the last year. Group's financial performance for the 6 months ended 30th June 2023 was largely attributed to decline in the blended average product price being partially offset by marginally higher sales volume and lower OpEx. Blended average product price declined by 40% versus last year 2022, and reached to $473 per metric ton. Decrease in the product price contributed QAR 5.9 billion negatively to the group net earnings, mainly due to lower price trajectory noted across the group basket of products and macro challenges. Fertilizer prices remained a key contributor to the overall decline and the blended average product price. As fertilizer prices declined by more than 30% versus last year and contributed QAR 4.3 billion to a reduction in the group bottom line. As detailed on Slide #15. Sales volume increased marginally by 3% versus the first half of 2022, primarily driven by higher production volume. Improved sales volume contributed by QAR 400 million and the overall growth in the group net earnings for the first half 2023 compared to last year. On the other hand, operating cost for the first half 2023 decreased by 20% versus the first half of 2022. The decrease in the operating cost was primarily linked to lower variable costs driven by end product price and tax, low material cost, partially offset by increase in volume and general inflation. With that note, I will hand over to Saffan to provide you with the quarterly results analysts.

Thank you, Abdulla Yaqoob. Moving on to quarter-on-quarter performance. as detailed on Slide 16, during the second quarter of 2023, the group's net earnings declined by 21% versus the first quarter and reached QAR 900 million mainly due to lower revenue, we had a decline of 16% [indiscernible] on a quarter-on-quarter basis. A combination of reduction in selling prices and sales volumes mainly drove the decline in group revenue. Selling prices declined by 9% sequentially, with global markets remain strict. Lower selling prices contributed QAR 0.4 billion negatively to group earnings sequentially as presented on Slide 17. On the other hand, sales volume declined by 8% and contributed a further QAR [ 0.38 ] billion negatively due to earnings. The lower sales volumes were primarily attributed to lower production between the fertilizer segment during second quarter of 2023 due to lower operating sales amid the facility maintenance. Our robust business models and the strength of our global supply chain continued to leverage our resilience and provide the flexibility to our operations, whereas our continued positioning of being a low-cost operator model ensured our competitive advantages. Moreover, as detailed on Slide 19, IQ's year-to-date EBITDA declined by 52% versus year-to-date last year, predominantly linked to lower product prices, partially offset by group's lower operating cost. Net earnings for Q3 2023 also declined versus second quarter of 2022 due to lower revenue, partially offset by lower operating costs. Financial position remained robust with cash and bank balances across the group standing at QAR 14.9 billion as of 30th June. After accounting for a total dividend payout of QAR 6.7 billion for the financial year 2022, and currently, the group has no long-term debt obligations. Group's reported total assets and equity reached QAR 40 billion and QAR 37.4 billion, respectively, as of 30 June 2023. The group generated positive operating cash flows of QAR 2.8 billion with a free cash flow of QAR 1.7 billion during first half of 2023. Moving on to segmental performance. As detailed on Slide 25 the segment reported that -- moving on to petrochemical shipment performance as detailed on Slide #25, the segment reported a net profit of QAR 825 million for the first half of 2023, significantly down by 45% versus first half of 2022. The decrease was mainly linked to a decline of 28% reported in the segmental revenues, which was particularly affected by lower blended average selling prices realized during the first half of 2023 on the backdrop of weaker global demand for petrochemical products. During the same period of the previous year, blended product prices for the petrochemical segment experienced a significant decline of 28%. This drop was attributed to overall decrease in global petrochemical prices resulting from the combined impact of falling crude prices and weaker consumer demand amidst deteriorating macroeconomic fundamentals. In contrast, sales volume remained relatively stable compared to the same comparative period. Meanwhile, production volumes showed a slight improvement of 2% due to enhanced facility availability. Sequentially, compared to first quarter the segment's net earnings inclined by 16%, predominantly linked to improved margins, although the segment revenue increased only by 4%, segment's operating costs remain broadly unchanged, resulting in a notable improvement in quarterly earnings. Moving into Fertilizer segment. The Fertilizer segment reported a net profit of QAR 723 million for the first half of 2023 as detailed on Slide #31, with a decline of 78% versus the same period of last year. This decline was primarily driven by lower segment revenue Segment revenue decreased by 53%, in line with reduced selling prices, which was declined by 53%, amid global macroeconomic challenges affecting nitrogen-based fertilizer markets. On the other hand, sales volume remained relatively flat compared to the same period. On a sequential basis, segmental revenue decreased by 33% compared to the previous quarter due to lower selling prices and sales volumes. Selling prices declined by 24% on a quarter-on-quarter basis and amid continued weaknesses in the fertilizer markets due to muted demand. Additionally, sales volume declined by 12% due to lower production volumes on account of facility maintenance during Q2 2023. Segments quarter-over-quarter net profit decreased by 58%, mainly due to lower revenues, due to decline in prices and volumes, partially offset by price and volume driven, lower operating expenses. On the steel front, the Steel segment reported a net profit of QAR 278 million, down by 55% versus last year. Lower segment earnings were mainly driven by lower revenues it decreased by 4% versus last year. The earnings were also impacted by higher volume-related operating expenses and marginally reduced other operating income. The combined effect of lower prices and increased operating expenses resulted in a notable decrease in segment profitability. The decline in revenue was primarily driven by lower selling prices, which declined by 18% on a year-on-year basis. This was partially offset by higher sales volume, which increased by 18% mainly linked to higher production volumes. On a quarter-on-quarter basis, segment profit improved by 8% versus previous quarter on the backdrop of improved operating expenses and associate income despite the moderate production in segmented revenue against muted demand, revenue declined by 8% with an average price dropping by 20% by the volumes paying down by 8% during the quarter. I now hand over to Rashid.

Thank you, for presenting the financial operation and segmented updates. I think we can now open the floor to the Q&A.

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

I have 1 question on the Fertilizer segment. Would you be able to quantify the financial impact of the turnaround during the second quarter? And then I know that you don't comment on the future expectations. But just wanted to confirm there is still any maintenance stoppages planned for this year or it's everything done already for 2023?

Thank you for asking this question. As you are aware that the first quarter was -- there is no planned turnaround for the fertilizer. However, the second quarter turn -- planned amount was conducted excessively. We are planning also to conduct another plant shutdown during the fourth quarter. And hopefully, this will not materially impact the production.

Our next question comes from the line of Anoop Fernandes from SICO.

The first 1 is just a follow-up on Ricardo's question. Could you please quantify the production impact? What was -- how much production did you lose as a result of the turnaround during the quarter? And the second question is on the Al Qataria Steel acquisition, I mean, what is the strategic intent behind this acquisition? If you could just outline that for us pending other details, that would be very helpful.

Saffan will answer the first question, and I will take the second question. Saffan, go ahead.

Now the turnaround was around roughly was around 30 to 35 days in the ammonia 2 and to sand. So, in terms of number of days I cannot talk, and remember how much ammonia to producers. So offline, I can tell you that number. So at this moment, I don't have exactly what is the production volumes, but we can tell you offline.

But we believe it is only 35 days planned shutdown, which is not impacting the overall production. However, going to your second question related to Al Qataria Steel plant acquisition, as we are highlighted, we are still under negotiation. That is a potential acquisition. And due to the market requirement since we are already negotiating with the other shareholder, we announced to the market. Talking about the strategy there is always an opportunity to take market share and there is always an opportunity where you can strengthen your position in the market. We saw this as an opportunity, and we are very well aware of the cyclical cycle that still, and we believe that either locally or in the region, there will be a project where our product will be required to serve that project either in the region or in Qatar. I hope I answered your questions.

Our next question comes from the line of [indiscernible] from CVQ.

I just got a couple of questions. One on your petrochemical sir. Actually, we saw the production volumes in the presentation, it had lower than compared to first quarter 2023. So has that anything maintenance in CAPCO? And of course, any further maintenance likely in the second half of 2023? And coming to urea, sir, I mean what we are seeing is, again, on your Page 32, in terms of your EBITDA margins, which has gone down along with the sales. So do we see that in all priority going forward? I mean, what we are seeing for the last 1.5 months of urea prices strengthening, EBITDA margin could strengthen in the division?

Yes. Answer to your question on the [ sequence ] there are one-off unplanned shutdown 2 days taking place due to various reasons, gas flows coming from -- there are sitting taking place within between -- it contains more than 1 segment, right? To have chloro alkali, you have polyethylene, you have full additive. So sometimes you have 1 or 2 days unplanned shutdowns, the gas flow from [indiscernible] all of them affect a few days, so that affects your production. But it's down by around 1% or 2%, right, quarter-on-quarter. So that is the reason for the [indiscernible] production volumes, 3% decline before that will get rectified in the next quarter. Coming back to your Fertilizer question, obviously, prices are recovering. During the third quarter, prices are recovering. Obviously, the way the model or the contracts have been structured. And as you know, during 2022, with natural gas prices in the peak and we were holding inventories those valued at very high cost. And then we were moving into 2023 and because of the [ FIFO ] valued inventory both have been sold during first half of the year. And with those inventories have been sold and clear now moving into -- and a bit first half we have been -- prices have been very low urea prices going down to even 260, and we were carrying inventories at very low prices and with prices recovering during the second half of the year and with prices recovering, obviously, you will see margins to see some form of improvement. So that, as you know, the way the contracts are structured and the way the inventories are getting value. I think that's your question, correct?

Yes. Yes. Yes. So I mean, overall, you're saying that we could not be seeing any further shutdown in petrochemicals, right, in the second half?

Petrochemical, unless you have unplanned shutdowns, you will not see any major shutdown because we had the major planned turnaround in 2021. That was around 70 to 72 days that was all CAPCO Group. Now unless you have a few 1 or 2 days shutdown for each month, you don't -- you are not going to see any major number of turnaround until next 2, 3 years. One note plus or minus volumes because these are large plants, right? 3,000 to 4,000 people working on these plants. So obviously, due to gas flows from [indiscernible] can have a small issue. So obviously, we might have now 1% or 2% plus or minus.

Our next question comes from the line of Nitin Garg from SICO.

I have 2 questions. One is you have classified Qatar fuel additives as discontinued operations, where you have mentioned the agreement is expiring the land lease agreement and the butane gas supply. So if you can provide some more clarity on it? I mean, is it up for sale or you are negotiating the agreements further beyond 2024? Also how should we think about it in our future assumptions in our modeling as this is -- as your 50% stake? So are you in touch with your other partners regarding the continuation? Or is it totally up for sale? Second question is on the urea shutdown. So just wondered now, I mean, was this a scheduled shutdown or it was pre pole? I mean looking at the market donation, India demand was weak, prices were very low around 250 to 260. So did you preponed or it was scheduled for second quarter? Just wanted to know because some of your peers, they do -- I mean, the preponed or sometimes the urea prices are high. So they postponed also -- these are down. So I just want to know whether IQ does this?

Thank you for your question. Actually, a question related to QAFAC was expected. Yes, we classified QAFAC as discontinued assets and operation. Basically, that's due to the expiry of the GVA less than 1 year, to expire on June 2024. And as they're the accounting standard that we need to consider it as discontinued operation until you finalize the -- among the stake honor. A comfort that I would like to give you and to give to the other shareholders that we will continue owning the 50% stake in QAFAC as QatarEnergy because the other 50% will go back to the founder of QatarEnergy is offering this other 50% for sale, we are willing to enter into a negotiation. However, still there is no talk in place on that regard. So basically, the GVA will be renewed for us as an IQ co owning 50% of QAFAC. Second question related to the shutdown in the fertilizer. Saffan, you can come...

So answer to your question Nitin, shutdown was planned, and usually, CAPCO being -- having [indiscernible] of trains, usually, we have such shutdowns every year with the price of [indiscernible] goes down. We used to have these shutdowns because otherwise, we have that philosophy of having this planned shutdowns.

Okay. Just a follow-up, I need on shutdown. So let's say, you have a shutdown scheduled in 4Q as well, as you mentioned. And let's assume the urea prices are very strong in 4Q. So can you delay that shutdown to 1Q or 2Q next year? Or you will do the shutdown in 4Q only?

That depends if the prices are very strong, that's on the CAPCO management to decide, depending on the gas availability, depending on you have enough inventory, depending on you can build up in inventory to sell to the market. And depending on you see, the important point is the shutdowns are planned, let's say 1, 1.5 years in advance. The gas is provided by QatarEnergy. So QatarEnergy gas is planned when the shutdown is planned, for example, in December, so QatarEnergy [indiscernible] planned that gas. So if QatarEnergy says, yes, I can say I can provide that gas in December, say, for example, they can produce in December. If QatarEnergy, we can't -- already -- we planned our upstream shutdown in December, you can't. So it's more or less not just because market is recovering or market is not recovering. It's not only 1 factor. There are so many other variables linked to it.

Okay. On QAFAC, I mean, to our knowledge, the other shareholder is OPEC and international octane. So QatarEnergy will be buying this stake or QatarEnergy is already a shareholder in QAFAC?

Yes. We still don't know what QatarEnergy is doing with the negotiation with the other stake owner. So a result of that will come later at a later stage even at our level that the insurance that we have is we're going to remain the 50% owner of QAFAC. Nothing will change on IQ so far.

We have no further questions at this time. I will now hand the call back to Mr. Bobby Sarkar.

Okay. Thank you, operator. If we don't have any further questions, we can end the call for today. I want to thank Abdulla, Rashid and Saffan for taking the time to go over the results and answer our questions. Thank you very much, and we'll pick it up next quarter.

Thank you. This does conclude today's conference call. You may now disconnect.

Thank you all.