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

Thank you for standing by, and welcome to the Industries Qatar Q3 Earnings Call. Please note today's call is being recorded. I would now like to hand over to Bobby Sarkar from QNB Financial Services to begin the call. Bobby, over to you.

Okay. Thank you. Hi, hello, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Industries Qatar Third Quarter 2023 Financial Results Conference Call. So on this call from QatarEnergy's Privatized Affairs Group, we have Abdulla Alhay, who is Acting Manager. We have Rashid Al-Mohannadi, who's the Head of IR and Communications; and we have Saffan Mohammed, who is the senior financial management and analyst. So we will conduct this conference as usual with the management first, going over the company's results, followed by a 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. Before we go into the IQ's 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 Tuesday, the 24th of October, IQ published its financial results for the 9-month period ended 30th of September 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. Mohammed Saffan, Assistant Manager for Financial Operations. We have structured our call as follows. At first, I will provide you with a quick insight on IQ's ownership structure, competitive advantages, and overall governance by covering Slide 4 till 10 and Slide 51 and 52. Secondly, Saffan will provide you with a brief on IQ key performance and operational performance matrices. Later, I'll provide you with an update on the segmental performance. And finally, we can open the floor for the Q&A. To start with, as detailed on Slide #5, IQ's ownership structure compromises of QatarEnergy with 51% stake, and the rest is in the free [ float ], held by various domestic and international corporate and individuals. IQ is a credit rated entity by S&P with AA- with a stable outlook and Moody's with A1 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 operation are independently managed by its respective Board of Director along with senior management team. As detailed on Slide #10 from a 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's governance structure, you may refer to Slide 51 and 52 of the IR deck. And for further details, you can go and check the corporate governance report within our website. I will now hand over to Mohammed Saffan to cover IQ key operational and financial performance matrices.

Thank you, Rashid. Good afternoon, and thank you all for joining us. Starting with macroeconomic environment and detailed on Slide 12 of the deck, the 9 months of 2023 witnessed a persistently challenging macroeconomic environment characterized by ongoing geopolitical uncertainty and growing concern over resistance due to hawkish monetary policies. These factors contributed to subdued demand across most commodity sectors in which the group operates, reflecting the cautious sentiment in a global economy in the gradual recovery process. The supply is also gradually returning to its pre-2022 level with most manufacturing -- manufacturers having commenced operations after supply chain and logistic bottlenecks have relatively eased. Nevertheless, there is some evidence of gradual sequential improvement in the macroeconomic outlook, which generally positively impacted the group's product portfolio. On an overall basis, lingering uncertainty in the global macroeconomic outlook continues to pressure our group's product portfolio compared to the previous year. Concerning the overall performance, as detailed on Slide 15, the group's operations remained strong as production volumes for the current period improved by 2% to reach 12.7 million metric tonnes versus 9 months of 2022. Higher operating rates and better plant availability across the group largely drove this improvement in production. Utilization rates for 9 months reached 100%, while the average reliability factor stood at 98%. This reflects the group's continued commitment to operational excellence, while ensuring plant reliability and unwavering focus to HSC. As announced, the group reported a consolidated net profit of QR 3.3 billion for the 9 months period ended 30th September 2023, with a decline of 53% versus 9 months 2022. Earnings per share for 9 months was QR 0.54 versus QR 1.16 for the same period of last year. Group revenue, on the other hand, was declined by 36% to reach QR 13 billion compared to QR 20.1 billion reported for the first 9 months of 2022. Now referring to Slide #16. I compared to 9 months of 2022. The group revenue for the current period decreased 36%, primarily due to a notable decline in blended selling price against the backdrop of easing of supply chain bottlenecks prevalent during '22 and relatively tighter monetary policies to keep inflation under check affecting consumer demand. Product prices on average declined by 36% versus last year, where lower price trajectories were noted across all operating segments. On the other hand, sales volume declined slightly versus the same quarter of last year on improved supplies and relatively stable production. As measured by EBITDA, profitability declined by 45% versus last year, predominantly linked to lower product prices, partially offset by group's lower operating costs. Net earnings for Q3 also declined by -- versus Q3 for the same reasons of EBITDA decline. The group's financial position remained robust with cash and bank balance standing at QR 15.8 billion as of 30th September 2023, after accounting for dividend payout relating to the year 2022 amounting to QR 6.7 billion. Currently, the group has no long-term financial debt obligations. The group reported total assets and equity -- reported assets and equity reached QR 42.2 billion and QR 38.6 billion, respectively, as of 30th September in 2023. The group generated positive operating cash flow of QR 4 billion with free cash flow of QR 2.3 billion during the first 9 months of 2023. I'll now hand over to Rashid to take you through the segment performance highlights. Rashid?

Thank you, Mohammed Saffan. I will start with the petrochemical segment. The segment reported a net profit of QR 1.1 billion for the 9-month period of 2023, down by 45% versus the same period of last year. The decrease was essentially linked to a decline of 27% reported in the segment revenue, which was particularly driven by lower blended selling price and sales volume realized during the current period. Blended product prices for petrochemical segment declined by 24% against the same period of the last year as a result of the overall decline in the global petrochemical prices on the back of easing of supply chain pressures, those were prevalent during 2022, leading to additional supply in the market and a cautious buying approach by most of the consumer to compact inflation. Sales volume declined marginally by 4% compared to last year. On the other hand, production volumes slightly improved by 1% against improved facility availability. Sequentially the segmental net earnings declined by 27% due to lower selling prices and reduced sales volume by 7% and 8% and 6% and respectively, impacting the segment quarter-on-quarter profitability. Regarding the fertilizer segment, the fertilizer segment reported a net profit of QR 1.4 billion for the 9-month period ended in 2023, with a significant decline of 67% versus last year. This decline was primarily driven by lower segmental revenue. Segment revenue decreased by 49%, in line with lower selling price, which declined by 49%, amid macro challenges affecting the nitrogen-based fertilizer market globally, driven by easing of supply challenges and softening of demand. On the other hand, sales volume remained relatively flat compared to last year amid stable production. Sequentially, segmental revenue increased by 29% compared to the previous quarter as sales volume and selling price has improved. Selling prices increased by 21% on a quarter-on-quarter basis, amid noted improvement in the global fertilizer markets. Additionally, the sales volume increased by 6% as segment reported lower production during the previous quarter due to facility maintenance. Segment net profit for the third quarter of 2023 significantly increased by 197% and mainly due to improved average selling price and sales volume and improved operating margin. Concerning the steel segment, the steel segment reported a net profit of QR 409 million -- QR 409 million, down by 47% versus last year. Lower segmental earnings were mainly driven by lower revenues, which decreased by 7% versus last year. The earnings were also impacted by higher volume-related operating expenses and marginally reduced other incomes. The combined effect of lower prices and increased operating expenses resulted in a notable decrease in our segmental profitability. The decline in revenue was primarily driven by lower selling price, which declined by 15% on a year-on-year basis. This was partially offset by higher sales volume, which increased by 9%, mainly linked to higher production volumes. Sequentially and comparing to the previous quarter, the segmental profit witnessed a 10% decline during this quarter. This resulted -- this reduction resulted from lower selling price and decreased sales volume down by 5% and 16%, respectively, due to subdued demand and decrease in operating expenses, which was partially offset -- which partially offset the impact. That takes us to the end of our presentation. Thank you for your attention. I think we can now open the floor for the Q&A session.

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

A couple of questions, if I may. The first one, if we look at the petrochemical segment, we've seen production volumes increasing about 4% compared to the previous quarter. But then on the sales side, the volumes have pretty much declined for all the products. Just wanted to get a little bit more color on that? Was that mainly driven because of weak demand? Or are you building up a bit of inventory for potential turnarounds? And then the second question is on fertilizers. On the previous call, you had mentioned that there might be another turnaround on the plans on the fourth quarter, is that still going ahead? And if you could provide us any sort of magnitude, would that be a similar impact compared to turnaround in the second quarter?

Yes. Regarding petrochemical, yes, it's a combination of both. So we are about to have -- we are currently having an ongoing shutdown in the fuel additives segment. So we are building a bit of inventory to smoothening out sales. So you have a bit of a reduction in the fuel additive segment. On top of that, there are a bit of demand issues slightly. Polyethylenes have there a bit of demand issues as well. So it's a combination of both. With respect to fertilizer, yes, Q4, there is a planned shutdown. So usually, as we always say, the planned shutdowns are usually coincide with upstream shutdowns from the other gases coming in. So it is expected in Q4, there will be a shutdown as per the information available at this point in time. If there is a change, they will advise us. But as for the time being, there will be a planned shutdown.

Our next question comes from the line of Faisal Azmeh from Goldman Sachs.

Congratulations on the strong set of numbers. Two questions on my end. Maybe just the first, in terms of the fuel additives JV. Just how do we think about the renewal of the contract there and the expiry of the JV? Is this something -- and if you can provide us with any update on that? Maybe if you can also shed some color on QAFCO as well? At what point does the JV expire? If you can give us some color there. And then the third question is just relating to any potential new feedstock allocation from the government. Do you feel or get a sense that, that could be a possibility given the expansion that is happening at the extreme level?

I think with regard to the fuel additive joint ventures, there is nothing as of now that was offered to IQ at that point of time for us to disclose. There is still ongoing commercial discussion at the shareholder level. And we'll come to know that this will be offered to IQ at a later stage, maybe closer to the expiry or on expiry. That's for the fuel additives. On the QAFCO and the expiry of the joint venture, we already have announced in 2020 that we already bought at 25%. And we already announced to the market that by 2035, that 25% will basically -- will be up for renewal or it will go back to QatarEnergy. So in terms of the 75...

It's QAPCO...

Referred to QAPCO. QAPCO is in 2029.

Yes. So the discussion on QAPCO, there is nothing on the table as of now on QAPCO and nothing has beat us for our valuation. However, we have to wait and see closer to the expiry of the joint venture. I think you had the third question,Faisal?

It's about feedstock allocation.

Yes, you can answer that, Saffan.

So feedstock allocation as of now, the feedstock right now, there is nothing specifically allocated for downstream entities within the privatized companies. So the major project within QatarEnergy, 2 major petchem projects have been -- currently been under consideration, about to be FIDd [indiscernible] in Qatar, the 1 is an equivalent project in the U.S. Other than that -- so the 2 mega projects, other than that nothing within the downstream -- downstream within the privatized companies or the listed entities. So if there is anything that could be advised, so nothing for us. Within us, within IQ, we have on value-additive project which is PVC project and the other one is QAFCO 7, for which these are all conversions from the existing intermediary products, ammonia is being converted -- or sorry, a couple of ammonia is getting converted to additional ammonia is produced through efficiency improvement. And on the other hand, cost -- VCM is converted to PVC within QVC.

Our next question comes from the line of [ Seki Mutukwa ] from Ashmore.

I hope you can hear me clearly. Just a question going back to the dividend, please. Obviously, you pay only once a year. But given the sort of communication you're aware of from listed petrochemical companies and the likes in region, which, to be honest, has been improving in terms of visibility on that dividend. I'm wondering your thoughts on, if we look at where consensus is at this point in time, at least from what I can see an expectation of 25% to 30% lower dividend for 2023 compared to 2022, so about 0.8. And I'm just wondering if there's any sort of commentary around that you can give in terms of where the market is, whether it still seems optimistic given where earnings are, and what you've said a number of times would be a sort of consistent in "payout ratio" in the sort of 70. So is there anything more you can say about the sort of dividend comfort one can take, especially given the net cash position you have even to cover the CapEx you've talked about the next couple of years?

So it's a very difficult question to answer, although we have all the comfort to pay a very, how do I say, very lucrative dividend, but the dividend policies are pretty much decided by the Board at that point in time, taking various factors into consideration, including market expectation and the results of current year and the results over the next 5 years plus the investment CapEx and in any growth projects. Last year was an exceptional year. We paid fairly -- the highest dividend of all times I believe -- yes, of all times, I believe. But again, given that we are operating in a cyclical industry, despite we are having large cash benefiting on the balance sheet, no debt and et cetera. Like you, as investors making guestimates, me sitting here also can make just best guestimate. The final decision is sitting with the Board. Unfortunately, we all here are not authorized or volunteer to make a number. But again, we can just -- but we are not supposed to discuss those numbers as part of the IR call. But again, obviously, how do we see, right, it could be a number effectively -- how do I say, a number that -- which you discuss something on that range.

Our next question comes from the line of Rene Selouan from Jadwa Investments.