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 Mr. Shahan Keushgerian to begin the conference. Shahan, over to you.

Thank you very much. Hi. Hello, everyone. I want to welcome you to Industries Qatar's Fourth Quarter and Fiscal Year 2023 Financial Results Conference Call. So, on this call from Qatar Energy's Privatized Companies Affairs, we have Abdulla Al-Hay, Acting Manager; Rashid Al-Mohannadi, Head of IR and Communications; and finally, Saffan Mohammed, Senior Financial Management Analyst. So, as usual, we will conduct this call with first management reviewing the company's results followed by a Q&A session. I will turn the call over now to Rashid. Please go ahead.

Thank you, Shahan. 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 investor, and no media representative should be attending this call. Moreover, please note this call is subject to the disclaimer statements as detailed on Slide #2 of the Investor Relations presentation. Now we can start with our call on Thursday, the 8th of February 2024, IQ published its financial results for the full year ended 31st December 2023. And today, in this call, we'll go through these results and provide you with an update on key financial and operational highlights. Today in this call, along with me, I have Mr. Abdulla Yaqoob Al-Hay, Active Manager for Privatized Company Affairs; and Mr. Saffan Mohammed, Senior Management Analyst in the Privatized Company Affairs. 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, Saffan will provide you on IQ key macroeconomical and performance aspect. And later, I will provide you with an update on the financial performance matrices. And then, we will guide you through the segmental performance, and we'll open the floor for the Q&A. To start with, as detailed on Slide #5 of the IR deck, the IQ ownership structure compromises of QatarEnergy a 51% stake, and the rest is in the float held by various domestic and international corporate and individuals. IQ is credit-rated entity by S&P with A+ and Moody's with AA3 credit rating, both with 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 the competitive advantage, as detailed on Slide #8 of the IR deck, the group is well positioned with several competitive advantages within its domain strategically and operationally as well as financially. These strengths include an efficient and well-maintained asset base, a qualified and highly trained workforce, a sure supply of feedstock and competitively priced energy sources, lower operating expenses, a dedicated marketing team in the form of Muntajat to market the group's petrochemical and fertilizer products, a reputable JV partner and most importantly, our experienced senior management team. As detailed on Slide #10. From the 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 the IQ code of corporate governance in further detail. I will now hand over to Saffan to cover the macro aspect, including the macroeconomy operation and year-to-date financial performance.

Thank you, Rashid. As-Salaam-Alaikum, and good afternoon. Thank you all for joining us. Starting with the macroeconomic environment. The macroeconomic context remained uncertain, brought challenges to most commodities globally, global supply and demand dynamics. The year was marked by lower commodity prices and introduced energy prices and an increased influx of commodity supply during the year. On the backdrop of supply side easing, most European producers gradually increase production to compensate for the previous year's curtailed output, driven by feedstock availability and affordability. Meanwhile, on the demand side, buyers exercised a cautious approach in their purchasing decisions, emotionally navigating the impact of slower economic recovery, which led to muted consumer spending significantly affected the demand for most commodities across our portfolio. These factors consequently contributed to a general downward trajectory in the trends of commodity prices compared to the previous year. Nevertheless, there was an evidence of stabilization in the macroeconomic outlook during the latter part of the year, which had, in general, a positive impact on the group product portfolio sequentially. Overall, the lingering uncertainty in the global macroeconomic outlook to add pressure on our group product portfolio compared to the previous year. Operationally, as detailed on Slide #15, Group's operations remained strong as production volumes for the current year remained stable against the last year and stood at 16.8 million metric tons. The stability in production was primarily driven by stable operating rates and plant availability across the Group. Plant utilization rates for the year 2023 remained at 100%, while the average reliability factor stood at 98%. This reflects the Group's commitment to operational excellence while ensuring the plant reliability and unwavering importance to Group's health, safety and environment. Production volumes declined by 7% on a quarter-on-quarter basis versus the previous quarter of 2023, with fuel additives and fertilizer along with steel segment undergoing shutdowns in the fourth quarter. Amid challenging macroeconomic environment, we managed to report a commendable set of financial results with a net income of QAR 4.7 billion, EPS of QAR 0.78, free cash flow of QAR 2.6 billion. The Group financial position also continues to remain strong with a total cash of QAR 15.8 billion. Group's financial fundamentals and stability was further demonstrated by Moody's recent upgrade of its rating to AA3 from A1 with a stable outlook. Financially, on a year-on-year basis on Slide #1, the Group reported a consolidated net profit of QAR 4.7 billion for the year ended 31st December with a decline of 46% versus last year. Earnings per share of QAR 0.78 versus QAR 1.46 was for the year ended 2022. Group revenue for year-end 2023 declined by 34% to reach QAR 16.9 billion as compared to QAR 25.8 billion reported for 2022. This reduction in revenue and net income both were driven by selling prices, which was on average declined by 34% versus last year, partially offset by improved operating costs, other income mainly related to reversal of previously booked impairment within the steel facilities and investment income. Profitability measured by EBITDA margins, although down on last year but still remain very competitive with an EBITDA margin of 37%. The softening of margin was primarily driven by weakened prices compared to last year. Moving on to quarter-on-quarter performance, and as detailed on the same slide compared to fourth quarter, the Group revenue for the current quarter marginally decreased by 3%. The decrease was primarily driven by lower sales volumes that was down by 7% amid lower production, which was partially offset by improved selling prices by around 5%. Net profit, on the other hand, improved by 19% on the backdrop of improved other income mainly related to reversal of previously booked impairment within the steel facilities and investment income. With respect to Group financial position, as noted on the same slide, the Group's financial position remained robust with cash and bank balances standing at QAR 15.8 billion after accounting for dividend payout relating to financial year ended 2022, amounting to QAR 6.7 billion. Currently, Group does not have any long-term debt obligation. The Group reported total asset and equity of QAR 43.1 billion and QAR 40 billion, respectively, as of 31st December 2023. The Group generated positive operating cash flows of QAR 5.4 billion with a free cash flow to firm of QAR 2.7 billion. Nevertheless, our robust operating models and the strength of our global supply chain continue to leverage our resilience and provide flexibility to our operations, whereas our continued positioning of being a low-cost operator ensures our competitive advantage. After reviewing the Group's current year financial performance with present and potential liquidity position and considering the current and future macroeconomic conditions, business outlook, capital expenditure, investing and financing requirement for the Group, the Board of Directors proposed a total annual dividend distribution of QAR 4.7 billion for the year ended 31st December 2023, subject to the approval of the General Assembly, representing a payout ratio of 100% of current year earnings -- current year net earnings, a dividend of QAR 0.78 per share, representing a dividend yield of 6% on the closing share price of 31st December 2023. Now I will hand over to Rashid to cover the segmental performance.

Thank you, Saffan. Thank you for presenting the financial and operational updates. I will follow up with a segmental review and start with the Petrochemical segment, as detailed on Slide #25, the segment reported a net profit of QAR 1.4 billion for the year ended 2023 down by 45% versus last year. This decrease was mainly linked to the decline of 26% reported in the segment revenues, which was mostly driven by a lower blended average selling price and selling volume realized during the year. The blended product prices for Petrochemical segment declined by 19% against the last year because of the overall decline in the global petrochemical prices on the back of crude oil price volatility, easening of supply chain pressure that was prevailed during 2022 and the cautious buying habit by most of the consumers on account of persistent recessionary fears. Sales volume declined marginally by 9% compared to last year, as detailed on Slide 24 due to the lower production, I mean shutdown and a conservative buying decision among most buyers. Net earnings for the segment witnessed a sequential decline of 34%, primarily due to the 16% reduction in sales volume. This reduction in sales volume was attributed to lower production resulting from plant shutdown and fuel additive segment. The results were partially offset by enhanced selling prices driven by improved market sentiment in the Polyethylene segment during the current quarter. Now we can move to the Fertilizer segment, as detailed on Slide 31 of the IR deck. The Fertilizer segment reported a net profit of QAR 1.9 billion for the year ended 2023, with significant decline of 65% versus last year. This decline was primarily driven by lower segmental revenue. Segment revenue decreased by 49%, along with lower selling prices, which declined by 47% among amid macro challenges affecting the nitrogen-based fertilizer markets globally. And this is driven by the easening of supply challenges and softening of demand. On the other hand, sales volume marginally declined by 3% versus last year and then lower production due to marginally lower operating rates. On a sequential basis, segmental revenue decreased by 7% compared to the previous quarter as selling volumes witnessed a reduction of 10% and a lower production on account of planned shutdown during the current quarter. On the other hand, selling prices increased by 4% on a quarter-on-quarter basis amid a noted improvement in the global ammonia markets. Segment net profit for Q4 of 2023 decreased by 16%, mainly due to lower sales volume offsetted by lower operating expenses and marginally higher selling prices. We can move to the last segment, which is the Steel segment. We can refer to Slide 37 of the IR deck. The Steel segment achieved a net profit of QAR 1 billion, making a significant 16% increase compared to the previous year. This substantial increase was mainly attributed to the improvement in the non-operating income related to reversing of impairment of non-current assets associated with the DR-2 facility previously mothballed and restarted in 2022. Furthermore, the additional reversal of impairment in the follow-up investment also contributed to the positive financial performance of the Steel segment. Amidst the positive net profit, the segmental revenue remained relatively unchanged compared to the previous year due to the moderate reduction in the average selling price, which was almost offsetted by the improvement in selling volume. The pricing dynamic and the sales volumes balancing each other are contributed to maintaining overall revenue consistency. Segment acquisition of Al-Qataria Steel during the Q4 of this year also contributed to the improved sales volume and profitability. Compared to the previous quarter, the segmental profit significantly increased by 376% during this current quarter. This incline was mainly attributed to the one-off impairment reversal for the noncurrent assets during the quarter. Segmental revenue demonstrated a 13% increase due to the higher sales volume, marginally higher and marginally higher selling price. Improved sales volume were partially driven by additional sales volume of Al-Qataria. And now that concludes our -- conclude our presentation. I think we reached the stage where we can open the floor for the Q&A.

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

A couple of questions on my side, if I may. The first one, it's on the Steel segment. If we look at the quarterly margin, it has been one of the weakest margins in a few years. So would you be able to just give us a little bit more color on the cost expense and what has driven this decline in margins? And then the second question, to the extent that you made comment, when you look into 2024, are you expecting any relevant maintenance turnarounds? How should we think about volumes in 2024?

Yes. So you were talking about the margins in general or a fuel additive margins?

No, the Steel segment.

The Steel segment?

Yes.

Yes. Steel, as you are aware, it is a very challenging market, and it's very -- the margins in the Steel segment is always [ 10 ]. And as you are aware, there is a supply where there is no demand either locally or globally. And we have focused on the local market to sell the final products of rebar steel and other where most of the project been completed where also we expand our sales to the region. Maybe some of the sales want to quit during the year related to the semi-finished products. So the margin and the steel, if you can see across even the other smelters, it is very challenging. I would say that we are doing much more better than others. Some of the other smelters, maybe they are already exited business while we still reported profits. Okay. We can go to the second question. If you have no further question on the steel.

Our next question comes from the line of Prateek Bhatnagar of HSBC.

There is a second question. He asked about the turnaround activity in the year 2024. Definitely, we run these plants, which require a yearly turnaround either -- and it a require plant shutdown on a yearly basis. So definitely, next year, there's going to be an activity, but there is no major turnaround. So it's just a normal business turnaround. Okay.

Our next question comes from the line of Prateek Bhatnagar of HSBC.

Related questions. The first is that in your results, you mentioned that after the expiry of the JV agreement in the QAFAC, all the shares will be transferred to IQCD. Could you confirm that? And also, is there any payment that you need to do to get the shares? And will the shares 100% ownership will be permanent or it will be for a certain time? The second question is that have the feedstock agreement regarding -- for the QAFAC also been renegotiated? And could you give any color in terms of gas prices?

Yes. Thank you for your questions. Just I would like to highlight in the past, we have not announced that we're going to have the share of the JVA at QAFAC level. We know that the JVA will expire on June 9th. And we have announced in the past, we will enter into a negotiation with QatarEnergy, either we take that the other 50% stake. We don't know what is the QatarEnergy appetite on this other 50% stake. So still nothing been concluded related to the other stake and QAFAC. But what I would say that as this stake or offer for sale, IQ would be interested to enter into a negotiation with the owner. So that is one thing. Related to the feedstock arrangement, feedstock arrangements have not been changed since the past at least 2 years. We have also highlighted that we arrived to a mechanism where the feedstock prices are linked to the final product prices, and this dynamic work very well during both cycle, high cycle and the lower environment cycle. So nothing has been changed and nothing to be highlighted in this regard.

Thank you. Our next question comes from Sashank Lanka of Bank of America.

I have 3 questions, if that's okay. I'm just looking at your operating rates on Slide #20. It seems like QAFAC at 50% was probably the lowest in some time. So just wondering what's the outlook going into Q1? Is the shutdown, the turnaround activity complete? Similarly, even for QAPCO, I think it was quite low versus what we saw in Q3. So in terms of operating rates going into Q1, should we assume operating rates will be similar to the average of the other 3 quarters because it seems like Q4 was particularly quite weak. That's the first question. The second question is related to the Blue Ammonia plant. I think you guided for 2026 as a startup. So where are we in terms of the ramp up the construction activities over there? And the third question is just on the dividends. I think you're sitting on still a very healthy cash balance. And I agree that you paid out 100% this time around. But how do you -- how would you look at dividends going forward given this JV QAFAC acquisition that's potentially possible and also the Blue Ammonia expansion, which means you will be spending over the next 2 years?

Thank you for your question. I will answer your question related to the operating rate. As you can see and obvious on this slide, we had a major turnaround in QAFAC. And we have also a planned shutdown and QAPCO during the year. So we are expecting to have the first quarter for both entities, having a better operational rates and we are not planning to conduct any major shutdowns for these 2 units. Related to the Blue Ammonia plant, work on progress. We already spent around QAR 1 billion on the project. The site preparation has been conducted and the construction started there at the facility and the projects are as per the plan. There is no delay anticipated so far and nothing to be reported related to the schedule of the project. As you are aware, we are funded the Blue Ammonia through our internal cash. And this is supported by the cash balance that IQ have and that's group companies. Even if the other 50% stake been offered for sale, still we have not made our decision either we're going to finance that requirement or we can utilize the cash. But most probably based on the historical information that we have, that we will continue having the IQ without any liability or we are not planning to take any kind of loan related to our growth.

If I could just follow-up on the Blue Ammonia CapEx spend. So you said QAR 1 billion to confirm, right? That's around $300 million. So you finished about 1/3 of the CapEx of the plant. Is that correct?

You are absolutely correct. It is about QAR 1 billion already paid for the project. The total project cost is $1.2 billion.

Our next question comes from the line of [ Joshua Martin of Ashmore Group ].

I don't know if you want to finish with the dividend question that last participant asked.

I am fine with it.

Yes. I mean I'd also like to know, so I guess, yes, how are you guiding for that dividend going forward, I suppose?

Yes, dividends going forward, we just announced the dividend for the year of 2023, and the decision came after looking at all the operational and the growth requirements. And we have also explained in the past how we arrived to this decision. This decision came after we looked at all aspects and requirement of the operating capital working and CapEx requirements for all 3 segments and either on petrochemical or in the fertilizer ore and the steel. So we look at our requirement and we look at our performance during the year and the Board of Directors takes the decision on the proposed dividends to the AGM. And as you can see, this year, the proposal was 100% of the net income of IQ, which will give us, I would say, a good record based on the even historical dividend distribution.

Perfect. And then on the fertilizer side, have realized urea prices steadied last few months? And is there any indication about where inventory levels with key clients are going and do you have any color on that side of things?

I think we realized during this quarter kind of lower urea price versus the previous quarter. However, our blended price reported for the fertilizer was supported by the increase in the ammonia prices. So this dynamic played in our favor. Yes, we don't sell a lot ammonia, but we happen to sell excess ammonia when it's available to the market. Going forward, it will depend on a lot of things, how the fertilizer market will unfold in the future, how the Indian tender will play in 2024, how the cropping season will happen next year. I think this year, we've seen very good cropping season in both Americas. So you'll see in our slides in terms of geographical distribution that we've sold higher than what we've sold in the previous year to that specific region. So it will depend on the dynamics going into the future.

Our next question comes from the line of [ Somnath Bhatnagar of API Analytics ].

So my first question is, could you provide us some input or outlook on the Blue Ammonia project and PVC projects? What are our revenue targets what are our outcomes from these projects?

Yes. The outcome, we cannot predict anything on the prices that is driven by market conditions, but rather what we could say is the capacity, Blue Ammonia is 1.2 million metric tons per annum of Blue Ammonia. So there are different views on the market. So some people say it could have premiums depending on which market you sell into. Some people say it may not fetch premiums depending on for what purpose you use it. On the other hand, PVC is -- I think we have 340,000 metric ton capacity. Now Blue Ammonia is expected to be online by Q2 2026. And on top of, as we know, more than financial, there is a lot of ESG benefits on Blue Ammonia with CO2 is captured and sequestered beneath earth. So we minimize carbon footprint. And on the other hand, PVC conversion of VCM into PVC brings a lot of other benefits, import dependability from India and also depending on major markets for PVC import to India and exporting VCM to few markets and et cetera. So these are the strategic benefits, but pricing PVC is a function of crude petrochemical, very difficult to predict and it is coming in 2026, I believe, 2026. At that time, petchem prices, very difficult to predict, a function of crude. But we could rather predict if the capacity plus our strategic motive. Hope I answered your question.

Yes.

Our next question comes from the line of Ejayan Al-ahbabi from Al Rayan Investment.

This is [indiscernible] Al Rayan Investment. Just one question. Are there any plans to change the frequency of dividends in June 2024 is still going to be annual? Do you not plan to go for quarterly or semiannual payments?

Yes. Thank you for your question. As of now, there is no plan to have any interim dividends during the 2024. It will be a similar practice and will be announced at the year end of the 2024. So I would say nothing to be different from our practice, unless we will announce it in the media.

Our next question comes from the line of [ Nikhil Patain of CBFS ].

Just 2 questions. One is regarding your -- on Page 37, you mentioned about a reversal of impairment on your noncurrent assets and additional reversal on impairment and follow-up investments. So just wanted to understand whether do we see any further reversals going forward? Secondly, you also mentioned about Al-Qataria in a sales volume. So how much of that added up?

So related to the reversal of impairment, as you are aware, we have mothballed smaller unit, the Steel segment, and we operate the bigger unit. So we conducted the valuation exercise where all the stakeholders supported the reversal of the impairment. So -- and we believe that by operating the bigger unit, this will help the profitability of the Steel segment, and we will be able to meet all the requirements of the local markets. Are we going to see any further impairments in the future? I don't.

Yes. Impairment reversal.

Yes. Further impairment or reversal of the impairment in the future, I don't think so, as of now. Unless there any other changes or unless we decide to go to a full operation of the Steel segment. But as of now, there is no decision been taken. Okay?

Okay. And on your Al-Qataria acquisition, sir, how much it contributed to your volumes? I mean, in fourth quarter, which started off your total volumes, you can give percentage.

I don't have this number as of now with me. Maybe Saffan, he can elaborate more because it is one of the units under our subsidiaries. However, we believe that this acquisition of Al-Qataria will give us the comfort of having all the steel or meeting all the steel requirements within state of Qatar. In addition to that, we have run the facility, Al-Qataria facility. We have noticed that the facility are running in the best way with no issues. And we have produced around -- are they available about how much? 15,000 metric tons after the acquisition because the date of the acquisition came in the mid of October. So 15,000 metric tons now recognized for the year 2023.

Okay. And regarding your shutdowns, you mentioned no major shutdown for QAFAC. Any other color, I mean, you can talk about other divisions in terms of any shutdowns, which we likely see especially in the first quarter or in the second quarter 2024?

So for the petrochemical QAPCO, we'll have approximately 35 days to 40 days of planned shutdowns. More than that, there may be a few unforeseen shutdowns depending on your reliability. So if there is any upstream shutdowns happening, you have to follow in the downstream as well. So as for Q1, if at all, the major shutdown will be in QAPCO 35 days, 36 days. This is for Q1.

Our next question comes from the line of Ricardo Rezende of Morgan Stanley.

A follow-up, if I may. On the Blue Ammonia project, have you already signed the carbon capture contract with QatarEnergy? What's the latest on that front?

As we have announced in the past, there is an arrangement with QatarEnergy for the carbon-capture facility. So this arrangement is still in place, and there is no progress on that arrangement.

Thank you. There are no further questions at this time. I will now hand the call back to Mr. Shahan Keushgerian.

Okay. Thank you, everyone, for joining, and I would like to thank management for giving us an update on the fourth quarter, and we will pick this up again in the second quarter. All right. Bye.

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