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

Hello, everyone, and welcome to Industries Qatar conference call. Please note that this call is being recorded. I'd now like to hand over to our moderator for today, Bobby Sarkar. Thank you. Please go ahead.

Thank you, operator. Hi, hello, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Industries Qatar's First Quarter 2024 Financial Results Conference Call. So on this call from QatarEnergy's Privatized Affairs Group, we have Abdulla Al-Hay, who is the Acting Manager; and Saffan Mohammed, who is a Senior Financial Management Analyst. So we will conduct this call with the management first reviewing the company's results followed by a Q&A. I would like to now turn the call over to Saffan. Saffan, please go ahead.

Thank you, Bobby. Good afternoon, and thank you all for joining us. Hope you are doing great. Before we're go into IQ's business and financial performance updates, I would like to mention that this call is purely for IQ's investors, and no media representatives should be attending this call. Moreover, kindly note that this call is subject to IQ's disclaimer statements as detailed on Slide #2 of Investor Relations presentation. Now moving on to the call. On Tuesday, 30th of April, IQ published its financial results for the 3 months ended period 31st March 2024. And today, in this call, we will go through these results and provide you an update on key financial and operational results. Today on this call, along with me, I have Mr. Abdulla Al-Hay, Manager, Privatized Companies Affairs. And 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 structure; secondly, Abdulla will brief you on IQ's key macroeconomic update and the performance aspects; later, I will provide you with an update on the overall financial performance metrics and guide you through the segmental performance of the group; finally, we will open the floor for a Q&A session with the investors. To start with, as detailed on Slide #5, IQ's ownership structure comprises of QatarEnergy with a 51% stake and the rest in the free float held by various domestic and international corporates and individuals. IQ is credit-rated entity by S&P with A+ and Moody's with A1, both with stable outlook. QatarEnergy, being the main shareholder of IQ, provides most of the head office functions through a comprehensive service level agreement. IQ's group of companies' operations are independently managed by its respective Board of Directors, along with senior management teams. In terms of competitive advantage, as detailed on Slide #8, the group is still positioned with several competitive advantages within its domain strategically, operationally as well as financially. These strengths include an efficient, well-maintained asset base; a qualified and highly trained workforce; assured feedstock and competitively priced energy sources; lower operating cost base; a dedicated marketing team in form of Muntajat to market group's petrochemical and fertilizer products; reputed joint venture partners; and most importantly, a very experienced senior management team. As detailed on Slide #10, from a competitive positioning perspective, IQ ranks amongst top-tier companies within the regional downstream space across most of the matrices. In terms of IQ's governance structure, you may have referred to Slide #51 and #52 of the IR deck, which covers various aspects of IQ's code of corporate governance in further details. I will now hand over to Mr. Abdulla to cover macro aspects, including macro economy, operations and year-on-year financial performance.

Thank you, Saffan. [Foreign Language] Good afternoon. Starting with the macroeconomic update. Although the global macroeconomic context is somewhat during the first quarter of 2024 has remained challenging as experienced mostly throughout the year 2023, sluggish economic growth forecast tied to monetary policies and the key market with the high interest rate and the inflationary fears have acted as constraints on demand for the key products. Geopolitical instability, export restrictions on certain [indiscernible] and lower production in some of the key production facility have affected the supply chain and consequently, broadly offset the demand-supply effects. Uncertainty surrounding the petrochemical market continued to persist in the first quarter 2024 as there have been no real demand similarly for the petrochemical segment. The macroeconomic outlook for the segment during first quarter 2024 was impacted by several factors, including stable crude prices, regional geopolitical uncertainty, weaker demand in key markets, driven by a higher interest rate environment and structured capacity additions. Macroeconomic environment for the Fertilizer segment achieved stability after reaching its historical peak during the first half of 2022. Restoration of the supply, return of the production of European production facility were aiding prices to adjust toward their long-term trend while recent stoppage in some of the Asian producer due to the facility shutdown and approved farmer affordability have aided the fertilizer prices stabilized over the last few quarters. The macroeconomic outline for the Steel segment continue to remain challenging. An ailing property sector in large economies like China and hawkish monetary policies helped by a higher interest rate environment, limited domestic demand and a slowdown in regional construction activity impacted steel prices. A sharp decline in raw material prices such as iron ore and scrap material further impacted the steel prices. As detailed on operational performance on Slide #15, the group operations remain stable and robust as production volume for the current period marginally improved by 1% to reach 4.5 million metric tons versus the first quarter of 2023. This improvement was largely driven by a stable operational rate and better plant availability across all the segments and planned maintenance in the polyethylene segment. Plant utilization rate for the first quarter 2024 stood at 103%, while the average reliability factor remained at 98%. This reflects the group's continued commitment to the operational excellence and reliable operation while ensuring unwavering importance to [ HKC. ] As noted on Slide #17, on a quarter-on-quarter basis, production volume improved by 10% compared to the fourth quarter 2023. This increase was due to the higher operating days across all segments, except polyethylene segments as most of the segments were on maintenance shutdown during the fourth quarter of 2023. Regarding the year-to-date financial performance, as detailed on Slide #14, group reported a consolidated net profit of QAR 1.3 billion for the first 3 months ended 31st March 2024, rate improvement of 10% compared to the first quarter 2023. Earnings per share for the first quarter 2024 arrived at QAR 0.21 versus QAR 0.19 for the same period last year. Group revenue for the first quarter 2024 moderately declined by 11% to reach QAR 4.3 billion compared to the QAR 4.8 billion reported for the same period last year. We note, from the Slide #17, improvement on IQ net earnings for the first quarter 2024 versus first quarter 2023 is largely driven by improved operating costs linked to lower variable costs. This was partially offset by a reduction in average selling price and sales volume versus the same period of last year. I will now hand over to Saffan to cover quarter-on-quarter performance metrics together with his segment review.

Thank you, Abdulla. Good afternoon, everyone, and thank you, everyone, for attending this earnings call. In 1Q '24, and as detailed on Slide #14, the group's net earnings declined by 10% versus fourth quarter of 2023, mainly due to lower nonoperating income in the first quarter of 2024 as the group reported a nonoperating income of QAR 550 million in the fourth quarter of 2023 relating to a reversal of impairment within group steel facilities concerning a restart of its previously mothballed DR-2 facilities. On a comparable basis, the adjusted net income for the current period has increased by more than 46%, if adjusted for this effect of nonoperating income. As detailed on Slide #16, revenue for 1Q 2024 has marginally increased by 8% versus fourth quarter of 2023, primarily due to improved sales volumes that were partially offset by a slight reduction in the average selling prices. Sales volumes have increased sequentially and with improved production within all segments, except the polyethylene segment. On the other hand, selling prices have marginally declined versus the previous quarter. Regarding the financial position analysis, as detailed on Slide #18, the group's financial position continued to remain robust with cash and bank balances raised to QAR 12.1 billion as of 31st March 2024 after's accounting for a dividend payout relating to the financial year 2023 amounting to QAR 4.7 billion. Currently, the group does not have any long-term debt obligations. The group's reported total assets and total equity reached QAR 39.4 billion and QAR 36.5 billion, respectively, as of 31st March 2024. The group generated positive operating cash flows of QAR 915 million with a free cash flow of QAR 400 million during the first quarter of 2024. Moving on to the segmental performance. As detailed on Slide #25, the Petrochemicals segment reported a net profit of QAR 354 million for the first quarter of 2024, marginally down by 7% versus the same period of last year. This decrease was mainly linked to a decline in the gross margin attributed to a reduction in the average selling prices. Average selling prices were down, which were broadly offset by improved sales volumes, which were up by 7%, resulting in segmental revenue broadly remained at par with last year. On a quarter-on-quarter basis, as detailed on Slide #25, segment's net earnings improved significantly by 67%, predominantly linked to improved segmental revenue, which inclined by 18% versus the fourth quarter and lower operating costs ultimately resulting in improved gross margin. The increase in segmental revenue was linked to higher sales volume reported amid higher production during the first quarter of 2024. With regard to Fertilizer segment, as noted on Slide #31, the segment reported a net profit of QAR 638 million for the first quarter of 2024 with an incline of 25% versus first quarter of 2023. This incline in net profit was primarily driven by improved operating costs, which declined by 28% versus the same period. The improvement in operating cost was associated with reduced sales volume that were over by 10% amid supply challenges and prevailing demand conditions. Furthermore, operating customer also reduced on the backdrop of improved variable costs driven by lower feedstock costs. Segment revenue decreased by 16% in first quarter of 2024 versus the same period of last year due to the combined effect of lower prices and sales volumes. Selling prices declined by 7% versus first quarter of 2023 after fertilizer prices return to their long-term average since peaking in first half of 2022. Sales volumes moderately declined by 10% during first quarter of 2024, mainly due to supply challenges and prevailing demand conditions despite relatively stable production during the year. On a quarter-on-quarter basis, segmental revenue marginally increased by 4% compared to the previous quarter, owing to higher sales volumes. Sales volumes improved by 7%, primarily driven by improved demand support. On the other hand, selling prices declined marginally, but remain within the historical ranges. Segment's net profit for the first quarter of 2024 increased by 21% due to higher revenues and lower operating expenditures. Concluding the segmental analysis with Steel segment, as seen on Slide #37, the Steel segment reported a net profit of QAR 156 million, which increased by 17% compared to the last year. Improved earnings were mainly driven by higher gross margins due to improved operating costs, which decreased by 19% versus the first quarter on account of improved raw material costs. Revenue declined by 16% due to lower prices and volumes combined. Steel prices on average decreased by 4% due to lower input raw material cost and softening of demand. Simultaneously, sales volumes were also down by 12% due to weakening of demand. Construction demand remained challenging due to the prevailing macroeconomic environment with most central banks continue to persist with their hawkish monetary policies. On a quarter-on-quarter basis, as you can witness on Slide #37, segmental profits declined by a notable 75% mainly on account of lower nonoperating income as the segment recognized a one-off nonrecurring other income in the fourth quarter relating to the reversal of an impairment of one of its operating facilities amounting to QAR 550 million. Comparatively, normalized earnings after adjusting for this impairment reversal in fourth quarter have improved by more than 100%. Segmental revenue increased marginally by 3%, mainly due to higher sales volumes, which increased by 6% due to higher production. Production improved by 14%, primarily due to higher output within Doha facilities as Doha facilities were on planned maintenance during fourth quarter of 2023 and scaling up of operations within recently acquired Al-Qataria. That concludes the presentation. I think we can now open the floor for the Q&A session. Thank you.

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

I have a couple of questions. The first one is related to maintenance stops for the rest of the year, if you could comment on what do you expect both for fertilizers and for petrochemicals. And then the second question is on QAFAC with the JV expiring next month, if you have any indications from QatarEnergy, how they're going to proceed and if other negotiations with the IQ for a potential acquisition of the stake.

Thank you so much. So with regard to your first question related to the shutdown and maintenance activity, so on the Fertilizer segment during the first quarter, we have 53 days of maintenance, and we are expecting to have 15 days in the second quarter and 20 days in the third quarter, another 20 days in the fourth quarter. This is for normal routine maintenance activity. For the petchem...

Petchem you mentioned.

Yes. For -- the information just I provided was for the petchem. And for the Fertilizer, we're going to have around 20 days for each of the quarter. So in the first quarter, we have about 24 days. And the same number of days for the second and third quarters. However, in the third quarter, we have an 85 days for further maintenance and shutdowns during the 2024 fourth quarter. With regard to your second question of the JVA expiry next month, you are correct. We have QAFAC JVA will be expired on the 6th of June 2024. Right now, all the parties and the shareholders at the final stages of the negotiation. Hopefully, we're going to hear something very soon about the JV and the extension of the JV, what would happen for the minority shareholder and everything and details. But still, the final outcome of that negotiation have not arrived to the final decision, so we will inform the market at the right time. I hope it is clear for you.

Yes, that is very clear.

Next question comes from [ Seki Mutukwa ] from Ashmore.

Two questions, please. The first one is just on the -- in the Fertilizer segment. The EBITDA margin sort of expansion, you talked about, obviously, the variable costs on feedstock but also other operating costs. Can you just give a sense of what was the biggest driver, if you will, of that expansion, whether it's compared to fourth quarter '23 or first quarter of '23. That's question one. Question 2 is just in the current quarter, although we've only had a month of the second quarter, are you seeing similar margins? Or has there been a sort of adjustment downwards or upwards just to get a sense?

So if you look at the gas prices and the product prices for the last quarter compared to this quarter, as you are aware, our formula is very linked to that prices. So the main differences and the reduction of these prices, basically, the cost of the fourth quarter 2023 of the feedstock, since we have the formula having the accumulated, I would say, average of selling price for the year versus it will be restarted at the beginning of this year. So in the first quarter, we have, I would say, a lower feedstock prices where also the prices went in the other way. So this is with regard to the Fertilizer segment. Regarding your second question, if you can just repeat it.

Sure. It was in the same segment, have margins sort of stabilized similar to the first quarter? Or has it seen a little bit of adjustment perhaps because of a catch-up in feedstock?

Yes. The margin will remain almost the same. I believe even if you look at the current prices of the urea and ammonia, which is $340, however, we believe that the upcoming period will be more challenging, and we are expecting a slight reduction in the urea and ammonia. And this is based on the number that we have and sourced from online. It is not something that we prepare, but this is the market expectation.

Question comes from Nitin Garg from SICO.

I have 2 questions. First is for the petrochemicals. I mean, we recently saw some recovery in prices compared to the fourth quarter, I mean, especially in the ethylene chain. So could you please explain, I mean, why -- what led to this recovery? I mean, was there some shutdowns, planned shutdowns? We also read somewhere that there were closures in Europe in terms of crackers, around 1 million tons. So I mean, do you think this price recovery will sustain or the prices have already started falling in April and May? So if you can comment on this recovery in prices. And also on the urea side, I mean, if you can highlight when was the last Indian tender came and at what prices it was filled and how much quantity for us to have a view on urea prices. As you said, the urea prices are expected to fall in the summer. I mean any update on the Indian tender. That's it.

Okay. For the petchem prices, I would say the market has stabilized a little bit. We see -- we don't see -- the price has improved, but it was an acceptable range. And we believe that the same range will continue for the year. Like the average realized price so far for the petchem we have is around -- especially for the LDPE products, around $1,000, and we are expecting the same range will continue for the year. And with regard to the urea prices and the tender, for myself, I don't have enough information regarding the India tender. However, we believe that during the summer time, the prices will be under pressure. That will maybe go down by $20, $20 to $30, and we hope the prices will pick up again in the third and end of the quarter of the year.

Okay. So just a follow-up on this. So this recovery was in petrochemical prices. Was it driven by shutdowns, I mean, in the supply? Or do you think the demand has actually increased?

See the 1 million shutdown, you see if you look at the global petrochemical supply, we talk about more than 100 million to 110 million metric tons, right? So 1 million shutdown is not going to make a major impact on the overall price. So it's pretty much demand driven.

Okay. And I mean -- so the prices, as you mentioned, the prices have stabilized. So I mean, it means that prices have fallen a bit compared to what was the recovery in first quarter. I mean during the 2Q, I mean, directionally, the prices have fallen. Is that correct?

It's not fallen.

It's not fallen. I would say it will stay at the same range, $1,000. This is the expectation that we have based on some of the analysis. It's not an IQ expectation, but some of the analysts that we found. So we believe it will remain healthy and stable during the year.

Next question comes from Abdullah Amin, QNB.

I have a question on fertilizers specifically. Slide 31, if you look at Slide 31, the net profit has been quite volatile from first quarter to second quarter last year, and then it's gone up. This year, if you look at urea price, it's already below $300. The Middle East is around $285. Average was [ $355 ] for first quarter. And if you look at the U.S. one, it's $298. So when do you think it's going to impact the margins for IQ? Is it just a lag or -- in this quarter?

So basically, Abdullah, our product prices are always and the margins are linked to the end product prices, right? So usually, it's linked on a year-to-date basis. Urea cost or the feedstock prices are linked to your year-to-date prices. So it will be reflective of -- on a monthly year-to-date prices. So when the prices -- either they increase as well as decrease will be reflective of your year-to-date bottom line. So when the price goes up, it will be -- increase will be cumulatively positive and the decrease also cumulatively negative.

And if I understand correctly, the feedstock prices also moves with urea price for the year average. So for feedstock, the higher...

Year-to-date average. Year-to-date average, correct.

So in summary, this means that your revenue will be lower in second quarter, and your costs will be higher in second quarter.