Mesaieed Petrochemical Holding Company Q.P.S.C. (MPHC) Earnings Call Transcript & Summary

Good day, and welcome to the Mesaieed Petrochemical Holdings Q3 2021 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Bobby Sarkar. Please go ahead, sir.

Okay. Thank you, Diana. Hello, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Mesaieed Petrochemical Holdings Third Quarter and 9 Months 2021 Results Conference Call. So on this call from QP's Privatized Companies Affairs Group, we have Sami Mathlouthi, who's the Assistant Manager in Financial Operations; and we have Riaz Khan, who is the Head of Investor Relations and Communications. So we will conduct this conference with management first briefly reviewing the company's results followed by Q&A. I would like to turn the call over now to Riaz. Riaz, please go ahead.

Thank you, Bobby. Good afternoon, and thank you all for joining us. Hope you're all doing great. Before we go into the business and performance updates, I would like to mention that this call is purely for the investors of MPHC and no media representatives should be attending this call. Moreover, please note that this call is subject to MPHC's disclaimer statements as detailed on Slide #2 of the IR deck. Moving on to the call. On 27th of October, MPHC published its results for the 9-month period ended 30th of September 2021. And today, in this call, we'll go through these results and provide you an update on key financial and operational highlights of MPHC. We have structured our call as follows. At first, I will provide you with a quick insight on MPHC ownership structure, its competitive strengths and overall governance structure by covering Slides 5 till 10 and Slides 40 and 41. Secondly, Mr. Sami will brief you on MPHC's key operational and financial performance matrix. Later, I will provide you with insights on segmental performance. And finally, we will open the floor for the Q&A session. To start with, as detailed on Slide 5 of the IR deck, the ownership structure of MPHC comprises of Qatar Energy with approximately 65.4% stake, and the rest is in the free float held by various domestic and international corporates and individuals. Qatar Energy, being the main shareholder of MPHC, provides most of the head office functions through a service-level agreement. The operations of MPHC's joint venture are independently managed by their respective Board of Directors, along with the senior management team. In terms of competitive advantages, as detailed on Slide 8, all of the MPHC's group companies are strategically placed in terms of competitively priced and assured feedstock supply under long-term arrangements, solid liquidity position with a strong cash flow generation capability and presence of most reputed JV partners. Additionally, its partnership with Muntajat acts as a catalyst for its access to global markets. As detailed on Slide 10, from a competitive positioning perspective, MPHC ranks amongst top-tier companies in the regional chemical space across most of the matrices and specifically leads the charge in terms of profitability metrics. In terms of governance structure of MPHC, you may refer to Slides 40 and 41 of the IR deck, which covers various aspects of MPHC's code of corporate governance in detail. I will now hand over to Sami.

Thank you, Riaz. Good afternoon, and thank you all for joining us. To start with, as detailed on Slide 12, in terms of macroeconomic dynamics, the momentum carried from the later part of last year on the back of satisfactory vaccination drive and easing out of geographic lockdowns in major markets led to a sequential recovery in demand for petrochemicals and the chlor-alkali products and positively reflected on selling prices. Industry-wide supply constraints and the global logistical bottlenecks also played a part in keeping the product prices favorable for the downstream producers. MPHC joint ventures benefited from these strong economic sentiments, which resulted in improved price levels and translated into an improved set of financial results as detailed on Slide 14. For the 9-month period ended 30th of September 2021, MPHC recorded a net profit of QAR 1.4 billion as compared to QAR 330 million for the same period last year, so up by 335%, as detailed on Slide #16. Group improved financial performance for the first 9 months of 2021 was largely attributable to improved product prices, which on average increased by 56% and translated into an increase of around QAR 1.1 billion in group net earnings, as you can see on Slide 17. Sales volumes were also furthered by 20%, mainly on account of improved production volumes and contributed by QAR 307 million positively to the current period profitability versus same period last year. The positive trajectory in product prices and improved volumes were slightly offset by increase in variable costs, which contributed by QAR 263 million negatively towards the current period earnings in comparison to the first 9 months of 2020. Current period net earnings were positively impacted by favorable variance amounting to QAR 33 million in relation to inventory differences due to lesser drawdowns in comparison to the same period last year. MPHC operations continue to remain robust and resilient with total production for the period reaching 891,000 metric tons, up by 22% versus last year, as detailed on Slide 15. The overall increase in production volumes was mainly attributed to improved plant operating rates during the current year as major plant turnarounds and preventive maintenance shutdowns were carried out in certain MPHC joint venture facilities during the 9 months of last year. Moving on, quarter-by-quarter performance. MPHC revenue improved by 5% versus second quarter of 2021, while net profit remained flat compared to the previous quarter. The key contributor towards a growth in revenue mainly as result of improved sales volumes which increased by 8%. However, selling prices declined by 3% during Q3 2021 compared to quarter 2 2021, mainly on account of supply side ease-outs, particularly for the petrochemical products. On overall basis, our base case strategy will be to continue our focus on the strategic drivers of operational reliability in terms of continued improvement in efficiency and achieving cost optimization, which would enable the group to contain costs while making strategic investments for unlocking further growth potential. I will now hand over to Riaz to cover the segmental performance.

Thank you, Sami. Starting with the petchem segment as covered in Slides 22 till 26. The performance of the segment bounced back with a net profit of QAR 1 billion, with an increase of 327% compared to the 9 months of last year. This notable increase was primarily driven by improved product prices, which increased by 49% on account of improved macroeconomic dynamics, coupled with supply constraints. Sales volumes also increased by 17% compared to the same period of last year against a backdrop of higher operating days in the current period. The growth in product prices, coupled with sales volumes, led to an overall rise in revenue by 75% within the segment to reach QAR 2.1 billion for the current period. Production volumes increased by 21% versus the same period of last year as the segment had planned periodic turnaround of Q-Chem II facilities during Q1 of 2020, which affected the overall operating rates for the last year. In terms of segment revenue by geography, as detailed on Slide 25, Asia remains a main market for the segment, along with Indian subcontinent and Europe. Moving on to the Chlor-Alkali segment, as detailed on Slides 27 till 31. The segmental performance recorded a significant recovery with a net profit of QAR 418 million compared to a net profit of QAR 42 million reported for the first 9 months of 2020. This notable growth was primarily driven by significant improvement in blended average selling prices, which increased by 85%, complemented by renewed product demand and supply side shortages. Sales volumes also increased by 11% compared to the same period of last year against the backdrop of better utilization rates in the current period versus last year. Growth in product prices, coupled with sales volumes, led to an overall increase in revenue by 132% within the segment to reach QAR 874 million for the current period. Production volumes rose by 24% versus the same period last year as the segment had more planned periodic shutdowns during quarter 1 of 2020. In terms of segment revenue by geography, as detailed on Slide 30, Indian subcontinent remains a main market for this segment. Now I think we can open the floor for the Q&A session.

[Operator Instructions] We just got one question in from Leszek Baranski with Millennium.

Let me start maybe with the first question. I've got 1 or 2 additional questions as well. So yes, if you look at all these like news flow about like logistical problems that even plastic producers potentially could have when delivering plastic to Asia or to Europe, so do you see any difficulties in this field or not much?

Well, so far, based on the latest results that we have until Q3 2021, we are seeing those issues, but we haven't been affected. So we have good, let's say, good contribution and good support from our -- from Muntajat, who are dealing with the sales and delivery of our products. So we don't see, even in the future, those kind of impacts that will affect us.

Okay. So the second question refers to a big discrepancy in prices between Europe and Asia. So basically, European markets, including even Turkey, they offer much higher prices, I guess. So are you able to use this opportunity and sell more into Turkey or Europe? Or you keep selling to your standard clients in Asia?

Well, I think we are mainly looking for the best outcome, so we are looking for the best net prices, netbacks, and that's the strategy that we have. And we have our partners dealing with those kind of sales. So our objective is always to look for the best for our shareholders.

Okay. And another question referring to PVC and by-products when you are producing PVC. So Mesaieed has got quite a visible exposure to this petrochemical chain. And my question is, because this chain looked quite profitable recently and probably still is, so do you see this to continue going forward?

Yes, Leszek, first thing to clarify in terms of the production which we are doing, it's VCM which we are producing, which is a precursor to -- or acts like a feedstock to the PVC. In terms of the overall market dynamics, PVC for the next at least 2 quarters, with the current constraints in the market, not only from China, but also from Europe, and thanks to the energy price trajectories as well as power rationing measures in China, so we are expecting a positive trajectory and upbeat in the prices, hopefully, with the current market dynamics. And I cannot comment on exact pricing levels which it will reach. But like from overall, what we see from the market consensus and from the experts which we hear, so this is what the price trajectories look like. And sitting now right now here and estimating about how the price trajectories will move further down the line in midterm range, it will be very difficult to say because there's a lot of variables in the market, a lot of demand and supply variables in the market, I would say. So on a short-term basis, next 2, 3, 4 months, 5 months down the line, it looks positive. But in terms of exact percentile, exact pricing, exact levels, it is difficult to say because that is not something which is our policy. We always caveat ourselves by referring what the market says. So this is what the market is saying, and this is what the consensus towards a short-term outlook for the product.

Understood. Yes, it's very clear. Yes, I was asking about sentiment, so you answered it very well. So another question is, you've got a sister company, Industries Qatar. And in case of Industries Qatar, the company started already to buy minority shares from subsidiaries -- in subsidiaries, not from. And basically, that's the way how to deploy cash. In case of Mesaieed, like kind of macro environment is positive, dividends are not very substantial. And there is cash by building on the company's balance sheet. So what's the strategy for Mesaieed? Is it similar to Industries Qatar? Or it will be something different, for example, I don't know, much higher dividend?

Yes. Well, different companies, they have different kind of strategies. And we are not following IQ, so it's 2 separate companies. And every company has its Board, which is different and taking totally different strategic decisions. So at the moment, we don't have anything on the pipeline, so in terms of acquisition of minority shares. We are working under joint ventures with our partners so far, so the working with the partners is very good. So we are in a win-win position, which benefited the shareholder of MPHC in general. So far, we have distributed around QAR 6.8 billion dividend, which were -- our dividend payout is ranging from 71% to 81%. So last year, the dividend payout was around 94%, which was exceptional due to the lower net profits. So the company will try to manage the cash in the benefits of the shareholders, so either through distribution or looking for opportunities where the Board believes that those opportunities will add value to the shareholders, so without taking huge risks. But at the same time, we try to work in the benefit of our shareholders.

Okay. Understood. And maybe the last question. Most recently, there were like very big changes in feedstock prices globally. Most people believe it's very temporary because of sudden undersupply of gas here or there globally. So should we expect that your formulas in Qatar, they should stay stable as they used to be, because these formulas are for years or decades, not for months or quarters?

Thank you for the question again. So looking back to our EBITDA margins especially, so you will see that it's increasing, starting from Q1 2020 from 29% to 58%. So it's despite the increase that we have seen in the feedstock. So until Q3 2021, you will see in the bridge analysis that there is a negative impact coming from feedstock, which is in line with the increase in feedstock prices. So we don't believe at the moment that the formulas will change. So those formulas are regulated by joint venture agreement between the shareholders and between Qatar Energy. So -- and we believe -- so those formulas take into consideration any variable increase in the market, which is taking into consideration those indexations. And we believe that we are trying to keep everything lean where we can control our EBITDA margin and we can make profits for our shareholders. Here, we just need to mention that in QVC, part of the feedstock is bought from external parties, and this part is representing around 25% to 30% of the feedstock that is consumed at QVC. And this will be basically variable and depending on the market condition and on the availability of those feedstocks on demand.

And we will now take the next question from Shabbir Kagalwala with Al Rayan Investment.

This is Shabbir from Al Rayan Investment. Do you have any planned outages for the remaining part of the year in 4Q?

Thank you, Shabbir, for the question. So yes, for Q4 2021, we have a big shutdown in QVC that's around 90 days. So this shutdown has already started. And this was a planned shutdown, so it's communicated already to the market, so in our previous press releases. And so yes, so that's 90 days for QVC. We don't expect any shutdown for Q-Chem and Q-Chem II. And if you look at the shutdowns until Q3 2021, you will see that the operating rate has increased a lot compared to last year where we have only an average 15 days of shutdowns compared to more than 115 days last year.

So when is the shutdown going to be completed?

It has already started, so beginning of October, and it would be completed by end of December.

End of December. Okay. The entire quarter. And I mean, during this period that there's a shutdown, you will not be -- do you have like enough inventory for sales? Or you did not build any inventory? Or inventory is less?

Well, the rates of sales that we have, so you'll see that most of the production is sold. So we don't have huge inventories at QVC level, and the inventory that we have built, they are not enough for 3 months' sales.

Okay. So basically, nothing will be sold in this quarter?

Yes.

Or 50% of what is...

It's small quantity that is existing in the stock, but very, very minor.

Okay. And my other question is -- forgive me, I lost my train of thought. But yes, sorry, the outlook for caustic soda. So caustic soda is, I mean, the prices have jumped significantly. Could you give us some color on how do you see the pricing for this product going forward?

Yes. Thank you, Shabbir, Riaz here. So basically, on the caustic soda, again, I'll caveat myself, this is a market consensus. It will be very difficult to comment anything from our side, which is not the policy or which has not been the policy historically even. So caustic soda, again, the supply-demand dynamics, it's very positive, and it is supporting the prices. Supply remains very short. Demand is on a higher side. Caustic soda, as you are aware, almost, like very high level at the global scale, 30% to 40% of caustic soda is used in alumina production. So the pricings are closely linked to alumina and then aluminum trajectories, which is, again, very positive on the aluminum front. And then the rest is basically in the paper industry, which is predominantly linked to the office usage as well as in the schools and different areas. So that is, again, very strong. The demand is strong from that perspective because most of the economies are coming out of those lockdowns throughout the year and have remained open unlike last year. So the price trajectories for the next 2 quarters is expected to be positive with supply remained constrained. As far as exact numbers and exact percentiles and exact references from our pricing perspective, that is something which is not the policy, where we'll caveat ourselves. So this is again a market consensus, and this is what market thinks.

Okay. So what is the current price of caustic soda? Is it still 350?

So we can comment until Q3 2021. So basically, we have seen a huge increase between Q1 2021 and Q3 2021 from 196 to 350.

And the last...

Sorry? I think that the prices are still stable now and comparable to the latest prices that we have seen in end of Q3 2021. But we cannot comment on the future.

Okay. My last question is -- I've already taken a lot of time. Just on the QVC that you said will be shut down, it basically produces VCM and caustic soda, right? So the volumes for both of these products will be off-line, right?

Yes.

It appears there are no further questions at this time, so I would like to turn the conference back to our speakers for any additional or closing remarks.

Thank you, Diana. This is Bobby again from QNB FS. If there are no further questions, we can end the call for today. I want to thank Sami, I want to thank Riaz for taking the time to answer investors' questions, and we'll pick it up next quarter. Thank you very much.

Thank you, everyone.

Thank you, all.

Ladies and gentlemen, this concludes today's call. Thank you for your participation, and you may now disconnect.