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

Good day, and welcome to the Mesaieed Petrochemical Holding Co. Q1 2022 Results Conference Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Mr. Roy Thomas. Please go ahead, sir.

Hello, everyone. This is Roy Thomas from QNB Financial Services. I want to welcome everyone to Mesaieed Petrochemical Holding Company's First Quarter 2022 Financial Results Conference Call. On this call from Mesaieed Petrochemical Holding Company, we have Sami Mathlouthi, the Assistant Manager of Financial Operations; and Riaz-ur-Rehman Khan, the Head of Investor Relations and Communications. We will conduct this conference call with management first reviewing the company results, followed by a Q&A. I will turn the call now over to Riaz-ur-Rehman Khan. Go ahead, Riaz.

Thank you, Roy. Good afternoon, and thank you all for joining us. Hope you're all doing great. Before we go into the business and performance updates of MPHC, I would like to mention that this call is purely for the investors of MPHC and no media representatives should be attending this call. 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 26th of April, that was yesterday, MPHC published its results for the 3-month period ended 31st of March 2022. And today, in this call, we'll go through these results and provide you an update on key financial and operational highlights. We have structured our call as follows: At first, I will provide you with a quick insight on MPHC's ownership structure, its competitive strength, overall governance structure, by covering Slides 5 to 10 and Slides 40 and 41. Secondly, Sami will brief you on MPHC's key operational and financial performance matrix. Later, I will provide you with insights on the 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 51 -- 65.4% stake, and the rest is in the free float held by various domestic and international corporates and individuals. QatarEnergy, being the main shareholder of MPHC, provides most of the head office functions through a service level agreement. The operations of MPHC's joint ventures 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 MPHC's group companies are strategically placed in terms of competitively priced and assured feedstock supply under the 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 competitive positioning perspective, MPHC ranks among top-tier companies in the regional chemical space across most of the matrices and specifically leads the charts in terms of profitability margins. 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. Starting with macroeconomic environment, as detailed on Slide 12, which remained uneven during the first 3 months of 2022, where demand for certain petrochemicals products slightly inched downward, owing to seasonal effect and buyer caution on prices after reaching peak during last year. On the other hand, specifically during the latter part of first quarter 2022, supply side was affected amid Russia-Ukraine conflict, enforcing sharp rise in energy prices. For the 3 months' period ended 31st of March 2022, MPHC recorded a net profit of QAR 443 million, up by 17% compared to last period of last year, as detailed on Slide #16. The group's improved financial performance for the current period was largely attributable to improved product prices, which on average increased by 26% and translated into an increase of QAR 209 million in the group's net earnings, as you can see on Slide #17. On the contrary, sales volumes declined by 14% versus same period last year, mainly driven by lower plant operating rates amid large-scale turnaround carried at Q-Chem facilities during the current period. Decline in sales volumes translated into a decrease of QAR 129 million in MPHC net earnings. On the operational performance, MPHC operations continue to remain robust and resilient, with total production for the year remaining -- reaching 245,000 metric tons. Current period production volumes declined by 13% compared to first quarter of 2021, which is mainly due to the larger turnaround carried at Q-Chem facilities. Moving on quarter-on-quarter basis. MPHC revenue inched higher by 3%, while net profit increased by 5%. Key contributor towards the improvement in revenue and net earnings was mainly linked to better sales volumes, which increased by 3% amid higher plant operating rates. However, selling prices remained flat during the first quarter of 2022 compared to Q4 2021 as effects of higher energy prices were mainly offset by muted demand. 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 efficiencies 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 comment on segment performance.

Thank you, Sami. Starting with the petchem segment as covered in Slides 22 to 26, Petrochemicals segment reported a net profit of QAR 247 million for the first quarter of 2022, down by 1% versus first quarter of 2021. The marginal decline in profitability was primarily driven by lower sales volumes, which declined by 21%, as the segment carried out a larger-scale turnaround at Q-Chem facilities during first quarter of 2022, which affected segment's production volumes to decline by 24%. On the contrary, product prices improved by 23% and offset most of the negative impact relating to the lower volumes. Selling prices improved mainly on account of continued momentum from positive macro drivers carried forward from the latter part of last year. On overall basis, segmental revenue declined by 4% versus first quarter of 2021. 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 Slide 27 till 31, Chlor-Alkali segment reported net profit of QAR 189 million for the first quarter of 2022, increased by 51% compared to the same period of last year. This notable growth was primarily driven by a significant improvement in the blended average selling prices, which increased by 40% versus the same period of last year, complemented by strength from end product industries like aluminium, polymers and et cetera. Sales volumes marginally declined by 3% compared to the first quarter of 2021. On an overall basis, revenue grew by 36% within the segment, while production volumes marginally grows by 5% versus the same period of last year. In terms of segment revenue by geography, as detailed on Slide #30, the Indian subcontinent remains the main market for this segment. Now we can open the floor for the Q&A session.

[Operator Instructions] We will take our first question from [ Leszek Baranski ] from Millennium.

I wanted to ask a question based on one of the slides. I read on one of the slides that utility costs increased visibly. And if you can elaborate a little bit what kind of utility cost, whether it's -- it is gas or electricity and how is it priced and how much the increase and what is the impact?

Well, utility cost, it's based on the ethane price that we are having at QVC. So this is linked relatively in terms of contracting agreement with the providers, which is linked slightly to the end products. And hence, we have some bonus that we have to pay in case the final products reached some ceilings. And that's the main reason for the additional utility costs.

Okay. So utility costs, they are -- they've got similar linkage to product prices, the feedstock costs, is that correct?

They are used -- this one is for the generation of the power plant that is used for the production of caustic soda and EDC products. And it's linked, in terms of as feedstock, it's going to the final project.

Okay. And coming back to the feedstock linkage. So I guess in both segments, because here we've got both segments, we've got this [indiscernible] poly segment and plastic segments. So is this linkage between feedstock cost and final product, does it work in the same way in both segments, or there are some differences?

Yes, it does work. I think in most of those kind of products, there will be a link between the feedstock costs and between the final products.

We will now take our next question from [ Nitin Butani ] from [ CBFS ].

Thanks for the presentation. On one of your CapEx slides, you have mentioned a turnaround related CapEx fee continuing in 2022 to the extent of QAR 142 million. I just wanted to know, is this going to be again for both the segments, Chlor-Alkali and Petrochem? And at the same time, what is the likely increase in volumes which one could expect in -- after all this turnaround?

Let's start first with the turnaround. So we had one turnaround in Q-Chem, which is in Q1 2022 and this one is a planned turnaround. This is one of the biggest turnarounds that we ever had in Q-Chem. And the main reason for the turnaround is to make sure that the facilities are up to date and then it's not to increase basically the production of the facilities, but to make sure that they are in line and then there are no issues to the continuity of those plants. So we had 39 days of shutdown during Q1 2022 for QVC for the total cost was around from USD 100 million to USD 120 million and that's only for Q-Chem I. So we are not planning any turnaround for the other facility at the moment. So the next turnaround would be for Q-Chem II, which is planned for 2026.

We will now take our next question from [ Jan Al Ravi ] from Al Rayan Investment.

Thank you for the presentation. So just following up on your last -- on the last comment which you made about turnarounds and shutdowns. So what will be the other planned shutdowns remaining for this year? Is there anything in the Chlor-Alkali segment?

Okay. So we have -- for QVC, we always we plan around 29 to 30 days per year for planned shutdowns. They are not turnaround. This is mainly due to the aging of the facility. So out of those 30 days, we have used 5 days in Q1 2022 and remaining 20 -- 25 days will be spread over the next quarters. So this is the plan. So the plan is around 30 days in total. And for the other plant of Q-Chem II, so we don't have any plan of shutdowns.

Okay. And you had recently announced in a press release about putting up a new plant, which will be using the VCM. Just wanted to know that will there be any more [indiscernible] it's 100% VCM or you will be needing more gas to produce the chemical to make PVC? And has the gas contract been secured?

Well, thank you for the question. So the idea is basically to use 100% of the VCM that we produce. We have studied all the benefits that is relating to the PVC project. And one of the main benefits is to reduce the hassle relating to the -- the transportation of VCM and all the logistics around the VCM production and transportation. So 100% of the VCM will be used in the production of the PVC. And then if we need maybe to add more, this will be studied at later stage. But the initial -- so it's 100% of the VCM will be used and we will secure the feedstock, so post the expiry of the JV.

And just to add, these lines are integrated. So VCM will directly move from the existing facilities towards the new PVC facilities. There is a proper integration among these facilities and they are just sitting next to each other. So in terms of sourcing of the feedstock, as mentioned in the press release, the source of the feedstock for the PVC will be the existing VCM and the ratio is almost 1:1.

Right. And what sort of increment in margin you would be looking for with this integration?

Well, at the moment, look, it's all depending of the prices. But however, there will be always a spread between the VCM and the PVC that they would generate for the business. So anything that is additional and any spread that is additional on top of the VCM will be added value to the shareholder in QVC.

And [ Shabbir ], just to add the point there, the spreads are easily identifiable from the markets in Bloomberg also. So this is something which is very, very a moving target always because these commodities where we operate, it's very volatile. So on certain days, the spreads could be doing very well as compared to the other days where we will be having a margin squeeze. So that's why it's intentional not to go as a company policy and discuss the spreads as well as the margins for something which is not there on the paper. But as far as the trends you will see, you will obviously be -- we will obviously be following the market trends because the quantities which we are producing, we are the price seekers from the market. So that play will always be ending up linking it to the macro trends.

We will now take our next question from Abdul Amin from QNB.

Thank you for the call and for the presentation. I just wanted to know the cost structure of different QVC and the petchems. Is it how much is the feed cost and how -- is it related to the output selling prices? Is it similar to IQ where output selling prices also affect the cost structure?

Well, different companies have totally different cost structure and different feedstock prices. So basically, we cannot communicate the feedstocks that we have. But what I can confirm is that all different companies, they don't have the same cost structure.

And Amin, just to add what Sami has mentioned, there are 2 slides in the investor deck, Slide #26 and Slide #31, where you can easily find out the realized prices as well as the volumes. And based on that, it's easily -- can be easily converted into the margin evolution. So the intention to show those slides was to present to the investors and to support the investors in their decision-making from the margin evolution perspective.

But is the output price related to the cost structure as well? Or it's not related at all?

Well, if you look -- look, if you look at there's another slide as well, which is company peers. So you can see easily that MPHC is providing -- I think it's #1 in terms of EBITDA margin and in terms of net profit margin. So basically, that's showing that the cost structure in itself, it's very competitive compared to all the peers in the region.

That's okay. But I'm just asking for a model, if I want to make a model, how would I structure the cost for these companies?

I think we'll not be able to structure in detail. So we can provide only on big components starting from EBITDA margin.

Yes. Because the reason is that [indiscernible] is not covered by any sell-side analysts. There is no estimate before the company announces results like other companies in Qatar or region. So if the cost structure is not clear, it will be hard to model it for the company.

No, it's -- as per the -- like the disclosure policy, these structures are very, very confidential and because there is multiple parties are involved, there is the feedstock supplier, then there is MPHC itself. And then you have the JV partner who is sitting at the OpCo level. So -- and then you have multiple JV partners. In Q-Chem's case, you have CPChem as your JV partner there. And then in terms of QVC, there is TotalEnergies are there as part of the JV arrangement. So as a policy, as a standard policy, we cannot exactly -- and we cannot go on granular level in terms of the cost structuring. Obviously, at the very, very high level, the cost structure is comprises of a fixed portion and a variable portion. But beyond then that, talking about the numbers in the numericals, it will be -- unfortunately, it will be very difficult for us to discuss. As far as to comfort the investors, intentionally, we have put in these slides from competitive positioning perspective, from EBITDA margin perspective as well as individual product pricing perspective, to support the case and to help the investors in case they are ending up making some models.

No, we appreciate the effort and we appreciate the presentation there at least every quarter. But having said that, I would appreciate also that some sell-side research, because we are buy-side investors, and if sell side covered this company, it will give more visibility of the company, it will be more clear to investors what the estimates are before the results and what is happening in the company. Like even IQ, at least there are certain sell-side analysts. So is it important for the management to make sure that some sell-side analysts cover this company? Or it's not that important anymore?

Firstly, on your question about IQ. This company is in a different silo. So I will not be commenting about IQ here. But then in terms of the sell-side coverage, the company's idea is to promote the coverage as much as we can from the material from our website as well as by conducting these calls and attending different conferences. It is up to the sell-side analysts when and how they want to cover the company. But from our side, we always keep ourself independent. We always approach them if they can independently cover the company, but we will not be ending up like paying something to do a sell-side coverage. That is not as per the policy.

Thank you, but nobody is paying anything to sell side to cover the company. If information is available, I think the houses which will cover. But I appreciate the effort for the presentation.

There are no further questions in the queue at this time.

All right. If there are no further questions, we'd like to thank Sami and Riaz for the results update and answering all the queries and look forward to speaking to you all for the next quarter results. Thank you.

Thank you so much. Thank you.

Thank you. Thank you all. In case anybody wants to have any further discussions about MPHC, please feel free to contact the QNB FS team or myself and I'll be very happy to host you all for a separate call. Thank you very much.

Ladies and gentlemen, that will conclude today's conference. You may now all disconnect.