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

Hello, and welcome to the Mesaieed Petrochemical Holding Company Conference Call. I would like to advise all participants that this call is being recorded. I would now like to welcome Roy Thomas to begin the conference. Roy, over to you.

Thank you, [ Tori ]. Hello, everyone. This is Roy Thomas from QNB Financial Services. I want to welcome everyone to Mesaieed Petrochemical Holding Company's First Quarter 2023 Financial Results Conference Call. On this call representing Mesaieed Petrochemical Holding Company, we have Abdulla Yaqoob Al-Hay, the Acting Manager of Privatized Companies Affairs, QatarEnergy; Sami Mathlouthi, the Assistant Manager, Financial Operations, Privatized Companies Affairs QatarEnergy; and Rashid Hamad Al-Mohannadi, the Head of Investor Relations and Communications, Privatized Companies Affairs, QatarEnergy. We will conduct this conference call with management first reviewing the company's results followed by Q&A. I will turn the call now over to Rashid Hamad Al-Mohannadi. Go ahead, Rashid.

Thank you, Roy. Good afternoon, and thank you all for joining us. Hope you are doing great. Before we go into the business and performance updates, I would like to mention that this call is purely for the investor of MPHC, and no media representatives should be attending this call. Currently note that the MS Teams link is to display the IR deck on screen. In case you want to participate in the Q&A session, you must dial in through the telephone lines and the phone numbers provided as part of the indication. Moreover, please note that this call is subject to MPHC disclaimer statements as detailed on Slide #2 of the IR deck. On Sunday, 7th of May, MPHC published its results for the 3-month period ended 31st of March 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 Abdulla Yaqoob Al-Hay, Acting Manager for Privatized Company Affairs; Sami Mathlouthi, Assistant Manager for Financial Operations. We have structured our call as follows. At first, I will provide you a quick insight of MPHC ownership structure, its competitive strength and overall governance structure by covering Slide 5 to 10 and Slide 41 and 42. Secondly, Sami will brief you on MPHC key operational and financial performance matrices. Later, I will provide you with insight on segmental performance. And finally, we can 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 compromises of QatarEnergy with approximately 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 to a service level agreement. The operation of MPHC joint venture are [indiscernible] (00:03:13) managed by the respective Board of Director along with senior management team. In terms of competitive advantages, as detailed on Slide #8. All of the MPHC Group companies are strategically placed in terms of competitively priced and assured feedstock supply under long-term arrangements, solid liquidity position. We have strong cash flow generation capability and the presence of most reputable joint venture partner. Additionally, it's a partnership with Muntajat acts as a catalyst for access to global markets. As detailed on Slide #10 from competitive position and prospective, MPHC ranks amongst the top-tier companies in the regional chemical space. Across most of the metrics, specifically leads -- and -- specifically lead the chart in terms of profitability margin. In terms of the governance structure of MPHC, you may refer to Slide 40 and 41 of the IR deck, which covers various aspects of MPHC code of corporate governance in detail. I will now hand over to Sami to give you a highlight on operational and financial updates on MPHC.

Thank you, Rashid, and thank you all for joining us. Starting with macroeconomic dynamics as detailed on Slide 12, macroeconomic climate remained wavered during the first quarter of 2023, marked by several factors carried forward from the last year which affected the commodity markets, including geopolitical conflicts and recessionary fields linked to inflation-related pressures and high interest environment. In addition, China's slow paced post-COVID recovery phase along with a recent fall in natural gas prices is bringing an additional layer of uncertainty to the commodity markets. On overall commodity prices for MPHC basket of products declined on a year-on-year basis following last 2 years' significantly high price environment. However, prices improved to an extent sequentially mainly on the back of relatively better supply-demand dynamics. Moving on to the financial performance. As mentioned in Slide 14, for the 3-month period ended 31st of March 2023, MPHC recorded a net profit of QAR 269 million, down 39% compared to the first quarter of 2022. As detailed on Slide 16, this decline in profitability was mainly linked to lower group revenue which was declined by 26% and reached QAR 721 million. As evident from Slide 17, decline in group revenue was mainly linked to the decrease noted in average blended product prices was declined by 21%, compared to the same period of last year, translating to a decline of QAR 224 million in MPHC current period net earnings as compared to the same period of last year. Subdued product demand might make the economic headwinds along with excess supply, resulted in lower commodity prices. Sales volumes also declined by 6% versus the first quarter of 2022 mainly driven by lower sales volumes reported by the Chlor-Alkali segment being partially offset by higher volumes reported by the Petrochemicals segment. Negative movements in sales volumes translated into a decline of QAR 32 million in MPHC current period net earnings versus the same period of last year. On the operational performance front, as detailed on Slide 15 MPHC operations continue to remain robust and resilient to total production for the current period, reaching 239,000 metric tons. Transaction for the first quarter of 2023 slightly declined versus the same period in last year, mainly due to maintenance turnaround carried out at QVC facilities during the current quarter, which affected production volumes on a year-on-year basis. Moving on to quarter-on-quarter performance, MPHC revenue declined by 16% and net profit decreased by 9%. Decline in revenue was mainly linked to lower sales volumes which decreased by 20% versus first quarter of 2022 as production volumes declined mainly linked to maintenance turnaround in chlor-alkali facilities. On the other hand, selling prices increased by 5% mainly on the back of relatively better supply-demand dynamics. On an 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 and making strategic investments for unlocking further growth potential. I will now hand over to Rashid to cover this segmental performance.

Thank you, Sami. Starting with Petrochemical segment as covered on Slide 22 till 26. Petrochemical segment reported a net profit of QAR 225 million for the current period, down by 9% versus first Q of 2022. This decline in profitability was driven by higher operating costs linked to higher production and higher sales volume, leading to unfavorable inventory movement. Segment revenue was lower by 1% to reach QAR 586 million for this quarter versus the first quarter of 2022 as lower sales price being entirely offset by higher sales volume. Growth in sales volume was mainly linked to higher production, which increased by 30% as the segment carried out a large-scale turnaround at Q-Chem facility during Q1 of 2022, which affected the segment production for the last year same period. On the other hand, product prices declined by 9%, mainly due to micro volatilities from last year, which affected current period price trajectory for most of the commodities in comparison to the same period of last year. In terms of the segment revenue by geography, as detailed on Slide 25, Europe remains a main market for the segments, along with Asia. We can now move to the Chlor-Alkali segment as detailed on Slide 27 till 31. Chlor-Alkali segment reported a net profit of QAR 18 million for the period, which significantly decreased by 91% compared to the same period of last year. Decline in bottom line profitability was driven by lower selling price and sales volume, which decreased by 43% and 39%, respectively. Selling prices declined as other industries such as alumina, aluminium, PVC, et cetera, remains under pressure due to micro volatilities. Sales volume declined mainly due to lower production impacted by the planned turnaround at the chlor-alkali facilities. Decline in selling prices and sales volume led to an overall decline in segmental revenue, which declined by 46% on a year-on-year basis and reached QAR 135 million for this quarter. In term of the segment revenue by geography, as detailed on Slide #30, Indian subcontinent remains the key market for the segment. Now we can conclude the call, and we can open the floor for the Q&A session.

[Operator Instructions] Your first question comes from the line of Abdullah Amin from QNB.

Congratulations on the results in difficult circumstances. I have only 2 questions. One, if you go to -- if you look at the incomes -- sorry, the quarterly report, Q-Chem versus Q-Chem II, Q-Chem II earnings are down because of the planned shutdown or maintenance. Is that correct? Hello?

Yes. Normally in Q-Chem I and Q-Chem II, we didn't have a turnaround during this quarter. So we had just small day or 2 days of shutdowns, which are relating to the maintenance of the facility. But the main...

Looking at the -- sorry, I was looking at the financial statements, footnote #4, where it's a detailed Q-Chem I, Q-Chem II, QVC as a total. So revenue for Q-Chem II was down year-on-year, and the profits were also down for Q-Chem II year-on-year. Any particular reason for that?

I think we have a decline in selling price as well as noted, there is a decline in the prices. This could be one of the reasons. And the sales volume...

But it should be the same for Q-Chem I as well, because they sell the same product, right?

Yes. I think when we look at both companies, I think Q-Chem and Q-Chem I in 2023, they have both registered decline in [indiscernible], but it's... .

No, Q-Chem I has shown a growth, sorry?

Q-Chem I?

Q-Chem I -- yes, is showing -- the revenue last year was QAR 389.6 million. This year, Q-Chem I revenue is QAR 521.5 million.

Yes, I'm coming to that. The main reason in Q1 2022 in Q-Chem, we had a big shutdown. That's a big turnaround that has been done in Q1 2022, which is not present in Q1 2023. That was the main thing. That was the largest turnaround that we have in Q-Chem I, which has impacted last year production. And that's why you are seeing in Q-Chem, an increase in revenue, compared to last year.

Thanks for the clarification. I have still 2 questions remaining. One is any other planned shutdown coming this year? Planned shutdown for...

For Q-Chem and Q-Chem II, we don't have any planned shutdown that are coming for the year 2022. So the turnaround, which are planned for 2025 and the year 2026. For QVC, we had registered the shutdown during this quarter, Q1 2023, but we will have a small shutdown days in average normally in QVC, as you know, it's an old plant. In average, we are having around 2 days per month. And this will have -- so in the next 9 months, so it's around 18 days in average that are planned to be happening.

My second question is regarding the CapEx on Slide 33. It says it's spread over with, I think, 45 years. How do you intend to finance this CapEx from internal sources or from financing as well?

Well, we have 2 types of CapEx. I think -- the first part, which are relating to the normal CapEx relating to the turnaround and to the normal operation of the companies, those that will be financed directly from the group companies by themselves. And we have another CapEx, which is related to QVC, which is the PVC project. That PVC project will be financed by the direct shareholders MPHC and the potential shareholder in QVC, which is IQ and this will be based on their potential shareholding in the QVC after 2026.

So still potential -- the shareholding of MPHC will financed from internal sources? Or is there any plan for other outside -- like borrowing?

Both will be financed from internal sources. So far, you will see in the financial statements that MPHC has spanned around QAR 17 million during the year, QAR 43 million last year. So in total, so it's around QAR 60 million to finance the PVC project until to date. So this will be direct from internal sources without any loan.

Okay. So is there any minimum cash balance or criteria that we -- sorry, MPHC manages internally or which can be disclosed? Because if I look at your footnote 6.1, so fixed deposits went down from QAR 1.478 billion in December 2022 to QAR 729 million. So is there a particular reason you matured the deposits? And because this is a high interest rate environment where the company can make higher returns? So I just wanted to understand, will it be used to -- so these cash fixed deposits will be used and this will lead to lower income from the interest income side?

Okay. Fixed deposits are normally linked to the dividend that we are receiving from the group companies. And as you can see in the balance sheet, we have received around more than QAR 280 million of dividend during this quarter. So the fixed deposit is impacted by 2 things. So the dividend that we received from the group companies and the dividend that we pay to our shareholders. So in March, we have announced and distributed around QAR 1.38 billion of dividend. And this will be taken out, and this will reduce the balance of fixed deposits that you see in 31st of December 2022. So the main reason for the decline of the fixed deposit and the cash balance in MPHC level is the distribution of dividend, which is QAR 1.38 billion. The -- do we maintain a minimum cash or not? So we have internally our own policies, those we cannot disclose. And this is based on the management of the cash at the holding level, and it's decided by the Board of MPHC.

Sure. Then last question. I was concerned about if the internal financing is done. Will it impact dividends going forward for the company? That was my primary concern, but I understand that Board decides the dividend, and there's no -- but if you can give any color on the dividends. Like will this impact dividends going forward?

I think the level of CapEx that you will see and we would see is spread over the next 5 years. It's not a big amount in terms of CapEx. These are mainly to safe [indiscernible] (00:18:46) the facilities without any major CapEx that is done over the next 5 years. We are speaking about around QAR 1.8 billion in the next 5 years, and our distribution during the last 2 years was around QAR 2.6 billion, which is more than 50% of that amount. So I don't think that the finance of the CapEx from the internal sources will have an impact on the distribution of dividend.

[Operator Instructions] Our next question comes from the line of Zohaib Pervez from Al Rayan.

How many days was this planned shutdown in the Chlor-Alkali segment?

The total shutdown planned for this year, 2023, it's around 43 days. Out of those 43 days, so I would say around 29 days has been deployed during this first quarter, and these are planned shutdown days, which are normally done at the QVC plant. So in some cases, we do those shutdowns during Q4 of the year, otherwise, if it is not possible to do it during Q4, we do it normally in the following Q1. As I said in the beginning, the turnaround for this year is done already in Q1, and then the remaining days, it's on average 2 days per month will be deployed during the next period.

So usually, it's done in Q4. So in 2021, it was probably done in Q4 and in 2022, it was...

Yes. I think it's every following year. So in 2 years, we have a major shutdown. And then if you take last year, for example, that's an average of 2 days per month, that's taking place.

Okay. So there was no major planned shutdown last year, right? .

Yes. Exactly.

Okay. Okay. Secondly, do you see any -- I can see that the prices have kind of stabilized in your -- both the segments, the Chlor-Alkali and -- over a quarter or a sequential basis. But the latest reports that we see from different sources suggest that the prices have again started to come down. How do you see these prices on a month-on-month or during this quarter, do you see further weakness? Or are you seeing the bottom is there and there's more stability on a sequential basis going forward?

I think this quarter results, a bit early to comment on as we are just in May, and we haven't closed April results. However, we are reading similar report to what we are reading. And as the latest hike in the Fed rate, the interest rate is increasing, that could have an impact on the GDP growth and our products are linked to the GDP growth. So that story could cascade to some kind of a lower level of pricing. But also at the other end, you have China, they're also opening up after the COVID restriction, and that would add additional layer of, let's say, demand. So it's kind of uncertain what could happen next quarter or during the year. But in the long term, we talk about 1, 2 years from now, specifically in the Petrochemical segment, China has announced several projects that will go online even in 2024 or 2025, but that could cascade in the overall market supply of petrochemical and that could have a cascading effect in terms of the prices. So short term, it's kind of uncertain. There are some drivers to drive the price down. Also, there are some drivers that could price up. Long term, there is additional capacity that could have -- could stress the market in terms of supply, you have additional supply, and then that could cascade into the pricing and how it will evolve in the long term.

Okay. Just a follow-up to that. Which segment are you talking about? Are you talking about the chlor, VCM, caustic soda or the [ HTP ], which segment is this planned -- these expansions coming online in China?

Petrochemical, the petrochemicals segment. Also, you have -- and you'll have the PVC also project coming up in the future on the PVC project, our [ separate ] PVC project are closely linked to polyethylene in the prices, et cetera. So those dynamics would kick in after we have the facilities up and running by, I think, '25 or '26. So yes, that's the answer to your question.

[Operator Instructions] No question at this time, I turn the call over to our presenter.

Correct. There are no further questions. We would like to thank Abdulla Yaqoob Al-Hay, Sami Mathlouthi and Rashid Hamad Al-Mohannadi from QatarEnergy for the results update and answering all the queries and look forward to speaking to you all for the next quarter results. I will hand over the call now to Abdulla Yaqoob Al-Hay for his closing remarks from his side.

Thank you all for joining us. Thanks a lot for your questions. I hope we clarify it all. And we're looking forward for the first half session, which will take place in August. Thank you.

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