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

Hello. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Mesaieed Petrochemical Third Quarter Conference Call. Please note today's call is being recorded. I would like to turn the call over to Phibion Makuwerere from QNB Financial Services. Phibion, begin the call.

Thank you, Krista. Good afternoon to you all. Thank you for joining us for the Mesaieed Petrochemical Holding Company's 3Q and 9M 2023 Earnings Conference Call. My name is Phibion Makuwerere, a senior research analyst at QNB Financial Services. On today's call, we have 2 members from QatarEnergy Privatized Companies Affairs management team. We have Rashid Hamad Al-Mohannadi, who is the Head of Investor Relations and Communication; and Sami Mathlouthi, who's the Assistant Manager in Financial Operations. As usual, they will go over the financial performance, and we'll have a question-and-answer segment immediately afterwards. I will now turn over the call to Rashid to begin. Over to you, sir. You can go ahead.

Thank you, Phibion. Good afternoon, and thank you all for joining us. Hope you are 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 Mesaieed Petrochemical Company, and no media representatives should be attending this call. Moreover, please note that this call is subject to Mesaieed disclosure statements as detailed on Slide #2 of the IR deck. We can move into the call. On Monday, October 23, Mesaieed Petrochemical Company published its results for the 9-month period ended 30th of September 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 Mr. Sami Mathlouthi, Assistant Manager of Financial Operations; and Saoud Ahmed, Senior Management, Report Analyst. We have structured our call as follows. At first, I'll provide you a quick insight on Mesaieed ownership structure, its competitive strength and overall governance structure by covering Slide 5 till 10 and Slide 41 and 42. Sami will brief you on key MPHC financial and operational matrices. And thirdly, Saoud will provide you with insight on segmental performance. And finally, we can open the floor to the Q&A. To start with, as detailed on Slide #5 of the IR deck, the ownership structure of Mesaieed comprises of QatarEnergy with approximately 56% stake, and the rest is in the free float held by various domestic and international corporates and individuals. QatarEnergy being the main shareholder for Mesaieed provides most of the head office functions through a service-level agreement. The operation of Mesaieed joint ventures are independently manned by their respective Board of Directors, along with senior management team. In terms of the competitive advantages, as detailed on Slide #8, all Mesaieed group companies are strategically placed in terms of competitively priced and assured feedstock supply under the long-term arrangement, solid liquidity position with a strong cash flow generation capability and the presence of most reputable joint venture partners. Additionally, the partnership with Muntajat acts as a catalyst for access to global market. As detailed on Slide #10, from a competitive positioning perspective, MPHC ranks among the top companies in regional chemical space across most of the matrices, specifically leading the chart in terms of the profitability and EBITDA margins. In terms of the governance structure of Mesaieed, you may refer to Slide 41 or 42 of the IR deck, which covers various aspects of Mesaieed code of corporate governance in detail. I will now hand over to Sami.

Thank you, Rashid. Good afternoon, and thank you all for joining us. Now moving into macroeconomic environment as detailed on Slide #12. Macroeconomic climate remained [ wavered ] throughout the 9-month period of the year, marked by persistent volatility. The macroeconomic backdrop has been marked by various challenges leading the fluctuation in commodity markets. These challenges encompass concern about recession due to inflationary pressures and high interest rate environment. Moreover, the commodity market faced heightened uncertainty owing to the slower global economic recovery and declining energy prices, presenting a dynamic and challenging environment. Furthermore, the oversupplied market is compounded by a weakened global economy as consumers modify its spending habits in the face of inflation, recession and rising interest rates. Overall, average commodity prices for MPHC basket of products declined year-on-year basis. For the group financial performance for the 9-month period ended 30th of September 2023, MPHC reported a net profit of QAR 849 million, down by 42% compared to last year. This decline in profitability was mainly linked to lowered group revenue, which declined by 26% to reach QAR 2.3 billion. The decline in profitability is linked to lowered group revenue that can be attributed to decrease observed in average blended product prices, which fell by 23% compared to the first 9 months of last year. This decline translated into QAR 768 million decrease in MPHC net earnings for the current period compared to last year, as you can see on Slide #17. The subdued commodity demand driven by macroeconomic headwinds and exacerbated by surplus supply decreased commodity prices. Sales volumes also declined marginally by 4% versus last year, mainly driven by lower sales volumes reported by the chlor-alkali segment, partially offset by higher volumes reported by the petchem segment on the back of higher operating rates compared to the previous period. Negative movement in sales volumes translated in a decline of QAR 49 million in MPHC 9 months period profits -- net earnings versus the same period of last year. EBITDA for the current period amounted to QAR 1.2 billion with a decline of 34% versus last year, mainly due to lower revenue. EBITDA margin for the first 9 months of 2023 reached 51% compared to 57% achieved during the first 9 months of last year. On the operational performance front, MPHC operations remained robust and resilient with total production for the current period reaching 841,000 metric tons. Production for the 9 months 2023 declined compared to last year mainly due to maintenance turnaround at QVC facility during the first quarter of 2023, which affected the production volumes during the first period. On a quarter-on-quarter basis, production volumes for third quarter of 2023 increased by 5% in comparison to second quarter 2023, mainly due to an incline noted in production volumes from both segments linked to higher operation days during the third quarter of 2023. MPHC reported a net profit of QAR 849 million for the 9-month period ending at 31st of September 2023, down by 42% compared to last year. This decline in profitability was mainly linked to lowered group revenue, which declined by 26% to reach QAR 2.3 billion. I will now hand over to Saoud to cover the segmental performance.

Thank you, Sami. Starting with petchem segment, as covered on Slides 22 till 26. The petrochemical segment recorded a net profit of QAR 710 million for the current period, marking a 26% decrease compared to 9 months period of last year. This decline in profitability was primarily attributed to reduced selling prices alongside slightly higher operating costs linked to increased production and sales volume, resulting in unfavorable inventory movements. The segment's revenue declined by 12%, reaching QAR 1.8 billion during the current period compared to last year. The decrease in revenue resulted from lowered selling prices, partially offset by increase in sales volume. The rise in sales volume was primarily attributed to higher production, which increased by 12%. This growth was driven by a large-scale turnaround at Q-Chem facilities during the first quarter of 2022, impacting production volumes for the same period last year. On the other hand, the average selling prices declined by 19%. This price drop was predominantly attributed to economic uncertainties from the previous year. These uncertainties carried over into the current period, impacting the price trajectories of most commodities compared to last year. Segmental profits decreased by 25% on a quarter-on-quarter basis, mainly linked to lower segmental revenue by 11%. Also, selling prices dropped by 11% on a quarter-on-quarter basis. On the other hand, sales volume remained flat on quarter-on-quarter basis and slightly higher production due to better plant availability. In terms of segment revenue, by geography, as detailed on Slide 25, Asia and Europe remain a main market for petchem segment. Moving on to chlor-alkali segment, as detailed on Slides 27 till 31. The chlor-alkali segment reported a net profit of QAR 59 million for the 9 months of 2023, significantly decreased by 87% compared to last year. The decline in bottom line profitability was primarily driven to (sic) [ by ] lower selling prices and sales volume, which decreased 41% and 21%, respectively. Selling prices declined due to ongoing challenges in demand and supply, reflecting the slower-than-expected recovery phase in the global activities across sectors associated with chlor-alkali. Sales volume declined mainly due to lower production impacted by the planned turnaround at chlor-alkali facilities during the first quarter of 2023. The decline in selling prices and sales volume led to an overall decline in segmental revenue, which decreased by 54% on year-on-year basis, reaching QAR 471 million for the third quarter of 2023. On a sequential basis, segmental profit increased significantly by 108%, primarily due to a higher segmental revenue, which rose by 13%. Additionally, selling prices marginally increased by 2% due to a relatively enhanced chlor-alkali market, hinting the gradual recovery phase gaining momentum. On the other hand, sales volume increased by 11% on quarter-on-quarter basis, attributed to a higher production resulting from improved plant availability. In terms of segment revenue by geography, as detailed on Slide 30, India subcontinent remains the main market for this segment. Now I will hand over to Rashid.

Thank you, Saoud, and thank you, Sami. I think that concludes our earnings call for Q3. We can now open the floor for the Q&A session.

[Operator Instructions] Your first question comes from the line of [ Mohammed Apalen ] from Jadwa.

Congratulations on the great set of results. I have a couple of questions. The first one is related to the agreement signed with the Ministry of Finance back in 2020, which is related to the tax repaid on the group projects. Can you shed some light on that agreement? And do you expect any material changes to take place on that agreement? Or do you think that this would be an ongoing forward, and there is no changes would place on the tax agreement?

I think you are referring to the MOU that has been signed between Mesaieed, QatarEnergy, the Ministry of Finance and the GTA. I think as you can see, all parties which are concerned with the tax, they are part of that MOU. So that MOU basically is stating that the -- undirectly, that the group companies, Mesaieed is not liable to tax. So group companies of Mesaieed, Q-Chem, Q-Chem II and QVC, they are taxable at the entity level. However, the payment of tax is paid directly to Mesaieed. So -- and the portion of tax which is not paid to the GTA will be paid by the Ministry of Finance. So far, there is no change to the concept in itself. So the agreement is still in place. There is no change to the concept, and this will continue until further notice and if the party will have another system to be put in place. So the party, they will need to meet again and then maybe agree another system. But so far, there is no change to this policy. So the companies will continue to make the payment of the portion of tax relating to the listed company directly to Mesaieed. This will be an additional cash flows in addition to dividend that is paid by the group companies, and this will be paid at the same time as the payment of the tax.

That's very clear. And also, another question when it comes to the company's feedstock formula. We know that the company mainly uses [indiscernible] as feedstock. But can you shed some light on the formula and if there is a floor or a ceiling that's being put in place? And how does it work exactly?

From our side, we don't make any disclosure regarding the feedstock. So I think for maybe better analysis, you can refer to the data that we are presenting in the financial statements of the cost of goods sold. And you can then slightly calculate the impact of any change in pricing in feedstock. But from our policy, we don't disclose anything about the feedstock formula and the calculation of feedstock at MPHC level.

Okay. That's clear. And when it comes to the group companies, despite the significant drop in Q-Chem II profitability and QVC as well, the payout ratios for both projects went up significantly during the period, and also the absolute dividend distribution from the projects remained at a healthy level despite the deterioration of the profitability given lower product prices. So how can we look at that? And should we expect the payout ratios to remain at a healthy level? Or is there a certain formula that the group companies follow when it comes to their dividend distribution policy to the Mesaieed, the holdco?

Yes. For sure, there is a policy that we set up for the group companies, and that's based on that policy. The group companies are paying the dividend. We cannot disclose that policy as well. But from the number that you can see, so far, there is QAR 766 million that has been paid during this year compared to QAR 967 million paid last year. So there is a timing issue as well that you will see as well in terms of payment of tax because the payment of tax, it's relating to the previous year. For example, if in the year 2022 you are making a very good performance, and based on that, you will have a bigger amount of tax that will be paid, that amount of tax will be paid during the year. For example, for the case of QVC and Q-Chem, that payment is done during the year 2023. So it will not reflect exactly the performance of the year in itself, but it could be an indication of the payment relating to last year. So I think on -- we disclosed on the financial statement. So the amount of dividend that is paid, not relating to the tax, and then the amount of tax which is paid. And based on that, you can have an indication of the amount of dividend which is paid during the year.

And when it comes to the amount of tax received from the Ministry of Finance at Mesaieed, at the holdco level, does the same lag applies as well? I mean for the tax refund.

Yes, yes. We don't -- there is no tax refund. So as I explained in the beginning, there is a system where the group companies, Q-Chem and QVC, instead of paying the portion of tax relating to Mesaieed directly to the GTA, they pay that to Mesaieed itself, okay? Then the Ministry of Finance will pay that amount of tax, which is paid by the group company directly to Mesaieed, they will pay directly to the GTA. This is the mechanism. That's the MOU.

Can you repeat the last part? Sorry.

Okay. So the MOU stipulates that the Ministry of Finance will pay to GTA our portion of tax that has been paid from the group company to us, okay? So there is no refund in itself from the Ministry of Finance to Mesaieed. So Mesaieed will get its portion of tax directly from the group company on the date of payment of tax. So it's not a refund mechanism. So it's a direct payment mechanism.

So basically, the group companies would pay their portion of Mesaieed's tax to Mesaieed directly, and the ministry of Finance will pay that amount to GTA?

At a later stage. At a later stage. We don't interfere on that process. So the MOU for us, the process will be completed by the reception of money from the group companies.

Okay. Okay. That's clear. So basically, when it comes to the tax payment from the group companies to Mesaieed directly, we should not assume that there is a lag as well?

No, there is a lag. There is a lag. There is a lag. The lag is because the payment of that tax is not relating to the dividend of the current operating year. So it's relating to the payment of tax relating to the performance of last year, okay?

Okay. So basically on -- yes. So when it comes to the foreign ownership in the group company, the group companies pay tax to GTA or the Ministry of Finance, which then pays to GTA tax based on the previous year. And when they pay that tax, that tax also is being paid to Mesaieed, which relates to the previous year.

Yes, exactly. So I think it's better -- it's better to look at that from the perspective that MPHC is a company which is not taxable and is eligible to get its profit from the group companies based on before tax.

That's very clear. And I believe you mentioned in the presentation, the IR deck that the retail investors who hold the stocks since the IPO would be eligible for a bonus by the end of this year. So could we know the date exactly? And if you can shed some light on that mechanism.

Yes. So basically, the date will be -- we are promising them to give them the closing day -- closing of the stock market on the 31st of December. So 1st of January would be your date where everyone is having their own free shares and there is no more incentive share scheme.

And on the free shares, that will be given out from QatarEnergy or there will be a [indiscernible]? How does that work?

Yes. So basically, as tabulated in the IPO prospectus, there was a commitment from QatarEnergy back then to any Qatari national who bought the share during the IPO that they will be entitled to receive 1 share in term -- 1 share for every share [ they IPO-ed then ]. And that 1 share will be split over 2 tranches. First tranche, they already received in 2018. The second tranche will be received by the end of this year. And there are certain conditions that are well stipulated in the IPO prospectus. Just to summarize a few of the key conditions, one of the most key conditions that the shareholder should obtain are not sell more than 50% of their IPO shares and they have to keep it until the first date, which is 2018, for them to receive 50% of the free incentive shares. And then they continue to hold the share. They will receive the other 50% at the end of 2023. And that share will be ordinary share, have equal rights to the existing share, and it will be transferred directly from QatarEnergy ownership to the IPO shareholder.

That's clear. Two last questions, and I'm sorry I'm taking a long time with this. But when it comes to the Ras Laffan ethane cracker, which is between QatarEnergy and Chevron Phillips, should we expect Mesaieed to participate in that in any form?

I think it's too early at this stage to decide about that. So that's a project between CP-Chem and QatarEnergy. So, so far, there is no agreements that MPHC will have any role on that cracker. So -- but it could be -- we could place some roles in the future, but it will be defined either as consumer of additional ethylene or -- so it depends. But so far, there is nothing agreed upon.

And the last question is related to the payout ratio from the holdco level. I mean say [indiscernible] payout ratio. How should we look at that? I know it's a Board decision solidly, but is there some form or formula or guidance that you can provide?

There is no setup formula because, as you can see from the previous years, last year, I think it was 78%, the years before. So it could be higher or lower. It's based on the decision, to be honest, of the Board. And the Board will take into consideration many aspects. So at the time of the decision, the aspect that the Board will look at is whether the company has future CapEx that needs investments or not, whether the prices at that time or the prices that are expected from the next year will be increasing or decreasing, whether there will be any potential of any cash flow payments during the next period or not. I think based on all of those aspects, the Board will take the decision on what will be the best scenario in terms of payment of dividend. But I think looking at the past, you will see that the Board is always rational in taking their decision. So first of all, they want to make some payment without taking any risk on the possibility of the companies or the holding company to have any issues in terms of cash flows that will affect either the production or what affects the execution of some of the investments at the group company level.

That's very informative and clear.

[Operator Instructions] And we have no further questions in the queue at this time. Phibion -- we do. We have one more question. Belal Sabbah from Jadwa.

You mentioned the incentive shares that are given to Qatari nationals, the first tranche taking place in 2018 and the second tranche at the end of 2023. Is there currently an estimation on how many shares will be issued at the end of 2023?

In terms of estimation, actually, this process is fully automated with the depository in [indiscernible]. So they are the one who is holding the information, and we'll come to have this exercise with them sometime toward the year end. But for you to have some kind of flavor, you can look at our own current ownership. We are owning as QatarEnergy [ 65.4% ]. And during the IPO, QatarEnergy, they were owning 74.275, if my memory serves me well. So you can see the reduction that happened that was purely due to the 2018 incentive share transfer, which is basically the 74% minus the 65%, so we are purely talking about maybe 8.8% reduction, okay? So if we assume that the shareholder who got the first tranche are interested to continue to hold the IPO stock and get the second tranche and they do that, then you should expect another 8% on top of that. And that would -- could drop the QatarEnergy shareholding to 56%. But that will be the best-case scenario whereby all the shareholders are holding their share from 2018 to 2023, and that would not be the case as there are movements from day to day and some shareholders are going and letting the lock up and they're selling the stock.

Yes. And just to make it clear as well, there will be no issuance of new shares. There will be no increase in capital. This would be only switching of shareholder ownership from QatarEnergy to Qatari shareholders who have met the criteria that is stipulated in the IPO.

So back-of-an-envelope calculation would be somewhere between 56% to 62%, I would say, that range. So we'll have at least 5% to 4% transfer from QatarEnergy to the shareholders. But they will come to know the exact number on the year end.

Yes. Okay. One more thing. Could you please comment on your expectation on the outlook for petrochemical prices? How are you seeing the situation now towards the end of the year? And what do you think are the opportunities and the challenges for next year?

The challenges that the petrochemical segment is facing globally is basically the consumer appetite. The consumers are taking sort of a conservative approach in terms of their buying habits. However, from reports we've seen from the market that regions such as U.S., they're slightly improving because some of the buyers that are buying in anticipation of the winter season coming up and the hurricane season as well. So they're stocking their inventory. But at the end of the day, the market -- the petrochemical segment is hugely affected because of the macroeconomic environment. And plus, it will be -- it will depend on how the oil price will evolve in the future. Of course, the correlation between oil and petrochemical is also an important factor given that there are some producers that are producing their petrochemical product using naphtha base. And those naphtha-based producers will be profitable to produce when the oil price is in a downside scenario. The oil price goes up, the naphtha producer will be less competitive. We're talking about the Far East specifically when we talk about Asian producers, et cetera, who are buying their naphtha at market price, et cetera. For us, we are sitting in low-cost producing entities and will follow the trend, whether it's going to be an upward or downward trend. However, we think we -- what we've seen so far is one of the, I would say, the lowest price we've seen for a long time for the last at least 2 to 3 years. And hopefully, the prices could evolve in the future to better trajectories.

Sure. I have a couple of more questions, if that's okay. The first one had to do with the shut -- it has to do with the shutdowns. Are there any planned shutdowns in the fourth quarter and for next year that we should be aware of in terms of like expected maintenance shutdowns that are planned?

Yes. At the petchem segment, so no shutdowns are planned during the next quarter or the next year. For the chlor-alkali, we will have one shutdown. Basically, we have another shutdown of 2 days per month for -- during the next quarter. This will continue during next year. Next year, we will have a shutdown as well in the chlor-alkali with an average, I will say, of 3 to 4 days per month for the -- especially the VCM and EDC products.

So just to make sure I understand correctly, the shutdowns will be 3 to 4 days every month starting in the last part of the fourth quarter and going into next year?

Yes.

And last -- yes, for the full year of 2024?

Yes. That's only for the chlor-alkali segment. And it's mainly relating to the new products that we are making. This could impact slightly the production during next year. But these will be all planned shutdowns during 2024 for the chlor-alkali segment only. So then in 2025, we will have planned turnarounds for Q-Chem II for 45 days. And then 2026, it will have another turnaround for Q-Chem I. And these are like basically turnarounds that are done on 5- to 6-year basis depending on the plan of the company.

Yes, clear. My last question has to do with dividend and on the payout ratio itself. So basically, what we see with some of the QatarEnergy subsidiaries, let's say, the historical trend, not necessarily a policy per se, but the historical trend when it comes to the payout ratio as a percent of net income, during times when the profitability is suppressed due to prices being lower [indiscernible] being there, the payout ratio as a percentage increases. And it comes down a bit as a percentage and better -- when you're in an up cycle. Can we assume the same type of trend in the payout ratio itself at Mesaieed? Is that the right way to think of it?

I think we cannot assume that, as I said in the beginning, it's -- there is no proper policy that is set to decide the dividend. So it's all based on the -- it's a decision of the Board, first of all. But as I explained in the beginning, it's all based on the commitment that the group companies will have in the future, the existing cash flow generation that the business is able to do at the date of payment of dividend and in the future as well and the trend in the pricing and the potential cash flow generation from the group companies. Taking into consideration all of these variables, the Board will decide the dividend. So I don't think the past behavior or the past practice that has been made will reflect the present and the future practices in terms of payment of dividend, but this will be based on the variables that are there during the payment of the dividend.

Clear. And just if I could squeeze one more, if time still allows and you'll allow me. Are there any plans in terms of -- or are you currently studying, entertaining the idea of expanding capacity, whether it's greenfield or perhaps M&A.? And the reason we ask is there is a sizable sum of cash that's being held on the balance sheet. And I'm just wondering what are your kind of strategic short- to medium-term thoughts on expanding.

Yes. I think strategically, these are always on the table. We discuss this very often, and that's our job, to try to find ways to improve the performance of the companies and to generate as maximum profits for the shareholders. And this could be achieved through many strategies. As you can see, we started with the PVC project at QVC level. This will improve, I think, the returns in terms of the chlor-alkali segment, making sure that the VCM that we are selling is now converted to PVC with lower risks, with less handling issues and then with better profitability through maybe a better spread between the PVC and the VCM in terms of pricing so that we can integrate the full cycle into our facility. That's at the CapEx level. In terms of studying other possibilities for managing or for including them as part of the portfolio, we discuss. We make some proposals. But as you can see, the Board will take the decision and the shareholders will take the decision based on profitability and what's the lowest risk possible because we don't want to take a huge risk to venturing outside of Qatar. We -- at the moment, most of our projects and most of our facilities are in Qatar, where we have full control. We have better access to feedstock in terms of feedstock costs. We can control the cost compared to venturing outside of Qatar, where things there are -- could be much higher in terms of costing, much difficulty in terms of managing or in terms of higher risk that can affect the returns to the shareholders. But be assured that we are trying our best to maximize the profits through many strategic options, which will be disclosed to the Board -- to the shareholders on time, once studies are completed and once we have visibility like what we have did for the PVC project.

Your next question comes from the line of [ Mohammed Apalen ] from Jadwa.

Just a follow-up question on the QVC, PVC plant. Could you know what's the current spread between PVC and VCM? And what sort of an IRR should we expect on the new project?

I think, yes, the existing spread, spread is in the last 10 years to now. So it's between USD 160 to USD 188. So that's the spread we are seeing, and it's moving from time to time once there is a shrink in terms of demand for the VCM or the PVC or the construction industry in general. At the moment, so the project has been done. The project started. We started already to pay from outside. So we paid so far QAR 156 million towards the project. And we are expecting the project to be completed by mid-2025. I think by that date, it's much better, I think. We don't disclose the IRR of the project during the construction phase, but it -- because as you can see, so prices are moving and fluctuating. And giving a price today might be misleading the shareholders and might be misleading the studies. So I think it's much better once we approach to the delivery of the goods. At that time, it will be much easier to have a more clear IRR, a more clear net present value. That could be shared in the future.

That's very clear.

And we have no further questions at this time. Phibion, I'll turn the call over to you for closing remarks.

Thank you, Krista. If there are no further questions, it brings us to the end of our call today. I would like to thank you all for joining us and for your questions. I'd also like to thank the management team for engaging with investors. Have a good afternoon. Thank you.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.