Oman Chlorine S.A.O.G. (OCHL) Earnings Call Transcript & Summary

[Foreign Language] It is our pleasure to welcome you all at Oman Chlorine Investor Sessions for year-end 2024. And before we started, I would like to introduce the team. My name is Said Habsi, I'm the CEO of Oman Chlorine. Here with me are Mr. Balakrishnan. He is the Group CFO. Then we have with us our Group HR and the Relation Manager, Mr. Majid Salhi. So I'll take you through the presentation. So this is the agenda of today. But from Page 12 onward, it's the financial topics. The 5 slides, it is an overview about the companies and also the subsidiaries. So I'll take you through Oman Chlorine. So Oman Chlorine is established in '97 as first Omani manufacturer of chlor-akali with capacity of 100,000 metric tons of all the major products. In 2007 and 2008, we were awarded His Majesty's Cup for the first best 5 factories in Oman. In 2021, we did an expansion, so we increased our capacity to 75 metric tons. And also, we built a new calcium chloride plant in order for us to downstream for the access, hydrochloric acid into calcium chloride. We have very good HSE track record, and also, we are ISO certified for producing and supplying quality chemical that goes into oil and gas, such as hydrochloric acid and calcium chloride and also in producing other chemicals that goes to different petrochemical as a raw material such as sodium hydroxide or caustic soda. This is our major shareholder list based on Muscat Stock Exchange. So we have Al Anwar Investments. They're holding 22%. Then we have Bank Muscat, 11%. We have Social Protection Fund, 9.5%. Then we have Oman International Petroleum and Energy Service, 9.1%. Then we have Al Ikhtyar Trading and Contracting, 5%. What do we produce? We produce 2 main products, which is hydrochloric acid and caustic soda. Then from those 2 products, we are downstreaming or we convert the product into a solid product. For hydrochloric acid, we downstream it to calcium chloride, as you can see, and our capacity is around 35 metric tons. Then, for the caustic soda, when we convert it to solid, we can produce up to 7,200. But as we speak, we are in process of expanding the solid section for caustic soda flakes in order for us to have the capabilities of converting all the liquid into solid for the export. Product use, as I mentioned, hydrochloric acid, it goes into oil and gas. The main application is enhancing oil recovery by stimulation -- acid stimulations. Calcium chloride goes into drilling operation as a drilling salt. Sodium hypochlorite goes as a water treatment. Caustic soda are used in more than half of all the chemical commodities -- chemical applications to create hundreds of secondary components that turn into different products such as plastics, detergent, alumina and different products. In 2013, Oman Chlorine decided to expand, so we built 2 factories. We built 1 plant in UAE under the name of Union Chlorine. We own today around 72%. Again, we produce exactly what Oman Chlorine produced. So we produce hydrochloric acid, calcium chloride, sodium hydrochloride. Then this is the ownership structure. Today, we own almost 72%, and we have 2 minorities. One of them owns 16.7%, and the other ones own 11.3%. The other entities or the other subsidiaries is established in -- again, at the same time with Union Chlorine based in Qatar. It's producing exactly the same what we produce in Oman and UAE. The only difference between UAE and Qatar is we have a JV to downstream the hydrochloric acid into calcium chloride because there's another manufacturer in Qatar. And that JV, we own 35%, which is Gulf Chlorine, own 35%, and the company in Qatar, we own 65%. Again, we are managing the company in Qatar. The ownership of Gulf Chlorine, we own 51%. And then Markab Capital, they own 49%, and the ownership of the JV that's catering for downstreaming the hydrochloric acid and converting into calcium chloride. Gulf Chlorine, they own 35%, and KLJ Qatar, they own 65%. For the financial, I will leave the floor to our group CFO, Mr. Bala.

Hello, good morning. I'll take you through the financials now. This year, the company's net profit was around OMR 1.4 million as against OMR 1.8 million last year. The primary reason for the decline in the net profit is due to interest from subsidiary, which we received last year, which is not anymore there in this year. That's what has happened in the parent company number. The cash dividend, which has been approved by the Board, is around 17.5%, which is still to be approved by the AGM. And share price as such stands in March beginning is around OMR 0.380 per share. The next slide is the historical movement of the revenue, EBITDA and profit for Oman Chlorine stand-alone. This year's revenue stands at OMR 12.5 million as against OMR 13.2 million last year. The primary reason why there is a decline in revenue is because we didn't trade much of calcium chloride. While the profit is around OMR 1.4 million, as I explained to you earlier, primarily due to interest not coming from the subsidiary, which has been converted as shares in Oman Chlorine. The gross margin is around 43.4% increase as compared to last year. We have done more -- we have used more of our acid to produce calcium chloride this year as against last year, we converted a lot of hydrochloric acid, which we bought and converted. That's one. Second is there's also a decline in salt prices, which we were able to successfully negotiated it down, and we saved around $5.6 per ton. And that also resulted in the gross margin percentage going up. The net profit is down because of the interest on subsidiary not being received this year, primarily. The group turnover was -- stands at OMR 34.4 million this year as against OMR 32.1 million last year. The profit is almost similar in the group level. The main reason for the group's increase in revenue is in chlorine, which is in Abu Dhabi. They increased the revenue by OMR 2.4 million. Primarily, they traded a lot of calcium chloride for delivery to Saudi and UAE. And then, the Gulf Chlorine increased the revenue by 0.4%. And Oman Chlorine, there's a slight decrease because of OMR 0.65%. The profits approximately remains the same. The main reason why the gross margin is almost similar to last year is similar because of more trading in nature in Oman Chlorine as against last year, which is more production in Oman Chlorine. The parent company's revenue fell by OMR 4.89 million, while the profit declined by 21%, primarily due to interest, which I explained earlier. The product volumes were similar to last year in Oman Chlorine. Only calcium chloride we didn't sell like last year. That's because last year, we used a lot of hydrochloric acid from outside to convert and sell. This year we sold less amount of calcium chloride. The combined capacity was better this year, slightly lower in the existing plant, and the plant -- brownfield plant of [ 105 ]. At the group level, the revenues increased by 7%. Primarily, increase in revenue is from Abu Dhabi. And the EBITDA slightly decreased due to more trading activities in Abu Dhabi and lower prices. Both Abu Dhabi and Qatar posted profits this year, in 2024, but UAE's profits are slightly lower than last year. We continue to monitor our prices along with the -- how the oil price is fluctuating. We are optimistic that there will be a continuous demand for our product and realization also will be good in this year. We expect that the selling price will remain stable, and so, we can generate similar revenues -- similar returns, that's what we expect. There's a disclaimer. And that's the end of the presentation.

So we'll open the floor for Q&A. So please introduce yourself before you ask the questions.

Mr. Habsi and Mr. Bala, this is Abbas Muslemi from Vision Capital. Right off the bat, I wanted to check with you regarding the competitive landscape in Oman because I was reading about Al Ghaith Industries Chemical Industries plant going live sometime last year. Can you talk about competition from these guys? There's a big plant that's come up next to you. And then what do you see the forecast for the Omani markets? That's my first question.

Yes. I'll just touch base about them. So they started in November 2024, with the capacity of 70 metric tons. They're producing exactly what we produce. So we will see pressure on prices in Oman market. They are based in Sur. They are producing hydrochloric acid. They're producing caustic soda. They can covert caustic into caustic soda flakes. And they believe they are in the process of also building a calcium chloride unit in order for them to downstream the hydrochloric -- access hydrochloric chloride into calcium chloride.

Okay. And obviously, in the market such as Oman, like you said, you expect competition to increase. And then in your presentation, you mentioned that you want to convert the liquid products into solid products for export market. Is it linked to them? Is this expansion linked to them coming up in the market and market becoming more competitive? Or was this always a strategy?

No, no. Let me put it this way. For the caustic soda flakes, it's always good that you have flexibility to convert it to solid for the export reason. I'll give you an example. For 1 metric ton of caustic soda lye or 1 metric ton of caustic soda flakes, you need 2 metric tons of caustic soda lye. It's always easier for you to export solid than liquids. That's reason one. Reason 2, the demand of caustic globally is always there. The only difference is, is on the index because index prices keep fluctuating. Sometimes it's good that you sell solid outside Oman when the price is on the higher side. I'll give you an example. In 2022, the price of caustic soda flakes is around $1,000/metric ton. So if we assume that the cost of lye is 500 metric ton -- $500 per metric ton, in Oman, the price was below $300. So it was always good that if you have that flexibilities, you choose where to sell in order to realize better margin. Okay. On calcium chloride, it's always good that we have a calcium chloride because it's an insurance policy, we call it, in order for you to run the plant at maximum capacity because as you know, that hydrochloric acid's demand is -- it's -- in Oman is enough only for 1 plant. There's 2 players. We'll start seeing pressure on hydrochloric acid. If you have a calcium chloride, you can convert it to calcium. If you have a calcium chloride unit, you can convert your excess hydrochloric acid into calcium and maintain 100% utilization on the main plant. And you realize a better margin on the flakes -- on the caustic.

Right. The reason I was focusing on the competition is because when I look at the group and parent company numbers, the parent company numbers is almost 90% of the group profits that belong to shareholders, right? So obviously, the parent company is doing much better than the group companies for the last few years and even this year. So now with this competition coming in right next door in Oman, I was just wondering what is the outlook for the parent company, especially taking into account that oil prices that have averaged above $80 in 2003 and 2004 are now in the sub-$70 range or close to $70 range. So then there are a couple of issues now, right? Because some of these product prices, at least I remember our last conversation with you, I've been talking to you for a few years now, there's a direct linkage to oil prices activity. And second thing is, of course, there is competition as well. So I just wanted to get your views on this topic given 2 issues; one is, of course, the competition that you spoke about. And the second issue is, of course, oil prices coming down compared to what they were in 2003, 2024 -- '23 and '24. This is the second question that I had for you, sir.

Okay. So I'll answer it in a different way. So basically, the main issues in the subsidiaries was both companies are doing very good. If you go and check the financials, you'll see that we paid abnormal interest rates because of the LIBOR because of the interest rates went like out of control for the last 2 years. So if you take particular Union Chlorine, Union Chlorine in 2022 and 2023 and 2024, we pay almost OMR 3 million as an interest and still the company did well. So that's the main problem in Union Chlorine is mainly because of the debt equity structure and also because of interest rates. However, we are working on something to solve those problems. In Qatar, the company managed to get revised tariffs. As you're aware that chlor-alkali business 70% is power. So in Qatar, the tariff went back to the normal, which around -- if you take it in amounts around 12 days, and that itself, it's a saving of OMR 0.5 million only on power. So we're expecting that Q1, both -- I mean, both companies will do very well because now the interest rates start going down and Gulf Chlorine is starting getting -- they are running the plant at 100% capacity. And also the tariff went down to the normal before 2017, which is half what we paid in Oman and what we paid in UAE.

On the parent, it is expected to continue its performance even though oil prices have come down and maybe product -- like basically, what I'm asking is what is the outlook on product prices then, on calcium chloride, on hydrochloric acid, on sodium -- caustic soda and sodium hypochlorite.

If you talk about caustic soda, it's -- as I highlighted before, it has a global index. So in 2000 -- beginning 2024, the caustic soda price was around $380 average price X. By end of 2024, the X price, it was ranging between $500 to $550, X. And if you look -- if you -- I mean, now we're end of -- almost beginning of March. So the price is still at that range. So if you compare Q1 to Q1, Q1, the price was $380. I'm talking about the caustic soda flakes. In Q1, till now, the average selling price is above $500. So it's around $120, X.

Excellent. Okay. That's good news.

For the flakes. However, there's a pressure on calcium chloride, and there's also pressure on hydrochloric acid. In Oman, it was because of competition. UAE, there is no -- because the competitions are there, there's 3 plants. In Qatar, they're doing fine. I think you will see the Q1 results for subsidiaries.

In Oman, and the parent should continue its solid performance, right? That's absolutely the...

No. There is a pressure on the margins because of the competition. We expect that to -- on the upcoming Q that there will be a decline on our margins because of the newcomer.

Yes, of course, there's a guy who's trying to take market share. Is there a way...

But again, as I say, because we just checked the numbers of January and February. But the group -- the subsidiaries, one of the subsidiaries, they did very well. They did like outstanding because of that. So it's -- their number, when we consolidate them, they will offset the decline, hopefully.

Okay. Okay. And I had a question on the financial side, this interest part. Of course, you have spoken about it in the past as well. I remember we had a long chat about this last year. And you said there were initiatives you were taking to sort of fix this and -- but at the same time -- okay, U.S. interest rates came down twice, but then not as much as we were expecting at that -- at probably the same time last year. So now what is your effective cost of borrowing? And how can we address them? Because clearly, this is a problem, not so much in Oman, but outside Oman. So what are -- how can we address this interest rate issue that we are still paying above market rates, right, or at least above market rates that we are seeing in Oman? I think your effective cost of borrowing is what, 8%, 9% right now, for the entire group.

Yes. Yes. So basically, the only place that we see a huge interest rate is UAE. In Oman, we pay low interest rates compared to them, and also, in Qatar, we pay low interest rates. However, we are working hard with our bankers to see how we can manage the loan there and getting a better dividend because they are our partner also because of the debt equity. They own more than -- technically, they fund us more than 70% of the debt. So we are expecting that by end of Q2, this issue would be solved.

If you can share how much are you paying in on the UAE loan and what's the loan outstanding there.

Just to give you -- so it -- in mix, if you take the average interest rate in 2024, it's around 8.5%. Today the interest rate is 7.5% -- 7.75%.

7.5%.

7.5%. So it reduced by 1%. The 1% is not enough. It's really on the higher side because Oman -- it's around 5.5%.

And we are selling. This is the rate in the market, 5.5%.

Yes, yes. So this is the rate. So, as I said, we are working closely with the bank in UAE, and we had a meeting with them last week, and hopefully, this issue will be solved in the upcoming months.

[Foreign Language] What's the rate in Qatar approximately?

Around the same like Oman, around 6%.

Okay. And I had another question on cash flows. When I see your balance sheet, the consolidated statement that I see the current borrowings of OMR 7.5 million. Is this something that you expected to pay in the first -- in the next year? Because I was thinking how are you going to get the cash to pay this. Because your current borrowing is showing OMR 7.5 million. So how are you going to pay this?

Yes. See, this current portion of term loan came up because of the higher interest rate in the past 2, 3 years. If we didn't have this higher interest rate, then we will not be having this issue. But we are working with the banks to revoke the current portion -- to refinance the current portion -- restructure the current term loans that is particularly in UAE. We don't have issue in Oman. UAE also, it's done softly, yes.

So hopeful -- so basically, what you're saying is Oman's loans -- term loans and Qatar's term loans are going to continue as per the current contract with the banks. Is that correct?

That's correct.

Okay. Yes, because when I -- even if I look at your cash flow statement, and I know your P&L has a big depreciation charge, which is a noncash expense, and I add it back, there was no way that I see you generating this kind of cash to pay this and service the interest. So that was my question. So you are saying that -- you will have to refinance because the other option is going ahead and raising equity, but that option is not on the table, right, you're not trying to come back to shareholders and do an equity injection.

Mr. Abbas, this issue has been -- we have identified this issue almost a year back. So it's not new. We are taking strategies to -- appropriate strategies to mitigate this, how to manage this. We already taken action. The only thing is this will come into -- during the course of this year as we get sold, outage.

Yes. For me, I remember this. That's why I told Mr. Habsi that a lot of the issues we are speaking about today on the debt side is something we have spoken about in the past. So when I see this number, it came as a surprise to me, but you've given me reason to be hopeful. So all -- I mean, I wish you and the UAE team good luck. And my last question is on the CapEx. Mr. Habsi mentioned about the expansion. Now, what is your maintenance CapEx? Once you've sort of met this expansion, what sort of maintenance CapEx is something that the parent and the group needs to continue its operations based on the current capacity?

See the maintenance CapEx will be on a cyclical basis. We don't have major maintenance CapEx. Every 4 to 5 years only we'll have a major maintenance CapEx. Otherwise, it will be hovering around 2%, 3% max pax of the total assets.

2%, 3% of the total assets, okay, fine. And after this small expansion that you spoke about in the solid products in Oman, there are no other major expansions that you're thinking about as we speak, right?

No.

Okay. I am going to wait my turn in case I have no questions. But I am sure, my colleagues would like to ask you questions.

Yes, Mr. Matthew?

Just 1 question on the upcoming competition in the domestic market. I'm seeing there are new plants coming up, one in Sohar -- Sur and the other one -- there is another one which was announced in Dhofar. So your thoughts on how do you see the upcoming competition coming up? And is there -- will there be a price war on this? Are you expecting any better price war on this one?

I think -- thank you, Mr. Matthew. The Sur one, I don't think that is -- that plant has materialized. They don't have anything on the ground. Sur one, as I answered, Mr. Habsi, they only started in Q4 last year, and we start seeing price reduction on the market.

Okay. And are there any new plants coming up in Qatar and UAE?

Qatar and UAE, similar plant, no.

I wanted to ask a couple of questions regarding the capacity utilization. So in one of the slides that you shared, you mentioned that currently, your hydrochloric acid is operating at a 32% capacity utilization, if I'm not wrong, so -- and sodium hydrochloride is at 15%. Now, what are the reasons, if I'm understanding it correctly? Is there any bottleneck that is preventing you to go over this current capacity? Or is it on the demand side?

Mr. [indiscernible], you are representing which company. So can you introduce yourself, please?

Yes. I'm from Vision Capital.

Which one?

Vision Capital.

Okay. So your question is on capacity of this...

Bala, I will answer this. I think on the slide, you see hydrochloric acid is 32% concentration, it's not capacity. That is product type. And 49% is the concentration of the caustic soda. It is not capacity. All the plants that we operate today -- last year, it's above 99% -- it's almost 100% capacity utilization in Oman and UAE and Qatar.

And that's true for all of the products, sir?

Yes. So basically, when you run the plant at maximum capacity or the product is -- you will produce as much as the nameplate.

It's for joint product, Mr. [indiscernible].

If you allow me a couple of questions, so Mr. Habsi, now if you have to take a holistic view, right, take a step back and there is this opportunity to reduce interest burden in UAE, and [Foreign Language] that should be resolved soon. You spoke about prices actually being better on average versus last year, right, except maybe hydrochloric acid. So what is your -- what is the outlook for the year for 2025 if you have to take a step back and look at your business? And what you are telling me is you expect to continue to work at 100% capacity utilization, locally, there might be a challenge with the competitor coming in. Obviously, he wants to take market share away from you. Qatar, you're going to benefit from the lower power costs. So if I put everything together, right, all the initiatives you're making as a company, what sort of prognosis do you have for the company in '25 and '26, sir?

Abbas, you are always asking this question every year.

No, I really because I love listening to you, that's why.

It's very difficult to give proper projections on the oil price. And also, it's very difficult to give projections about what would be the selling price of caustic soda globally. With all these things happening between U.S., Russia, the U.S. and China, we cannot project. I'll just give you an example. In 1 year, if you take 2024, Q1, the global market was willing -- was buying at price of $380. Then end of the same year, you were selling above $500 -- the maximum price, $550. So the fluctuating on price is really -- you cannot predict that due to a lot of reasons, political reason, logistics, energy cost. So it's very difficult to project what will be the selling price till end of the year. But what we can tell you short term, the price of -- the index will be above $500 till end of Q2. But after Q2, I cannot give you price. That's why we don't have a long demand for the export market because of price fluctuations.

Okay. And when it comes to the parent, which you said will be under pressure on performance because of the competition, is it easy to substitute the local market with the export markets even if you take the extra freight into account or it's not that easy?

It's -- you still run the plant at 100% capacity. You still sell, but we'll sell at lower margin.

But you want to sell to local even if the realization is lower in the local market. Is it because it's a long-term strategy to protect the market?

It's not necessarily because if the price of -- for example, the price of caustic outside is better then it's better for you to sell outside.

Okay. And so you don't have any long-term contract that had locked you in local markets, you're quite flexible?

No, no, we have long-term contracts, yes. And some contracts do expire, and we start getting a new contract. We start losing contracts also. And that's normal. Because, again, you have a plant that's producing exactly the same thing. And by the way, that plant also -- they are also our neighbor in UAE. So their plant in UAE started with our plant in UAE in 2017, and they -- it was less than 5 kilometers between the 2 plants. Yes. So for new comer, of course, you will approach the client trying to penetrate the market by offering cheap price in order to capture the market share. And that's what we're seeing. But for us, we don't want to go into that price war. We try to find a different strategy in opening new markets. [indiscernible] would be normal.

And when will your expansion be live, the expansion that you spoke about?

For the flakes, it will be end of July.

Okay. And you've already -- and how much more CapEx are you expecting to make for that part?

It's around OMR 3 million. No, it's OMR 2.3 million or something, but we have -- 50% we have paid, balance is going on.

Okay. That's the question. And is that -- it's again funded from mix of debt and equity, locally?

No, no. We got a very good interest rate, around 3%. For us in Oman, just we use Oman Development Bank.

Okay. This is a good news. Okay. So the funding is secured for the entire OMR 3 million...

Yes. Yes. And part of that funding, we got a fund from Oman Development Bank at very good interest rates. Is there anyone who would like to ask any questions before we ended the session? Gentlemen, thank you very much for attending our session and hope that we'll see you next time. Thank you very much.

Thank you.