Saudi Basic Industries Corporation (2010) Earnings Call Transcript & Summary

Ladies and gentlemen, this is goofiness and we have Sabic employees, I would like to welcome you all. I will be your moderator for SABIC's earnings call for the third quarter of 2023. Today's call will be lead by SABIC's CEO, Abdulrahman Al-Fageeh; joined by our CFO, Mr. Saraf Rage, our VP of Governance and Controllership, Ian Sloman and our [indiscernible]. Please note that this call will be recorded and published in the Sabic website at Sabic.com, along with the quarter related documents. Now please allow me to hand over the call to [indiscernible].

Thank you, Nova. Good afternoon, ladies and gentlemen, and thank you for joining us today. I'd like you to note that any statements made during this call relating to matters that are not historical facts may be forward-looking statements. These statements are based upon assumptions of the management, which are believed to be reasonable at the time made and are subject to certain risks and uncertainties. The actual results could differ materially from those forward-looking statements. Please refer to the statements in the presentation slides and our financial reports, which are available at sabic.com. For the quarter 3 earnings call, we will be starting with SABIC highlights of the quarter and also the ESG update. We will then cover the business environment, followed by key industries and trends, major petrochemical prices and also market spreads for our key projects. Later, we will focus on SABIC financials and also segments performance. Finally, our CEO will address the third quarter summary and the outlook for quarter 4. We will then conclude the call with a live Q&A, whereby participants will have the opportunity to engage and discuss the company's performance and any other questions related. We would appreciate to keep the questions limited to Sabic only. With that, I will now hand it over to our CEO, Abdulrahman Bin Al-Fageeh.

Thank you, Moneef. Ladies and gentlemen, good day to you all. I hope that you and your families are keeping healthy and safe. In this earnings call, we will -- should lie on SABIC performance during this quarter and the market overview. With revenues of $9.6 billion. We have generated an EBITDA of $1.5 billion. And reported net losses of $767 million in this third quarter of this year. EBITDA margin has been approved in the Q3, driven by the increase in sales volume supported by a decrease in our feedstock prices. SABIC is committed to driving greater sustainability in the global chemical industry. And this is our commitment that has been recognized by firms, ranking, SABIC as first on the manufacturing list, Middle East sustainable $100 million less. On the 3rd of September 2023, SABIC has announced signing an agreement with the Public Investment Fund, PIF, to acquire all SABIC shares in the Saudi Iron and steel company, what we call it Hadeed. Hadeed is one of the SABIC first manufacturing companies and is a fundamental pillar to sustainable development in the Kingdom of Saudi Arabia. Since its inception in 1979, and the initial steel production that was in 1983 the company has been a major contributor to local, regional and sometimes to global European developments. This is not just the biggest step forward and Hadeed's journey towards success, but strategically, that enables change, development and growth in various areas. The transaction will foster new knowledge and experience that will contribute to shaping a brighter future for Hadeed and etc. It will help realize SABIC's strategic goal become the preferred world leader in chemicals and those that led to achieve long-term growth. Above all, this is well and enhance the strategic capabilities of the metals industry in the Kingdom and ultimately fulfill the goal of the Vision 2030. Can I go to Slide 4. It always make me proud of SABIC when sharing the sustainability, ESG and innovation development. I'm very pleased to share the latest development of our collaboration with BASF in Germany and Linde to build the world's first electrically heated steam cracker furnaces, which we have already been updating you on the last couple of years, pleased to now confirm another step on this breakthrough project hitting an important milestone recently with the installation of the latest transformers for the demonstration unit of this plant. Technology can potentially reduce the CO2 emission by at least 90% compared to the conventional technologies. The completion of the project is scheduled before the end of this year, followed by a stepwise commissioning and startup. Our commitment to continued advancement and sustainability and innovation has been recognized once again by R&D 100 awards, a global science and innovation competition, naming SABIC winner, the 2023 R&D 100 award for our innovation solutions in the mechanical material category. Our new grade of resin with a novel plastic-based design was distinguished for its highest performance compared to the other polymers and metal alternatives. Also, a recognition of the effectiveness of our governance, we have been awarded a certificate of completion of the compliance program by the general authority for competition in Saudi Arabia, which is an independent body that aims to enhance transparency and ensure fair competition and combat monoplastic practices and the Kingdom. Our contribution and innovation are also seen in this high and the strategic collaborations where technology, sustainability and mobility have come together in our recent collaboration with Formula E as the innovation partner to develop GENBETA. This revolutionary electric race car drawn in our still expanding portfolio of thermoplastics developed under our dedicated solution platforms, BLUEHERO for the electrification and the TRUCIRCLE for circular economy. Reinforcing the company ambition to accelerate the world shift to electrification and carbon neutrality. We are also committed to develop an innovative, sustainable solution for our customers. We are proud to share now of our valued based versions of new rail resin grades to further advance the bioeconomy of plastics. This is specialty material with our biocircular feedstock can serve a drop in the replacement for traditional grades with an equivalent performance and prosperity. The broad range of physical properties of NORYL resin supports the needs of emerging markets such as electric vehicles, solar, wind and electric vehicles batterys and social industry like water management, building and construction and automotive. SABIC already offer new rare resins with more than 25% post-consumer recycled content. The availability of biobased Virgin have the choice of environmentally responsible material, helping our customers to meet increasingly rigorous sustainability goals. I'm confident that our commitment to innovation and sustainability will continue to drive our growth and success in the years to come.

Thank you, Abdulrahman and a warm welcome to our Q3 earnings call. I'm happy to introduce to you our latest financial results. Before we start, let me walk you through macroeconomic highlights during Q3 2023. The global economy started the year without significant positive momentum in the global chemical industry. Global GDP reported a lower growth rate compared to the previous quarter, driven by our services and manufacturing sector. Inflation responded to tightening lending policies, but is still persistent on a high level and continuing to weaken consumer purchasing power. Rising interest rates and generally high [indiscernible] is slowing down investment affecting the manufacturing and services sector adversely. As a consequence, we will -- we still observe weak demand globally in our target market with uncertainty going into the fourth quarter of the year. Oil prices increased by 10% to $86 per barrel, affected by OPEC plus curtailment that set the ceiling and reduction in the U.S. oil reserve by 9%. Moving into feedstock prices. Methanol prices increased by a range between 6% to 8% due to lower supply from OPEC+. Natural gas prices reduced by 9% in Europe due to high quantity being stocked in the European market and increased by 17% in the U.S. due to higher demand before the winter season. Moving on to Slide 7. We will illustrate the global demand trend we are seeing in the key industries for SABIC. Demand in Q3 quarter-over-quarter showed different sentiment among the sector and improvement in the automotive sector, while contracting sentiment in electronics and health care sector. As a trend, we are expecting moderated improvement in food and beverages. However, other sector is expecting to be flat. Moving into Slide 8. This slide shows the movement in the market reference price for our key petrochemical products in key regions quarter-over-quarter in Orange and year-over-year in blue. The visual in the graph alone implies that downward in the market across most of projects and regions associated with high inflation and innovative interest rate along with the lower demand and higher supply to. Let us start with LEG. We have noticed prices decreased by 6% globally as a result of higher supply and new capacities despite improvement in polyester fiber demand in China. Methanol prices decreased by 8% globally, driven mainly by ample supply, especially in the U.S. attributed to competitive natural gas prices, although the prices in China increased by 2% driven by higher demand from non-MTO which offset the loss of MTO. For MTBE, prices globally increased by 17%, driven by the improvement in demand from driving season. For PE, prices decreased globally by 6% due to higher supply, although China prices was up by 1%, supported by a slight improvement in demand. For PPE, prices decreased globally by 8%, resulted from an ample supply across the world, given the major turnaround scheduled in the second quarter. For BCE for the carbonate globally, prices decreased by 6%, driven by lower government investment and weak recovery signals. Moving into Slide 9. This slide reflects the integrated spread of petrochemical benchmark prices over primary feed start costs for our key products in key regions, explaining short-term market dynamics. You will notice that the chart illustrates historical data since full year of 2021 till this quarter. And third quarter naphtha propane prices were higher, resulting a lower spread marginally for oil product. Starting with our top line compared to prior quarter. Sales revenue increased by approximately 6% or roughly $500 million to $9.6 billion. The average selling price declined by 1% quarter-over-quarter. A global SABIC sales volume was 7% higher quarter-over-quarter, supported by the higher sales volume in chemical and polymers segments by 8% and 15%, respectively, mainly driven by higher production on oxygenate glycol, PE and PP. Petrochemical sales volume increased by 11%, while agri-nutrient sales volume decreased by 12%, offset by higher average selling price in the agri-nutrient by 11%. As you can see in the table, EBITDA margin was higher at the16% in Q3 2023 supported by the company efforts to increase the sales volume globally in Q3 despite the market challenges, supported by lower average cost of sales by 3% in addition to incremental realization for synergy with Saudi Aramco of around $140 million. [Audio Gap] compared to the biggest quarter driven by lower average selling price and lower sales volume. Going to the third quarter major event, the BIF acquired the entire stake of SABIC and the Saudi Iron and Steel Company in Hadeed. This transaction is part of the company's strategic portfolio optimization to bring more focus into Cyber core and strategic business. The cash flow estimated from Hadeed transaction post closure planned in the first quarter 2024 is around $1.8 billion to $2.2 billion, which will be essential for funding our growth journey. The financial impact of the transaction in the third quarter was around $782 million recorded as a fair value remeasurement. In addition, there has been nonrecurring transaction during the quarter, mainly from recording a provision impairment in Europe assets as part of business ongoing portfolio optimization. This resulted in a net loss of $767 million in Q3 2023. However, SABIC net income from continuing operation was $143 million. For the 9 months comparison, sales decreased by 26%, driven primarily by lower average selling price by 24% in addition to lower sales volume by 2% across all segments, largely driven by volumes. We achieved EBITDA margin of 15% level despite the lower average cost of sales by 16% and selling and distribution expense by 32% compared to the previous 9 months. At the [indiscernible] Integrion joint venture and the soda companies decreased by $762 million compared to the 9 months of 2022. We recorded a net loss of $278 million in 9 months of 2023. Our net income from continued operation was $742 million, 82% lower than previous number. Before I move to discuss regular information, I would like to highlight that we remain focused on further optimization, working capital and cost reduction, which improve our P&L and cash generation. Moving into segment financial results, starting with Petrochemicals. With a robust sales volume performance in the petrochemical segment achieving 11% higher sales volume quarter-over-quarter. Average sales prices in the petrochemical business declined by 5% due to the stagnation in the global demand and higher supply. The EBITDA of our petrochemical business in Q3 2023 has improved by 5%, along with a slight improvement in the margin. Moving over to Slide 12. Agri-Nutrients business sales volume decreased by 12%, mainly due to lower sales in urea. In terms of performance, Q3 EBITDA was 37% higher than prior quarter, primarily driven by higher average selling prices, which increased by 11%. This was substantially due to the following factors: restocking and demand from key markets, India and U.S., supply tightness in Africa, China export limiting. In conclusion, SABIC will continue its effort to reduce cost, optimize working capital, maximize return and progress into growth with a continuous effort to increase the sales volume facing the market and global economy challenges. This was demonstrated clearly during the current quarter, which has resulted in a better EBITDA mark, improved working capital and increased sales.

Thank you, Salah. Looking ahead, we remain to expect an average global GDP growth rate of about 2.5% for the 2023. And we continue to focus on our operational excellence, our capital discipline and progressing on our growth despite the current challenging market. We remain disciplined in managing our CapEx, and we estimate around NOK 3.3 billion to NOK 3.8 billion to be spent in the year this year. Thank you very much, and back to you, Nova, for the Q&A.

Thank you, Abdulrahman Bin Al-Fageeh . [Operator Instructions]. First question from Morgan Stanley, Ricardo presenting.

A couple of questions on my side. The first one is related to this optimization that you're doing in Europe and that you had a provision related to that in the third quarter. Would you be able to provide some more color on what's the magnitude that we're looking at and potential capacity anticipation? And the second question, when we look at the CapEx guidance for this year from $3.5 billion to $3.8 billion, should we expect any sort of a similar level for next year?

I think we get the first one. Second, can you repeat the second question?

Yes. On the CapEx, when we look into 2024 compared to the guidance that we have for 2023, should we expect something across the stellar level?

Okay. Thank you very much. Yes, got you. First of all, I mean, your question related to Europe, I mean. Europe remaining for SABIC is an important and in a strategic region. As everybody knows that, I mean, the European region right now is challanging a lot or facing a lot of challenges, including the increase in the Fed stock, I mean like the major one that we are using in naphtha or the energy prices that also use for our energy mix and also our utilities. And no doubt, I mean that Europe will continue to be a major also base for SABIC in terms of innovations. And continuing our people and our assets in Europe and providing a lot of innovative solutions for our customers and our business partners. Our main focus right now in Europe is to continue with our safety as usual and to continue the reliability of the supply to our customers and also to make sure that we have an optimization for our portfolio and our European assets because I think this is an important for the long term of our existence in Europe. As far as the second question related to the spending in year 2024. I mean in the [indiscernible], we will keep the same way that we have done in the past 3 years by continue the discipline in our expense, especially in the run and maintained ones and as far as the new strategic growth, I think we are still at this point of time reviewing our business plan for next year. And in our Q1 of next year, we are going to tell you more about how it is the size of our investments for our strategic growth.

Next question from JPMorgan, Alex Robert.

Okay. Yes, just a quick couple to follow on from a bit more than me just asked. Are you actually profitable at the EBITDA level at the moment? That's my first question. And then when we look at the supply/demand situation going into 2024, I mean, it could well get worse. So I'm just wondering, when you look at your plans for the next year in terms of plant operating schedules, et cetera, are you anticipating maybe reinforcing it maybe reducing in the last year? And then my third question is, can you just give you an update on where we stand in terms of your expansion project [indiscernible] or when you might make FIDs on those projects.

Alex, I have to admit that we have difficulty in the voice. I think it is from our side, not yours. So I'll try to answer the question in a way with the way that I understand it, but please feel free. If I did not address your question well, then please just repeat it again. In terms of the EBITDA, I just want to inform you that the way that we manage our EBITDA in SMEs on a global basis for each one of our portfolio. And I have mentioned earlier that the challenges that we are facing and increasing the stock and energy prices, definitely, that put a lot of pressure in our margin in our European assets. We are trying our best to make sure that we continue to provide an innovative solution and also differentiated material from our assets in Europe to make sure that we maximize our value from those assets. That is not something easy. It is very difficult at this point in time. But hopefully, that is going to ease in the near future. I could not get in the second 2 points. Anyone from my colleagues here, help me what is the second points.

I think there was a question about the time lines for the recent announced oil to chemical projects.

Okay. As you may know that we have announced that in November 2022 for the Russia to convert 400,000 barels of oil into chemicals. And at that starting point, we start to develop the base case and recently a study for that production and also for trying to select the best technology that can apply for such kind of a huge complex provided that we need to make sure that we develop that technology based on the commitment for our sustainability and the commitment of the reduction of our carbon footprint. Still at this point of time, we are in developing the business cases and the visibility study. And we will announce at the right time when we are going to move into the next phase.

So maybe, Alex, if you don't mind, replace your second question, and if there is any other further questions, you could also address it at the same time.

Yes. So given expectations of weak demand continuing, I'm just wondering when you're planning your outages for 2024, whether you intend to increase plant shutdowns to reflect the weak demand situation or by going forward amendment, whether you think that 2024 is going to be another year of strong operating rate?

That's clear, Alex. Actually, our outages for our continuous maintenance and turnaround, I don't think this will be impacted by the situation right now because we have a rigorous plan for maintaining our plants, and that's long term. And most of the time, it has not been impacted by the situation. The most important thing that we try to maximize from each assets that will bring more value, not only to us and the company, but also to our customers and making sure that we bring the best value to our customers. In the meantime, it has to be economical and it has to be also bringing value to the company. Not expecting that major outage from our plant is going to be happening, it is the other way around trying to maximize the differentiated and highlighted value portfolio out of our assets.

Next question from Bank of America, Sashank.

I just have 3 questions from my side. I think the first one on CapEx. Is our understanding correct that currently, you do not have any FD past many media expenting product? That's the first question. The second one is on your European restructuring, which you mentioned, I know [indiscernible] but could you probably elaborate a bit more in detail on the steps you're taking exactly in terms of restructuring and which in the countries you operate in from. And the third question is just in terms of the world natural progenic strategy and the expansions, which we were supposed to hear about this year, is there different or the plants we should be looking at?

Thank you Sashank. In terms of the Capex I think I have spent maintain and the way that we continue to be disciplined in making sure that we have a very disciplined and development as well. As far as [indiscernible] I think we are this point in time analyzing our deals that our business takes us for the CapEx in the future. And as I mentioned, I think, in the next quarter we Q1 2024, we are going to change with you our views about the CapEx for the year 2024 and after. As far as the restructure in Europe, this is the -- actually the transformation of all our assets in Europe has been started also for 4, 5 to make sure that we have the right transformation in our assets to make sure that we maximize the value that can be done from our stakeholders out of our assets in Europe. We will keep doing this, and this transformation is not only done because of the current economic situation, it is long term. It is something that has been started, and it will continue. And the institutional right now is not attributable for us and our structure in Europe has been, as mentioned in the past and was doing. If there is any major things that is going to be taking place the [indiscernible]. What was the first one?

The question, I think we have the [indiscernible].

I mean, I can't comment on mid [indiscernible].

Next question from [indiscernible].

Starting off with just looking at the numbers so far this quarter, when you think about how still there's been an equipment. If you can maybe just share more color on where this improvement is coming from? Is it largely coming from the international assets? Or is it coming from domestic assets? That's the first question. Next question is, I think, a little more cost over asset sales. What are the -- I would say I mean seeing you identified that effect, it's not core business, what are the other assets that we should think about that are not core to save at this stage. And then the final question is just on the dividend. Obviously, we've seen an increasing focus on performance-linked dividends. Is this something that you would propose to the Board at some point where we start to move from that being what could be an adult to the involves more of a performance net.

I'll take the third question related to the you asked that it is not part of the core and the [indiscernible]. I think we have announced loath the steel business is not part of the chemical business. So that was the one that has announced and if you look at our portfolio right now you see [indiscernible] basic metal and polymers. The second one is the agri nitrate and the third one is the specialty, which is closely linked to our core business in the chemicals and polymers. So at this point of time, other than steel, the business portfolio at this point of time is the SABIC core business. Sala?

Okay. Thank you very much for your question. I think before jumping into asking or answering the question around the vertical optimization because portfolio optimization is really a very important element of our strategy going forward. But there are many elements of our strategy that actually we were very focused on in order to weather through a very difficult time for the chemical business. One, for sure, is reducing our expenditure, especially fixed cost and sales cost. And we have actually progressed very well. Our savings and reduction of cost, if I only take 9 months, and this is a high-level number is around EUR 350 million. So this is very important, very critical for us. Second is optimization of working capital. And we've done a lot of work in order to optimize our working capital. And we have actually made an improvement of around more than $700 million for the last 9 months. Only for the first in the third quarter, we've actually managed to improve our working capital by around $250 million to $260 million. So these are very important. Now I go to portfolio optimization. As the CEO mentioned, we look into the portfolio optimization for a very strategic point of view. We are very long term, whether it is in the region when we talk about restructuring of Europe and restructuring our product output. But definitely, we are long term, we want to remain and have a footprint in Europe. On the portfolio optimization, I think we've done a great job in SABIC in developing the steel industry. We would like now to focus more on our strategic business. We want to actually grow our business going forward. The liquid to chemical project is coming on the way. And we review project by project as the CEO mentioned that we are actually working on the visibility study. So Hadeed, although there is a disposition losses, which is an accounting losses that we had to record of around EUR 780 million. The proceeds of this transaction that we expect to come at the closure of this transaction on the first quarter of 2024 is around $1.8 billion to $2.1 billion, which is really a great source for us to support our growth today. So we actually always look into optimizing our portfolio, whether the project or region. And also during this process, we will continue to turn around nonperforming assets within our portfolio. So I hope I answered your question.

Okay. Thank you all for your valuable questions. Finally, in the last slide, you will see our upcoming engagement, whereby we look forward to engage with you and continue the dialogue. We stay at your disposal running you query or your clarification you may have as an intact to our open channels displayed in the slide. Thank you all for attending SABIC's third quarter of 2023. We will now be adjourning the call wishing you all the best.