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

Welcome to SABIC's Q3 2024 Earnings Call. This is [ SalZmami ], acting as a moderator. Please note that the call is being recorded, and a transcript will be published on SABIC Investor Relations web page together with supplementary materials. The earnings call will feature commentary from SABIC's CEO, Engineer Abdulrahman Al-Fageeh, together with CFO, Mr. Salah Al-Hareky; and IRO, Mr. Naif AlAyed. Naif AlAyed will now guide us through an outline of today's event.

Thank you, Sarah. Thank you for joining the SABIC Q3 2024 Earnings Call. Please note that forward-looking statements in this call are made with certain assumptions, risks and uncertainty. These statements are not a guarantee of future performance. Actual outcome may differ materially from what the statement implied. Please refer to the disclaimer in the presentation and in our financial reports, which are available at sabic.com. Our CEO will start by going over the high-level market context that influenced our industry performance in the third quarter of 2024. This will be followed by a rundown of some key points to bear in mind with respect to SABIC Q3 performance. The CFO will then walk you through SABIC Aggregates financial performance with additional insights on the third quarter of this year. Our CEO will come back at the end to provide a brief outlook for the remainder of 2024 and open the line for a Q&A session. We ask that participants limit their questions to SABIC corporate performance and avoid referring to listed affiliates companies. Now please join me in welcoming SABIC's CEO, Engineer Abdulrahman Al-Fageeh.

Thank you, Naif, and thank you all to those who have dialed to join us today in the earnings call. Let us begin with the brief and overview of the macroeconomic landscape of Q3 2024. Global GDP saw modest -- although some major economics faced shutdowns or slowdowns. Inflation eased and central banks began lowering interest rates. These trends stimulate economic growth. Overall, economic indicators point to a temper increase in market momentum. Let me turn now to the petrochemical industry. It is evident that the overcapacity and the weak demand remains a challenge. As shown in the graph, current utilization rates are still below long-term averages. Additionally, PMI data that is the Purchasing Manager Index signaled a decline in global economic conditions with values below 50 for all regions. I now would like to highlight 6 points that determined SABIC's commitment to improving its overall performance. Our total recordable incident rate for Q3 2024 was 0.09, a testament to our dedication to health, safety and operational excellence. The sale of our shares in Alba Bahrain is major determination of our portfolio optimization journey, which is our CFO will shed some light later. Despite market challenges, SABIC maintained a stable EBITDA margin, demonstrating our resilience. Our growth projects, including SABIC Fujian Petrochemical Complex and the MTBE plant at Petrokemya Jubail are progressing well. Also, we have increased the capacity of the SABIC SK NEXLENE company in Korea by 90,000 tons per year. SABIC is honored to have been selected as a sustainability champion in the petrochemical sector by the Ministry of Economy and Planning in the Kingdom of Saudi Arabia. We are not only driving change within our own operations, but also empowering other corporates across the value chain to alleviate their sustainability performance. The slide lists one of -- one more Q3 highlights related to our solutions and portfolio innovation, which I will discuss in the next slide. There are 4 developments in the innovation and sustainability that I would like to share with you. First, we have completed the mechanical work of the pyrolysis plant of the advanced recycling joint venture in Europe. This milestone represents another step towards our commitment for sustainable solutions through our TRUCIRCLE initiative. Second, SABIC has inaugurated the world's largest solar installation using fully recyclable material at the Genk site in Belgium, developed in collaboration with our partners in Europe, featuring 4,600 innovative solar panels made with SABIC material, which are 100% recyclable and significantly lighter than the traditional panels. Third, the Independent Commodity Intelligence Service give the ICIS 2024 Innovation Awards for the Best Process Innovation from a large company through the larger-scale electrically heated steam cracking furnace developed by SABIC in collaboration with BSF and Linde in Germany. In fact, the furnace was recognized as being the overall winner of the all award categories. The last development I want to highlight is the R&D 100 award that our LNP STAT-KON compound. This electrically conductive material can be used in the mass production of electrode plates for patches. Let us now take a look at the quarterly demand and sales of the individual end markets we serve. As you know, and as you can see, market conditions varied across end products. Demand was stable in the majority of the industries, but it grew in the automotive, hygiene and health care. We expect to see the market trends in Q4 2024 to remain unchanged in most of end sectors, except for consumer goods, agriculture, where we anticipate an improvement over the prior quarter. I will now hand the call over to our CFO, Mr. Salah Al-Hareky, for a review of the SABIC's financial results and additional comments on individual markets.

Thank you, Abdulrahman, and good afternoon to all, and thank you to everyone joining the call. Despite market challenges, SABIC leveraged its global footprint to boost sales volume, which resulted in $9.8 billion in revenue, representing a 3% increase in last quarter. Q3 EBITDA reached $1.52 billion, stable compared with Q2. And our year-to-date EBITDA is ahead of last year, totaling $4.24 billion over the first 9 months of 2024. This reflects our focus on profitable growth and continued total shareholder return. Our net income for this quarter is $268 million, an increase of $1 billion compared to third quarter last year, mainly due to the fair valuation of Hadeed as discontinued operation in the third quarter 2023 as part of our portfolio optimization effort. For the 9 months period, our net income from continued operation totaled approximately $1 billion with a 40% increase compared to last year. I would like to highlight that the cash generation of SABIC business remained strong. Our cash flow from operation amounted to $1.75 billion, which improved relative to previous quarter. SABIC diversified global product portfolio allows us to seize opportunity across geographical region and product lines. We increased sales volume by 4% quarter-over-quarter, driving EBITDA growth despite lower price and higher variable cost. Our EBITDA shows a healthy trend since Q4 of last year. Now let me go through our segment separate performance. Next slide. As you can see in the slide, petrochemical sales volume rose by 5%, which was offset by a 4% decline in average selling price. Both our polymer and chemicals business have increased their sales with polymer and with polyethylene and polypropylene being the primary driver of higher sales. Overall, the volume sold during the third quarter was around 10 million metric tons. In the Agri-Nutrient sector, market opened at a sizable deficit but improved as the quarter progressed and outage in several regions caused shortage of supply in the market. As a result, revenue increased by 17%, driven by 17% rise in prices, partially offset by approximately 1% decline in volume. Total sales volume for the third quarter was around 1.8 million metric tons. At SABIC, we will continually optimize our portfolio through focusing on our core business and relocating our capital to higher-margin opportunity to be a preferred world leader in chemical. Hadeed and Functional Forms divestment with the sale of Alba shareholding mark the beginning of our portfolio optimization journey. The sale proceed of Alba shareholding is expected to be within a range of $880 million to $950 million. We are looking to further optimize our operating cost as well as ensuring we are competitive in all markets where we operate. This concludes the financial highlights. I will now hand back to SABIC, CEO, for year-end ahead guidance.

Thank you, Salah. At SABIC, our long-term focus remains on strategic portfolio optimization, restructuring of underperforming assets, prioritizing customer intimacy, sustainability and innovation and finally, cost and capital discipline. Our guidance for the year ahead is based on stable economic growth as reflected in our global GDP growth rate of 2.7% for the year 2024. We maintain a disciplined approach to managing our CapEx, projecting spending to be at the lower range of USD 3.3 billion to USD 3.9 billion for the year 2024. This concludes the presentation portion of today's call. Back to Sarah to kick off the Q&A session.

The first question is from Prateek Bhatnagar from HSBC.

The first is on your CapEx guidance. The first question is on CapEx guidance. You've cut the CapEx guidance from $4 billion to $5 billion to $3.3 billion to $3.9 billion. What does it mean for SABIC's growth projects? Or in other words, where has the CapEx been cut from? That's number one. Number two question is, could you quantify the one-offs which we have seen this quarter? So what was the impact of the fair value assessment loss from Alba, currency exchange, divestment of Functional Forms. So basically, I wanted to get a sense of what is the clean net income from continuing operations. These are the 2 questions I have.

Okay. Patrick, even though we have some difficulties in understanding your -- especially the second question, that was a lot of cutoff in the voice, but we will answer you, but if you do not get the answer that you are looking for, just please repeat the question. If the first one is related to the CapEx, and we used -- spend $3.3 billion to $3.9 billion, and you are saying what is the plan for the company for this? I can tell you that we keep the -- maintaining our discipline in managing our CapEx and also optimizing it and optimizing our cost discipline. This is -- that's why the reduction in our CapEx is coming mainly from what is the company is taking in the past few years to make sure that there is a discipline in the -- in our CapEx during the -- during this difficult time in the economy. I'm not sure I get the second question, but Salah, have you get...

I would like to comment, I think, to add to the comment made by the CEO. I mean we -- I'm sure you are very aware of the challenging market. So we have actually done a very extensive work to optimize our capital spend. So that's why you see our capital spend is actually on the low side. And potentially year-end is going to be at the lower range of the capital guidance that we provided. On the second question, on the Alba, while we have actually announced the Alba transaction, which is -- by the way, this is a result of our effort looking at the portfolio of SABIC across region, not only in Middle East or Saudi Arabia, but also we're looking at our portfolio in Europe and America. So Alba actually had been announced. And we -- while it is announced, there's actually some due diligence required and relevant regulatory approval that we need to complete before we actually close the transaction. I hope, Prateek, we answered your question.

The next question is from [ Joseph Valery ] from Morgan Stanley.

The first one is about sales volume. They have been quite resilient in the third quarter for both Petchems and Agri-nutrients. And I was wondering how do you see those evolving in the fourth quarter and for 2025? And then about the portfolio optimization after Hadeed, Alba and Functional Forms business, where do you see potential opportunities for further optimization?

Thank you. I'll take the first question. Salah, please take the second one. As you may know, I mean, we -- every year, we review our maintenance and turnarounds and also our inventory and the size of our inventory at the site and outside the site. And we maintain our assets to make sure that we operate this asset, of course, safely and maximize the utilization of this asset and make sure that we have a high discipline in our operational integrity of all of our assets, making sure also that there is an enough inventory to supply all of our customers around the globe at the right time with our products. So this is mainly the changes in the sales volume from quarter-to-quarter. And -- but we are not trying to make any projects that sometimes it does not require that the market because of the number of grades that the company has, the number of portfolio that we have. It is huge in the company. So we are trying to make the optimization, both in the production side as well as in the inventory side. Salah?

Okay. Thank you for your question. I think I answered partially the question on the portfolio optimization, but I will probably shed more light about it. And actually, we have started the work on the portfolio optimization a few months ago, and the work is continuing to progress very well. This work is actually very comprehensive. So we're looking at all of our assets in Saudi Arabia, in Europe and America. And the intention is very -- in our mind, is very straightforward. It's not only looking into nonstrategic assets, for potential divestment. But also, we're looking into some of our core assets that actually positioned a certain region. And the intention of the whole exercise is actually unlock value and improve our capital efficiency going forward and then invest the proceed in higher-margin market and region. And also it's very important and critical, this proceed of capital and the divestment and the portfolio optimization is to also support our intention to distribute dividend and potentially grow dividend over time. So although the dividend aspect is the discretion of the Board approval, but actually, this is the intention going forward. So I hope I answered your question.

The next question is from Brennan Eatough from Riyad Capital.

Can you hear me?

Yes, we do.

Okay. That's great. Congrats on the earnings. Obviously, presentation is lit as always. Just wanted to talk about the drop of the net profits Q-over-Q. Margins stayed roughly the same. Net profits were roughly 100% of operating profit in 2Q '24, and it looks like as a percentage of operating profit, it's around 40%. I just wanted to know what happened in between. Just double check the discrepancy there. And then I also wanted to get an opinion, if I could, on any type of changes you might be seeing coming up ahead for the Agri-Nutrients business regarding Chinese supply restrictions?

Thank you, Brennan.

Did you get the second part of the question?

So Brennan, I'll answer the first part of the question, and then maybe our CEO can take the part on Agri-Nutrients. So yes, I agree with you. There's actually a difference between our net income and EBIT. And this is actually attributed to mainly the tax payment and the tax expense for this quarter is around, I think, $400 million, $370 million. And there are some nonrecurring also accounting posting of transactions. One is the losses related to derivative. Although it is very small, it's around maybe $40 million, $45 million. So this is why you see the difference between the net income and EBIT. I will forward your second part of the question to our CEO.

Yes. If I understand your question correctly, this is the Chinese impact supply in the Agri-Nutrients. And I can tell you that Agri-Nutrients, it's been, by the way, in SABIC more than SABIC itself for 60 years right now, which has established a very robust market around the globe, and we have a solid base of customers in Kingdom and outside the Kingdom. And I can say, I mean, if I just review any impact, I did not see no major impact in any supply that comes from China or go to China.

The next question is from Waleed Jimma from Goldman Sachs.

I just have a couple of questions. First of all, just adding to the first question on CapEx following the cut on full year CapEx guidance. We also saw some recent media reports that some projects related to the oil to chemicals in Saudi were canceled. Could you please shed some color on SABIC's CapEx outlook looking into next year onwards? And how should we think about oil to chemical projects in Saudi? The second one is if you could just talk about your carbon capture projects that you're undertaking with Aramco, how SABIC is positioned in these initiatives in terms of CapEx and expected returns? And how is the company likely to benefit from these investments?

Thank you, Waleed. I think the first question related to the CapEx has been answered by Salah, but if we still have some additional inquiry, we can add it. But the second question related to the oil to chemical project, I think we are aware of what is -- I mean, has been said in the media related to this project, but I can tell you that the oil to chemical project as a concept, it has been there for many years. We are studying this conversion of oil into chemical, which has required a lot of technology development, a lot of enhancement of the technology and the conversion factors and a lot of feasibility study that need to be taken. So we are still in that development in the technology area as well as in the feasibility of the project. And we would like to just stress to you that we are still committed to realize the synergies between Saudi Aramco and SABIC as has been announced many times and which is part of it, including the liquid to chemical, and we'll continue to make that optimization and continue to make the investment that required the optimization and improving into our value added to our shareholders. And if there is any update on this project, the major ones, I think we are going to make it clear at the right and appropriate time. Related to the second -- third question, I think you asked about the carbon capture, if I'm not mistaken, and sequestration. Let me just tell you, I mean, the carbon capture, it's part of our strategy in the decarbonization. So our decarbonization start with our energy intensity programs that we are establishing. Also, it is -- part of it is the improvement in our operations and our turnarounds and our ups and downs, which is eliminate to some extent, our emissions and also the carbon capture and utilization, which we have proved it in Jubail. We captured more than 500,000 metric tons of carbon dioxide and we utilize this. And now lately, we are studying with Saudi Aramco how to also sequestrate this carbon dioxide when it is being collected and purified. So this is ongoing, and the feasibility study for this is progressing very well. And definitely, when it comes to time that there is a major development in this, we are going to announce it.

The next question is from Oliver Connor from Citibank.

Just one for me now, actually. If I think about the macro again and the dynamic of low utilization rates that you mentioned in your press release, I mean, are you seeing any indications of rationalization or investment slowing? Because it feels like we've been talking about the sort of rationalization for a while, but there doesn't seem to have been a market response just yet.

Thank you, Oliver, for the question. Look, I mean, the optimization in our portfolio is ongoing, and it will keep on going. And as you may see this year, we have rationalized the olefin 3 ethylene with its derivatives. And I think this has eased our operation in Europe and because of the demand in Europe, as you may see, it has been impacted a lot. So that's what has been done this year. Continuation of any rationalization for the business, it depends. It depends on the overall world and global economy, how does it go? And it's also part of the -- as I mentioned earlier, in the -- our portfolio optimization. Still, the optimization is ongoing. And I don't see that anything that at this point of time can be shared. But if there is anything developed, definitely will be shared in the appropriate time.

The next question is from Sashank Lanka from Bank of America.

Can you hear me?

Yes.

So a couple of the questions on portfolio optimizations as you discussed. And so are there any further closures in Europe that could be possible from your end and we heard a lot of announcements over the last few weeks from some of the European peers. Just wondering if there's a few more assets...

Sorry, go on.

A few more closures in Europe that...

Sashank, I understood your question correctly. And as I mentioned, we're looking at Europe as part of our portfolio optimization. We have done a lot of work. We've actually taken steps to optimize our footprint in Europe with the closure of Olefin 3 cracker as our CEO referred to. But the work on looking at Europe is still ongoing, Europe, America and KSA. And we're hoping that we will be able to share more information in the first quarter 2025.

The next question is from Alex Comer from JPMorgan.

Can you hear me?

Yes, maybe louder.

A couple of questions from me. Obviously, there's a lot of talk about a number of my compatriots have sort of asked with regard to Europe and the state of play over there and rationalization. So maybe you could let us know, are you EBITDA positive in Europe? And maybe you could give us a bit more information with regard to your profitability in Europe. I noticed in your accounts last year, there's some fairly big tax losses booked. So just what the profitability in Europe is? And then also with regard to your European business and the ethylene derivative balances, when can we expect the Wilton cracker to come back up? Is that still a plan to restart that cracker? Or has that been abandoned?

Okay. So Alex, thank you very much. Let me answer your first question. I think I have already answered the question on Europe. And we continue to look into our assets in Europe. I mean, while a closure and rationalization of our footprint in Europe is one option, but there are many options for Europe. One definitely is we continue also to optimize our performance within our assets in Europe, optimizing our capital spend, optimizing our fixed cash cost. And there are many also options that is actually under review, including -- and again, this is options. Nothing had actually materialized, is a partial exit or full exit. But these are options that's being reviewed by the management and potentially the Board to draw and put color on the path going forward.

As far as the second part of your question related to the ethylene balance and related to the Wilton cracker, I can mention to you that, as you may know, that the ethylene is long in Europe, no doubt about this. And it's been long for even sometimes. But it's balanced for SABIC. I mean our operations in SABIC, it is well balanced with our ethylene. So we have no problem with securing or producing ethylene for our assets in Europe. As far as the Wilton project, it is under construction, and I think it has almost completed their construction. And actually, it's been put in 2 phases. The Phase 1 has been done 4 years back when we convert half of our furnaces into ethane cracks. And now we are going to complete the second phase of that cracker to convert the total cracker into gas cracker. So now, I think we are transitioning into approach to finalize the preparation for the start-up. We want just to make sure that the plant when it did start up after a few years of stoppage that it is safely started up, and this is what is most important thing. So we are, at this moment, planning this safe startup.

Thank you, Alex, and thank you all for the thoughtful questions. The Investor Relations team is available for pending inquiries and any follow-up from today's call. Contact information is displayed on screen. The call has now concluded. Thank you again for attending SABIC's earnings call for the third quarter of 2024. You may now disconnect.