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

Welcome to SABIC's Q1 2025 Earnings Call. This is Sarah Alzamami, acting as a moderator. Please note that the call is being recorded. A transcript of the recording together with supplementary materials will be published on the Investor Relations web page on SABIC's website. Today's earnings call will feature SABIC's CEO, Engineer Abdulrahman Al-Fageeh; and its CFO, Mr. Salah Al-Hareky; and IRO, Mr. Naif AlAyed. Naif will now take us through an outline of today's event.

Thank you, Sarah, and thanks to those of you who are joining the SABIC Q1 2025 Earnings Call. Please note that forward-looking statements will be made in this call are based on certain assumptions filled with risk and uncertainty. These statements are not a guarantee of SABIC's future performance. Actual outcome may differ materially from what the statement implied. For the details, please refer to the disclaimer in the presentation and in our financial report, both of which are available at sabic.com. Our CEO will start his presentations by going over the market context that influence our industry performance in the first quarter of 2025. This will be followed by a rundown of some key points with respect to SABIC Q1 2025 performance. And subsequently, he will outline SABIC's key priorities for 2025 and the expected end industry market movements. The CFO will then walk you through SABIC's aggregate financial performance, focusing on the first quarter of 2025. Afterwards, our CEO will come back to provide a brief outlook for the year. At the end, we will open the line for a Q&A session. I ask that participants limit the topic of their questions to SABIC corporate performance and avoid referring to listed affiliate companies. Now please join me in welcoming SABIC's CEO, Engineer Abdulrahman Al-Fageeh to the call.

Thank you, Naif, and thank you to those who have dialed in to join today's earnings call. Let us begin with a brief overview of the macroeconomics and industry landscapes. The first quarter of this year shows signs of a deceleration toward economy. The global GDP growth rate was only 2.97% and growth rates forecast for the year have been downgraded to 2.2%. Lower inflation due to falling energy prices has eased some monetary policies, but tariffs might reverse this progress. Hovering at 50 for the quarter, the Manufacturing Purchasing Managers' Index remains weak. Overall, macroeconomic indicators point to increasing uncertainty about the global economy, largely a result of the U.S. trade policies. In the petrochemical industry, overcapacity remains a challenge and demand was under pressure from oversupply and increasing uncertainty. Chemicals capacity utilization remains below the historical global average. Now I would like to highlight 6 points that demonstrate SABIC's commitment to improving its overall performance. Our total recordable incident rate for the first quarter of this year is 0.08 at a 27% improvement in comparison to the first quarter of last year. This is a testament to SABIC's dedication and commitment to the health and safety. Moving to commercial innovation. I'm happy to say that we have won the 6 Edison Awards, 1 gold, 2 silver and 3 bronze. They were given to SABIC in the categories of Material Science, Green Energy Transition and Clean Water, Food & Agriculture. This is a strong reflection of our commitment to continue investing in innovation and develop groundbreaking market-focused solutions. Innovation remains an important growth engine for us and a contributor to our long-term business success. I'm also pleased to announce that SABIC's General Assembly approved the new composition of new Board of Directors. The formation of our new Board will bring greater diversity, deep industry expertise and strategic insights. We would like to extend our appreciation and gratitude to our ongoing Board members for their service to the company and its shareholders. They have enriched the company and the Board with their invaluable expertise and contributions. As part of enhancing our operating model and advancing SABIC long-term competitiveness, we constantly evaluate the transformations needed to effectively align our workforce and third-party service with evolving business priorities and future demands. In the first quarter of this year, we embarked strategic workforce optimization initiatives. This restructuring is expected to pay back in 3 years through structural cost savings, a long-term efficiency, which we will continue. Our growth projects remain on target. The SABIC Fujian Petrochemical Complex in China, the flagship project of our strategic expansion in Asia is progressing towards a mechanical completion by the second half of 2026. In Saudi Arabia, our MTBE project in Petrokemya in Jubail is also advancing well towards mechanical completion later this year. Another project in one of our Saudi affiliates, the LTRS mega project Ibn Zahr was also successfully completed. It will enable us to increase our MTBE production while reducing our CO2 footprint. This is a demonstration of our commitment towards improving the profitability and performance of existing assets. Finally, I'm proud to inform you that SABIC recently achieved 2 milestones in our sustainability journey in China. Our Shanghai plant was officially certified as a model green factory by the Shanghai Economic and Information Commission and the Shanghai Development and Reform Commission. The other milestone was achieved by our Nansha plant in China as it marks its second year of using 100% green electricity. Moving now to SABIC's priorities for 2025. I group them under 4 focus areas: first, operational excellence; second, transformation; third, selective growth; and fourth, the value creation. In the area of operational excellence, we continue to prioritize safety and reliability by fostering a culture of continuous improvement and capitalizing on the digitalization. We are also optimizing our operations to establish cost leadership and increase productivity. As part of our transformation journey, our asset portfolio is also being optimized, in line of our core businesses and strategic positioning. This means that we will improve our underperforming assets around the world and equip our global organization with the tools and expertise needed to overcome the challenges of an ever-changing global market. It is worth mentioning that we have completed the Alba transition as part of our ongoing portfolio optimization during the first quarter of this year, and we received the cash proceeds. Our selective growth projects are being cost effectively executed so that our business can expand through a strategic partnership and optimized market deployment. This creates value, which brings me to the last focus area. By focusing and delivering value creation, we can consistently deliver stable to growing dividends to our shareholders, and we intended to do so by maintaining robust financial through disciplined capital allocation and cost management. It also means innovating to meet our customers' demand and unlocking further synergies from our integration with Saudi Aramco. Let us now talk about quarterly product demand and sales for the end market that SABIC serves. As you can see in the slides, demand was stable in Q1 for most of our end product sectors with some growth in industrial, electrical and electronics and hygiene and health care. And we expect demand to remain stable across the board next quarter. And with that, I will now hand the call over to the SABIC CFO, Mr. Salah Al-Hareky. He will review the company's financial results and provide additional commentary in our business segment's performance. Salah.

Thank you, Abdulrahman, and a warm welcome to everyone joining the call today. SABIC continued to leverage its global business footprint in the first quarter of 2025 to generate $9.2 billion in revenue, about the same amount as the previous quarter. Early 2024, the company commenced its transformation and portfolio optimization initiative, focusing on cost structure and strategic positioning. In 2024, we divested Hadeed and our equity in Alba. In Q1 2025, we launched first phase of global restructuring and manpower optimization. The expected cost reduction of progress so far is more than $90 million annually. Q1 EBITDA is $670 million, mainly impacted by onetime restructuring costs that position us for long-term value creation. These strategic actions will lower cost, sharpen focus and enhance future return with initiatives reflecting SABIC's broader transformation agenda. EBITDA, excluding the impact of special items, mainly restructuring and manpower optimization of around $300 million amounted to $1 billion. This represents a 7% increase compared to $930 million in Q4 2024. The EBITDA margin before special items reached 11% in Q1 2025 compared to 10% achieved in Q4 2024. Moreover, an upgraded A+ long-term credit rating from S&P demonstrates our robust financial standing. It reinforced our confidence in our resilience and long-term stability. Our balance sheet remains strong. Our gearing ratio of 0.48% gives us the flexibility to sustain our dividend commitment and capital investment. Next, I will discuss the quarterly performance of our separate business segments. In Petrochemical, both prices and volumes in Q1 2025 were flat compared to Q4 2024. Within this segment, chemical experienced slightly higher sales volume, whereas polymer had marginally lower sales volume. In total, our first quarter sales volume reached 9.6 million metric tons. In terms of profitability, we can see that EBITDA was lower quarter-over-quarter, yet the EBITDA, excluding special items in Petrochemical is $689 million compared to $629 million in Q4 2024, which represents around 10% improvement quarter-over-quarter. Next slide, please. And Agri-Nutrients, in Agri-Nutrients, we observed higher prices in Q1 2025 as consequences of tight supply in several regions at the time of healthy global demand. However, lower production resulted in 4% lower sales volume compared to last quarter. The total Agri-Nutrient sales volume was around 1.8 million metric tons in the first quarter of 2025. The EBITDA, excluding special item of Agri-Nutrients during first quarter of 2025 is $308 million. Let me now wrap up. Next. We remain committed to drive greater capital efficiency through disciplined capital allocation, structural cost reduction and an enhanced focus on return. We're also strategically optimizing our workforce to strengthen our cost structure and position the company for sustainable long-term success. At the same time, we are maintaining a strong balance sheet and disciplined financial framework. That's why we ensure resilience and agility across business cycle. Our portfolio optimization efforts are progressing with a clear intent to exit noncore business and relocate resources towards strategic priorities. This concludes the financial highlights. I will now hand back to our CEO, for our year-ahead guidance, Abdulrahman?

Thank you, Salah. Our guidance for the year ahead is based on slow economic growth as reflected in revised expected global GDP growth rate of 2.2%. And in line with our commitment to value creation and selective growth, our 2025 capital investment is expected to be between USD 3.5 billion and USD 4 billion. This concludes the presentation portion of today's call. We can now kick off the Q&A session.

Thank you, Engineer Al-Fageeh. [Operator Instructions]. First question is from Ricardo Rezende from Morgan Stanley.

A couple of questions, if I may. The first one, it's on the expected savings from some of the initiatives you implemented on the first quarter. What should be the timing on those numbers that you provided? How much would you expect to capture in 2025 and 2026? And then another question on the portfolio optimization. Until now, most of your initiatives have been focused in Europe. So when you look forward, should we expect you to continue optimizing some of your footprint in Europe? Or are you also looking at some of the other regions where you have plans?

Thank you, Ricardo. This is Salah. A very good question. We actually -- in 2024, we've actually launched 2 very important initiatives. One is very strategic where we actually look into the repositioning of our business, especially in Europe and America. And also, we've launched another initiative, which is transformation with a focus in cost reduction and value creation. So we're very actually much progressing very well. I think we will be able to give you more information and detail, especially on the portfolio optimization, hopefully, in third quarter this year, and we'll give you more information on what we're doing. However, in second quarter, we will also provide hopefully more information on the progress. Now what you have seen here, the $1 billion is actually more of the restructuring and the focus on Europe and America and was actually more of a soft restructuring of organization in order to really understand our cost structure when it comes to manpower and resources allocation. And we've done the same thing. We've done it in Europe and America. We've done also the resizing and the optimization of resources in Saudi Arabia. And then the result of this manpower optimization was a cost onetime hit of around $300 million. The gain or the cost avoidance that we will hopefully enjoy every year minimum is $92 million. So going back, I know there is a lot of eagerness to understand more about the portfolio optimization. We'll be more than happy -- and the transformation, will be more than happy to provide that information later, hopefully, second quarter, detail some progress. And then third quarter, we'll give you the result of our review.

Next question is from Sashank Lanka from Bank of America.

I have 2 questions, if that's fine. The first one is just on the market ever since April 2, just wanted to understand with the trade wars, have you started to see any impact now that it's almost a month in terms of your volumes and just demand? That's the first question. And the second question is with regards to your expansion plans. Obviously, you have this, the Fujian petchem complex in China. But just wondering what's the outlook for expansions in Saudi. We have seen a couple of companies in the sector announcing feedstock allocation for mixed feed crackers. Will SABIC as well at some point, be looking for expansion similarly?

Thank you very much. And for the markets and the trade war, I think the beauty of SABIC that we have the global footprints of our assets and our distribution. And I can tell you that so far, we have not seen any major interruptions to our supply chain due to these trade wars. I mean, our supply chain continue to deliver to our customers. As far as the expansions, as I have mentioned that we are progressing very well with our Fujian -- SABIC Fujian project in China. And hopefully, by middle of next year, we are going to complete the construction and start the commissioning and startup in the second half of next year as well as also our expansions here in Saudi Arabia for the MTBE that I have also explained. Any future expansion or growth for the business with any major development with this will be immediately informed you and you will be notified by the time that we have any development in this area.

Yes. It's actually on the investment side, I think we're very focused into being very disciplined in allocating our capital. But we have a very clear path in doing that. We're doing the transformation, the portfolio optimization in order to unlock our capital and grow. I think we have been growing. We've been growing in different regions. Saudi Arabia is also a focus of our growth, especially with our major shareholders. I think that's very important that we have, as the CEO mentioned, there is a synergy on the investment pathway also with the major shareholder.

The next question is from Jassim Al-Jubran from Aljazira Capital.

Just one question on trade war from my side. With the elevated tariffs in place from U.S. and China, do you see any potential for a shift in Chinese demand from U.S. to KSA? And how has the overall impact of trade war been so far this quarter?

Jassim, I can understand that your question related to the trade war, but I could not understand what do you mean by moving from China to Saudi Arabia. But I can tell you that -- can you specify exactly what you mean by that?

Yes. I mean with the implemented tariffs between U.S. and China, can we see the demand from -- Chinese demand from U.S. to shift to Saudi Arabia to see more demand from Saudi Arabia to avoid tariffs?

Look, I mean, at this point of time, actually, there is uncertainty about the supply chain changes globally. But I can tell you, and I have explained earlier that we did not see any interruption to our supply chain. But the opportunity, opportunity for moving the supply chain among the -- our assets globally, I think this opportunity is being assessed at this point of time and analyzed. But the most important thing is that we continue to deliver to our customers in a very reliable way and maintaining our, of course, market share. But if there is an opportunity out of this dilemma, definitely, the company is going to look into this.

The next question is from Oliver Connor from Citibank.

Just going back on the sort of restructuring point. Obviously, you mentioned on people costs. I mean, how are you thinking about the business in terms of the global footprint going forward? Clearly, you got growth in China. You've got potential for growth in Saudi. I'm just trying to get a sense of where you see the business coming out of this cycle, maybe streamlined or maybe fewer geographies in terms of where your assets are?

Thank you very much. I think that's a great question. I mean, no doubt, the petrochemical industry is going through a very challenging time. And the key success in this time is a focus on cost reduction and improving our margin, reducing our G&A, reducing our fixed cash cost, which is what we're doing right now. Now there is also the other aspect of it, which is the repositioning of our business and assets within European market and America. And this is where we're doing the work. I mean, we're not ready to share any information. I don't have the detail right now, but we will be more than happy to give you a little bit of a detail, hopefully, second quarter and more detail in the third quarter. Now of course, anything, any move we do because there are always a low-hanging fruit. And we capture those low-hanging fruits in order to make an impact. And we don't want to wait for the program to finish. We're going to do that immediately. So what you have seen on the restructuring and manpower workforce optimization is one aspect and many to come, hopefully, in the future. This is very critical and very important. And then we also look into assets that we -- not within our strategic focus or not the core assets or asset that is not -- we don't have the competitive advantage. And we are looking into options of these assets in a way that actually yield a better return to our shareholders. I hope I answered your question. Thank you very much.

Thank you all. Thank you all for the thoughtful questions. The Investor Relations team is available for pending inquiries and any follow-up from today's call. The contact information is displayed on screen. The earnings call for the first quarter of 2025 has now concluded. Thank you again for attending. You may now disconnect.