Welcome to the Borouge Q1 2024 Earnings Management Webcast. My name is Adam, and I'll be your operator for today. If you'd like to ask a question in the Q&A portion of today's call, you may do so by pressing star followed by one on your telephone keypad. I will now hand the floor to Samar Khan to begin, so please go ahead when you are ready.
A warm welcome to everyone, and thank you for joining Borouge's first quarter earnings call. My name is Samar Khan, and I'm the Vice President of Investor Relations at Borouge. I have with me today the Borouge management team: Chief Executive Officer, Hazeem Al Suwaidi; Chief Marketing Officer, Rainer Hoefling; Chief Operating Officer, Dr. Hassan Karam; and Chief Financial Officer, Jan-Martin Nufer. We'll begin with a short presentation by the management team in respect to performance for the first quarter, as well as our outlook for the rest of 2024. We'll then open the call to your questions. I'll now hand over to Hazeem to present highlights from the first quarter.
Thank you, Samar, and thank you all for joining us today. Borouge has delivered a very strong financial performance for the first quarter, 2024, significantly beating market expectations in a challenging market environment. Performance was driven by improved pricing from our strategic focus on high value-added segments and regional optimization, operational excellence, and maintain cost efficiencies. Borouge reported an excellent net profit of $273 million in Q1, representing an increase of 37% on a year-on-year basis, supported by higher pricing premia and disciplined cost management. Adjusted EBITDA in Q1 increased 23% versus the same period last year to $567 million, representing an outstanding EBITDA margin of 44%. This is the one of the highest EBITDA margins amongst our direct peers.
Strong cash conversion, industry-leading margins, and robust balance sheet support our commitment to maintain 2024 dividends of $1.3 billion. This reflect our commitment to deliver exceptional shareholder value through market cycles. I would like to spend a moment on our substantial and sustained EBITDA margin evolution over the last year, which is a key differentiator for us. In Q1 2024, we reported an EBITDA margin of 44%, which has been steadily increasing over the previous four quarters. This is mainly due to the successful execution of the Value Enhancement Programme, which delivered $607 million positive impact in 2023. Through the cycle, our unique business model supports our ability to deliver one of the highest EBITDA margins amongst our direct peer group.
This strong margin profile is driven by our ability to command premium above product benchmark prices by focusing on high value add and differentiated products and geographic optimization. Our ability to sell our full production volumes, even in the most challenging market conditions, due to our well-established selling and distribution network and our long-standing partnerships in our core markets. Our management approach to maintain a well-positioned cost base that support our bottom line in an unstable pricing environment. All these value drives hinge on our ability to deliver exceptional production volumes, high utilization rates, and excellent asset reliability. I would like now to hand over to Rainer to provide a commercial update.
Thank you, Hazeem, and good afternoon, everyone. In quarter one, 2024, blended average selling prices of Borouge across polyethylene and polypropylene were up 5% versus the previous quarter and down 5% year-on-year. In quarter one, benchmark prices for both PE and PP were flat versus the previous quarter and down by 4% and 6% respectively on a year-on-year basis. Despite this challenging environment, Borouge was able to command relatively high premia over benchmark prices, reflecting the company's strategic focus on high value-add products. In quarter one, premia for PE and PP were both up 19% and 46%, respectively, versus quarter four, 2023. Premium for PE, $222 per ton, up by $35 per ton versus last quarter, and for polypropylene, $162 per ton, up by $51 per ton versus the previous quarter.
Polyolefin market prices improved slightly during quarter one, mainly due to supply tightness following lower supply from North America and Middle East and higher freight costs. China's economy returned to expansionary zone this March, PMI of 50.8, but market analysts are still cautious and await further signs of sustainable recovery. We expect prices to fluctuate within a narrow band in 2024, and pricing in quarter two, 2024, to be slightly lower than levels achieved in quarter one, 2024, for both PE and PP. That said, Borouge remains well positioned versus industry peers and is expected to continue to deliver product premia above benchmarks due to its strategic focus on differentiated and durable products. I will now briefly discuss sales volumes for the period before I ask Dr. Hassan to take us through some operational highlights from the first quarter....
Quarter one, 2024 sales volumes remained healthy at 1,135 kilotons, despite the feedstock-related turnaround in the quarter. Sales volumes for PE were down by 8% and for PP were down by 26%, respectively, on a quarter-on-quarter basis. Our sales volumes from Energy and Infrastructure Solutions represent 45% of overall sales volumes in quarter one, versus 36% in the previous quarter. This is part of Borouge's strategy to focus on durable and high value-add products, where we can realize higher pricing premium. Borouge maintains its focus on innovation and strives to generate at least 20% of annual sales volumes from new products. The 2024 product pipeline includes new products offering differentiated solutions to our customers.
The Asia Pacific market continues to be the largest destination for sales, with 58% of total sales volumes, followed by the Middle East and Africa with 39%. Other regions represent 4%. Over to you, Dr. Hassan.
Thank you, Rainer, and good afternoon, everyone. In Q1, we secured the highest product quality and asset reliability of 99%, demonstrating our operational and commercial excellence. Production operated at utilization rate of 106% and 81% for PE and PP, respectively. This allowed us to deliver strong production volume, mitigating the impact of a feedstock-related turnaround. The Olefin Conversion Unit, OCU, also played an important role by maintaining a very high utilization rate of 101% during the quarter. As previously communicated, we are also planning the turnaround of the Borouge 3 plant, expected to have a total volume impact of 330 KT. This is currently planned for Q4 2024. Our turnaround are part of Borouge regular plant maintenance, which keeps the company world-class asset base well-maintained and support industry-leading asset reliability and efficient and safe operation.
I will now hand over to Jan-Martin Nufer to discuss our financial.
Thank you, Hassan, and good afternoon, everyone. Overall, we are delighted to report a very strong net profit of $273 million for the first quarter in a challenging market environment. It represents an increase of 37% from the previous year. Q1 revenue was recorded at $1.3 billion, a 6% decline on a year-on-year basis and a 13% decline from the previous quarter. The 16% decline in total sales volume was counteracted by a 5% increase in average selling prices due to our focus on high value-add segments during the quarter. We delivered a strong EBITDA margin in Q1 2024 of 44%, versus 33% in Q1 2023, and 40% in Q4 2023. This is reflecting our improved operational efficiencies.
Excellent production levels enabling strong sales, cost efficiencies, and strategically managed sales volumes were successfully counteracting overall market softness. On to the next slide. We will now look at cost, an area where again, we continued to make progress. In Q1, 2024, our overall cost base, excluding depreciation and amortization, declined by 20% as compared to the same period last year, and 18% from the previous quarter. Total cost of goods sold, excluding, again, depreciation and amortization, decreased by 24% on a year-on-year basis and 21% versus the previous quarter due to lower production volumes and one-off adjustments, such as positive inventory effects. Our selling and distribution expenses in Q1, 2024 recorded a decline of 4% year-on-year, despite higher freight costs towards the later part of the quarter.
General and admin expenses in Q1 increased by 7% from $46 million to $50 million on a year-on-year basis. Borouge's first quartile position in the PE and PP cost curves, when combined with its ability to command premium against benchmarks, supports a very strong margin profile. On to CapEx and cash flow. Adjusted operating free cash flow in Q1 was very significant, with $552 million. Cash conversion was recorded at 97%, one of the highest since IPO. Further optimizing the financial position and financing cost, a further loan prepayment of $100 million was done under the commercial facility. With this, a total of $950 million debt volume could be retired.
Dividend payment of $650 million was made in Q1, related to the full year 2023 dividend commitment of $1.3 billion. Borouge intends to maintain a $1.3 billion dividend for 2024.
... Borouge maintains premium above benchmark prices over the cycle, which contributes to a strong operating free cash flow and high through the cycle dividend paying capacity. I will hand over to Hazeem to summarize and conclude.
Thank you, Jan-Martin. As mentioned earlier, we are still navigating a challenging market environment characterized by subdued global demand, geopolitical uncertainty, and delayed recovery in the sector. I would like to highlight that Borouge continues to deliver strong results and has been performing ahead of market's expectations across key financial metrics. The company will continue to focus on its core strategy in the high value-added products and regional optimization to tactically navigate the softer pricing expected in Q2. In Q2, sales volume are expected to return to normal levels following the feedstock-related turnaround in Q1. Borouge is well positioned from an overall cost basis for the rest of 2024, following the successful implementation of the Value Enhancement Programme in 2023. We continue to monitor the various geopolitical situations and to proactively manage and mitigate any risks and impact to our business.
As an update to our major strategic growth project, Borouge 4 has crossed the 60% completion mark and expected to be completed as scheduled. With the recontribution of Borouge 4, our production capacity will increase by 1.4 million tons and is expected to add $1.5 billion-$1.9 billion to revenue annually after full ramp-up. In addition, as part of our asset optimization and debottlenecking program, Borouge is currently also advancing plans for a second ethylene unit, EU 2, to expand total production of olefins and polyolefins by a further 230 kiloton. After project completion 2028, the unit is expected to contribute $220 million-$250 million of an annual revenue. Additional growth is also being actively explored through international expansion opportunities as mandated by the board.
We are currently exploring an attractive growth opportunity in Asia Pacific region, which has entered the visibility stage and will provide further update in due course. Borouge is committed to driving innovation and value creation across the business and is implementing digitalization and artificial intelligence program to enhance efficiency across operations. These initiatives have started delivering value, and we expect more to be realized in the near future. We reaffirm Borouge's commitment to pay $1.3 billion in dividends for 2024, offering a significant dividend yield of 6.5% on the current share price. Since the IPO, Borouge has paid substantial dividends of $2.3 billion. With that, we will open the floor for any questions.
Our first question comes from Faisal Al Azmeh, from Goldman Sachs. Faisal, your line is open. Please go ahead.
Hi, and congratulations on the strong set of numbers. Maybe two questions on my end. Just in terms of the CapEx so far spent on Borouge 4, when you compare it with what was guided during the IPO, are you effectively realizing any meaningful cost savings? Or effectively, too, should we expect the same level of CapEx to be spent on the project? That's my first question. And my second question relates to underlying demand in Asia. How has the issues in the Red Sea really impacted underlying demand in that part of the world? And are you seeing more supply coming from the Gulf into Asia, and how are you mitigating this? Thank you.
Thanks for the question. Jan-Martin here. Maybe let me answer the first question related to the CapEx for Borouge 4. I think we're pleased to report that we do not foresee, at that stage, any change in terms of the magnitude for the CapEx for Borouge 4 at that point. And, as Hazeem has been pointing out, we're making good progress. So the trajectory is heading towards the completion date as earlier communicated, and the CapEx are within the earlier indications.
So on the market side and Red Sea. So on the Red Sea side, but we have more or less business as usual. But there is some longer lead time to customers, but that we managed already. The logistics companies, the shipping companies, they enlarged their network there. Bit higher logistics cost, compensated by higher prices also. When it comes to the growth, it was even a bit the opposite, but that there was more demand in the market based on this disruption.
And we could take some opportunity out of that, which means is currently less supply into the Asian market on polyethylene, that we could take the opportunity also to raise the polyethylene prices. And on the other side, due to some slightly increased logistic cost from Asia, there was less-
... of polypropylene material into the Middle East region, where we were able to significantly increase also the prices there, which we have seen, and also resulting into better premium. But looking a bit forward, I think, based on the fact that the Panama Canal, right, perhaps gets a bit more water, but so that the supply into Asia is creeping up a little bit. So it's on the other hand, if you look at the overall feedstock situation, what we see also based on this slight disruption. So the feedstock prices, oil prices, remain on a relatively high level. So they came up around the $90 level.
Also, naphtha came up respectively, and the analyst estimate is also that will remain in quarter two to quarter three. Also, when in this combination, we think that in quarter two, prices coming down a little bit, but they remain then relatively stable in quite a narrow band on the demand side. So not a lot of changes. What we see here overall, perhaps a little bit when I talk about market cautious optimism of a soft landing globally. But when you look in our regions, but we had recently the China PMI, but the last couple of days, there is a better sentiment than it was last year. But so there is a bit light in the tunnel.
They estimate a better growth here in China and the other Southeast Asian regions, also the GCC, I think with a solid growth. So with this, we think that the overall year 2024 remains a solid year with demand and also on the price level side.
Thank you very much.
The next question comes from Prateek Bhatnagar from HSBC. Prateek, your line is open. Please go ahead.
Yeah, thanks a lot for taking my question. I have two. With respect to your growth, both organic and inorganic, which product teams look attractive to you in the long term? And are you looking to diversify into other product chains apart from polyolefins? That's the first question. The second question is on the feedstock-related shutdown. There was primarily lower propylene supply. So if the propylene, propylene supply from ADNOC would have been usual, what would have been the EBITDA margin in Q1? Thanks. These are the two questions.
I can take the first one. When it comes to our growth, whether it's organic, whether it's inorganic, I would just like to remind everyone, we are fundamentally based on a very strong foundation when it comes to our joint venture between ADNOC and Borealis, based on a technological leading edge. It's called Borealis Borstar proprietary. This is a unique technology in polyethylene and polypropylene. We have been growing significantly in this specific area within PE, PP, because this is a business we know very well. Based on a very strong support on feedstock from ADNOC and a leading-edge technology from Borealis Borstar, we have the right recipes to make this a competitive edge solutions when it come to polyethylene, polypropylene.
So as we have seen throughout the years, over the last 25 years, we have been investing in, in primarily in PE and PP. With Borouge 4 also, as, as you have seen, we have completed 60% of the project. It's also primarily PE with the latest technology of Borstar third generation technology for, for our plant on Borouge 4. That will enable us also to go more toward more specialty products with Borouge 4. There is no intention to invest in any different, I would say, business besides polyolefins. But we will make sure we will evaluate all the possible good businesses that can implement and build further also synergy for our business. So, so yeah, that's all. There's some also on,
Yeah.
Go ahead there, Martin.
No, thanks. Thanks for the other question in respect to the EBITDA margin. First of all, very happy to see the trajectory that we have been taken that was depicted in the presentation in terms of the EBITDA margin. If you would now look at the first quarter and take out the singular effects in the quarter, you would still be looking at an EBITDA margin in the magnitude of 40% plus. So that's what you can expect in terms of the trajectory, if you look at the development that we have been depicted from the last five quarters onwards.
Thanks a lot. Very helpful.
The next question comes from Afaq Nathani, from International Securities. Your line is now open. Please go ahead.
... Hi, thank you for taking my question, and congratulations on the great set of numbers. Just one thing on the side. We've seen the product premiums significantly jump in Q1, and that's always very encouraging to see. Just want to understand what is driving this momentum, and what should we be expecting going forward? I know the medium-term guidance has been communicated and stays the same, but maybe a little bit on how should we be looking at this in the near term. Thank you.
Yeah, on the premium side, the driver, what I said already is everything. So the one is always the product mix, how you position this. So that we were selling in the first quarter quite significant volumes on the infrastructure side, right? And this driving, of course, also the premium up. And on the other side, with the volume we were selling, we had a significant price increase also in the Middle East on polypropylene, right? And also on the regional mix, we were selling on the mix side, more to the Middle East region, right, which was driving the premium quite up.
So, that tells you right what we discussed already in the last couple of one and a half years. So when the opportunity comes, we have a good opportunity and agility with our setup, what we have, right, to tactically position also the volumes, right? If we can, and on the other side, with the differentiation that what we have in the product, when there's an opportunity, we can also drive the price premium up. How is it in the future, the volumes will go up, but it will normalize a little bit, so we will also sell then a bit more in the other regions again. So perhaps a price premium come down a little bit.
Also, as I said, in quarter two, perhaps prices come down a little bit, but over the cycle, we reiterate our premium of $200 and then $140.
Understood. That's very clear. Thank you so much.
As a reminder, that's star followed by one on your telephone keypad to ask a question today. The next question comes from Shehbaz Shaikh from Al Ramz. Shehbaz, your line is open. Please go ahead.
Hello. Congratulations on the strong set of results, and thank you for taking my question. So I have two questions. First of all, regarding, like, the sustainability of the higher premium on the product. So should we anticipate a downward trend in the coming quarters? Because in this quarter, we have, like, a record high premium. And the second question is on the dividend, like, with the potential impact from the B4 expansion, EU development and inorganic opportunity in the Asia Pacific region. So how confident you are in effectively managing the current dividend payouts?
Second question. Second, I take.
First, go ahead.
Yeah, the first question I in principle answered already, so, but, so first of all, we reiterate our commitment over the cycle of $140 premium for polypropylene and $200 for polyethylene. But as said, in quarter one, the driver was on one side, product mix and segment mix. So we were selling quite significant volumes in the infrastructure segment. I was up to 45% in quarter one, which delivers good premium.
On the other side, also, based on these logistic disruptions, there was also some trade flow changes, less polypropylene into the Middle East, where we could then take the opportunity, shipping more to the Middle East, with a 45% share on the Middle East side, in quarter one, and increasing significantly the polypropylene prices here. But we see prices coming down a little bit in quarter two, at the beginning of quarter two, stabilizing now based on a good feedstock. So with this, with more sales also in quarter two and quarter three, they're selling then more also to Asia North and then Asia South again, which brings the premium perhaps a little bit down.
Overall, we reiterate our commitment over the cycle to this premium.
And if I take, then the, the second question on, respect to the B4 expansion and the international growth and the impact on the balance sheet, respectively, the dividend payout, I'd like to reiterate that, you know, we continue our prudent approach in terms of the financial management of the company. We have, as you can see, a very robust balance sheet. So we are very confident to manage the dividends going forward, including the B4 recontribution, which is fully factored in into our considerations. If we look into additional, international growth, if and when it materializes, we will also structure that accordingly to be able to live up to the dividend expectations.
Okay. Thank you.
The next question comes from Youssef Bari, from Morgan Stanley. Giuseppe, your line is open. Please go ahead.
Hello. Thank you for taking my question. As-
... One, if I may, on the potential Asian expansion. Will it be greenfield or acquiring a stake on an existing project? And, yeah, what are your thoughts about that?
I think, as we have communicated, we have been mandated by the board to seriously look for further also potential investments for the company. We are at a visibility stage now. It's moving in the right direction. The evaluation is going forward in the right direction, I would say. And we'll provide more details as we have more details, and in the right time, I think we will provide you with more materials. But I think what's more important for us is that this opportunity makes sense for Borouge expansions, together with Borouge 4, and further also with this international investment we'll make.
We will make sure that this synergy is in the right setup for Borouge and ensuring that it will have the best financial impact on the company as well. And we'll provide you more details once we progress with evaluating this opportunity further.
Okay, thanks. If I may, follow up, how do you see the economics of a project in Asia versus the Middle East?
What particular here, Martin?
That's fine. Look, I think if we compare it obviously to the operations that we have here with our unique positioning in Ruwais, this is a very specific setup, which cannot be replicated, as you know. But when we're looking into the potential expansion and international growth, as we have been depicting it, we will make sure that the product is beating all our hurdle rates in terms of the attractiveness. And we'll look into that one, as Hazeem has been pointing out very carefully in terms of the financial contribution, which obviously needs to be positive for the company.
Okay. Very clear. Thank you.
As a part of a reminder, that's star followed by one on your telephone keypad to ask a question today. As we have no further questions, I'll hand it back to CEO, Hazeem Al Suwaidi, for any concluding remarks.
I just want to thank everyone for joining us for this call, and looking forward to to do more engagements in the near future. Thank you, everyone.