Hello, everyone. Welcome to Industries Qatar third quarter 2024 earnings call. Please note that this call is being recorded. I'd now like to hand over to our moderator for today, Bobby Sarkar. You may now begin
Thank you, operator. Hi. Hello, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Industries Qatar's third quarter and nine months 2024 financial results conference call. On this call from QatarEnergy's Privatized Companies Affairs, we have Abdulla Al-Hay, who is the Manager for Privatized Companies Affairs, Rashid Hamad Al-Mohannadi, who's the Head of IR and Communications, and Saffan Mohammed, who's the Senior Financial Management Analyst. We will conduct this conference as usual with management going over the company's results, followed by Q&A. I would like to now turn the call over to Rashid. Rashid, please go ahead.
Thank you, Bobby. Good afternoon. Thank you all for joining us. Hope you are all doing great. Before we go into IQ business and performance updates, I would like to mention that this call is purely for IQ investors, and no media representatives should be attending this call. Moreover, please note that this call is subject to disclaimer statement as detailed on Slide 2 of the IR deck. We can move into the call on Tuesday, 29th of October 2024. IQ published its result for the nine-month period end the 30th of September 2024. Today in this call, we will go through these results and provide you on key updates on financial and operational highlights. Kindly note that the MS Team link is displayed the IR deck on screen.
In case you want to participate in the Q&A session, you may dial in through using the phone numbers identified in the invite for the call. Today on the call, along with me, I have Mr. Abdulla Yaqoob Al-Hay , Manager for Privatized Companies Affairs, and Mr. Mohamed Saffan Senior Financial Management Analyst. We have structured our call as follow. At first, I'll provide you with a quick insight on IQ ownership structure, competitive advantages, and overall governance structure. Secondly, Saffan will brief you on key IQ macroeconomic fundamentals and IQ financial performance metrics. Finally, we'll open the floor for the Q&A. To start with, as detailed on Slide 5 , IQ ownership structure comprises of QatarEnergy with 51% stake, and the rest is in the free float held by various domestic and international corporates and individuals.
IQ is credit rated entity by S&P with double A-minus and Moody's with double A three credit rating, both with a stable outlook. These ratings were further affirmed by S&P during Q2. QatarEnergy being the main shareholder of IQ provide most of the head office functions through a service level agreement. Operation of IQ group companies are independently managed by its respective board of directors along with senior management teams. In terms of the competitive advantages, as detailed on Slide 8 , the group is well-positioned with several competitive advantages within its domain, strategically, operationally, as well as financially. These strengths include an efficient and well-maintained asset base, a qualified, skilled, and highly trained workforce, a sure supply of feedstock and competitively priced energy sources, lower operating costs, a dedicated team in the form of Muntajat to market the group, petrochemical and fertilizer products, and reputable JV partner.
Most importantly, a well-experienced senior management team. As detailed on Slide 10, from the competitive positioning perspective, IQ ranks among the top-tier companies within the regional downstream space across most of the matrices. In terms of the IQ governance structure, you may refer to Slide 51 and Slide 52 of the IR deck, which covers various aspects of IQ code of corporate governance in further details. I will now hand over to Saffan to cover macro aspects, including macroeconomy, operations, and IQ financial performance.
Thank you, Rashid. Good afternoon. Thank you all for joining us. Ladies and gentlemen, welcome to Industries Qatar's earnings call for the nine months period ended 30th of September 2024. Starting with the macroeconomic updates. The global economy faced persistent challenges stemming from tight monetary policies implemented to combat inflation. Despite some central banks have started easing interest rates, prolonged high rates continue to suppress industrial activities, particularly in advanced economies. This has resulted in subdued global industrial production growth with regional variations reflecting differing economic conditions and outcomes. The petrochemical sector continues to struggle with overcapacities, especially in China, and higher energy cost in Europe, leading to depressed margins and industrial consolidation. The fertilizer market, particularly for urea, showed resilience due to tight global supply and steady demand.
Meanwhile, the steel industry grapples with overcapacity and muted demand both internationally and regionally, exacerbated by high interest rates and slow growth in the construction sector. These factors, combined with geopolitical instabilities, create an uncertain outlook for various industries, affecting overall economic recovery and supply-demand dynamics. Now we can dive into the financial performance as reported on Slide 15. Group reported a consolidated net profit of QAR 3.5 billion for the nine months period ended 30th September 2024. With an improvement of 7% versus the same period of last year. Earnings per share for the period was QAR 0.58, compared to QAR 0.54 for the same period of last year. EBITDA, on the other hand, it was QAR 5 billion with an EBITDA margin of 39%, compared to EBITDA of QAR 4.8 billion with the same period of last year, with an EBITDA margin of 37%.
Group recorded a revenue of QAR 12.7 billion that was marginally declined by 2% compared to QAR 13 billion reported for the same period of last year. Reduction in revenue for the current period was due to an overall decline in selling price that was marginally offset by an improved sales volume. Going through IQ's net earnings for the nine-month period versus the same period of the current year, as detailed on Slide 16. Group's financial performance for the period was largely attributed to the following factors. Product prices. Blended average product prices marginally declined by 3% versus nine months 2023, reaching to $453 per metric ton. This contributed negatively to the group net earnings by QAR 457 million compared to the same period of last year.
Despite prices being marginally down in 2024, it's worth noting that product prices have continued to stabilize over the last few quarters after peaking during second half of 2022. This price stability was supported by supply challenges arising from regional geopolitical uncertainty, plant turnarounds, export restriction in some of the larger economies, production shortfalls in some of the larger facilities, and fiscal and monetary policy revisions in some of the larger economies as well. On the other hand, demand for downstream products were impacted by greater economic headwinds in large economies, aggressive monetary policies, limited domestic regional demand. While a positive trend was noted in the recent past on the backdrop of improved economic fundamentals, including relaxation of aggressive monetary policies, followed by some of the central banks supported greater consumer participation and demand. Sales volumes.
Sales volumes for the nine-month period inclined slightly by 1% versus the same period of last year, primarily driven by demand stabilization, resulting from gradual easing of macroeconomic challenges and supply bottlenecks. Despite ongoing regional uncertainties and variations in shipping timing across some segments, overall sales volumes have improved. This positive trend was further supported by a year-on-year marginal increase in production levels. Operating expenditures. Operating costs for the period of nine months 2024 decreased compared to 2023. The decrease in operating expense were primarily linked to lower variable cost, driven by price-linked feedstocks and raw material cost and favorable inventory movements, partially offset by higher general cost inflation. Comparing IQ's net earnings for the third quarter versus second quarter as detailed on same slide. The current quarter's net earnings for 3Q saw IQ's net earnings inclined by 13% versus the second quarter to reach QAR 1.2 billion.
This improvement was primarily due to higher gross margins in the polyethylene and fertilizer segment, owing to lower operating cost, primarily the cost of goods sold. However, this improvement was partially offset by lowered non-operating income in the steel segment as the steel segment recorded one-off other income in the second quarter of 2024, on account of reversal of previously provided bank guarantee to one of the segment's associates. From a segmental perspective, petrochemical segment's performance improved notably versus the last quarter on the back of improved volumes as the segment's polyethylene facilities were on maintenance during the second quarter of 2024. Petrochemical prices broadly remain unchanged versus the previous quarter. Profitability in the fertilizer segment improved notably on the backdrop of improved revenue due to higher prices and reduction in operating costs, mainly the direct cost. Product prices improved marginally on the backdrop of steady demand and supply tightness.
Steel segment financial performance for the current quarter was impacted due to the absence of one-off in the segment, as the segment recorded a one-off income during the second quarter, related to the reversal of bank guarantee, as explained above. Financial position. As detailed on Slide 15, the group's financial position remained robust with proportionately accounted cash and bank balance of QAR 11.3 billion. As of 30th September 2024, after accounting for a dividend payout relating to the financial year 2023 amounting to QAR 4.7 billion and an interim dividend for 2024 amounting to QAR 1.9 billion. Currently, the group does not have any long-term debt obligations. The group reported a total assets and total group equity of QAR 40.9 billion and QAR 36.9 billion respectively, as of 30th September 2024.
The group generated positive operating cash flows of QAR 3 billion, with a free cash flow of QAR 1.3 billion during the first nine months of 2024. We can move into the segmental review, and I will hand over to Rashid.
Thank you, Saffan. We can dive into the segmental performance review, starting with Petrochemical. As detailed on Slide 24, the Petrochemical segment reported a net profit of QAR 4.2 billion for the nine-month period of 2024. This result is marginally up by 2% versus the same period of last year. This increase was primarily attributed to higher segmental revenue, while the segment successfully maintained its margins. This was despite the challenging macroeconomic condition. The segment witnessed some signs of recovery during the year. This recovery was reflected in the marginally improved sales volume by 6%, although the average selling price was slightly lower by 3%, compared to the same period of last year. Production levels remained relatively stable throughout this period, albeit some planned and unplanned shutdowns during the year.
The segment's ability through effective plant utilization, cost optimization, and asset excellence to navigate these market conditions effectively, capitalizing on slight improvement in the microeconomic factors and maintaining operational efficiencies, contributed to the overall increase in the profits. On the quarter-on-quarter basis, the segment net earnings improved by 21% due to higher sales volume by 13% amid an increase in production. Selling prices marginally declined by 1%. Operational performance within the segment improved, as the previous quarter had witnessed some outages within the polyethylene segment. Overall, higher sales volume, coupled with relatively stable prices quarter-over-quarter, contributed to higher earnings for the current quarter. We can move to the fertilizer segment, as detailed on Slide 30.
The fertilizer segment reported a net profit of approximately QAR 1.6 billion for the nine-month period of 2024, with a notable improvement of 14% versus the nine month of 2023. This commendable increase in the net profit was driven by reduced operating costs. The improvement in operating costs was mainly associated with lower variable costs, owing to decreased feedstock prices and favorable inventory changes. Additionally, the sales volume marginally improved by 3% due to increased production volumes compared to the same period of last year. Despite the improved profitability, the segment revenue decreased in the nine months period for this year compared to the same period of last year. The decline in revenue was due to lower selling price by 4%, which was partially offset by improved sales volume.
Selling prices declined marginally versus the same period last year, as the nitrogen fertilizer prices have stabilized to their long-term averages since peaking 2022. On a quarter-on-quarter basis, segmental revenue improved versus the previous quarter, primarily due to marginally higher selling prices by 14%. This improvement was partially offset by reduction in sales volume by 5%. The increase in selling prices was mainly attributed to stabilization of the nitrogen prices toward their long-term averages. The segment net profit for 3Q increased, driven by a higher gross margin resulting from improved revenue and reduced operating costs associated with lower variable costs. Now we can move to the last segment, which is the Steel segment. As shown on Slide 36, the Steel segment reported a net profit of QAR 435 million, representing a 7% increase compared to last year.
The improved segmental earning was primarily driven by one-off other income of QAR 143 million, recognized in Q2 of this year. This income resulted from the reversal of the bank guarantee previously provided to one of the segment associates. Segmental revenue declined due to combined effect of lower prices by 3% and volume by 7%. Average steel prices declined marginally on account of higher supply and softening of both domestic and international demand. Similarly, sales volume were also down on account of challenging demand conditions. Construction demand continued to remain challenging due to prevailing macroeconomic environment, with most central banks continued to persistently impose hawkish monetary policies. Although conditions started to improve since 2H 2024, as a result of the gradual global recovery. Particularly China, a larger contributor to the construction economy, has taken a series of measures to reignite its domestic construction sector.
The recent monetary policy changes by some central banks have started to act as a demand catalyst and support a growth in revenue within the segment. On a quarter-on-quarter basis, segmental profit declined versus the previous quarter, mainly on account of recognition of one-off non-recurring other income in 2Q related to the bank guarantee that was reversed pertaining to one of the segment associates. Segment revenue increased by 14%, primarily due to higher sales volume during the current quarter. This improvement was largely attributed to enhanced production, which benefited from increased facility availability following the completion of planned maintenance during the previous quarter. With the conclusion of the segmental analysis, we have reached the end of our presentation. I believe we can open the floor for the Q&A session.
We are now opening the floor for question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. Thank you. Your first question comes from Giuseppe Villari from Morgan Stanley. Your line is now open.
Hi. Good afternoon, thank you for taking my question. I have two, if I may. Firstly, about fertilizers. How do you see prices evolving in the fourth quarter? Maybe a bit of outlook for 2025 as well. Then about the projects that QatarEnergy recently announced around urea. Is there a chance that you may take over those projects down the line? Thank you.
Thank you for your questions. Regarding the forecast, the company policy is not to provide the forecast or forward-looking statement. However, you can form your view based on looking at various items or various elements within the market. First of it will be, I would say, the monsoon season or the harvesting season for farmers across the globe. Also, you'll be looking at the demand coming from India in particular. I think India, they have announced a further tender in October. There are some speculations on the market whether India will further offer additional tender notice to the market. Also, we have to look at the Northern Hemisphere as well regarding the demand and how it will evolve in the future as well, with the harvesting season across North America as well.
In term of basically the project that was announced by QatarEnergy, I think this question was asked in the previous quarter as well. For IQ, we haven't received anything with regard to this project. Of course, if something of that nature that will involve IQ, we'll announce it to the market. As of now, it's as per QatarEnergy announcement, and IQ has not received any offer to participate in this project as of now. We cannot forecast what will happen in the future, whether this will be offered to us or whether QatarEnergy will take it. It will be a QatarEnergy decision.
Okay, perfect. Thank you very much.
Your next question comes from Abhinav Sinha from Lesha Bank. Your line is now open.
Yeah. Hi. One question from my side on the gross margin. If we look at the year-over-year gross margin, it has declined in the third quarter. If I'm looking only at the third quarter number. Can you just run through what happened? Because last time I remember you had said it was because of the inventory costing. What was the drivers in this quarter? Thank you.
I think the EBITDA margin has improved versus the previous quarter. Of course, this year we are faced with lower price environment. That's one impact that impacts our situation compared to last year. However, if you look at the segmental performance, you will find out that fertilizer has improved on the segmental margin as well as the petrochemical. I'll hand over to Saffan. Maybe he has a few points to add as well.
if you look at, you're talking about the 41% running to 39%. Is that your question?
I'm just talking at the group gross margin. I'm talking about the 23%. Yeah.
Gross margin or EBITDA margin you are talking about?
Gross margin.
You're looking at from the financial statement or the presentation?
Yeah. Financial statements. Yeah.
From the financial statement. There are a couple of reasons for that. Now, we are consolidating QAFAC also. QAFAC is now fully consolidated. QAFAC's last year performance is much higher than this year. That has an impact on your financial. Last year, we had.
Okay
The only QAFCO and Qatar Steel, because now QAFAC, we are consolidating on IFRS 3. That has an impact. QAFAC prices are down compared to last year. That has a major impact on methanol prices were, I think, down by at least a minimum 20%, especially MTBE prices.
Okay.
Of course, fertilizer prices are also down from year-on-year.
Understood. Just on QAFAC, you would continue to consolidate until and unless there is a re-agreement on the JDA or something like that, right?
Basically, as we mentioned at the half year and the last year in the financial statement, now the JDA is expired. Now we are having a discussion with the related parties once the new agreement is finalized. Based on that conclusion, the accounting will change. Right now, based on the current legal agreements, it is IFRS 3, so we consolidate as a subsidiary.
Okay, fine. Thanks.
Sorry, I answered the question on the prospect of EBITDA margin from proportionate perspective. Saffan's answer was accurate.
From financial statement.
Yeah.
Okay. Sure. Thanks.
Your next question comes from Anoop Fernandes from SICO. Your line is now open.
Yeah. Hi, good afternoon, gentlemen. This is Anoop from SICO. Just one question on QAFCO 7. What is the status of that project? How much has been spent to date? How much is left to be spent? In terms of % completion, where are we right now?
We cannot give the actual spend. We are pretty much with the budget, and it will be on stream as per the original announcement, which is pretty much the second quarter of 2026. We are built as planned. There won't be any major shocks or anything. It will be as planned as on budget.
Okay, thank you.
Your next question comes from Faisal Al Azmeh from Goldman Sachs. Your line is now open.
Hi. First, congratulations on the numbers. Another question maybe just on the growth outlook. Any potential for the JV with TotalEnergies on the QAFCO side? On the QAFCO side, is there any potential to add more or debottleneck or expand that part of the business? Is it mainly fertilizers is where the opportunity is at this stage? That's my first question. My second question, obviously, we've seen the semi-annual dividend policy that got introduced. Is there a certain payout structure that we should also think about, generally, that you're likely to abide by, or it's always going to be left up to the board at the end of the year? Thank you.
I'll answer the second question first. The dividends are always a board decision. Several factors that would drive the board decision, including the cash flows, the net income, historical payouts, how the stock exchange would do at that particular period, and all of those would influence, drive the board decision. The second question you're asking whether we would acquire QAFCO or something. Is that the question, or the first question?
No, it's just whether there's any organic, greenfield potential on the petrochemical side at this stage. I understand also, given that you mentioned the acquisition of the minority in QAFCO as well as that. When would that be due in terms of the renewal? Is it in 2028?
JDA expires half of 2029. That's the potential inorganic growth. Right now, the organic growth is a function of feedstock availability from QatarEnergy. Right now, there has been no official announcement of any feedstock availability to downstream or IQ in particular. All growth basically can come from debottlenecking, efficiency improvements, and on those sides. Other than that, we have not been advised of any opportunities. Rashid spoke about the urea project, which is predominantly a QatarEnergy project. The other, which was previously announced, a couple of petrochemical projects, which are also QatarEnergy. Right now, there are no, how do I say it, capacity additive projects other than Ammonia-7 for us and the PVC project, which is relatively small.
Thank you.
Next question comes from [inaudible] . Your line is now open.
Yeah. Thank you, gentlemen. Thank you, Rashid and Saffan. Well, actually, my question is pertaining again back to urea. We understand that your prices have gone up in the third quarter. We were just looking at in the past history, till May, the prices had been on a slide down, and from June onwards, it has started to rise. We've taken, suppose we remember two months lag, it looks like the prices should have not increased the way it has increased during third quarter against second quarter. I wanted to understand what has happened there. In case, suppose you look at the international pricing trends. My second question is pertaining to your feed stock. We can understand, in terms of feed stock has come down prices and the EPM has increased because of that. Wanted to relate that again with the pricing.
Product prices have been on an average good. Your feed stocks to certain extent could have also a little bit have gone up. What has been the trend? If possible, you can just explain that. Thank you.
As we say, there was a demand pull during third quarter. The demand pull is also pretty much, how do we say? Pretty much seasonal, pretty much temporary. Also as of course, you know that our feedstock pricing is also pretty much functional to the urea prices. Again, based on year-to-date urea prices. With urea price increasing, obviously the feedstock price will get adjusted, but it will get reset at the beginning of the year, in the next year. Again, the detailed calculations are done by the group company. On a net-net basis, price increase would benefit QAFCO, IQ. Price increase would have positive impact. Again, there are other factors also and how your opening inventory, at what price your opening inventory you carry on, and what price your closing inventories are sitting in your balance sheet.
These are all other factors that would drive your overall profitability. Now, 2023, you carried on inventories at cheaper cost compared to 2022, so that supported your 2024 PNL. That's what you see positive inventory movement driving your profitability as well. There are so many factors that drives this. Not only your prices, but other factors that drive your cost of goods sold, the components of cost of goods sold as well.
Just apart from that, anything we can talk about on the maintenance part in the fourth quarter, current quarter, petrochemical facilities, fertilizer, anything coming up?
Other than unplanned shutdowns, which we cannot predict, there will be a planned shutdown in one of the fertilizer facilities.
Yeah. How many days?
I cannot exactly tell you. Usually, fertilizer facilities will be on maintenance for between 24 to 36 days. I believe this one is expected for roughly one month.
Okay. Lastly, on your billets, sir, the company has sold billets for a long time. This you did mention, depending upon the seasonality and all that. We do expect that could continue, wherever you find possibility of shift and making revenues, you will go through that process?
Yeah. As and when you find opportunities, we'll continue to sell because we have capacity to produce and it is profitable, it gives positive EBITDA. If you have that, you will produce and sell. The steel strategy is to maximize utilization of the plant and sell it, because you are technically a low-cost producer, right?
Right. Okay. Thank you, sir.
Question comes from Abhinav Sinha, from Lesha Bank. Your line is now open.
Hi. Actually, I have a follow-up question on the capital allocation. Given that you sit on a sizable cash, just wanted to check, is there a plan to do buybacks? Thank you.
There have been, after QNB had this buyback, still we have not make any, how do I say? Discussion on that. Maybe the management may think on that, still, we have not had any significant discussion on that part. Right?
Okay. Thank you.
Your next question comes from Yousef Husseini from EFG Hermes. Your line is now open.
Thank you so much, gentlemen, for the presentation and taking our questions. Just one question from my side on the urea volumes, this quarter and last quarter. I noticed you guys are close to about 1.5 million tons a quarter in 3Q and 2Q this year versus, if I take the average last two years, it's about 1.38 million, 1.39 million. Just wondering, is this sustainable, sort of the 1.5? Or was this just sort of favorable inventory, you had some extra stock the last couple of quarters? Just trying to figure out how to think about volumes going forward, just given how strong the performance has been the last two quarters. Thank you.
Your production capacity is around 5.8 million to 5.9 million. You sell everything. Sometimes one quarter, the last minute volumes get shipped in the next quarter. There is always a timing issue happens for around 100,000 to 150,000 metric tons. Sometimes the weather plays a role at the receiving end or at the dispatching end. Due to that you have always this. If you take an average quarterly volumes, you take 5.8 million to 5.9 million. Roughly you talk about 1.45 million, 1.5 million metric tons. That is your predominantly average sales volume.
Okay. Thank you so much. Appreciate it.
Your next question comes from [inaudible] Y our line is now open.
Hi. Thanks for the call. Sorry, just wanted to go back to what you mentioned on the maintenance days. I didn't quite catch what you mentioned on the 30 days. Is that for next year, or was it the fourth quarter?
This year, fourth quarter.
Okay. This is for the fertilizer plant, right?
Fertilizer plant, yes.
Okay. Thank you.
We don't have any raised hands as of the moment. I'd now like to hand back over to Bobby Sarkar for further remarks.
Okay. Thank you, operator. If we don't have any further questions for today, we can end the call. I want to thank Saffan and Rashid for taking the time to go over the presentation and answer our questions. We will pick this up next quarter. Thanks, everyone.
Thank you.
Thanks.
Thank you for attending today's call. You may now disconnect. Have a wonderful day.