Thank you for standing by, and welcome to the Industries Qatar Q3 earnings call. Please note today's call is being recorded. I would now like to hand over to Bobby Sarkar from QNB Financial Services to begin the call. Bobby, over to you.
Okay. Thank you. 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 2023 financial results conference call. On this call from QatarEnergy's Privatized Companies Affairs, we have Abdulla Yaqoob Al-Hay , who is the Acting Manager. We have Rashid Al-Mohannadi, who is the Head of IR and Communications , and we have Saffan Mohamed , who is the Senior Financial Management Analyst. We will conduct this conference as usual with the management first, going over the company's results, followed by a Q&A. I would now like to turn the call over to Rashid. Rashid, please go ahead.
Thank you, Bobby. Good afternoon and thank you all for joining us. Before we go into the IQ's business and performance update, I would like to mention that this call is purely for IQ investors, and no media representative should be attending this call. Moreover, please note that this call is subject to the disclaimer statement as detailed on Slide 2 of the investor relations presentation. Now we can move on to the call. On Tuesday, the 24th of October, IQ published its financial results for the nine-month period ended 30th of September 2023. Today in this call, we will go through these results and provide you an update on key financial and operational highlights. Today on this call, along with me, I have Mr. Mohamed, Saffan, Assistant Manager for Financial Operation. We have structured our call as follows.
At first, I will provide you with a quick insight on IQ's ownership structure, competitive advantages, and overall governance by covering Slide 4 till Slide 10 and Slide 51 and Slide 52. Secondly, Saffan will provide you with a brief on IQ key performance and operational performance matrices. Later, I will provide you with an update on the segmental performance. Finally, we can open the floor for the Q&A. To start with, as detailed on Slide 5 , IQ's ownership structure comprises of QatarEnergy with 51% stake, and the rest is in the free float, held by various domestic and international corporate funded and individuals. IQ is a credit-rated entity by S&P Global Ratings with AA- with a stable outlook and Moody's Investors Service with A1 credit rating with a positive outlook. QatarEnergy, being the main shareholder of IQ, provides most of the head office function through a service level agreement.
IQ group companies operation are independently managed by its respective board of directors along with senior management team. As detailed on Slide 10 from competitive positioning perspective, IQ ranks among the top-tier companies within the regional downstream space across most of the matrices. In term of the IQ's governance structure, you may refer to Slide 51 and Slide 52 of the IR deck, and for further details, you can go and check the corporate governance report within our website. I will now hand over to Mohamed, Saffan to cover IQ key operational and financial performance matrices.
Thank you, Rashid. Good afternoon and thank you all for joining us. Starting with macroeconomic environment and detailed on Slide 12 of the deck, the nine months of 2023 witnessed a persistently challenging macroeconomic environment characterized by ongoing geopolitical uncertainty and growing concern over recessions due to hawkish monetary policies. These factors contributed to subdued demand across most commodity sectors in which the group operates, reflecting the cautious sentiment in a global economy in the gradual recovery process. The supply is also gradually returning to its pre-2022 level, with most manufacturers having commenced operations after supply chain and logistic bottlenecks have relatively eased. Nevertheless, there is some evidence of gradual sequential improvement in the macroeconomic outlook, which generally positively impacted the group's product portfolio. On an overall basis, lingering uncertainty in the global macroeconomic outlook continues to pressure our group's product portfolio compared to the previous years.
Concerning the overall performance, as detailed on Slide 15, the group's operations remained as strong as production volumes for the current year improved by 2% to reach 12.7 million metric tons versus nine months of 2022. Higher operating rates and better plant availability across the group largely drove this improvement in production. Utilization rates for nine months reached 100%, while the average reliability factor stood at 98%. This reflects the group's continued commitment to operational excellence while ensuring plant reliability and unwavering importance to HSE. As announced, the group reported a consolidated net profit of QAR 3.3 billion for the nine months period ended 30 September 2023, with a decline of 53% versus nine months 2022.
Earnings per share for nine months 2023 was QAR 0.54 versus QAR 1.16 for the same period of last year. Group revenue, on the other hand, was declined by 36% to reach QAR 13 billion compared to QAR 20.1 billion reported for the first nine months of 2022. Referring to Slide 16, compared to nine months of 2022, the group revenue for the current period decreased 36%, primarily due to a notable decline in blended selling price against the backdrop of easing of supply chain bottlenecks prevalent during 2022, and relatively tighter monetary policies to keep inflation under check, affecting consumer demand. Product prices on average declined by 36% versus last year, where lower price trajectories were noted across all operating segments. On the other hand, sales volume declined slightly versus the same quarter on last year on improved supplies and relatively stable production.
As measured by EBITDA, profitability declined by 45% versus last year, predominantly linked to lower product prices, partially offset by group's lowered operating cost. Net earnings for Q3 also declined by versus Q3 for the same reasons of EBITDA decline. The group's financial position remains robust, with cash and bank balance standing at QAR 15.8 billion as of 30th September 2023, after accounting for dividend payout relating to the year 2022, amounting to QAR 6.7 billion. Currently, the group has no long-term financial debt obligations. The group reported assets and equity QAR 42.2 billion and QAR 38.6 billion respectively as of 30th September 2023. The group generated positive operating cash flow of QAR 4 billion, with free cash flows of QAR 2.3 billion during the first nine months of 2023. I'll now hand over to Rashid to take you through the segmental performance highlights. Rashid?
Thank you, Mohamed, Saffan . I will start with the petrochemical segment. The segment reported a net profit of QAR 1.1 billion for the nine-month period of 2023, down by 45% versus the same period of last year. The decrease was essentially linked to a decline of 27% reported in the segmental revenue, which was particularly driven by lower blended selling price and sales volume realized during the current period. Blended product prices for petrochemical segment declined by 24% against the same period of the last year as a result of the overall decline in the global petrochemical prices on the back of easing of supply chain pressures. Those were prevalent during 2022, leading to additional supply in the market and a cautious buying approach by most of the consumers to combat inflation. Sales volume declined marginally by 4% compared to last year.
On the other hand, production volume slightly improved by 1% against improved facility availability. Sequentially, the segmental net earnings declined by 27% due to lower selling prices and reduced sales volume by 7% and 8% and 6% respectively, impacting the segment quarter-on-quarter profitability. Regarding the fertilizer segment, the fertilizer segment reported a net profit of QAR 1.4 billion for the nine-month period ended in 2023, with a significant decline of 67% versus last year. This decline was primarily driven by lower segmental revenue. Segment revenue decreased by 49%, along with lowered selling price, which declined by 49%, amid micro challenges affecting the nitrogen-based fertilizer market globally, driven by easing of supply challenges and softening of demand. On the other hand, sales volume remained relatively flat compared to last year amid stable production.
Sequentially, segmental revenue increased by 29% compared to the previous quarter, as sales volume and selling price has improved. Selling prices increased by 21% on quarter-on-quarter basis amid noted improvement in the global fertilizer markets. Additionally, the sales volume increased by 6% as segment reported lower production during the previous quarter due to facility maintenance. Segment net profit for the third quarter of 2023 significantly increased by 197%, mainly due to improved average selling price and sales volume and improved operating margin. Concerning the steel segment, the steel segment reported a net profit of QAR 409 million, down by 47% versus last year. Lower segmental earning were mainly driven by lower revenues, which decreased by 7% versus last year. The earnings were also impacted by higher volume-related operating expenses and marginally reduced other incomes.
The combined effect of lower prices and increased operating expenses resulted in a notable decrease in the segmental profitability. The decline in revenue was primarily driven by lower selling price, which declined by 15% on year-on-year basis. This was partially offset by higher sales volume, which increased by 9%, mainly linked to higher production volumes. Sequentially, and comparing to the previous quarter, the segmental profit witnessed a 10% decline during this quarter. This reduction resulted from lower selling price and decreased sales volume, down by 5% and 16% respectively, due to subdued demand and decrease in operating expenses, which partially offset the impact. That takes us to the end of our presentation. Thank you for your attention. I think we can now open the floor for the Q&A session.
At this time, I'd like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile any questions. Again, if you'd like to ask a question, please press star one on your telephone keypad now. Our first question comes from the line of Ricardo Rezende from Morgan Stanley. Please go ahead.
Good afternoon. Thanks for taking my question. A couple questions, if I may. The first one, if we look at the petrochemical segment, we've seen production volumes increasing about 4% compared to the previous quarter. On the sales side, the volumes have pretty much declined for all of the products. Just wanted to get a little bit more color on that. Was that mainly driven because of weak demand, or are you building up a bit of inventory for potential turnarounds? The second question, it's on the fertilizers. On the previous call, you had mentioned that there might be another turnaround on the plant on the fourth quarter. Is that still going ahead? If you could provide us any sort of magnitude. Would that be a similar impact compared to turnaround in the second quarter? Thank you.
Yeah. Regarding petrochemical, it's a combination of both. We are about to have, or we are currently having an ongoing shutdown in the fuel additive segment. We are building a bit of inventory to smoothen out sales. You have a bit of a reduction in the fuel additive segment. On top of that, there are a bit of demand issues. polyethylene's, there are a bit of demand issues as well. It's a combination of both. With respect to fertilizer, yes, Q4 there is a plant shutdown. Usually as we always say, the plant shutdowns are usually coincided with the upstream shutdowns from where the gas is coming in. It is expected that Q4 there will be a shutdown as per the information available at this point in time. If there is a change, they will advise us.
As for the time being, there will be a planned shutdown.
Perfect. Thank you.
Our next question comes from the line of Faisal AlAzmeh from Goldman Sachs. Please go ahead.
Yes, hi, and congratulations on the strong set of numbers, and thank you for the opportunity to ask questions. two questions on my end. The first in terms of the fuel additive JV. Just how do we think about the renewal of the contract there and the expiry of the JV? Is this something, and if you can provide us with any update on that? Maybe if you can also shed some color on QAFCO as well. At what point does the JV expire? If you can give us some color, there. Then the third question is just relating to any potential new feedstock allocation from the government. Do you feel or get a sense that that could be a possibility given the expansion that is happening at the upstream level? Thank you.
Hey, Faisal. I think with regard to the fuel additive joint ventures there is nothing as of now that was offered to IQ at that point of time for us to disclose. There is still ongoing commercial discussion at the shareholder level. We'll come to know whether this will be offered to IQ at a later stage, maybe closer to the expiry or on the expiry. That's for the fuel additives. On the QAFCO and the expiry of the joint venture, we already have announced in 2020 that we already bought the 25%. We already announced to the market that by 2035, that 25% will be up for renewal, or it will go back to QatarEnergy. In term of the 75-
It's QAFCO.
I was referring to QAFCO.
QAFCO.
QAFCO is in 2029.
Yes. The discussion on QAFCO, there is nothing on the table as of now, QAFCO, and nothing has reached us for our valuation. However, we have to wait and see closer to the expiry of the joint venture. I think you have a third question, Faisal.
It's about feedstock allocation.
Yeah. You can answer that, okay?
Feedstock allocation as of now, the feedstock right now, there is nothing specifically allocated for downstream entities within the privatized companies. The major project within QatarEnergy, the two major petchem projects have currently been under consideration of about to be FID. One is RLPP in Qatar, the one is an equivalent project in the U.S. Other than that, two mega projects. Other than that, nothing between the downstream or downstream between the privatized companies or the listed entities. If there is anything that will be advised, nothing for us. Within us, within IQ, we have one value additive project, which is PVC project, and the other one is QAFCO 7. For which these are all conversions from the existing intermediated products. ammonia is getting converted.
Oh, sorry, additional ammonia is produced through efficiency improvement, and on the other hand, VCM is converted to PVC within QVC.
Thank you.
Our next question comes from the line of Seki Mutukwa from Ashmore. Please go ahead.
Hi, all. Hope you can hear me clearly. Just a question going back to the dividend, please. Obviously, you pay only once a year. Given the sort of communication, you're aware of from listed petrochemical companies and the like in region, which to be honest has been improving in terms of visibility on that dividend, I'm wondering your thoughts on, if we look at where consensus is at this point in time, at least from what I can see, an expectation of 25% to 30% lower dividend for 2023 compared to 2022, so about QAR 0.8.
I'm just wondering if there's any sort of commentary around that you can give in terms of where the market is, whether it still seems optimistic given where earnings are and what you've said a number of times would be a sort of consistent, in inverted commas, payout ratio in the sort of 70s. Is there anything more you can say about the sort of dividend comfort one can take, especially given the net cash position you have even to cover the CapEx you've talked about the next couple of years? Thank you.
It's a very difficult question to answer, although we have all the comfort to pay a very lucrative dividend, but the dividend policies are pretty much decided by the board at that point in time, taking various factors into consideration, including market expectation and the results of current year, and the results over the next five years plus the investment CapEx and any growth projects. Last year was an exceptional year. We paid fairly the highest dividend of all times, I believe. Again, given that we are operating in a cyclical industry, despite we are having large cash balance sitting on the balance sheet, no debt and et cetera. Like you, as investors making guesstimates, we sitting here also can make best guesstimates from the final decision is sitting with the board.
Unfortunately, we all here are not authorized or volunteer to make a number. We can just make it, but we are not supposed to discuss those numbers as part of the IR call. Obviously, it will be a number, a number which you discuss, something on that range.
Okay.
Our next question comes from the line of Rene Selouan from Jadwa Investment. Please go ahead.
Hi. Thank you for the presentation and opportunity to ask questions. My question is in the fertilizer segment. Revenues increased significantly, and sales volumes also increased, and the price of the products increased. I was just wondering if we take the difference between revenue and EBITDA, it was lower in the third quarter versus second quarter of 2023. I'm wondering how is that possible? Could you please explain that?
Okay. I believe it's the other way. If you look at EBITDA margin is 48% compared to 31%, that tells the story the other way.
Yeah, the cost. The difference between revenue and EBITDA was lower.
Basically, I think what had happened, if you know how the feedstock mechanism works. Your feedstock cost is based on a year-to-date urea price. If you recall, at the beginning of the year, you had the inventories billed at inventories costing, which was costing at high price urea, because at the end of last year, you had inventories. Those were valued at very high urea prices, right? Those have been sold during Q1 and Q2, and those have been cleared out of your balance sheet. Correct? During current year, Q1 and Q2, your urea prices were lower. Your inventories, those were sitting in QAFCO's inventory, were valued at low price. You were having low price inventory on one side; your cost side of your books were lower. On the other hand, Q3 urea price start to go up.
It reached somewhere around QAR 375, QAR 400. Revenue line, top line was on the high side, whereas on your cost side, were going down because you were having inventories. Those were valued at Q1, Q2 inventory. Q1, Q2, you remember urea prices were around QAR 300. Low price inventory. If you look at urea prices, it was around QAR 352, QAR 286, on average around QAR 300. Whereas Q3 urea price was QAR 354. If you look at the slide here. You realize revenue at QAR 354 in Q3, whereas your inventory valuation is around QAR 310, QAR 320. Your delta between revenue and cost is higher. That's why you have a better EBITDA margin. If you look at your Q4, go ahead.
Shouldn't the cost be going up, given that year-to-date price is going up in the third quarter and your
No. Year-to-date inventory, what was carried in Q4 has been realized in Q1 and Q2. In Q4, it all depends on how Q4 prices would be. If Q4 prices continue to increase, you will be selling at higher prices, and your inventories also can go. Still you will improve your margin. It's all a function of your price versus cost. Because you value inventories at weighted average.
Okay.
Our next question comes from the line of Prateek Bhatnagar from HSBC. Please go ahead.
Hi. Thanks for taking my question. I have three basically a follow-up from the question asked before. In Q4, you say there is a shutdown in the fertilizer. Could you guide us how big the shutdown will be? Which plants are getting shut? For how long? That's number one. The second question is on the QAFCO 7 plant. What's the status of that? Is the plant still that you'll bring online that plant without shutting QAFCO 1 or QAFCO 2, or you'll be just replacing those plants with some additional ammonia capacity? That's the second question. Number three is on Al Qataria acquisition. How is the integration taking place? How are you thinking about synergies? What benefits are you starting to see from that? Thank you.
To answer your question number one, the shutdown. These are typical shutdowns. Usually, fertilizer plants typically get shut down for 30 to 35 days. Could be plus or minus a few days, depending on when it is getting shut down and reopens. That answers your first question. It's a combination of trains, right? You have an ammonia train and a urea train, usually. The second question, QAFCO 7 is as scheduled. The EPC contract goes on with the contractor. As you know, it's a new ammonia train. Its contract value is around $1.1 billion, expected to produce 1.2 million metric ton of ammonia. Depending on what we want to sell, it could be we can sell it as blue ammonia or gray ammonia. We have QatarEnergy Renewable Solutions is constructing a CCS, carbon capture and storage facility to capture the CO2.
It's more kind of an environmental sustainability project, more than a conventional ammonia train. Project is on schedule, on time, and we are targeting a Q1 2026 commercial launch, I believe. With respect to You had another question on QAFCO 1 and QAFCO 2, right? That is under discussion. There are various options being considered. We will come out with the strategy going forward. Coming to Al Qataria. Al Qataria, it is basically there are horizontal and vertical integration and synergies coming from Al Qataria. You're buying pretty much a competitor, so that brings you horizontal integration. Al Qataria is a rolling mill. If you look at the production profile of Qatar Steel, they have some excess billets. Al Qataria uses billets, and they import it from various parts of the GCC.
If they stop buying from the GCC and start to buy from Qatar Steel, that gives you some backward integration. You have supplier integration. Otherwise, Al Qataria can control its customer, otherwise it gives you forward integration. That gives you some integration over vertical supply chain. Additionally, Qatar doesn't have wire rods, one of the intentions is to build a wire rod plant or wire rod facility in Doha via Al Qataria. That brings you product diversification, you can have other administrative synergies. The other point is Al Qataria is a new mill built in, I believe, late 2010s. You have new technology, that could bring better quality steel, et cetera.
You have technical synergy, you have administrative synergy, you have backward-forward horizontal integration, and marketing synergies because you can sell additionally half a million steel within the same marketing and distribution team. These are all the things we have looked at. It might take time, but again, integration doesn't happen overnight, over one or two months. Over a period of time, you would realize these values in the books of Qatar Steel and IQ.
Our next question comes from the line of Nitin Garg from SICO. Please go ahead.
Yeah. Hi, thank you for the conference call. I have just a follow-up from the previous question. First is on the shutdown. You mentioned 30-35 days. Which month it is? Is it like October, November, or December? And how big it is? Your ammonia capacity is around 4 million tons; urea is around 6 million tons. Tentatively, how much capacity will go for a shutdown? That's my first question. Second, on the expansion, the blue ammonia project. What we know about this project from previous conversation is the Train 1 and Train 2 will replace QAFCO 7. There will be some additional, around half a million tons, which will be added additional. Train 1 and Train 2 will be replaced by QAFCO 7, plus additional half a million tons.
Just wanted to confirm if you have additional gas allocation for the additional, or it will be used from the existing allocation via rationing or efficiency improvement. Where are we in terms of this project? As you mentioned, you are on track, but the contract was awarded, so how much construction is done, or the construction has not started?
Answer to your question, the question number 1, the shutdown is with A5. A5 is a relatively larger size. A5, U5, it is relatively sizable train. From our annual report, probably you can find out what is the size of those train, and if it is 30-35 days. Also, don't forget, before a shutdown happens, sometimes we operate the trains slightly above capacity to capture the volumes that we usually lose during the shutdown period. In reality, we don't lose as we lose per the design capacity. That is the answer to that question. The question regarding what is the progress on this QAFCO 7. That question is very difficult to answer, but as per the schedule what we have, the project will be completed on time.
If you want to give me a mathematical answer, I would say, 48 months divided over X multiplied by that. I would have to give you that kind of a percentage answer. I'm part of this fertilizer group asset team, but I know is there is no delay, no warning sign that is appearing on the project scheduling. There may be one or two days, there is something at detailed project network. At our end, what we hear, project is as scheduled. Coming into your third question with respect to Ammonia-1 and Ammonia-2. There are various options QatarEnergy QAFCO could consider. Right now, nothing has been officially looked at. We are looking at various option. One option is to relook at. There is always this option called revamping. You do some work on the train itself.
Currently, the train consumes, say, I'm just making up a number, 50 MMBtu of natural gas, CH4, to produce a ton of ammonia. You do some improvement to the train and reduce it to, we say, 35 MMBtu. That's a good option, and operate the train, and sell this QAFCO 7 produces 1.2 million metric tons of ammonia. Completely sell that as blue ammonia and use QAFCO 1 and 2 to feed urea 1 and 2. That's a better option because blue ammonia is something that is the next generation of the sustainable products we are talking about over the next few years. We are looking at various options. If the revamping is not going to reduce the gas consumption significantly, maybe QatarEnergy would look at various options. At this point in time, we don't have the exact answer to tell you. Options are being considered.
It's a CapEx versus return.
Okay. There will be some additional ammonia, right? I mean, the Train 1 and Train 2 is.
Yeah. Right now, of the 1.2, depending on, say, if one and two continue to operate, I can sell 1.2 million as sellable ammonia. If one and two is going to be discontinued, I can sell only around 500,000 as sellable ammonia because QAFCO urea 1 and 2 would require ammonia to continue, right? That's the mathematics.
Okay. Thank you.
Our next question comes from the line of Ricardo Rezende from Morgan Stanley. Please go ahead.
Hi. Just a follow-up question on the new ammonia project. Have you already signed a carbon capture contract with QatarEnergy? The follow-up on the last question, depending on the outcome of the number 1 and 2 trains and the amount of incremental ammonia that you could sell in the market, would it be possible to have the flexibility of selling part of the ammonia from QAFCO 7 as blue and the rest as gray? Thank you.
Thank you for your question. This is Rashid. I think what announcement we made is regarding to Ammonia-7 project, that it will be a blue ammonia project. As we mentioned during our few earning calls, 1 and 2, the decision on 1 and 2 will be taken separately. Whether we will revamp the facility, whether we will build a new facility, whether we'll shut down the facility, that will be taken separately. This is on the Ammonia-1 and Ammonia-2 . I think there already been a team that is looking at Ammonia-1 and Ammonia-2 , and how they can look at various options on how to optimize the output of Ammonia-1 and Ammonia-2 and get the best for the producing entity.
I think maybe perhaps we can ask this question in the following quarter once the team, I think, has at least reached a conclusion on that and basically reached an answer to that. I think it's still at the working level team, we'll get to know that in the next quarters, hopefully, what will happen for Ammonia-1 and Ammonia-2 .
There are no further questions at this time. I would now like to turn the call over to Bobby Sarkar for closing remarks.
Okay. I guess if there are no further questions, we can end the call for today. I want to thank Rashid and Saffan for taking the time to answer our questions, and we will pick this up next quarter. Thank you so much.
Thank you.
I'd like to thank our speakers for today's presentation and thank you all for joining us. This now concludes today's call. You may now disconnect.