Hello. Welcome to the Industries Qatar conference call. I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Mr. Bobby Sarkar to begin the conference. Bobby, over to you.
All right. Okay. Thank you, operator. Hello, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I want to welcome everyone to Industries Qatar's second quarter 2023 financial results conference call. On this call from Qatar Energy's Privatized Companies Affairs Group, we have Abdulla Yaqoob Al-Hay , who is the Acting Manager, Rashid Hamad Al-Mohannadi , who is the Head of IR and Communications, and Saffan Mohamed , who is the Senior Financial Management Analyst. We will conduct this conference with the management first reviewing the company's results, followed by a Q&A session. I would like to turn the call over now to Rashid. Rashid, please go ahead.
Thank you, Bobby. Good afternoon. Thank you all for joining us. Before we go into the IQ business and performance update, I would like to mention that this call is purely for IQ's investors, and no media representatives should be attending this call. Moreover, please note that this call is subject to the disclaimer statement as detailed on Slide 2 of the IR deck. Moving on with the call. On Tuesday, 8th of August, IQ published its financial results for the six-month period ending 30th June 2023. Today in this call, we will go through these results and provide you an update on key financial and operational highlights. Today in this call, along with me, I have Mr. Abdulla Yaqoob Al-Hay , Acting Manager for Privatized Company Affairs, alongside Saffan Mohamed, who is the Senior Financial Management Analyst. We have structured the call as follows.
First, I will provide you a quick insight into IQ ownership structure, competitive advantages, and overall governance structure. Secondly, Abdulla and Saffan will brief you on IQ key operational and financial performance metrics. Later, Saffan will provide you with an update on the latest segmental performance. Finally, we can open the floor for the Q&A. To start with, as detailed on Slide 5 , IQ ownership structure comprises of Qatar Energy with 51% stake. The rest is in the free float held by various domestic and international corporates and individuals. IQ is a credit-rated entity by S&P with AA- with a stable outlook and Moody's with A1 credit rating with a positive outlook. Qatar Energy being the main shareholder of IQ provides most of the head office function through a service level agreement.
IQ group companies' operations are independently managed by its respective board of directors along with senior management team. As detailed on Slide 10, from competitive position and perspectives, IQ ranks among the top-tier companies within the regional downstream space across most of the metrics. In term of the IQ governance structure, you may refer to Slide 50 and Slide 52 of the IR deck, which covers various aspects of IQ code of corporate governance in further detail. I will now hand over the call to Abdulla to cover IQ key operational and financial performance matrices.
Thank you, Rashid. [Non-English content] and thank you all for joining us. I am pleased to share several significant updates at the group level. Firstly, I would like to inform you about a development that stems from collaborations with various authorities in Qatar. As you can see in Slide 5 footnote. With essential support from our shareholder and subsequent approval by Council of Ministers on October 12, 2022, regarding amendments to our Articles of Association, Industries Qatar has diligently engaged with relevant authorities. Today, I am proud to announce that the foreign ownership limit has been successfully raised to 100%. This move reflects our commitment, and we appreciate ongoing trust of our stakeholder.
Secondly, in line with our official press release on June 21, 2023, Industries Qatar board of director has granted preliminary approval of a potential acquisition of 100% stake of Al Qataria Steel. This strategic move is anticipated to be executed through our wholly owned subsidiary, Qatar Steel. It is important to note that the successful completion of this transaction is subject upon securing the regulatory clearance and diligently addressing all potential considerations. Once this transaction is completed, we will be disclosing further details. For those who wish to dive deeper into specifics of the target company, which is Al Qataria Steel, they are welcome to visit their website at www.qsteel.qa.
Moving on with the macroeconomic environment, as detailed on Slide 12, the macroeconomic environment remained challenging during the first half of 2023, as geopolitical uncertainty persisted along with recessionary fears amongst most consumers linked to hawkish monetary policy by many policymakers, resulting in subdued demand for most commodities. Concerning performance within the petrochemical segment, a slower-than-expected recovery in the global economy, oil price volatility, and uncertainty in the global macroeconomic outlook negatively weighted on petrochemical segment performance in the first half of the year. On the other hand, buyer cautious approach, mainly linked to monetary policy driven by recessionary fears, continue to challenge an already oversupplied market. On fertilizer front, prices have been on a downward trajectory, primarily driven by a cautious approach from buyers, along with high inventory levels in key markets.
The easing of supply disruption from the challenging phase in 2022 has contributed to this trend. Moreover, this has a broader impact on declining grain, energy, and other commodity prices, along with general inflation adding to the prevailing market pressure. Moving to the steel segment, demand for the domestic steel continue to recover following a muted demand during the later part of 2022 on the backdrop of restricted construction activities. On the global front, the steel price remained weak, with Chinese slow pace post-COVID recovery phase starting to take shape on one side. Subsidizing by the sluggish phase in the construction sector, affected mainly by a high-interest rate environment. As a result, this placed a severe burden on the construction sector.
Moving to the group performance, the group reported a consolidated net profit of QAR 2.1 billion for the six months ended 30th June 2023, with a decline of 62% versus last year. Earnings per share for the first half was QAR 0.35 versus QAR 0.90 for the last year. The group revenue for the first half 2023 declined by 38% to reach to QAR 8.9 billion as compared to QAR 14.3 billion reported for the last year. The group's financial performance for the six months ended 30th June 2023 was largely attributed to decline in blended average product price, being partially offset by marginally higher sales volume and lower OpEx. A blended average product price declined by 40% versus last year, 2022, and reached to $473 per metric ton.
Decrease in product price contributed QAR 5.9 billion negatively to the group net earnings, mainly due to lower price trajectory noted across the group basket of products amid macro challenges. Fertilizer prices remained a key contributor to the overall decline and blended average product price, as fertilizer prices declined by more than 30% versus last year and contributed QAR 4.3 billion to a reduction in the group bottom line. As detailed on Slide number 15, sales volume increased marginally by 3% versus the first half of 2022, primarily driven by higher production volume. Improved sales volume contributed by QAR 400 million in the overall growth in the group net earnings for the first half 2023 compared to last year. On the other hand, operating cost for the first half 2023 decreased by 20% versus the first half of 2022.
Decrease in the operating cost was primarily linked to lower variable cost driven by end product price index, lower material cost, partially offset by increase in volume and general inflation. With that note, I will hand over to Saffan to provide you with the quarterly result analysis.
Thank you, Abdulla Yaqoob Al-Hay. Moving on to quarter-on-quarter performance, as detailed on Slide 16. During second quarter of 2023, the group's net earnings declined by 21% versus the first quarter and reached to QAR 900 million, mainly due to lower revenue, where a decline of 16% was noted on a quarter-on-quarter basis. A combination of reduction in selling prices and sales volumes mainly drove the decline in group revenue. Selling prices declined by 9% sequentially with global markets remain stressed. Lower selling prices contributed QAR 0.4 billion negatively to group earnings sequentially, as presented on Slide 17. On the other hand, sales volume declined by 8% and contributed a further QAR 0.4 billion negatively to group earnings. The lower sales volume were primarily attributed to lower production within the fertilizer segment during second quarter of 2023 due to lower operating days amid the facility maintenance.
Our robust business models and the strength of our global supply chain continue to leverage our resilience and provide flexibility to our operations, whereas our continued positioning of being a low-cost operator model ensured our competitive advantages. Moreover, as detailed on Slide 19, IQ's year-to-date EBITDA declined by 52% versus year-to-date last year, predominantly linked to lower product prices, partially offset by group's lower operating cost. Net earnings for Q3 2023 also declined versus second quarter of 2022 due to lower revenue, partially offset by lower operating costs. Financial positions remained robust, with cash and bank balances across the group standing at QAR 14.9 billion as of 30th June, after accounting for a total dividend payout of QAR 6.7 billion for the financial year 2022. Currently, the group has no long-term debt obligations.
Group's reported total assets and equity reached QAR 40 billion and QAR 37.4 billion respectively as of 30th June 2023. The group generated positive operating cash flows of QAR 2.8 billion, with a free cash flow of QAR 1.7 billion during first half of 2023. Moving on to segmental performance, as detailed on Slide 25. Moving on to petrochemical segment performance as detailed on Slide 25. The segment reported a net profit of QAR 825 million for first half of 2023, significantly down by 45% versus first half of 2022. The decrease was mainly linked to a decline of 28% reported in the segmental revenues, which was particularly affected by lower blended average selling prices realized during the first half of 2023 on the back of the weaker global demand for petrochemical products.
During the same period of the previous year, blended product prices for the petrochemical segment experienced a significant decline of 28%. This drop was attributed to overall decrease in global petrochemical prices resulting from the combined impact of falling crude prices and weaker consumer demand amid deteriorating macroeconomic fundamentals. In contrast, sales volume remained relatively stable compared to the same comparative period. Meanwhile, production volumes saw a slight improvement of 2% due to enhanced facility availability. Sequentially, compared to first quarter of 2023, the segment's net earnings inclined by 16%, predominantly linked to improved margins. Although the segment's revenue increased only by 4%, segment's operating costs remained broadly unchanged, resulting in a notable improvement in quarterly earnings. Moving into fertilizer segment.
The fertilizer segment reported a net profit of QAR 723 million for the first half of 2023, as detailed on Slide 31, with a decline of 78% versus the same period of last year. This decline was primarily driven by lower segment revenue. Segment revenue decreased by 53%, in line with reduced selling prices, which was declined by 53%, amid global macroeconomic challenges affecting nitrogen-based fertilizer markets. On the other hand, sales volume remains relatively flat compared to the same period. On a sequential basis, segmental revenue decreased by 33% compared to the previous quarter due to lower selling prices and sales volumes. Selling prices declined by 24% on a quarter-on-quarter basis amid continued weaknesses in the fertilizer markets due to muted demand. Additionally, sales volume declined by 12% due to lower production volumes on account of facility maintenance during Q2 2023.
Segment's quarter-over-quarter net profit decreased by 58%, mainly due to lower revenues due to decline in prices and volumes, partially offset by price and volume-driven lower operating expenses. On the steel front, the steel segment reported a net profit of QAR 278 million, down by 55% versus last year. Lower segment earnings were mainly driven by lower revenues, which decreased by 4% versus last year. The earnings were also impacted by higher volume-related operating expenses and marginally reduced other operating income. The combined effect of lower prices and increased operating expenses resulted in a notable decrease in segment's profitability. The decline in revenue was primarily driven by lower selling prices, which declined by 18% on a year-on-year basis. This was partially offset by higher sales volume, which increased by 18%, mainly linked to higher production volumes.
On a quarter-on-quarter basis, segmental profit increased by 8% versus the previous quarter on the backdrop of improved operating expenses and associate income, despite a moderate reduction in segmental revenue. Against muted demand, revenue declined by 8%, with an average price dropping by 20%, while the volumes being down by 8% during the quarter. I now hand over to Rashid.
Thank you, team, for presenting the financial, operational, and segmental update. I think we can now open the floor for the Q&A.
Thank you. If any participant would like to ask a question, please press the star followed by the one on your telephone. That is star one to ask a question. Our first question comes on the line of Ricardo Rezende from Morgan Stanley. Please go ahead with your question.
Hello. Good afternoon, everyone. Thanks for taking my question. I have one question on the fertilizer segment. Would you be able to quantify the financial impact of the turnaround during the second quarter? I know that you don't comment on the future expectations, but just wanted to confirm there's still any maintenance strategies planned for this year, or is everything done already for 2023? Thank you.
Yes, thank you for asking this question. As you are aware that the first quarter, there is no planned turnaround for the fertilizer. However, the second quarter, a planned turnaround was conducted successfully. We are planning also to conduct another plant shutdown during the fourth quarter. Hopefully it will not materially impact the production.
Thank you.
Thanks.
Our next question comes on the line of Anish Fernandes from Citi. Please go ahead with your question.
Yeah. Hi, good afternoon, and thanks for taking my questions. The first one is just a follow-up on Ricardo's question. Could you please quantify the production impact? How much production did you lose as a result of the turnaround during the quarter? The second question is on the Qataria Steel acquisition. What is the strategic intent behind this acquisition? If you could just outline that for us, pending other details, that would be very helpful. Thank you.
Saffan will answer the first question, and I will take the second question. Saffan, go ahead.
The turnaround roughly was around 30 to 35 days in the Ammonia 2 and urea plant. In terms of number of days, I cannot offhand remember by how much the ammonia bundle could produce us. Offline, I can tell you that number. At this moment, I don't have exactly what is the production volumes, but we can tell you offline.
We believe it is only 35 days.
Yeah.
Planned.
Shut down.
Planned-
Shut down
Shutdown. It's not impacting the overall production. Going to your second question related to Qataria Steel plant acquisition, as we are highlighted, we are still under negotiation. That is a potential acquisition, and due to the market requirement, since we are already negotiating with the other shareholder, we announced to the market. Talking about the strategy, there is always an opportunity to take a market share, and there is always an opportunity where you can strengthen your position in the market. We saw this as an opportunity, and we are very well aware of the cyclical cycle that steel is in. We believe that either locally or in the region, there will be a project where our product will be required to save that project, either in the region or in Qatar. I hope I answered your question.
Thank you very much.
Our next question comes on the line of Nikhil Phutane from CBQ. Please go ahead with your question.
Good afternoon, sir. Thanks for the presentation. I just got a couple of questions. One on your petrochemical, sir. Actually, we saw the production volumes in the presentation, a tad lower than compared to first quarter 2023. Has that anything maintenance in QAFCO? Of course, any further maintenance likely in the second half of 2023? Coming to urea, sir, what we are seeing is, again, on your page 32, in terms of your EBITDA margins, which have gone down along with the sales. Do we see that in all probability going forward? What we are seeing over the last one and a half months of urea prices strengthening, EBITDA margins could strengthen in the division? Thank you.
Answer to your question on the petchem, there are one-off unplanned shutdowns, few days taking place due to various reason, gas flows coming from, there are trippings taking place, trips taking place between It contains more than one segment, right? You have chlor-alkali, you have polyethylene, you have fuel additives. Sometimes you have one- or two-days unplanned shutdown. The gas flow from north to south, all of them affects a few days, so that affects your production. It's down by around one or 2%, right? Quarter on quarter. That is the reason for the petchem production volumes 3% decline. That will get rectified in the next quarter. Coming back to your fertilizer question, obviously prices are recovering during the third quarter, prices are recovering. Obviously, the way the model or the contracts have been structured.
As you know, during 2022, with natural gas prices have hit the peak and we were holding inventories, those were valued at very high cost. When we were moving into 2023, because of this FIFO value of inventory, those have been sold during first half of the year. With those inventories have been sold and cleared, with first half, prices have been very low, urea prices going down to even $260s. We were carrying inventories at very low prices. With prices recovering during the second half of the year, obviously, you will see margins to see some form of improvement. That's, as you know, the way the contracts are structured and the way the inventories are getting valued. I think that's your question, correct?
Yeah. Overall, you're saying that we could not be seeing any further shutdown in petrochemicals, right, in the second half?
Petrochemical, unless you have unplanned shutdowns, you will not see any major shutdown because we had the major planned turnaround in 2021. That was around 70 to 72 days across all QAPCO group. Unless you have few one- or two-days shutdown for each month, you are not going to see any major number of turnarounds until next two, three years.
Okay. Thank you, sir.
You will see 1% or 2% ± volumes because these are large plants, right? 3,000 to 4,000 people working on these plants. So, obviously due to gas flows from north, pipes can have small issues so, obviously we might have 1% or 2% ±.
Okay. Thank you for the detailed answer, sir. Thank you.
Thank you. Our next question comes on the line of Nitin Garg from SICO. Please go ahead with your question.
Hi, gentlemen. Thank you for taking my questions. I have two questions. One is, you have classified Qatar Fuel Additives as discontinued operations, where you have mentioned the agreement is expiring, the land lease agreement and the butane gas supply. If you can provide some more clarity on it. I mean, is it up for sale or you are negotiating the agreements further beyond 2024? How should we think about it in our future assumptions, in our modeling? You have 50% stake. Are you in touch with your other partners regarding the continuation, or is it totally up for sale? Second question is on the urea shutdown. Just wanted to know, was it a scheduled shutdown or it was preponed? Looking at the market condition, urea demand was weak. Prices were very low, around QAR 250, QAR 260.
Did you prepone it or it was scheduled for second quarter? Just wanted to know because some of your peers, they do. They prepone or sometimes the urea prices are high, so they postpone also the shutdown. Just wanted to know whether IQ does this. Thank you.
Thank you for your question. Actually, a question related to QAFAC was expected. Yes, we classified QAFAC as discontinued assets and operation. Basically, that's due to the expiry of the GBA, less than one year, to expire on June 2024. As per the accounting standard that you need to consider it as discontinued operation until you finalize among the stake owner. A comfort that I would like to give you and to give to the other shareholders, that we will continue owning the 50% stake in QAFAC. As Qatar Energy, because the other 50% will go back to the founder of Qatar Energy is offering this other 50% for sale. We are willing to enter into a negotiation. However, still no talks have been placed on the card. Basically, the GBA will be renewed for us as an IQ owning 50% of QAFAC.
Second question related to the shutdown in the fertilizer. Saffan, you can comment.
Answer to your question, the shutdown was planned, and usually, QAFCO having six trains, six pair of trains, usually we have such shutdowns every year. Whether prices goes up or goes down, we used to have those shutdowns because otherwise we have that philosophy of having these planned shutdowns.
Okay. Thank you. Just a follow-up on shutdown. Let's say you have a shutdown scheduled in 4Q as well, as you mentioned, and let's assume that urea prices are very strong in 4Q. Can you delay that shutdown to 1Q or 2Q next year? Or you will do the shutdown in 4Q only?
That depends. If the prices are very strong, that's like a QAFCO management to decide, depending on the gas availability, depending on you have enough inventory, depending on you can build up enough inventory to sell to the market, and depending on you see, the important point is, the shutdowns are planned, let's say, one year and a half year in advance. The gas is provided by Qatar Energy. Qatar Energy gas is planned, let's say, when the shutdown is planned, for example, in December, Qatar Energy upstream has planned that gas. If Qatar Energy says, "I can provide that gas in December," say for example, they can produce in December. If Qatar Energy upstream says, "No, we can't. Already we planned our upstream shutdown in December," you can't. It's more or less not just because market is recovering or market is not recovering.
It's not only one factor. There are so many other variables linked to it.
Okay. Thank you. On QAFAC, to our knowledge, the other shareholder is International Octane Limited. Qatar Energy will be buying this stake, or Qatar Energy is already a shareholder in QAFAC?
Yeah. We still don't know what Qatar Energy is doing with the negotiation with the other stakeholders. A result of that will come later at later stage. Even at our level, the assurance that we have is we're going to remain the 50% owner of QAFAC. Nothing will change on IQ so far.
Okay. Thank you so much.
Thank you.
Yeah, no further questions at this time. I'll now hand call back to Mr. Bobby Sarkar.
Okay. Thank you, operator. If we don't have any further questions, we can end the call for today. I want to thank Abdulla, Rashid, and Saffan for taking the time to go over the results and answer our questions. Thank you very much, and we'll pick it up next quarter.
Thank you. This does conclude today's conference call. You may now disconnect.