Hello, welcome to the Industries Qatar conference call. I would like to advise all participants that this call is being recorded. I would now like to welcome Bobby Sarkar to begin the conference. Bobby, over to you.
Thank you, Cherry. Hello, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Industries Qatar's first quarter 2023 results conference call. On this call from QatarEnergy'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, and then we will follow it up with the Q&A. I would now like to give the call over to Rashid. Rashid, please go ahead.
Thank you, Bobby. Good afternoon. Thank you all for joining us. Hope you are doing great. I kindly note that MS Link is only for displaying the presentation on the screen. In case you want to ask question at the end, you may dial in on the number displayed on the invitation shared with you. Before we go into the 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 investor relations presentation. We can move on to the call. Yesterday, on Sunday, 7th May, IQ published its financial results for the three-month period ending 31st March 2023.
Today on 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 Abdulla Yaqoob Al-Hay , Acting Manager for Privatized Companies Affairs, and Saffan Mohamed, Senior Financial Management Analyst. We have structured our call as follow. At first, I will provide you with a quick insight on IQ ownership structure and competitive advantages and overall governance structure. Secondly, Abdulla will brief you on IQ key operational and financial performance metrics, and later on, Saffan will provide you an update on quarterly results and the latest segmental performance. Finally, we'll open the floor for the Q&A session.
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 a credit-rated entity by S&P with A+ and Moody's with A1 credit rating, both with a stable outlook. QatarEnergy, 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 teams. In terms of the competitive advantages, as detailed on Slide 8 , the group is well-positioned with several competitive advantages. The business remains strategically, operationally, as well as financially.
These strengths include an efficient and well-maintained assets base, a qualified and highly trained workforce, a sure supply of feedstock and competitively priced energy sources, lower operating costs, a dedicated marketing team in the form of Muntajat to market the group petrochemical and fertilizer products, strong liquidity position, and reputable JV partners, and most importantly, a well-experienced 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 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 governance in further detail. I will now hand over to Abdulla to cover IQ key operational and financial performance matrices.
Thank you, Rashid. [Non-English content ] Good afternoon and thank you all for joining us. Starting with the economic environment, as detailed on Slide 12. Macroeconomic environment continues to remain challenging during the first quarter 2023 because of the geopolitical uncertainty in the Russian Ukrainian conflict, reduced demand for most of commodities, recessionary fears on account of inflationary pressure, and hawkish monetary policies enhanced by most of the central banks. Especially on fertilizer sector and constraints to the first quarter 2022, when fertilizer prices reached decades high, the price continued to fall during the first quarter 2023. This pressure pins downward pressure on grain, energy, other commodity prices, and general inflation. Also, some European fertilizer production came back online following the capacity curtailment during the fall of 2022 owing to the energy crisis and easing of supply and logistic issues prevailing during the half year of 2022.
Similarly, the performance of the petrochemical industry in the first quarter 2023 was influenced by market sentiment around China's reopening, oil price volatility, and global macroeconomic uncertainty. Although some petrochemical prices improved slightly compared to the fourth quarter of the year 2022, due to better supply-demand dynamic, mainly on the back of the relatively better supply-demand dynamic. Steel sector remained somewhat resilient internationally, as China's slow pace post-COVID recovery phase starting to take shape. However, sluggish phase in the Chinese construction sector continued since last year. The domestic steel market showed signs of recovery following muted construction activity since later part of 2022.
Moving on to financial performance for the three-month period ended 31st March 2023, as detailed on Slide 16 of the IR deck, the group reported a net profit of QAR 1.2 billion as compared to a net profit of QAR 2.7 billion for the last year, with a decline of 57% on year-on-year basis. Additionally, group revenue of first quarter 2023 declined by 32% to reach QAR 4.8 billion, as compared to QAR 7.1 billion reported for the first quarter of 2022. This negative financial performance versus last year was largely attributed to the lower product price, which on average declined by 35%, and translated in decrease of QAR 2.6 billion in the group bottom line earnings, as you can see in Slide 17.
On other, contrary, sales volume increased by 3% versus the same period of last year, primarily driven by higher plant operation rates. This growth in sales volume contributed QAR 199 million positively to the current period bottom line earnings versus the same period of last year. As detailed on Slide 15, the group production level were up on the first quarter 2022 by 14%. This improvement in production was largely driven by higher operating rates and better plant availability across all segments. I will now hand over to Saffan to cover the quarterly results and segmental performance.
Thank you, Abdulla. Moving on to quarter-on-quarter performance, as detailed on Slide 16, the group's revenue declined mainly due to lower selling prices, which declined by 22% versus fourth quarter of 2022. The global economic context remains under stress due to recessionary fears and continued geopolitical tension, resulted in downward price trajectory for most of the commodities. On the other hand, sales volume increased by 10%, linked to better production achieved on a quarter-on-quarter basis, primarily in the steel segment, being partially offset by lower volumes reported for petchem. Our robust models and the strength of our global supply chain continue to leverage our resilience and provided flexibility to our operations. Whereas our continued positioning of being low-cost operator ensured our competitive advantage. Moreover, as detailed on Slide 19, IQ's EBITDA margins continue to remain robust.
Also, we continue to build our strong financial position with improved cash flow generation capabilities. The group generated QAR 0.8 billion in terms of free cash flows during the first quarter of 2023, as detailed on Slide 18. We move to segmental performance in petrochemical segment. Moving on to the segmental performance, petchem segment reported a net income of QAR 382 million for the first quarter of 2023, significantly down by 33% versus the same period of last year of Q1 2022. The decrease was mainly linked to decline in product prices, which was decline of segmental revenue, which is declined by 26%, which was affected by lower blended selling prices versus the same period of last year.
Blended product prices for the segment declined by 23% versus last year, as a result of general decline in petchem prices at the macro level, due to combined effect of decline in crude and weaker consumer demand against the backdrop of deteriorating macroeconomic fundamentals and a general decline in demand due to, again, recessionary fears. Sales volume also declined compared to the first quarter of 2022. Production volumes, on the other hand, improved against the backdrop of higher facility availability. As you all recall, we had fairly large shutdowns during the previous years. On a quarter-on-quarter basis, segment's net earnings declined by 2%, being predominantly linked to segmental revenue, which declined by 8% versus the fourth quarter of 2022. The decline in segmental revenue was primarily linked to lower volumes reported amid lower production.
On the other hand, selling prices improved sequentially by 4% on the back of relatively better supply-demand dynamics within the polyethylene segment. Moving on to fertilizer segment. Fertilizer segment reported a net profit of QAR 510 million for the first quarter of 2023, with a decline of 71% versus the same period of last year. This decline was primarily driven by lower segmental revenue. Segmental revenue was decreased by 44% for the first quarter of 2023 versus the same period of last year due to lower selling prices. Selling prices declined by 45% amid macroeconomic pressures affecting fertilizer markets. Sales volume marginally increased by 3% during the first quarter of 2023 on account of improved production levels, which increased by 11% on a year-on-year basis amid relatively lower shutdown days reported for the current quarter versus same quarter of last year.
On a quarter-on-quarter basis, segmental revenue decreased by 35% versus the previous quarter due to lower selling prices. Selling prices declined by 38% versus the previous quarter amid continued weakness in the fertilizer markets and challenging supply-demand economics dynamics. On the other hand, sales volumes improved and a growth of 6% was noted in sales volumes on a quarter-on-quarter basis. Segment's net profit for the current quarter decreased by 57%, mainly due to comparatively lower prices realized during the first quarter of 2023 versus the previous quarter, as well as the segment reported higher operating costs on account of unfavorable inventory movement due to higher sales volumes. On the steel segment, steel segment reported a net profit of QAR 134 million, down 49% versus last year. Lower segmental earnings were mainly driven by lower revenues, which decreased by 6% versus Q1 of 2022.
The earnings were also impacted by higher volume-related operating expenses and marginally reduced by other operating income. Decline in revenue was primarily driven by lower selling prices, which declined by 16% year-on-year basis. This was partially offset by higher sales volume, which was increased by 12%, mainly linked to higher production volumes. On a quarter-on-quarter basis, segmental profit improved by 17% versus fourth quarter mainly on account of higher revenues. Segment revenue increased by 64%, mainly due to higher sales volume, which increased by 55% as demand returned to normal levels as domestic construction activities are gradually returning to mid 2022 levels. Selling prices improved sequentially by 6%, mainly due to constructive supply-demand dynamics within the steel markets, both domestically and internationally. I now hand over to Rashid.
Thank you. Thank you, everyone for presenting the financial, operational, and segmental update. I think we can now open the floor for the Q&A, the current dial-in number. Kindly note that the MS link is purely for displaying the presentation, and if you have any question, you may ask the question on the dial-in number. Thank you.
At this time, I would 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 the Q&A roster. Okay. Our first question comes from the line of Ricardo Rezende from Morgan Stanley. Your line is now open.
Hello. Good afternoon, thanks for taking my question. I guess the first question is on the outlook for fertilizers for this year. I understand that you have some of the benefits on the cost side throughout the year, but if you could give us a color on how you're looking at on the fertilizer segment for 2023. The second question is on dividends. For the past couple of years, given the strong performance, you've been paying about 75% of your net income as dividends. If given the current outlook, it's looking like that 2023 should be a little bit weaker compared to the past two years. How should we think about dividend payment or the payout for 2023, given a weaker outlook, but at the same time, you're having a very strong cash balance position. Thank you.
Thank you for asking these two questions. Related to the outlook, we usually do not discuss any outlook results. We discuss our historical performance. However, for the fertilizer, we see that the market right now, as of now, are stable. However, the prices got impacted. For the following three quarters of the year, we hope the prices to stabilize. It's not going to be as strong as 2022, where the prices achieved the highest historical record. For the Year-end dividends proposal or if you are compared to last year or based on the historical data that you can see in our presentation slide, you will note that Industries Qatar have been very generous in paying dividends, especially during hard time of COVID, where Industries Qatar paid 100% of their net income as dividends.
The dividends payout ratios or the dividends decision usually came at the year-end where all the board members discuss the market situation and discuss the company requirements for their all future capital expenditure plus their routine maintenance. They decide on a dividend that would be meeting the expectation of the market. I hope I answered the question.
It was worth it. Thank you very much.
All right, our next question comes from the line of Anoop Fernandes from SICO. Your line is now open.
Hi, good afternoon. This is Anoop from SICO. I have two questions related to your fertilizers business. If I look at the first quarter 2023 EBITDA margin and I compare that with 1Q 2021, we were at 35% in 1Q 2023, and in 1Q 2021, we were at 53%. In fact, the volumes in 1Q 2023 were higher than 1Q 2021. Just trying to understand why is there such a difference in the EBITDA margin profile if the urea prices have been sort of comparable? That's question one. The second question is, your urea assets now have been running at a very high utilization rate of 400%. Are you expecting any or planning for any shutdowns over the course of this year? Thank you.
Okay. The answer to that question number 1 is quite easy. If you are comparing your 2021 versus 2023, you need to compare also Q4 2020 and Q4 2022 urea price as well. Now, you know the natural gas prices are also linked to urea prices, correct? Now, the Q4 urea prices was around $600 on average, whereas Q4 2020 urea prices was around $250, if I recall correctly. Correct? If you look at your historical numbers. Now, our feedstock valuation or feedstock pricing is linked to urea prices. Right? If you look at those prices, now in this quarter, now our Q1 part of the urea that had been sold coming from the fourth quarter of 2022. Our inventory that had been sold in Q1 are valued at the inventory that is coming from the previous quarter, which has been valued at very high valuation.
The feedstock that had been valued using very high feedstock, which is linked to high urea prices. Whereas in 2021, urea prices were valued at very low prices, using around $250, $270 levels of urea. Obviously, the margins are high.
Yeah. I had a sense that that is what you said. Is it fair to assume that in the second quarter we will see the gaps drop significantly?
Obviously. Basically, usually the FIFO inventory valuation is being used. Obviously the quarter one inventory will be sold in quarter two going forward. If the urea price is maintained or improves, obviously Q1 production will be sold in the next quarter. We are expecting the margin to be improved unless other discharges don't happen.
Yeah, understood. Understood.
The second question, usually we have six pair of trains, six pair of ammonia urea trains. Obviously, every year one pair of train will go through a shutdown. Obviously, we will have a shutdown maybe in the second half of the year. During the first quarter, we did not have a shutdown, that's why you have a fairly large, very high utilization. There will be some shutdowns probably in the second half of the year.
Thank you very much.
The question comes from the line of Nitin Garg from SICO. Your line is now open.
Yeah. Hi. Thank you for the opportunity. My question is similar to the previous question by Anoop. If you look at the second quarter of 2021, the urea price was $360, and this quarter also the urea price is around $365. The cash cost in the second quarter of 2021 was QAR 1 billion. The cash cost in this quarter is QAR 1.5 billion. Is it the same explanation? The inventory thing for this quarter, the gas cost is related to the previous quarter when the urea price is $580 for the last quarter, this quarter is $620.
Are you referring to this particular slide, Nitin?
Slide number.
No, I'm comparing this thing again, in line with what Anoop has. In Q2 2021, the urea price was $360, and this quarter also the urea price is $360. The margins in this quarter are much lower.
That's again, basically, if you look at Q4, urea prices were in the range of $600, year-to-date prices. Your valuation of your feedstock, which is primarily the key component of your inventory, is valued at that price. Obviously, that moved into this quarter. Obviously, 70% or 65% of your cost of goods sold comes from that. That has been moved into your Q1 sales. Obviously, you have a very high cash cost which is there.
Okay. Just a follow-up. How you pay the gas price. Is it like a monthly thing or a quarterly thing?
That is between QatarEnergy and QAFCO. The movement, whether it is sitting in your P&L, what is moving to cost of goods sold, that's a cash flow statement thing. That is not part of your P&L. Payment is between QatarEnergy and QAFCO. They have terms. Sometimes it is 45 days, sometimes it is 60 days, depends. Anyway, what we discuss here is P&L, not the cash flow statement. Correct?
What you're trying to understand. That is irrelevant to this question. What we're trying to look at here, if our cost of goods sold, the EBITDA margin has increased, because in Q4, because we had very high urea price, our gas cost have increased. That gas, that increased inventory has been sold in Q1 because of the FIFO valuation. The inventory that has been produced in Q1 will be gradually sold in the subsequent quarters, right? Whether QAFCO pays in one month or two months, that is between QatarEnergy and QAFCO. That has nothing to be part of this whole equation, I believe.
Okay. How much lag we should assume, like say for every quarter, it should be, as you said, around 60% to 70% would be from the previous quarter.
No. That again, depends on demand. In the quarter, if previous quarter's inventory plus the current quarter's production had all been sold, the margin would have been improved. If you read our speaker notes, we have mentioned clearly there is demand and supply issue. That's what the price have also come down, right? Had the demand had been more, the urea prices would have been around QAR 400 plus.
Okay. Any update on your expansion?
QAFCO-7? It is going as progress, as planned.
Okay. Thank you.
Our next question comes from the line of Sashank Lanka from Bank of America. Your line is now open.
Yes. Thank you for the presentation and the opportunity to ask questions. I have three questions. Maybe we can go one by one. On the first question, again, the topic of the inventory losses for the fertilizer segment. Is there a number in QAR million that you can give us on how much inventory losses you had? That it'll help us understand what normalized earnings or EBITDA for the segment were. That's the first question.
It is very difficult to give that number. You have to normalize the EBITDA. We have given some normalized EBITDAs in the previous, like for the segment. We cannot. It's a changing number depending on the prices, Sashank. The segment has a particular level of margin quarter to quarter, depending on the selling prices, depending on what kind of volume moves, it changes. You can look at the historical last three, 12 quarters. You can rationalize the margin.
Okay. No, because the movement from Q4 to Q1 was quite significant. Also, you have that formula which is linked year to year in average prices. It's quite unique how your margins move this quarter. That's the reason why I'm asking, even if you can give us like a recurring EBITDA, that itself will be helpful.
For QAFCO, what you could do, you could remove that 35%, go back to the previous 12 quarters and remove that, you could do a regression or something to arrive at a margin.
Okay. Thank you. The second question is on your steel segment. I noticed that volumes were up. Prices also improved quarter-on-quarter. Margins were actually quite weak when I looked at it versus Q4 2022 and also Q1 last year. Just want to understand what's driving this margin drop, because I think these are the lowest margins we've seen in about four, five quarters.
There are a couple of reasons. One is the volume is up, right? Also, the product mix, and the regional mix. We have started selling some intermediate products in the global markets. That is one reason. When we sell intermediate products, obviously, we have low margins. Anyway, we are operating the plant, that's why the volumes are high. With iron oxide, consumption of oxide pellets, average consumption price of oxide pellets have also increased slightly. It is the blend of products with intermediate products increasing, plus the consumption cost. Still for all, the average margin remains fairly reasonable.
Okay. Thank you. My last question is just on the petchem segment. We saw volumes down quarter-on-quarter, and also, I guess year-on-year. I'm just wondering, did you have any shutdown in Q1?
The plants have operated reasonably well compared to last year. Plants are operating pretty stable. The availabilities are high compared to last year. These are, as mentioned in the call, these are pretty much market driven. Nothing to do with the operational side.
Okay. Thank you so much. Thank you.
Our next question comes from the line of Rene Selouan from Jadwa Investment. Your line is now open.
Yes, hi. Thank you for the presentation. I'd like to ask you a follow-up question to Sashank's question regarding the volumes. There was a drop of 3% in production volume quarter-on-quarter for petrochemical segment. However, sales volume dropped by 11%, despite the improvement in prices of petrochemical products. I would imagine demand has improved. Why this drop in sales volume?
You can see from Slide 28, you have the breakdown. Basically, there are timing of shipments are also part of it. It is predominantly demand and supply. Although prices increase and it is the regions which you sell and the product mix also.
This will spill over to the second quarter?
Exactly, yeah. This is what we expect.
Okay. Are there any shutdowns expected in the petchem segment in the nine months that are coming?
Yeah, there will be some. Some shutdowns are expected. I cannot give further details, but there will be some shutdowns. These are all large plants. As always, we follow in this Japanese philosophy. We want to make sure that plants operate very reliably, and we want to ensure that we always ensure that plant maintenance takes priority.
Okay. Thanks.
Question comes from the line of Khadija Al Siyabi from Bank of Muscat . Your line is now open.
Hello. Thank you very much for the presentation. I have one question from myself. Can you just give us more capex guidance for this year and the coming year? Thank you very much.
Yeah. You can see from the presentation here, this guidance is based on our current year business plan. The majority of capex are turnaround and maintenance related other than QAFCO-7. We have a new project that is going on to produce ammonia. Other than that, the capex are predominantly maintenance and turnaround related. In terms of company-wise, the major capex is coming from QAFCO related to QAFCO-7, which is an efficiency improvement. At the same time, we're going to produce some additional volumes as well, saleable ammonia.
Thank you very much.
Next question comes from the line of Faisal AlAzmeh from Goldman. Your line is now open.
Yes, hi. Just a quick follow-up on the question on petrochemicals demand, just to understand that point a bit better. Are you seeing any signs of weakened demand or is it just a delay in shipments? When you compare Q1 of this year versus Q4, are you actually seeing trends that have been improving? That's my first question. My second question is just on the steel business. When we look at the production numbers that Sashank mentioned, the volumes have been quite healthy in Q1. How should we think about the remaining quarters of the year? Should we expect a similar trend in terms of production levels? Or do you see the mix changing at some point? Thank you.
In terms of petchem, the recent small hike in interest rates by the Fed, the whole issue on the petchem, it's a function of GDP. There is always a discussion of the recessionary figures linking to GDP. Consumption and all will play a role. Again, with China slightly opening up and Indian economy is taking a big positive move from the Indian economy on various currency moves and et cetera, that could take a positive move as well. We are more kind of neutral on petchem markets and with we being a low-cost producer. We are very kinds of market to pick things to recover during the second half of the year or leave Q2 aside. The second half of the year, the market prices should recover to some extent.
On the steel side, as we mentioned during our speech, we will operate the plants at our full capacity level. We will trade the plant or the product mix to benefit to the maximum based on the market demand. The most profitable product is rebar. Depending on demand and supply and with the domestic demand is coming back to life with post-FIFA. We will more focus on the value-adding products, and we'll continue to operate with products that gives maximum return to us.
Thank you.
Thank you. Our next question comes from the line of Anoop Fernandes from SICO. Your line is now open.
Yeah. Hi. Just a follow-up from me on the gas prices. If we look at the urea that is used for the indexation part of the formula, is it a particular geographical price that is used, or is it some select Middle East price, or is it an average of prices by geography based on your sales mix? I'm asking this because lately we've seen quite a bit of divergence between the North American prices and the Middle Eastern prices. I'm thinking if that has some sort of impact on the prices you pay as well.
It is a blended price because in the price that is realized in our books.
Okay, understood. Thank you.
Again, if you would like to ask question, press star then the number one on your telephone keypad. There are no further question at this time. I turn the call back over to our speakers.
Hey, this is Bobby Sarkar again. If there are no further questions, we can end the call for today. I want to thank Abdulla, Rashid, and Saffan for taking the time to answer our questions, we will pick this up next quarter. Thank you, guys.
Thank you all for attending the call. Thanks a lot.
This concludes today's conference call. You may now disconnect.