Operator  

Hello, everyone, and 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.

Saugata Sarkar   QNB Financial Services SPC

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 9 Months 2024 Financial Results Conference Call.

So on this call from QatarEnergy's Privatized Affairs Group we have Abdulla Al-Hay, who is the Manager for Privatized Company's Affairs; Rashid Al-Mohannadi, who's the Head of IR and Communications; and Saffan Mohammed, who's Senior Financial Management analyst. So 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.

Rashid Hamad Al-Mohannadi  

Thank you, Bobby. Good afternoon and 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 statements as detailed on Slide #2 of the IR deck.

Now we can move into the call. On Tuesday, 29th of October 2024, IQ published its results for the 9-month period ended 30th of September 2024. And today in this call, we'll go through these results and provide you on key updates on financial and operational highlights.

Kindly note that the MS Team link is displayed on IR deck on screen in case you want to participate in the Q&A session, you may dial in using the phone numbers identified in the invite for the call.

Today on the call, along with me, I have Mr. Abdulla Al-Hay, Manager of Privatized Company Affairs; and Mr. Mohammed Saffan, Senior Financial Management analysts.

We have structured our call as follows: At first, I'll provide you with a quick insight on IQ ownership structure, competitive advantages and overall government structure. Secondly, Saffan will update you on key macroeconomic fundamentals and IQ financial performance metrics. Later, I'll provide you an update about the segmental performance. And finally, we'll open the floor for the Q&A.

To start with, as detailed on Slide #5, IQ ownership structure compromises 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 AA- and Moody with AA3 credit rating, both with a stable outlook. These ratings were further affirmed by S&P during the Q2. QatarEnergy being the main shareholder of IQ provides 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; qualified, skilled and highly trained workforce; a sure supply of feedstock and competitively priced in 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; and most importantly, our experienced senior management team.

As detailed on Slide #10, from the competitive positioning prospective, IQ ranks among the top-tier companies within the regional downstream space across most of the metrics. In terms of the IQ governance structure, you may refer to Slide 51 or 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.

Saffan Mohammed  

Thank you, Rashid. Good afternoon. Thank you all for joining us. Ladies and gentlemen, welcome to Industries Qatar's earnings call for the 9 months period ended 30th 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 started easing interest rates. Prolonged high rates continued 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 continued to struggle with overcapacities, especially in China and higher energy costs 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 9 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, was QAR 5 billion with an EBITDA margin of 39% compared to EBITDA of QAR 4.8 billion with the same period with an EBITDA margin -- 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 9 months 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 9 months '23, reaching to USD 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 economics as well.

On the other hand, demand for downstream products were impacted by neutral economic forecasts 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 support a greater consumer participation and demand.

Sales volumes. Sales volumes for the 9 months 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 cost were for the period of 9 months 2024, decreased compared to 2023. The decrease in operating expense were primarily linked to lower variable costs driven by price-linked feedstocks and raw material costs and favorable inventory movements, particularly 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 polyethylenes and fertilizer segment owing to lower operating cost, primarily, the cost of goods sold.

However, this improvement was partially offset by lowered nonoperating 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 segments associates.

From a segmental perspective, Petrochemicals 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's 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 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 9 months of 2024.

Now, we can move into the segmental review, and I will hand over to Rashid.

Rashid Hamad Al-Mohannadi  

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 1.2 billion for the 9-month period of 2024. This is -- this result is marginally up by 2% versus the same period of last year.

This increase was primarily attributed to higher segment 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 prices were slightly lower by 3%, compared to the same period of last year. Production levels remained relatively stable throughout this period, abate some planned and unplanned shutdown during the year.

The segment ability through effective plant utilization, cost optimization and asset excellence to navigate these market conditions effectively capitalizing on slight improvement in the macroeconomical factors and maintaining operational efficiencies contributed to the overall increase in the profits.

On a quarter-on-quarter basis, the segment net earnings improved by 21% due to higher sales volume by 13% amidst increase in production, while 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 earning for the current quarter.

And now 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 9-month period of 2024, with a notable improvement of 14% versus the 9 months of 2023. This commendable increase in the net profit was driven by reduced operating cost. The improvement in operating cost 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 9-month 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 peak in 2022.

On a quarter-on-quarter basis, segmental revenue improved versus the previous quarter primarily due to moderately -- to marginally higher selling price by 14%. This improvement was partially offset by a reduction in sales volume by 5%. The increase in sales volume -- sorry, the increase in selling prices was mainly attributed to stabilization of the nitrogen prices toward their long-term averages.

The segment's net profit for 3Q increased, driven by a higher gross margin resulting from improved revenue and reduced operating costs associated with lower variable costs.

And 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 QR 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 a 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. Simultaneously, sales volume were also down on account of challenging demand condition. Construction demand continued to remain challenging due to prevailing macroeconomical environment with more central banks continue to persistently impose high cash monetary policies.

Although conditions started to improve since 2H 2024, as a result of the gradual global recovery and particularly China, a larger contributor to the construction economy has taken a series of measures to reignite its domestic construction sector.

However, the recent monetary policies changes by some central bank 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 nonrecurring 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 resulted from increased facility availability following the completion of plant 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.

Operator  

[Operator Instructions] Your first question comes from Giuseppe Villari from Morgan Stanley.

Giuseppe Villari   Morgan Stanley

I have 2, if I may. Firstly about fertilizers. How do you see prices evolving in the fourth quarter and maybe a bit of outlook for 2025 as well? And then about the projects that QatarEnergy recently announced around urea. Is there a chance that you may take over those projects down the line?

Rashid Hamad Al-Mohannadi  

Thank you for your questions. Regarding the forecast, the company policy is not to provide the forecast on a forward-looking or forward-looking statement. However, you may -- 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 of the harvesting season for farmers across the globe. Also, you'll be looking at the demand coming from India, in particular. I think India, we have announced a further tender in October.

There are some speculation in the market, whether India will further offer additional tender or 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 the -- of basically the project we -- 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. And of course, if something of that nature that will involve IQ, we'll announce it to the market.

But as of now, it's as per QatarEnergy announcement, and IQ is -- has not received any offer to participate in this project as of now. So 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.

Operator  

Your next question comes from Abhinav Sinha from Lesha Bank.

Abhinav Sinha  

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 numbers. So can you just run through like what -- because last time I remember, you had said it was because of the inventory costing. So what were the drivers in this quarter?

Rashid Hamad Al-Mohannadi  

I think the EBITDA margin has improved versus the previous quarter. And 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 from the segmental margin as well as the petrochemical. I'll hand over to Saffan, maybe he has a few points to add as well.

Saffan Mohammed  

See, if you look at -- you're talking about the 41% revenue to 39%, is that your question?

Abhinav Sinha  

No. I'm just talking at the group gross margin. So I'm talking about the 23%...

Saffan Mohammed  

Gross margin or EBITDA margin, you are talking about?

Abhinav Sinha  

Gross margin.

Saffan Mohammed  

So you are looking at from the financial statement of the presentation?

Abhinav Sinha  

Yes, yes. Financial statements. Yes.

Saffan Mohammed  

From the financial statement. There are a couple of reasons for that. Now we are consolidating QAFAC also. QAFAC is now -- is fully consolidated. So QAFAC last year performance is much higher than this year. So that has an impact on your financial. Last year, we had only QAFCO and Qatar Steel. Now, QAFAC, we are consolidating on IFRS 3. So that has an impact. QAFAC prices are down compared to last year. So that has a major impact on where ethanol prices were, I think, down by at least minimum 20%, especially MTBE prices. So -- and, of course, fertilizer prices are also down year-on-year.

Abhinav Sinha  

Understood. And just on QAFAC, I mean, you would continue to consolidate until and unless there is a reagreement on the JV or something like that, right? Or...

Saffan Mohammed  

Yes. So basically, as we mentioned that the half year and the last year and the financial statement, now the JVA is expired. So now we are having a discussion with the related party. Once that the new -- once the new equipment is finalized and so 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.

Abhinav Sinha  

Okay.

Rashid Hamad Al-Mohannadi  

Sorry, I answered that question on the prospect of EBITDA margin from a proportionality perspective. So Saffan, answer was accurate.

Saffan Mohammed  

Financial statement.

Rashid Hamad Al-Mohannadi  

Yes, yes.

Operator  

Your next question comes from Anoop Fernandes from SICO.

Anoop Fernandes   Securities & Investment Company BSC

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? And in terms of percentage completion, where are we right now?

Saffan Mohammed  

We cannot give the actual spend, but 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. So we have built as planned. So there won't be any made shock for anything. So it will be as planned, as on budget.

Operator  

Your next question comes from Faisal Al Azmeh from Goldman Sachs.

Faisal Al Azmeh   Goldman Sachs Group, Inc.

First, congratulations on the numbers. And another question maybe just on the growth outlook. Any potential for the JV with Total? On the QAFCO side, is there any -- on the QAFCO side, is there any potential tool to add more or debottleneck or expand that part of the business or is it mainly fertilizers is where the opportunity is at this stage? That's my first question.

And my second question, obviously, we've seen the semiannual dividend policy that was 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?

Saffan Mohammed  

I'll answer the second question first, so the divisions are always a Board decision. So 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 to drive the Board decision. The second question you're asking whether we would like acquire QAFCO or something, is that the question or the first question?

Faisal Al Azmeh   Goldman Sachs Group, Inc.

No, it's just whether there's any organic like greenfield potential on the petrochemical side at this stage? And I understand also given that you mentioned the acquisition of the minority in QAFCO as well as when would that be in terms of the renewal in 2028?

Saffan Mohammed  

Maybe, half of 2029, that's the potential inorganic growth. So right now, our organic growth is a function of feedstock availability from QatarEnergy. So right now, there has been no official announcement of any feedstock availability to downstream of IQ in particular.

So all growth basically can come from debottlenecking efficiency improvements on those sites. But rather than that, we have not been advised of any opportunities. Rashid spoke about the urea project, which is predominantly a QatarEnergy project and the other previously -- which was previously announced, a couple of Petrochemical projects, which are also QatarEnergy. Right now, there are no, how do I say, capacity-additive projects other than ammonia for us and the PBC project, which is relatively small.

Operator  

Next question comes from [indiscernible] from CBFS.

Unknown Analyst  

Well, actually my question is pertaining again back to urea. This we understand that your price has gone up in third quarter, but you were just looking at in the past history, till May, the prices have been on a slight down. And from June onwards, it has started to rise. And we've taken, suppose you remember, 2 months lag, it looks like the prices should have not increased the way it has increased during third quarter against second quarter. So I wanted to understand what has happened there, I mean, in case I suppose you look at the international pricing trends?

My second question is pertaining to your feedstock. I mean you can understand in terms of feedstock has come down, prices and the JPM has increased because of that. But I wanted to relate that with, again, with the pricing, product prices have been, on an average, good. So your fish stock to a certain extent could have also a little bit of gone up. So what has been the trend? I mean, if possible, you can just explain that?

Saffan Mohammed  

So the -- as we say, there was a demand pull during third quarter, which is -- the demand pool is also pretty much, how do we say, pretty much seasonal and pretty much temporary. And also as, of course, you know that our feedstock pricing is also pretty much functional to the urea prices. But 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.

So -- but again, the detailed calculations are done by the group company. So on a net-net basis, price increase would benefit QAFCO IQ, price decrease would have a lot of impact. But again, there are other factors also and how you're opening inventory, at what price you're 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 inventory set at cheaper cost compared to 2022. So that supported your 2024 P&L. That's what you see positive inventory movement driving your profitability as well. So there are so many factors that drive not only your prices, but other factors that drive your cost of goods sold, the components of cost of goods sold as well.

Unknown Analyst  

Okay. Okay. Just apart from that, anything we can talk about on the maintenance part in the fourth quarter, current quarter Petrochemical facilities? Anything coming up?

Saffan Mohammed  

Other than unplanned shutdowns, which we cannot predict, there will be a planned shutdown in one of the fertilizer facilities.

Unknown Analyst  

How many days?

Saffan Mohammed  

I cannot exactly tell you, but usually, fertilizer facilities will be on maintenance for between 24 to 36 days. I believe this one is expected for roughly 1 month.

Unknown Analyst  

Okay. Okay. And lastly, on your billets, I mean the company has sold billets as a long time. So I mean, this you just mentioned, depending upon the seasonality and all that. So we do expect that could continue? You could -- wherever you find possibility of shifts and making revenues, you will go through that process.

Saffan Mohammed  

Yes. 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. And if you have that, you will, you can say. So the strategy, the Steel strategy is to maximize utilization of the plant and sell it like -- because you're technically a low-cost producer, right?

Operator  

Question comes from Abhinav Sinha from Lesha Bank.

Abhinav Sinha  

Actually, I have a follow-up question on the capital allocation. So given that you sit on a sizable cash. So just wanted to check, is there a plan to do buybacks?

Saffan Mohammed  

There have been -- after QNB had this buyback, still we have not made any, how do I say, discussion on that, maybe the management may think on that, but still we have not had any significant discussion on the buyback.

Operator  

Your next question comes from Yousef Husseini from EFG Hermes.

Yousef El Husseini   EFG Hermes Holding S.A.E.

Just 1 question from my side on the urea volumes this quarter and last quarter. So I noticed you guys are close to about 1.5 million tonnes a quarter in 3Q and 2Q this year versus, if I take the average last 2 years, it's about 1.38 million, 1.39 million. So just wondering, I mean, is this sustainable sort of the 1.5 or it was just sort of favorable inventory you had some extra stock the last couple of quarters to figure out how to think about volumes going forward, just given how strong the performance has been in the last 2 quarters?

Saffan Mohammed  

Please note, your production capacity is around 5.8 million to 5.9 million. So you sell everything. So sometimes 1 quarter, volumes get shipped in the next quarter. So there is always a timing issue that happens for 100,000 to 150,000 metric tons. Sometimes weather plays a role at the receiving end or at the dispatching end.

So due to that, you have all this. So if you take an average quarterly volumes you take 5.9 million -- 5.8 million to 5.9 million, so roughly, you talked about 1.45 million, 1.5 million metric tons. So that is your predominantly average sales volume.

Operator  

Your next question comes [indiscernible] from Al Rayan.

Unknown Analyst  

Sorry, just wanted to go back to what you mentioned on the maintenance stage. I didn't quite catch what you mentioned on the 30 days, is that for next year or -- was it the fourth quarter?

Saffan Mohammed  

This year, fourth quarter.

Unknown Analyst  

Okay. And this is for the fertilizer plants, right?

Saffan Mohammed  

Fertilizer plants, yes.

Operator  

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.

Saugata Sarkar   QNB Financial Services SPC

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. And we will pick this up next quarter. Thanks, everyone.

Rashid Hamad Al-Mohannadi  

Thank you. Thanks.

Operator  

Thank you for attending today's call. You may now disconnect. Have a wonderful day.