Methanex Corporation (NASDAQ:MEOH) Q1 2024 Earnings Call Transcript

Methanex Corporation (NASDAQ:MEOH) Q1 2024 Earnings Call Transcript April 25, 2024

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Operator: Good morning. My name is Kathleen and I will be your conference operator today. At this time, I would like to welcome everyone to the Methanex Corporation 2024 First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference call over to the Director of Investor Relations at Methanex, Ms Sarah Herriott. Please go ahead, Ms. Herriott.

Sarah Herriott: Good morning, everyone. Welcome to our first quarter 2024 results conference call. Our 2024 first quarter news release, management’s discussion and analysis and financial statements can be accessed from the Financial Reports tab of the Investor Relations page on our website at methanex.com. I would like to remind our listeners that our comments and answers to your questions today may contain forward-looking information. This information by its nature is subject to risks and uncertainties that may cause the stated outcome to differ materially from the actual outcome. Certain material factors or assumptions were applied in drawing the conclusions or making the forecasts or projections, which are included in the forward-looking information.

Please refer to our first quarter 2024 MD&A and to our 2023 annual report for more information. I would also like to caution our listeners that any projections provided today regarding Methanex’s future financial performance are effective as of today’s date and it is our policy not to comment on or update this guidance between quarters. For clarification, any references to revenue, EBITDA, adjusted EBITDA, cash flow, adjusted income, or adjusted earnings per share made in today’s remarks reflect our 63.1% economic interest in the Atlas facility, our 50% economic interest in the Egypt facility, and our 60% interest in Waterfront Shipping. In addition, we report our adjusted EBITDA and adjusted net income to exclude the mark-to-market impact on share-based compensation and the impact of certain items associated with specific identified events.

These items are non-GAAP measures and ratios that do not have any standardized meaning prescribed by GAAP and, therefore, unlikely to be comparable to similar measures presented by other companies. We report these non-GAAP measures in this way because we believe that they are a better measure of underlying operating performance and we encourage analysts covering the company to report their estimates in this manner. I would now like to turn the call over to Methanex’s President and CEO, Mr. Rich Sumner for his comments and a question-and-answer period.

Rich Sumner: Thank you, Sarah, and good morning, everyone. We appreciate you joining us today as we discuss our first quarter 2024 results. For the first quarter, our average realized price of $343 per tonne and produced sales of approximately 1.7 million tonnes generated an adjusted EBITDA of $160 million and adjusted net income of $0.65 per share. Adjusted EBITDA was higher compared to the fourth quarter of 2023 primarily due to a higher average realized price. Our business delivered a strong quarter financially despite $25 million of G3 delay cost being recognized in adjusted EBITDA during the first quarter, which was comprised of costs associated with monthly utilities take-or-pay contracts and employee costs, as well as the accounting recognition of overhedged gas costs through the third quarter projected restart.

The safe restart of G3 continues to be our company’s top priority. We announced in mid February that the startup of the G3 plant was delayed due to complications in the auto thermal former during the late stages of the initial start-up process. Since that time, we’ve been working hard to understand the root cause of the issue, expedited repairs, complete comprehensive reviews of all remaining plant systems and implement any necessary changes. These work streams are all progressing well. We estimate that the repair costs will be approximately $15 million and expect that total capital cost for the project will remain at approximately $1.3 billion. The remaining CapEx to be spent on G3 is $70 million, which is fully funded with cash on hand. And we expect that to be spend evenly over the second and third quarters of 2024.

Given the progress to date on all work streams, we believe we will be ready to start up the plant in the third quarter of 2024. And I want to thank all of our global and regional team members for their continuing efforts and responding to the delay and continuing to safely manage our business. Another critical activity for our company during the first quarter was the major repair of the syn gas compressor units and resulting restart of our Egypt plant. We’re happy to report a successful repair and safe and quality restart of the plant, all of which was executed in the time frames we’ve previously disclosed. And I also want to recognize our team’s efforts in expediting these activities to bring us back online in Egypt. Now turning to the, fourth quarter fourth first quarter methanol pricing and market dynamics.

Our first quarter global average realized price of $343 per metric tonne was $21 higher than the previous quarter as global methanol markets tightened with constrained production leading to a global inventory drop and increasing prices in all regions. Compared to the fourth quarter of 2023, global methanol demand was slightly lower, primarily due to two large methanol’s Olefins units, completing turnarounds during this period of supply constraints, while global demand for chemical and energy applications remained steady. Methanol’s cost competitiveness in the current elevated energy price environment as well as its clean burning attributes continue to support strong demand in energy applications such as biodiesel and MTBE. On the supply side, operating rates were constrained by seasonal natural gas restrictions in Iran and China.

Supply was also constrained by planned and unplanned outages in the Atlantic Basin and overall reduced methanol production led to a drawdown of global inventory. We estimate the current — current methanol marginal cost of production to be between $260 per tonne and $280 per tonne, based on current coal pricing in China. We continue to see relatively stable methanol pricing in China, at between $290 per tonne and $310 per tonne and all other major methanol markets. Pricing are at premiums to these levels. Our second quarter European price was posted at €525 per metric tonne. Our North America, Asia Pacific and China prices for May were posted at $645 per tonne $400 per ton and $390 per tonne, respectively. We estimate our April and May average realized price ranges between approximately $345 per metric tonne and $355 per metric tonne.

Looking ahead into the second quarter, we anticipate both supply and demand to gradually increase and exceed first quarter levels, as gas restrictions are expected to ease, and seasonal construction and mobility demand improves. Through 2024, from a supply perspective, we continue to monitor the potential start-up of the project in Malaysia later in the year. And we expect the net supply impact from the planned startup of G3 to be somewhat muted given the significant offset from our supply reduction in Trinidad on similar timeframes. From a demand perspective, we continue to closely monitor the macroeconomic environment and have seen some positive economic indicators that support a stable and moderate growth rate for traditional chemical applications with favorable energy pricing and policy support particularly in China continuing to support methanol demand into energy applications.

Now turning to our current financial position and outlook, we ended the first quarter with approximately $378 million of cash. And yesterday, we announced the renewal of our $300 million revolver with the addition of a $200 million tranche this provides us with additional financial flexibility to manage the business and to repay the $300 million bond due in December 2024. Looking ahead to the second quarter of 2024, we’re expecting similar adjusted EBITDA and similar realized methanol price and produce sales with higher Egypt production offsetting the impact of lower Chile production, as we move into the winter period in the southern hemisphere. As for annual estimates, we’ve updated our 2024 equity production guidance to seven million tonnes, as production has been adjusted lower for the planned startup of G.

three in the third quarter with full rates through the fourth quarter and the Egypt outage which lasted to mid February of this year. Actual production may vary by quarter based on the timing of turnarounds, gas availability, unplanned outages and unanticipated events. We believe the planned startup of G3 in the third quarter represents a significant improvement in the asset portfolio and cash generation capability of our business. As a reminder, on a run-rate basis at $350 per tonne realized price, and 8.3 million equity tonnes, the business generates approximately $850 million in adjusted EBITDA and $450 million in free cash flow per year. We believe we’re well positioned to maintain a strong balance sheet, profitably grow the business and return excess cash to shareholders.

We’d now be happy to answer questions.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Joshua Spector from UBS. Please go ahead.

Joshua Spector: Yes, thanks for taking my question. I guess first I wanted to follow-up on your 2Q comments that you’re implying flat sequential EBITDA, despite pricing kind of made today higher sequentially? Obviously, you talked about volumes down, but can you talk about, are there any other factors there in terms of the ramp-up in any costs with the delay at Tier 3 or any other investments that might moved the needle there sequentially?

Rich Sumner: Yes, I think, when we look at the second quarter, we’re expecting similar levels of produced product. We’re expecting slightly higher pricing but we probably won’t get the impact that you have in the first quarter when you’re in a bit more of a rising price environment and that has some benefits. So we’re expecting it to be very similar in terms of – in terms of our earnings levels for this – for the second quarter. So hopefully, hopefully that answers the question.

Joshua Spector: Okay, thanks. And then if I could just ask on G3. So in terms of you’re making progress, I guess specifically on the root cause analysis there. I don’t know there’s anything that you can comment on that you guys have concluded though thus far but obviously, what the issue was but in terms of making sure the issue doesn’t recur when you start up but what’s the level of confidence there? How far are you down that path?

Rich Sumner: We’re very far down that path. What we’ve done is we did an independent review, root cause analysis ourselves and we also had our technology provider Johnson Matthey doing their own independent review. Really a lot of this came down to the thermal dynamics on the startup of the plant and so we are going to have – we’ve agreed on a set of different start-up conditions that we feel confident in moving into the restart mode. Part of the work streams we have now is to embed that new – those restart conditions into our program for restart and train all of our people on how we’re going to move back into that into the third quarter. So we’re quite confident. We understand what the issue was and that we’re going to have different conditions that will – that risk is very, very low.

Joshua Spector: Got it. Thanks and good luck.

Operator: Your next question comes from the line of Joel Jackson from BMO Capital Markets. Your line is now open.

Joel Jackson: Hi. Good morning. I’ve a couple of questions. On the insurance settlement, you’d expect or insurance payment you’d expect out of Egypt. Can you give us should know maybe what the magnitude of is now when we would expect that?

Rich Sumner: Yes, it’s – so we’re going to have a claim for 100%, Joel, as you know we own 50% of the total magnitude of the claim which is still kind of being discussed over $50 million and it’s still being worked on. So we would be taking half of that, right.

Joel Jackson: Okay. Fair enough. When you’re giving your outlook for Q2, I think you said 345, 355 is your April, May average price. So a couple of questions there. And then you’ve talked about similar EBITDA in Q2. So a couple of questions there. One, it seems like you’re applying an even steeper discount rate or even a wider discount rate in Q2 than you had in Q1. And then when you’re talking about these general kind of soft guidance here, are you assuming June pricing similar to April and May, are you assuming a drop-off in pricing in June?

Rich Sumner: No, no. I think we’re just – we’re using – like when we look at the estimate we gave you which would point to a kind of a350 price, where you will be using that there’s some a small increase on an average realized price basis but that will be some likely. I mean it all depends on inventory flows and that kind of thing. So it’s what level of produced products we’re going to be selling. We think it will be similar levels, which ultimately gets to back to sort of similar levels of earnings for the quarter. So there’s not really any stories on discount there, like we have had an increase in pricing, and we’d be expecting that, that would translate into slightly higher realized pricing as well.

Joel Jackson: And just to sneak one more in. If we assume the price holds around here at $350 a ton realized methanol and G3 comes on in 2-3 like you expect and you build up enough cash to pay down your $300 million of expiring maturities this year, so at $350 methanol, do you think you’d be in position to be able to buy back stock in the fourth quarter?

Rich Sumner: I mean, I think we’re focused as G3 right now and then we have strong cash flows, but so we’re going to watch cash really carefully as we get to the end. The focus is G3 and getting that $300 million to pay that down. You can play with the numbers and it all depends on production and methanol prices and so there’s scenarios where we’ve got more cash. I think right now we’re focused on the $300 million and beyond that when we look into next year that gave the numbers around run rate, we think there’s a lot of cash to look at what we do beyond the $300 million including share repurchases. So I wouldn’t be building in any expectations on that towards the end of the year. The focus is G3 and then the $300 million.

Joel Jackson: Thank you.

Operator: Your next question comes from the line of Hassan Ahmed from Alembic Global. Your line is open.

Hassan Ahmed: Rich, obviously continued unrest in the Middle East and yet again Iran in the focus. What are you guys seeing in terms of, call it, operating rates domestically within Iran as well as Iranian product potentially still finding its way into the export markets?