Methanex Corp Q1 FY2024 Earnings Call

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. 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.

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 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, are 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.

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, expedite 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 the 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 spent 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. I want to thank all of our global and regional team members for their continuing efforts in 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 syngas compressor units and the 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. Turning to the fourth quarter, our 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 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 and 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 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, between $290 per tonne and $310 per tonne, and all other major methanol markets. Prices 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 tonne, 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. 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 in cash. 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 produced 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 G3 in the third quarter, with full rates through the fourth quarter and the Egypt outage which lasted until 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 a $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.

Your first question comes from the line of Joshua Spector from UBS. Please go ahead.

Yes, thanks for taking my question. I guess first I wanted to follow up on your Q2 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 G3 or any other investments that might move the needle there sequentially?

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 same impact that you had 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 our earnings levels for the second quarter. Hopefully, that answers the question.

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 if there's anything that you can comment on that you guys have concluded though thus far but obviously, what the issue was but what's the level of confidence there? How far are you down that path?

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 restart conditions into our program for restart and train all of our people on how we're going to move back into that in 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.

Got it. Thanks and good luck.

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

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?

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.

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, or are you assuming a drop-off in pricing in June?

No, no. I think we're just – when we look at the estimate we gave you, which would point to a kind of a $350 price, we'll be using that there's 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 back to 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.

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 Q3 like you expect and you build up enough cash to pay down your $300 million of expiring maturities this year, at $350 methanol, do you think you'd be in a position to buy back stock in the fourth quarter?

I mean, I think we're focused on 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 are 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.

Thank you.

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

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

Thanks, Ahmed. Right now, we seasonally see Iran lower into the fourth and first quarter. That's typically what we see in some of it. It's hard to say how much of this is operating rates, gas constraints and then ultimately is there any other factors at play. I think we saw a really quite a low production quarter in the first quarter and it's been slow to see Iran coming back in the market. Slower than what we've historically seen as we kind of move out of the first quarter. We don't know if that's still they've got gas constraints happening or is it technical issues. But at this point, we're not seeing Iran moving back into the market the way we've normally seen it. I think just on the Middle East conflict generally, I think it hasn't impacted methanol markets greatly just because there isn't a lot of Middle East flows moving into Europe and where you've seen some supply chains being really impacted. As Iran has become more directly involved, we're going to continue to watch and see what, if any impact that may have on them as we move forward. So it's difficult to say if what we're seeing today how much of that is tying back to what we're seeing geopolitically.

Understood. A two-part question on demand, near term as well as longer term. In the press release, you guys talked about sequentially global methanol demand being sort of down a smidge. You obviously talked about some outages on the MTO side of things, but conventional demand actually holding up quite firm. So on the narrow term side of things, do you attribute the conventional demand firmness to restocking or is it more organic demand growth that you're seeing because of the macro environment? And then on the longer-term side of things, I've been doing a fair bit of work on the marine opportunity. Could you just also sort of rehash your latest and greatest thought process longer term on the marine opportunity, particularly with different sorts of fuel options available for that end market?

Thanks. To start with the shorter-term demand situation, we noted that demand was slightly down in Q1, primarily due to MTO production rates being around 80%. This reduction was influenced by two units undergoing planned maintenance, which tends to occur when methanol supply is tight. However, those units are now operational again, and the industry is running at about 85-90% capacity. On the traditional chemical side, we observed stability during the first quarter. The Chinese Lunar New Year typically causes a slowdown during this time, impacting traditional chemical demand, which is approximately 20 million tons in China. We are seeing some encouraging signs of modest demand growth in traditional chemical applications. Manufacturing and export figures from China are improving, but they are still managing challenges within their domestic market, especially in real estate and housing, which is exerting some pressure. In other regions such as Asia, the U.S., and Europe, positive trends indicate improvements over last year. Specifically, Korea and Japan have seen enhancements related to their export markets. Europe has also stabilized after a downturn, leading to slow growth. Overall, we expect demand growth this year to mirror last year's performance. Regarding the long-term outlook for marine fuels, this sector is showing sustained growth. The trend for methanol dual-fuel ships has surpassed LNG in orders for the first time, with around 280 ships currently in operation. The growth in this area will be progressive, expected to ramp up significantly by 2025 and continue through 2028-2029. As for how this impacts demand, it's something we are currently assessing. Ship owners have two options for fuel: methanol or traditional marine fuels. The decision will hinge on the economics of conventional fuels compared to low-carbon options and their willingness to invest in cleaner fuels. Our Low Carbon Solutions team is actively engaged in discussions with various shipping companies about their future fuel strategies and how we can offer cost-effective solutions to meet their needs.

Very helpful Rich. Thank you so much.

Thanks.

Your next question comes from the line of Steve Hansen of Raymond James. Your line is open.

Yes, thanks. I appreciate it, Rich. Just wanted to go back to G3. Again, is there one or two key gating items that are really important here over the next month or two that you need to get through that will derisk it? Or will you not know until you get really close to start-up?

Yes, when we first provided our estimate, it was based on the significant lead time and the key factor was the production of the bricks. We have managed to speed up the production of those bricks, and we expect to have them air freighted to us and on-site in Louisiana before the end of the second quarter. This is one aspect of our work, focusing on materials and the repair of the ATR. Additionally, we need to incorporate all the insights from the root cause analysis and conduct a thorough review of all systems that have not yet been tested during the startup. Each of these work streams is extremely important. We are witnessing considerable progress, which is why we are confident about restarting in the third quarter. We won't set a specific date because our priority is safety and quality, and we want to get this right. I hope that provides more clarity.

So it does in the range, just to be clear as we start up in Q3 and it sounds like the actual tonnes won't hit the income statement though until Q4. Is that how to think about it?

It's give-or-take. That's probably the way to think of it, yes.

Thank you. Jim, I would like to revisit some of your comments in the MD&A regarding the catalyst in Chile and your plans there. While it seems that not much has changed, could you provide a summary of what’s going on and how it will affect future production? It appears there will be some enhanced production benefits related to the catalyst points.

Yes. If you look at our performance in Chile over the last few quarters, it has been very positive. This is the first time we’ve been able to operate our plants at full capacity. Recently, we have moved to contract gas and have over-contracted for gas from Argentina, which is beneficial. However, we continue to face export restrictions during winter months, and as we approach the end of April, we expect to produce from one plant at around 70% capacity using gas from Chile. In this quarter, we were about 25,000 tonnes short of our capacity due to a decline in the catalyst unit at one of our facilities. We are planning to complete the necessary work during this period, and when we restart, we are working on securing gas for the same timeframe next year, which should enable us to achieve higher production. Overall, we have a positive outlook for Chile and will focus on minimizing the duration of these winter restrictions and securing long-term gas contracts.

Appreciate the color. Thanks.

Your next question comes from the line of Ben Isaacson of Scotiabank. Your line is open.

Good morning, everyone. This is actually Victor Zamin, jumping onto Ben. So Rich, how confident are you with your production guidance in New Zealand? The Q1 operating rates were below the average for the last few years and we know some of it was maintenance driven, but can you clarify the magnitude of a possible reduction in your production guidance? And if the gas travels continue, what is the run rate we should think of going forward?

Thanks, Victor. Our guidance for the year is between 1 million tonnes and 1.1 million tonnes. During the quarter, two of our plants operated below full capacity. Towards the end of the quarter, we took one plant offline for planned maintenance related to gas processing, as previously mentioned. We are working to bring that plant back online. We are closely monitoring production from our existing fields and collaborating with our main gas suppliers to improve performance from the wells. It’s encouraging that OMV is planning a larger drilling campaign later this year, which we believe will be beneficial in the medium-term. I don’t have a revised estimate today, but we will keep monitoring and inform you of any changes to our guidance. In the medium to long-term, the new government appears to be more supportive of the gas industry and recognizes the role of gas in the energy mix, which we view as a positive development for investment. We will continue to provide updates on our guidance and outlook as we progress through the upcoming quarters.

No, that makes sense. Thank you.

Your next question comes from the line of Matthew Blair of TPH. Your line is open.

Good morning. Thanks for taking my questions. What are your expectations on China's MTO market for Q2? I think we're seeing less turnaround activity planned, but then we're also seeing just lower MTO margins. So what does that mean for the overall MTO utilization?

Yes, MTO margins is something that has been under pressure for quite some time. What we've seen is that they’ve been running pretty stably, and typically they take lower operating rates as when there's a supply strained environment, where methanol prices are running up, or they will see them often take some turnarounds to perform maintenance. Right now, they're operating at 80% to 85% operating rates, but the market's pretty tight. In Asia, in particular, they're working off of low inventory levels. We haven't seen any decisions being made there that would change our view of where we are today and operating rates. But that's always something that will continue to monitor. A lot of times what happens is they become the balance on the market, right? If the market goes short, they will moderate their rates, and it puts things back into balance, but we're not seeing any indications of that right now.

Sounds good. And then could you talk about the underlying cost dynamics in Q2 versus Q1? It seems like there would be some tailwinds in a few areas. One would be G3 appears to be running at around a $15 million on fixed cost impact in Q2 versus the $25 million in Q1? And then I think in Egypt, shouldn't you be rolling off some elevated shipping costs now as you have that plant back online? Are there any other elements on the cost side that we should be thinking about for Q2? And does that make sense you would have some cost tailwinds in Q2 versus Q1?

Yes. I think you're right about the G3 cost impact. We brought forward the full impact of the overhedged position, which was all accounted for in the first quarter. So we wouldn't expect a big impact from that in the second quarter. Costs on a monthly basis for the take-or-pay will impact, which is about $4 million to $5 million, like you said. So I do think that is certainly net-net we should expect lower costs from that shipping. Obviously, shipping is all about sometimes how our mix of product gets sold and which product catalog supply chains etc. Overall, we do expect more efficiency in our fleet than we would have experienced in the first quarter. I think those are probably the big ones that you've identified and there's nothing else that tells us to factor in.

Got it. Thank you very much.

Your next question comes from the line of Laurence Alexander of Jefferies. Your line is open.

Hey, good morning. This is Kevin Augustine on for Laurence. So just with gas restrictions easing into Q2, I guess how do you expect operating rates to sort of evolve over the year? I'm just trying to get a sense of you know how you expect inventories to go directionally? And then I guess sort of the puts and takes on pricing. I'm just trying to get a big baseline pricing for '24 and '25 and I guess how you can reasonably reach mid-cycle pricing conditions. So, yes just basically operating rates just how do you expect that to evolve?

Yes, I believe our overall global operating rates are around 65%. This takes into account the low operating rates in China and Iran. Typically, we expect the second and third quarters to be stronger, while the fourth and first quarters tend to be weaker. When averaged, it consistently aligns with the 65% operating rate. Demand remains relatively stable in traditional chemical applications, and there is a reasonably positive demand in energy applications. The industry is projected to grow by 2 to 3 million tons, aside from the Malaysian plant, which we anticipate to come online late this year or possibly in the next year. However, we don’t foresee that impacting the market in 2024. The market is relatively balanced, especially with Trinidad, and we don’t expect significant fluctuations in inventories that would affect methanol prices at this time. We will keep monitoring the situation, but we expect 2024 to remain balanced throughout the year.

Okay. Got it. Thank you. And if I could just sneak one more in, I guess prices largely rising. I guess how do you expect discount rates to evolve in 2024?

Typically, contracts are structured on an annual basis. Q1 marks our first quarter of adjusted discounts in our portfolio, which generally last throughout the year. After that, there will be another recontracting period with adjustments. Our primary focus is on the average realized price. Currently, China is pricing at $300 levels, while we're realizing $350 per tonne. We are pleased with our portfolio's performance and anticipate that, assuming all else remains constant, this will continue.

Understood. Thank you.

Your next question comes from the line of Nelson Ng from RBC Capital Markets. Your line is open.

Great. Thanks. And good morning, everyone. So you touched on methanol as a marine fuel earlier. I know green methanol is pretty expensive, but with methanol as marine fuel kind of ramping up? Is interest in low carbon methanol picking up? And I guess, from your perspective, are you mainly producing low carbon methanol through the purchase of RNG in North America?

Yes, thank you, Nelson. Certainly, the interest in methanol, particularly low carbon methanol, is increasing. Currently, we do produce a limited amount of green methanol using renewable natural gas, but this is not being sold into the marine sector at this time; it is going into traditional chemicals under a small contract. We are working to acquire more renewable natural gas to supply the marine sector, although prices for it are quite high. We are also exploring alternative methods to create cost-effective low carbon methanol, utilizing our existing assets. This includes using renewable hydrogen and CO2 as direct inputs where incentives and regulatory support are available. Some locations may be considered for this process. These are some of the initiatives we are advancing, and I hope to share more updates as our low carbon solutions team makes progress.

Thank you for the information. I have one final question regarding your balance sheet. Assuming G3 is fully operational next quarter, what cash buffer do you intend to maintain from a liquidity standpoint? In the past, this buffer ranged from $200 million to $300 million, so I'm curious if your needs for a cash buffer will change after G3 is operational.

We don't see that changing. Just our structure for cash and how we move cash to fund the business, we need a certain amount of cash. So we're not going to be changing that. Of course, a lot of times they can depend on methanol prices and we can't run it lower, but $300 million is an efficient and comfortable number for us. We don't see that changing.

Great. Thanks. I’ll leave it there.

And we have a follow-up question from Joel Jackson of BMO Capital Markets. Your line is open.

Hey Rich, I don't really want to beat a dead horse, and it's because I'm getting so much incoming on this question for the last 30 minutes, and it's coming back to about the similar EBITDA in Q2 versus Q1. I think people are struggling to understand, you're seeing that have similar volume right now and maybe some of the higher pricing. And you've spoken of cost tailwinds on this call you said that the overhedged position for G3 you resolve that in Q1, so you'll have that problem. It seems that most of you did $150 million in EBITDA in Q2 of last year at a lower price deck and similar volume. Is there something, what has described what the offsets are? Sorry, go ahead.

Yeah, yeah. I will. I think we must have described this properly before. But in Q1, we had a bigger price move up; it was around $25 a tonne. When we have that type of price move in a quarter, we get a bit of a tailwind on our cost structure because what's coming through on our costs for both produced and purchased inventory reflects a price that was lower from the previous quarter. There's a bit of a tailwind and we'd thought through Q1 that we won't get that same level of tailwind through Q2, because we're in like we're talking about a price move that might be $5 a tonne, $10 a tonne or something like that. I think that's the missing piece mainly. And I would probably maybe we cannot follow on current conversations about that if there’s any.

Can you provide an estimate of the inventory write-up on your purchased methanol in Q1 compared to what it normally is in that quarter?

I think this is more of what is the cost to produce inventory in the fourth quarter and the cost of byproduct in the fourth quarter versus the first quarter, which is reflected in the higher methanol price. So I think it's just the typical flows of how things work as we move through pricing quarter to quarter. I think that has probably a $10 million to $20 million positive impact on Q1 that we won't see as much of in Q2.

Okay. I'll definitely look there on this afternoon. Thanks a lot.

Yes.

There are no further questions at this time. I will now turn the call back over to Mr. Rich Sumner.

Okay. Well, thank you everyone for your questions and interest in our company. We hope you will join us in July when we update you on our second quarter results.

This concludes today's conference call. You may now disconnect.