Methanex Corp Q1 FY2025 Earnings Call

Good morning. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the Methanex Corporation First Quarter 2025 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. I would now like to turn the conference call over to the Director, Investor Relations, at Methanex, Ms. Sarah Herriott. Please go ahead, Ms. Herriott.

Good morning, everyone. Welcome to our first quarter 2025 results conference call. Our 2025 first quarter news release, management discussion and analysis, and financial statements can be accessed on 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 forecast or projections which are included in the forward-looking information. Please refer to our first quarter 2025 MD&A and to our 2024 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. 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 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 to discuss our first quarter 2025 results. Our first quarter average realized price of $404 per ton and produced sales of approximately 1.7 million tons generated adjusted EBITDA of $248 million and adjusted net income of $1.30 per share. Adjusted EBITDA was higher compared to the fourth quarter of 2024, primarily due to a higher average realized price and higher produced sales. As we entered the first quarter, methanol markets were very tight with numerous supply constraints across the industry, leading to pressure on global inventories. In the Atlantic basin, supply was restricted by planned and unplanned outages, gas feedstock constraints, and restricted flows from the Middle East caused by the conflicts in the region. In the Pacific basin, supply was restricted primarily from very low operating rates in Iran, which we estimate were well below 50% through the first quarter. These conditions led to pressure on global inventories and high methanol pricing through most of the first quarter. Conditions in the Atlantic basin improved through the first quarter as plants returned from planned and unplanned outages, as well as increased supply flows from the Middle East into Europe. As a result, we saw a decrease in methanol pricing in the Atlantic from high levels as we moved into the second quarter. In the Pacific, we've seen some improvement in operating rates in the basin with increased production from Iran, although coastal inventories in China remained well below prior-year average levels through April. In China, we've seen methanol spot pricing decrease by approximately $20 per metric ton from Q1 levels, which we believe is driven by the anticipation of increased supply into the market and some moderation in global energy pricing, impacting marginal production cost and MTO affordability. We estimate the current marginal cost of production in China is in the $270 to $280 per ton range. We posted our second quarter European quarterly price at €625 per ton, representing a €75 decrease from the first quarter. Our posted prices for North America, Asia-Pacific, and China were flat in April and decreased in May. We're closely monitoring the impact of potential tariffs on global economic activity and are cautiously managing our business through this period of uncertainty. Although the direct impact of tariffs on our business currently is limited, an economic slowdown would impact methanol demand. To date, we have not seen an impact on methanol demand, and we expect demand in the second quarter to be higher than the first quarter, given increased seasonal activity in construction and mobility as well as higher MTO operating rates. MTO operating rates are expected to increase given increased supply availability in the market from seasonally higher operating rates in the methanol industry in the second quarter. Now, turning to our operations, Methanex production in the first quarter was lower compared to the fourth quarter, with lower production from Geismar, Trinidad, and Egypt. In Geismar, production was lower due to a planned turnaround at G2 and an unplanned outage at G3 at the end of February. G2 successfully restarted in March and is operating at full rates. We announced this morning that G3 has successfully restarted and has begun producing methanol. Our team worked closely with Johnson Matthey, a technology provider, during the outage to complete a root-cause analysis and revised startup plan, which was successfully executed by the team. In Chile, I'm very happy to share that both plants have been operating at full rates, and production was higher in the first quarter due to better reliability and the technical constraint being removed during the outage that occurred in November 2024. We have gas contracts in place with Chilean and Argentinian producers until 2030 and 2027 respectively, which underpin approximately 55% of the site's gas requirements year-round. We continue to expect seasonality in production, but are seeing positive developments, making full gas supply for a two-plant operation available for longer periods. In Egypt, first quarter production was 20,000 tons lower than the fourth quarter due to gas curtailments that were driven by gas supply-demand balances in the country. We're monitoring the gas market closely and would expect to experience some curtailments in 2025, particularly in the summer months, depending on gas supply and demand dynamics. Now, turning to our current financial position and outlook. We ended the first quarter with $1.031 billion of our share of cash and continued access to our $500 million undrawn revolving credit facility. As a reminder, in the fourth quarter, we executed our OCI acquisition financing plan, including issuing a $600 million bond and securing a $650 million term loan commitment from our banking partners. The completion of these financing arrangements gives us the financial capacity to complete the OCI acquisition and flexibly achieve our deleveraging plan. We are continuing to progress the regulatory process and expect the transaction to close in Q2 2025. Our 2025 priorities are to safely, reliably, and efficiently operate our business, close the OCI transaction and achieve the identified synergies, and direct all free cash flow to reduce leverage. We do not anticipate significant growth capital over the next few years and remain focused on maintaining a strong balance sheet and financial flexibility, paying particular attention to the prevailing economic environment. Based on our second quarter European posted price, along with our April and May positive pricing in North America, China, and Asia-Pacific, our April and May average realized price range is forecasted between approximately $360 and $370 per metric ton. Based on this lower forecasted average realized price coupled with lower produced sales due to the G3 outage, we expect lower adjusted EBITDA in the second quarter of 2025 compared to the first quarter. We'd now be happy to answer questions.

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

Thank you very much. And good morning, everyone. I have two questions. Rich, the first one is about capital allocation, which I’m sure you’ve been asked before. When the OCI deal was announced, your stock was at $40 and the weighted average spot price was around $350. Now, the stock is at $30 and the weighted average price is closer to $300. This means the buyback return opportunity has improved, while the OCI return has seen a slight decline from a time value of money perspective. There are slightly increased balance sheet risks. I’m not asking whether there’s a chance to do buybacks instead of OCI. My question is how flexible is the board willing to be regarding this decision? What criteria do they consider when deciding to pivot towards buybacks instead of completing this transaction while avoiding criticism for being too focused on short-term results? Thank you.

Thanks, Ben. I think when we talk about capital allocation and we look at our priorities for capital, number one, we want to have a strong balance sheet and be able to maintain our business through all cycles. When we looked at both of those opportunities with the OCI acquisition, we're very excited about the value that creates for the company. But what we were committed to and remain committed to is de-levering the balance sheet, and that's the continued focus for all of our free cash generation right now until we get to a place where we were pre-deal with a much stronger asset base having brought on those assets. So, that's the main focus. And right now, we're not considering share repurchases at this moment.

Thank you for that. My follow-up question is about Iran. Can you provide an update regarding the port explosion and its impact on methanol, including trade, nearby capacity, and storage? Additionally, what is your latest information about how sanctions and their enforcement are affecting methanol flow from Iran? Thank you.

Yes. Thanks Ben. So, first and foremost, that was a really tragic event that happened in Iran. We don't believe that that's impacted methanol in any way. But, obviously, that's something that they're going to have to review and figure out what that does from a safety and operational perspective, but not impacting methanol. As it relates to sanctions, I think what we saw through Q4 and Q1 is we saw Iran probably at some of the lowest points we've seen from an operating perspective, mainly because of the gas situation there. We believe a lot of residential demand combined with how the gas infrastructure performs. And obviously, that has to do with the impact of sanctions on their ability to produce and invest in infrastructure there. So we saw well below 50% operating rates through Q1. We are starting to see increased rates as we come out of the winter period. We get most of our intel by looking at trade flow statistics, so we don't have a lot of insight into actually how each plant is operating. And we continue to monitor that. But we are expecting an increase in Iran flows into Coastal China in the coming months.

Thanks.

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

Morning. So, great that G3 is starting to ramp back up with the last while here. Do you think about that plant and some of the challenges you've had on it? It's a bit of a different setup and configuration at those plants and I think the type of configuration sort of requires, what's the right words, more user experience, competence, getting to know the asset better. Can you talk about that as the team learns to run this asset better? How much confidence do you have that you can run this plant at 95% and the other plants, or do you have to model for more maintenance, more downtime, more issues going forward?

Thanks, Joel. The big thing for us was getting the right restart conditions for the ATR. That was the challenge we worked through. We worked really closely with Johnson Matthey, as well as bringing third parties here to help us through that process. We have now got restart conditions. This startup went very smooth. We've also built in validation checks that would tell us about the two issues we experienced, and all of our validation checks have looked really good. These conditions can be used any time we have a plant come down for maintenance. We expect that these conditions look really good if everything's checked out. We feel really good about the ability for this plant to be up and running on a sustained basis and planning for high reliability. Of course, we have to prove that out and have a sustained run, but the startup went extremely smooth, and we're very happy with where we're at right now.

Okay. And then you have a busy month or so coming up. I guess you're going to close the OCI assets in the next imminent weeks. Have you been able to get some more color on how Nat Gas and Beaumont have ramped up? I seem that they're doing better than they have in the past or is if you really only get on site once you close a deal?

Once we finalize the deal, we visit the site. We learn about industry operating rates from news reports or analysts that many people follow. Recently, both plants went through turnarounds, which is beneficial for us. We're progressing through the regulatory process in Q2 and are eager to integrate those world-class assets into our supply chain.

If I just fit one more in. It looks like you're implying about a 40% discount rate so far posted price in Q2. Is that the right level of discount rate we should be using as a base case for the rest of the year, second half of the year, even after the OCI asset closes and after G3 is back running normal?

We gave a range of $360 to $370 for the posted price. It's probably on the higher end of that range for the few months, giving a discount rate. What we're looking at right now is always what's the level over China and our global ERP. Right now, China's pricing is around $270 to $280, and we're realizing this level. We could see some moderation in that depending on the global supply-demand balances and what we see on energy pricing. But right now, we really focus on what's our realized pricing over China. So, it's hard to give you a discount rate. I mean, if you want to use that 40%, it's something we'd probably want to get back to you on. But right now, we like the premiums that we're seeing in the market. We'll continue to track and monitor that as we move forward.

Thank you.

Your next question comes from the line of Josh Spector with UBS Financial. Your line is open.

Yeah. Hi. Good morning. Thanks for taking my question. I wanted to ask two things on China, just one where you talk about where prices are today. I mean, they've moved down decently over the last month. How do you think about the support level, given where coal is moving towards? Does that leave more room to move down or is there something where you'd say, this is something that drives support here? And then second, just I know there's not really any direct trade flow here of U.S. into China, but just thinking about tariffs creating friction. Does that have any impact on Western Basin supply at all in terms of some of the movements or Asia, if that's the one worth commenting on more? Thanks.

Adding to your first question, the cost curve today is at that $270 to $280 level. That's a pretty firm cost curve based on coal pricing around $650 per ton. We've seen coal pricing right in kind of the range that the government sets on where they target coal pricing to be. We have tested our cost curve many times in this industry, and it is quite resilient and responsive. The other data point to check is MTO affordability and where olefins pricing is at. I would say that's another data point pointing around that $280 to slightly above level. So, we think China is firmly in that space today. As it relates to product movements and friction, we don't expect a lot of U.S. flows moving to China currently. Actually, there are no flows at this moment. The biggest thing we'd be looking at is just the impact of tariffs on export manufacturing out of China. We're closely monitoring that right now.

And probably too tough to answer, but I'll try is just if you did have some downturn further from here in terms of China demand, would you see exports going into China needing to find a new home or would you see domestic assets shutting down? Is there any one of those that you would see as a more likely scenario?

What we would see is that we don't anticipate a significant impact because, fundamentally, China is a major consumer of methanol. They use about 60 million tons, with roughly one-third of that going into traditional chemical applications. If you consider the export aspect, it's estimated that about 50% is exported. Approximately 15% of manufacturing from China is directed to the U.S., which results in a relatively small figure that we are monitoring. We don't expect to see a substantial reaction concerning demand at this time. If there were an oversupply situation, we might see some reduction in operating rates in coastal China to align the market, but that's a situation we are currently observing, and we don't foresee a significant impact.

Helpful. Thank you.

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

Yes. Good morning, guys. Thanks for the time. Just wanted to ask about risk mitigation as you move into the closing stages of the transaction here, what are the key steps you need to take or maybe some of the initiatives that you need to put in place to make sure you've got the risk managed on these new assets? And thinking gas in particular, I know it's unhedged. Any additional operational or off-take marketing type agreements? Just walk us through how you can get a hold of that and take risk down in what's still a pretty uncertain environment. Thanks.

Thank you, Steve. We have established a significant integration management team to oversee all aspects of the integration. By day one, we aim to produce methanol safely and reliably while also delivering to our customers. Although we cannot enter that business immediately, we have been preparing as thoroughly as possible in advance of the transaction to ensure we are ready from day one. We don't foresee major risks or obstacles, but we are continuously evaluating and addressing potential risks. A key priority is to get access to the systems for early communication and to understand the flow of information, including billing and invoice payment processes. We are considering all of these factors to ensure a seamless integration from the outset and to quickly incorporate this into our business. We will also focus on achieving synergies, which will take time. Our dedicated team has been working internally and collaborating with OCI as much as possible ahead of the transaction while being mindful of the regulatory process.

Okay, great. That's really helpful. And then just thinking back to the D3 recovery and startup now that's been announced. Are there going to be getting milestones as it's going through this new, I'll call it, run rate process with the new catalysts in place or the new fixes to the ATR anyway? So how should we think about that? Is there planned ups and downs to test out how it's going? I'm trying to get a sense of whether we should expect any sort of fluttering in the operating rate here in the next quarter or two.

I think one distinction, and maybe it's just something to clarify, is this has all been about startup conditions and getting the unit to full operating rates. Once we've got the unit up to full rates, the auto-thermal reformer has operated really well at 100% operating rates. We operated for four months at close to full capacity, producing 600,000 tons. What we didn't have in our startup conditions led to the catalyst damage. What we've done now is we've validated through the process and now have startup conditions that allow us to get to those high levels without doing any damage within the unit. There is no bringing down to test. We expect to be at high operating rates, and of course, if we had unplanned downtime, we would inspect and validate everything that we can’t do while we're online, but everything online indicates we’re in good shape.

Okay, great. And then just one last one. I apologize if I missed it earlier on some of the tariff talk, but is there any issue with bringing methanol in from Trinidad, as you see it here today? Is there any kind of risk to the tariff structure there and how that should impact sort of inbound flows, I guess, more broadly from the country?

Yes. There are some limited flows of Trinidad into North America, mainly in the east coast supply chain. There is a flat 10% tariff currently, which has a very minor and limited impact on the business. That's something we're working on right now.

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

Morning, Rich. A question around demand. Over the last couple of years, I take a look at a variety of sort of commodity chemicals out there. They've been pretty weak, maybe even some sort of customers of yours. I'm just sort of thinking in terms of like polyurethanes and the like. And I know that's a much smaller piece of the pie. But as I read sort of some of your near-term commentary, particularly as you talked about some sequential demand declines in Q1, it appears to me that there were primarily seasonal reasons, Lunar New Year and the like, that may have slightly reduced your MTO operating rates. If I heard you correctly, you're talking about a sequential uptick in demand in Q2. So, with all of this volatility, macroeconomic volatility, and some of your end markets being a little volatile, could you talk about how methanol demand has actually held up far better than some of the other commodities and what your expectations are even in this sort of reduced global GDP growth environment over the next couple of quarters?

Sure. Thanks, Hassan. Right now, I think I've talked about the makeup of demand for methanol. When we look at it, about 50% is for traditional chemical applications, about 30% to 35% is for energy applications, and the other 15% to 20% is for methanol to olefins. We start with energy applications, which have been quite good for us. We haven't seen big variability or volatility in that demand, which has been stable and growing. MTO tends to be a balance on the industry; when there's a lot of supply in the market, they tend to operate high rates, and when the supply gets tight, they tend to operate low rates. So, there's a bit of noise in our demand because of the balancing act of MTO operating rates. Traditional chemical applications vary by region and depend heavily on GDP in each region. That’s something we monitor closely. We have a lot of leading indicators of economic activity around the world. It hasn't been particularly strong, but we haven't seen weakness in it. When we expect demand to pick up, it's not talking about big increases from a percentage basis, just that it’s seasonally low in Q1 and expected to be seasonally higher in Q2. Certainly, auto housing and all those leading indicators are things we're tracking closely. One thing to note about our industry relative to other petrochemical industries is that we've seen lower growth than historically. Existing supply in methanol has had a hard time keeping pace even with slower growth because of constraints around Iran, constraints around Russia, Venezuela, Trinidad, New Zealand, and others. These factors have led existing supply to be constrained, with not a lot of new capacity being added in the industry. I think there is a bit of differentiation, even with slower demand; methanol is not getting out of balance like we do see in some of the other sectors.

Understood. Very helpful. And as a follow-up on the feedstock side of things, particularly on the U.S. natural gas side, with the close of the OCI deal, your exposure is going to get larger in the U.S. It just seems that you have arguments being made on both sides of natural gas prices. We've seen volatility, crude oil prices have come under pressure. There are pundits talking about how potentially in a lower oil price environment, there could be shut-ins in the Permian. As your exposure rises in the U.S., how are you thinking about nat gas? How are you guys thinking about your existing hedging program? How are you thinking about the hedging program on a go-forward basis with the OCI deal eventually closing?

Thanks. We look at it closely. Right now, we actively are in the market with our rolling hedge program targeting certainty around our cost structure at around 70% operating rates. When we have seen short-term volatility, the long run end of the curve is coming down. When you look at where the long end of the curve is, we’re seeing $3.50 pricing or below, which is positive for us. We haven't taken any action on that to-date with OCI. It is trending positively for gas pricing, giving us a great cost structure over a longer period. In the short-term, spot gas has traded down below $3.50. But looking over the remainder of 2025 into 2026 and somewhat into 2027, it's still in the $4 range. We're able to be opportunistic with layering in. We're looking at both the short-term and long-term, but we believe there will be opportunities to get a solid cost structure to underpin making our company stronger and more resilient with these assets.

Very helpful, Rich. Thank you so much.

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

Great. Thanks, and good morning, everyone. My first question is about the gas supply situation in New Zealand. Can you provide more details on this? It seems that you've diverted gas in the first quarter, whereas in the past, this typically happened during the summer or the Northern Hemisphere summer. Do you anticipate that the power sector will increase its gas usage, and is the decision to divert gas something you can control, or is it made by the offtaker?

Thanks. On New Zealand gas, you're right, we did produce about 160,000 tons during the quarter. We produced less at full capacity from one plant. We are selling a small portion of gas that was a contract ask from us last year. As we move into the winter months, it's more likely we could see a big ask on gas, which we would respond to if that's the case. Our continued operations at one plant are dependent on gas production in New Zealand, and we're working closely with our gas suppliers. We need the gas to maintain our minimum operating rates. The situation is dynamic. We can give you more of an update when we get through Q2.

And if methanol prices trend lower, are you able to push more into the power sector or like you said, it’s more about some asking for it?

It’s more about supply-demand balances in the country and requests that come to us. Certainly, we're there and have always been responsive to that, and we'll continue to be.

And then just switching topics a bit. On the OCI transaction, can you just talk about which key approvals are needed and if any have been received yet?

Yes. We're going through the regulatory review process in both the U.S. and Europe and those continue to progress. Those are the remaining steps for approval of the transaction.

Okay, got it. I'll leave it there. Thanks.

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

Great. Thank you, and good morning, Rich. Want to circle back to the Q2 guide. The $360 to $370, it seems to imply that the discount rate is getting worse in Q2 than it was in the first quarter. Are there any structural changes that would explain that, or is that just a function of the geographical mix?

No, I think you probably shouldn't read too much into that. I think we'll probably be on the high end of the range, so I'm not sure where we are calculating the percentage. Again, we're really focused on what the realized pricing is over what we think the cost or price center region is, which is China. We've seen inventories getting more healthy and through with more supply into the market. As we trend through Q2, we'll continue to track. Directionally, we have seen some moderation. But I wouldn’t point to a big expansion in the discount; it’s more about where some of the spot markets have trended in the short-term.

Sounds good. And then you mentioned improving methanol demand in the second quarter in part due to higher MTO operating rates. Is there any numbers you can share on where MTO utilization is today versus the average for the first quarter? Thank you.

Yes. Today, it's around 75% to 80% operating rates, which is similar to the first quarter. We've seen when there's lots of supply available in the market that when Iran ramps up and we start to see more coastal products available in China, they can get above 90%. There's about 21 million tons of capacity, so a 10% change means a kind of 2 million tons of demand there. That will depend on availability in the market once these plants come out of maintenance.

Great. Thank you.

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

Good morning. Could you discuss how severe a trough you considered while evaluating scenarios for the OCI merger and what liquidity metrics were your focus? Additionally, could you provide an update on the current situation with the shipping pipeline for methanol flex fuel capacity?

Thanks, Laurence. In terms of a trough scenario, we typically plan the company and the balance sheet around a $250 per metric ton price. This is the lowest we've seen pricing go in a 12-month period, usually only in an economic shock event like COVID or a financial crisis. The first thing is having assets at the low end of the cost curve and cash positive through the cycle. We ensure we have access to liquidity. Our undrawn credit line will actually increase to $600 million post the deal. We have natural levers in our business. Typically, when you see lower methanol prices, our gas contracts respond. In those lower environments, we see gas in North America tends to be a lot lower, and then the U.S. dollar tends to strengthen against foreign currencies. We also look at discretionary CapEx and OpEx and other measures in those environments. We feel we've properly planned for any trough scenario. We're far away from that today, and we'd have to see a lot greater impact to get to anything that resembles that.

Okay, great. And just on the marine flex fuel?

Sorry. We’re seeing all the containerships, and the outlook is for 350-plus ships coming into the market over the next four to five years. By the end of this year, the demand potential for all the ships on the water would be close to about 3 million tons of demand potential. This depends on their selection of fuel, whether they will burn methanol or conventional bunker fuels. Currently, gray methanol is more expensive than low sulfur fuel oil but cheaper than marine gas oil. We’re in discussions with them on their needs. Giving you a demand forecast is difficult because those decisions haven't been structurally made yet. We're not seeing long-term contracts for methanol currently, and we are ensuring methanol is available in major ports through relationships with bunkering companies. Discussions around low-carbon methanol continue, becoming more about our cost decisions and regulations; we're in active discussions about that as well. The IMO has taken steps to push forward regarding lower carbon fuels and penalties for non-compliance. We're watching that closely.

And then just lastly, the U.S. proposals to implement fees on China-made or China-owned ships or fleets ordering ships from China. Does that create any arbitrage opportunities for you relative to competitors?

I don't think it does. Being a Canadian company, our opportunity depends on the type of ships we're discussing. The ships we are building are medium-range vessels that are smaller, in contrast to larger container ships. We can provide more information on that question later.

There are no further questions at this time. I will now turn the call back over to Mr. Rich Sumner. Thank you for your questions and interest in our company. We hope you'll join us in July when we update you on our second quarter results. This concludes today's conference call. You may now disconnect.