Methanex Corp (MEOH) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Methanex second quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference call is being recorded on Thursday, July 18th, 2002. I would now like to turn this conference call over to Mr. Brad Boyd, director investor relations and corporate comptroller. Please go ahead, sir.

Good morning, everyone. We’re doing the call today from Toronto. As usual, I want to remind you that our comments and answers to your questions may contain forward-looking information, and information, by its nature, subject to risks and uncertainties that may cause completed outcome to differ materially from our actual outcome.

Please refer to the bottom of our latest news release and to our 2001 Annual Report for more information. I just want to turn the call over now to Pierre, who’s going to give us his remarks.

Thank you, Brad, and good morning, everybody. I’ll follow the format that we’ve used over the last few conference calls. I’ll start with some general comments and make some more specific comments about the second quarter. I’d then like to update you on our strategic projects, make a few comments about the outlook, and then turn it over to you for questions.

So starting with general comments, you might recall that at our last conference call, we mentioned that most of the drivers that impact our business or affect our business results look favorable. And here we are three months later, and Methanol’s fundamentals are just as positive as they were at that time, if anything, more positive. And I sure want to take this opportunity to review again with you the key drivers that impact our business.

Let me start with supply. At the start of the year, there were several unplanned interruptions amongst producers around the world, including ourselves, and that’s been followed by a period of time when we are now seeing normal maintenance shutdowns at other large production sites. And the result of this is that incremental supply continues to be limited, basically in all geographies. And in our judgment, and certainly from our market intelligence, global inventories now are at the lowest levels that we’ve seen in many years.

As an indication of that, you know the position that we have in the industry, with at least 25 percent of the overall production. Our own inventories are down to about 33 days of sales, 650,000 tons, round numbers. That’s quite low for us. It’s certainly very low compared to where we’ve been over the past 12 months, and it’s below our target. We like to operate—the precise numbers are it’s 44 days is what we think is optimum for us. So you can see that we’re probably representative of the industry and have low inventories.

We would like to have a little bit more supply capability at this point, so we’ve been going out, seeing if we can identify some significant or reasonable quantities of spot material, and it’s been very difficult for us to find reasonable lots so that we can supplement our own supplies. So all of that, to say that the supply side continues to look [technical difficulty] down the road, and they happen to be ours around the end of 2003.

From a demand point of view, again, a positive picture. We see a small pickup in demand. It’s evident across all the end uses and most of the geographies. Some of this is likely due to inventory rebuild, which is not unusual when you’re in a period now of prices that are increasing rapidly. But the general consensus amongst our people was that we are seeing a small real demand increase, and we’ve just had a complete review with our customers around the world over the past few weeks, and that certainly confirms that.

As we look forward, there’ve been further announcements in MTBE, in California, in particular, where majors like BP, Shell, and Exxon have confirmed their intention to switch to Ethanol over the next year or so, so by the end of this year or some early next year, it’s not a surprise. It was anticipated. Those three represent about 50 percent of the overall consumption or supply of MTB in California. And frankly, in our view in the current supply and demand environment, we don’t expect the impact of this change to have much of an impact on pricing, if any at all. So that’s our view on demand, so we think that continues to be [technical difficulty] level somewhere between 325 and 350, I believe right now per million BTU.

That provides a solid floor of around $150 per ton. But current prices are well above that, which demonstrates again, as we’ve said in the past, that when you get into an environment of supply and demand that isn’t balanced, that is what dominates, not the price of natural gas. And as further evidence of this, if you see Methanol prices continue to move upwards over the past few months, including spot prices, and that’s been in spite of declines of natural gas prices for the current month or from the coming month.

All of this has resulted in—all of these factors have really resulted in spot prices to continue around the $200-a-ton level. Transaction prices have moved up every month to reflect the spot price, and for those of you who don’t follow this precisely, let me take you all the way back to February and talk about prices in dollars per ton in the United States. We start in February at $120; March was $125; April was $140; May was $167; June was $187. July was $207. These are posted contract prices. Transaction prices will be slightly below that, but it gives you a clear indication of how rapidly prices have moved in an environment of strong supply and demand fundamentals.

Our judgment at this point would be that if the current prices are maintained throughout the third quarter, we would expect our own realized prices, global average, that is, to be in the $175 range, and that would compare to $138, which is what we realized in the second quarter. In addition to all of this, another important driver, of course, is our own cost structure, and our costs have continued their favorable trend. They were down again in the second quarter just slightly compared to Q1, but they were down. If we compare it to a similar period last year, which happened to be a high point in our cost structure, our cash costs are actually down a full 20 percent from that period of time.

Probably the most encouraging thing to me and my colleagues has been the improvement that we’ve had in logistics cost. We’ve been able to achieve almost $5 per ton or $25 million per year reduction in our logistics cost. We estimate that this improvement is sustainable. It’s been achieved primarily because of a fundamental restructuring of our approach to logistics. But I’ve always said that once you fix your natural gas and you’ve got large plants with low conversion costs, your next degree of freedom is logistics. It’s a very large expenditure for us, and we’ve been focusing on that, and again, delivering in terms of results. This $25 million a year is a solid value creation impact.

So with that as general comments, let me now move to the second quarter, a few specific comments. I’m sure you’ve seen the net income. It’s just under $16 million or 12 cents a share. EBITDA has moved over 50 million, at 52 million for the second quarter, and that’s a very substantial turnaround, of course, from the loss of 17 million, and then EBITDA of 11 million in the first quarter.

Simple comparison, really, quarter-to-quarter, there are no unusual items. Most of the improvement is due to pricing. There was some movement in gas. Chilean gas costs came down to their low point, and that was offset by cost increases that we saw in North America. Any other changes were minor. On the revenue side, sales volume at 1.8 million, very similar to the first quarter. The change to note is that the amount of our sales that came from our own production, which is the only way for us to generate margin, of course, any significant margin, that was up about 50,000 tons, and that really came because we had improved output from our production plants.

Pricing was up $27 per ton over quarter one. We had healthy gains in all regions except Europe. As a matter of fact, because the price in Europe is fixed on a quarterly basis, in the second quarter, the prices there were a full 20 percent below the average of the other regions. Costs for the second quarter, I’ve already mentioned that. We saw a small decline in our cash cost in spite of increases is natural gas costs in North America, and again, I just want to repeat that we continue to see this sustainable improvement in our logistics cost.

From a production point of view, plants are running well. They’re running at capacity. The only interruptions have been ones that have been outside of our control. There was a small interruption to our plant in British Columbia and Canada when the natural gas supply was interrupted. And again, our inventories are quite low, as I mentioned earlier, at 33 days of sales.

Some comments on cash and cash flow, cash flow from operations was strong, just under 50 million, 47 million for the quarter. Our closing cash balance was 441 million. We had a very successful financing in the quarter, 200 million of ten-year bonds, really investment grade type bonds with no restrictive covenants at 8.75 percent. That was done in June, and of course, one of the reasons we have the high cash balance is we’re going to use part of these proceeds to repay some notes due in August for an amount of 150 million.

We’re making excellent progress on project financing for the Atlas project in Trinidad. From a planning point of view, I’m looking at our CFO, Allen, here. We’ve basically completed our cash contribution to this project, assuming, of course, that we conclude the project financing in the third quarter. And to that end, we not have a commitment letter, and we’ve started the interactions with banks and other institutions that will support that commitment letter. So that’s a lot of progress here in the second quarter from an overall financing point of view, really proud of what our financial team has done. So again, we continue to be in great shape financially, particularly with the current outlook that we see for Methanol prices.

A very brief update on strategic initiatives: In Trinidad, the Atlas project that I just mentioned, that contract, a reminder that this is a fantastic project from a value creation point of view, very low capital costs, very low operating costs, and great location. And the target date is the end of 2003 for completion. And at this point, we see that as continuing to be the plan.

Chile and Australia, we have two projects that we are developing there. We continue to do that. We’ve interacted with our boards to give them updates on this. And the final decisions are still over the next six to nine months, and as we conclude these, we will let you know where you are.

A third point I want to cover is distribution. I mentioned at our annual meeting our commitment to distribute excess cash to shareholders and that we would look at developing a policy for our board. In developing this policy, we wanted to look at two things; one, the feasibility of having a small sustainable dividend that we could look to increase over time as well as a more general philosophy on distributions when we have substantial amount of excess cash, which we continue to project we will have. We’ve completed this work. We’ll be discussing it with our board shortly, and we’ll make an announcement when the board has reached a decision or that work has been completed.

Just to close with an outlook, we feel really good. We really feel optimistic about the outlook for our company. As I mentioned at the outset, all the major drivers that affect our business are pointing in the right direction. Demand’s improving, inventories are low. A new supply for the foreseeable future is limited. Pricing trends are favorable. Our costs are at a low point. Our liquidity is great, and frankly, those are all very important considerations. So we do expect much improved results going forward. As you know, we don’t like the forecast results. We never have, and we’re not about to start, because it’s so dependent on the magnitude of the price changes from Ethanol. But I think it’s important to point out that at this point for Methanex, a $10 change in the realized price means an improvement in operating income on a quarterly basis of just below $15 million. So clearly with our current outlook for prices, we’re looking at much-improved results.

So I’ll stop here, and we’ll be happy to take your questions. Operator?

Thank you. Mr. Bob Hastings, Raymond James Equity Research, please go ahead with your question.

You’re a great quarter.

Thank you, Bob.

A couple of things. One is the—you mentioned that if prices stay where they are now, you could average, I think $375 a ton in the third quarter. Does that include Asia to where it is now, or does that include sort of the formula adjustment that would see them sort of catching up to the other European and North American prices?

Bob, you probably don’t realize that what you said, $375 in the quarter, which would be quite an improvement in price. So I did say 175, and that would be composed of what we see as the new posted price for Europe, which before discounts, is equivalent to just over $200 a ton. The new posted price for July in the U. S., which again, before discounts, is about $200 a ton. Latin America, which tends to move quickly, too, with spot prices, primarily, and then the gist of your question, Asia, the [indiscernible] in Asia is starting to catch up throughout the quarter.

On average, we say—we’re comfortable saying, you know, we should be at $175 a ton range.

Okay. And I notice that the stock buyback, you’re still trailing the maximum amount that you can buy. It doesn’t look like you’ll be able to get to your 11.5 million shares under the normal course distributed. I’m just wondering what the reason for that might be. Is that a reflection of where you think the stock value is or—or what?

Well, a few points. First of all, the last part of your question , it’s not at all a reflection of where the stock is. I think for those who are not aware on the call, we have bought 50,000 shares per day every single day since the normal course issue have been started on October the 29th. So we’ve never tried to time the market. We continue to feel that it’s great value, an appropriate thing to do.

If we were to continue at 50,000, as you said, the arithmetic says we’d be a bit short. We’d buy about 10 million, maybe just under, and from my perspective, at a time when we’re just about to discuss with our board the possibility of instituting a small, sustainable dividend and developing a general philosophy on distributions, I think that’s more important, Bob, than at this point, than just trying to do the exact arithmetic to, you know, fully complete the normal course issue bid. But, you know, the thing that doesn’t change is our commitment to return the excess cash to the shareholders in whatever form makes the best sense at a point in time.

Okay. And the board’s meeting on those distributions and the philosophy tomorrow, is it?

Yeah, this week.

Thank you.

Thank you. Sam Kens [phonetic], [Indiscernible] Capital, please go ahead.

It’s a very good quarter as well, a good outlook, too, for short term.

[Indiscernible] Why did you have to add the short term part to that?

Well, you just put it in your press release, a short-term outlook, not [indiscernible] or long term, so I’m just answering that. Argentina had the strangest circumstance, and you wouldn’t be aware of it because you have the marketing rights to that plant. That production from that new plant got blocked in Q2 because of health concerns of rail car transportation. Can you kind of elaborate on that and what the general magnitude of plant problems was in Q2?

Okay. I think I might be ill-equipped to give you on the phone here exactly our estimate of plant shutdowns generally in Q2. We’ll have to do that offline if that’s okay with you.

Sure.

But just dealing with Argentina specifically, the history, of course, is it started up at the beginning of the year. There was an accident in the plant. There was a fire, significant damage to instrumentation. Then the plant was out of commission. Then when the plant was ready to restart, the owners had not, I guess, appropriately ensured that the rail movements could take place to the different communities that it has to go through to get to the sea. This, as you know, Sam, is in [Indiscernible], which is almost on the Chilean border. And it has to find its way east to the ocean, so it moves by rail.

So you know, I’m not too sure how to add much more than that. The communities see a unit train of chemical products going through their community as an issue, and I guess I would say we are more used to dealing with that because we transport by so many different methods all over the world, and with our approach to responsible care, we would have taken care of that well ahead of time. Unfortunately, Rexall did not, and so they have to resolve that issue before the plant can restart, because they restarted at full tanks. We helped them with some rail movements, but in terms of being able to run the plant at capacity, that’s been the issue. So the plant is ready to restart, but will not until the communities have allowed the movement of those, that rail movement, through the plants.

And as we speak, they still have not allowed that?

That is correct.

Okay. One more if I may. On logistics freight and your $5-a-ton saving, that’s been your target for quite a while, and congratulations for reaching it. How much more is left here that you think you can glean in that area?

That’s a tough one to answer. I will tell you how we’ve achieved the $25 million savings, and that maybe can lead to, you know, thinking about how we can move further. There’s been two—two major reasons for the improvement. One is that it is due to the restructuring of the contract, just the basic time charter contracts. I’ll tell you why we did that. The other, and the most significant to me is that we have staffed that organization with pros, with really experts in the logistics area. They have worked to basically rejuice the—I’m looking at [Indiscernible] here. I can’t remember the expression that we use for reducing the number of—

[INDISCERNIBLE SPEAKER]: Rotation.

Rotation days for the ships, and of course, if you rejuice rotation days, it me3ans the ships are full of Methanol being paid for more of the time. So it’s a combination of rejoicing the daily costs in the time charters with a much more efficient operation, and that has come primarily by organizing ourselves to deliver that. And as you’ve said, we’ve had that objective for a long time, and we’re delivering on it.

The—what—in terms of the future, I should say that when we looked at the Atlas plant in particular, we were able to add two ships there probably at the absolute optimum time, not necessarily because of good planning, but at a time when yards were at a lot of capacity, when steel prices were very low, and so we ended up with, for that particular opportunity, with the best rates that we currently have in our system. And that’s allowed us to look at restructuring the other contracts as well, so certainly as the Atlas plant comes onstream in 18 months, we would expect again to get another bump-down in our logistics costs. But it’s hard slugging, but I think with the right organization and continuing to—I think with the institution of much better information systems, we can take a little bit more out.

Pierre, thank you.

There are currently no further questions in the queue. Are there further questions? Yes, we have another question from Mr. San Kens, Gosher Capital. Please go ahead.

Gee, Pierre, can’t get you [indiscernible] that lightly.

It’s amazing what happens when your results start to move positively.

I guess. Sustainability of your production level, which is outstanding at 98 percent, are you technically at 98 percent, or would you argue now that you’d have a higher capacity capability, I guess, in Chile than what you have, i. e., is it really more like 90 of a larger base, and sustainability which you did for year Q2, [indiscernible] for the petrochemical industry?

No. Actually, we’re pretty tough on ourselves. We—with Rodolfo, and you’ve met Rodolfo, what Rodolfo and his team do is that they—he happens to be at the table right now. What we do is that every time that we establish a new level of production, that becomes our benchmark, and so when we talk about how much we can deliver against a stated capacity, it’s against our best, so you know, these are not the type of chemical processes like others I’ve been involved in when you have a possibility for 20 percent, you bottleneck. I think that when we say three million tons in Chile, that’s very, very close to the maximum.

Okay.

When we say 2.4 million tons for New Zealand, that’s again very close to the maximum. You know, as we’ve said before, it’s a key element of our philosophy of operational excellence. We work very hard at that. We don’t back away from scheduled maintenance turnarounds, and we think we have great people, and we get the results.

Speaking of New Zealand, I guess, just to broach the issue of available economic gas there and what may happen down the road, obviously, you’re planning contingency here, is there any movement any which way in government positions or other positions lately?

Well, let me try and answer that, and again, we happen to have Bruce Aiken around the table, who’s responsible for Asia, so he can add to what I say if he chooses to. Our planning basis today is that we will have enough gas at the right price to run at capacity until the end of 2003, and then, that we would plan on having two years at approximately half of capacity, and then from then on, that we would be able to access gas to be able to run at one-third of capacity. What that means in our global environment is that the short fall in capability in New Zealand in 2004 is offset by—almost exactly offset by Atlas coming onstream even though it’s not in the right region. And then in the longer timeframe, then the planning that we’re doing for Australia and the planning we’re doing for Chile starts to, of course, more than offset that, and then we start to have a little bit more of our sales coming from our own production.

So the numbers I mentioned to you would be our base case. If you said to me, “How much gas did you get if you were prepared to pay much more than what we pay today,” that’s a very difficult question, and up till the redetermination process, in other words, the estimate of the reserves in the big Maui field are completed sometime around the end of this year, it’s very difficult to answer that question.

Bruce, do you want to add anything?

Yeah. I’d just say the re-determination process is a very complex process, and the outcomes is uncertain, but I think the—[indiscernible] described is a realistic operating scenario, and that’s the way we’re continuing to proceed forward.

Your base case assumes no reduction of allocation?

Yes, it does.

Oh, it does in there?

Yeah.

Yeah. It’s just based on all, you know, the best information we have at this point.

Okay. Thanks, Pierre and Bruce.

Okay.

Bob Hastings, Raymond James Equity Research, please go ahead.

Yes, thank you. Pierre, the actual profit margins in North America are now positive for the first time since, I think, about 1997 on any kind of sustained basis. How do you see that impacting sort of the industry? Do you expect plants to reopen, or is it going to take a long time, or do you still think that people are looking to eventually get out of the business?

Well, let me try to adjust the point this way. First, a bit of history before talking about what we are right now. You know, even in the second quarter when prices start to move up, if you look at what—assuming people buy short-term gas, if you look at the cost of gas in the second quarter, the number I have in front of me is that the average for the quarter was 342. At 342, the cash cost of a U. S. Gulf Coast producer would be just under $150, and if their realizations are anywhere similar to ours in North America, then there would have been no margin. And then you can go back a couple of more quarters, and you would make the same argument. So there certainly hasn’t been cash generation for people who buy short-term gas, but your question is more today?

Yes.

In looking forward. So, for instance, you know, Q3 gas right now, around $3, I guess, if you combine the next three months. That’s cash cost more like $135 per ton, so certainly with the outlook that I mentioned, that outlook would have slightly higher prices in North America, maybe, than what I said. Then that would give a good margin. But when I look at the people who have shut down and the reasons for which they’ve shut down, my judgment today is that none of the plants that are shut down would restart. I would actually add that we continue to be in dialogue with one of the larger producers who has an intent to shut down the plant regardless of where Methanol prices are today.

A lot of those plants, I guess, are now approaching 30 years old and getting long in the tooth anyway.

Well, it’s also about, you know, people look at the track record of the past few years, and particularly if they’re facing a capital expenditure or if they have an alternative for the plant, some of these plants can be converted to hydrogen production. So for people who have—who look at the history of the past few years and you may have an alternative, and if they consume Methanol [indiscernible], if they can interact with the Methanex and satisfy themselves that they have both security of supply and a reasonable commercial deal, you know, why tie up assets in that business? So a few people continue to go through that. They’re not easy decisions to make, but we’re involved in some of those, so I actually see the possibility of further restructuring in North America rather than, you know, the opposite, which is the question you really asked.

Yeah, and when—I guess that would also be sort of heightened by the MTBE announcements?

Yeah, well, you know, the MTB announcements, I just want to continue to emphasize that there’s nothing new there. There’s no new news there. This is certainly what we’ve been planning all along. It just happens to be coming at a time when it’s unlikely to have any significant impact, because my God, the—you know, when I do my own calculations, I look at the impact of what might happen in California over the next year, it gives the industry a bit of breathing room and opportunity to replenish our inventories. But, you know, longer term, yes, that would be a factor.

Yeah, and I think maybe the MTB issues may be helping. On the one side, it looks like it hurts demand a little bit. That demand is getting offset by growth elsewhere, but also it probably has some impact on keeping some supply additions away and still getting rid of some other supply.

I think that logic makes sense.

Okay, thank you.

Thanks, Bob.

Tony Campbell, Dot Partners, please go ahead with your question.

Good morning.

Good morning, Tony.

A couple of questions if I might. You guys have a lawsuit, I think. Could you update us on where that stands with regard to MTBE, and then I will return to one of my favorite questions since a lot of these fuel cell companies seem to be disappearing into the dust because there’s not much in the way of fundamentals behind them.

What do you see in the fuel cell area, and how do you see fuel cells perhaps providing some demand for Methanol two or three years out to maybe overcome the MTBE issue?

Thanks, Tony. First of all, on the first point, I just assume you’re referring to our claim under NAFTA?

Yes, sir.

It is not exactly one year since we closed the arguments in Washington to complete the first stage of the process, which is basically looking for a decision as to whether or not this is a legitimate NAFTA case. We’ve been following up recently, and although we’ve been saying this to ourselves from quarter-to-quarter, we expect shortly to get a decision either way.

That decision would be yes, it is a legitimate case, and then you go to damages, or it’s not, and then we have to decide, you know, the next step for ourselves. So we are in a waiting mode and have been for 12 months.

On the fuel cells, our current view is we continue to see significant potential. Our own attention, certainly in terms of effort and allocation of resources, has been primarily in a non-automotive area recently. Having said that, we did participate with the California fuel cell partnership in building a Methanol fueling station, which was our commitment, and of course we have the Necar 5 from Daimler, which is a Methanol-based fuel cell that went from California to Washington. And that was encouraging, but our own effort is in the non-automotive area. We’ve made small investments there. We continue to see that as the major potential, but I don’t think that we would count on any revenue in the type of timeframe which you mentioned, which was a three-year timeframe.

This continues to be, in our view, the longer-term timeframe, and in a five- to ten-year timeframe, there are three potential new sources of market growth that don’t exist today. One is Methanol’s power concerning geographies where it makes sense, and the other one is Methanol [Indiscernible], again in geographies where it makes sense, and there are people working on both these projects. And the third is fuel cells, and yes, in a five- to ten-year timeframe, these applications have an opportunity to overwhelm the reduction in Methanol demand from MTBE. Their [indiscernible] a magnitude different.

Thank you.

There are currently no further questions.

Well, thank you very much, Operator. And for those of you on the line and on Web case, audio Web cast, we thank you for joining us.

Excuse me. We do have one further question. Did you want to take it from Don Anderson, Salmon & Partners? Thank you. One moment, please. Mr. Anderson, with Salmon Partners, please go ahead.

Thank you. Now I got onto the call late, so I apologize if this was already addressed, but I just wanted to see what your latest view was on the potential or the plant in Iran that may come on some point over the next, who knows, year or two or sooner. I just wanted to hear what the latest views were on that. And again, I apologize if it was already asked.

No. The question wasn’t asked, Don. And again, for everybody on the line, an opportunity to get an overview. Iran is blessed with lots of gas, and therefore, gas privitization is a key part of the strategy, and Methanol plants are a part of that. We haven’t changed our view very much in terms of the timing. Our estimate would be different than what is being published in the papers and we see a next Iran plant coming on at the end of 2004 or early 2005, and that’s based on the intelligence we have in terms of the stage of construction as one of the track record of bringing those plants onstream.

Thank you.

You’re welcome.

Okay. There are no further questions.

Thank you, Operator, and again, thanks to all of you for joining us.