Methanex Corp (MEOH) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing-by welcome to the Methanex Corporation fourth quarter earnings conference call. At this time all participants are in listen mode only. Later, we will conduct a question and answer session. As a reminder, this call is being recorded on Thursday, January 29, 2004. I would now like to turn the conference call over to Mr. Chris Cook, Director, Investor Relations. Please go ahead sir.

Thank you Ann. Before we begin today, I'd just like to take this opportunity to remind listeners that our comments and answers to your question 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. So, I would ask that you please refer to the bottom of our latest news release and to our 2002 annul report for more information. I would now like to turn the call over to Mr. Bruce Aitken, President and Chief Operating Officer of Methanex. Bruce?

Yes. Thank you Chris. Good morning everyone and welcome to the Methanex Investor conference call. I'm in Vancouver with a number of my colleagues here in the room. Our Chairman and CEO, Pierre Choquette will not be joining us today. Pierre is in Trinidad. We are reaching an important stage in the completion of our Atlas project in Trinidad, and as we speak, we have a review meeting for that project underway. We feel there is real benefit in obtaining Senior Management attention to our major projects at this point in time. So Pierre has asked me to lead this call today. You should be assured that he has made his contribution to both the quarterly results and my comments this morning. 2003 has been a fantastic year for us. We began the year with a terrible outcome to our New Zealand gas situation, but despite this setback we produced great financial results. For the fourth quarter, the income of four unusual items is $29m or $0.24 per share. For the year, $186m or $1.52 per share. EBITDA for the fourth quarter was very similar to Q3 at $83m while EBITDA for the year was a fantastic $391m. As you would expect from these results, cash flows from operations continue to be very strong, $64m for the quarter and $330m for the year.

A brief way to characterize the fourth quarter is the sales from our own produced product increased by about 10% and this was offset a little by lower prices resulting in a very similar EBITDA. During the fourth quarter, we also took a decision to substantially write-off the book value of our Medicine Hat and New Zealand assets. Both of these plants are in locations, which face an uncertain future. We can no longer justify the carrying value of these assets. The total write-off from both of these assets is $139m, and of this about $130m was a non-cash write-off. These write-offs complete for us the restructuring of our assets that are not supported by long-term low cost gas supply, in other words the only assets that remain on our balance sheet and now underpinned by long-term gas contracts. It's quite appropriate at the end of year to reflect on the environment in which we operated in and how we positioned the company in that environment. During the 2003 we have seen the methanol demand/supply equation remain in reasonable balance. Global ships in demand that are affecting many commodities are also evident in the methanol industry. Growth in Asia, in particular China, contrasts the declining demand in North America and flat or no growth in Europe. We would expect this trend to continue in the future. Demand (Audio Gap) and this represents a decline in methanol demand of out about 2m tons per annum. Interestingly as the political measurements in the US are leading towards a decline in demand what we would regard as a very useful gasoline component, we are observing relatively strong demand growth for MTBE and other global markets. The mid decline of methanol into MTBE over the last 12 months weakened at about 1m tons. So, that suggests growth of MTBE and other markets of about 1m tons balancing up to 2m ton decline in the markets I mentioned.

Global demand for methanol and to our other derivates saw a good growth and offset the decline experience in MTBE. So, year-over-year demand for 2003 to 2002 was relatively flat. On the supply side of our industry, we had observed quite strong operating rates particularly in some of the relatively high cost in countries such as China. And I guess on a high price environment this is a growth what one would expect. The people who have incentives to run their plants at high rates. Offsetting this has been the loss of supply for our own plant in New Zealand and I will comment on that in more detail a little later. So the demand supply balance that I have described has led to an average realized price of methanol for the year of $220 a metric ton. This contrasts with $155 in 2003 and is the highest price that we have enjoyed as an annual average since 1995. So, I would like to move on now, make a few comments about costs. We did suffer cost increases for gas in all of our plants in Chile and Trinidad, I gas cost linked to methanol prices. So, when methanol prices increase naturally natural gas prices increase as well. In our Trinidad plant in North America is subjected to high North American gas costs. And comparing 2003 to 2002, we lost about $33m of margin head 2002 gas prices prevail throughout 2003. So, quite a significant impact on our Trinidad plant. We have also incurred increased cost in New Zealand as a result of both higher gas costs and a higher fixed unit cost that results from lower production. We have also had an uncharacteristic series of outages at our plants in Chile. We take great pride in the reliability that we have enjoyed from our Chilean assets over many years. However, in 2003 we lost about 215,000 tons in unplanned shutdown. This is equivalent to about 7% of our total capacity in Chile. We have unfortunately suffered another unplanned shutdown in January, which resulted in a loss of 39,000 tons of production. These shutdowns are quite unusual and they are not related and we do expect and we are confident that the Chilean site can return to the normal reliable site that we are accustomed to. And that would be, we would expect that site to operate at 96%, 97% of it's capacity.

As I mentioned earlier in my remarks, we faced a significant challenge earlier in 2003. In 2002, our New Zealand plants produced almost 2.3m tons of Methanol at a very competitive discussed. In 2003, we produced a little less than 1m tons at a relatively higher cost but despite this we still achieved an outstanding result for the year. Those of you that have listened to our conference calls over the last year might recall that Pierre equated some numbers that we would need to achieve in order to produce the same financial result for our shareholders regardless of the outcome of these oil and gas. As already said it's time now to report but we did in fact execute our operational plans to achieve exactly what we had forecast. As I said earlier, it's very disappointing to have effectively lost down as a long-term low cost supply for our Asia-Pacific customers. The impact of the loss of New Zealand productions at least partly offset by the production from the Titan facility in Trinidad. You may recall that we acquired 90% of the Titan plant that we did not own in May 2003. This plant was acquired at a predetermined price, the prices did not reflect the high methanol market that arouses here. The Titan acquisition added 577,000 tons to produce methanol during 2003. The plant has operated at a very high reliability rate in excess of 98% and has exceeded all of the financial expectations that we had for this engagement. I would like to turn now and just talk a bit about our strategic initiatives that we were working on, and our two major projects in Trinidad and Chile.

The Atlas project in Trinidad is expected to go into commercial production during Q2 of this year. The project in Chile is on time and on budget, and is expected to be on stream in 2005. The completion of these two projects will represent a steep change in the cost structure of our company. At mid-cycle processing, we expect these two projects will add in excess of $100m of EBITDA to our cash generation potential, so, another real boost to the ability of Methanex to generate cash for its shareholders. And we've always been successful in signing a gas contract, within series of production level of a little more than 500,000 tons during 2004. And we continue to work on other gas options for our plants. In the meantime, we are operating our plants at quarter high level in Q1, and annual rate of 1.3 million tons, which does reflect the fact that gas deliverability is available. Our issue is secure and contractual work to that gas. We've talked in previous conference calls about our desire to underpin or raise our market position with long-term supply. I'm encouraged by the progress made by our corporate development team to identify opportunities that achieve all of the criteria that we've established in the new projects. We're still pursuing a number of options, but would like to narrow our focus to a third option before the end of this year. I would like to also make some comments regarding cash on hand and offer some thoughts around the priorities for the use of cash. Essentially, what we have been doing and what we would like to continue to do is adopt a balanced approach with three aspects of that balance. The first is reinvesting in our business, the second is managing our balance sheet appropriately, and the third is returning excess cash to shareholders.

I commented early on about two major projects in Trinidad and Chile. We think that it is prudent to have the liquidity, identify equity in these projects, and at the beginning of 2004, the remaining equity contributions that the two projects was about $180m. So clearly, this is a priority for our cash. We have established what we believe the valuable franchise in the methanol industry, and often had access to unique opportunities to invest. We have a very disciplined approach to investment. I think we have demonstrated that over the last 12 months and will only proceed with projects that satisfy both quantitative and qualitative hurdles that we've established. I talked a few minutes ago regarding opportunities in Asia-Pacific. We would expect based on the options that we're assessing with our contribution of equity to projects, to projects to supply Asia-Pacific would be unlikely to exceed $100m. So, this is the first element to have balanced approach to cash is reinvestment in our industry, where we can deal with our returns that are necessary. I think a lot amounted to our balanced approach to cash management is a constant review of our balance sheet. Methanol is a secret for commodity, and we believe that it is prudent to delever during times of strong cash flows. As part of our portfolio bid, we have chances of project-specific financing. This talk of financing is typically quite restricted and imposes the cost and inflexibility on the operations in our plants, advantage for us. Firstly, it reduces balance sheet leverage. Secondly, it reduces negative carry, the difference between interest earned and interest paid. And thirdly, it reduces operational costs and improves the flexibility in our supply chain.

As long as teams work on opportunities to accelerate the repayment between $100m and $150m of project gains, we would hope to be able to talk more on this initiative by the end of Q1 2004. The third important element of our balanced approach is returning cash to sales. I am pleased it's just the third element. But the third least important element, I've stressed before that we have a balanced approach. We regard this as just important as the other two elements. In the last four years, we have distributed over $450m to shareholders by way of ordinary dividends, special dividends and share repurchases. We're completely focused on shareholder value and committed to continue providing returns that maximize shareholder value. We scheduled some yearly dividend in 2002 and increased this by 20% in 2003. As we've done with Trinidad and Chili, expansions on production to 12 months. We are improving the quality of the company's earnings and I cited a few numbers on this a little earlier. We think that this will allow us to review the level of our yearly dividend at this time. continues to our cash flows and a successful start of the new plants. We believe that we will be well positioned to carry out our share repurchase. We would expect to do this by middle of . Our track record is that we've always carried through and completed such bids and not all companies can make this claim. So, the hesitation to proceed immediately is driven by the desire to eliminate risks related to uncertainty. The Atlas project is the largest methanol plant in the world. We are due to complete construction in the next couple of months and we'll commission the plant in Q2. Board and announcing that we will regard as commitment to repurchase shares. We think that it is prudent to assure ourselves of greater certainty regarding the steps we start off for that purpose. This is a rather long explanation, but I hope that it helps shareholders understand the company's approach to cash management. Once again, our commitment is to a balanced approach between , managing our balance sheet to maintaining cash to shareholders.

Lastly, I just like to make a few comments on the short-term outlook. Our methanol demand supply dynamics remained tight, and no new suppliers have until our Atlas plant begins production. Contract pricing in all of the major consumer markets on a non-discounted basis is around $250 per metric ton. And in the meantime, it seems to be towards higher pricing. We are seeing in Asia today processing in the 270 ranges. Through the arrangements we've entered into with , we are able to determine the level of production from 1.5m tons of North American methanol capacity. This flexibility provides us the opportunity to seamlessly introduce products from our major projects to the market . So for Q1, we expect profits to an average, are better on n Q4 by about $10 per metric ton. Our volumes of produced methanol would be a little lower than Q4. So, a small offsetting effect from lower produced volume. The only other variation of significance is the result of the write-off of Medicine Hat in the New Zealand plants. Depreciation in Q1 would be lower by about $7m than the depreciation charge in Q4. The balance of 2004 will remain positive as the tight supply of the our North American natural gas costs, reasonable global and economic growth, and limited new supply are fundamentals that lead us to believe that 2004 will be another excellent year for our company. So, I am happy to stop here and we're happy to take some questions.

Peter Butler of Glenhill Investment Research. Go ahead please.

Okay. I had two things. As I read some of the analyst reports on your company, I am a bit puzzled. I hear what you are saying and I agree with your outlook on Methanex. But you don't seem to be communicating this to the Canadian security analysts who -- most of these guys have extremely low numbers for this year and even lower numbers into '05, and that's what they've been doing for the last couple of years. They've been pretty much from the sweep if the stock is open, what are these guys are missing or what can you do to get those numbers up?

Well, thanks for the question Peter. I think the question was, as the only Director of the company and it should more appropriate be directed towards analyst. I guess we communicate to them exactly as we communicate to all other shareholders. They spend time analyzing our company and cannot because the answers that they believe are reasonable. I would say that the consensus forecast for Q4 was $0.22, and we came in on $0.24, that's not a long way away from reality, but I am reluctant to comment on that forecast going forward. They have exactly the same information as all other shareholders do.

Okay. I, the other things is, maybe you can comment, it looks to me like, you have a huge opportunity in China and my view has been that in the last couple of years, when China really gets rolling, they are going to suck the Methanol out of the rest of the world and you are going to have -- you are going to end up paying the highest price in world, and you are going to have a whole a lot of pricing leverage due to a very strong demand growth there. Is that how you guys see it or?

Yes. I mostly agree with that Peter. I think it's a good observation. My observation is that China is sucking up commodities and feedstock results was, from all over the world, methanol every commodity you think of, few process are extraordinary at the moment and ammonia, urea also as a product that have high process because of demands from China. And I guess, it's evident that China is manufacturing finished products and exports them around the world, and they need, what they don't have is low cost feedstocks. I think there is a few watch outs in China. They are, -- there is domestic methanol industry in China, and there is a lot of boarding of new clubs. But we don't feel particularly threatened by that. The plants are all very small, they tend to be in locations under extraordinary high costs. Most of the times we looked at has cash in the $150 to $200 per metric ton gross range. And those continue to walk right when the price goes down. So, we are developing a new slow processing mechanism in China, but perhaps it doesn't exist today. So, I think it was some really interesting opportunities. We have opened an office in Shanghai this year. We are going to add staff to that during 2004. We have a real focus on China's being half of our Asian business in the next decade. We are approaching China as well as some market, a little like the United States and Europe, it's a huge market in terms of geographic scale, number of customers, we have to develop distribution system, that's very similar to distribution systems we have in other markets.

Okay, thanks for your comments.

Bob Hastings of Raymond James, please go ahead with your question.

Thank you very much. I guess after abusing the Wall Street analyst and then on the call, yesterday, moved up to Canada. That's kind of interesting. So, just in terms of the Trinidadian operations, the Atlas plant, can you tell us of the final cost estimate is there? And when you expect product to actually hit the market? And I will just look to my colors, that $435m, is that what the number is?

Yes. That's the capital cost, Bob are around $415m.

450 or 415?

415. It included, when I look out working capital, bill, etc. You know it would get to about 425.

Okay, that includes working capital. Okay and what about the, when product actually hits the market, is that going to be in --?

Well, I guess we have been purposefully a little, Bob, because we are in commissioning, the commission size continues through Q2. So, we would expect certainly the product to be hitting the market in Q2, but I wouldn't like to be too definitive on the exact size.

Okay. And if I could just get a clarification on two items. One is the New Zealand run rate in the first quarter, you said it was annualized run rate, it was 1.3 million tones, and clearly I don't think you gave the long-term gas under contracts, and that's your buying sort of spot gas or short-term gas. I mean, is there a possibility that, that kind of run rate could just continue through the year based on spot gaps or --?

Yes, we have been saying for a while that we'd expect production from between 500,000 tones and a million tones, and I think I still feel that's probably the end outcome. We will definitely, given that run rate in Q1, we will definitely be more than 500,000 tones. Will we be more than a million? I sort of doubt it, because I think we have a big incentive to be operating those plants as hard as we can. we are not sure but we have the same incentives. So, the first half, we're are going to be producing more than we will in second half, but it is a little dependant on what gas is available, what the price is, the economics at the time.

Okay, thanks for clarifying that. The last one, I didn't quite get your debt repayment. Did you say a 150 million for this year?

100 to 150 is what we are looking, it's in that range.

And a lot of that is right down to the type I assume?

It's project specific, so you can circulate on that, but yes.

Okay. Thank you very much, and good results.

Thanks.

Don Anderson of Salmon Partners, go ahead.

Thank you. Just wondering what if you could quantify the effects of the Sterling and Peso on your operations as to sort of what, if you hedge there or what percentage of cost down there are priced in Peso, please?

This is Bruce, I'll ask him to answer that question.

Obviously, in terms of our overall cost structure in Chile, it's predominantly US dollars. Having said that, there is about $25m worth of exposure. So, the annual Peso exposure --

When?

In Chile?

What time?

We tend to hedge approximately 50% of that per year.

Okay, Chris, it sounded like there was someone else from the line there. I wasn't sure what that was, but I think I got the answer. Thanks.

Is the operator there? We think we have a bit of interference on this line. Sorry about that Don. Perhaps you could repeat the question?

I was just wondering what they are looking before the US plants, you've got under control now?

Through the month-by-month basis, I think we keep a very close watch clearly on natural gas prices in North America, the propelling mid-to-low price of supply chain. What I would say sitting here today, we are very short in our supply chain and we are pretty well breaking even on all of the basements from North America including the . So, is not to keep those operating and is keeping our supply chain intact. So as long as that's the case, we are not going to make any change of tool. You could expect comes up, we would probably prefer to take one of those costs down, but that's a little bit stickier at the moment. If it makes the interest to continue to operate one or both of them then we'll continue to do so.

Okay, thanks. What about new facilities coming on after Iran and then your own Chile facility, what do you see over the next couple of years?

There is another new plant in Saudi Arabia, that's sponsored by Mitsui, that's due up in 2005, our own plant in Chile early 2005, and then there is another Iranian plant, I think, we've actually got it now from 2006. The Iranian is very difficult to get any intimation, of reliability out of Iran and everything you hear is grossly optimistic and nothing ever happens in the plant what they say is going to happen. So, I think if you read the newsletters, there is a suggestion that the Iran plant will come up in 2005, they would never achieve that sort of construction rate before and no reason to suggest they will achieve it now. So, I think just looking at my comments, any other plants -- no, I think that's it for -- that's really just the million ton plant in Saudi Arabia and our own extension in Chile, there are already two plants in 2005 that will hit the market.

Okay. That Iranian one is a million tons as well?

So, it's a bigger plant in a sense, so it's a 1.7m tone plant. I think we've got it in our forecast in 2006 at the moment.

Okay. And what about your, there is plan under construction supposedly in Trinidad right now. I'm sure you see that when you are down there. Any word on that one?

. It's another 1700 ton a day plant. I think we had that in our forecast in 2006 as well. It is making progress but it's slow progress. Every time I'm in Trinidad, I drive by it, they have several works on the site but not much else. So, something is happening, but it doesn't quite look like a Methanol plant just yet. So, here we are at the beginning of 2004, you'd expect another two years at least before you see that plant in the market.

That's it from me, thank you.

Tony Campbell, please go ahead with your question.

I'm sorry, I don't have a question really, thank you very much.

Okay, thank you. Peter Butler, please go ahead with your question.

Yes. I don't want to step up ahead of somebody else hasn't asked an initial question. The operator seems to have a bit of problem here. Can you guys hear me?

Yes. We can hear you.

Okay. Well, then picking up one that you something mentioned, it sounds like that when you get the Trinidad plant up and running, on spec etc, that you feel confident at that time in the disposing of the cash flow, and it sounds like a 10% share repurchase program would be in the cards. You didn't mention dividends. Does this, has the management turned to share repurchases and no dividend increases in the cards. How do you guys see it?

I did make mention of ordinary dividends Peter, and we certainly see that as we improve the quality of the company's earnings and that's is the case when we start up these plants. But there is an opportunity to review ordinary dividends. So, I think that is probably one of our primary focus to ensure that we have a sustainable ordinary dividend, and as the quality of the company improves, we believe the sustainability improves. So, we would definitely be reviewing that.

Okay, I'm sorry I didn't catch that. Thanks for your help.

Okay.

If there any further questions please queue up now. Brian MacArthur from UBS, please go ahead with your question.

Good morning, I was wondering if you could just comment on inventory levels? I know it's in the fourth quarter, you drew down about 250,000 tons. You mentioned the first quarter sales will be down a little bit. Is that just an inventory issue or what's going on there?

I don't have specific numbers for you Brian, but all I could say a comment on a generic sense is that inventory levels are extraordinary low. We've been running on empty for much of the fourth quarter and we continue to really struggle on the supply chain to keep inventories in the right places at the right time. And that's always an indicator of tight markets. So, what we observe in inventory is what we would expect to observe at this sort of time.

So, the reduction in the first quarter, is that the timing issue for sales?

It probably is. I can't answer that question specifically.

Okay, great. Just tax rate for this year. Can you give us some guidance?

Yes Brian. The tax rate if we discussed in the Investors conference in Toronto in November, we expect it to be around 35% for 2004. In terms of current deferred split, it should be broken down, approximately 60% deferred, 40% current.

So, unless New Zealand runs at a much higher rate that won't change a lot.

That's right.

Great. Thank you very much.

Bob Hastings from Raymond James, please go ahead with your question.

Sorry, can you hear me.

Yes, we can.

So, it sounds like few people on the call. Sorry, I was just going to ask the tax question myself, so I'm done, thanks.

That's it operator. No other questions there? Well, thank you everyone for attending our fourth quarter call. I think this has been an outstanding quarter for us and an outstanding year for Methanex, and we are pretty excited about the future. We think 2004 will be another excellent year. So, thanks for your attention and good luck.