Methanex Corp (MEOH) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation's First 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 call is being recorded on Thursday, April 28th 2005.

I would now like to turn the conference call over to Ms. Wendy Bach, Director of Investor Relations.

Thank you, operator. Good morning ladies and gentlemen. I would like to remind our listeners that our comments and answers to your questions 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. Please refer to the bottom of our latest news release and to our "2004 Annual Report" for more information.

And I'd now like to turn the call over to Methanex's President and CEO, Mr. Bruce Aitken, for his comments.

Yes. Thank you, Wendy, and good morning everyone. Welcome to Methanex first quarter investor conference call. I'm in Vancouver, and I have a number of my colleagues in the room with me.

The first quarter is another outstanding quarter meaning that our key performance measures are the best we've achieved in 10 years -- the highest net income, the highest cash flow per share, and the highest EBITDA. Our net income of $76 million was $10 million higher than the comparable fourth-quarter figure in 2004 and more than 60% higher than the net income for the first quarter in 2004. We achieved this result in an environment of tight supply and demand for methanol, and methanol prices remained high and stable.

In all global markets, the Methanex non-discounted reference price is a little over $300 per metric tonne and in oil markets remains unchanged during 2005. In North America and Asia, we have maintained the pricing stability into May. While in Europe, the second quarter price remains at 230 euros per metric tonne -- the same level that it has been at for the last three quarters. A number of our planned and unplanned outages in the first quarter have maintained tight market conditions, with not any inventory rebuilding taking place. Our inventories still belong at level that we regard as optimum.

The first addition to global supplier -- sorry -- China in 2005 will be our own Chile IV plant. We have been a little frustrated by some late design changes introduced for the project plant technology provider. However, construction is essentially complete, all utilities have been commissioned, and we are in the process of loading catalysts into the last piece of equipment that needs to be commissioned.

We expect to be making methanol within the next two weeks and to be making deliveries to customers from this plant in the second quarter. This new capacity won't have much impact on our second-quarter results, but will have a positive impact on the second half this year, as product from Chile IV is fully absorbed in international supply chain. The only other increment at global suppliers out of China this year will be from a new plant in Trinidad. From press reports, we understand that this plant will start production in July and be shipping to customers in August.

Just to remind, let's say, the owners of this plant have announced an arrangement with several needs that we expect will result in the shutdown of two assemblies on methanol plants in the US, which will substantially offset supply from the new Trinidad plant. We, therefore, continue to believe that new supplier additions in 2005 will be substantially offset by industry restructuring and demand growth. This is an environment that continues to be conducive to above average methanol pricing.

China remains as a significant influence on the methanol industry. On the demand side, continually strong growth in that country bodes well for strong methanol demand growth. On the supply side, new methanol plants are being built. At today's level of pricing, we expect that all methanol plants in China are cash positive and profitable. And as you would expect in this environment, we have been (inaudible) to try and run their plants as hard as possible.

We are certainly observing increases in domestically produced methanol in China, and this may lead to some price volatility in that country, as 2005 progresses. However, key issues in China are that the majority that domestic produces are small-scale and high cost, and the coal-based methanol does not meet the specification of many customers. We would expect to see supply curtailments from domestic producers at prices that are normal than levels prevailing today, but still much higher than historic average prices.

I would also note that imports into China are reasonably stable. Imports in Q1 were about 300,000 metric tonnes. It is only slightly less from the average quarterly imports during the haul of 2004. I would also emphasize that Methanex has two elements of supply time flexibility. Apart from New Zealand, we produced about 1.1 million metric tonnes of methanol during 2004. We have downsized our organization in that country. And in 2005, we only have the capacity to produce up to 530,000 metric tonnes of methanol.

We have, therefore, reduced at least 600,000 tonnes of supply in 2005, which substantially offsets new productions in Chile IV. We have sufficient gas to run our plant in New Zealand at about 400,000 metric tonnes this year. We continue to be able to source modest quantities of reasonably priced natural gas and may run our plant on capacity through to the end of 2005 and maybe into 2006 and focus us entirely on our ability to produce positive cash flow.

The second element of supply chain flexibility is our plant in Kitimat, Canada. This is the early plant in our system that buys natural gas at North American prices. Our Kitimat plant was cash positive in January and February of this year but with increasing natural gas prices has been cash negative in March and April. We had certain contractual commitments at our Kitimat plant that require us to run this plant during 2005.

However, at the end of this year we will have much more flexibility to deicide whether to operate. The decision on whether to operate is a function of methanol prices and natural gas prices. And again, our decision will be driven by our ability to generate positive cash flow. In summary, therefore, between New Zealand and Kitimat, we have up to 1 million tonnes of supply flexibility.

Energy prices are variable that are fixed to methanol industry, and I've discussed the impact of energy prices in prior calls. The primary impact of our energy prices today is an increase in the slope of the industry's cost curve. And just to give you an example, at $7 natural gas in North America, the plant carried cash costs for our North American producer are about $280 million per metric tonne, and this compares with our Q1 realized price of $262 per metric tonne. And our $262 is a delivered price, not a flat gate cost.

So it's really to conclude, therefore, that North American producers today are cash negative. I would remind listeners that while we use North American producers as an example, there are a large number of producers in Europe and Asia that make methanol from energy related feedstocks. So in a world of $50 oil, we are also in a world where many methanol producers are struggling to make a return.

Energy prices continue to influence methanol price rolls and high energy prices increase the methanol floor price. The first quarter of 2005 was another example of our ability to produce strong cash flows. Operating cash flow in the quarter was $116 million. We invested $21 million back into the methanol business, mostly for the construction and our Chile IV plant.

We returned a total of $34 million to shareholders through dividends and share repurchases. Until the end of last week, we have repurchased a total of 8.4 million, since initiating the normal course issuer bid back last May. These shares have been repurchased at an average price of about US$15 per share, and we will continue to buy share up to the expiry of the bids in mid-May. We expect to buy back a total of about 9.2 million shares, but our total crosses 12.2 million shares.

The reason that we will not quite completely bid and that we wanted to retain financial flexibility to repay some of our public funds that expire in August of this year, our current plan is to repay $100 million of debts and to refinance the balance of $150 million. This action was a very consistent with our commitment of maintaining a balance and keeping an impressive balance sheet and returning excess cash to shareholders. We have an extremely strong balance sheet and repaying a modest amount of debt will leave us in an excellent position to take advantage of any future opportunities to extend our leadership in the methanol industry.

Perhaps, before taking some questions, I could make a few comments on the second-quarter results -- obviously, a forecast of the second-quarter results. We expect earnings to be a little bit lower than our record Q1. We have a 30-day plant turnaround at our Titan plant in Trinidad in April. It's still undergoing right at the moment. We're also expecting an increase in our Chilean gas costs that adjust on a rolling 12-month average basis. And we expect a new increase in our gas costs at our Trinidad facility.

I quoted some numbers a little earlier on North American gas prices and those of use follow that market will know that gas prices are mostly leading over $7 for the months of March and April. And our assumption is that gas prices will continue to stay strong in the second quarter. Other than these items, there are no fundamental changes that are impacting our results. Selling prices and volumes in Q2 should remain quite similar to Q1.

So I will stop at this point and would welcome any question from listeners.

Thank you. For any questions, please queue up, now.

And we have Peter Butler in the queue. Go ahead.

Yes. Good morning, guys.

Good morning, Peter.

You mentioned that your Q1 operating rate was 96%. What was the rest of industry going at, do you suppose?

I don't have a number on my mind, Peter. But certainly, there were a large number of outages and disruptions that occurred in Q1, both planned and unplanned for that matter. There were two turnarounds in Saudi Arabia that took out production. The Iranians have continued to be (inaudible) in their production during Q1. But my expectation is that we're in the lower 80% range -- 80% to 85% range. And that's really what we've seen for the much of the last 12 months.

You were doing great on the conference call until you got to the second quarter down. I'm worried that this plays into the traditional habit of your Canadian analysts that after you produced a great quarter, they'd say, "Well, you know, that was great, but watch out next quarter or watch out next year."

Yes. One thing I tried to emphasize, Peter, that volumes and prices really remained very stable. It remained about the same. And the other comment on that a little earlier was that Chile IV is -- while it's not going to impact Q2 results much, it will have an impact in Q3 and Q4. So I don't want to forecast having it flat, but you got to take this and place some positivity from my comments.

Well, net-net, if you close your two plants, and you bring up Chile and supply demand stays tight. Doesn't that sound like your next year's earnings should be up for sure?

That's based on an assumption of methanol prices. But yes, that would be correct. If methanol prices stayed stable, then the lower cost base that we enjoy from Chile IV and the shutdown of our higher cost capacity would generate higher earnings.

Yes. Okay. What happens after May with your share repurchases, Bruce?

You have to wait for that for our opinions on that, Peter. I don't have any insight right at the moment.

Okay. Thanks for help. Great quarter.

Thank you.

Bob Hastings from Canaccord Capital. Go ahead please.

Bob Hastings, are you on the line for a question?

Yes. Can you hear me?

Yes. Go ahead.

You're not coming through, Bob.

Is this any better?

Yes. It is much better.

Okay. Great. Okay. So great quarter, by the way. But now I know that your total volumes were down -- probably, the lowest level we've seen -- total volume sales at lowest levels that we've seen since the third quarter of '03. And I was wondering, kind of, given the tightness of the market, why your sales might have been down in total?

Yes. I wouldn't rate too much into that, Peter. I think we did it certainly at quarter-by-quarter fluctuations, and you would have noticed that Q4 was very high. And we had a number of reasons why we customers trading product forward in Q4. And that tends to smooth itself out over the years. So certainly, I would say, nothing too dramatic. We've certainly tried to limit the amount of methanol that we've been buying on the spot markets and also to set attractive trenching requirements. So we're being unfortunately having to turn customers away, which we don' like doing, but we only want to serve customers if it makes economic sense for both parties.

Okay. I noticed you've built a little inventory here. And I just wondered maybe part of that was sort of because of the Titan turnaround or/and how much was because maybe you saw increased production coming in from Iran and the Saudi streams?

Yes. No, again, I wouldn't want to read anything into that. I think that we do have the Titan turnaround. We still -- we would like to run it with about a million tons of inventories. So you can still see we are somewhat below what we would regard as optimal. And I would hope that we will see our inventories growing, because we certainly serve the customers more reliably and at lower cost with a little more inventory in their system. So again, we are trying very hard to actually build inventory and being only modestly successful.

Okay. Great. Thanks. Well, one last, if I can be permitted. Have you considered talking to Celanese to backstop them, in case DM5 has operating difficulties in start up?

No. No, we haven't. Just in general discussions that I've had with Celanese, in recent times, they have reasonable confidence. And I think, as I understand, they have a bit of flexibility with their own plants. I guess that they know where we are if they want to call.

Okay. Thank you very much.

Okay.

Nice quarter.

Ann Kohler from IRG Research. Go ahead please.

Great. Good morning. A couple of questions. First, I know there was a Bloomberg article that you -- a Methanex article. They had talked about Chinese demand. And I was wondering if both of you had any data in terms of what the Chinese demand was, sort of, and is anything in the first part of the year versus a year ago?

I don't think really had -- and typically methanol demand follows industrial production. And I think we saw some numbers just (inaudible). Industrial production increase is 16% in Q1 in China, in general. So I don't think we've seen methanol demand quite that strong in Q1. We did get the Chinese New Year, which interferes with other one, the annual pattern in the first quarter. So I would describe Chinese demand in the first quarter as being a little bit slower around Chinese New year. But certainly, it's come back strongly, as we come into the second quarter. And I would expect that if we see industrial production growing at the sort of rates that are being reported, we are going to see demand growth for methanol. But we know a lot of our own customers -- our international customers are building capacity for (inaudible) in China. A lot of that is due to start up this year and next year. So we know, even from the international producers, that there is very strong growth for methanol demand in that country.

Is there -- but I assume that you would be -- terminal that you're building search facilities in Korea will be able to handle that, or do you feel that you'll be able to meet the demands of your customers as they move into the Chinese market and bring those facilities on stream?

Yes. (inaudible) Korea is an important part of our supply chains. We will complete the expansion of that in May. So it's getting very close. We're going to start running our largest wafer to 100,000 ton basal into the pacific sometime probably in the second quarters as soon as the terminal is commissioned. What they does for us is, allow us to bring a very large volumes of methanol from Chile into Asia and positions us very well in Korea, which is really the center of that market for distribution into China and Japan. So, certainly what we've done in terms of reconfiguring our supply chain positions us very well to supply our customers in a way that's very competitive with the Middle East.

Great. And then just one last question, is there any update on Egypt?

We continue to make really good progress on Egypt. We are spending, I think, increasing amounts of money, as our confidence in that project grows. We have set ourselves a target of -- we had set ourselves a target at the end of this year. While I think realistically it's going to into 2006 before we make that decision. But we are making very good progress on selecting our technology where selected scale, we have selected sites, we have reached substantial agreements with all of our partners, and we are really -- we are just about to kick-up front in engineering and design process, which will establish good packages for ABC contract this year. Well, a lot progress and lot of work being done and we remain quite positive about the prospect for an Egypt project.

Okay. Great. Thank you.

Cherilyn Radbourne from RBC Capital Markets. Please go ahead.

Thanks and good morning. My first question relates to China. I understand that there was a methanol industry conference held there recently and I was wondering, where the Methanex attended and whether you could give us any of the highlights as they relates to your own analysis of the likely impact of Chinese capacitations on supply and pricing?

Yes. Certainly the people from here are saying that they all have attended that conference that we held, but we forgot. Highlights, I think there is one thing that muses, I think, not only us but also the methanol industry is that that the Chinese seems to have view that methanol process is high and staying high forever and continue to build methanol capacity with that view on that. And there certainly was some commentary around the conference that what happens when the process of methanol starts to go down and cash costs begin to be generate negative returns for Chinese producers. And the third thing that the Chinese are not focused on at all, a lot of the investors in that country that have come to this industry had only come in the last couple of years and hardly ever seen methanol crosses $200,000 in ton. So we know that we are in a cyclical industry and process will cycle. But why people continue to build capacity with cash costs in expense of doing development ton, domestic energy in a country which is shorter of energy that makes no logical sense, it make no economic since. It makes certainly no environmental sense using coal to make methanol. So, certainly, the sense was that there is incredible optimism in the Chinese methanol industry based on with the current operating environment. There are continued trends to build new capacity in those, there are trends coming on all the time. A lot of growth trends are driving the very strong demand growth. A lot of methanol ending up in gasoline, which again -- and we didn't understanding a lot of what's happening there, and we do know that you can easily blend modest quantities of methanol with gasoline and with no negative implication. So, it could be as part of the China strategy to turn the coal into gasoline (inaudible). And therefore we are doing this (inaudible) doing it, but it doesn't make some sense. So, that was probably a bit of (inaudible) that I said, as you asked for some feelings around the conference and that simply will offset that..

Okay, great. I did see an article coming out of that conference that suggested Methanex was considering buying methanol from Chinese producers to serve the Asian market, was there any truth to that?

No. (inaudible). Certainly, what we do in (inaudible) we are very active in spot markets and we're always buying and selling methanol on the spot market, and I think for instance a way of keeping our finger on the pulse of the methanol industry. It gives you a feel to how much volume is available, what sort of prices, how Pittsburg people have to sell or buy. So I think it's a way of us simply understanding that dynamics of the industry on those data. We would like to develop methanol capability in Asia and we don't have it today. So I'm against if somebody from our organization made a comment around that and it was interpreted that we were going to buy Chinese methanol and redistribute it Asia, that's certainly is not our plan. Our plan is simply to position ourselves to participate in the spot markets in China.

Okay, great. And then any comment on the starters of new plant expected to come online in 2007, has anything broken ground?

No. I don't think anything at all and if we look at our own schedule in Egypt and I described a little bit of that what we've done earlier. We don't expect to reach a financial clause until sometime we are in 2006 and that will see us producing methanol quite late into 2008. We started our project in the middle of last year, we started in the middle of '04, and we think we've set ourselves really ambitious goals in terms of completing engineering and financing and building our plants. And we think we can do it no later than four years. I am not sure -- I wouldn't like to sound arrogant about this, but I think it's difficult to do much quicker than that. So, I haven't seen any projects that reach financial clause, I didn't see many that have selected technology providers. I haven't seen many that have made the sort of progress that we've made with Egypt. So, that's all to say they haven't done it, I just haven't seen any reports on that. So, it wouldn't seem to me that there is much probability of new plants emerging into 2007, but as I say, we don't have pretty much information on all the projects that are proceeding out there.

Okay. And last question, just an update on specific industry inventory levels, I think, you commented previously that there are about 1.3 million tons below normal. Is that still the case?

I haven't really -- there is a chart there with the presentation what you referring to and lots of what we haven't updated that you in Q1. So I just want to say, the comments I made earlier, that there were a lot of unplanned and planned outages in Q1 and we certainly have seen no noticeable change in availability of spot volume. The sense, certainly, is that there has been no inventory rebuilding taking place. So has there inventory draw down? I don't think so. I think the inventory is running pretty hard out anyhow. So I don't -- certainly don't sense any change in that Cherilyn.

Okay. Thanks very much. That's it from me.

Okay.

Tony Griffin (ph) with Emrose Advisors (ph). Please go ahead.

Hi. Good morning. I guess what I am questioning is, your decision to pay down $100 million of the -- some $250 million of debt that you have coming due. Can you explain the deliberations that you went through in terms of possible avenue that are available for your surplus equity including dividends, share repurchases or debt retirement. What led you to conclude that using $100 million for that purpose was the highest invested fees of that capital at this juncture?

Thanks for the question Tony. And number of factors led us to that conclusion. By the way, I have said before and we continue and I will reiterate again, we are looking at our dividend and the comment I made in the past is that, when we bring on new capacity, we think we have improved our ability to sustain our dividend. So we certainly, the statement what we have given is eventually for some interest production. But we think at that point we have improved the sustainability of our dividend and we will be discussing that with our board shortly. So I was just reiterating what I really did in the past. So we are positively disposed to increasing that dividend. We have also had a long track record of buying back shares. And I have made a few comments around that this morning. In terms of renewal of debt, again, you have to wait for nay use on that. But just staying on track record, we've bought back shares every year in the last five years. We bought back, I think, 80 million shares from about 10 years and an average of about $10 per US per share. So we have a long track record and was done on a very consistent basis. So you shouldn't interpret our decision to retire debt of being any lack of enthusiasm on dividend and share repurchases. Turing to the date specially, we have two public bond issues. One will expire this year, as I have mentioned and another would expire in 2012. So we have occasional opportunities to look at whether we said increase or decrease the level of those bond issues. So here we are in time when cash flows are very strong. If you've analyzed our results very closely, you will probably notice that we don't get full productivity for interest on those bonds. So in replaying a portion of those bonds at the moment actually generates an after-tax return in of about 7 or 8%. So we found that to be a little bit attractive. So really, it's part of those balance. It's a balance between distributing excess cash flow to shareholders. Looking at our balance sheet and being thinking about the future, we have certainly got to keep our powder dry for opportunities in this industry to find a merger in the future. And when we are in an environment of very strong cash flows, we think the retirement of small amount of our debt make sense. So, again, lots of factors in consideration of that decision Tony.

Okay. And just a follow up in terms of the share repurchase program. Once you completed the repurchase of, I think, you said 9 million or 9.2 million shares, would it be fair to say that you are going wait until the expiry in May to make any type of decision with respect to renewal of normal course issued debt or some other avenue?

We need to discuss with our board what I propose will be going forward. And, again, just to reiterate, we had a very consistent approach with buying back shares. So you should be able to anticipate what our preference is.

Okay. Thanks

If there are any further questions, please queue-up now. There are no further questions in the queue at this time.

Okay. Well, that's it. I would say, that you very much everyone participating. It's been another excellent quarter for Methanex and we are very excited about our business, about the positioning that we are in. We believe we can continue to generate very strong earnings and cash flows and continue with our very consistent approach of distributing that cash flow to shareholders and continue to grow the strength and balance of our company. So to shareholder thank you very much for your continuous supports and we look forward to the next time we are able to report our earnings to you. So thank you very much for your participation.

This concludes Methanex's quarterly result conference call.