Q1 2021 Methanex Corp Earnings Call
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This conference is being recorded so it's cool sales at all as you see.
All participants please standby your conference is ready to begin.
Ladies and gentlemen, thank you for standing by welcome to the Methanex Corporation Q1, 2021 earnings call I would now like to turn the conference call over to MS. Kim Campbell. Please go ahead.
Thank you.
Everyone welcome to our first quarter 2021 result conference call. Our 2021 first quarter news release management's discussion and analysis and financial statements can be accessed on the reports tab on the Investor Relations page on our website at Methanex Dot com.
I would like to remind our listeners on our comments and answers to your questions. Today may contain forward looking information.
This information by its nature is subject to risks and uncertainties caused the standard outcome to differ materially from the actual outcome.
Certain material factors or assumptions were applied in drawing conclusions or making forecasts or projections, which are included on forward looking information flow.
Please refer to our first quarter 2021, MD&A and for our 2020 annual report for more information.
I would also like to caution our listeners at any projections provided today regarding methanex or future financial performance are effective as of today's date.
It is our policy not to comment on our update this guidance between quarters.
For clarification any references to revenue EBITDA cash flow or income made on today's remarks reflect our 63, 1% economic interest in the us.
And our 50% economic interest in the Egypt facility.
In addition, we reported our adjusted EBITDA and adjusted net income to exclude the mark to market impact on share based compensation and the impact.
I was getting at.
Yes.
We reported these non-GAAP measures in this way to make them a better measure of underlying operating performance and we encourage analysts operating the company reported their estimates on this matter.
I would now like to turn the call over to Mike.
President and CEO, Mr. John Lauren on his comments on a question and answer period good morning, everyone.
Thank you, we're continuing to stay safe and healthy as.
As we deliver on Q1 2021 result, arguably that we've operated.
For over 12 months are.
Our resilient business model and robust.
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We'll have to navigate through this challenging period.
We are incredibly proud of our team worldwide, who have shown tremendous commitment and agility over this year.
Our teams have continually it Josh.
Work to keep each other safe, while maintaining our operations and delivering reliable methanol supply to our customers.
This morning.
Our strong first quarter 2021 financial results, which highlight the value of our business model.
We will also share what we see in the methanol market today review, our operational results and discuss our book entering the second quarter.
Turning to our financial results posted higher methanol prices in the first quarter of 2021, increasing our average realized price to $363 per ton.
By $81 compared to the fourth quarter of 2020.
Our adjusted EBITDA of $242 million increased by $106 million over the fourth quarter of 2020.
These results demonstrate the leverage that our earnings have to higher ethanol price.
We also recorded higher adjusted net income of $82 million or $1 <unk> per share in the first quarter net increase of $70 million or 92 cents per share compared to the fourth quarter.
Turning to the markets methanol demand continues to recover and on current and at the current trajectory, we anticipate global methanol demand will return to discrete endemic levels later this year.
Global methanol demand in the first quarter of 2021 increased by approximately 5% compared to the first quarter of 2012.
Yeah.
This steady methanol demand recovery combined with ongoing industry supply challenges led to tight market conditions and higher methanol prices in the first quarter.
We are pleased to see favorable industry conditions continue into the second quarter.
We estimate the industry cost curve, which is set in China remained at approximately 262 to $180 per ton.
Spot prices in China are above this range today.
Early in the second quarter methanol market conditions remained tight in global inventory levels remain low as industry supply challenges persist and methanol demand continues to recover.
We recently posted our May North American price, which increased by $23 to $542 per tonne and our Asia Pacific price, which remained at $430 per ton.
We set our European contract price quarterly and our second quarter posted prices 410 euros are approximately $490 per ton.
Now turning to our operational results.
Our first quarter of 2021 production of one 6 million tons.
Similar to our fourth quarter results are on production of our outlets in medicine hat facilities offset lower production in New Zealand and Geismar facilities in the first quarter.
In New Zealand, our production was lower on the first quarter of 2021 compared to the fourth quarter of 2020 due to lower gas deliveries as we mentioned last quarter, we consolidated production on our two large larger montney leasing.
Plant idle or white Kibali plant indefinitely.
We estimate production in New Zealand for 2021 on $1 5 million tonnes.
On the upstream gas sector will be completing several field development projects that are expected to improve gas availability over the coming years.
In Geismar on production in the first quarter was lower than the fourth quarter, because we completed a planned turnaround at our Geismar two facility.
Interest on Yuri in February did not significantly impact the site.
Following the turnaround our Geismar facility has been running extremely well and we have achieved record production levels at this site.
We completed the Debottlenecking project work at Geismar, one and 2020, and we expect the Geismar two debottlenecking project to be complete in mid 2021.
As a result, our operating capacity for our Geismar facilities to increase to $2 2 million tons from 2 million tons, an increase of 10%.
In Trinidad our production in the first quarter was higher than the fourth quarter as planned turnaround activities impacted production in the fourth quarter.
Based on current gas deliveries, we estimate production in Trinidad for 2021.
The $1 1 million tonnes, reflecting methanex interest.
In Chile, our production in the first quarter was higher than the fourth quarter as our Chile one plant.
Ran nearly at full operating rates are.
Chile for bat remains idle due to gas supply constraints driven by upstream production declines in Argentina.
We typically experience lower gas deliveries in the southern hemisphere winter months.
Impacting our second and third quarters and it is uncertain how long these lower gas deliveries will persist.
Our current gas supply is sufficient to run our Chile, one plant and we estimate production for Chile for 2021 to be 800 to 900000 tonnes.
In Egypt, our production in the first quarter was similar to the fourth quarter as our plant ran at nearly full operating rates.
In medicine hat, our production in the first quarter was higher as planned turnaround activities impacted production in the fourth quarter.
Now turning to our balance sheet, we have a strong liquidity position with over $850 million in cash 300 million undrawn revolving credit facility with no debt maturities until the end of 2024.
Our disciplined approach to capital allocation has not changed.
Although long term.
We believe we are well positioned to meet our financial commitments.
Execute on attractive growth opportunities that exceed our hurdle rate and deliver on our commitment to return excess cash to shareholders through dividends and share repurchases.
A key focus for us in 2021 is deciding on the next steps of our Geismar three project a unique project that significant capital and operating cost advantages, we have a robust decision making process for evaluating the project.
Before deciding whether to restart construction management and our board will carefully consider many factors, including the strength of the global economic recovery and the overall methanol industry outlook, our financial position and our ability to execute on the project.
We expect to decide on the next steps for the project later this year.
We are encouraged by the favorable industry conditions that we've seen so far in 2021.
We continue to monitor industry operating rates and new capacity scheduled to start up later this year and the impact on the current global supply demand balance.
We are optimistic that the global economic recovery will accelerate as vaccines rolled out worldwide as governments announced additional fiscal support measures for.
For now we continue to prioritize liquidity and financial flexibility to best position ourselves to deliver long term shareholder value.
Now turning to the outlook for the second quarter.
We expect realized methanol prices in the second quarter of 2021 will be similar to the first quarter based on our posted prices so far.
We forecast that our second quarter production will be similar to the first quarter. We anticipate similar adjusted EBITDA results in the second quarter compared to the first quarter.
We continue to focus on operating our plants safely and reliably delivering secure and reliable supply to our customers.
<unk> our financial flexibility.
We are well positioned to deliver long term value to shareholders. We would now be happy to answer your questions.
Okay.
Yeah.
Yeah.
Operator, we're ready to answer questions now.
Thank you sorry, I was on mute. Thank you we will now take questions from the telephone lines. If you have a question and you're using a speaker phone. Please lift your handset before making your selection.
If you have a question. Please press star one on your devices keypad. Please limit your inquiries to one question plus a follow up question. After that if you have further questions. Please rejoin the queue you.
You may cancel your question at any time by pressing Star two please press star one at this time, if you have a question there'll be a brief pause while the participants register for questions. Thank you for your patience or first question Jacob bout CIBC. Your line is open. Please go ahead.
Hi, good morning, John.
Hi, Jacob.
First question here, just the so some pretty decent free cash flow on the quarter.
Maybe just talk about priorities for capital allocation and share buyback dividend.
Investment in Q3.
Yeah, So nothing has really changed Jacob.
On our strategy about capital allocation, we are you know.
Prioritizing financial flexibility and liquidity at this point as we come out of the pandemic and get clarity on demand and certainly supply is much more understood.
But really three uses for cash nothing has really changed will take some cash to grow the company in line with the market growth as long as we can find projects that exceed our hurdle or meet or exceed our hurdle rate, which certainly geismar $3.
And then also take a balanced approach to return additional excess cash to shareholders through dividends and buybacks. So nothing's really changed in our capital allocation strategy.
What would you put three three ahead of the increase in dividend.
Well you know again, we take a balanced approach so we've looked at.
Over the last period, we returned $2 billion through dividends and share repurchases and growing the company doubled its size.
By investing similar amount of money. So obviously, when we're doing a brownfield or Greenfield project, depending on the price of methanol most of the free cash would go to <unk>.
Striking a project, but above $300 a ton realized we can complete G. III and have additional cash for distributions. So a lot will be determined by what the actual realized price for methanol will be.
Are you still looking for a partner at G III.
Our preference is still to have a partner for G III and we're pursuing that.
I'll leave it there thank you.
Thanks Jacob.
Thank you. Our next question from Ben Isaacson Scotiabank. Your line is open. Please go ahead.
Thank you and good morning, everyone. John first question is on the discount rate came in at roughly I think it was 18 eight methanex guided for around 17 for the year does that mean that we.
We need to increase that discount rate for the year or do you expect it to fall below 17 on the back half of the year to get to that guidance.
And we haven't changed our guidance at this point and I think what's important is to look at the realized price for methanol when we make pricing decisions around the world, we're trying to optimize the realized price for all markets.
When I look at the quarter.
There are some anomalies.
We have one posted price for example for Asia Pacific based on freight differentials and sanction product only allowed to go to China. There was some additional pressure in China this quarter.
Very nice to realize price in China, but when you look at it compared to Asia on one posted price.
It really did impact our discounts, but I'm really happy with how we came out of the quarter on a realized price of $3 63 is our best realized price since Q3 2018.
So I think to me.
There is a lot of focus on the discount, but when we make our pricing decisions globally, we're not focused on hitting a target of X percent on the discount we're trying to maximize the overall realized price for the company.
Thank you and then just a follow up maybe on indirect question on G. III can you just talk about how important market share is to methanex. When you look at produce tons commission tons purchase tons.
I know in the past you'd been roughly about 14 15 per cent market share off the methanol market, that's obviously come down a bit with with Titan, Chile for and what type of Ali.
Idled right now.
Can you talk about how important that market share is in terms of your ability to kind of influence where methanol tons are going on and how that impacts you.
But I think what's important bed is leadership.
He'd been the clear leader in this industry not just on marketing but.
Safety responsible care logistics proving on new technologies I could go on forever, but we're the clear leader so.
So leadership is really important.
Industry structures nice, we'd like the nature of the industry structure, we'd still we think leaderships import market share as part of that but we don't get hung up on a on a particular market share target.
But leadership is more important and youre right to point out we've had some issues.
Trinidad, Chile, and New Zealand, but I can go back the last 15 years.
Medicine hat was closed we didn't have any production in the United States, we were suffering.
Our plants in Chile, and zero or maybe almost zero in New Zealand. So this is kind of part of our business. It seems like we always have issues somewhere we have 11 plants running and.
Well, we're always trying to optimize.
Leadership position as opposed to market share.
That's great. Thanks, so much John.
Thank you our.
Our next question Nelson <unk> RBC capital markets. Your line is open. Please go ahead.
Great. Thanks, and good morning, everyone.
First question relates to G. Three like have you.
I presume you're looking into it now but in terms of the labor market. Its a pretty hot can you just comment about the labor market in.
And in the Gulf Coast, and what you see there if there if you're seeing any cost pressures.
Yeah, I'll I'll turn the question over to Mike <unk>, our senior VP corporate development and he's obviously.
And that's really in touch with debt market down there so Mike yes.
So we've seen <unk>.
As an activity over the last year I'd say, we saw a debt obviously.
As COVID-19 kicked in and.
You saw prices come off for labor materials.
When we see more activity today is people see a recovering economy I'd say from our perspective.
I think its about where it our expectation would be that <unk> would be about where we had it before we went into care and maintenance.
Yeah, I would just add Nelson that we've just completed a turnaround there on G. Too. So we used a lot of labor.
To do that.
Certainly the our experience was labor productivity and availability as well as cost was not any different we completed that turnaround ahead of schedule and under budget. So I think that's a really good.
Indicator of the labor in the market today, I think one of the challenges when we look to make the <unk> decision that may not be the case, a year or 18 months from now as you know things could get quite eat it.
Economic net economic activity picks up and we could you know 18 to 24 months from now be competing for labor and not all labor is created equally you know we'll use different labor at different stages of the construction projects I think what's important is to be ahead of the curve.
When you're thinking about and I think today when I look at G. III.
On the engineering is complete all the equipment is spread pretty well purchase so it's really on what I call. A gold project now is taking all the pieces and putting them together.
So.
On the price has been significantly derisked and it's just around productivity on an hourly rate. So we'll think about all those things as we make.
Our recommendation to our board about that G. III project. Later later this year also.
<unk> II plants are transferred to plant from Chile to there in the last five to seven years.
We're very familiar with the labor on that area. The on the construction labor the firms and we have the top notch firms in the area that we're working with them. We expect if we do restart the G. Three project to get there.
Which I think is really important.
And those are some of the things that we'll think about as we make a decision.
And if you were to restart construction.
What would you be looking at 'twenty, two 'twenty, three or 'twenty 'twenty four completion date.
Yes, it's 24 months is our current view from the day, we say we're going to go about 24 months.
Great I'll leave it there thank you.
Yes.
Thank you our next question Matthew Blair Tudor Pickering Holt. Your line is open. Please go ahead.
Hey, Good morning, John I had a question in regards to the guidance I think you mentioned two more production quarter over quarter, I guess I thought it would have been a little higher with with Geismar coming out of turnaround. So what would be coming down here should we think about you know lower production from Chile, and I guess, maybe anywhere else.
Yes, I think I said in my remarks Matthew.
We're coming into the winter months in Chile.
We always expect to get lower gas deliveries because.
More gas is diverted for heating and that part of the world in the winter time, So we expect to run the Chile, one plant through the winter, but probably get lower gas deliveries than we did in Q1.
Got it and then your recent contracts for me in Asia, and North America.
Indicate better better price moves on what the spot market was showing and I think in the past you've mentioned you know it's not a perfectly good spot market can be pretty small and illiquid at times, but could you just talk about you know what youre seeing in your business that would support stronger.
On the contract pricing relative to what we're seeing on the spot market.
Yes, so we're seeing very tight markets very low inventories and demand improving so those things usually contribute to a good pricing environment I'd say on the Atlantic Basin, which is Europe, and North America, you're right to point out very small illiquid spot markets. So, they're they're they're somewhat indicative, but they don't really move.
Markets like for example, most of the business is contracted so.
What's more important is the availability of product getting it there to our customers on time on spec.
As their business has improved there they're worried about their supply chains and their suppliers ability to meet their needs and I'd say. This pandemic is really illustrated the global supply chain that really been impacted and.
You can look at a long list of things in North America that aren't available today.
Because of supply chain disruptions and just not enough material to go around whether thats recreational vehicles lumber.
I could go through a long list of things that have been impacted so I think that.
Availability of methanol reliable supply is being prioritized over over price today.
Having said that in China, there is a real liquid spot market.
I mentioned earlier that.
Sanction products can only make its way to maybe China and India, so depending on how well the sanction product operates we can see.
Instances, where more product arrives and can only go to a couple of places we don't sell on India, but we do sell a lot in China, which does impact.
On the supply demand balance can lead to some pressure on pricing in a short term period, but overall when we look at Asia.
Besides China, which is probably fairly balance the rest of the markets are tight.
And as.
As demand recovers, we're going to need some new supply.
Whether its existing supply to operate better our new supply coming on as a way of the coke methanol plant to keep things balance. So it's all about demand and you know what I've seen the IMF forecast for 6% GDP growth this year and maybe 5% next year on the U S reported six three so I think those are all really pause.
Ziv numbers, then will lead to good good demand for methanol. So to me, it's all about reliability and being able to service the demands of our customers.
Great. Thank you.
Thank you. The next question, Mike Lee Head Barclays. Your line is open. Please go ahead.
Great. Thanks, Good morning, John.
My first day.
I wanted to drill down a bit on demand into the energy markets I think in the release you highlighted strength in MTO, but just wondering what you're seeing in other energy applications, obviously, given the rise in oil prices and what seems like a rapidly growing desire in the world of late for a cleaner burning fuel applications. So just curious what you're seeing on there.
Yeah, Youre right to point out MTR has been quite strong.
We saw some growth over Q1 2020, and it's it's the one bright spot through the pandemic and operated really well and on the 90% rates.
Olefin prices continue to be quite strong.
So.
We would expect those MTO plans to continue to operate quite well if I look year over year on the what we call other energy there's been growth there as well.
So I think there is more room to grow there, especially on things like MTBE now people have not been driving as much as they normally do in the pandemic I'd say, China is kind of back to normal.
Pre pandemic levels for driving et cetera, and with the recent change in the E 10 standard <unk> five.
You know theres a lot more room for MTBE in the fuel pool, there, which should be good for demand. So you know the traditional applications, which make up about 50% of methanol day men are driven by GDP and.
Lots of good signs there right now so it's hard to predict the future, but you know certainly we're seeing a lot of things lining up to see a favorable demand environment, especially as vaccines rollout.
You know, where we've seen vaccines rollouts in places like the United States and our Geismar area. We've seen cases go go way down quite significantly quite quickly. So you know our anticipation is vaccines will continue to rollout and we will see increased economic activity and probably a lot of pent up demand.
Should resurface, but again, it's hard to predict the future but.
Certainly in a better spot today than this time last year.
Great. That's helpful and maybe just for my follow up question on the G. Three decision I apologize in advance if I'm overly parsing words here, but I think last quarter. You said final decision by summer today I think you said later this year so.
With some of the uncertainty in the world is that being pushed out at all or I'm, just reading too much into it.
No I think you're reading too much into it.
We have our our strategy session with our board each summer I think I signaled last last quarter that we will plan to make a recommendation to our board at that time and that's still the plan.
Fair enough. Thank you.
Having said that if we.
We make a positive decision there'll be a bit of a ramp up time right. So.
That's why we're saying later this year if theres a restart if if there is a further delay then obviously, there's a further delay.
We're not in a position to make that decision today, but we will make a recommendation by the summer.
Thank you very much.
Thank you. The next question Eric Petrie Citi. Your line is open. Please go ahead.
Hi, good morning, John.
Okay.
So I think you estimated global methanol demand up 5% this quarter.
Same periods last year it was down seven you know.
Was Chinese new year about the same and can you give an estimate as to how very impacted methanol derivative demand on the U S.
Yes, so we're not we're not back to pre pandemic levels, yet I think I mentioned that in my in my opening remarks.
Q1 is always a softer quarter I mean, theres not a lot of variability in our business, but because of Chinese new year on the huge impact on methanol demand in China, It's always a little bit below let's say Q4 Q2. So when we look at Q Q1, sorry versus Q4 last year.
'twenty 'twenty.
Demand was down about two five per cent, but year over year five so we're still not back to pre debt pre pandemic levels, but were pretty close and we anticipate as I mentioned, we'll get back. There later this year. So that's our current view.
But having said that we've now had five quarters of last day Matt.
Focused demand growth.
As we entered 2020 at about 3% to 4%, which is around three to three and a half million tons a year, we've lost that.
So does that come back quickly or slowly.
GAAP, but certainly what we're seeing now is signs in.
On demand could pick up nicely.
Nicely and get back to pre pandemic levels sooner rather than later, but we'll continue to watch it and certainly.
Certainly adjust accordingly.
And I don't know if I heard you say did you have a estimate for the early impact.
In terms of demand destruction.
In the U S right.
Yeah.
That's down 6%.
Okay.
And then as a follow up question a competitor on Trinidad announced short term gas agreements to restart their methanol plants, because usually the same and then work towards the longer term agreement or what's the strategy there.
Yeah, So our strategy was.
Our five year contract ended and at the end of 2019, and we had been negotiating obviously for some time before the expiry of our contract to get something with the N D C and the government debt.
Allowed us to stay profitable throughout the cycle.
We weren't able to achieve that so we agreed with them to go month by month.
And no no take or pay and we have the ability to shut down is as we as we as we thought.
If we wanted to as we came into the negotiations we didn't make the progress that we had we had hoped.
With the pandemic starting up it was tightened was one of the only plants that we have flexibility to turn off as well as Chile. Four so we made the decision to turn it off we continue to negotiate with the NGC, but I think I've been pretty clear, we're not going to restart the plant on a month by month gas situation, we'd have to have something more certain because we.
Have to hire people and spend some tens of millions of dollars to restart the plant. So I'm not sure what our competitor has as far as the month by month and obviously it makes sense for them to just start off but for us.
We're thinking more medium to longer term and we're still negotiating where and we're hopeful we'll get something to allow us to restart that plant, but it's not our current view that that will happen in the short term and this is not just on methanol thing on the island and I think the ammonia.
Answers are experiencing the same phenomenon. So you know there is gas is just.
Matter of negotiating something that makes sense.
Over the methanol cycle to allow us to stay profitable and we haven't been able to achieve that yet.
Helpful color. Thanks, John.
Thanks.
Thank you the net.
Question, John Roberts UBS. Your line is open. Please go ahead.
Good morning, This is Matt Skowronski on for John.
You mentioned low global inventories are kind of persists on a market right now what is your sense for when inventory levels can be replenished to normal levels and then does this vary by region.
I would say we are seeing low low ethanol inventory levels globally, not only in tanks, but our customers as well so I I.
I can't predict the future I wish I could but no inventories will rebuild if there is more supply than demand.
When that happens I really don't know, but right now it will take some time, if there's more supply than demand to replenish global inventory.
Thank you.
Yeah.
Thank you our next question Joel Jackson BMO capital markets. Your line is open. Please go ahead.
Morning, John.
On a couple of questions I'll do one one at a time on maybe Jon can you reconcile some of your comments on price that you gave I'm a little confused. So you gave the guidance on the call earlier that you expect Q2 methanol ASP to be similar to Q1, yet I mean, we already know what the postings are for two months into Q2, we know what Europe.
You said, you're trending 10 to $50 a ton higher than the front couple of months of Q1, you said the discounts why there's a little bit inflated I think maybe you give me your own words in Q1, and then later on the call you talked about pricings out inventories down dynamics good.
Now how can pricing be similar in Q2 versus Q1.
I guess is your definition of similar so you know what we were anticipating.
Depending similar pricing it could be better as obviously, you're not going to be worse, we think but at this point our view is similar.
How would you define similar [laughter].
Yeah.
Similar as close to where we achieved in the past okay.
On the second question I have is on last quarter. You gave some guidance that you would do about $6 6 million tonnes of attributable production for the year. This year you didnt provide that in the release you gave some other kind of plant by plant or a country by country guidance is $6 six or roughly the same number as it hires on the work this year.
Yeah, I don't have that number off the top on my head I, probably have to take that offline Joel but.
You know I don't want to obviously for competitive reasons, our release and on our number.
That people can then backward into our turnarounds and what we might be doing so.
I'll take that offline with you.
May I just ask why it was okay to why are you comfortable releasing it three months ago, but not now.
You know I think when we look at our turnaround schedule and where our productions on region by region, We've got a lot more volatility today.
We weren't expecting what happened in New Zealand.
Obviously, Chile is a bit of a.
The Argentinian gas a bit of a wildcard so but we're not that comfortable in being specific about that right now.
Thank you very much.
Thank you our next question Hassan Ahmed.
On that global your line is open. Please go ahead.
Good morning, John.
Good morning, John I wanted to just revisit a demand.
Hey, just a couple of comments. So obviously your year over year demand was up but sequentially down went off the scent and I know theyre, obviously, a bunch of moving parts you know Chinese new year's day late.
And obviously the negative impact of jewelry.
But you know.
As I sort of take a look at our product.
It all makes I mean, you know the olefins polyolefin side was Super strong in Q1, I would imagine MTO margins was Super strong you know asset deal on margins.
On sort of strong as well so just trying to reconcile where that sequential demand reduction came from what do you sort of just exclusively attribute that due to jewelry and X you read demand, possibly would have been sequentially up or were there other factors.
Just so we're clear are you talking about Q4 'twenty versus Q1 'twenty one.
Correct.
Yeah. So you know.
The demand that was lost was mainly in China.
Okay.
Q4, 'twenty versus Q1 'twenty one.
There was about 400000 tons less demand in China and that was all on the traditional methanol.
Derivatives.
Understood Okay alright.
Now moving on again, you know Q1, a bit of a quirky quarter, because they'll be it be it a sort of COVID-19 yet.
You read the like.
Just sort of trying to get a better sense of.
Whether or not you saw any meaningful changes in trade flows.
If I could sort of broadly the Iran side as well into this question as well because obviously new administration in the U S. I liked the thank you know sanctions won't be as rigid as day, where over the last couple of years. So are you seeing any meaningful trade flow changes and how are you thinking about.
Iran going forward.
Yeah, I'd call it quirky as well on the trade flow so.
We're seeing product come in in North America from areas that aren't traditional let's say so that's quirky to me tells me that you know there's not enough material in in North America to satisfy demand today, and if demand grows I'm not sure where it's going to come from.
Coke will start up at some point probably needed is what I would say if demand continues to incur.
Increase like we're seeing with Iran.
I think the the relationships.
Still strain again, I can't predict the future on a geopolitical expert.
But you know.
Is it going to be solved tomorrow I don't think so.
No if it gets solved tomorrow.
It takes a while to readjust supply chains I've mentioned already there's not a lot of spot market in North America, and Europe, So, let's say, where everybody's happy Tomorrow. We're all friends again, it'll probably take a contracting season for Iranian product start flowing again to Europe, and Korea, and places where it used to so.
You know I don't know how how it is going to resolve itself with the nuclear deal.
Theres talking going on but I'm not on the inside of those talks and how.
How onerous they are and what sort of on the table. So again, we'll watch what actually happens and then make some judgments about what what might happen over time.
Things normalize, but I think it's too early to make any definitive plans there soon.
Very helpful. Thanks, so much.
Thank you. Our next question is from Cherilyn Radbourne TD Securities. Your line is open. Please go ahead.
Thanks, very much and good morning.
John I was hoping we could revisit your view of the mechanical state of the industry supply if I could express it that way after a year of COVID-19 and just how that's influencing your view of pricing for the rest of the year.
I can only talk about our operations I, you know I can't really talk about our competitors.
I'd be speculating and I don't like to do that.
We have now conducted three turnarounds in the COVID-19 environment extremely difficult.
You know that.
The book provisions you have to put in place to keep everybody safe.
On quite onerous.
Say regular maintenance day to day on plans is very difficult as well we have minimal people on site during the COVID-19 environment. So the maintenance that we normally do is probably a lot.
A lot less in the COVID-19 environment.
Then the non COVID-19 I think you know when we look at our turnarounds getting experts into the country. In this really challenging places like Trinidad and usually when we do a turnaround we'd have.
50 people or 30% to 50 people of our own people coming from Egypt.
Chile, and New Zealand with their expertise to help us.
Due to the best possible job on the turnaround because when you do a turnaround you're doing a lot on maintenance youre, not just changing catalysts, but you're fixing a lot of the things that.
You've accumulated since the last turnaround Youre also doing a lot of inspection. So you know keeping plants reliable is really based on maintenance.
Maintenance, but also inspection finding problems before they state that they see.
C.
Make you go down for unplanned reasons. So when you don't have all these experts coming in whether it's on your own or your vendors that have a lot of expertise.
You really don't have the same depths of inspector.
Inspection.
Capability and expertise so all of this I think leads to probably.
Potential of having poor reliability over time, then you have countries like Iran. As we've talked about haven't sanctioned so well.
Whether they can get people that are out of the country or not they can get maybe the materials.
Stylists.
Different things that they need to.
To do turnaround so it's complicated.
We don't talk about the detail here on these calls about a turnaround, but you have AT&T 100 people on site for 60 day is doing a whole lot of work that's been planned for two to three years. So it's.
It's really a complicated issue and I'd say, we are seeing plants being less reliable.
And there's nothing I see out there that would change my view on that today, but.
But again, it's really hard to predict the future, but I think when we look at our own experience is.
<unk> been really really a challenge to do regular maintenance and turnarounds.
Okay. That's helpful.
I also wanted to get your perspective on the potential for methanol on the marine fueling and what you think investors should watch to judge the momentum there, which you clearly seem to have ticked up with interest from Maersk.
Yeah. So I know, we get labeled as at all or even chemical company single product Chemical company, which I don't mind, but are you able to talk about.
On the innovation and R&D I remember being at the forefront of the standard conversion on the methanol way back when and.
I remember being in front of investors and its never going to happen. If we're going to work what are you guys doing.
And then we decided with our own ships to prove out the technology.
The dual fuel capability and a lot of knee sales at that time, and it's going to be LNG is gonna be scrubbers methanol is never going to find its way into that space and here. We are we will have 60 per cent of our fleet running on methanol over the next one to two years, then companies like Maersk and others.
Making the same commitment that all of their new vessels will have this dual fuel capability. So I think that's really excited I think it's a great example of our team being innovative proving out technology and not listening to the naysayers and the thing works and the thing is flexible and you can use ultra low sulfur diesel or methanol.
And Oh shifts last 15 to 25 years still don't have this capability for the life of the ship.
On the big Winter here is that.
There is a pathway to green methanol, if there is a pathway to having 100% renewable Massimo I know that's really important for a lot of our our customers and for people looking to make choices on fuels. It's not just for today, but it's for the future. So I think it's really interesting that big companies are now jumping.
On board and are.
Making significant commitments to methanol.
Fuel I've always said, it's not like boilers, that's not like fuel blending.
Shouldn't have demand.
Change overnight, but this is chip.
<unk> get built.
So I've always said, it's a mid decade demand drivers. So by 2025, we think the demand for methanol for this application will will be good.
And are there any milestones that we should be watching on the short term to gauge that.
Well I think.
Where people spend on their money are they making their investments and theres been on couple of very large shipping companies recently.
Made a commitment to all their new vessels will be dual fuel.
And you always see on our competitors like Chroman, you know building ships that have this dual fuel capability.
Each one of our ships that runs 100% on methanol.
Is 10000 to 12000 tons per year.
Men and a 60% of our ships are running on it Thats you know a day.
A man of around 150 to 200000 tons. So you know on the big scheme of things not significant but I think the growth potentials, what I get excited about and once you have this capability is there for the history of the ship so Oh.
Pretty interesting development will be a driver of demand into the future.
Thanks, that's all for me.
Thank you our next question Bernard Horn Polaris Capital Management. Your line is open. Please go ahead.
Hi, good morning, So two questions. The first on New Zealand is there any new update on the causes and the resolution of the situation there I'm kind of it seems like as the first strange one and I have a follow up on Q3.
Yeah, we don't have any any more information on what we've already shared we know that the suppliers that are run that field, Oklahoma are bringing in rigs to do some on onshore drilling but that will take some time. They tell us are optimistic you know they can get back to rates that they had before but until it happens.
We're guiding to where we are but there needs to be some drilling.
Two to correct, what what's happening with the field.
Okay, Thanks and on <unk>.
Three of them when you when you first commented on the tradeoff between.
Starting earlier or later it seemed like there was some incentive to perhaps getting going earlier, but on your last remarks. It sounded like you were.
It wasn't so easy to get things going on right now so.
I guess, there's that reconciliation on your comments there but.
My broader comment as you and the post COVID-19 World do you see any fundamental changes in demand and likewise on the supply side that would.
Mean, putting the G three on line.
Mike.
Might be better to do it a little bit later or earlier any other respect.
We have a good view on supply so post the coke methanol plant coming on you know there's not a lot in the next three to four years.
So on into the COVID-19 environment, nothing has been moved along and nothing's been sanctioned or under construction. So not a lot of supply coming on in the next three to four years I think the bigger question is demand.
So we'll have to come to a view on what demand looks like over the next funded to two years and then it's S.
G III comes off what's it going to look like.
You know 24, so that's part of the work streams that we're working on Bernie and we don't have a view on that today, but.
But that'll be a key consideration, whether we decide to restart later this year or not.
And lastly, how do you anticipate Q3 might.
Interplay with your purchased methanol.
Yeah. So our goal is to have about 20% of what we sell being purchased and the other 80% being our equity molecules.
Obviously this quarter, that's changed a little bit because of losing production in New Zealand.
And in Chile.
And tightened as well but.
I think that's our goal. So if we had a view that we delayed G III.
Then probably if we didn't have any.
More product or additional production on our New Zealand on Chile, then, we'll probably look at our our sales mix in the medium term.
Certainly early days, but our goal is to have 20%.
Of our of our sales.
On spot and commission products.
Okay, and then and the G three wouldn't affect that 20% going forward.
That's right I mean, we'd lower obviously, where we are today on our spot and commission sales.
And we'd probably grow our position a little bit as well.
Okay. Thanks, that's all for me.
Thank you. Our next question from Jason Cross Shop Polaris Capital Management. Your line is open. Please go ahead.
Hey, John.
Quick quick question here, just on the supply side.
If you think about.
You know how much.
Capacity was iron on body industry, I guess over the last kind of six or 12 months.
Relative to you know how much could come back online fairly easily if you kind of just give me a rough estimate on how many tons that would be helpful.
I don't have that number off the top of my head, Jason I'll have to get that number to you, but you know the operating rates of the industry was lower in Q. The last two quarters than traditional is that sustainable going forward I really don't know, but well on can get you the number specifically about loss production versus what we.
Call average or normal.
Got it okay. It's good because I mean ultimately the question will be you know if demand as we've talked about greenfield new capacity and fairly limited for the next couple of years and if demand is strong and so I was just interested to know how much basically you know latent supply can come and meet that demand, but yes, you can get back to me what that number that'd be helpful. Thank you.
Yeah, what I would say Jason is that at current pricing.
We would expect anybody that can run would be running.
So it's not like day supply offline because the economics are favorable so and you know on the price environment.
363 every single plant in the world that can run should be running so the question for me is what what are the issues in and can they get them resolved and be more reliable and on.
Don't know, but just on average if I look at the overall operating rates you know we were down a couple of percent Q Q1, 'twenty one versus Q4 'twenty. So a couple of percent on on the which in an 85 million ton market. So what's that.
I don't know halfway into on something like that.
And just I, just I guess for my own.
Education on how long does it take to kind of see idle a plant right how long does it take to restart.
It depends on how you idle it.
If you idle as you know with the intention on preserving it and restarting it at sometime in the future probably 60 to 90 days I would guess if everything was to go right.
It depends on on hiring people and a lot of a lot of factors as well.
Thank you.
Thank you our next question, Chris Schott Manes Crespi. Your line is open. Please go ahead.
Hi, I had a quick one just on on shipping I assume you know the market for free type there.
I assume your tankers. It runs full both ways is that this is it.
Benefit there ever meaningful enough the margins that we see something significant there or is it just a little slow out of the thing that you do.
Doing well on the shipping side as well.
Yeah, the backhaul that we do which is about 30% to 40% of all the cargoes. We carry are not mass at all in their backhaul.
All of that revenue goes into cost of goods. So it's you know it's netted out in our in our logistics costs. So it's for US meaningful you know on millions of dollars to me is still still meaningful hundreds of millions or more meaningful but its not hundreds of millions so.
You can take a number of 30 to 40 per cent of what we carry and you know our tonnage on our ships and you know the rates for liquid chemicals. So.
You could back into a number pretty quickly, but that you know that shows on our cost structure not not as a revenue line. So you know quarter over quarter, depending on the.
Market rates per spot cargos, and Coa cargoes that might change you know 10, or 20%, but it's not going to drive a huge changes in our earnings but it's a great business. We have on our team has done an excellent job in developing that and gotten really good at cleaning our ships. So we havent had on off spec cargoes as we've been doing this so.
Our team deserves a lot of a lot of credit there.
Alright, that's all I had thanks.
Thank you. Our next question is from Rowland Ross Crum extra investments. Your line is open. Please go ahead.
John Good good evening and good morning to use them.
Not a surprise to you is if you get that from one of the largest channel with us but allow me to go back to.
The very first question around cash cash flow.
And feature on of capital so.
First question is and so you're guiding Q2 to 250 million EBITDA.
You are just printed if I get it straight 160 million on operating cash flow. So.
So that's a roughly 70%.
Operating cash flow conversion.
You've printed up around 100 of free cash flow is set up to 50 per cent.
Now I see that you had a working capital swing was 86 million I assume that's two to blow up on accounts receivable.
So yeah first question is how do you guys see guy to 250 EBITDA is.
Is it fair to say you go back to what you got anyhow around 70% to 80% free cash flow conversion.
150 to 200 million.
Additional cash coming in this quarter, which is almost done and then the second question. If you allow me we've been through that.
If you look at the G suite stack I do appreciate there is no decision.
Although you know what our recommendation is so if I got the numbers straight you announced a billion for total Capex 400 has been spent you just announced a 60 million is gonna be done. So that leaves me with a 900 million Capex left.
And if I get it straight just to ask you straight you got a 624 construction loans. So you could build cheap free just with the existing construction loans and took revolver and then you're still sit on our 860 million cash that will go to hopefully within them.
<unk> 2 billion to <unk>.
So how does that leave us all together are you sitting on a lot of cash you increased the interest expenses, our executive compensation is $18 million.
And you're only paying out a $10 million dividend Pan am and when do you think that would be increased thank you.
Yeah, So our capital allocation hasn't changed as I as I mentioned already our current view is too.
Prefer liquidity.
At this time and financial flexibility, we will look at what our opportunities too.
Our debt and our leverage I think that's one thing that we'd like we'd like to do.
We've seen three significant black Swan events in the 11 to 12 years.
So that's had a huge impact on our view of our debt levels I think the cash on the balance sheet debt that will carry will be more than what we haven't had in the past as especially as we go into looking at projects, but we'll continue to have a balanced approach depending on prices above 300 methodology pointed out.
While we generate free cash even with our investments in a in a project like a G. Three so you know we'll look at all of the above and we're not going to hoard cash.
But we will keep a little bit more than traditionally we have on the on the balance sheet on where we're favoring probably paying down debt as well at the same time, so I'd say stay tuned and you know if prices stay where they are today, we're going to have lots of money and lots of cash to build projects and distribute through dividends and in share.
Repurchases.
Certainly we're thinking about how to return cash to shareholders.
You know we did make the decision to cut the dividend, which was a very difficult decision for us never done that before since we instituted the dividend and conditions, where that we thought that was the right move at the time. So there'll be a you know again to continue a balanced approach between dividend.
And share repurchases. So nothing has really changed but you know if we if we continue to have this pricing environment will have lots of lots of cash to do lots of things with.
Right you allow me go back to the first question because you just answer the second one so the $86 million.
Yeah, Yeah, so relevant Sanjay I'm speaking on the CFO and I don't think we've met that Oh, Yeah, Youre right. We did have a working capital build and that's something that is natural when you have a increase in methanol prices on our cost of inventory goes up a little bit because of our gas arrangements, where we share the upside with the with the methanol with a gas supplier and also on risk.
<unk> as you mentioned in your remarks.
And so as you go into a more steady environment, you wouldn't see that anymore of it flattened out and of course, that's methanol price. Its fall you have the opposite effect. So there is a working capital release. So you were you were accurate in describing.
The nature of the $86 million.
Okay I appreciate it John.
Sorry to go back to the second one on one more time, that's literally the last one so what needs what needs to be happening from now to a decision on the dividend.
Well I think we need to see.
The band recovery, which should lead to a positive price environment and then we'll have to look at our dividend.
And make sure that we think is sustainable through black Swan events like we just saw so you know what level that is we haven't decided yet but I think there is room to grow the dividend from where it is today.
If we get back to a more normal pricing environment, which today you know if we knew that the pricing today. It was gonna be similar for the next three or four years that would be an easy decision to increase the dividend, but we're not quite there yet we'd like to see how demand recovers and like I said in my earlier comments things are looking positive.
But we'd.
We'd like to see a little bit more recoveries on demand and see how vaccines rollout in more normal business conditions.
Okay.
Okay.
Thank you.
Thank you the last question, Steve Hansen from Raymond James Your line is open. Please go ahead.
Yeah, Thanks, guys I'll round it out here.
John just one comment you said earlier struck me as interesting is that you know you're selling a lot of product to China now.
I can remember a time, where you sold very little product to China.
Do you think about that environment going forward given that it is one of the bigger growth markets and you're contemplating a new capacity coming in of course in the Gulf. So is there additional infrastructure that you would need to service those kinds of growth markets that tankage terminals storage of some sort or I mean, how should we think about that.
Given sort of the regional diversification there.
Yeah. So you know all day in a few more ships, which you know obviously that we've looked at and having the pipeline. The nice thing about you know when we buy ships or invest in ships, we have ships coming to their end of their time charter all the time. So we have a lot of flexibility in there, but we'll need a bit more ships.
And probably a bit more tankage as well you know we're targeting all of G. III to go to to Asia at this point.
That's our current planning.
But getting tankage, we think as you know is something we can achieve we're not worried about having enough storage space a lot quite a few of our deliveries as well our direct to customers. So.
Arc logistics teams as a super job on on planning out.
You know, what we're gonna need and the nice thing about the G. III is we still have 24 months in front of actually making product. Once we decide if we decide to restart the project. So I'm not really that worried Steve about logistics and our team is really are experts in this area and we have lots of flexibility and lots of options.
To meet the needs of what we will have from a per productive capability.
You'll have noted.
Our production because of tightened in Chile, and New Zealand is lower as well. So we still have those those are commitments for logistics.
Today so.
I think net net if you look at Geismar three versus what we've lost its you know not that much more incremental production. So incremental logistics is not going to be a key.
Our concern for us going forward.
Okay very good that's helpful. Al I'll, just close by saying you know methanol markets, a really boring so don't worry.
Thank you.
Yes.
Okay. Thanks, everybody.
Methanol is an essential income chemical building block used to Bruce many consumer and industrial items.
It's used to make chemicals that formed the basis of products used to construct and insulate our homes automotive components to make cars lighter improved fuel efficiency and then the technology rely on to stay connected.
Methanol is essential role in countless consumer and industrial applications as important as a clean burning and an economic feel we continue to believe that long term outlook for methanol remains intact.
We're encouraged by the favorable industry.
Dynamics that we've seen so far in 2021, we remain focused on operating our plants safely and reliably delivering secure and reliable supply to our customers, ensuring we maintain financial flexibility to deliver long term value to shareholders. Thank you for joining us today and we'll speak with you again in July. Thank you for your interest in our company.
Thank you. The conference has now ended please disconnect your lines at this time. Thank you for your participation.
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