Methanex Corporation

All participants, please stand by. Your conference is ready to begin. Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation Q3 2020 earnings call. I would now like to turn the conference call over to Ms. Kim Campbell. Please go ahead. Good morning, everyone.

Welcome to our third quarter 2020 results conference call. Our 2020 third quarter news release, management's discussion and analysis, financial statements can be accessed from the Reports tab of the Investor Relations page on our website at methanx.com. I would like to remind our listeners that our comments and answers to your questions today may contain forward-looking information. This information, by its nature, is subject to risks and uncertainties that may cause the stated outcomes to differ materially from the actual outcomes. Certain material factors or assumptions were applied in drawing the conclusions or making the forecasts or projections which are included in the forward-looking information. Please refer to our third quarter 2020 MD&A and to our 2019 annual report for more information. I would also like to caution our listeners that any projections provided today regarding Methanex's future financial performance are effective as of today's date. It is our policy not to comment on or update this guidance between quarters. For clarification, any references to revenue, EBITDA, cash flow, or income made in today's remarks reflect our 63.1% economic interest in the Atlas facility and our 50% economic interest in the Egypt facility. In addition, we report our adjusted EBITDA and adjusted net income to exclude the mark-to-market impact on share-based compensation and the impact of certain items associated with specific identified events. We report these non-GAAP measures in this way to make them a better measure of underlying operating performance, and we encourage analysts covering the company to report their estimates in this matter. I would now like to turn the call over to Methanex's President and CEO, Mr. John Florence, for his comments and a question and answer period.

Good morning. We hope that everyone is continuing to stay safe and healthy. In the third quarter, we continue to demonstrate the resilience of our business through this difficult time. Our manufacturing operations and global supply chain have run safely and effectively throughout the pandemic, which has enabled us to deliver on our commitment of secure and reliable supply to our customers around the world. We'd like to express our appreciation to our team members across the globe who have demonstrated their ongoing commitment and agility this year. This morning, we'll comment on our Q3 results. provide an overview of what we're seeing in the methanol markets, and discuss how we continue to manage our business in this challenging environment, including additional steps that we've recently taken to increase liquidity and preserve financial flexibility through this uncertain time and emerge stronger when market conditions further improve. Now I'll turn to the third quarter results. We recorded adjusted EBITDA of $40 million, which was higher than the second quarter, as a result of higher average realized price, which is partially offset by lower sales of Methanex's previous product and higher costs. We recorded an adjusted net loss of $79 million, or $1.03 per share, in the third quarter, higher compared to the second quarter, primarily due to the one-time finance charge of $15.4 million related to the early repayment of our $250 million unsecured notes that were due in March 2022. Excluding this one-time finance charge, we would have recorded an adjusted net loss of $68 million, or 88 cents per share. Now turning to the methanol market. We estimate that global methanol demand increased by approximately 9% in the third quarter of 2020 compared to the second quarter as economic activity rebounded around the world and methanol demand recovered across all regions and end-use markets. Globally, demand for traditional chemical applications improved as manufacturing activity recovered, particularly in the automotive and construction industries. Demand for energy-related applications, including MTBE, biodiesel, and other fuel applications, improved as ground transportation and fuel demand saw some recovery. Methanol to olefin demand has remained strong throughout 2020. While demand has recovered in the third quarter of 2020, global demand, global methanol demand in the year through Q3 2020 remains 3% lower than the comparable year-to-date period in 2019 and below pre-COVID expectations for 3% to 4% growth. On an annual basis, we estimated the forecast demand in 2020 will be lower than the 2019 by 3 million tons versus pre-COVID expectations for 3 million tons of growth. As a result, we estimate that 2020 global demand will be 6 million times lower than pre-COVID forecasts, reflecting the demand destruction resulting from the pandemic. Global methanol industry supply declined in the third quarter of 2020 compared to the second quarter due to various planned and unplanned outages and planned shutdowns to respond to lower methanol demand. Our Titan plant in Trinidad remains idle, while our Chili Fort plant, which has been idle since April 1, starting. Overall, the combination of increased methadol demand and lower industry supply has tightened global inventory levels and moved methanol prices higher. We estimate that the industry cost curve, which continues to be set in China, is approximately $200 to $240 per ton. Spot prices in China are above this range today. As a result of the tighter market conditions, our posted prices for October and November increased. We recently posted our November North American price, which increased by 13% to $379 per ton, and our Asia Pacific price, which increased to $310 per ton. Our European contract price is set quarterly, and our fourth quarter posted price is 275 euros for $320 per ton. Now, turning to our operations. Our production levels were lower in the third quarter as we undertook planned maintenance activities at our Medicine Hat facility and our office facility in Trinidad. In New Zealand, our production levels were lower in the third quarter as a result of received lower gas deliveries as previously forecast. We expect to receive higher gas deliveries in the fourth quarter. In Guyver, both of our plants ran at full operating rates during the third quarter. completed our low capital cost Geismar 1 de-bottlenecking project to increase our production capacity by approximately 10% or 100,000 metric tons per year and expect to ramp up to our new full production capability for Geismar 1 over the coming weeks. In Trinidad, we commenced the planned turnaround at our Atlas facility towards the end of the quarter and expect to resume production in early November. Our Titan facility remains idle, and negotiations with the National Gas Company of Trinidad and Tobago for a long-term gas agreement continue. In Chile, our production levels were lower in the third quarter, as we received lower natural gas deliveries during the southern hemisphere winter months, when the natural gas supplies are needed for residential heating. As global ethanol demand is improving, we are in the process of restarting our Chile 4 plant. In Egypt, our plant ran at nearly full operating rates. In Medicine Hat, our production levels were lower as we commenced a planned turnaround in August 2020 and subsequently completed at the end of October. Now we'll turn to our balance sheet. In the current unprecedented environment impacted by both COVID-19 and challenging commodity prices, the path and pace for global economic recovery and methanol demand remain uncertain. We believe that it's prudent to plan for a wide range of scenarios, including the possibility of a prolonged period of lower methanol demand and lower methanol prices. We have taken a series of actions in 2020 to preserve liquidity and improve financial flexibility during this uncertain time, including deferring approximately $500 million in capital spending on our Geismar 3 project, reducing our dividend by approximately $100 million on an annual basis, suspending share buybacks, reducing maintenance capital and operating costs, and obtaining covenant relief on our credit facilities. In addition, in mid-September, we issued $700 million in 2027 notes to repay existing debt and increase our liquidity and financial flexibility with limited impact on our leverage metrics. We have repaid the $200 million drawn on our revolving credit facility, and in late September, we issued an early redemption notice to repay our existing $250 million bond that was originally due in March 2022. The cash flow impact of early bond requirement will be reflected in our fourth quarter results. The remaining $250 million is available to provide additional liquidity. We have no other debt maturities until late 2024. During the third quarter, we also secured additional flexibility under a revolving credit and Geismar III construction facilities related to the minimum EBITDA to interest coverage ratio covenant through to December 31st, 2021. A prior waiver had provided covenant relief until June 30th, 2021. The steps that we have taken in 2020 to increase liquidity and improve our financial flexibility position as well to navigate through this uncertain time and generate significant long-term value when market conditions further improve. We are pleased to see recent early signs of economic recovery, including improvement in methanol demand and prices. Nevertheless, we continue to evaluate all options to preserve liquidity and improve financial flexibility as necessary. Now I'd like to turn briefly to our Geismar 3 project. As we've noted before, Our Geismar 3 project is a high-quality project with substantial capital and operating cost advantages and has been significantly de-risked. In April 2020, we placed the project on temporary care and maintenance for up to 18 months, given the significant uncertainty regarding the global economy due to COVID-19. The project was in excellent shape and progress had been safe, on time, and on budget, and the head project had been significantly de-risked. We deferred approximately $500 million of capital expenditures with the expected spending during the temporary care and maintenance period reduced to only the costs that were already committed and the completion of activities that preserve the flexibility to complete the project in the future, such as certain key engineering activities and procurement of critical path equipment. Construction on the Geismar 3 project remains on hold, and the various factors today do not currently support restarting construction. We want to be clear that we have a robust decision-making process for evaluating the project, and there are many factors that management and our board will need to consider carefully before restarting construction, including the global economic recovery and the methanol demand outlook, the methanol industry's needs for new capacity, the methanol price forecast, the ability to fund the project, and our suppliers' ability to complete construction and deliver material equipment on time and on budget in light of any COVID-19 restrictions. We will continue to review and monitor these factors as we continue to evaluate G3. We continue to explore partnership arrangements for the project. Now turning to our outlook for the fourth quarter. We expect that the outlook over the coming months to continue to be uncertain. We cannot predict the full impact of COVID-19 pandemic on the methanol market. Based on our posted prices so far, we expect average realized prices in the fourth quarter to be higher than the third quarter. We expect that our production levels in the fourth quarter will be higher compared to the third quarter as we have completed our planned maintenance activities in Medicine Hat and Trinidad. We are in the process of restarting our Chilling Fork plant and we expect to receive higher gas deliveries in New Zealand compared to Q3. We expect adjusted EBITDA to be higher in the fourth quarter compared to the third quarter. As we look forward towards next year, we are updating our guidance on a couple of items starting in 2021. We expect our selling, general, and administrative costs to be flat in 2021 compared to 2020, as we continue to focus on our low-cost strategy. And we expect our maintenance capital guidance in 2021 to be approximately $120 million, Before we pause for questions, we'd like to highlight a couple of points about the resiliency of our business. While the near-term outlook is uncertain, we continue to believe that the long-term methanol industry supply and demand fundamentals are strong. Methanol is a key chemical building block that is used to produce a variety of everyday consumer and industrial items. Methanol is also used in a growing number of clean burning and economic alternative energy applications. We expect that demand for methanol will rebound and grow as global economic activity recovers. As a global methanol industry leader with a network of production facilities around the world, an integrated global supply chain and low-cost structure, our competitive advantage of delivering secure and reliable supply to our customers around the world remains intact. We have strong cash flow potential with significant leverage to methanol prices. We estimate that every $10 increase in our average realized price translates into approximately $60 million increase in adjusted EBITDA on an annual basis. We remain focused on operating our plants safely and reliably, delivering secure and reliable supply to our customers, and strengthening our business by preserving liquidity and improving financial flexibility. We are well-positioned to navigate through this uncertain time and emerge stronger when market conditions improve. We would now be happy to answer any questions.