Methanex Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Methanex Corporation Q2 2021 earnings call. I would now like to turn the conference over to Ms. Kim Campbell. Please go ahead, Ms. Campbell.

Good morning, everyone. Welcome to our second quarter 2021 results conference call. Our 2021 second quarter news release Management's discussion and analysis and 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 outcome to differ materially from the actual outcome. Certain material factors or assumptions were applied in drawing the conclusions or making the forecast or projections which are included in the forward-looking information. Please refer to our second quarter 2021 MD&A and to our 2020 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, adjusted 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. These items are non-GAAP measures that do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other companies. 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 manner. I would now like to turn the call over to Methanex's president and CEO, Mr. John Florin, for his comments and a question and answer period.

Thanks, Kim. Good morning, everyone. Today, I'm pleased to discuss our excellent second quarter 2021 financial results. In addition, we'll share our view of the methanol markets, review our operational results, and discuss our outlook entering the third quarter. We'll also make a few remarks regarding our decision to restart construction on our Geismar 3 project, our strategic shipping partnership, and our priorities around capital allocation, including the recent announcement to increase the quarterly dividend. Then we will open up call for your questions. Returning to our financial results, we increased our average realized price in the second quarter to $376 per ton, a $13 increase compared to the first quarter. Adjusted EBITDA increased to $262 million in the second quarter, an increase of $20 million compared to the first quarter. We also recorded higher adjusted net income of $95 million, or $1.24 per share in the second quarter, an increase of $13 million, or $0.17 per share compared to the first quarter. These results illustrate the significant leverage that our earnings have to methanol prices. Now, turning to the methanol market, over the last 12 months, methanol prices have rebounded as the global economic recovery continues and vaccines roll out worldwide. Current methanol industry dynamics are favorable, supported by strong methanol demand, low global inventory levels, ongoing industry supply challenges, and a constructive energy price environment. We estimate that the global methanol demand increased by approximately 3% in the second quarter compared to the first quarter. We anticipate that global methanol demand will surpass pre-pandemic levels later this year. Strong methanol demand combined with ongoing industry supply challenges around the world and the delayed startup of new industry capacity additions supported higher prices in the second quarter, with tight market conditions continuing into the third quarter. We estimate that the industry cost curve set in China has increased to approximately $300 to $320 per ton, supported by rising coal and natural gas prices. We recently posted our August prices, which remained at $542 per ton in North America and $420 per ton for Asia Pacific. We set our European contract price quarterly, and our third quarter posted price is €410, or approximately $485 per ton. As we mentioned on our call in mid-July, over the last few months, we completed a comprehensive review of the medium- to long-term industry outlook. We reviewed our expectations for demand growth, the timing for new industry capacity additions, and industry operating rates for new and existing methanol plants over the coming years. Based on that work, we believe that the methanol industry medium term outlook is positive. A new industry supply will be needed to meet growing methanol demand over the next five years. Now turning to our operational results. Our second quarter 2021 production of 1.5 million tons was lower than the first quarter, primarily due to the lower gas availability in New Zealand and Chile. In New Zealand, our production was lower in the second quarter compared to the first quarter due to ongoing lower gas deliveries. In addition, we agreed to a short-term commercial arrangement with Genesis Energy to make natural gas available to support a tight New Zealand electricity market. As a result, we temporarily isled one of our new plants for approximately three months. We expect the margin from the sale of gas will be offset the margin lost from the lower forecasted production volume of 85,000 tons. We estimate that production in New Zealand for 2021 of 1.4 million tons. The upstream gas sector is completing several field development projects that could improve gas availability over the coming years. In Geismar, our production in the second quarter was higher than the first quarter as we completed a planned turnaround at our Geismar II facility in the first quarter. We finished the de-bottlenecking project at our Geismar 2 plant in the second quarter of 2021, following the work completed at our Geismar 1 plant late in 2020. As a result, our operating capacity for our Geismar facilities is now 2.2 million tons on an annual basis, an increase of 10%. Completed for a capital cost of approximately $125 per ton for the additional 200,000 tons of capacity. In Trinidad, our production in the second quarter was higher than the first quarter as we received full gas deliveries. Based on current gas deliveries, we estimate that production in Trinidad for 2021 to be 1.1 billion tons, reflecting Methanex's equity interest. In Chile, as expected, our production in the second quarter was lower than the first quarter. We typically experience lower gas deliveries in the southern hemisphere in winter months, impacting our second and third quarters. We should receive higher gas deliveries in the fourth quarter, and we estimate production in Chile for 2021 to be 800,000 to 900,000 tons. In Egypt, our production in the second quarter was slightly lower than the first quarter due to minor technical issues that have been resolved. In Medicine Hat, our production in the second quarter was similar to the first quarter as the plant ran at nearly full operating rates. Now, turning to our balance sheet. We have a strong financial position with over $750 million in cash on our balance sheet at the end of the second quarter. This amount reflects our strong adjusted EBITDA results in the second quarter and the repayment of $173 million drawn on our G3 construction facility. We've previously announced a strategic shipping partnership with Mitsui OSK Limited, or MOL, with the proceeds of $145 million expected by the end of 2021. This transaction will not have a material impact on our earnings. Our waterfront shipping subsidiary generates revenue from shipping methanol to Methanex customers and third-party backhaul arrangements. As a result of the partnership, MLL will be entitled to a proportional share of waterfront's net earnings, which fluctuate based on ship volume and tanker market rates. However, in terms of our financial statements, our ownership of waterfront shipping now and after this transaction is complete is accounted for on a consolidated basis, resulting in 100% of the revenues and expenses being included in our financial statements. We continue to generate meaningful cash flow across a wide range of methanol prices and have an undrawn backup liquidity, including our $600 million G3 construction facility and our $300 million revolving credit facility. Now, turning to our Gaismar 3 project, we are We were pleased to announce that our board unanimously approved the restart of the construction of our GASMR3 project, a unique project with significant capital and operating cost advantages that enhance the project's returns. An abundant and low-cost natural gas supply in the U.S. underpins production for this project. In addition, we estimate that G3 will have one of the lowest CO2 emission intensity profiles in the industry. Ultimately, Geismar 3 will strengthen our asset portfolio and substantially improve our future cash generation capability. We believe that Geismar 3 will deliver significant long-term value to our shareholders. Our capital cost estimate for the project is $1.25 to $1.35 billion. We expect that approximately $435 million will be committed to the project as we end at the end of Q3 2021 through the care and maintenance period. We expect approximately $800 to $900 million in remaining capital costs after resuming construction in October 2021. We are confident in our ability to complete this project on time and on budget. We have substantially reduced the project execution risk profile over the last 24 months. We are well positioned from a labor perspective as construction on our project is ahead of other major capital projects in the region. We have also secured prices for the majority of our bulk material costs. Our remaining budget includes allowances and contingencies for both escalation and the remaining risks on the project. And lastly, turning to our capital allocation priorities. Our capital allocation priorities remain the same. We use the cash that we generate to maintain our business, pursue value accretive growth opportunities, and continue our strong record of returning excess cash to shareholders. Going forward, we will increase our emphasis on financial flexibility in three ways. We plan to hold more cash, targeting a minimum of $300 million of cash on hand plus our remaining G3 capital costs during construction. We plan to target lower leverage and reduce our debt levels over time to a target of approximately three times debt to EBITDA at methanol prices between $275 to $300 per tonne. and we'll increase our weighting on flexible vehicles for distributions such as share buybacks combined with sustainable dividend to return capital to shareholders. We recently announced that we reset our quarterly dividend to 12.5 cents per share. We anticipate that we'll have the ability to further de-lever and increase shareholder distributions such as share buybacks in a few quarters at methanol prices of approximately $325 a ton or higher. Geismar 3 is the only significant growth capital in our plans over the next few years. We expect that G3 will substantially increase our cash generation capability and support a significant increase in our future shareholder distribution potential. Now, turning to the outlook for the third quarter, we expect realized methanol prices in the third quarter of 2021 will be similar to the second quarter based on our posted prices so far. We forecast that our third quarter production will be similar to the second quarter. We anticipate our adjusted EBITDA results in the third quarter to be similar to the second quarter. Finally, I want to mention that we recently published our annual sustainability report. We have publicly reported on our sustainability performance since 1997 and continue to enhance our sustainability and ESG-related disclosure to align with evolving best practice and to support greater transparency and comparability. This year, our disclosures align with the Sustainability Accounting Standards Board, or SASB, reporting standards for the chemical and marine transportation sectors. Also, our disclosures reference some aspects of the Task Force on Climate-Related Financial Disclosures, or TCFD, and some requirements of the Global Reporting Initiative, or GRI. We will continue to look at ways that we can improve our sustainability performance in reporting over the coming years. I would now be happy to answer any questions.