Methanex Corporation

ladies and gentlemen thank you for standing by welcome to the methenix corporation q4 2021 earnings call i would now like to turn the conference call over to miss sarah harriet please go ahead miss harriet good morning everyone welcome to our fourth quarter 2021 results conference call our 2021 fourth 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, MSNX.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 forecasts or projections. which are included in the forward-looking information. Please refer to our fourth 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 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 Floren for his comments and a question and answer period.

Thanks, Sarah. Good morning and all the best in 2022. We hope that everyone is continuing to stay safe and healthy. Today we will review our outstanding fourth quarter and full year 2021 results, provide an overview of the methanol markets, discuss our operational results, and share our near-term outlook. We will then open the call out for questions. Turning to our financial results, In the fourth quarter of 2021, we recorded our highest quarterly adjusted EBITDA in the company's history of $340 million and a record adjusted net income of $185 million or $2.43 per share. Our exceptional fourth quarter results are primarily due to higher realized prices and higher produced sales volume, highlighting the significant leverage to methanol prices. For the full year of 2021, Our financial results were significantly stronger compared to 2020 due to higher realized methanol prices. We recorded our highest annual adjusted EBITDA of $1.1 billion and robust adjusted net income of $460 million or $6.03 per share. We are extremely pleased with our record financial results this past year following a very challenging 2020. I'm proud of how our global team operated given the ongoing uncertainty of COVID-19 pandemic. Our exceptional safety performance coupled with high plant reliability and strong prices enabled us to deliver outstanding financial results for our shareholders. Now turning to the methanol market. We estimate that the global methanol demand in 2021 increased by approximately 5% to 86 million tons compared to 2020. This increase was driven by strong recovering demand for traditional chemical applications from increased manufacturing activity. Energy related demand also rebounded but was slightly offset by lower demand from methanol to olefins or MTO production. We estimate that the global methanol demand decreased by approximately 2% in the fourth quarter compared to the third quarter. Traditional demand growth in the fourth quarter was offset by lower demand for MTO producers due to planned outages and the continued impact from China's government mandated industrial operating rate restrictions. The methanol industry ran at a lower operating rate in 2021 due to various planned and unplanned outage. The run up in energy prices in 2021 impacted feedstock cost and availability. which made it difficult for production to increase back to pre-COVID levels. In the fourth quarter, there were several plant outages, particularly in Iran, due to natural gas restrictions, and in China, where natural gas and coal were diverted to meet seasonal power demand. Methanol prices fluctuated during the fourth quarter. Prices increased early in the quarter due to tight supply and rising energy prices before moderating later in the quarter. Our average realized price increased $55 per ton in the fourth quarter to $445 per ton compared to the third quarter of 2021. Entering the fourth quarter, energy prices, particularly coal and natural gas prices, increased significantly, which moved the cost curve higher. In December and into the first quarter of 2022, we have seen coal prices moderate to around 900 RMB per ton as a result of intervention in coal production in China by the Chinese government. The result has been that the industry cost curve, which continues to be set in China, decreased to approximately $350 per ton at a coal price of 900 RMB per ton. Although still robust, our February posted prices were lower in Asia Pacific and flat in North America and China at $480, $619, and $430 per ton, respectively. Our European contract price is set quarterly, and we increased our first quarter 2022 prices by 15 euros per ton to 599 euros per ton. Our fourth quarter discount rate was higher compared to our guidance for 2021. As a result of tight market conditions during the fourth quarter, we saw meaningful price premiums compared to China pricing in all markets. For Asia Pacific, where prices were $50 to $100 higher than China, We have traditionally used one posted price for the entire region, which includes China, and this resulted in a significantly higher discount for the product we sold in China. In 2022, we have introduced a separate posted pricing for China, or the CPCP, and do not expect similar volatility in our future discount rate as a result of these large pricing differentials between China and other Asia-Pacific markets. We mentioned on our Q3 quarterly call that we provide updated guidance on our discount rate to posted methanol prices. In 2022, we expect to see higher discount rates of approximately 20% on average compared to our prior 17% guidance, as we are experiencing a more competitive environment. We do not expect the higher discount to impact our overall realized price for methanol, as we make our pricing decisions are made with a view on supply and demand fundamentals and the global cost curve at any given point in time. Overall, the methanol markets remain strong. We continue to see strong traditional derivative demand, and we expect higher operating rates from the MTO sector in Q1. Today, the MTO industry is operating at approximately 80% rates. We continue to be optimistic about new methanol demand. In 2021, a number of announcements were made by container ship operators for orders of dual-fueled vessels. We estimate in the next three to four years that there'll be over 35 dual-fueled vessels on the water, sorry, 55 dual-fueled vessels on the water, including 19 of our own ships, and that the annual demand from these dual-fueled vessels will be approximately 1 million tons per year, assuming they run on methanol 100% of the time. Now, turning to our operational results, our production levels were significantly higher in the fourth quarter compared to the third quarter due to higher gas availability in Chile and New Zealand and record production at our Geismar facilities. In New Zealand, our production levels were higher in the fourth quarter following the completion of the short-term commercial arrangement we made to idle one plant and to make natural gas available to support the New Zealand electricity market. Since then, we've operated both Montanui plants, We estimate that our 2022 production in New Zealand to be approximately 1.5 million tons from the two Mount Nui plants. In Geismar, both our plants ran at full operating rates during the fourth quarter, resulting in record quarterly production for those plants. With the completion of the second low-cost de-bottlenecking project at G2, the Geismar facility's annual operating capacity has increased by 10% to 2.2 million tons. In Trinidad, our Atlas production in the fourth quarter continues to be strong and was similar to the third quarter. We continue to have discussions around opportunities for longer-term gas supply for our assets. In Chile, production levels were higher in the fourth quarter as we restarted Chile 4 in October. We expect to operate both plants during the southern hemisphere summer months to the end of April 2022. We estimate that the production in Chile for 2022 of approximately 1 million tons. In Egypt, production levels were slightly lower in the fourth quarter due to operating constraints, and in Medicine Hat, production for the fourth quarter was similar to the third quarter. Our 2022 production is forecasted to be approximately 7 million equity tons, although actual production may vary by quarter based on gas availability, planned maintenance outages, extended unplanned outages, and anticipated events. Turning to our balance sheet, We ended the fourth quarter in a strong financial position with $932 million in cash and $900 million of undrawn backup liquidity, which meets our goal of having cash on hand for the remaining G3 capital cost spent. We previously announced a strategic shipping partnership with Mitsui OSK Limited, or MOL, with proceeds of approximately $145 million. We have received all regulatory approvals for the transaction and expect it to close during the first quarter of 2022. Turning to our capital allocation priorities. Our capital allocation priorities remain the same. We will use the cash we generate to maintain our business, pursue value accretive growth opportunities, and continue our strong track record of returning excess cash to shareholders. Construction on our highly-advantaged G3 project is progressing to plan and is well-positioned to be completed on time and on budget by the end of 2023 or early 2024. All major equipment items are now on site, which reduces the risk of supply chain issues or inflation. Our capital cost estimate for the project is $1.25 to $1.35 billion, and we have spent approximately $508 million to the end of 2021. We expect approximately $750 to $850 million of remaining capital costs before capitalized interest. We continue to anticipate to spend approximately $100 million per quarter, understanding that the timing of expenditures may fluctuate period to period. In the fourth quarter, we spent less than the $100 million due to the timing of expenditures related to the project. With our strong liquidity position and cash flow generation, we are well positioned to fund the Geismar 3 product from cash on hand. In addition to completing our G3 project, we plan to focus on increasing our production by securing additional economic natural gas for our existing assets. Excess cash will continue to be returned to shareholders with a preference for using flexible share buybacks. In the fourth quarter, we returned $68 million to shareholders through our share repurchase program and regular dividend. Now turning to the outlook for the first quarter. Based on our current posted prices for the first two months of the first quarter and notably higher forecasted sales of produced product versus the fourth quarter of 2021, we expect the first quarter 2022 EBITDA to be similar to the fourth quarter of 2021. Methanol market fundamentals remain strong, and we are confident in our ability to generate meaningful cash flow at current methanol prices. In 2022, we remain focused on managing safely through the global pandemic, continue to progress our Advantage G3 project safely and on budget, operating our plant safely and reliably, delivering secure and reliable supply to our customers, and enhancing our strong financial position and financial flexibility. We are well positioned to continue delivering significant value to shareholders over the medium to long term. We would now be happy to answer any questions.