Methanex Corporation

Good morning, my name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the Methanex Corporation 2022 Fourth Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press star one again. I would now like to turn the conference over to the Director of Investor Relations at Methanex, Ms. Sarah Harriot. Please go ahead.

Thank you. Good morning, everyone. Welcome to our fourth quarter 2022 results conference call. Our 2022 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 at methanex.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 2022 MD&A and our 2021 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, average realized price, EBITDA, adjusted EBITDA, cash flow, adjusted income, or adjusted earnings per share made in today's remarks reflects our 63.1% economic interest in the Atlas facility our 50% economic interest in the Egypt facility, and our 60% interest in waterfront shipping. In addition, we report adjusted EBITDA and adjusted net income to exclude the mark-to-mark impact on share-based compensation and the impact of certain items associated with specific identified events. These items are non-GAAP measures and ratios 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 because we believe they are 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. Rich Sumner, for his comments and a question and answer period.

Thank you, Sarah, and welcome to all of you. We appreciate you joining us today as we discuss our fourth quarter and full year 2022 results. I'm excited to be leaving the company and to be having my first earnings call since becoming CEO of Methanex on January 1st. In December, we announced changes to the Executive Leadership Team, or ELT, with a few longstanding ELT members retiring. I want to thank them for their significant contributions to the company. The new members of the ELT all have extensive industry experience, and as a team, we all share a passion for safety and value creation. Now let's turn to a review of our fourth quarter and full year 2022 financial results. For the fourth quarter, our average realized price of $373 per ton generated adjusted EBITDA of $160 million and adjusted net income of 73 cents per share. Adjusted EBITDA was lower in the fourth quarter, primarily due to lower proceeds from the redirection and sale of natural gas in Egypt, partially offset by the benefit of a decline in gas and logistics costs. In 2022, we recorded annual adjusted EBITDA of $932 million and robust adjusted net income of $343 million or $4.79 per share. Combined, 2021 and 2022 are the highest adjusted EBITDA and operating cash flows in the company's history. I'm proud of the team for delivering another year of strong financial results and I'm very excited for the Geismar 3 plan coming online this year as it will further enhance our cash generation capability. We estimate that global methanol demand increased slightly in 2022 to 88 million tons. Methanol demand in the fourth quarter was down approximately 5% compared to the third quarter of 2022, primarily driven by lower MTO operating rates. MTO affordability was under pressure from low olefins prices, leading to lower operating rates and some plant outages. Demand from traditional chemical applications was also slightly lower due to lower consumer spending, year-end stocking in Europe and Asia, and continued lackluster demand in China due to COVID-19 restrictions. Demand from energy-related applications was relatively stable in the fourth quarter. Industry operating rates in the fourth quarter were similar to the third quarter, with lower operating rates in China and Iran due to the seasonal diversion of natural gas to meet meet power demand offset by stronger operating rates from the Atlantic region. High coal pricing in China continues to provide support to the methanol cost curve. We estimate the industry cost curve based on the marginal coal producer costs in China to be approximately $330-$350 per ton, with coal pricing continuing to remain well above 1,000 RMB per ton levels. Based on these industry supply and demand fundamentals, we are seeing relatively balanced markets in the Atlantic and tight markets across Asia and China, underpinned by high energy pricing globally. Our February posted prices remained stable in North America and increased in Asia and China. Less volatile spot prices in the fourth quarter, primarily in China, led to a lower discount rate of 20.5% compared to 21.5% in the third quarter. In 2022, we had an average discount rate of 21%, And in 2023, we had a similar discount rate. We continue to monitor the macroeconomic and energy price environments. We see potential demand upside from the reopening in China following the Lunar New Year, given the significant methanol demand in China, as well as Asian countries with strong economic ties to China. We continue to see a high global energy price environment, which enhances methanol's cost competitiveness against alternative fuels, supporting demand growth. Interest from the grain industry and orders for dual fuel vessels able to run on methanol continue to grow. Based on existing dual fuel ships and orders to date, demand potential grows from approximately 300,000 tons today to 3 million tons over the next few years. On the supply side, we did not anticipate any capacity additions outside of China in 2023 besides our Geismar 3 project, which is expected to start production in the fourth quarter. Turning to operations, our production levels were higher in the fourth quarter compared to the third quarter. As the Egypt plant restarted after an extended turnaround, we had higher gas availability in Chile and New Zealand and no plant turnarounds. We did experience unplanned outages in Geismar, Chile and Trinidad that impacted the fourth quarter production. In 2023, we have three plant turnarounds which will be undertaken sequentially and complete by September. Our forecasted production for 2023 is approximately 6.5 million equity tons, excluding production from G3, although actual production may vary by quarter based on timing of these turnarounds, gas availability, unplanned outages, and unanticipated events. We ended the fourth quarter in a strong financial position with approximately $806 million of cash, excluding non-controlling interest, and including our share of cash in the Atlas Joint Venture, and with $600 million of undrawn backup liquidity. Construction on our Advantage G3 project is progressing safely on time and on budget, with production expected in the fourth quarter of this year. The expected G3 capital spend remains unchanged at $1.25 to $1.3 billion, and we've spent approximately $910 million before capitalized interest to the end of the fourth quarter. The remaining $415 to $465 million of capital expenditures and including approximately $75 million in accounts payable is fully funded with cash on hand. We are looking forward to adding G3 to our asset portfolio as it will enhance our cash flow generation capability and lower the CO2 intensity of our portfolio. Looking ahead to the first quarter of 2023, we continue to see a strong methanol pricing environment, and we expect slightly higher production in the first quarter compared to the fourth quarter. I'd also mention that our sales of produced product were meaningfully lower than our production for the fourth quarter. As a result, we're expecting much higher sales of produced product and higher adjusted EBITDA in the first quarter of 2023 compared with the fourth quarter of 2022. In the medium term, the methanol market outlook is positive. and we have growing cash flow generation capability with G3 production expected in the fourth quarter of this year. At $375 per ton realized methanol price and $4 per MMPTU gas, we expect G3 to generate approximately $250 million of EBITDA per year. With our G3 project being fully funded with cash on hand and our ability to generate meaningful cash flows across a wide range of methanol prices, We are well positioned during this period of economic uncertainty to maintain a strong balance sheet, pursue economic value-added growth opportunities, and continue returning excess cash to shareholders.