Methanex Corporation

Good morning, my name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mesonex Corporation 2023 first 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 followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star 1. Thank you. I would now like to turn the conference call over to the Director of Ambassador Relations at Methanex, Ms. Sarah Harriot. Please go ahead, Ms. Harriot.

Good morning, everyone. Welcome to our first quarter 2023 results conference call. Our 2023 first quarter news release, management, discussion, and analysis, and financial statements can be accessed from the Reports tab of the Investor Relations page on our website at methenx.com. I'd 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 first quarter 2023 MD&A and to our 2022 annual report for more information. I would also like to caution our listeners that any projections provided today regarding Mathenex's future financial performance are effective as of today's date. It is our policy not to comment on or update 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 our 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 President and CEO, Mr. Rich Sumner, for his comments and a question and answer period.

Thank you, Sarah, and good morning, everyone. We appreciate you joining us today as we discuss our first quarter 2023 results. For the first quarter, our average realized price of $371 per ton and produced sales of approximately 1.65 million tons generated adjusted EBITDA of $209 million and adjusted net income of $1.11 per share. Adjusted EBITDA was higher in the first quarter compared to the fourth quarter, primarily due to higher sales of methanol-produced methanol, driven by higher production in Egypt, Atlas, and Chile. Throughout the first quarter, we saw a relatively balanced global market, which continues to be underpinned by high global energy prices. Global methanol demand in the first quarter was flat compared to the fourth quarter, 2022. Demand for traditional chemical applications decreased slightly due to the seasonal slowdown in manufacturing activity, including the slowdown in China during the Lunar New Year. Demand for methanol to olefins, or MTO, increased slightly in the first quarter with some improved operating rates through the quarter as several production units increased production on improving margins and increased methanol availability demand for energy applications including mtb biodiesel and various fuel applications in china increased slightly driven mainly by levels of economic activity as well as continued cost competitiveness in today's high energy price environment during the first Part of the quarter, industry operating rates in China and Iran were negatively impacted by the seasonal diversion of natural gas to meet power demands, and Atlantic operating rates were lower due to planned and unplanned outages. Starting near the end of the first quarter, we saw strong operating rates in the U.S. Gulf and easing of gas retailments in China and Iran, leading to increased production, which led to lower methanol prices globally. Our average realized price for the first quarter was $371 per metric ton compared to $373 per metric ton for the fourth quarter. And our first quarter discount rate was in line with our guidance for 2023 at approximately 21%. Coal pricing in China continues to remain strong at a level above 1000 RMB per ton. And we estimate the industry cost curve based on a marginal producer cost in China to be approximately $320 to $340 per ton. Our May posted prices in North America, Asia Pacific, and China decreased by $20, $10, and $15 per metric ton respectively, and our Q2 European price was posted 10 euros per metric ton higher than Q1 2023. We continue to closely monitor the macroeconomic and energy price environment with inflationary pressures and resulting tight monetary policies presenting headwinds for global economic growth. Notwithstanding these risks, We expect demand for traditional chemical applications to increase as we move into the housing and construction season and from continued growth in the Chinese economy after their COVID reopening and Chinese Lunar New Year holiday in the first quarter. In addition, MTO operating rates have continued to improve and two MTO units representing approximately one and a half million tons of annual demand are in the process of restarting production. We also continue to see a high global energy price environment, which enhances methanol's cost competitiveness against alternative fuels supporting demand growth. In the short term, we expect the recent methanol operating rate increases, mainly from Iran and China, to support increasing demand. For the remainder of 2023, we do not anticipate capacity additions besides one plant in China and our Geismar 3 project with expected production in the fourth quarter. Regarding the emerging marine market, interest from the marine industry and orders for dual field vessels able to run on methanol continue to grow during the first quarter approximately 35 additional vessel orders were placed bringing the total number of dual field vessels on order to over 135. we estimate that demand potential will grow from approximately 300 000 tons today to 4 million tons over the next four next few years In February, we completed the first ever net zero voyage fueled by biomethanol produced from our Geisinger plant in partnership with Mitsui OSK Lines or MOL. Our collaboration with MOL demonstrates the versatility of methanol as a brain fuel with a pathway to net zero emissions. Turning to operations, our production levels were higher in the first quarter compared to the fourth quarter with limited unplanned outages. The team safely and successfully completed a plant turnaround at G1 with the plant restarting production in February. We ended the first quarter in a strong financial position with approximately $709 million cash, excluding non-controlling interests, and including our share in the Atlas joint venture, and with $300 million of undrawn backup liquidity. We remain committed to return excess cash to shareholders through our ongoing 5% normal course issuer bid that expires in September, and we announced that our board approved an increase of our quarterly dividend by 6% to 18.5 cents per share. This increase is in line with our 5% share repurchase program and maintains our cash outlay for dividend payments at approximately $50 million per annum. Construction on our G3 project is progressing safely on time and on budget with production expected in the fourth quarter of this year. Overall, the G3 project is over 80% complete and the team has started to shift from mechanical construction activities to commissioning activities. The expected G3 capital remains unchanged at $1.25 to $1.3 billion and we have spent approximately $995 million before capitalized interest to the end of the first quarter. The remaining $330 million to $380 million of cash expenditures, including approximately $75 million in accounts payable, is fully funded with cash on hand. Looking ahead to the second quarter of 2023, we expect a lower methanol price environment, and as a result, we're expecting a lower adjusted EBITDA in the second quarter of 2023 compared with the first quarter. Our overall production guidance for the year of 6.5 million metric tons of equity production, excluding G3, remains unchanged. In the medium term, the methanol market outlook is positive and we will have growing cash flow generation capability with G3 production expected in the fourth quarter of this year. At a $375 per ton realized price and $4 per mm BTU gas price, we expect G3 to generate approximately $250 million of adjusted 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. We would now be happy to answer questions.