Methanex Corporation

Good morning, my name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Methanex Corporation 2023 second 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'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, please press star one again. I'd now like to turn the conference call over to the Director of Investor Relations at Methnex, Ms. Sarah Harriot. Please go ahead, Ms. Harriot.

Good morning, everyone. Welcome to our second quarter 2023 results conference call. Our 2023 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 methnex.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 2023 MD&A and our 2022 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 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 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 that 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 good morning, everyone. We appreciate you joining us today as we discuss our second quarter 2023 results. For the second quarter, our average realized price of $338 per ton and produced sales of approximately 1.62 million tons generated adjusted EBITDA of $160 million and adjusted net income of $0.60 per share. Adjusted EBITDA was lower in the second quarter compared to the first quarter, primarily due to a lower average realized price. The decline in the average realized price was driven by global methanol supply outpacing demand growth, and low global energy prices, leading to a decrease in the methanol cost curve and methanol to olefins affordability. Methanol demand in the second quarter increased modestly compared to the first quarter of 2023, and we continue to monitor demand closely with ongoing macroeconomic headwinds. Demand for traditional chemical applications, which represents 50% of global demand, increased slightly compared to the first quarter. but remains at or slightly below 2022 demand. This is mainly due to the slower than anticipated pace of economic recovery in China and the impact of inflation and resulting monetary policy actions on the rate of global industrial activity. Demand from energy-related applications such as MTBE and fuel blending increased during the second quarter driven by improved mobility in China as well as continued cost competitiveness of methanol. MTO operating rates also improved slightly compared to the first quarter when a number of units undertook outages, although MTO affordability remains under meaningful pressure as a result of continued low olefins pricing. On the supply side, methanol production from China and Iran faced natural gas restrictions in the first quarter, increased steadily throughout the second quarter, and strong operating rates in other regions led to global methanol supply outpacing demand growth, and higher global inventory levels. Declining coal pricing in China in the second quarter also put some pressure on the methanol cost curve, with coal prices moving from over 1,000 RMB per ton levels to approximately 850 RMB per ton currently. We estimate the industry cost curve based on the marginal coal producer cost in China to be approximately $260 to $280 per metric ton, During the second quarter of 2023, our global average realized price was $338 per metric ton, compared to $371 per metric ton for the first quarter. The declining spot prices in the second quarter, primarily in China, led to a higher discount rate of 25%. Our August posted prices in North America, Asia Pacific, and China were posted at 516, 315, and $305 per metric ton, respectively. And our third quarter European price was posted at 395 euros per metric ton. Based on our July and August posted prices, we estimate our global average realized price to be approximately 290 to $300 per metric ton for these two months. Turning to the emerging marine fuel demand, announcements from the shipping industry for new dual-fuel vessels continue to accelerate. In the second quarter, Maersk announced a further 17 ships and Evergreen ordered 24 dual-fuel container ships. In addition to these new-build orders, we are now seeing growing interest in dual-fuel retrofits, with C-SPAN announcing to retrofit 15 vessels. By 2028, we now estimate approximately 200 dual fuel methanol ships on the water with potential demand of over 6 million tons per year, which is an increase of around 2 million tons per year compared with the demand number I reported at the end of the first quarter. We ended the second quarter in a strong financial position with approximately $600 million of cash and $300 million of undrawn backup liquidity. We continue to carefully manage the balance sheet, and our current cash position allows us to operate the business with all remaining G3 spend fully funded. With continued macroeconomic uncertainty and the impact of declining methanol prices through the second quarter, we cease share repurchases under the normal course issuer bid, which expires in September 2023. Our intent remains to repay rather than refinance the $300 million bond due at the end of 2024, And under current market conditions and pricing levels, we will be prioritizing excess cash towards this repayment. Construction of 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 around 90% complete. The project team remains focused on safety and delivering a high-quality and reliable plan. The expected G3 capital spend remains unchanged at $1.25 to $1.3 billion, and the remaining $240 to $290 million of cash expenditures, including $65 million in accounts payable, is fully funded with cash on hand. Looking ahead to the third quarter of 2023, we are expecting lower adjusted EBITDA compared with the second quarter as we expect to realize a lower methanol price, and have lower production with seasonal gas restrictions in Chile and a turnaround schedule in New Zealand. Our overall production guidance for the year of 6.5 million metric tons of equity production, excluding G3, remains unchanged. We remain focused on delivering strong operational results from our existing assets and completing the G3 project safely on time and on budget. We are well positioned during this period of economic uncertainty with growing cash flow generation capability from G3 and a portfolio of assets that can generate cash flow across a wide range of methanol prices.