Saudi Basic Industries Corporation (2010) Earnings Call Transcript

Welcome to SABIC's Q2 2025 Earnings Call. This is Sarah Alzamami, acting as a moderator. Please note that the call is being recorded. [Operator Instructions] Today's earnings call will feature SABIC's CEOs, Engineer Abdulrahman Al-Fageeh; it's CFO, Salah Al-Hareky ; and its IRO, Naif AlAyed. Naif will now take us through an outline of today's event.

Thank you, Sarah, and thanks to those of you who are joining the SABIC Q2 2025 Earnings Call. Let me begin by pointing out that forward-looking statements will be made in this call. These statements are based on assumptions filled with risk and uncertainty, so they are not a guarantee of SABIC's future performance. Actual outcome may differ materially from what the statements imply. For the details about our forward-looking statements, please refer to the disclaimer and the presentations and our financial reports, both of which are available on sabic.com. With the disclaimer out of the way, the earning call will start with the presentation by our CEO. He will briefly describe the market context that influence our industry performance in the second quarter of 2025. This will be followed by a rundown of some key points with respect to SABIC Q2 2025 performance and priorities. Thereafter, the CEO will outline SABIC's current transformation program before reviewing the expected industry market movements. The CFO will then take over the call to walk you through SABIC aggregate financial performance, focusing on the second quarter of 2025. Afterward, our CEO will return to provide a brief outlook for the rest of the year. We will end the call with an open-line Q&A session. I ask the participants [ to limit ] the topic of their questions to SABIC's corporate performance and avoid referring to listed affiliates. Now please join me in welcoming SABIC's CEO; Engineer Abdulrahman Al-Fageeh.

Thanks to you all for joining us today in this earnings call. Let me begin with a brief overview of the macroeconomics and industry landscapes. The second quarter of this year 2025 growth rate was only 2.5%. Tariff and trade uncertainties as well as the slow business activities in major markets have put pressures on the global economy. Hovering at 50, the quarter -- the manufacturing Purchasing Manager Index remains weak as new orders slowed amid the global trade uncertainties. And the global petrochemical industry overcapacity remain a challenge. Operating rates remain below the historical global average. And the oversupply, combined with the macroeconomic uncertainties, put margin under pressure as and upset. I now would like to mention six highlights of the quarter. This reflects the strength of our commitment to meet our 2025 priorities, operational excellence, transformation, selective growth and value creation. First, health and safety, the total recordable incident rate for Q2 is 0.07. This once again underscores SABIC's top priority, which is part of our operational excellence. Second, value creation for our shareholders. Aligned with our commitment to create value for the shareholders, SABIC's Board has approved a total distribution of USD 1.2 billion for the fire half of the 2025. Amid ongoing market challenges in the chemical industry, we took a disciplined decision to adjust the dividend in line with current conditions. We remain firmly committed to a balanced capital allocation approach, ensuring competitive dividend distributions across the cycle supporting long-term value creation. Third, portfolio optimization. As part of our ongoing journey, we reached two key milestones decision in Q2. First, the closure of our Teesside cracker in the United Kingdom; second, our intention to evaluate a strategic option concerning SABIC's subsidiaries, the National Industrial Gases Company, [ RAS ]. Both milestones will be addressed in more detail later in this call. The fourth highlight is related to the value created through customers outreach and intimacy, resulting in tailored solutions in which mutual growth and long-term partnership are based. In Q2 2025, we successfully introduced 58 new products for our customers. Also, we introduced a new internally developed technology platform called MegaMolding. That combines our expertise, data tools and materially specifically for the production of our large thermoplastic parts that help manufacture replace heavy material thermosets, sheet-molding compound and other conventional material with high-performance thermoplastics offering significant weight reduction, cost savings and greater design flexibility. The fifth highlight pertains to value creation on the basis of the quality of our products. SABIC affiliated received -- SABIC affiliates received Gold, Silver and Bronze awards at the 7th King Abdulaziz Quality Awards. And on the basis of positive customer feedback, SABIC was honored with the Best Polymer Products -- or Producer award in the LLDP, which is the linear low-density polyethylene category, by the Polymers for Europe Alliance and the European Plastic Converters Association. The last highlight of the quarter concerns the solid progress we have made in our key growth projects. The SABIC Fujian Petrochemical Complex in China, the flagship project of our strategic expansion in Asia, is on track for mechanical completion in the second half of next year. And the MTBE project at our Petrokemya affiliates in Saudi Arabia is progressing well in accordance to planned cost and schedule. The ABC phase is more than 95% complete. Commissioning will occur during the third quarter of this year, with the ramp-up to the [ honest ] peak production expected in the last quarter of this year. I mentioned that transformation is one of our 2025 priorities. But it's actually just another stage a company-wide transformation that began back in 2021. I now would like to take a moment to go into a little more detail about the current program in our transformation in journey. We have designed the new phase of the program to realize the full potential of SABIC's assets portfolio, focusing first on underperforming businesses, sites and regions. The new phase makes a strategic transformation, targeting a reoccurring and annual EBITDA impact of USD 3 billion by 2030, driven by $1.4 billion in cost excellence and $1.6 million billion in value creation as we unlock greater value for our shareholders and reshape our performance trajectory. Over the past years, transformation has been part of SABIC's culture. And this legacy gives us confidence that we can deliver the $3 billion target value. To ensure the transformation program success, SABIC is realigned on [ prudent ] investments, new capabilities and the latest digital tools, the last of these part of the digital transformation journey, which I will now describe. At SABIC, digital transformation is not a side initiative, it lies at the very core of how we deliver growth, improve sustainability and deliver value essentially when we have built a foundational platform for our operational excellence. Currently, we are upgrading our enterprise resource planning systems so that it digitally integrates our management processes from start to finish. The advanced digital tools that will upgrade offer support to smarter and faster decision-making. The upgrade plan is 54% completed, and we expect it to go live in fourth quarter of this year. On the manufacturing side, 496 AI models were deployed to enhance our environmental, health, safety and security performance as well as to upload our energy efficiency and operational excellence. As of today, 42% of our manufacturing facilities now actively use AI or tools to gain performance insights, apply automated control and make smarter decisions. More recently, an AI-based solution was implemented to optimize the planning of our ethylene distribution and maximize our asset utilization. To maximize the value digitalization, we set a guideline to provide a structured framework for the governance of the security, ethics and effective use of AI technologies. This slide finishes the part of my presentation. It shows how demand we -- was stable in Q2 for the most of -- in the product sectors with some growth in industrial, electrical, electronics, hygiene and healthcare. We expect demand to remain stable across the board next quarter. And with that, I will now hand the floor over to SABIC's CFO, Mr. Salah Al-Hareky. He will review the company's financial results and provide additional commentary on our business strength performance. Salah?

Thank you, Abdulrahman. And a warm welcome to everyone joining today's call. SABIC continued to leverage its global footprint in the second quarter of 2025 and generated $9.5 billion in revenue, 3% higher than the previous quarter. This increase was mainly due to higher sales volume, offset by lower average selling prices, in addition to licensing and engineering revenue of $230 million realized in the second quarter. The operational performance that underlines our revenue generation is best assessed on an adjusted basis. Therefore, following global best practices, we are introducing adjusted financial metrics this quarter. The adjusted figures exclude one-off nonoperational anomalies that can distort our operational business performance. On an adjusted basis, we achieved an EBITDA of $1.4 billion, a 40% increase over the last quarter. The adjusted EBITDA margin reached 15% compared to 11% in the last quarter. Net income on an adjusted basis has improved quarter-over-quarter by $148 million, considering adjusted losses of [ $90 million ] last quarter. In the first half of 2025 operating cash flow reached $894 million, considering for CapEx and factoring in proceeds from portfolio optimization and disposal of assets, total cash generation for the first half of 2025 was $1.7 billion. Finally, our net debt position underscores our financial resilience and robust standing. Let me now proceed to our profitability. The 40% quarter-on-quarter improvement in adjusted EBITDA reflects the strength of our diversified product portfolio and our ability to capture value through improved margin and higher volumes. This performance was further supported by the global reach of our technologies, allowing us to respond swiftly to shifting market dynamics and customer demand. At SABIC, we continue to prioritize operational excellence and enhance business resilience. This means disciplined cost management, agile supply chain execution and persistent focus on efficiency across our operation. Now let's turn to the progression of our net income. Despite ongoing market challenges, adjusted net income rebounded to $129 million, recovering from a loss of [ $90 million ] in the previous quarter, a clear reflection of our focus on operational efficiency and financial discipline. Reported net income came at negative $1.1 billion, primarily impacted by the permanent closure of our Teesside cracker in the U.K. This decision was part of our broader portfolio optimization effort, underscores our commitment to disciplined capital allocation and improving long-term positioning in Europe -- European region. Moving to segment profitability, next slide, the Petrochemicals segment delivered a 3% increase in sales volume, driven by stronger demand in chemicals. However, this was offset by a 3% decline in average selling price, reflecting continued pricing pressure across global markets. Adjusted EBITDA for the Petrochemicals segment improved by 54%, supported by higher volume and margin recovery across key projects. The performance was further strengthened by our ability to leverage SABIC's global technology footprint to enhance efficiency and competitiveness. In total, volumes sold during the quarter reached approximately 9.9 million metric tons, reflecting our resilient operating capabilities and strong market presence. Moving to Agri-Nutrients segment, the segment revenue grew by 2%, supported by increase in both volume and prices. While second quarter is typically a low season for the sector, global supply shortage driven by shutdown at several producers, created a favorable window, with SABIC effectively capitalized on both sales volume and pricing. Quarter-over-quarter, average selling prices increased by 1%, though the seasonal effect tempers this comparison. A more representative view shows that prices in Q2 2025 were over 30% higher than Q2 2024. Total sales volume for the quarter reached approximately 1.9 million metric tons, reflecting our strong market positioning and ability to respond quickly to shifting supply-demand dynamics. Building on the CEO remark regarding SABIC's transformation journey, we are concurrently repositioning our global footprint through focusing portfolio optimization effort, with more emphasis on our investment in Europe and America. The petrochemical industry continue to be structurally challenged, including prolonged global overcapacity and sustained margin pressure. In response, we have accelerated our portfolio optimization actions, establishing a dedicated project management office and their direct Board oversight to drive execution with discipline and urgency. As part of our ongoing portfolio optimization program and building on a prior milestone in 2024, including divestment of Hadeed, Alba and Functional Forms, we announced in Q2 our intention to evaluate strategic options of our subsidiary, the National Industrial Gases Company, with an objective to unlock value and strengthen financial flexibility. Moreover, the closure of our cracker Teesside in the United Kingdom, a decision aligned with our portfolio to enhance capital efficiency, strengthen our financial position and create long-term value for our shareholders. The overarching strategic objective is clear: To address underperforming assets, repositioning our international assets through participating in market consolidation and exiting noncore business where competitive advantage is challenged in order to redeploy capital towards higher-margin growth-oriented opportunities that better support our long-term strategic ambition and ultimately maximize shareholder value. Further update on our portfolio optimization journey will be shared as we progress toward further execution milestone through the third quarter. Let me end my presentation by emphasizing once again SABIC unwavering focus on maximizing long-term value for its shareholders. We continue to maintain a strong balance sheet, underpinned by a prudent financial framework that ensures resilience through market cycle. Improving profitability and cash generation remain a top priority with continued effort to reduce cost, create integrated value creation and enhanced capital employed. We are actively driving portfolio optimization and accelerating our transformation to remain competitive and agile amid evolving industry dynamic. Most importantly, we remain committed to delivering shareholder value through competitive dividend while strategically redeploying capital towards higher-growth, higher-margin opportunities, reflecting our confidence in SABIC's financial strength and positioning the company for a stronger, more sustainable long-term performance. This concludes the financial highlights. I will hand over back to CEO to walk you through our year-ahead guidance. Abdulrahman?

Thank you, Salah. Our guidance for the year ahead is based on current economic growth, as reflected in revised the expected global GDP growth rate of 2.3%. Aligned with our commitment to capital discipline and selective growth, our 2025 capital investment is expected to be between USD 3 billion and USD 3.5 billion. This concludes the presentation portion of today's call. We can now pick up the Q&A session.

[Operator Instructions] The first question is from Faisal Al Azmeh from Goldman Sachs. Please get close to the mic and ask your question.

Thank you for the opportunity to ask questions. Two questions on my side. Just maybe firstly on the dividend. Obviously, we saw the dividends effectively get cut in the first half versus last year. I recall from prior calls, we always heard about the kind of like maintaining the dividends flat and growing. Has the policy changed for the year? And how should we think about the policy going forward? That's my first question. My second question relates more towards the portfolio optimization. Should we expect more impairments for the year? Or are you done with the majority of the impairments for 2025? And maybe if you can talk a bit about the operational benefits that you're going to -- you're targeting by 2030. Obviously, $3 billion is a big number. Maybe if you can walk us a bit through how to think about that and how you plan to achieve that.

Thank you, Faisal. I will take the dividends, and Salah might take the other questions. In Q4 of 2024, as you may know, we have introduced the new mechanism of distributing the interim dividends by annual basis, starting from this year, from 2025, which enhances the Board decision-making to maximize the shareholder investment value and the alignment of the company financial performance. Following the ongoing market challenges in the chemical industry, we took a disciplined decision to adjust dividends align with the current conditions, and we remain firmly committed to a balanced capital allocation approach, ensuring competitive dividend distribution across the cycle while supporting our long-term value creation. Salah?

Yes. Thank you, Abdulrahman. Well, I think the CEO answered the dividend, but this is very important that we also understand that there is a 100% commitment to our dividend going forward. Our financial framework also talk to our commitment to the dividend. So the allocation of capital, as the CEO mentioned, explain very well this commitment through the allocation of capital between our run and maintain and sustaining capital, our dividend and opportunistic growth. On the second question on the portfolio optimization, the portfolio optimization would actually -- the decision, which was made on the Teesside, and this is part of the maximization and prudence of allocating capital. And the work on the portfolio optimization is still ongoing. There is intention to maximize the shareholder [ loan ], of course, and ensure our capital efficiency through repositioning of our investments and -- specifically in Europe and America. And we have actually taken very much a good step, where we actually designed a soft carve-out for our assets in Europe and America, where we have the ATB, Europe and America and then the [ Bitcom ] in Europe. And we've actually put -- designed a very clear and stronger accountability framework, where we can actually improve and transform the business and also explore opportunity of market consolidation through partial or full exit in the future. And definitely, we will provide information as we progress very well. I think there was a question on the transformation. Okay. So on the transformation, and this is the first time when we announced the $3 billion transformation value on the target, and we have worked very hard in order to focus not only on the cost reduction because the game of the day with consideration of the challenging Petrochemical business is cost, cost, cost. So we have a focus on the cost. But also, we have a scope on this transformation, where we want to create value. The $3 billion, and there is a breakdown for the cost excellence and the value creation, so this program has actually started. It started maybe late 2024, but we are establishing the target this year. We've progressed very well. On the first half of the year, we've actually realized $120 million on this program and of course, $200 million or $225 million, which is -- the first number -- sorry, the first number $120 million was EBITDA related, and the $225 million is non-EBITDA, which is basically the capital optimization and working capital.

Next question is from Ricardo from Morgan Stanley. Ricardo, Rezende. Ricardo, please come close to the mic and ask your question.

The first one that I have, it's on -- between the CapEx and the CapEx reduction for this year, how much of that $500 million decline was CapEx being pushed to other years? And how much of that was actually savings? And then following up on a comment that you just made about the portfolio in the Americas and in Europe, are you also looking for your footprint in KSA? Could we see some reductions there as well?

Actually, the second question, did you get the second question? I get -- the first one is clear. The second...

Second question is around the portfolio actions for assessment or studies in KSA.

Okay. Thank you very much, Ricardo. For the first question related to the CapEx spending, actually, we have a big portion of our CapEx in the run and maintain, and we managed to reduce this by 10% this year. Actually, the figure is around $200 million. All growth projects are progressing as per plan, as I explained in my presentation. As you may recall, both the MTBE Petrokemya is within the budget, within the schedule. Same thing with the SABIC Fujian in China, it's the same. I think it is within the budget and within the schedule, and there is no delay in this project so far, as far as we know until this point of time. Having Petrokemya that is going to be started in the fourth quarter of this year. And hopefully, the SABIC Fujian is going to have the commissioning and start up in the second half of next year.

Okay. So maybe on the transformation, I think in the presentation, we talked the focus in Europe and America, where we're actually very much challenged. I think it's not only SABIC challenging on those both regions, many companies, many peers are challenged. For the KSA and other regions, we're also focusing on this. And the objective of the portfolio optimization is to cover the strategic assets and nonstrategic. On the nonstrategic front, where we also see there is a competitive advantage for alternatives, we are actually assessing assets. And we've taken some steps towards that. For example, Hadeed was one, and we managed and -- to divest our Hadeed. Alba is another example. We're actually now reviewing options, strategic options for the gas and industrial gas. We're also looking to other noncore assets within the Saudi Arabia. On the core strategic assets, we are tackling this from two perspectives: One is the transformation, which is actually looking into improving profitability of our assets in Saudi Arabia and improving efficiency, and also looking into options also to improve the profitability through a partnership.

Next question is from Alex Comer from JPMorgan. Alex, please go close to the mic and ask your question.

So my first question, the licensing revenue from Fujian, exactly what is that? And maybe you could explain the accounting there. That's the first question. Secondly, we've heard a lot about sort of Chinese involution in recent weeks, i.e., potential closures of plants in China slowing down of projects. So I just wondered, as you've got project on the ground, whether you've seen anything there? A third question, just with regard to Wilton, you talked about this being good capital allocation. But I mean, frankly, is it because you've already spent the money here? And I would have thought that this on completion, given it's a U.S. ethane import project, would then be -- from a variable cost base, is one of the cheaper plants in Europe? So to spend the money and then close it down is slightly sort of perplexing to me. So maybe you could just explain that. And then finally, if I may, I've heard some rumors about ethane allocations being increased in Saudi going forward. And I just wondered if you got any update on whether we might see your percentage of ethane feedstock go up.

Thank you very much, Alex. Actually, I captured very clearly two questions, one related to the licensing of the Fujian project, the other one is related to the Teesside. Let me address these two parts. The licensing revenue, actually, it is part of our business to leverage our know-how, leverage our technology that SABIC has developed or codeveloped with our partners. You may know we have more than 11,000 patents around our technologies that we are leveraging these in our new projects and et cetera. So in this quarter, the revenue came from the individual contract signed by the group, and we were in -- no significant licensing revenue recognized and the -- if you asked about the compare periods of before, we didn't have that. In the Teesside, let me just explain the rationale behind Teesside. As part of our disciplined portfolio management and capital allocation that we have explained, SABIC made that decision to permanently close the Olefin 6, which is only the cracker in that side of Teesside. And that cracker -- and that is part of the total complex, including, of course, the polyethylene plants. The company emphasized on the decision as a result of thorough analysis, am I optimizing competitiveness that you mentioned and aligning with the long-term strategic priority of the company? Also, the action is in line with the company portfolio review to reduce cost and definitely has to improve the profitability of the company short, medium and long term. SABIC will continue as part of that exercise, too, focusing on the operational efficiencies, driving the shareholders' value and positioning the company for sustainable long-term growth for profit. The other two questions? We shut down?

Yes. I think if you can repeat your question, Alex?