Saudi Basic Industries Corporation (2010) Earnings Call Transcript

Q2 2026 Earnings Call. My name is Sarah Alzamami, and I'll be serving as a moderator today. Please note that the call is being recorded. A transcript of the recording together with supplementary materials will be published on the Investor Relations web page on SABIC's website. Today's earnings call will feature SABIC's CEO, Dr. Faisal Al-Faqeer; its CFO, Mr. Salah Al-Hareky; and its IRO, Mr. 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 2026 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 guarantees of SABIC's future performance. Actual outcomes may differ materially from what the statements imply. For the details about our forward-looking statements, please refer to the disclaimer in the presentation and in our financial reports, both of which are available at SABIC.com. This call will start with a presentation by our CEO, which will provide an overview of the market context for the quarter, highlight key operational and performance developments and share the focus area as we move forward. The CFO will then walk you through SABIC Aggregates' financial performance of the second quarter of 2026, show the segment's performance and provide additional context for our announced dividend. We will end the call with an open line Q&A session. I ask the participants limit the topics of their top questions to SABIC Corporate's performance and avoid referring to listed affiliates. Now please join me in welcoming SABIC's CEO, Dr. Faisal Al-Faqeer to the call.

Thank you, Naif, and thank you to everyone for joining SABIC's Second Quarter 2026 Earnings Call. Let me begin with an overview of the macroeconomic environment and the industry conditions that shaped our performance during the quarter. The global GDP growth rate stood at approximately 2.2%, below initial expectations, reflecting the impact of geopolitical tensions, supply distribution and higher energy prices. The manufacturing PMI was above 52%, indicating continued expansion in manufacturing activities. However, this was largely impacted by supply chain disruption and purchasing activity increased to secure material availability. While the external environment remains challenging, SABIC continues to focus on disciplined execution and maintaining safe and resilient operations, while positioning the company for long-term value creation. Turning now to industry dynamics and market drivers. While global overcapacity continue to pressure the industry's operating rates, we expect a gradual improvement over time as less competitive capacities get rationalized. Against this backdrop, SABIC remains well positioned. Our gas advantaged Middle East crackers operate in one of the world's lowest cost regions, supported by advantaged feedstock and a strong balance sheet. At the same time, we are investing selectively and with discipline in high-growth markets, particularly in Asia, positioning SABIC to capture future demand. Let me now turn to the operating environment. The second quarter presented exceptional operational challenges, including the continued closure of the strait of Hormuz, disruptions and operational activities at key facilities within the energy sector and higher global energy prices. Throughout this period, our priorities were clear: first and foremost, safeguarding our people and operations while ensuring business continuity and responding quickly to changing conditions. We delivered on those priorities by maintaining our strong safety performance and demonstrating efficient execution and business agility across our portfolio. We maximized feedstock utilization through our flexible ethylene network and infrastructure in Jubail, controlling costs and allocating resources efficiently. Leveraging our global footprint and diversified portfolio, commercial initiatives such as buy and sell and swap arrangement helped us meet our customers' demand and maintained a strong Net Promoter Score. We also took decisive actions across our supply chain to maintain the continuity of supply and reliable deliveries. Polymer shuttle volumes from the East to the West Coast were increased by more than 150% compared to the previous quarter, enabling us to diversify export routes through multiple ports. At Yanbu, for example, we leveraged the newly launched Red Sea Express Surface to successfully export polymer products in partnership with the Saudi Port Authority and Fork Maritime. Building on these efforts, we successfully shipped around 6,600 standard polymer containers from Jeddah Islamic port, representing the highest ever handling of SABIC exports on a single vessel from the Red Sea Gateway terminal. And in collaboration with the National Shipping Company of Saudi Arabia, Bahri, we completed the largest ever chemical shipment to South Asia abroad, the world's largest liquid chemical tanker, demonstrating the agility of our logistics and operations. And in Agri-Nutrients, we completed our first shipment of bagged and bulk urea through the West Coast to South Asia, establishing an additional export route that will further strengthen our presence in global markets while supporting food security. Overall, our focus on safety, operational efficiency and disciplined execution enabled us to navigate the quarter while ensuring business continuity and resilience. Before turning to our quarterly highlights, I would like to acknowledge a significant milestone. This September, SABIC will celebrate its 50th anniversary, marking half a century of innovation, transformation and growth. Over the past 5 decades, we have successfully navigated industry cycles, evolving market conditions and period of transformation, emerging stronger each time. The resilience and agility we demonstrated throughout this period reflects the qualities that have shared SABIC since its inception and continue to guide us today. As we celebrate this milestone, our focus remains firmly on the future. And while we manage the immediate challenges of the quarter, we also continue to execute our long-term strategic priorities. Let me begin with our operational performance and innovation highlights for the quarter. We maintained our best-in-class total recordable incident rate of 0.08, reflecting our continued commitment to excellence across environment, health, safety and security. We also remain committed to delivering value to our shareholders despite a challenging environment with the announcement of $880 million in dividends for the first half of 2026. In light of ongoing geopolitical development and logistical distributions, the company has taken a more prudent decision to adjust its dividend, reflecting a balanced capital allocation approach. This decision ensured the company maintains competitive shareholder distributions across the business cycle while preserving financial flexibility to navigate uncertainty. Invest in strategic priorities and support sustainable long-term value creation. Innovation continues to be one of our key drivers. During the quarter, we introduced 32 new product solutions, further expanding our customer-centric portfolio. We also signed a memorandum of understanding with CEER, Saudi Arabia's first electrical vehicle brand to explore the application of SABIC's advanced material and next-generation electric vehicles, reinforcing our role as an innovation partner in enabling future mobility solutions. Moving to portfolio and transformation. We realized $547 million year-to-date, keeping us on track towards our $3 billion transformation target by 2030. Our portfolio optimization program also continues to progress well. Following the announced divestment of European Petrochemicals and Engineering Thermoplastics in Europe and America earlier this year, both transactions continue to progress as planned, and we will provide further updates as key milestones are achieved. In addition, and in line with our strategic direction, we reached an agreement on the key terms of combining our shareholding in SABIC Terminal Services Company, Sabtank, with Jubail Chemical Storage and Services company, Chemtank through a share exchange. We expect the transaction to capture operational synergy, strengthen the strategic positioning of the combined terminal business and support the creation of a national prochemicals logistics champion. The transactions remain subject to customary regulatory approvals and other closing conditions. We also continue to evaluate additional strategic partnerships and opportunities to unlock future value from these companies. Finally, let me now turn to our accretive growth projects. The SABIC Fujian complex continues to progress well with the start-up expected in the fourth quarter of this year. We also achieved successful commercial production at our 1 million tonne MTBE plant in the Kingdom of Saudi Arabia. The facility has demonstrated that SABIC's proprietary MTBE technology fully meets all projects targets, including achieving full nameplate production capacity, which further strengthened our manufacturing footprint. Finally, we signed a project development agreement with Rongsheng Petrochemicals to jointly evaluate the Jintang new materials project in China, supporting our long-term growth strategy in one of the world's largest chemicals markets. Taken together, these highlights demonstrated that while managing today's operational challenges, we continue to execute our strategy and focus on SABIC's long-term growth. Looking ahead, our priorities remain clear. We will continue to execute our portfolio optimization program to strengthen returns and improve return on capital employed. Our transformation program remains on track to deliver its $3 billion recurring annual EBITDA and backed target by 2030. Supported by disciplined execution and capital allocation across the organization with a planned capital investment of $3.5 billion to $4 billion, while prioritizing projects that create long-term value. At the same time, we remain focused on selective growth opportunities, including the SABIC Fujian complex, which will further strengthen our global manufacturing footprint. These focus areas position SABIC for future success, growth and long-term shareholder value creation across evolving market conditions. I will now hand the call over to our Chief Financial Officer, who will take you through our financial performance in more details. Thank you.

Thank you, Faisal. A warm welcome to everyone joining today's call. As the CEO mentioned, the second quarter was characterized by a challenging operating environment and during the unprecedented supply chain disruption. Through disciplined execution, we maintained business continuity while mitigating the impact of our business wherever possible. Despite the geopolitical tension and supply chain disruption experienced during the quarter, SABIC delivered resilient continuing operation financial performance with revenue declining only by 5% quarter-on-quarter to $6.6 billion. The decrease was primarily driven by lower sales volume, reflecting the impact of supply chain disruption. However, through robust and agile supply chain operation and redirecting product to alternative routes, together with our global footprint and diversified portfolio across petrochemical and specialties, SABIC was able to capture a 41% increase in average selling price compared with the previous quarter and significantly mitigate the impact of lower volumes. Adjusted EBITDA declined only by 18% quarter-on-quarter to about $900 million, resulting in an adjusted EBITDA margin of 14%, down 2.2 percentage points from the previous quarter. I will discuss the key drivers behind the performance in more detail later in today's meetings. Adjusted net income was a loss of $100 million compared with $218 million last quarter. Cash flow from operations year-to-date totaled to more than $280 million, lower than same period last year, mainly due to higher working capital driven by inventory buildup. We maintain a robust debt level, underscoring the continued strength of our balance sheet. Let me walk you through the main driver of EBITDA movements. During the second quarter, while sales volume declined by 33% due to the closure of Strait of Hormuz, our resilient supply chain network enabled us to redirect volume to an alternative route and effectively capture higher market prices, resulting in a 41% increase in average selling price quarter-on-quarter. This partially mitigated the impact of lower volume on profitability. However, higher liquid feedstock prices offset part of this benefit, limiting the improvement in margins. Additionally, we maintained our focus on cost discipline and operational efficiency, achieving a 3% year-to-date reduction in general and administrative expenses. Furthermore, our transformation program delivered around $515 million of recurring earnings year-to-date, with approximately 60% coming from cost excellence and 40% from value creation, keeping us on track toward our 2030 target. I will now discuss the performance of our business segment. Starting with Petrochemical, despite the challenging business environment during the quarter, including the closure of Strait of Hormuz and the resulting logistic disruptions, we delivered a resilient financial performance, maintaining adjusted EBITDA broadly in line with the previous quarter at more than $630 million. This performance reflects the resilience of our commercial and supply chain operations. leveraging the Kingdom's logistic flexibility together with the SABIC agile commercial expertise, we redirected volume through West Coast. Even under these conditions, we sold around 5.5 million metric tons, demonstrating the strength of our supply chain network and our ability to maintain business continuity. Through these actions, we captured a 42% increase in average selling price quarter-on-quarter, substantially offsetting the impact of a 33% decline in sales volume. EBITDA was further supported by stronger polyethylene performance and controlled cost management, helping to mitigate the impact of lower sales volume and higher liquid feedstock cost. Looking ahead, while industry overcapacity remains a structural challenge, the recent geopolitical development have added another layer of complexity to the operating environment. Nevertheless, SABIC remain focused on strengthening the resilience and competitiveness of its petrochemical portfolio while continuing to serve customers reliably and create long-term value. Turning to Agri-Nutrients. Adjusted EBITDA was just above $180 million during the quarter, reflecting the impact of supply chain constraints experienced during the period. During the quarter, we successfully initiated urea export through the Kingdom's West Coast for the first time, including the first urea shipment through Yanbu commercial port. This demonstrated the flexibility of our logistics network and will enable us to successfully sell approximately 960,000 metric tons. Looking ahead, while the urea market has softened, our focus remains on maintaining cost competitiveness, operational flexibility and commercial discipline to support long-term value creation. Moving to Specialty segment. Adjusted EBITDA was $101 million during the quarter. While the business continued to benefit from strong demand and commercial execution, EBITDA was impacted by higher manufacturing-related costs compared with the previous quarter. Demand remained robust across key end markets, particularly in high-value application, supported by favorable seasonal trends. This enabled us to deliver 2% increase in average selling price and a 14% increase in sales volume quarter-on-quarter, reflecting our value pricing strategy and continued customer demand across our strategic market. With that, let me now provide some additional context on the dividend announced for the first half of 2026. Despite the ongoing geopolitical and logistic challenge, SABIC remains committed to delivering long-term shareholder value. The recent dividend adjustment reflect more prudent capital allocation, balancing competitive shareholder return while maintaining financial flexibility to navigate through uncertainties. Our dividend approach is managed through the cycle, recognizing the cyclical nature of our industry rather than focusing on short-term view. At the end of the first half of 2026, our net debt to adjusted EBITDA remained at a low level of approximately 0.18x, providing significant financial flexibility. We continue to allocate capital with a clear priorities, maintaining our assets, delivering competitive dividends and investing selectively in growth opportunities. Supporting this approach, our transformation program, which has delivered $258 million of non-EBITDA cash saving year-to-date through capital efficiency measures, which is additional to the recurring EBITDA mentioned before. Looking ahead, we remain focused on key drivers of long-term value creation. Over the past 3 years, our portfolio optimization program has unlocked $2.3 billion of capital, enabling us to redeploy capital towards higher return opportunities. Our transformation program targeting $3 billion of recurring earnings by 2030, together with our strong balance sheet and advantaged asset base underpins our ability to generate sustainable cash flow and deliver competitive dividend through the cycle. As I conclude, I would like to reiterate SABIC's clear focus on driving long-term shareholder value despite the challenging environment. The foundation for long-term success outlined to strengthen by unlocking value through disciplined capital recycling, derisking the portfolio by addressing underperforming assets and leveraging partnership and refocusing the assets based on cost advantaged region and value chain and continue to build sales through efficient go-to-market channels. This concludes the presentation portion of today's call. We will now be open to receive questions.

[Operator Instructions] The first question is from Sriharsha Pappu from HSBC.

I appreciate the context on the dividend announcement. I just had a quick question on volume development through the quarter. Obviously, with the strait closed, you had a 33% drop in volume in Q2. Could you talk us through how that changed month-on-month, April, May, June? And how we should think about volume drop for Q3 if the strait remain closed? So are we going to see a 33% drop again in Q3? Or is it -- has it been mitigated largely because of your efforts over the course of the quarter?

Thank you, Harsha. Generally speaking, sales volume improved gradually as the quarter progressed. And the crisis started at the end of quarter 1. So that -- this is why you see the impact in quarter 2 at [indiscernible] but we were able to establish new routes and shipping our products from the Western region, including agri, which was done for the first time. Historically, we used to ship the polymers from the Western region, but for agri, specifically for urea, this was the first time we do it from the Western region. Additionally, we can still deploy our petrochemical volumes from the West Coast port, as I mentioned, and prioritizing local market demand and maximizing the alternative routes. Talking about quarter 3 is premature since we are watching what's happening with the both straits. And hopefully, it will not be less than quarter 2 volumes.

The next question is from Ricardo Rezende from Morgan Stanley.

I think following up with what Harsha asked, could you comment a little bit on the cost and incremental logistics costs that you're seeing from moving all of those volumes from East to West and exported from the West? And have you also noticed any other conflict-related costs?

Ricardo, thank you very much. I mean it's definitely because of -- Okay. So Ricardo, let me answer the questions. I think due to the interruption of the supply chain, we have incurred additional costs. So in petrochemical, we saw around 40% increase in logistic cost. However, in aggregate, the increase was around 60%. Of course, this includes the land cost as well as the cost associated with the marine bunker adjustment and other global shipping costs in addition to a risk premium and insurance. Of course, these additional costs are absorbed by higher product prices across our portfolio.

The next question is from Prateek Bhatnagar from Jefferies.

I have 2. The first question is about your volume drop again. Can you split the 33% drop which you are seeing into the solid chemicals and the liquid chemicals? That's number one. Number two is that we have also seen trade disruptions through Bab el-Mandeb. So are you seeing any exports being impacted for now? And if you then route your exports through the Suez Canal, what will be the incremental cost? That's my 2 questions.

Thank you, Prateek. For the first question, I think it's very difficult to split as I don't have the exact numbers. However, you would expect that will be mostly in chemicals because we can easily move polymer from Eastern region to Western region and exports through outside of Saudi Arabia. We don't see currently and up to now, any impact on the Bab el-Mandeb, Strait of Bab el-Mandeb on our shipments, and we are watching the situation carefully and closely.