MEOH

Methanex Corporation (MEOH)

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Methanex Corp. (MEOH)

Investor Day Conference Transcript

September 27, 2012 3:00 PM ET

Executives

Jason Chesko - Director, Investor Relations

Bruce Aitken - President and CEO

Michael Macdonald - SVP, Global Operations

John Floren - SVP, Global Marketing and Logistics

Paul Schiodtz - SVP, Latin America

Lisandro Rojas - Exploration Manager, E&P Business Line, ENAP Sipetrol

Tim Williams - VP, Upstream and Feedstock Acquisition

Ian Cameron - SVP, Corporate Development and CFO

Analysts

Jacob Bout - CIBC World Markets

Charles Neivert - Dahlman Rose & Co.

Presentation

Unidentified Participant

Okay. Here you go. You got a time.

Jason Chesko

Yeah.

Unidentified Participant

Okay. Thoughts -- we have your thoughts here, so you will see me up there, how you are relative to the time…

Jason Chesko

Yeah. Yeah.

Unidentified Participant

If you need to speed up this whole things down.

Jason Chesko

Yeah. Okay. Okay. That’s perfect. That’s there or not?

Unidentified Participant

Yeah. You can check. Yeah. That’s better.

Jason Chesko

Yeah. It’s safer to see it, okay.

Unidentified Participant

Yeah.

Jason Chesko

Okay. That’s fine.

Unidentified Participant

Okay.

Jason Chesko

Thank you so much. Welcome to the [margin of product commercial] portion of the Medicine Hat Investor Conference. Also I want to welcome those who are listening in today by webcast.

Before we get started, I just wanted to provide a brief safety briefing about the hotel. So in the event of an emergency, where we would need to evacuate the building today, we would exit through the doors behind you, where we all entered and turn right and proceed to the front desk, and exit through the front doors. While some of the area would be in the open parking area in the front of the petrochemical station to the right of the hotel.

I’d also wanted to remind everybody that we are going to have forward-looking statements in both our presentation material and comments made in today’s remarks, and for more information you refer to the appendix.

So just a brief overview of today’s agenda, we have several members of our senior management team here. They are going to touch and highlight the key areas that the investment community is focused on in terms of the industry and our company.

We also have a guest speaker today, Lisandro Rojas, who is from Santiago, Chile. He works with ENAP Sipetrol and he will be giving us sort of a deeper dive into the Chile natural gas resource.

The presentations are expected to last about two and half hours. We’ll have a 15-minute break about halfway into it. And just a key point in track, we are going to have one Q&A session at the end of all of our presentation, which will last about 25 minutes. So I asked people to resume all of your questions for that time period.

So, with that, I’ll things over to our President and CEO, Bruce Aitken to first some introductory remarks.

Bruce Aitken

Great. Thanks, Jason, and good afternoon, everyone. I hope you enjoyed your trip to the plant this morning. So as the main engineer, I know we’ve got lots of main engineers in the plant that probably are the most interesting plants in the world to visit that you don’t see anything going in the front and nothing coming up the back. But there is, you know there is a lot of stuff going on inside there.

But I think part of the value of coming to see a plant like Medicine Hat is you get to see and how we run our organization. And I think a lot of things that Bryan said in his introduction talking about Responsible Care and how important that is to us.

But, any successful chemical company that doesn’t pay lot of attention to environment, health and safety, if you don’t do that well, then you are -- you put in peril your success as an organization.

I think the efforts we make with people and a lot of the comments Bryan made around people. I think if you go into any Methanex site anywhere in the world, you’ll find the similar spirit, different cultures but similar spirit. I think another recent observation today is lots of the different accents from Trinidadian, the Kiwi, the Canadian and then there’s probably few others unless, we had some Chilean as well.

So Methanex is a little united nations. We are very active in moving people around the world, and this is all about continues improvement and making sure that we share lessons and share best practice. So I think some of things that I hope you got out of them today.

So I’ve just got a few little comments to set the stage. We’ve had the same strategy as a company now for 15 years and I think that’s appropriate, strategy is not something to change every year. We are very focus on being a global leader and I think we’ve achieved the leadership position in the methanol industry that delivers lots of value for us.

And I’m sure again if you custom and back the Bryan’s presentation earlier today, you see lot of the words that we use in our corporate strategy are also used in the manufacturing groups strategy.

And after that, what is our competitive advantage? Do we have the competitive advantage? And I think its, our flexible global supply chain, which -- and which has really explained in this chart. We are manufacturing in six different countries around the world. I’m counting Louisiana in that six as it’s just around the corner.

We have our shipping company with storage facility and spread over many countries around the world. So it’s our ability to move product from multiple production sites and multiple proto-sites to supply customers in every market around the world that I think is something is quite unique about our company and very difficult to duplicate.

I think we get value out of that by buying in the lowest cost countries and reselling in the higher cost countries or in the higher sales regions. We get value by having I think the best intelligence in this industry which enables us then to set methanol prices.

So John will cover this slide in a bit more detail, but at a high level demand continues to grow very robustly for methanol. This is a chart is prepared by CMAI, so 8% compound average growth rate over the next five years.

We are the 15 million tonne industry, so it implies 4 million tonnes of new supply is needed every year, that’s four [Wilscon] plants. And when we talk about supply anywhere in industry there is very little thing added on the supply side. And certain plants that we are heading into an environment of tight demand and supply which implies also high prices.

We are going to talk about most of things as we go through and various members of the senior team will discuss some of that. The big picture is that we are in positioning to grow our, double our production from the year 2010 through the 2014 and most of the places were in place to be able to achieve that.

As a company, we had very impressive line of earnings. We’ve never had negative earnings in the history of the company, 21 years that I’ve been with Methanex. We’ve always generated positive earnings and positive EBITDA.

Clearly, we suffered a lot during the financial crisis as most companies did, but I think the fact that we continue to generate positive earnings and continued all of our projects during that time was -- as system and about the robustness of our organization.

Really the decline in earnings from 2006 and 2007 more many things was been driven by the less of production in Chile and really that’s where we are starting climb out of that production halt today and as we talk about increase production going into 2013, ’14 and ’15, you will see those, our anticipation of much stronger earnings in the next few years.

And I think the equation of capital allocation is very typical subject that I hear a lot of chatter about in the investment community today, that our approach to it is that we are very committed to our dividend. We initiated the dividend back in 2001. We’ve increased it every year except for the year of the financial crisis. We anticipate as we continued to increase production levels, that we will be able to continue to improve our dividend payout. So that is one commitment that we’ve made.

We think it’s sustainable. We never even contemplated stopping or curtailing our dividend during the crisis. Again, this is something about how we run our company and the robustness of our balance sheet and the robustness of our organization.

We’ve bought back a lot of shares in the last 10 years. And so when we are thinking about buying back shares, there is an element of balance between growth and share buyback. So we’re always contemplating the projects that we have on hand and the opportunity to buyback shares.

So the opportunity today is to execute the projects that we are working on. As one example at Medicine Hat, we spent $50 million resetting that plant and today it’s generating over $100 million of EBITDA. So, clearly, I wish we had a whole lot more projects as good as that.

New Zealand is almost as good as that. The paybacks are a little longer that levered between one and two years, depending on your assumptions and the payback on the relocation project in Louisiana is three to four years, again depending on your assumptions around natural gas pricing and methanol prices.

So the projects that we are working on today I think have very strong returns and are very compelling. So as long as we have those sorts of opportunities, we are motivated to continue building our leadership position in this industry and you shouldn’t expect to see us buying back shares in the short-term.

But as we look forward, when we do our year three-year projections of cash flows, we are certainly positioned that we would be generating substantial cash flows over and above the level that we are spending to grow our company and we would anticipate as such being in a position to repurchase shares.

So, well, those -- I’ll leave you with those few comments. I will hand over to Michael to talk about global manufacturing.

Michael Macdonald

I’ll try to keep it short. Thanks, Bruce, and hello to everyone as well. Just picking up on a comment that Bruce made in terms of sort of the global nature of our business, this morning those of you who were at the plant site met both Janice and [Bryan Robert Penny]. So Bryan moved up here last year and will be moving back to New Zealand at the end of this year and Bryan will take over the site leadership of our facilities in New Zealand and Cliff will become the site leader here.

So just another example in terms of how we think about our business. So it is global, we move people around and try to give people experience. They also grow their talent through that process.

The visit to the plant site this morning makes the slide a little bit easier to talk about. So what I wanted to do is just focus on the chemistry for a minute and link that into a lot of the demand for methanol as well.

So for those of you on the webcast, unfortunately you didn’t get to visit to the plant but two are included, look inside the furnace which runs around 900 degrees centigrade and then a visit to the compression facilities and also close look at the different vessels around the plant site.

And the thing that I would stress is that the underlying chemistry in methanol really hasn’t changed. So what we do is we take, in our case natural gas. We add an oxygen to the carbon and natural gas, and that helps us also make hydrogen, then we compress that and turn it into methanol and then purify the methanol.

So it sounds kind of simple. When you look at the equipment in the plant, there’s actually quite a lot of equipment there and one of tricks in methanol was about heat integration and we talked about that a little bit at the plant site.

But for those on the webcast, a lot of the equipment we have is in relation to recovering energy and recycling it, and that means both cheaper operations, but also a smaller environmental footprint and we are very focused on that as a company.

So all of Methanex’s methanol is made from natural gas and the main component in natural gas is methane, which has one carbon in it and methanol has one carbon. So it’s a lot of capital to start with one carbon and end with one carbon, but the chemical process to do that is actually little more complicated.

If you look at the derivatives that come from methanol, many of the technology, in fact most of the technologies that use methanol to make other derivatives are actually purposed, built and designed to use the methanol molecule.

And the reason for that is that methanol is a cooperative molecule and chemically it's relatively easy to separate the different components and difference parts of it, and end up with a very reactive CH2 molecule or CH2, so that species even and join together and make other things.

And that's one of the main growth drivers and methanol today in China is methanol-to-olefins and effectively all that technology does is takes a methanol molecule, strips out of water and then joins the carbons back together, and that's why methanol-to-olefins is popular. You can upgrade any raw material through methanol into olefins and you can be quite selective about the olefins that you make.

So if you look at the chemistry of making methanol, what we're really doing is converting some form of carbon into species that’s easily transportable, environmentally benign and easy to make into other things and that's why you don't see a lot of substitution in methanol demand.

So this morning, Bryan talked quite a lot about Responsible Care and safety and so forth. And I just wanted to touch on that for a moment as well. Responsible Care is a program that was initiated by the chemical industry and was largely in response to the Bhopal incident, which many of you may remember, quite a disaster, a lot of people died as a result of a chemical release.

And this was a voluntary program by the industry and was really about trying to improve the reputation of the chemical industry and I’d say at Methanex, we use Responsible Care as really the glue that holds a lot of our business operations together.

So it’s not just about health, safety, environment inside our plant, it’s about product steward shipment, that’s a large part of our industry leadership, and it’s also about how we interact with the communities that we have around our plants and also thinking about new demand growth to methanol, so all of those things come together under the umbrella of Responsible Care.

I think from a business perspective, we see Responsible Care is not just a sense but also an investment where we get a good return and the fundamentals of it, from running a business is relatively simple.

If we care for our people and our people care for each other, ultimately that translates into caring for our equipment and caring for our plants means that we have higher reliability, and reliability is one of the key components in terms of profitability in our business.

And so we see Responsible Care being part of our global approach to how do we mitigate risk. And starting at the ground level thinking about safety, the housekeeping of our plants, the relationships with the community is all critical to that. And just in terms of, as we think about, all of our plants obviously have operating permits and permits from the government and so forth.

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