Methanex Announces Second Quarter Results-Methanol Prices Remain Strong Into the Third Quarter
2008-07-22 20:13:00
Methanex Announces Second Quarter Results-Methanol Prices Remain Strong Into the Third Quarter
VANCOUVER, BRITISH COLUMBIA–(EMWNews – July 22, 2008) – Methanex Corporation (TSX:MX)(NASDAQ:MEOH)(SANTIAGO:Methanex) –
For the second quarter of 2008, Methanex reported Adjusted EBITDA(1) of $78.9 million, net income of $38.9 million and earnings per share of $0.41 (on a diluted basis).
Bruce Aitken, President and CEO of Methanex commented, “The strong methanol price environment resulted in another good quarter of earnings. In the second quarter, we achieved an average realized price of $412 per tonne on sales volumes which were up about 10% over last quarter.”
“Entering the third quarter, the pricing environment remains strong. Overall methanol demand is healthy, despite softness in some derivatives due to general weakness in the economy in some regions. In China, low operating rates coupled with strong demand, including growth into DME and gasoline blending supported by high energy prices, have resulted in China significantly increasing its imports over the quarter. Plant outages across the global industry have also continued, adding further tightness to the market.”
“With the shift to our larger plant in New Zealand in Q3, we will be in a better position to benefit from strong industry conditions. Longer term, we also expect production improvements from Chile, resulting from the gas exploration activities ongoing in southern Chile, and from our Egypt project which is on schedule to be producing methanol by early 2010.”
Mr. Aitken concluded, “Strong cash generation in the second quarter continues to leave us in an excellent financial position. With US$345 million cash on hand at the end of the quarter, a strong balance sheet and a US$250 million undrawn credit facility, we are well positioned to meet our financial commitments related to the Egypt methanol project, pursue opportunities to accelerate natural gas development in southern Chile, pursue opportunities to sponsor methanol demand in new energy applications, pursue other strategic growth initiatives, and continue to deliver on our commitment to return excess cash to shareholders.”
A conference call is scheduled for Wednesday, July 23, 2008 at 11:00 am EST (8:00 am PST) to review these second quarter results. To access the call, dial the Telus Conferencing operator ten minutes prior to the start of the call at (416) 883-0139, or toll free at (888) 458-1598. The passcode for the call is 45654. A playback version of the conference call will be available for fourteen days at (877) 653-0545. The reservation number for the playback version is 518973. There will be a simultaneous audio-only webcast of the conference call, which can be accessed from our website at www.methanex.com. In addition, an audio recording of the conference call can be downloaded from our website for three weeks after the call.
Methanex is a Vancouver based, publicly traded company engaged in the worldwide production, distribution and marketing of methanol. Methanex shares are listed for trading on the Toronto Stock Exchange in Canada under the trading symbol “MX”, on the NASDAQ Global Market in the United States under the trading symbol “MEOH”, and on the foreign securities market of the Santiago Stock Exchange in Chile under the trading symbol “Methanex”. Methanex can be visited online at www.methanex.com.
FORWARD-LOOKING STATEMENTS
Information contained in this press release and the attached Second Quarter 2008 Management’s Discussion and Analysis contains forward-looking statements. Certain material factors or assumptions were applied in drawing the conclusions or making the forecasts or projections that are included in these forward-looking statements. Methanex believes that it has a reasonable basis for making such forward-looking statements. However, forward-looking statements, by their nature, involve risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. The risks and uncertainties include those attendant with producing and marketing methanol and successfully carrying out major capital expenditure projects in various jurisdictions, the ability to successfully carry out corporate initiatives and strategies, conditions in the methanol and other industries including the supply and demand balance for methanol, the success of natural gas exploration and development activities in southern Chile and our ability to obtain any additional gas in that region on commercially acceptable terms, actions of competitors and suppliers, actions of governments and governmental authorities, changes in laws or regulations in foreign jurisdictions, world-wide economic conditions and other risks described in our 2007 Management’s Discussion & Analysis and the attached Second Quarter 2008 Management’s Discussion and Analysis. Undue reliance should not be placed on forward-looking statements. They are not a substitute for the exercise of one’s own due diligence and judgment. The outcomes anticipated in forward-looking statements may not occur and we do not undertake to update forward-looking statements. These materials also contain certain non-GAAP financial measures. Non-GAAP financial measures do not have any standardized meaning and therefore are unlikely to be comparable to similar measures used by other companies. For more information regarding these non-GAAP measures, please see our 2007 Management’s Discussion & Analysis and the attached Second Quarter 2008 Management’s Discussion and Analysis.
(1) Adjusted EBITDA is a non-GAAP measure that does not have any standardized meaning prescribed by Canadian generally accepted accounting principles (GAAP) and therefore is unlikely to be comparable to similar measures presented by other companies. Refer to Supplemental Non-GAAP Measures in the attached Second Quarter 2008 Management’s Discussion and Analysis for a description of each Supplemental Non-GAAP Measure and a reconciliation to the most comparable GAAP measure.
Interim Report
For the Three Months Ended June 30, 2008
At July 22, 2008 the Company had 93,962,342 common shares issued and outstanding and stock options exercisable for 1,607,893 additional common shares.
Share Information
Methanex Corporation’s common shares are listed for trading on the Toronto Stock Exchange under the symbol MX, on the Nasdaq Global Market under the symbol MEOH and on the foreign securities market of the Santiago Stock Exchange in Chile under the trading symbol Methanex.
Transfer Agents & Registrars
CIBC Mellon Trust Company
320 Bay Street
Toronto, Ontario, Canada M5H 4A6
Toll free in North America:
1-800-387-0825
Investor Information
All financial reports, news releases and corporate information can be accessed on our website at www.methanex.com.
Contact Information
Methanex Investor Relations
1800 - 200 Burrard Street
Vancouver, BC Canada V6C 3M1
E-mail: [email protected]
Methanex Toll-Free:
1-800-661-8851
SECOND QUARTER MANAGEMENT’S DISCUSSION AND ANALYSIS
Except where otherwise noted, all currency amounts are stated in United States dollars.
This second quarter 2008 Management’s Discussion and Analysis should be read in conjunction with the 2007 Annual Consolidated Financial Statements and the Management’s Discussion and Analysis included in the Methanex 2007 Annual Report. The Methanex 2007 Annual Report and additional information relating to Methanex is available on SEDAR at www.sedar.com and on EDGAR at www.sec.gov.
Six
Three Months Ended Months Ended
---------------------- --------------
($ millions, except Jun 30 Mar 31 Jun 30 Jun 30 Jun 30
where noted) 2008 2008 2007 2008 2007
--------------------------------------------------------- --------------
Sales volumes (thousands
of tonnes)
Produced methanol 910 678 1,360 1,588 2,500
Purchased methanol 541 669 269 1,210 644
Commission sales(1) 168 143 89 311 228
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Total sales volumes 1,619 1,490 1,718 3,109 3,372
Methanex average
non-discounted posted
price ($ per tonne)(2) 489 703 330 595 433
Average realized price
($ per tonne)(3) 412 545 286 476 362
Adjusted EBITDA(4) 78.9 127.1 76.5 206.0 313.4
Cash flows from operating
activities(4,5) 68.5 102.3 67.2 170.8 246.2
Operating income(4) 52.5 104.0 48.1 156.4 261.3
Net income 38.9 65.5 35.7 104.4 180.4
Basic net income per
common share 0.41 0.67 0.35 1.09 1.74
Diluted net income per
common share 0.41 0.67 0.35 1.08 1.73
Common share information
(millions of shares):
Weighted average number of
common shares 94.5 97.2 102.7 95.8 103.9
Diluted weighted average
number of common shares 95.1 97.5 103.0 96.3 104.3
Number of common shares
outstanding, end of period 94.0 95.6 101.1 94.0 101.1
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(1) Commission sales represent volumes marketed on a commission basis.
Commission income is included in revenue when earned.
(2) Methanex average non-discounted posted price represents the average of
our non-discounted posted prices in North America, Europe and Asia
Pacific weighted by sales volume. Current and historical pricing
information is available at www.methanex.com.
(3) Average realized price is calculated as revenue, net of commissions
earned, divided by the total sales volumes of produced and purchased
methanol.
(4) These items are non-GAAP measures that do not have any standardized
meaning prescribed by Canadian generally accepted accounting
principles (GAAP) and therefore are unlikely to be comparable to
similar measures presented by other companies. Refer to Supplemental
Non-GAAP Measures for a description of each non-GAAP measure and a
reconciliation to the most comparable GAAP measure.
(5) Cash flows from operating activities in the above table represents
cash flows from operating activities before changes in non-cash
working capital.
PRODUCTION SUMMARY
Q1 Q2 YTD Q2 YTD Q2
Q2 2008 2008 2007 2008 2007
(thousands Capa- Produc- Produc- Produc- Produc- Produc-
of tonnes) city tion tion tion tion tion
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Chile I, II, III
and IV 960 261 309 569 570 1,320
Titan 213 229 217 225 446 450
Atlas (63.1% interest) 268 288 293 234 581 414
New Zealand 132 124 120 120 244 238
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1,573 902 939 1,148 1,841 2,422
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Chile
Our methanol facilities in Chile produced 261,000 tonnes during the second quarter of 2008 compared with 309,000 tonnes during the first quarter of 2008. We have natural gas supply contracts for approximately 60% of our natural gas requirements for our production facilities in Chile with natural gas suppliers in Argentina with the remaining natural gas supply coming from natural gas suppliers in Chile. Since June 2007, the government of Argentina has curtailed all natural gas exports to our plants and we do not expect to receive natural gas supply from Argentina. We currently source natural gas for our methanol facilities in Chile primarily from Empresa Nacional del Petroleo (ENAP), the Chilean state-owned energy company, and from GeoPark Chile Limited (GeoPark). Methanol production at our facilities in Chile was lower during the second quarter of 2008 compared with the first quarter of 2008 primarily as a result of lower natural gas supply from ENAP due to higher demand for natural gas general use in southern Chile during the winter months as well as some deliverability issues.
To secure natural gas to supply our plants in Chile we continue to invest to accelerate natural gas development and to purchase more natural gas from suppliers in Chile. On May 5, 2008, we announced that we signed an agreement with ENAP to accelerate natural gas exploration and development in the Dorado Riquelme exploration block and supply natural gas to our production facilities in Chile. Under the arrangement, we expect to contribute approximately $100 million in capital over the next three years and will have a 50 percent participation in the block. The arrangement is subject to approval by the Government of Chile. We began receiving some small quantities of natural gas deliveries from the Dorado Riquelme block in May 2008. Also, in late 2007, we signed a natural gas prepayment agreement with GeoPark under which we will provide US$40 million in financing to support and accelerate GeoPark’s natural gas exploration and development activities in the Fell block in southern Chile. Under the arrangement, GeoPark will also provide us with natural gas supply sourced from the Fell block under a 10-year exclusive supply agreement. GeoPark continues increasing its deliveries of natural gas to our plants from the Fell block to a level that currently represents approximately 5 percent of our total natural gas requirements to operate at capacity in Chile.
We continue to pursue other opportunities to invest to help accelerate natural gas exploration and development in areas of southern Chile. In late 2007, the government of Chile completed an international bidding round to assign natural gas exploration areas that lie close to our production facilities and announced the participation of five international oil and gas companies. Exploration and development activities in these areas in southern Chile have commenced. On July 16, 2008, we announced that under the international bidding round, the government of Chile awarded the Otway hydrocarbon exploration block to a consortium that includes Wintershall Holding AG, GeoPark, and ourselves. Wintershall and GeoPark each own a 42% interest in the consortium and we own a 16% interest. Exploration work is expected to commence by the end of this year. The minimum exploration investment committed in the block by the consortium is US$30 million.
We cannot provide assurance that ENAP, GeoPark or others would be successful in the exploration and development of natural gas or that we would obtain any additional natural gas from suppliers in Chile on commercially acceptable terms.
Trinidad
Our methanol facilities in Trinidad operated well during the second quarter of 2008 and produced a total of 517,000 tonnes compared with 510,000 tonnes during the first quarter of 2008.
New Zealand
Our Waitara Valley facility in New Zealand produced 124,000 tonnes during the second quarter of 2008 compared with 120,000 tonnes during first quarter of 2008.
In addition to our 530,000 tonne Waitara Valley facility which we have operated over the past few years, we have up to 1.9 million tonnes of additional flexible annual operating capacity from our idled Motunui facilities in New Zealand. In May 2008, we agreed to terms on a natural gas supply arrangement which will allow us to restart one idled 900,000 tonne per year Motunui methanol plant. We plan to restart this facility during the third quarter of 2008 and operate this plant until at least the end of 2009. We will continue to operate the Waitara Valley facility until the Motunui plant restarts. We have become more optimistic about the longer term future of our New Zealand operations and we believe there is potential to operate our Motunui plant longer and potentially restart our Waitara Valley plant again. The continued operations of the flexible New Zealand facilities are dependant upon industry supply and demand and the availability of natural gas on commercially acceptable terms.
EARNINGS ANALYSIS
We analyze the results of produced methanol sales separately from purchased methanol sales as the margin characteristics of each are very different. We discuss changes in average realized price, sales volumes and total cash costs related to our produced methanol sales whereas we discuss purchased methanol on a net margin basis.
For a further discussion of the definitions and calculations used in our Adjusted EBITDA analysis, refer to How We Analyze Our Business.
For the second quarter of 2008 we recorded Adjusted EBITDA of $78.9 million and net income of $38.9 million ($0.41 per share on a diluted basis). This compares with Adjusted EBITDA of $127.1 million and net income of $65.5 million ($0.67 per share on a diluted basis) for the first quarter of 2008 and Adjusted EBITDA of $76.5 million and net income of $35.7 million ($0.35 per share on a diluted basis) for the second quarter of 2007.
For the six months ended June 30, 2008, we recorded Adjusted EBITDA of $206.0 million and net income of $104.4 million ($1.08 per share on a diluted basis). This compares with Adjusted EBITDA of $313.4 million and net income of $180.4 million ($1.73 per share on a diluted basis) during the same period in 2007.
Adjusted EBITDA
The increase (decrease) in Adjusted EBITDA resulted from changes in the following:
Q2 2008 Q2 2008 YTD Q2 2008
compared with compared with compared with
($ millions) Q1 2008 Q2 2007 YTD Q2 2007
--------------------------------------------------------------------------
Average realized price $ (103) $ 96 $ 147
Sales volumes 51 (34) (140)
Total cash costs(1) 16 (39) (59)
Purchased methanol (12) (20) (55)
--------------------------------------------------------------------------
$ (48) $ 3 $(107)
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(1) Includes cash costs related to methanol produced at our Chile,
Trinidad and New Zealand facilities as well as consolidated selling,
general and administrative expenses and fixed storage and handling
costs.
Average realized price
Three Months Ended Six Months Ended
---------------------- ----------------
($ per tonne, except Jun 30 Mar 31 Jun 30 Jun 30 Jun 30
where noted) 2008 2008 2007 2008 2007
------------------------------------------------------- ----------------
Methanex average
non-discounted posted
price(1) 489 703 330 595 433
Methanex average realized
price(2) 412 545 286 476 362
Average discount 16% 22% 13% 20% 16%
---------------------- ----------------
(1) Methanex average non-discounted posted price represents the average of
our non-discounted posted prices in North America, Europe and Asia
Pacific weighted by sales volume. Current and historical pricing
information is available at www.methanex.com.
(2) Methanex average realized price disclosed above is calculated as
revenue, net of commissions earned, divided by the total sales volumes
of produced and purchased methanol.
We commenced 2008 in a tight methanol market environment as a result of planned and unplanned supplier outages, including outages at our Chile facilities, which began in the second half of 2007. Our average non-discounted posted price for the second quarter of 2008 was $489 per tonne compared with $703 per tonne for the first quarter of 2008 and $330 per tonne for the second quarter of 2007. Our average realized price for the second quarter of 2008 was $412 per tonne compared with $545 per tonne for the first quarter of 2008 and $286 per tonne for the second quarter of 2007. The change in our average realized price for produced methanol for the second quarter of 2008 decreased our Adjusted EBITDA by $103 million compared with the first quarter of 2008 and increased our Adjusted EBITDA by $96 million compared with the second quarter of 2007.
For the second quarter of 2008 our average realized price was approximately 16% lower than our average non-discounted posted price. This compares with approximately 22% lower for the first quarter of 2008 and 13% lower for the second quarter of 2007. We have entered into long-term contracts for a portion of our production volume with certain global customers where prices are either fixed or linked to our costs plus a margin and accordingly, we expect the discount from our average non-discounted posted prices to widen during periods of higher methanol pricing. The discount from our average non-discounted posted price narrowed during the second quarter of 2008 compared with the first quarter of 2008 primarily as a result of lower methanol pricing.
Sales volumes of produced methanol
Sales volumes of produced methanol for the second quarter of 2008 were higher by 232,000 tonnes compared with the first quarter of 2008. Sales volumes of produced methanol for the first quarter of 2008 were lower than production volumes primarily as a result of a rebuilding of produced inventories during the first quarter.
Sales volumes of produced methanol for the second quarter of 2008 and six months ended June 30, 2008 were lower by 450,000 tonnes and 912,000 tonnes, respectively, compared with the same periods in 2007 primarily as a result of lower production at our Chile facilities during 2008. Lower sales volumes for these periods decreased Adjusted EBITDA by $34 million and $140 million, respectively.
Total cash costs
Our production facilities are underpinned by natural gas purchase agreements with pricing terms that include base and variable price components. The variable component is adjusted in relation to increases in methanol prices above predetermined prices.
Total cash costs for the second quarter of 2008 were lower than in the first quarter of 2008 by $16 million. Natural gas costs for produced methanol were lower by $19 million during the second quarter of 2008 compared with the first quarter of 2008 primarily due to the impact of lower methanol pricing during the second quarter of 2008. Ocean freight costs were higher by $3 million during the second quarter of 2008 compared with the first quarter of 2008 primarily as a result of changes in our shipping routes and higher fuel costs.
Total cash costs for the second quarter of 2008 and the six months ended June 30, 2008 were higher than the same periods in 2007 by $39 million and $59 million, respectively. Natural gas costs for produced methanol for the second quarter of 2008 and the six months ended June 30, 2008 were higher compared to the same periods in 2007 by $24 million and $29 million, respectively, primarily as a result of higher methanol pricing in 2008. Ocean freights costs for the second quarter of 2008 and the six months ended June 30, 2008 were higher compared to the same periods in 2007 by $9 million and $13 million, respectively, primarily as a result of higher fuel costs and lower backhaul profits. The remaining increase in cash costs for the second quarter of 2008 and six months ended June 30, 2008 relates to higher unabsorbed fixed production costs in Chile and higher selling, general and administrative expenses primarily as a result of changes in foreign exchange rates and timing of expenditures.
Margin on sale of purchased methanol
We purchase additional methanol produced by others through long-term and short-term offtake contracts or on the spot market to meet customer needs and support our marketing efforts. Consequently, we realize holding gains or losses on the resale of this product depending on the methanol price at the time of resale. During the fourth quarter of 2007, as a result of reduced production rates at our Chile facilities, we increased our purchasing levels to continue to meet commitments to our customers. As these purchases were made in a period of significantly increasing methanol pricing, we recorded cash margin on sale of purchased methanol of $35 million during the fourth quarter of 2007. In 2008, methanol pricing moderated from these high levels and we recorded negative cash margin of $19 million for the first quarter of 2008 and negative cash margin of $31 million on the resale of purchased methanol for the second quarter of 2008.
Depreciation and Amortization
Depreciation and amortization was $26 million for the second quarter of 2008 compared with $23 million for the first quarter of 2008. The increase in depreciation and amortization for the second quarter of 2008 compared with the first quarter of 2008 was primarily due to higher sales volume of produced methanol in the second quarter.
Depreciation and amortization for the second quarter of 2008 and six months ended June 30, 2008 was $26 million and $50 million, respectively, compared with $28 million and $52 million, respectively, for the same periods in 2007.
Interest Expense
Three Months Ended Six Months Ended
---------------------- ----------------
Jun 30 Mar 31 Jun 30 Jun 30 Jun 30
($ millions) 2008 2008 2007 2008 2007
------------------------------------------------------- ----------------
Interest expense before
capitalized interest $ 13 $ 14 $ 11 $ 26 $ 22
Less capitalized interest (3) (3) - (6) -
------------------------------------------------------- ----------------
Interest expense $ 10 $ 11 $ 11 $ 20 $ 22
------------------------------------------------------- ----------------
Interest expense before capitalized interest for the second quarter of 2008 was $13 million compared with $14 million for the first quarter of 2008 and $11 million for the second quarter of 2007. In May 2007, we reached financial close and secured limited recourse debt of $530 million for our joint venture project to construct a 1.3 million tonne per year methanol facility in Egypt. Interest costs related to this project have been capitalized since that date.
Interest and Other Income
Three Months Ended Six Months Ended
---------------------- ----------------
Jun 30 Mar 31 Jun 30 Jun 30 Jun 30
($ millions) 2008 2008 2007 2008 2007
------------------------------------------------------- ----------------
Interest and other income
(expense) $ 13 $ (1) $ 13 $ 12 $ 18
------------------------------------------------------- ----------------
Interest and other income (expense) for the second quarter of 2008 was $13 million compared with an expense of $1 million for the first quarter of 2008. The increase in income and other income during the second quarter of 2008 compared with the first quarter of 2008 was primarily due to the impact of changes in foreign exchange rates as well as a $5 million gain on sale of ammonia production assets during the second quarter of 2008. The assets sold are located at our Kitimat site which was permanently closed in 2005.
Interest and other income for the second quarter of 2008 and six months ended June 30, 2008 compared to the same periods in 2007 remained the same and decreased by $6 million, respectively. Interest and other income during 2008 was lower than 2007 due to the impact of lower interest rates and lower cash balances during 2008 compared with the same periods in 2007. This decrease in interest and other income during 2008 was offset by the gain of $5 million on sale of ammonia production assets during the second quarter of 2008.
Income Taxes
The effective tax rate for the second quarter of 2008 was 30% compared with 29% for the first quarter of 2008 and 28% for the second quarter of 2007. The statutory tax rate in Chile and Trinidad, where we earn a substantial portion of our pre-tax earnings, is 35%. Our Atlas facility in Trinidad has partial relief from corporation income tax until 2014.
In Chile the tax rate consists of a first tier tax that is payable when income is earned and a second tier tax that is due when earnings are distributed from Chile. The second tier tax is initially recorded as future income tax expense and is subsequently reclassified to current income tax expense when earnings are distributed. Accordingly, the ratio of current income tax expense to total income tax expense is highly dependent on the level of cash distributed from Chile.
SUPPLY/DEMAND FUNDAMENTALS
We commenced 2008 in a tight methanol market environment as a result of planned and unplanned supplier outages in the second half of 2007. This resulted in high methanol prices during the first quarter which are unsustainable in a normal supply and demand environment. As we entered the second quarter of 2008, methanol prices had moderated and pricing has remained relatively stable during the quarter. There have been significant planned and unplanned outages across the global industry recently, including in Trinidad and Tobago, Saudi Arabia, Western Europe and most recently Equatorial Guinea. Consequently, we have recently seen tightening market conditions and this has resulted in increasing spot prices. Methanex non-discounted posted prices for July average approximately $500 per tonne across the major regions.
Excluding the 1.7 million tonne per year plant in Saudi Arabia, which commenced operations last quarter, the next increments of world scale capacity additions outside of China are two 1.7 million tonne per year plants under construction in Malaysia and Iran, and we expect product from both of these plants to be available to the market later this year or in the first half of 2009. We also believe that global methanol demand growth combined with the potential shutdown of high cost capacity as a result of high feedstock prices could offset this new industry supply.
Methanex Non-Discounted Regional Posted Prices(1)
July Jun May Apr
(US$ per tonne) 2008 2008 2008 2008
------------------------------------------------
United States 526 526 499 532
Europe(2) 465 465 465 465
Asia 500 500 450 450
------------------------------------------------
(1) Discounts from our posted prices are offered to customers based on
various factors.
(2) EUR295 at July 2008 (Apr 2008 - EUR295) converted to United States
dollars at the date of settlement.
Overall, while demand growth for some derivatives, such as formaldehyde and biodiesel, has weakened in some regions, we believe that global demand remains healthy in both traditional chemical derivatives and in energy applications as high energy prices continue to drive strong demand for fuel blending and di-methyl ether (DME) in China. In addition, high energy prices are continuing to support strong demand for MTBE outside of North America.
We believe methanol demand in China will continue to grow at high rates as a result of strong traditional demand driven by high industrial production growth rates and strong demand related to alternative fuel uses such as gasoline blending and DME. We also believe that there is increasing pressure on the cost structure of the Chinese methanol industry and the cost to export as a result of escalating feedstock costs for both coal and natural gas based producers in China, the continued appreciation of the Chinese currency and reduced fiscal incentives for exports of methanol introduced during 2007. During the first quarter of 2008, China was a net exporter of methanol as a result of the very high methanol price environment, which gave producers in China the incentive to export methanol. As we entered the second quarter of 2008, methanol prices had moderated and China reverted back to a net importer of methanol and we believe this has supported strong methanol prices in China and other global markets. Due to the high cost position of many of the Chinese producers, we believe that substantially all domestic methanol production in China will be consumed within the local market and that imports of methanol into China will grow over time.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities before changes in non-cash working capital in the second quarter of 2008 were $69 million compared with $67 million for the same period in 2007. The cash flows from operating activities before non-cash working capital are consistent with the level of earnings in each period. During the second quarter of 2008, the change in non-cash working capital decreased our cash flows from operating activities by $34 million. This was primarily due to a decrease in our trade payables which was partially offset by lower inventory levels. These changes were primarily as a result of the impact of lower purchased methanol and timing of natural gas payments during the second quarter of 2008 compared with the first quarter of 2008.
During the second quarter of 2008, we repurchased for cancellation a total of 1.6 million common shares at an average price of US$26.55 per share, totaling $43 million. During the second quarter of 2008, we completed the normal course issuer bid that expired at May 16, 2008. Upon completion of this bid, we had repurchased a total of 8.7 million common shares at an average price of US$26.01 per share, totaling $226 million. On May 6, 2008, a new normal course issuer bid was approved. This bid commenced May 20, 2008 and expires May 19, 2009 and allows us to repurchase for cancellation up to 7.9 million common shares.
Also during the second quarter of 2008, our Board of Directors approved an 11% increase in our regular quarterly dividend to shareholders, from US$0.14 per share to US$0.155 per share. During the second quarter of 2008 we paid quarterly dividends of approximately $15 million.
We are constructing a 1.3 million tonne per year methanol facility at Damietta on the Mediterranean Sea in Egypt. We expect commercial operations of the methanol facility to begin in early 2010 and we will purchase and sell 100% of the methanol from the facility. We own 60% of Egyptian Methanex Methanol Company S.A.E. (“EMethanex”) which is the company that is developing the project. We account for our investment in EMethanex using consolidation accounting. This results in 100% of the assets and liabilities of EMethanex being included in our financial statements. The other investors’ interest in the project is presented as “non-controlling interest”. During the second quarter of 2008, total plant and equipment construction costs related to our project in Egypt were $84 million. EMethanex has limited recourse debt of $530 million. During the second quarter of 2008, a total of $49 million of this limited recourse debt was drawn. The total estimated future costs to complete the project over the next two years, excluding financing costs and working capital, are expected to be approximately $505 million. Our 60% share of future equity contributions, excluding financing costs and working capital, over the next two years is estimated to be approximately $145 million and we expect to fund these expenditures from cash generated from operations and cash on hand.
We have excellent financial capacity and flexibility. Our cash balance at June 30, 2008 was $345 million and we have a strong balance sheet with an undrawn $250 million credit facility. We invest our cash only in highly rated instruments that have maturities of three months or less to ensure preservation of capital and appropriate liquidity. Our planned capital maintenance expenditure program directed towards major maintenance, turnarounds and catalyst changes, including costs to complete the restart of the Motunui facility, is currently estimated to total approximately $100 million for the period to the end of 2010.
We believe we are well positioned to meet financial requirements related to the methanol project in Egypt, complete our capital maintenance spending program, complete the restart of the Motunui facility, pursue new opportunities to enhance our leadership position in the methanol industry, pursue investment opportunities to accelerate the development of natural gas in southern Chile, investigate opportunities related to new methanol demand for energy applications, pursue other strategic initiatives and continue to deliver on our commitment to return excess cash to shareholders.
The credit ratings for our unsecured notes at June 30, 2008 were as follows:
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Standard & Poor's Rating Services BBB- (stable)
Moody's Investor Services Ba1 (stable)
Fitch Ratings BBB (negative)
Credit ratings are not recommendations to purchase, hold or sell
securities and do not comment on market price or suitability for a
particular investor. There is no assurance that any rating will remain in
effect for any given period of time or that any rating will not be revised
or withdrawn entirely by a rating agency in the future.
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SHORT-TERM OUTLOOK
Over the next year, we believe that traditional and non-traditional demand growth, along with closures of high cost capacity, will substantially offset the new supply that is scheduled to start up over the coming year and that supply/demand fundamentals will be in reasonable balance. We also believe that methanol prices will be underpinned by strong demand in China and global energy prices.
The methanol price will ultimately depend on industry operating rates, global energy prices, the rate of industry restructuring and the strength of global demand. We believe that our excellent financial position and financial flexibility, outstanding global supply network and low cost position will provide a sound basis for Methanex continuing to be the leader in the methanol industry.
CONTROLS AND PROCEDURES
For the three months ended June 30, 2008, no changes were made in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ADDITIONAL INFORMATION – SUPPLEMENTAL NON-GAAP MEASURES
In addition to providing measures prepared in accordance with Canadian generally accepted accounting principles (Canadian GAAP), we present certain supplemental non-GAAP measures. These are Adjusted EBITDA, operating income and cash flows from operating activities before changes in non-cash working capital. These measures do not have any standardized meaning prescribed by Canadian GAAP and therefore are unlikely to be comparable to similar measures presented by other companies. We believe these measures are useful in evaluating the operating performance and liquidity of the Company’s ongoing business. These measures should be considered in addition to, and not as a substitute for, net income, cash flows and other measures of financial performance and liquidity reported in accordance with Canadian GAAP.
Adjusted EBITDA
This supplemental non-GAAP measure is provided to assist readers in determining our ability to generate cash from operations. We believe this measure is useful in assessing performance and highlighting trends on an overall basis. We also believe Adjusted EBITDA is frequently used by securities analysts and investors when comparing our results with those of other companies. Adjusted EBITDA differs from the most comparable GAAP measure, cash flows from operating activities, primarily because it does not include changes in non-cash working capital, other cash payments related to operating activities, stock-based compensation expense, other non-cash items, interest expense, interest and other income (expense), and current income taxes.
The following table shows a reconciliation of cash flows from operating activities to Adjusted EBITDA:
Three Months Ended Six Months Ended
------------------------ ----------------
Jun 30 Mar 31 Jun 30 Jun 30 Jun 30
($ thousands) 2008 2008 2007 2008 2007
------------------------------------------------------- ----------------
Cash flows from
operating activities $ 34,220 $110,586 $123,825 $144,807 $314,927
Add (deduct):
Changes in non-cash
working capital 34,294 (8,267) (56,601) 26,027 (68,710)
Other cash payments 1,801 320 3,547 2,121 4,287
Stock-based
compensation expense (5,207) (4,628) (6,747) (9,835) (10,269)
Other non-cash items 1,378 (6,427) (3,540) (5,049) (6,187)
Interest expense 9,630 10,690 11,159 20,320 22,226
Interest and other
income (expense) (12,671) 837 (12,606) (11,834) (17,678)
Current income taxes 15,441 23,960 17,478 39,401 74,804
------------------------------------------------------- ----------------
Adjusted EBITDA $ 78,886 $127,071 $ 76,515 $205,958 $313,400
------------------------------------------------------- ----------------
Operating Income and Cash Flows from Operating Activities before Non-Cash Working Capital
Operating income and cash flows from operating activities before changes in non-cash working capital are reconciled to Canadian GAAP measures in our consolidated statements of income and consolidated statements of cash flows, respectively.
QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of selected financial information for the prior eight quarters is as follows:
Three Months Ended
--------------------------------------
($ thousands, except Jun 30 Mar 31 Dec 31 Sep 30
per share amounts) 2008 2008 2007 2007
--------------------------------------------------------------------------
Revenue $600,025 $735,934 $731,057 $395,118
Net income 38,945 65,484 171,697 23,610
Basic net income per common share 0.41 0.67 1.74 0.24
Diluted net income per common share 0.41 0.67 1.72 0.24
--------------------------------------------------------------------------
Three Months Ended
--------------------------------------
($ thousands, except Jun 30 Mar 31 Dec 31 Sep 30
per share amounts) 2007 2007 2006 2006
--------------------------------------------------------------------------
Revenue $466,414 $673,932 $668,159 $519,586
Net income 35,654 144,706 172,445 113,230
Basic net income per common share 0.35 1.38 1.62 1.05
Diluted net income per common share 0.35 1.37 1.61 1.05
--------------------------------------------------------------------------
NORMAL COURSE ISSUER BID
On May 6, 2008 the Company filed a Notice of Intention to Make a Normal Course Issuer Bid with Toronto Stock Exchange (“TSX”) pursuant to which the Company may repurchase up to 7,909,393 common shares of the Company, representing 10 percent of the public float of the issued and outstanding common shares of the Company as at May 2, 2008. This normal course issuer bid repurchase program, which is carried out through the facilities of the TSX, commenced on May 20, 2008 and will expire on the earlier of May 19, 2009 and the date upon which the Company has acquired the maximum number of common shares permitted under the purchase program or otherwise decided not to make further purchases. The Company has entered into an automatic securities purchase plan with its broker in connection with purchases to be made under this program. Shareholders may obtain a copy of the Notice of Intention without charge by contacting the Corporate Secretary at 604-661-2600.
FORWARD-LOOKING STATEMENTS
Information contained in this Second Quarter 2008 Management’s Discussion and Analysis contains forward-looking statements. Certain material factors or assumptions were applied in drawing the conclusions or making the forecasts or projections that are included in these forward-looking statements. Methanex believes that it has a reasonable basis for making such forward-looking statements. However, forward-looking statements, by their nature, involve risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. The risks and uncertainties include those attendant with producing and marketing methanol and successfully carrying out major capital expenditure projects in various jurisdictions, the ability to successfully carry out corporate initiatives and strategies, conditions in the methanol and other industries including the supply and demand balance for methanol, the success of natural gas exploration and development activities in southern Chile and our ability to obtain any additional gas in that region on commercially acceptable terms, actions of competitors and suppliers, actions of governments and governmental authorities, changes in laws or regulations in foreign jurisdictions, world-wide economic conditions and other risks described in our 2007 Management’s Discussion & Analysis and this Second Quarter 2008 Management’s Discussion and Analysis. Undue reliance should not be placed on forward-looking statements. They are not a substitute for the exercise of one’s own due diligence and judgment. The outcomes anticipated in forward-looking statements may not occur and we do not undertake to update forward-looking statements.
HOW WE ANALYZE OUR BUSINESS
We review our results of operations by analyzing changes in the components of our Adjusted EBITDA (refer to Supplemental Non-GAAP Measures for a reconciliation to the most comparable GAAP measure), depreciation and amortization, interest expense, interest and other income, unusual items and income taxes. In addition to the methanol that we produce at our facilities, we also purchase and re-sell methanol produced by others. We analyze the results of produced methanol sales separately from purchased methanol sales as the margin characteristics of each are very different.
Methanex-Produced Methanol
Our production facilities generate the substantial portion of our Adjusted EBITDA, and accordingly, the key drivers of changes in our Adjusted EBITDA for produced methanol are analyzed separately. The key drivers of changes in our Adjusted EBITDA for produced methanol are average realized price, sales volume and cash costs. Changes in Adjusted EBITDA related to our produced methanol include sales of methanol from our facilities in Chile, Trinidad and New Zealand.
The price, cash cost and volume variances included in our Adjusted EBITDA analysis for produced methanol are defined and calculated as follows:
PRICE
The change in Adjusted EBITDA as a result of changes in average realized price is calculated as the difference from period to period in the selling price of produced methanol multiplied by the current period sales volume of produced methanol. Sales under long-term contracts where the prices are either fixed or linked to our costs plus a margin are included as sales of produced methanol. Accordingly, the selling price of produced methanol will differ from the selling price of purchased methanol.
COST
The change in our Adjusted EBITDA as a result of changes in cash costs is calculated as the difference from period to period in cash costs per tonne multiplied by the sales volume of produced methanol in the current period plus the change in unabsorbed fixed cash costs. The change in consolidated selling, general and administrative expenses and fixed storage and handling costs are included in the analysis of produced methanol.
VOLUME
The change in Adjusted EBITDA as a result of changes in sales volumes is calculated as the difference from period to period in the sales volumes of produced methanol multiplied by the margin per tonne for the prior period. The margin per tonne is calculated as the selling price per tonne of produced methanol less absorbed fixed cash costs per tonne and variable cash costs per tonne (excluding Argentina natural gas export duties per tonne).
Purchased Methanol
The cost of sales of purchased methanol consists principally of the cost of the methanol itself, which is directly related to the price of methanol at the time of purchase. Accordingly, the analysis of purchased methanol and its impact on our Adjusted EBITDA is discussed on a net margin basis.
Methanex Corporation
Consolidated Statements of Income (unaudited)
(thousands of U.S. dollars, except number of common shares and per share
amounts)
Three Months Ended Six Months Ended
--------------------- ---------------------
Jun 30 Jun 30 Jun 30 Jun 30
2008 2007 2008 2007
--------------------------------------------------------------------------
Revenue $600,025 $466,414 $1,335,960 $1,140,346
Cost of sales and
operating expenses 521,139 389,899 1,130,002 826,946
Depreciation and
amortization 26,396 28,373 49,509 52,112
--------------------------------------------------------------------------
Operating income before
undernoted items 52,490 48,142 156,449 261,288
Interest expense (note 7) (9,630) (11,159) (20,320) (22,226)
Interest and other income 12,671 12,606 11,834 17,678
--------------------------------------------------------------------------
Income before income taxes 55,531 49,589 147,963 256,740
Income taxes:
Current (15,441) (17,478) (39,401) (74,804)
Future (1,145) 3,543 (4,133) (1,576)
--------------------------------------------------------------------------
(16,586) (13,935) (43,534) (76,380)
--------------------------------------------------------------------------
Net income $ 38,945 $ 35,654 $ 104,429 $ 180,360
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net income per common share:
Basic $ 0.41 $ 0.35 $ 1.09 $ 1.74
Diluted $ 0.41 $ 0.35 $ 1.08 $ 1.73
Weighted average number of
common shares outstanding:
Basic 94,520,011 102,697,808 95,837,568 103,894,611
Diluted 95,149,888 102,973,271 96,341,992 104,278,109
Number of common shares
outstanding at period
end 94,037,242 101,120,704 94,037,242 101,120,704
See accompanying notes to consolidated financial statements.
Methanex Corporation
Consolidated Balance Sheets (unaudited)
(thousands of U.S. dollars)
Jun 30 Dec 31
2008 2007
--------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 344,525 $ 488,224
Receivables 302,545 401,843
Inventories 246,767 312,143
Prepaid expenses 35,358 20,889
--------------------------------------------------------------------------
929,195 1,223,099
Property, plant and equipment (note 4) 1,710,287 1,542,100
Other assets 145,615 104,700
--------------------------------------------------------------------------
$ 2,785,097 $ 2,869,899
--------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 295,072 $ 466,020
Current maturities on long-term debt (note 6) 15,282 15,282
Current maturities on other long-term liabilities 19,436 16,965
--------------------------------------------------------------------------
329,790 498,267
Long-term debt (note 6) 663,015 581,987
Other long-term liabilities 75,997 74,431
Future income tax liabilities 342,735 338,602
Non-controlling interest 70,755 41,258
Shareholders' equity:
Capital stock 436,289 451,640
Contributed surplus 19,221 16,021
Retained earnings 855,814 876,348
Accumulated other comprehensive loss (8,519) (8,655)
--------------------------------------------------------------------------
1,302,805 1,335,354
--------------------------------------------------------------------------
$ 2,785,097 $ 2,869,899
--------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Methanex Corporation
Consolidated Statements of Shareholders' Equity (unaudited)
(thousands of U.S. dollars, except number of common shares)
Accumu-
lated
Number Other Total
of Contrib- Compre- Share-
Common Capital uted Retained hensive holders'
Shares Stock Surplus Earnings Loss Equity
--------------------------------------------------------------------------
Balance,
December 31,
2006 105,800,942 $474,739 $10,346 $724,166 $ - $1,209,251
Net income - - - 375,667 - 375,667
Compensation
expense
recorded
for stock
options - - 9,343 - - 9,343
Issue of
shares on
exercise of
stock
options 552,175 9,520 - - - 9,520
Reclasification
of grant
date fair
value on
exercise
of stock
options - 3,668 (3,668) - - -
Payments for
shares
repurchased (8,042,863) (36,287) - (168,440) - (204,727)
Dividend
payments - - - (55,045) - (55,045)
Other
comprehensive
loss - - - - (8,655) (8,655)
--------------------------------------------------------------------------
Balance,
December 31,
2007 98,310,254 451,640 16,021 876,348 (8,655) 1,335,354
Net
income - - - 65,484 - 65,484
Compensation
expense
recorded
for stock
options - - 2,893 - - 2,893
Issue of
shares on
exercise
of stock
options 128,513 2,392 - - - 2,392
Reclassification
of grant
date fair
value on
exercise
of stock
options - 776 (776) - - -
Payments
for shares
repurchased (2,850,000) (13,081) - (60,995) - (74,076)
Dividend
payments - - - (13,464) - (13,464)
Other
comprehensive
loss - - - - (12,161) (12,161)
--------------------------------------------------------------------------
Balance,
March 31,
2008 95,588,767 441,727 18,138 867,373 (20,816) 1,306,422
Net
income - - - 38,945 - 38,945
Compensation
expense
recorded
for stock
options - - 1,705 - - 1,705
Issue of
shares on
exercise
of stock
options 86,353 1,508 - - - 1,508
Reclassification
of grant
date fair
value on
exercise
of stock
options - 622 (622) - - -
Payments
for shares
repurchased (1,637,878) (7,568) - (35,921) - (43,489)
Dividend
payments - - - (14,583) - (14,583)
Other
comprehensive
income - - - - 12,297 12,297
--------------------------------------------------------------------------
Balance,
June 30,
2008 94,037,242 $436,289 $19,221 $855,814 $(8,519) $1,302,805
--------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income (unaudited)
(thousands of U.S. dollars)
Three months ended Six months ended
------------------------------------------
Jun 30 Jun 30 Jun 30 Jun 30
2008 2007 2008 2007
--------------------------------------------------------------------------
Net income $ 38,945 $ 35,654 $ 104,429 $ 180,360
Other comprehensive income
(loss), net of tax:
Change in fair value of
forward exchange contracts
(note 13) 325 227 60 (153)
Change in fair value of
interest rate swap contracts
(note 13) 11,972 - 76 -
--------------------------------------------------------------------------
12,297 227 136 (153)
--------------------------------------------------------------------------
Comprehensive income $ 51,242 $ 35,881 $ 104,565 $ 180,207
--------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Methanex Corporation
Consolidated Statements of Cash Flows (unaudited)
(thousands of U.S. dollars)
Three months ended Six months ended
------------------------------------------
Jun 30 Jun 30 Jun 30 Jun 30
2008 2007 2008 2007
--------------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $ 38,945 $ 35,654 $ 104,429 $ 180,360
Add (deduct) non-cash items:
Depreciation and amortization 26,396 28,373 49,509 52,112
Future income taxes 1,145 (3,543) 4,133 1,576
Stock-based compensation
expense 5,207 6,747 9,835 10,269
Other (1,378) 3,540 5,049 6,187
Other cash payments (1,801) (3,547) (2,121) (4,287)
--------------------------------------------------------------------------
Cash flows from operating
activities before undernoted 68,514 67,224 170,834 246,217
Changes in non-cash working
capital (note 11) (34,294) 56,601 (26,027) 68,710
--------------------------------------------------------------------------
34,220 123,825 144,807 314,927
--------------------------------------------------------------------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Payments for shares
repurchased (43,489) (78,614) (117,565) (123,886)
Dividend payments (14,583)
For more information, please contact
Jason Chesko
Director, Investor Relations
Methanex Corporation
604 661 2600 or Toll Free: 1 800 661 8851
Website: www.methanex.comMajor Newsire & Press Release Distribution with Basic Starting at only $19 and Complete OTCBB / Financial Distribution only $89
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