Methanex's CEO Hosts 2014 Annual General Meeting (Transcript)

| About: Methanex Corporation (MEOH)

Methanex Corporation (NASDAQ:MEOH)

2014 Annual General Meeting (Transcript)

April 30, 2014 02:00 PM ET


Tom Hamilton - Chairman

John Floren - President and CEO


Unidentified Company Representative

Good morning everyone and welcome to the 2014 Methanex Corporation Annual General Meeting. Before we start with the business of the meeting, there are few safety items I would like to address.

If for any reason we must evacuate, instructions will be given via the public address system. Once the announcement is made, please exit following the directions of the Pan Pacific staff. The security manager Chris who is at back of the room will be in charge of this procedure.

We’ll proceed to the musters station locator across the road between the Waterfront Center office building and the Fairmont Waterfront Center Hotel where the Pan Pacific staff will be positioned.

Please remain at this location until the Pan Pacific staff advises it’s safe to return to this facility. And lastly, if you have any questions following the CEO’s presentation, I ask you to please use the microphones which are available in the middle of aisle.

Now I’m going to turn it over to Mr. Hamilton.

Tom Hamilton

Thank you Kevin and good morning everyone. The meeting will now come to order. My name is Tom Hamilton, Chairman of the Board of Methanex Corporation. And in accordance with the company’s bylaws, I will preside at this Annual General Meeting. Again, I wish everyone here a very good morning and warm welcome to the 2014 annual general meeting to shareholders of Methanex Corporation.

I’d also like to welcome those of you who are listening to the meeting through our webcast. Now, as a courtesy to everyone, if you have your iPhones and your cell phones if you turn them off please as I’ve done that would be well received. So thank you. Mr. Kevin Price, who just spoke to you, Secretary of the company is present and in accordance with the bylaws will act as Secretary and record the minutes.

The minutes of last year’s meeting are available and any shareholder wishing to inspect them should contact Kevin.

Mr. [Wayne Bob] of CST Trust Company will act the scrutineer for this meeting and will assist in the tabulation of proxies and ballots. If there’s any shareholder or proxy holder who has not registered with scrutineers, would you please do so now?

The Secretary has in his possession the affidavit of mailing from CST Trust Company as to do mailing of the notice calling this annual general meeting. The form of proxy and the information circular in news dated March 7th 2014.

These documents were mailed into those who were shareholders for the company as of March 3, 2014, which is the record date. I direct the copy of the affidavit of mailing to be kept by the Secretary with the records of this meeting. Immediately following the presentation of formal business, Mr. John Floren your President and CEO will address the meeting and we look forward to hearing his remarks.

The question period will follow his remarks in order to make it easier to post questions; we have made question cards available to anyone who wishes to submit a question in that manner. If you have not received a question card and would like them, please raise your hand and you be provided with one. The question cards will be collected following Mr. Floren’s remarks.

If you don’t want to write it down, we also have microphones available. The company’s bylaws provide the quorum necessary for the transaction of business, the meeting of shareholders is to shareholders present in person or by proxy and representing not less than 20% of the loads and entitled to be catch that such meeting.

I'll now request Mr. Buck on behalf of the scrutineer to report the number of shareholder present the meeting in person and by proxy and the number of share is represented both in person and by proxy.

Unidentified Company Representative

Totaling 79,420,077 common shares represented in person or by proxy at this meeting, this represents 82.4% of the 96,387,331 issued an outstanding common shares.

Unidentified Company Representative

Thank you very much. Based on that information, I'll find the quorum shareholders is present and therefore declare at the meeting is properly called. Dually constitute and able to proceed to the transaction of business. I would also like to expressed my appreciation to those shareholders who were present in those who return their proxies.

The first side of the business is the adoption of the minutes for the last Annual General Meeting of the company held on April 21, 2013, I now invite (inaudible) to present the motions with respect to those minutes.

Unidentified Company Representative

(Inaudible) .

Unidentified Company Representative

Well someone talking the motion. Thank you. All in favor please raise your hand, contrary if any, there is a carry unanimous. The next side of the business is receive to the consolidated financial statement of the company for the year ended December 31, 2013 and the other carries report there on, this material is contained in our Annual Report which is mailed registered shareholders and those beneficial shareholder, who requested it. Unless someone specifically request the auditory reports will not be read at the meeting. If a shareholder raise a question concerning the financial statements you may ask them now or during the question and answer period following John Floren’s presentation.

If there are no questions at this time, I now declare the financial statements and the auditors report there have been received by the shareholders is submitted to this meeting. Before moving on to the election of directors, I want to recognized the forum of directors who is in the audience today, in fact he is former CEO and Chairman of the Board, Pierre Choquette, there is Pierre and his lovely wife Brenda. Nice to have you here.

Now to the item of election of directors, the company proposes to elect 11 directors and I would like to introduce them to you and ask that each director stand for a moment as they are introduced.

Bruce Aitken, formerly President and CEO of Methanex Corporation.

Howard Balloch, formerly Chairman of Cannacord Genuity Asia Limited and former Canadian ambassador to People’s Republic of China.

Phillip Cook, formerly Corporate Vice President at the Dow Chemical Company.

John Floren, President and CEO of Methanex Corporation.

Bob Kostelnik, Principal of Glenrock Recovery Partners and formerly Vice President of Refining for CITGO Petroleum Corporation.

Doug Mahaffy, formerly Chairman of McLean Budden Limited.

Terence Poole, formerly Executive Vice President Corporate Strategy and Development of NOVA Chemicals Corporations.

John Reid, formerly President and CEO of Terasen Incorporated; Janice Rennie, formerly Sennio Vice President of EPCOR Utilities; and Monica Sloan, formerly Managing Director and CEO of Intervera Limited.

As I mentioned before I am Tom Hamilton, formerly Chairman, President and CEO of EEX Corporations and I too am standing for re-election for the Methanex Board. I now declare the meeting open for nominations for the election of Directors and call upon Al Collins for his nominations.

Al Collins


Thomas Hamilton

Thank you. Are there any further nominations?

Hearing no further nomination I now declare nominations closed. I also declare those nominated to be duly elected Directors of the Company to hold the office for term expiring not later than close of next of the next Annual General Meeting of the company.

The next item of business is the reappointment of KPMG as the Auditor of the company and authorize the Board of Directors to determine the amount of auditor’s remuneration. I now request Margot Campbell to present her motion in that regard.

Margot Campbell


Thomas Hamilton

Thank you. Well someone second the motion.

Unidentified Company Representative

I second the motion.

Thomas Hamilton

Thank you. All in favor will please signify by raising your hands. Contrary if any?

Carrying unanimously. I might also add that over 99% of the votes cast have been voted in favor of this matter by proxy in advance of the meeting.

The next matter for consideration is the advisory resolution with respect to Methanex approach to executive compensation, the so called say on pay vote, I now request (inaudible) to represent her motion in that regard.

Unidentified Company Representative


Thomas Hamilton

Will someone second the motion?

Unidentified Company Representative

I second the motion.

Thomas Hamilton

Thank you. All in favor, please signify by raising your hands. Contrary if any? That’s carrying unanimously. I might also add that 98% of the votes cast have been voted in favor of this matter by proxy in advance of the meeting in other words 98% of the votes cast except the approach the company’s taken to executive compensation.

As there is no further business to be brought before the meeting, I shall now call upon Stefan Grubic to present his motion for termination.

Stefan Grubic


Thomas Hamilton

All right. Will someone second the motion.

Unidentified Company Representative

I second the motion.

Thomas Hamilton

Thank you I want favor will please signify by raising your hand. Contrary if any?

Carry unanimously. The formal business of the meeting is now completed and is adjourned.

Thank you very much for your participation. I would once again like to express my sincere appreciation to those shareholders who are in attendance. As well as those who submitted your proxies and I’ll now ask John Floren, the President and CEO of the company to address us and as I said following John’s presentation.

John Floren

So this is going to be some forward-looking statements and some other things I am going to talk about today. So please be guided accordingly. So we are going to have a review of 2013 which was an outstanding year for the company. Talk about the industry, what’s happening in the industry, where we are going, some of our growth initiatives, some of the priorities for the company and some slides about value.

So in list of accomplishments, it was an excellent year for the company record net income of adjusted $471 million, record sales volume of 8 million tons success in delivering a 1 million tons of new production between New Zealand and Medicine Hat on time and under budget, secured the gas contract to underpin our relocations from Chile to Louisiana with Chesapeake proceeding with the second relocation of Geismar 2, really solid progress on the relocations and I will get into a little bit of that in a minute.

We sold 10% of our interest in our Egypt facility to Epicor which has been our partners since day one at evaluation of $1,200 a ton which is an outstanding result, and we have just recently secured orders for seven new time charter vessels are going to be able to run on methanol.

So you can see here we have a 7% annual growth in the demand from 2010 to 2013 and at the same time very limited supply coming on in the same period. And then average modified return on capital employed from 2004 to 2013 that’s up by 15% and you can see that we announced our first quarter results this morning with another $250 odd million in EBITDA generation.

The performance of the share price. You can see we outperformed our peers with the average growth of 21% between 2003 and 2013 including dividends. What are the issues where we underperformed a little bit in 2013 with our plant reliability? Here you can see our plants are more reliable than many of our competitors, but we still have a target to be reliable at 97% on average throughout the set of our assets.

If we had achieved that target in 2013 we would generate another $50 million and EBITDA. So to me this is lower hanging fruit as we get back to have more reliable plans we don't have to invest almost no capital at all to get this additional EBITDA. So I know [Harvey] and the manufacturing team are working hard in this issue.

Our performance in responsible care is consistent with the industry average but weaker than prior years and this is a very big focus for the management team at Methanex, I truly believe that safety and reliability go hand and hand with the size and then plans that are the safest also have the best reliability. So we're really focused on improving not only our reliability, but our safety.

What's leading to the demand growth in the industry is really the energy applications and you can see here some of the ones that have been ongoing for years and you can see some of the new ones. So there are six different ways today that methanol is finding its way into energy. And with a high price of oil and low price of natural gas that arbitrage which traditionally has been about 10 to 1 so the price of MMBTU of gas to barrel of oil has been about 10 to 1 so $100 oil would be like $10 gas. But really gas in North America for example’s around $4 to $5. Stat opens up tremendous opportunity for methanol and its energy content to finest it way to compete with liquid fuels. As well in many applications methanol is more environmentally friendly in this cleaner burning and that's also driving a lot of growth.

So, these are numbers by one of the industry consultants. IHS, you can see they are projecting an 8.1% compounded annual growth rate for methanol. That turns out to be about 3 million to 4 million tons of new demand from methanol per year, our world scale plant in our industry is about a million ton. So, we need 3 to 4 plants per year just to keep up with the demand growth that we're seeing.

So, the bar on the left side of the slide is that demand growth of 8.1% between now and 2017, which gets us through about 22 million tons of new growth. The bar on the right is really of what we see coming on in supply outside of China.

And so the blue bar is what our projects are, which are Geismar 1 and 2, the green bars, some other industry expansions. We have pretty good visibility in the industry out 4, 5 years to how many new plants and how much productions coming on, because that's how long it takes to build the plant. So, you can see here, we have quite a deficit between supply and demand, which should lead to a very good price environment for methanol in the next five years.

Here is a recent picture of our Geismar site, that's the plant 1. The Chile 2 plant has been relocated to Geismar. All the pieces are there. It's really a construction project at this point. We're targeting the start up of the plant later this year. GEISMAR 2 is basically been taken apart are Chile 3 and it's starting to load on ships and it's on way to Geismar as we speak and we've expect to have all the pieces on site for Geismar 2 by September of this year.

We are seeing cost pressures on this project. There is a Tsunami of chemical and GTL and LNG projects coming in this area, not only in Louisiana, but in Texas, which is putting pressure on Labor rates as well as [podiums]. We think, we're still ahead of the curve, I think the worse part of the construction inflation we're going to see is in the 2016, 2017 period, we will have our projects completed by then. So we still think these are going to be outstanding projects and have pay backs in the three to four year range.

So in Chile, we have potential upside. So right now the first price for us is to get our production in Chile back to a two plant operation. I mentioned on the call this morning that we are planning to shutdown or operation again this winter sometime in the next 7 to 10 days, because of a lack of gas in the winter time in Chile.

There are some extremely positive things happening in Chile, on the Chilean side, where a lot of unconventional drilling is happening, hydraulic fracturing is ongoing. As we learned in the U.S., it took years and years for them to learn to techniques to unlock the shale gas that was in the U.S. and it's taking some time in Chile as well, but we're optimistic that [en app] will be successful in getting more gas in Chile overtime.

We've also this year recently secured Argentina gas for the first time since 2007. So what happen to gas, we're going to run our operation over the last six months has come to Argentina. Interesting in Argentina, it has the second largest shale gas reserves in the world about 500 Tcf of gas. For a million ton methanol plan, you need one Tcf for a 20 year life. So this is a lot of gas in Argentina.

As they developed the gas and as they self sufficient in energy in Argentina again, the political will to export gas they change that we saw in 2007 when they stopped exporting any gas to any country or any (inaudible). So first price is to get those plans running at higher rates in Chile. If we have a view sometime in the next 6 to 12 months that it’s unlikely to have a two plan operation in Chile. We do have the option to think about relocating a third plan maybe to Guizmar and we do have a small team working on that.

So we’ll make that decision in the next 12 months or so and then beyond that decision we’ll take about 2.5 years to move that plan. We are also pursuing some of our rights under our non-perform contracts mainly from Argentina, we're in arbitration with one particularly supplier and we're pursuing damages related to non-delivery of gas in Chile from Argentina.

So some of the priorities for 2014, top priority for the company always is to meet customers’ expectations, customers or the people that pay our bills and pay our salaries and we need to always do a good job and being the leader and exceeding their expectations. Safely execute Guizmar, successfully manage the cost and the schedule pressure and have it running by the end of the year.

Safety as I mentioned is a top priority for the company and we're really focused on improving our record and safety. We're going to progress our investment decision on Medicine Hat 2, we have a team working on a potential expansion or current site in Medicine Hat, but a 1.2, 1.3 million ton plant. The economics look quite challenging as we model all of that product would flow to Asia where the growth is coming.

So we will look to make a decision on a potential Brownfield, new built in Medicine Hat over the next 12 months as well. We're really looking to lock in all of our assets with long-term gas contract similar to what we have with Chesapeake let say we were pretty close on Guizmar and a gas contract until the recent change with gas going up to above 450 in the U.S. and on a spot basis even $20 sometime this winter because it was an extremely cold winter as well as the methanol price coming down from some of its high. So we are working hard this people to secure, people working to secure a long-term tenure year gas contract for both Guizmar 2 and Medicine Hat the existing plan.

Continue to support the growth for methanol into energy that’s really driving the demand growth. So tradition of applications methanol and chemicals are growing somewhere between 2% and 3% for year and that represents 60% of the market and the energy applications are growing at double digit, so we need to really make sure as methanol finds its way more and more to energy that were handling the product safely and that we’re making sure that technical issue is associated with using methanol are well understood and being treated well.

I would say the limited to our growing of our company as our human capital, we’re about 1,100 people globally today running about a $6 billion market cap business. We have quite an aging workforce especially in the western countries, so we expect retirements to consume about 20% to 25% of our workforce over the next three to four years as we look to add 1 million tons every two years, we see our employees ratio our numbers are going from 1,100 to 1,500 and 1,600 and at the same time replacing a couple of hundred retire, I think that is going to be one of the limiting factors of our growth it’s not capital, it’s not opportunity is how we are going to execute the projects.

In a market that’s going to be very tight for labor that we are looking for a lot of work happening here in North America on GTLs, LNG and other ammonia the etcetera, so it’s a real work for talent and I think this issue was getting a lot of focus in the company and we need to retain hire the very best people so we can grow the company.

So here is a little bit of growth chart that we used internally, so you can see here we are at about 5 million tons when we stand up here at this time last year, we've added a million tons between medicine debottlenecking and New Zealand restart looking to add another million tons by the end of the year with Geismar 1 and Geismar 2 and then we have the Chile 4 either relocation or getting higher rates of activity in Chile with Chile and Argentinean gas Medicine Hat 2 and then having more success with the current Chile one plan that's been running at about 50% and then another growth plan.

So you can see here we're looking to double our operating capacity by 2020. At a time, the industry is really going to need additional methanol. One of the interesting things when you talk to people looking to use methanol as an energy source, there biggest concern as well as methanol going to come from, if they're going to make the commitment for capital to convert ships or to build MTO plants there really concerned about security supply for methanol.

Some of the value considerations, you can see here a list of our current plans as well as our expansion with just Geismar 1 and not a lot of additional capacity in Chile so for 100,000 tones. You can see here, we're trading at around $820 of tone for replacement costs I mentioned earlier that we were successful and achieving $1,200 a tone for the 10% we sold in Egypt to APICORP and I know Mike Herz, the corporate development team and they're looking at new build capital today it's well an access of $1,000 a ton that's not with the lumpsum EPC contract that's taking risk on time in materials of construction risk. So you can see we’re still relatively undervalued versus replacement cost in this industry.

You can see here, the EBITDA generation capability of the company. If you focus on the middle column, which is what we're executing today, the 2 million tons of additional with Geismar 1 and 2. I think last quarter, we realized over $500 a ton in methanol pricing. But if you look at a moderate $400 a ton realized price as we get to 8 million tons of our own productive capacity, we're generating about $1.2 billion in EBITDA, apply a multiple of 7 to 8 to that, to buy 96 million shares, you can see that we have tremendous room for growth in shareholder values even today.

What have we done with cash over the years? What our opportunities for cash? Certainly we're going to stay focused on methanol, I get asked all the time about are we going to diversify the company? And I'd say well, we have enough opportunities in this industry to grow the company. So why we would get into things we don't know anything about.

So, we’re going to stay focused on methanol. We're going to have a balanced approach, like we always have, we're going to take our cash and try to grow the company as I mentioned in the previous slide and we're going to return excess cash through the form of dividend and share buybacks.

So, you would have seen this morning, we announced a 25% increased to our dividend and we issued a 5% normal course issuer bid to buy back shares. This is the first time we've started to buy back shares since 2008-09.

So, just summary, so excellent fundamentals in the industry, these opportunities don't come along many times in a 30 year period in the chemical industry and the methanol industry is growing, we’re the leader, we have the ability to add capacity at relatively low capital because some of the idle capacity we have. Certainly a solid franchise when we look around the world with our terminals, with our ships, with our people, with our rail car as part is really hard to replicate our infrastructure in a way that we can move methanol around the world very seamlessly from basin to basin.

Limited new supplies which should lead to a fairly high price environment over the next four to five years and adding capacity of 2 million tons by 2016, so we get really well positioned to generate a lot of cash and we will give that cash back to shareholders through dividends and buybacks and continue to grow the company. Thank you very much for your interest.

So, I think now it’s time for any questions that might have been written down or if you want to go the microphones.

Question-and-Answer Session

Tom Hamilton

All right, first question. Could you say more about the rationale for share repurchases at current prices and what other alternatives are considered for such case?

John Floren

Sure. So, we have three uses for cash of the company. So when we think about excess cash and what we do with it, diversification is always an option, taking the cash and buying another business. When we look at other businesses in the chemical industry or other industries, we don’t find [ones I] return 15% on capital employed over a long period of time and our current industry is growing significantly that allows us to grow as well.

So we’ve discounted looking to diversify the company and stay in methanol. The other option is to leave the cash on the balance sheet. I think we’ve seen a lot of activity with activist shareholders that come in and try to do things to your company, your balance sheet that you may not be comfortable with long term to generate value.

So I think leading it on the balance sheet, growing is not an option. So taking the cash and growing the company, we have growth projects in front of us to add 2 million tons in simply two other growth projects between Medicine Hat 2 and Geismar 3 or Chile 4 relocations. So when we issued a share buyback of 5%, we consider to higher buyback, but we preserve the ability to grow the company at the same time that we’re going to buy back shares. I think I gave a couple of indications on our replacement costs, as well as our potential for EBITDA and cash flow generation being very high.

So at current price of 61 or 62, yes we think the shares, buying back shares is good value for our shareholders. We bought back 130 million odd shares I think since 1994 at an average price of $9 or $10, so we still think buying back shares whether it’s a capacity number, 820 per ton in salt capacity or potential EBITDA generation.

Dividend also, we increased our dividend but we considered increasing the dividend even higher than the 25% that we did. But what we like to see our dividends is having a three really pronged strategy. It needs to be sustainable, so we stress test the dividend payment at the bottom end of the cycle of methanol pricing. The last time we saw the bottom end of the cycle was right after the financial crisis and that was $200 a ton, methanol pricing.

Certainly it was difficult times for us at that type of pricing but each and every one of our plans was still cash positive and we didn’t cut the dividend in that period. We didn’t grow it, but we maintained it. I think shareholders had looked for dividends, like to see them grow over time, but they hate to see them cut. So we do stress test it at the bottom end of the cycle. And then it needs to be meaningful. What’s meaningful in a commodity chemical industry, somewhere between 1.5% and 2%. So I think the yield today is with the new increase is about 1.7 and then growing. So we have grown the dividend every single year since 2002 except for two years of the financial crisis.

So those are the other options that we consider for using the cash that we will maintain a balanced approach where we take some cash to grow the company, we have a meaningful growing sustainable dividend and excess cash over and above that will return to share buybacks.

Tom Hamilton

Other questions? So, if there are no other questions, ladies and gentlemen, we appreciate your interest and support of the company and thank you for attending. And thanks for your good attention. And we’ll have look forward to another great year, see you here next year. We’re done.

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