OCI NV
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OCI NV
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Good afternoon, and good morning to all the audience in the U.S. Welcome to the OCI N.V. First Quarter 2019 Results Conference Call. Thank you for joining us on this call to discuss our results and outlook. With me today are Nassef Sawiris, our Chief Executive Officer; and Hassan Badrawi, our Group Chief Financial Officer. On this call, we will review OCI's key operational events and financial highlights for the first quarter of 2019, followed by a discussion of our outlook. And as usual, at the end of the call, we will host a question-and-answer session. As a reminder, statements made on today's call contain forward-looking information. These statements are based on certain assumptions and involve certain risks and uncertainties, and therefore, I'd like to refer you to our disclaimers about forward-looking statements. Now let me hand it over to Hassan.
Thank you, Hans. And thank you for all for joining us today. I'd like to start today's call with some of the usual highlights, covering our first quarter performance. During our last conference call at the end of February, we communicated to the -- to our -- to the market our intention to maintain a disciplined sales approach. This resulted in a large portion of our sales volume shifting as you may have read in our press release in the first -- into the -- first quarter and second quarter. During the first quarter, we witnessed some of the worst weather conditions in decades in the United States, which caused the delay in nitrogen fertilizer applications and consequently weakened demand. Also in Europe, purchasing started quite late with resulting pressure on prices visible during the late part of the quarter. Rather than selling at material decrease prices in March, we implemented a strategy to hold back product and especially at the start of the season, resulting in a significant buildup of the inventories towards the end of the first quarter. We actually reached a peak of more than 1.1 million tons of nitrogen fertilizer stocks at the end of March, well above 0.5 million tons that we reported at the end of December. In addition, we had some major plant turnarounds for one of the ammonia lines at our Algerian operation Sorfert, which was the first major turnaround since commissioning the plant in 2013. During the turnaround, we replaced a major piece of equipment and carried out various maintenance work. As a result, this line has been able to run close to its maximum design capacity since the completion of the works, well above its average 2018 utilization rates. We also discussed in February that we had a -- that Natgasoline was not running during part of the first quarter, due to some external utilities supply issues. We are glad to report that these have been fully resolved in February, and the plant has running -- has been running very well since. Turning to the financial results. We reported a 22% decrease in sales produced -- sales volumes reaching 1.7 million tonnes during the quarter, in comparison to the same quarter last year. The buildup in our fertilizer inventories was the main driver of lower sales volumes, as I mentioned earlier, offsetting volume growth in our industrial chemicals portfolio. Production levels at our nitrogen facilities were healthy during the quarter. Our plants in Egypt ran well above nameplate capacity. IFCo, our plant in Iowa showed robust reliability despite a harsh winter. And our Dutch operations ran at healthy operating rates. Because of the lower volumes, our first quarter revenue decreased by 20% to the reported $597 million and our adjusted EBITDA $129 million was below the $235 million achieved in the first quarter last year. Our free cash flow was relatively neutral, drop of $16 million negative before growth CapEx during the first quarter, again, due to the working capital outflow, of $105 million, which we expect to be reversed during the second quarter and Nassef will cover some of that topic. And our total CapEx was $60 million in the first quarter, of which $19 million was for maintenance. Growth CapEx was $41 million, mostly related to the BioMCN second line, which is nearing completion and the 13% methanol capacity expansion of OCI Beaumont. As a result, our net debt was approximately at the same level as the end of December. However, with the strong dispatches already underway in Q2, we expect to resume our deleveraging path from Q2 onwards. And at this point, I'd like to turn over the call to Nassef Sawiris, our Chief Executive Officer.
Thank you, Hassan. Let me start with the current market conditions and how the second quarter is shaping up. When we last spoke, demand was delayed due to the unprecedented weather conditions, and we had started to build up inventories, which continued throughout March. I'm pleased that we stayed disciplined, the season is now in full swing, and we have shipped record volumes in both the U.S. and Europe in the past weeks.As of this moment, we have successfully placed the extra buildup of inventories. We have sold many of our products at higher prices than if we would have sold them in March, confirming the merit of our strategy. For example, Egypt urea prices are up around $40 since the lows in February. In addition, our strategic presence in the heart of the Midwest means that we are capturing high in region logistical premiums as compared to product imported into the region from NOLA. We have placed urea tons at more than $125 per short ton above NOLA levels in recent weeks. We could hold product until the second quarter and maximize net back prices due to our investments in fund and off-site storage capabilities across the U.S., Midwest and Europe. I would like to thank the whole team for sticking to our disciplined sale strategy and for making the logistics for those -- these record product moments possible. As I look at our main market, the demand for nitrogen fertilizer product is looking healthy and has been strengthened throughout the second quarter. The outlook for our U.S. business remains particularly good, crop planting is behind where it has been in recent years and wet weather has delayed some corn planting, but the poor ammonia application last fall and this spring means we are confident that we can continue to move urea and UAN into late June and possibly early July. We are shipping record volumes as we benefit from a shift of ammonia to urea or UAN. But despite this shift and the weak ammonia application season, attracted ammonia, repay has resulted in record ammonia deliveries at strong price. We are also shipping record CAN volumes in Europe. This is due to both, our decision to store significant volumes in anticipation of the season, and the effect of low river levels in the second half last year. Demand is currently very strong and several price increases have been announced in the past weeks. For the first half of 2019, we expect higher CAN volumes than during the same period last year. Overall, across the industry, we expect ending stocks of nitrogen fertilizers to reach levels below the average of recent years by the end of June before the seasonally weaker summer period. This will help a tightening of the global supply and demand balance as we expect very few new capacity additions and we expect exports from China to remain at low annual levels. Our industrial nitrogen portfolio is performing well and growing. Melamine prices have decreased slightly from the fourth quarter of 2019 into the first quarter of this year, but remain at good levels. I'm pleased with the continued strong growth of our DEF business and we are well on track to more than double our DEF sales volumes in 2019. We also continue to assess how we can further expand and optimize the premium products with low seasonality. A final look at the methanol market. Despite recent methanol price volatility, overall fundamentals of methanol markets remained positive. We expect new methanol capacity additions to remain limited in the next couple of years. Overall, economic growth and current oil pricing environment are also supportive of methanol demand. MTO is coming back online and increasing operating rates [indiscernible] partly due to trade war uncertainty affecting downstream demand in China. And 2 of 3 new MTO facilities are still on track for startup in the next few months, representing more than 3 million tonnes of additional methanol consumption. In addition, we are benefiting from significantly lower gas prices in Europe. Against this backdrop we expect to start production at the second line at BioMCN in the early parts of June and are on track to increase methanol capacity at OCI Beaumont by midyear. Short term, we have also had a boost from Natgasoline, which despite an extended shutdown built up excess inventory relative to normal levels during Q1. Product sales have accelerated during the second quarter and have now returned to normalized levels. Gas prices are also looking very favorable. In Europe, gas prices are now less than half the level of last year's highs, and we expect to see the full benefit from the current quarter onwards. In the U.S., we also continue to benefit from low gas prices and hedges at our different operations. We have costless collars for the majority of our gas needs at OCI Beaumont and Natgasoline and prices below $2.40 for almost 70% of IFCo's requirements this year. Finally, looking at the OCI's outlook for 2019, specifically, we expect a record second quarter, resulting in a higher adjusted EBITDA in the first half of 2019 compared to the first half of 2018. We reiterate our expectation of continued growth in adjusted EBITDA and improvement of our leverage metrics in the full year 2019. We'll now open for questions.
[Operator Instructions] Your first question comes from the line of [ Roger Spitz ].
Can you say how much was available to draw under your revolvers as of March 2019?
In excess of $200 million, but you can get the specifics after the call.
The -- in term -- regarding nitrogen, U.S., why did, Q1 '19 EBITDA moved up to $40 million from $21 million year-over-year given your volumes were well down and ammonia prices were down. Was that driven by higher UAN prices? I would have thought with the volumes down that EBITDA wouldn't be up, even though I understand IFCo was up?
Which plant are you referring to?
I'm referring to the segment in your Press Release, nitrogen U.S. The EBITDA was $40 million in Q1 '19 and $21 million in Q1 '18 and I thought the volumes were well down.
Yes, Mike. It's a combination also of volumes, gas prices and selling prices. So despite the lower volumes and the buildup of inventories, we achieved those numbers.
I see. How about regarding nitrogen, Middle East, [ MENA ] as you put it on the same page. Q1 '19 was $50 million versus $122 million year-over-year, or down $70 million. Can you say how much was that due to Sorfert being under turnaround? And how much was that due to building your volumes at Sorfert and your 2 Egyptian facilities. Can you break the down that $70 million between those 2 issues?
So the volume impact is about -- is more than $35 million, and this is at cost. So obviously, we're selling it at higher prices now than on that. So that should reflect in the second quarter. But the turnaround would be part of the balance, and that is about it.
Your next question comes from the line of Henk Veerman.
I've got a few questions. So if I can ask them one by one. Firstly, you produced -- in fertilizers, you produced about 1.16 billion tonnes of fertilizers in Q1. And you also produced for inventory about 600,000 tonnes. So total production in the quarter is about like 1.7 billion. That's about same level as last year. Is it safe to assume that let's say the ramp-up in IFCo was more or less offset by Sorfert, the production stop at Sorfert? Is that a fair assumption, just for my understanding?
Yes, yes. That's the bulk of that assumption, and also Europe had a good production, but the bulk of it is Iowa ramp up.
And then related to that. So let's say from Q1 to Q2, so let's take that 1.7 billion as a starting point, then in Q2, you sell. So you produce another 1.7 billion. So you sell the 600,000 of your inventory. And then, let's say, Sorfert also produces a couple of hundred thousand. Is it then fair to say that, let's say, sequentially Q2 versus Q1, your total production more or less doubles. Is that how we should think about your seasonality?
Not production, you mean, outflows?
Yes, sorry, products sold, that's what I mean.
We'll have to do the -- I would say not doubles, but increases. If you add the 600,000 inventory buildup, and you assume the same production, that's not the doubles, that's almost like a 40%, 50% increase.
Yes. Okay. Okay. Okay. Then my second question is on Natgasoline. So Natgasoline EBITDA on a full ownership basis was about $16 million in the quarter. So $8 million for you and for $8 million for your partner, where it only produced for 1 month basically in March and in that month. So you -- let's say, they got the business -- the asset produced $16 million of EBITDA. Can we then assume, let's say, if Natgasoline wouldn't have the supply constraints that you experienced, that's, let's say, quarterly run rate on sort of the pricing levels that we're at is about $60 million to $80 million EBITDA for the remainder of the year, assuming we'll have like a clean quarter, is that how should we think about that?
You're not too far, but also I mean, you have to take into consideration the gas prices and all that, but you're not too far.
Okay. Okay. Okay.
We've achieved that already in Q4, so that's not -- and prices have come down a bit, but not a lot.
Okay. That's clear. And then on DEF. On the DEF production, you mentioned that year-on-year for the full year your outlook will more than double. Yet, Q1 seems a bit, let's say, low and I'm assuming there's no seasonality in there. Could you maybe comment on that?
Yes, we actually like the seasonality in the U.S. because peak driving season is at the time when there is low farm application in the summer. So we're starting to see that [indiscernible] starts after Memorial Day, when you have -- but we see DEF the month picking up and yes, there is technicality in the DEF, demand related to trucking and driving season.
Okay. Okay. My last question is on the press release you sent out on the 4th of March, where you said there has been inbound interest in the methanol assets. Could you confirm the discussions are so or less -- more or less ongoing, given there has been no comments as of that date?
We are not going to comment on specifics on that, but as a general statement, we do review our portfolio very vigorously, and methanol is taking an increased amount of time for us to evaluate all strategic options.
Okay. Let me ask 1 follow-up on that and this is my last question. Let's say, you put a replacement value on those methanol assets in the presentations -- of your company presentation, but let's say, in your view, would it make sense that in today's market the assets are worth more than the replacement value numbers you put in that presentation?
In the rational world, without any tensions or trade or lack of predictability of the coming in the short term, replacement value means that you're giving away 4 years of cash flows. So in a rational market, you should be expecting a higher value than replacement value because you're compounding also the cash flows, which otherwise would have been deferred until the completion of construction. So that's our belief. While assets could trade below replacement value in methanol, no transactions would -- is likely to occur below replacement value.
Your next question comes from the line of Thomas Wrigglesworth.
Couple of questions, if I may. Obviously, we've seen this big step-up in the Corn Belt and nitrogen prices. Can we assume that you will have realized this new level that has been achieved in May, rather than averaging in through -- in 2Q through -- and have you resisted selling tons in April, noting that we've seen the spike that you kind of indicated at the fourth quarter results? Secondly, I think you've been clear, but just to clarify. Your point is that inventories are low and even if we do lose some planting, it should lead to a good supply and demand balance least in country in the U.S. as we go into year-end. Is that what I should understand? But -- and thirdly, outside of the U.S. can you give us your thoughts on what pricing is going to look like over that summer period? Obviously, we don't have the gas price support that we had during the summer season for those seaborne tons. So if any insights you could share on how the summer's going to progress? Do you think China is going to step back in and stop buying tons, again, from the seaborne market if prices go low enough?
So first on the question of April and May, this is really a week-by-week exercise. To give you an idea, this week, there's -- if you're calling from U.S., there's a lot of wetness in the Midwest. So this week is different. That is expected to go away beginning of next week. And we expect the month to even accelerate even further next week to play catch up in a very time-sensitive period. So it's very tough to give you an average of April and May, but for sure, oil price in the Midwest is trading at historical premiums as well as, in general, urea is trading higher in April and May than it did in February and March. What we need to explain in general is that this strategy is not just opportunistic. We consider a sale off-season to a stockist as a virtual non-sale because it does not hit the ultimate demand sources. It's merely placing volumes in the hand of an intermediate at a low price in the off-season, which is counterproductive once the season starts. So we have invested in distribution and all that to prevent that from recurring. Now as far as the summer, we expect that this summer pricing to be significantly higher than last summer on the back of multiple issues. Number one, the inventory levels at end of June are expected to be extremely low. People have delayed purchasing decisions. Yesterday, there is talk of another Indian and Asian tenders till June. So we go into the season, which is the off-season, which starts in July with very little carryover and the same in Europe, with very little carryover from May and June. So with that in mind, we expect summer pricing or what some people knew -- as referred to as fill pricing to be significantly higher than last year. And we've seen that already in Europe with CAN prices announced for July, almost 20% higher than same time last year. So for the second half, we believe pricing will be stronger. And we don't see China coming back with big volumes. It just doesn't make sense for China to import energy, keep the pollution at home and export the product that produces very little margin for the Chinese economy. So that's our outlook for the second half.
And just a follow-up, if I may. I think, you said at the full year results that U.S. gas prices in Q2 would be $2.13 MMBtu, does that still stand? I appreciate there's probably some flexible -- that things may have -- market-to-market developments may have changed $2.30, the kind of right level of 2Q gas in the U.S.?
Not too far from that, yes, very close.
Your next question comes from the line of Frank Claassen.
I'm Frank Claassen from Petercam. First of all, a question on your CapEx guidance. Is that still $200 million to $220 million for this year? Secondly, on Sorfert, do you expect any dividend payments related to Sorfert for this year? And finally, related to DEF, we've talked about the U.S. I think you updated on your plans for DEF outside of the U.S. So Europe and maybe also Egypt. And what progress are you making with launching DEF in those regions?
DEF is still being launched in small volumes in the emerging market yet. I mean, we -- to give you an example, major introduction of DEF in China only happened last year. So that's going to grow exponentially, but it's not as material as AdBlue in Europe of DEF in U.S. What was the other question?
On the CapEx guidance.
The CapEx guidance hasn't changed.
Okay. And on Sorfert, do you expect any dividends payments from Sorfert this year? Or what is your view on that?
Yes, we expect dividends to reflect 2018 earnings, and this is already agreed.
Okay. And when will that happen, is that Q2, Q3?
Summer, so kind of July is where we expect that to happen. We still have [ to call ] the AGMs and all that which are underway and then the process starts. We expect probably, I would say Q3.
Okay. And maybe coming back on DEF. Thought you also had plans to launch in Europe. Is that still the case and what is your progress over there?
So we have made a few trial shipments from Egypt, and we're still evaluating. And it's merely based on the economics of granular urea versus DEF. But this year, in Europe, we realized higher netbacks with granular urea.
Next question comes from the line of Geoff Haire.
I've just got two. First of all, can you just outline what your pricing strategy is for nitrates in Europe? Will you be following Yara? Or if you've got a different strategy from what Yara has announced last week? And then just on Q2 EBITDA that you've commented, just if you could outline what gives you so much confidence that you can generate more than $310 million of adjusted EBITDA in the second quarter that would be very helpful.
So on pricing, I do not prefer to comment on competitor pricing. But all we can say is that we're extremely disciplined in terms of not offering product that is not needed at reduced prices. That is our strategy, and we think we're going to implement it. And it worked for us in summer and Q3 and Q4 last year. So there will be no bargains offered in the summer of 2019, especially on the back of low inventory -- ending inventory globally by end of June. So without going into numbers, we believe that this summer is going to be materially higher prices across all nitrogen products. The second question was the...
The EBIT?
Yes, we're confident, obviously, it helps that we are now almost at end of May, and we saw the portion of June production already. So you can have that kind of confidence when you've locked in your gas price for the quarter, and you have a solid order book that gives you visibility. So yes, we are confident on that.
Your next question comes from the line of [indiscernible].
I just wanted to clarify when you are saying you are looking to meet your methanol portfolio, do you have an adviser at the moment and what's the time line for this strategic review?
So we'd rather not comment on that, but we typically engage advisers on transactions. So -- but we'd rather not comment on that now.
Time line? Do we expect an update?
We'll probably give a further update with the next quarter results late in the summer.
Your next question comes from the line of [ Roger Spitz ].
First, I don't know if you'd be willing to provide this, but would it be possible to provide the Q1 '19 year-over-year volume declines in each of nitrogen U.S., nitrogen Europe and nitrogen [ MENA ].
I rather do this off the call, so you can check with Hans and some of it is already segmented. But I'd rather you can get that after the call, if you don't mind.
Of course. Would it be possible to provide the off-balance sheet accounts receivable, securitization, the amounts outstanding as of March 31?
Again, I mean, you -- that would be probably easier for us to answer on a separate call. It's very specific and the amounts very obviously with the build-up in inventories. So there is a decline because what we didn't sell in March, some of it has already been actually cashed.
Got it. And my last one is, regarding the ammonia prepay program. Just for my edification, is this the same or different from the fill program, I feel like it's different. And also if you delivered all this volume, but the U.S. farmers weren't planting because of the extraordinarily wet weather. What has happened to this ammonia, is it sitting in warehouses along the Mississippi or somewhere that will be sold down in Q2?
No, it's being -- a lot of it is already being delivered and has been delivered in April and May, so these are -- especially in early April. So this is ongoing. It's -- orders that have been placed few months earlier with targeted dates and a lot of it has already been shipped in April and May, at these higher prices.
Just so I'm clear, is this also known as the fill program? Or is this different from the fill program that people speak of?
It's kind of different. It's -- because ammonia doesn't store that much, so I mean -- that well. So it's mostly our commitment for volumes yet to be produced. Whereas what we believe is the understanding on the fill program is that you sell to big traders, they put it in the warehouses, wait for months and make 20% to 30%. Something that -- factors that we have tried to avoid and consistently try to avoid.
Your next question comes from the line of Hari Thirumalai.
This was more in relation to trying to understand your business a little better. Obviously, it's comforting to see a very strong guidance for the second quarter and that's great, but just in terms of trying to reconcile your guidance and confidence in terms of not only just hitting your EBITDA numbers, but also seeing good momentum in volumes. How do I reconcile that with the information that's released by the USDA, especially in relation to corn planted and soybean planted, especially in the Midwest, where we still see a significant backlog in relation to where the acreage is relative to where it was last year, for example, in places like Illinois, it's still way below what it was in mid-May where it was about 95% planted, now it's still 25%. So I'm just trying to understand how does it work in terms of your ability to shift volumes when acreage planted for corn and soybean in the Midwest continues to be low?
So first of all, we are now talking and we are already end of May. We do not have a lot of volumes to sell in order to meet our guidelines and hence our confidence. What we have to sell from here till end of June are not a lot of quantities. So that is one thing. You can look at it 2 ways. You can look at having 45% of the corn planting taken place as a potential significant uptick next week when the weather should dry up in the Midwest and this is the current expectation. And we have -- the volume is not placed exclusively in our plants. But it has also been distributed to a lot of leased storage facilities. So on a single day, you are not capped by the logistical constraints of shipping out the 1 plant, you're shipping out of in that case 6 or 7 different locations. And the same in Europe. So we have done a lot of work on logistics and we can ship a lot in a very short period of time. So -- but again, on the guidance, we have not a lot of volumes to sell in June in order to meet your targets for a stronger H1.
Your next question comes from the line of Henk Veerman.
One small follow-up from my side. When you talk about the growth in EBITDA half year '19 versus half year '18, should we assume that includes the IFRS 16 impact of about $25 million for that half year, which is helpful for your adjusted EBITDA? Or do -- can we also expect the growth in EBITDA on a, let's say, on an IFRS 16-adjusted basis.
It includes the IFRS adjustment.
There are no further questions at this time. Please continue.
Okay. I'd like to thank everybody, and looking forward to our next call. Thank you.
That does conclude our conference for today. Thank you for participating. You may all disconnect.