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OCI NV
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Thank you for standing by, and welcome to the OCI N.V. First Quarter 2021 Results Conference Call. [Operator Instructions] I must advise you, the call is recorded today Wednesday, the 5th of May, 2021. I would now like to hand the call over to Mr. Hans Zayed, Director, Investor Relations of OCI N.V. Please go ahead.
Thank you, and good afternoon and good morning to our audience in the U.S. Thank you for joining the OCI N.V. First Quarter 2021 Conference Call. With me today are Ahmed El-Hoshy, our Chief Executive Officer; Hassan Badrawi, our Chief Financial Officer. As you've seen, we published our results this morning. And on this call, we will review OCI's key operational events and financial highlights for the quarter, followed by a discussion of the outlook. As usual, we will host a question-and-answer session at the end of the call. As a reminder, statements made on today's call contain forward-looking information. These statements are based on certain assumptions and involve 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 Ahmed.
Thank you, Hans, and thank you all for joining us today. I'd like to start, as always, by covering our top priority, which is safety, as we want all our employees and contractors to go home safe and every day. Our recordable 12-month rolling incident rate was 0.26 incidents per 200,000 manhours as of the end of Q1 2021. Our goal remains to prioritize process safety and to reduce operational incidents to 0 at all our production facilities across the globe. Then moving on to our performance during the quarter. We are pleased that we reported a record adjusted EBITDA, delevered our balance sheet at a fast pace and delivered our year-end net leverage target early by achieving it already at the end of March. This performance was especially driven by the significant and sustained improvement in fundamentals of our end markets, combined with our strong focus on operational performance at all our plants and the great execution of our commercial team in capturing significantly higher selling prices as we stick to our commercial strategy and maintained a disciplined sales approach. I'd like to thank all our employees for their continued dedication to OCI and its values.Our sales volume increased 9% to 3 million metric tons during Q1 2021 compared to the prior year. In particular, we had another quarter of strong performance in methanol as we recorded an increase of 27% in owned produced methanol sales volumes in Q1 2021 compared to the same time in 2020. This was driven by a significant step-up in production at OCI Beaumont and BioMCN as our methanol facility in the Netherlands continued to achieve steady utilization rates in both production lines and reached record levels during the first quarter of 2021. The extreme cold weather and spike in natural gas prices in the U.S. in February and early March resulted in downtime at OCI's U.S. plants, but the impact was meaningfully more than offset by cash gains from physical and financial gas hedges, as you saw in our results.With that, I'd like to turn it over to Hassan to discuss the financial results in more detail.
Thank you, Ahmed. I'll briefly cover some key highlights of our financial results, as usual, starting with the P&L. Our consolidated revenues increased by 38% to $1.12 billion, and our adjusted EBITDA rose by 134% to a record $452 million in the first quarter of 2021 compared to the first quarter of last year. Our adjusted EBITDA margin also improved considerably from 24% in Q1 2020 to 40% in Q1 2021. This performance underscores the benefits of our diverse stream of global revenues and our competitive position on the global cost curve, with a young asset base and strategic locations and with around half of our total gas requirements emanating from assets with fixed gas price regimes. In the current pricing environment, the competitive advantage of Fertiglobe assets becomes more evident.To bridge adjusted EBITDA from the first quarter of 2020 to the first quarter of 2021, there are 3 factors I would like to highlight. First, the biggest driver of this growth was the improvement in market backdrop, as Ahmed already pointed out and will be discussing in more detail later on in the call. Selling prices improved across the board in the first quarter as well compared to both the first and the fourth quarter of 2020 with increases ranging from around 15% to 65% across our various commodities. Secondly, despite the impact of downtime in the U.S. and in Europe during the unprecedented U.S. winter freeze and the result of a spike in European gas prices, our total sales volumes also continued to increase and were up, as Ahmed mentioned earlier, 9% year-on-year, with sales and production volume growth in both the nitrogen and methanol segments, signifying our continued improvement in operational performance. Finally, although the prices of our key cost input natural gas were on average, higher for the group in the first quarter of this year compared to the first quarter of 2020, especially in Europe, we made cash gains in the U.S. to the tune of around $75 million to $80 million. The total net impact from natural gas outside the gains, considering the negative impact of the higher gas prices, amounted to around $40 million to $45 million. In terms of our segment results, I'd like to highlight Fertiglobe, which achieved revenue growth of 50% and adjusted EBITDA increases of 105% compared to the first quarter of 2020 and 56% compared to the fourth quarter of 2020. Fertiglobe's competitive position improved significantly with European gas prices normalizing at higher levels, which resulted in adjusted EBITDA margin improvement from 31% in Q1 2020 to 43% in Q1 2021. Important to point out that Fertiglobe has completed the realization of the target synergies post consolidation of Fertil in September 2019. And the commercial performance has been especially visible on the ammonia business where our disciplined approach to the market has optimized our netback and the financial results of the business in this current market environment. With excellent, excellent free cash flow conversion, we expect healthy dividends from Fertiglobe in 2021 and on a continuing basis. Also highlighting the methanol's group adjusted EBITDA was also significantly higher in Q1 2021 compared to the same quarter last year due to a healthy increase in production volumes, the continued growth of our fuels business and higher methanol prices, which all combined and offset the higher gas prices in the Netherlands compared to a year ago. Margins, excluding -- EBITDA margins, excluding gas gains for the methanol group, more than doubled between Q1 2020 and Q1 2021 to over 30%, which also represents a healthy growth -- healthy margin growth of more than 13% at BioMCN despite the high gas price environment in Europe. Turning to the balance sheet and our cash flow performance. As a result of our improved performance and record EBITDA during the quarter, we generated healthy operating free cash flow. And as a result, we were able to delever a further $306 million during the quarter, resulting in a net debt position of $3.4 billion as of the end of Q1 2021. Free cash flow before growth CapEx amounted to $326 million during the quarter, underlying strong free cash flow conversion. Total cash capital expenditures were $57 million in the first quarter, down from $96 million in Q1 2020. However, we continue to guide for $300 million in total CapEx for the full year. We have achieved substantial improvements in our cost of debt over the last 3 years, with our weighted average cost of debt reducing from approximately 6% at the end of 2018 to close to 4% today, while maintaining progress on our capital structure simplification and reductions in gross debt. We have consistently prioritized free cash flow for deleveraging to progress to our long-term balance sheet target of 2x through the cycle with leverage reducing in just the 5 quarters from -- in the last 5 quarters from 5.4x to 3x today, which is the target we have for ourselves for year-end now achieved early. The expected strong performance of the business in 2021 and excellent free cash flow conversion will allow us to continue to progress towards our target capital structure and expect further reductions in gross debt, leverage and the weighted average cost of debt over the course of this year. Achievement of our target capital structure remains a priority as this will allow OCI the flexibility to consider exciting growth opportunities in the evolving hydrogen economy as well as shareholder returns in the future. We continue to proactively optimize our balance sheet. For instance, we recently repaid $147 million of 5.875% bonds at IFCo and $100 million of our 5.25% and 4.625% bonds at MG. This will deliver additional interest cost savings of circa $10 million per annum on an ongoing basis -- delivered additional interest cost savings of $10 million per annum on an ongoing basis while creating prepayable debt to absorb future positive free cash flow -- inflows. We also expect a significant step down in the margin of our core $850 million revolving credit facility of at least 175 bps to take effect in Q3 2021 as a result of the deleveraging profile of the group. We will continue to evaluate opportunities to achieve similar objectives and further simplification of our capital structure on an ongoing basis. Briefly, just wanted to also mention that you may have seen the news that we are considering an IPO of Fertiglobe, our 58-42 partnership with ADNOC. We can confirm that we have started preparations, and we are in early stages of that process. And we'll continue to provide updates as appropriate throughout the year. With that, I would like to hand over to Ahmed for our market outlook and group strategy.
Thanks, Hassan. I'll discuss our outlook and some more exciting recent developments and achievements in our ESG strategy. The outlook for OCI remains positive for Q2 and beyond, supported by strong underlying demand for nitrogen fertilizers driven by healthy farm economics and a continued recovery in our industrial markets for ammonia, methanol, melamine and DEF.I'll start with the outlook for nitrogen market. Global nitrogen prices have recovered from trough levels reached in 2020, with prices rising 50% in Q1 2021 and further increases of 15% to 30% to date in the second quarter. These price increases are underpinned by healthy agricultural fundamentals. We have seen a steady increase in corn prices over the past few months to 8-year highs driven by strong corn imports from China, declining global foreign stock-to-use ratio and rising farm income, supported by farm economics, and as a result, nitrogen demand and prices. Crop conditions also remain behind prior years amid growth -- amid ongoing drought conditions in key growing areas such as Brazil and are contributing to the increase in crop prices. U.S. corn acreage in the 2020-2021 season is expected to be 92 million to 93 million acres. And with the relationship between the new foreign soybean ratio, now strongly favoring corn, we expect a further increase in corn acreage in the next fertilizer season, supporting higher 2021 U.S. nitrogen prices even in the off-season. The higher crop pricing is also supporting strong demand in Argentina as imports in Q1 2021 were 80% higher year-over-year, and a further 1 million tons is expected to be imported over the June to November period, benefiting our operations in Fertiglobe, in particular, as Egypt benefits from a 6.5% duty exemption and advantage in this market. Higher fertilizer demand in China on strong domestic crop prices and the shift towards nitrogen-intensive corn and animal [ fees ] combined with the recovery in industrial urea consumption in the country is also expected to likely limit urea exports from China in 2021 to a level that is lower than what we saw in 2020. Robust import demand in Latin America, Australia and India is driving a healthy increase in Fertiglobe's urea volumes as well in Q2 2021. In Europe, we expect strong demand on improved farm income and low nitrate inventories across all European producers to drive tighter market conditions into the second quarter of 2021 compared to the prior year. In the U.S., the UAN inventories are low, and we believe many producers have sold forward in the first part of Q1 to well into the second quarter, resulting in limited availability of spot product. Our U.S. Midwest operations are, therefore, benefiting from a combination of higher sales volumes and prices in the second quarter following our Q1 production hit, which resulted in lower volumes. To summarize, given low inventories, coupled with high feedstock costs in Europe and grain prices at 8-year highs, this helps create an environment for a more muted seasonal reset in pricing compared to what we've seen in prior years. Now switching to the industrial side. We're benefiting from a strong rebound in all major global economies and in many sectors, with forecasts for global growth of more than 5% this year and almost equally strong for next year. This gives us good visibility on our end markets and will boost demand for methanol, melamine and ammonia, which is used -- which are used in many downstream products across various end markets, including but not limited to, of course, in construction, automotive, textile, plastics, you name it. Furthermore, the recovery in transportation applications increasingly bolstered demand for our products, keeping market conditions tight.Starting with ammonia market. They've been void by a structural tightening in the last few months as we've all seen with the recovery in industrial demand as well as gas supply curtailments and outages in Trinidad, combined with the fact that on the medium to long term, we see no major merchant ammonia capacity additions expected until 2023. OCI's DEF sales in the United States also reported another strong quarter in Q1 2021, with truck sales up sharply and the SCR-equipped vehicles we keep at a record high, which, combined with the higher urea sales prices, supports an improving trend for Q2 as well as the balance of the year. Melamine markets have also tightened, driven by a rebound in demand from home renovation construction in Europe and the U.S. markets, and we've seen the melamine quarterly contract prices increased to a decade high in the second quarter, which has already been signed up. The second quarter is also developing positively for our methanol business as market conditions also remain tight. We've seen -- and we've seen and supported increases -- we've seen increases, sorry, in the May contract price as announced last week, which provides good visibility on our sales and prices out of the U.S. in Q2. And obviously, the European contract prices set quarterly, and that was set for all of Q2 late in March. What are the drivers of that? Well, we see demand recovery continuing in the U.S. and European core markets driven by demand from the end markets I discussed earlier. And then in China, we're seeing high utilization rates from the MTO side where the outlook continues to be robust. We're also seeing increases in demand for fuel applications as lockdowns come to an end. I mean, this is an important point that we raised on the last call that we think that, that area is not still recovered to pre-pandemic levels in terms of methanol and gasoline blending and then, obviously, for biofuels blending -- blending into the renewable fuels market. Second, global inventories in methanol are low as demand continues to recover strongly and new supply has been delayed. I'd like to also give an update on our ESG initiatives since our Investor Day in early March. As we discussed then, ammonia and methanol are the best positioned product to create low carbon and carbon-free food, fuels and industrial feedstock. And therefore, it can help decarbonize a wide range of end markets and industries. We continue to prioritize high impact, [ low to ] low CapEx initiatives that achieve financial returns in a short period of time while also decarbonized. As you may recall, 45% of our ESG reduction equipment is 0 to low CapEx, including accelerated operational excellence, and switch to renewable energy. Our operational -- I'd like to reaffirm our guidance that the operational excellence program, which includes higher onstream times, less [ hard ] stops and better efficiencies, is expected to yield at least an additional $75 million per year of EBITDA annually over the next 3 to 5 years, but we believe this number can be materially higher than that with the higher selling prices we're seeing. As discussed, OCI is uniquely able to decarbonize while generating positive cash returns, which is fundamental to our strategy and our core. We are pleased that we've also made good progress in continuing to expand our offering of low-carbon products to our customers. We recently signed one agreement and one letter of intent with 2 major industrial gas companies for the supply of low-carbon hydrogen to OCI Beaumont in Texas. This will enable us to produce blue ammonia at the plant up to its full ammonia production capacity of 365,000 tons starting later this year. Decarbonizing the feedstock supply will be one of the main avenues our customers can benefit from to decarbonize their own footprint and a crucial way for them to achieve their own targets. This is even more pertinent at OCI Beaumont, which is strategically located in Texas, in the center of one of the largest hubs or potential for blue and green ammonia customers in the United States. It has a large customer base that is not only an industrial feedstock space but also fertilizers where Texas is also a major corn producer and also future marine [ devout ] as we're in close proximity to Houston, one of the 4 major global bunkering hubs for shipping. I'd also like to highlight our fuels business. As our fuels business is growing at a large-scale potential for maritime and road transport in the future, we've established a new business unit, OCI Clean Fuels, which focuses on sustainable fuels. It includes our current and fast-growing biofuel offering of both bio-methanol and bio-MTBE amongst others, as well as the future use of ammonia and methanol for shipping and other fuel applications as we accelerate the transition to producing blue and green ammonia at our plant. Use of ammonia and methanol on the shipping fuels was particularly promising as these products are among the best placed alternatives to help a sector decarbonize and reach IMO targets in a cost-effective way. Since our March update, several new announcements and studies have materialized in the shipping sector, including major shipowners, engine manufacturers and [indiscernible] all endorsing the use of ammonia and methanol as the shipping fuel of the future. For example, as you may have seen, we're still a leading global shipping engine manufacturer and underscored methanol and ammonia as a more credible fuel than hydrogen-powered ships. And Maersk, one of the largest container shipping companies in the world, announcing the launch of its first line of vessels to operate on carbon neutral methanol in 2023, which is 7 years ahead of initial 2030 ambition. We see tremendous momentum building up from ESG that has resulted in many tangible opportunities in almost all our global sites, and they're all quite interesting, and we're evaluating them across all these -- all the various sites and across the global OCI group. This exciting momentum around our ammonia and methanol businesses as enablers of the hydrogen economy has also influenced our strategic review of the methanol business. Along with the accelerated strengthening of our balance sheet, market conditions for methanol have improved considerably since last year, and the outlook remains positive. All of this has shifted our focus of the review to potential partnerships of strategic nature rather than a full divestment. That facility -- and these partnerships with strategic nature would facilitate an acceleration of our growth for our Clean Fuels business overall. To conclude, we believe that based on the current visibility on volumes and pricing, we expect a stronger second quarter with higher adjusted EBITDA than in Q1, and we see 2021 as a year of free cash flow growth and deleveraging. We are now seeing the strongest nitrogen and industrial markets that we've experienced in years with the robust underlying fundamentals supporting our medium- to long-term outlook. Against this background, and even more broadly, our unparalleled asset base, coupled with our dynamic team, are uniquely positioned to achieve our exciting ESG growth agenda while maintaining our relentless focus, as always, on shareholder value. With that, we'll open the line for questions.
[Operator Instructions] Your first question today comes from the line of Christian Faitz with Kepler.
I have a couple of questions, please. I'll ask them one by one. First question would be, can you confirm that the Texas freeze impact is completely solved, i.e. there's no Q2 impact anymore from any supply chain issues, et cetera?
Yes. Thanks for the question. Yes. On the Texas incident or the U.S. freeze incident that happened in February, and -- it affected our production in February. As we mentioned, we had the U.S. plant all down during that time, but we don't see an impact in Q2. We see it as a Q1 event.
Okay. Great. Yes. Then second, on your cash flow evolution. First of all, congrats on that. Given the much improved business momentum, I would have expected a higher working capital -- negative working capital move. You seem to be managing your receivables but also your payables struggle, though. Inventory has also hardly moved up in the balance sheet. So can you comment on that?
Yes. So you're saying you would have expected to see a working capital cash outflow given how much EBITDA we generated?
Yes. Indeed. I mean, better business momentum typically leads to higher working capital outflow.
Yes. I mean, it's a good point. But it probably has to do with kind of the fertilizer season. Sometimes, in late Q1, if you have some shipments, you get prepayments from investors for Q2. So there's some from customers from Q2. So there is some prepayment activity in Q2. And then also, I think the team has done a tremendous job on receivables. And we've seen the gas impact -- for example, from a gas perspective, we got the gas payments in Q1 as well. So that helped support the working capital in the business.
We also had a very efficient and low cost securitization program that helps in ensuring the best sort of monetization possible and the reduction of the fluctuation in working capital. That doesn't mean, of course, that we will not continue to see, during certain quarters, some fluctuation in working capital, including outflows, but that is something we manage as best as we can.
Sure. Again, congrats on that. And last and final question, please, can you elucidate the rationale for the potential Fertiglobe IPO? And would that still then fit with your global strategy of ammonia/methanol for shipping? Would that be still part of your global network you talked about at your ESG Day in March.
Maybe I'll take the first question, and then to Ahmed on the second question. On the IPO rationale, I mean, there's not much we can say at this juncture, as you can appreciate. However, Fertiglobe will become our vehicle for future growth outside North America and Europe given the strategic location of the assets and its competitive cost structure, which becomes, as I mentioned during my earlier speech, more evident when gas prices are higher across the globe. And Ahmed I'm sure can comment on the positioning of the assets geographically. I think -- we think the IPO will help crystallize the value of this underlying business in the future. And that's all I can say at this point.
Yes. I mean, I think Hassan touched on it well. And with regards to just the Fertiglobe asset base, it was a major part of our ESG Day in early March, we discussed the location of the assets. And the fact is that we think it's -- from a value perspective, it's an interesting platform overall. It has very good access to the [ Suez ] market as well as the [indiscernible] market in terms of the bunker opportunity for shipping, as we've said. The fact that we have ammonia plants in 3 different countries is very helpful. When you think about the push towards new projects and new concepts and the fact that we have low -- very attractive renewable energy potential across the Fertiglobe platform, when we have renewable energy, we have ammonia plants, we have ammonia storage and loading infrastructure, we have the ability to export, and then we have the European import capabilities for ammonia that OCI has as well. When you think about all of that, all we need potentially is just bringing in and slotting in somebody to produce renewable hydrogen from renewable energy and giving us the hydrogen offtake on a low CapEx basis. So we see a lot of growth initiatives that can be enabled by an IPO of this type of business. But as Hassan said, we can't get into too much detail.
Your next question comes from the line of Thomas from Citi.
It's Tom Wrigglesworth from Citi. A couple of questions from me. Just following up from Christian there. Natgasoline, if you haven't had the interruption based on the prevailing prices, what do you think would have been kind of a reasonable contribution to EBITDA from Natgasoline? Just give us a sense of how much that could contribute in 2Q. Secondly, China exports. I noticed that you're still expecting Chinese exports to be in the 4.3 million tons for 2021, down year-on-year. Is that -- you still -- what's your conviction in that number? There's quite a lot of debate about China picking up exports. I'm kind of quite keen to gain your insights there on that. And lastly, on the -- just back to methanol. U.S. Chinese methanol spreads are quite wide. U.S. price seems quite high, and yet -- and you're quite bullish. So are you expecting the Chinese methanol price to track back higher at this point rather than weigh on the U.S. price?
Yes. Thanks, Tom, for the question. So I mean, I'm not going to be able to give you an exact bridge on the Natgasoline side in terms of the exacerbation that was caused by the freeze. But say that just looking at Q2 versus Q1, obviously, we see better average pricing, right? We see from a volume perspective, obviously, with the production, higher volume. And I will say that in terms of the gas gains that we said, that $75 million to $80 million Natgas gain, not that much of the gas gain was in Natgasoline. So that gives you a little bit of a sense around Q2 just directionally, but wouldn't be able to comment too much further on that. Your second question, trying to keep track it here was around the Chinese, Chinese export. So I mean, as discussed briefly in the prepared remarks, I mean, it's the technical urea demand that we're seeing continually step-up with the industrial activity recovery in China. It's the ag demand in China. I mean, one of the major drivers of this recovery in the ag cycle has been the Chinese corn buying we saw last year and we anticipate even higher -- significantly more Chinese corn buying this year, but also a change in approach from a demand perspective for nitrogen because, as the feedstock, with the trade war that we saw during the prior administration, soybeans, which was a major export from the U.S. to China, started getting replaced with the use of corn. So Chinese are going to be looking to find more corn, which is more nitrogen-intensive. So we think that that's another area of latent demand that's going to be helpful as well. And then lastly, India is clearly going to be highly dependent on China. I mean, India needs to import several million tons by, I think it was 4 million, 5 million tons by December, right -- or 6 million tons, sorry, by September. So they're going to have to take a lot in this tender that's going on right now, but they're also dependent on their plants running well. And we've seen some issues in start-up year-to-date on the Indian side and a reliance on their domestic production. Domestic production hasn't been doing so well. And so we think China is going to have to be there and to [ provide for ] the Indian market as well. So overall, we do think that this year will be lower than last year in terms of exports. We'll see. We're still kind of not yet halfway through the year, but a lot of favorable demand side drivers behind that. Your last question, I believe, was on methanol and the spread between the U.S. and the China market. I mean, we've seen that for some time. Obviously, we have new capacity coming online in the Atlantic Basin, but we've seen continual kind of start-ups on the Trinidadian supply side. So we've seen us and guidance from some of our peers around production rates fluctuate, and that's a major part of the Atlantic Basin, which has caused the need for funds to flow into the Atlantic Basin at times to satisfy those higher prices. So I think it's partly that, and it's the timing of new stores, which we think the new capacity addition probably comes online probably later in the summer rather than earlier in the summer just given what we're seeing in activity on the methanol side. But -- and also, usually, we've seen kind of start-stop of start-up. And then also, we see on the Chinese side, yes, Chinese prices are a bit above the marginal cash cost floor despite coal going up, but they're still long ways away from the affordability rates that people are able to pay for on the MTO side. So that looks -- we see kind of healthy demand on the MTO side with the forward curves on olefins continuing to look robust. That gives us some more conviction on the ability for Chinese prices to stay supportive. But we do need to just look at this lumpy supply as it comes down to the global markets, and we're hopeful that the demand continues -- can continue to absorb the demand growth we're seeing.
Just one more follow-up. Do you think it's possible that there's enough optimism around crop prices and the strength that you've indicated towards next season as well in 2022, that effectively, the producers of nitrogen fertilizers will resist any summer low in prices?
I mean, I think that if there's going to be a year to see that, I mean, this would be the year. What we've been seeing was a very tight market that we just haven't seen here, both for urea as well as UAN. A good run here on ammonia that we've seen in the U.S. The inventories are -- haven't been this low in a long time, and you have corn at a high level. And we're seeing even demand for sweet corn, what we've seen -- we've been hearing is quite high. So we think a lot of demand goes -- a lot of demand will occur. We've seen some cooler weather in the U.S., which has pushed out a little bit of what we expect on the germination of the plant. So we think that side risk can be pushed and extended into July. So you can -- you see -- the best way into Q3 rather than stopping in Q2, which is very helpful, and there's not a necessary reason that you have to have a big reset in price. And we think that it could be much, much more muted versus prior years and not have to offer better. And on the European side, I think it's similar. We're already seeing good AN prices in the market. And kind of on the CAM side, we're also pretty hopeful that, particularly with the higher European gas price we're seeing now that we should see muted and little decreases because people are looking 1 year out. Farmers are looking 1 year out and are concerned around the inflation in crop input prices and staying naked going into next year.
Next question comes from the line of Faisal Al Azmeh from Goldman Sachs.
Congratulations on the strong set of numbers. Two questions on my side. Maybe firstly, we're thinking about the potential IPO and the proceeds from the IPO, given the deleveraging process that you've already achieved so far and how you're progressing. What potential uses for the proceeds do you have in mind if the IPO takes place? And I was just trying to get a sense of cash deployment options should the balance sheet condition improves. And my second question is really on the supply side of the equation. I mean, you've highlighted a few points on demand. But when thinking about Nigeria and some of the larger facilities that were supposed to come online, what are you hearing? What are you sensing in terms of their ability to bring that capacity online on time? And how does it impact the market?
Maybe I'll take the first question and defer to Ahmed on the second question regarding the new facilities, urea -- I assume urea facility you're referring to. On the IPO process, I mean, again, very early on in our -- in the process. We continue at N.V. level to be committed to optimizing our capital structure and getting to an investment-grade profile through the cycle. So it is logical to think or to assume that in the event of such an IPO taking place, that the proceeds from this IPO will continue to contribute to this target and just create more flexibility in our decision-making going forward, looking at various avenues of deployment. But the priority continues to be, of course, getting our balance sheet to where we want it to be comfortably on a run rate basis. Ahmed, I defer to you on the...
Yes. I mean -- yes. So -- and I'll just add, I think one of the major things that I think has been a success has just been the decrease in interest expense that has still a long way to go, and we really want to bring down that interest expense so that we can achieve EBITDA to free cash flow bridge, which we think can be quite exciting for OCI specific. Can you repeat the question, Faisal, with regards to you said -- did you say Indian and Nigerian custody were the questions, Faisal?
Generally, on the supply side, when looking at some of these newer facilities that were supposed to come online, what are you gauging in terms of their ability to bring that capacity online? Do you feel that the market is experiencing further delays? Or do you see these facilities coming online at some point? And how do you assess their ability to impact the pricing in the second half of the year?
Yes. I mean, we're no stranger to delays in construction projects on newbuilds. So it's a tough process. And as I mentioned, I think previously, particularly, COVID makes it very difficult. So we continue to see delays on some of these urea capacity expansions. We did see the capacity online in India that has had issues already. And I think one of those plants is probably supposed to be done, I think, first of June. And that obviously impacts some of the demand that India is going to need for the next tender or for this ongoing tender. With regards to Nigerian capacity, I mean, that projects continue to be delayed, but we think that now that it started commissioning, we've heard of some issues on the commissioning side as well as delay in completion of port infrastructure, which means that they'll probably be more affecting the domestic market rather than global markets. But obviously, something to monitor, something we look at, something that our methanol -- sorry -- our Fertiglobe urea team is actively focused on, and at times, could potentially be a distributor for some of these producers as they come online and has been building up its capabilities to do it in a high -- highly effective and low-risk way to place products in the various downstream markets that we look to that our product is in.
Maybe if I could just squeeze another question. Just on the partnerships on the methanol side, I mean, are you in advanced stages or early stages in terms of negotiations? Or how can we think about that?
Yes. I mean, I can't go into too much -- I can't really comment on that at all. But just say -- and to reiterate what we said earlier, which is that we don't see this as a financial-sponsored type investment. If we do entertain something like that, it would be strategic in nature where we get value out of that strategic partnership or investment from these strategics that can help us accelerate the growth trajectory we're already on from an ESG perspective when it comes to methanol and overall clean fuels. So that's really the focus here. And obviously, if we have any updates, we would provide them.
Your next question comes from the line of Henk Veerman from Kempen.
Congrats to the strong start of the year. I have 3 questions. The first one is on Fertiglobe, which was probably your best-performing division this quarter. Was it -- again, did not pay out a dividend to your noncontrolling shareholders. Can you remind us what the total dividend accruals at the end of the quarter? And can you give us any idea on, let's say, the size of dividend payments for the next quarters? Then, yes, my second question is on the capital allocation. I was wondering because you're now at 3x net debt to EBITDA. Let's say, excluding any effects from a potential IPO of Fertiglobe, I think you will -- yes, you will materially go below 3x net to EBITDA towards the end of the year if the season progresses, yes, as expected. Can you then already pay out or will you consider paying out a dividend over 2021, next year? Or is, let's say, the 2x a very sort of hard target? And then my third question is on the methanol partnership, more of a follow-up. I was wondering, do you -- will you sort of pursue, yes, a sort of a partnership where you have majority ownership, like compared to -- similar to the Fertiglobe partnership where you -- yes, which allows you to fully consolidate -- or continue to fully consolidate the methanol business? Or is, let's say, more of an equity accounted structure more preferred?
Thank you for the questions. Maybe I'll kick off with the -- answering the first 2, defer to Ahmed on the methanol strategic partnership question. In regards to your first question, it's true, it's not obvious in the financials, but we don't give specific information on the seasonal advance on the dividend extraction. But what I can say is that the free cash flow conversion profile of Fertiglobe allows for very healthy dividends on an annual basis and we believe, on a continued basis. And the timing of that may not be, let's say, normalized on a quarterly basis. So we did take out a dividend, for example, on the 1st of April from Fertiglobe, it just didn't appear in the financials. Secondly -- in terms of your second question, I mean, it's true. We did achieve our net leverage target of 3x early. We had set the target for ourselves a few months -- several months ago. For year-end, we achieved it at the end of Q1. So given that we are guiding for further deleveraging in Q2, and we continue to see a good fundamental backdrop in both our nitrogen and methanol market for the remainder of the year, I think the combination of those variables would indicate that our deleveraging trajectory should continue in a healthy manner. We're not giving any further guidance at this point of what the exact number is, but I think it's not difficult to reduce the direction of travel. Ahmed, would you -- sorry. And just the second part of your question, regarding the 2021 -- whether we will consider returning capital to shareholders. I mean, we are obviously -- again, as we achieve our -- as we continue to focus on achieving our sort of balance sheet optimization targets, I think all options are on the table in terms of the deployment of our free cash flow. We think the fact that this year and next year are important years in terms of our deleveraging, that this gives us the flexibility to look at various avenues for our free cash flow deployments.
Yes. And just to answer that last question -- thanks, Hassan. And just to answer that question in terms of the form of the partnership. I think I wouldn't really be able to comment on what that would look like. I would say that just generally, we'd like to have -- with what Hassan and I mentioned earlier, and I think we mentioned on prior calls, the fact that we've delevered significantly and -- versus where we are when we -- where we were when we started the strategic review as well as the improvement in supply/demand for methanol that we've seen and the continued outlook where, over the medium to long term, demand continues to actually supply. And then third, and last but not least, is the ESG profile. We want to continue to have good skin in the game on the methanol side. And we -- our whole focus is to try to get enough resources and kind of overall achievability of creating the value that we think underlies our methanol and ammonia commodities. On the methanol side, like I said, we -- we're still -- we're in London right now, still pretty much in lockdown, all going to be released in kind of a week or so. We think that the second half of the year should be great for biofuels -- for our biofuels business that hasn't had that benefit. And we think that as things are trending in the right direction overall for methanol as well as transportation, fuels, methanol and the feedstock. And for methanol, in the shipping fuel. So we still want to have a big part of that business going forward, and that's why we gave the update on strategic guidance here.
Next question comes from the line of Frank Claassen from Degroof Petercam.
Two financial questions. First of all, on the profits you made on the gas hedge, the $75 million to $80 million. You've already indicated limited for Natgasoline, but could you roughly break down how much was for Beaumont and how much was for Iowa? That's the first one. And then secondly, given your strong deleveraging, could you update us on how much lower your interest charges could be in 2021?
Yes. I mean, I don't want to go into more detail. I would say just as it had a bigger impact on Beaumont and IFCo rather than Natgasoline. And Natgasoline Q2 does look stronger materially than Q1. To split it out between Beaumont and IFCo, what we did is we just provided the net amount across the plant. So I wouldn't be able to give you a breakdown between those.
Yes. And on the interest cost guidance, I think we've -- similar to what we covered briefly during the last conference call, we continue to guide for circa $60 million to $70 million lower than 2020 in terms of cash interest, but that excludes debt modification costs, which, of course, will be -- which as you know, was part of last year's numbers, but this year, will depend on what capital structure activities we have -- we undertake in the balance of the year. But in terms of sort of run rate, $60 million, $70 million lower. And we still think that this should continue to decrease in 2022 and onwards. As we find opportunities to reduce our interest costs, we talked about the step down in RCF on an annualized business. We have some callable bonds, which will also help eventually reduce some of our expensive debt to reflect the sort of the profile -- the evolving profile of the business as we -- and reflect the sort of the cash flow generation that we're experiencing in -- this year.
Your next question comes from the line of Lisa De Neve from Morgan Stanley.
So congratulations on your very strong performance in the first quarter. Two questions. The first one is on UAN. So I mean, what are you seeing in U.S. UAN markets? It seems that it has been very strong so far year-to-date, but I also believe there's quite some risk for incremental imports from Russia. So just wondering what your expectations are for the second quarter and rest of the year for UAN and what you're seeing. That's the first question. And then secondly, going back to earlier questions on the divestment of the methanol business, and I'm really sorry for bringing this up again, but what I mentioned to this, I mean, what type a partner would be valuable to? Or in other words, what would you consider as a value-added contribution from a partner's perspective, perhaps something on the ESG side or something? I would be more interested to know what a partner could bring to the table for you and what would be of your interest.
Sure. So with regards to UAN question, yes, we've seen a fairly strong market. We've actually seen inquiries. Even this week, we're doing inquiries on Q3 bids from customers. They weren't too far below where some of the markets are at today. So like I said earlier, I think low inventories, high crop prices are getting people concerned around, okay, with next year when you're seeing the corn soybean ratio looking favorable. Your question on Russia is a good one, and I think that's always something we have to focus on because of Russian selling into the U.S. markets. But there's a few other things going on, which is, one, people look at going potentially into Europe still as well. We've seen sanctions on the Russian production side affecting the supply and demand of UAN into Western Europe. I think right now, it's not a very high period of activity for UAN, but we think that there's still some movement upwards on the European side for UAN, which bodes well for that arc between Europe and the United States. And we've seen Russians produce a bit more urea instead of UAN and have a stronger domestic market in the past. And we've seen, obviously, the reliance, as I mentioned, on Trinidad and UAN coming in as well. So there are a few different elements that play. I think one advantage that U.S. producers have is the infrastructure that is in place in terms of storage and railcars and customer relationships and all of the above. I think we have to continue to watch for the Russian imports because they do and they have come in, but we have to look at the global supply-demand balance and also the -- what the starting inventories will be this year. I will also mention that we do think that there is a -- that there are more turnarounds in this nitrogen market in the U.S. in 2021 versus 2020. We think a lot of turnarounds have been delayed, which is supported for that in these -- particularly during the low period. So that's on the UAN question. Your second question, with regards to the partner -- I mean, I think it's -- all we've said is it would be -- something that would be strategic in nature that adds value, not financial. In terms of giving detail around it, I mean, it's one where if you were to think about the trajectory that we talked about in the last few months that we want to achieve, which is low carbon feedstock to get an -- a very valuable decarbonized methanol and industrial feedstock and as a fuel, like we're seeing on the ammonia side as well, we think that's very powerful. As I stated a few times, many companies globally are getting the push towards setting out decarbonization targets. Well, how are you going to reduce your carbon? You're going to go back to where is the carbon produced, and it was often produced very close to hydrocarbons, which are natural gas, oil and other feedstocks. There -- our ability to have lower carbon feedstocks like we've now shown that we've been able to do in [indiscernible] green ammonia, in our bio-methanol business globally and in our blue ammonia out of Texas. It's about filing and putting puzzles and pieces together to get further distribution downstream and/or lower carbon feedstocks upstream so that we can accelerate our push and create that shareholder value and monetary returns while decarbonizing and achieving our targets for the balance of the decade.
Your next question comes from [indiscernible] from Berenberg.
One question concerning the Beaumont plant in Texas. So the volumes you indicate for blue ammonia imply 100% of capacity. So can you comment a bit around the timetable and when you expect to reach such capacity? And third question, how should we think about CapEx from 2022 onwards?
Yes. So with regards to the blue ammonia capacity, obviously, we're very excited to now have the ability to have a decarbonized ammonia product for the food, the fuel as well as the feedstock chain. Our goal is working with our customer base now that we have this offering. And like I said, it starts later this year to be able to convert 100% of our production into blue. So figuring out how to get that distributed downstream and doing it in a way that's a win-win for ourselves as well as for the customer base. So we're working on it as we speak now with the customers. And most importantly, we have the ability and the option to switch into blue ammonia, which we think is on a relatively attractive basis. Okay. And then the other question was with regards to CapEx. Yes. So your question was what, sorry, on the CapEx side?
Yes. That could have an impact on 2022 CapEx...
Just to give examples of no CapEx initiatives, the low to no CapEx initiatives to decarbonize while kind of achieving financial targets as well in the process. So like I said, during our ESG Day, we're looking at that big portion -- the low-hanging fruit, and this is one of the areas and an example of some of the low-hanging fruits that we're looking at to decarbonize and significantly reduce our footprint while also creating value without having a big CapEx outlet.
Yes. Understood. And the second question on the nitrogen supply. Do you see room for Iran to have a further participation in urea exports? Or do you think the bulk of this growth is already behind us?
So we've seen Iran and continue to participate in various markets on the urea side. So they've not -- they've definitely not disappeared. I mean, they just reallocated some where the product is going. One of the areas they were going to was previously with India, but they've now gone to many other markets as well. And as we said before, I mean, we're going to see how things play out on the Iranian side, but we think that it puts Iran in a very tough position when they're exporting, and they're having to put effectively built prices to use satisfying measures to get products from their source to a destination that doesn't want to do this in a straightforward way. So we think that to the extent they're able to sell not just for a fraction above marginal cost, which is [indiscernible] not only on the urea side, but also on the ammonia methanol side. We think that their ability to be a competitive player and actually sell well above marginal cost and where the prices would bode well for the 3 major products that are produced out of Iran that we also compete in. So these discounts that we continue to see on the urea side, $50, $60 on the methanol side, sometimes even larger, I think, disappears. And then it's questionable in terms of the amount of additional incremental volumes that could come from that because they do still suffer from the gas shortages in the winter and the fact that some of these plants were built using non-proven technologies during periods of sanctions -- during earlier parts of the last decade.
Your next question comes from the line of Rikin Patel from Exane.
Just 2 actually. Firstly, on the market, you spoke about India earlier in terms of demand and supply balance, but just curious if you could provide some insights into the current tender and how you think that will impact nearer-term pricing. And then secondly, just following up on the first global IPO, and I appreciate you're limited on what you can say. But in terms of the remaining business, methanol side, how does this impact your thinking on further portfolio transformation in the U.S., personalize your assets or Europe going forward? That would be helpful.
Yes. I mean, the offers have just been kind of published, I think, in the last few hours on India tender. And we're going to see [indiscernible]. It's a little bit too early to speculate. But we do think is that India does need to take this IPO of course. I think the offer comes from a $2.2 million, $2.3 million or something, $2.6 million. $2.6 million [indiscernible]....
$2.3 million.
$2.3 million does take 1.5 million tons via the tender roughly. And they're going need to come back every 90 days until September to make sure that they have enough production in the market. They went for a longer shipping period, which is indicative of needing to take more tons going -- I think they're closer to 50 days versus closer to 40 days that they've done in the past, which really cleans up May and June for some of those lagging funds. And some producers have, we think, sold into other markets in the meantime while there have been delays on this India tender. We think that this will be a good way to kind of continue to suck up the supply out of the various markets, including China, over the course of the summer. We also think Latin America can -- will continue to need to import products, Australia as well in the next few months. And as I mentioned, we're excited, particularly with what we've been seeing in Argentina, it's quite strategic for us in that we've been benefiting from a duty exemption that allows us to be very well in place for our different products going to Argentina. Obviously, the next 1.5 months still has the U.S. and European markets still applying urea for top [indiscernible]. And we're seeing -- and we've seen over the last few years -- you may have seen continual focus on urea where, actually, I think July futures are above June where there's a concern again that I mentioned on the UAN side. There's that concern again about having enough product in the U.S., which is -- it'll be an interesting year to see how NOLA performs relative to global markets. But the U.S. has also quite a lot of inventory, and I think it's surprised with the fact that it continues to be the highest price [indiscernible] the world stretching into May and potentially into June, and Brazil is racing up with it as we speak as well. So we'll see how that unfolds. Can you repeat, sorry, your second question?
Yes. No, just on the remaining business following the IPO of Fertiglobe, the fertilizer assets that is. Has this impacted your puts on further portfolio transformation? Are you selling further assets in Europe or the U.S. or any sort of other partnerships?
Well, I think Hassan kind of went through some of the rationale behind the IPO itself with Fertiglobe. Our strategy and focus and kind of what we're looking at globally as the team continues to be focused on the same thing, which is operational excellence, getting the most out of our assets. I mean, the fact that we had over a 30% increase in methanol volumes despite the downtime at Natgasoline in Q1 bodes well for what we see for the remainder of the year on the methanol side, and we want to achieve that. With regards to the fertilizer assets, we also still see further optimization potential in the 2 assets we have outside of Fertiglobe, in terms of both energy efficiency and onstream time. Then very related to that, and it's hard to decouple it, is our ESG focus and the different opportunities there. Obviously, operational excellence is a part of that. But like I said, almost every single site globally has multiple initiatives being reviewed that are either upstream feedstock related to decarbonize or downstream customer related. So we're seeing a lot of different avenues to decarbonize that are very interesting on the demand side and on the -- and utilizing our existing infrastructure side. When you say, in terms of divestments, I mean, we're going to continue to look for value creation opportunities. We like the fact that we can -- we will also demonstrate our potential for -- in this type of environment as we delever and we get our operational excellence up, decreasing the cost of EBITDA and free cash flow more and more so that we have more capital within the OCI system and have to decide how we allocate that capital across the different initiatives. And we're always looking for opportunities to consolidate it. Our anticipation with this Fertiglobe IPO, we don't lose the fact that there is still the strong OCI presence in the ecosystem with Fertiglobe to allow for a continued consolidation, what is still a fragmented industry that's in dire need of consolidation relative to other commodity chemical markets.
Next question comes from the line of Chetan Udeshi from JPMorgan.
I had 2 questions. First is, can I confirm, when you say Q2 adjusted EBITDA higher than Q1, are you including the gain from natural gas in that comparison? So are we talking about comparison versus Q1 with the natural gas included when we talk about Q2 higher than Q1? That's the first question. The second question was a bit more technical, if I may. Within your Middle East business, especially in Algeria, there is an arrangement where the minority holder in the Algerian JV is paid higher dividend than the proportionate share that they have in that business. How should we then think about the economic interest of OCI overall in the Fertiglobe? Because I think it's fair to say you have a share in Fertiglobe. But within your share, there are also minorities who might have higher economic increases given the structure of the dividend payments.
Yes. I can take that. I mean, regarding the first question, yes, the guidance, I mean, we're not going to be cheeky. The guidance is -- that includes the Natgas gain. So that's included. We're going to -- we believe we're going to be having a better quarter in the second quarter on top of that. So again, that's a reflection of the backdrop of some of the best markets we've seen, and we are positioned with a unique profile of assets that has some of the best cash flow conversion, youngest suite of assets in the industry. And despite that, we still have opportunities from -- based on manufacturing excellence program to find further efficiencies and volume step-ups. I think we've demonstrated even in the sort of the -- in lower price conditions, that we were still able to generate free cash flow and improve our leverage profile in the last 2 years. So now with the uptick in the market, it's a very different story. On the second question, yes, I mean, that something has been -- we've been very -- it's known to investors and analysts. So we always discuss it in all of our meetings, that you pay, we distribute or the net economics in Algeria are about just under 40% our share. The way we look at it, it's kind of like looking at the gas -- the very low gas price and the fact that there is no income tax in Algeria. So we kind of look at it on a consolidated basis. So whether you look at it as a form of an income tax or whether you look at it as a form of a normalized gas price, this is kind of -- it's structured as just a higher share of dividends. And yes, I mean, we are -- we do have minor partnerships in our ecosystem concentrated in Fertiglobe. And that's why we always guide to -- whenever there are distributions, there's going to be minority interest leakage. It can be lumpy at times, depending on the timing of extraction. But as the Fertiglobe business is now having an excellent year, and we highlighted it in the first quarter, naturally, there'll be some higher leakage associated with that because we're going to be extracting very healthy dividends going forward, because this is a business with a cost structure that has very interesting free cash flow conversion possibilities as prices go up with a fixed gas cost regime. It's uniquely -- it keeps improving on the -- on sort of the cost curve.
Your final question comes from the line of Roberto Casoni from Otus Capital.
Most of my questions have been answered already. But I have one, which is possibly related to the Q2. I mean, it's still unclear to me what Q2 is going to be developing like. I mean, if I just look at the nitrogen, ammonia and urea price, I mean, Q2, of course, is going to be much better than Q1. Actually, it's possibly the easiest comp next -- this quarter in terms of sales. But it's not clear, particularly ex Fertiglobe, is how the natural gas price will impact. And you say that you hedged the Natgas, and this should be included as a gain in Q2. This is something I can actually -- don't understand. So what happens when the hedge is not there anymore? I mean, can you elaborate a bit better how should we see Q2, particularly ex Fertiglobe in terms of margin expansion, ex also the hedge, if it's possible?
Yes. I mean, fair question. I mean, just with regards to the hedging, the hedging gain that we had, that Hassan referred to in the last question, was a Q1 event that we had pretty strong winter hedges in place. So that type of hedging is not in place here in Q2. It's the effect that we had in Q1. And the team did a really good job of being able to resell gas at times also monetize financial derivatives at times to generate a net gain of $70 million to $80 million.
Okay. And that gain was mainly in the U.S.
That gain was only in the U.S. So we had a $25 million hit relative to last year on higher gas cost in Q1 that we -- that are in the results you've seen to date.
Right. So we can say without the hedge -- sorry for interrupting you. Without the hedge, U.S. would be EBITDA single digits in millions.
Single digits?
Yes. I mean if you have the $70 million, $80 million, $75 million, $80 million impact positive in the U.S., and EBITDA in the U.S. was $80 million in Q1, I'm talking about nitrogen only...
Okay. That's where I think the confusion is. You're saying nitrogen only. I'm saying this is across methanol and nitrogen including...
Okay, okay, okay. That is where -- okay.
It was a net gain of that amount.
Now it's clear. So now having clarified it, how should I expect -- I mean, should I see margin expansion at Fertiglobe in Q2 then?
Yes. I mean, generally, we're -- obviously, there's volatility. As we said, with the price environment we're seeing today and the fact that we're able to sell some visibility on Q2, yes, we should see marginal expansion outside of Fertiglobe in Q2. There's been obviously a run-up in gas prices the last few days in Europe. I think I mentioned earlier, that could result in some lower margins. But overall, we see that as a positive to capture -- one of, I think, the questions from Citi earlier was in terms of people, how they think about the summer reset. When you have higher gas prices, you have 2 of our 9 plants, 2 of our 9 plants experiencing the higher gas prices, but also all the European plants -- Eastern European plants and ones that are less efficient hang those higher gas prices, pushing up the gas price floor, which we think will build for the broader system. And this drives overall, our guidance for overall business for a higher Q2, including gas gains of Q1, higher Q1 EBITDA.
We have no further questions if you wish to continue. We have no further questions on the telephone line, sir.
Well, thank you, everybody, for joining our call, and we look forward to the next.
Thank you. That does conclude your call for today. Thank you all for participating, and you may now disconnect.