OCI NV
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OCI NV
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Hello, and welcome to OCI N.V. First Quarter of 2022 Results. My name is Elliot, and I'll be coordinating your call today. [Operator Instructions] I would now like to introduce our host, Hans Zayed, Group Investor Relations Director. The floor is yours. Please go ahead.
Thank you. Good afternoon, and good morning to our audience in the U.S. Thank you for joining the OCI N.V. First Quarter 2022 Conference Call. With me today are Ahmed El-Hoshy, our Chief Executive Officer; and Hassan Badrawi, our Chief Financial Officer. On this call, we will review OCI's key operational events and financial highlights for the quarter, followed by a discussion of OCI's outlook.
As usual, at the end of the call, we will host a question-and-answer session. The quarterly reports, financial statements and the presentation are available on our IR website. I would like to remind you that any forward-looking statements made on this call involve risks and the actual results could differ materially from those statements. With that, let me hand over to Ahmed.
Thank you, Hans, and thank you all for joining us today. We're pleased to announce another set of excellent quarterly results with an adjusted EBITDA of just under $1 billion for the quarter and $3 billion for the trailing 12-month period and the reduction in net debt by approximately $1.8 billion in the past 2 quarters alone on the back of solid free cash flows, taking us down to a very low net leverage level of 0.4x on a consolidated basis.
Despite Q1 typically being the weaker one ahead of the -- the weaker quarter ahead of the Q2 seasonal strength -- this is a continuation of our strong performance in the fourth quarter of last year when our end markets started recovering from a prolonged 5-plus-year downturn, and we're already starting to see things get tight. The conflict in Ukraine and subsequent sanctions on Russia have tightened the global nitrogen grain and energy markets even further over the past few months, and these supply and trade challenges could extend well into 2023 and beyond.
As many of you know, the difficulty associated with this crisis is large because Russia and Ukraine account for almost 30% of global grain exports, but almost 28% for wheat, 19% for corn. As well as on the nitrogen fertilizer side, 25% of ammonia and UAN exports and around 15% of urea trade globally. So a very big effect on our markets.
At OCI, we aim to address potential grain shortfalls in overall food security concerns by producing as much product as possible and filling in supply gaps that may arise. That's the message to our global team, and I'm happy to say that everybody is taking that in full stride, and we're putting our heads down to try to achieve that following our operational excellence strategy, which we've been pursuing for the last several quarters and is part of our medium-term plan.
I'd like to thank all our employees for helping to make this happen and for their strong commitment to improving and growing our business at the same time. A lot of hard work has gone into bringing us to this point, and I'm pleased with what our dynamic team in state-of-the-art asset base can accomplish.
As we discussed in February, we are excited about our strategic growth opportunities that can both decarbonize and grow our asset base in a value-accretive way for the future hydrogen economy, while also returning capital to our shareholders. We will discuss our capital allocation priorities in more detail as well today. But before we go into more details, as always, I'd like to cover our top priority, safety as we want all our employees and contractors to go home safe every day at OCI.
Our 12-month recordable incident rate at the end of March was 0.35 incidents per 200,000 man hours at the same levels as of the end of 2021 and well below industry averages. Despite being below these industry averages, we continue to stress our relentless focus on operational and process safety and avoid incidents at all costs. We also see safety -- we also see safety as a virtuous circle. As we improve and focus on occupation and process safety, reliability and even energy efficiency will increase all part of our operational excellence program.
Turning now to some of the highlights of our performance during the quarter. Our own produced sales volumes were 13% lower at 2.6 million metric tons during Q1 2022 compared to Q1 2021, and this can be explained by 2 main reasons. Firstly, on the nitrogen side, there was a more significant shift of sales volumes from the first into the second quarter of this year as we built up inventories of approximately 400,000 tons. The U.S. spring application started late in the quarter due to cold and wet weather and some shipments from Vertigo also moved from Q1 to Q2. With the majority of our volumes already committed for Q2, we are now benefiting from a combination of strong in-season demand in Q2 and from higher netbacks, which just set up for an even better performance this quarter, in Q2. This also provides a good visibility ahead and sets us up for a strong second half of the year.
I'd like to also highlight our Dutch nitrogen operations, which did well as we continue to operate and maximize our downstream production in Europe by sourcing ammonia volumes from our operations in the Middle East via Fertiglobe as well as in the U.S. to support our downstream production. By doing so, our underlying performance in Europe improved year-over-year, and we continued to provide essential nitrogen fertilizers to our European agricultural customers. This unique supply chain is one we can leverage in the future by importing low and no carbon hydrogen in the form of ammonia and methanol, which can help decarbonize the EU and reduce its reliance on imported natural gas during these difficult times by reducing natural gas consumption and importing the product, whether it's ammonia or methanol.
Secondly, from a volume perspective, methanol volumes declined 44% year-over-year as BioMCN remained shut due to the high gas price environment in Europe since we shut the plant down in middle of last year. And we also had some downtime at Beaumont, but that was partially offset by higher production at Natgasoline.
Lastly, I'm happy to report continued strong improvement in our financial standing and balance sheet, which positions us well for returning capital to shareholders as well as pursuing -- allowing us to pursue our unique decarbonization of growth initiatives. I'll now hand it over to Hassan to discuss the financial results in more details.
Thank you, Ahmed. I'll begin by commenting on all of the transformation and series of events for the company these last few weeks. We are pleased with the recognition for our performance and trajectory from all 3 credit rating agencies, including S&P, Moody's and Fitch, who all upgraded OCI to investment grade a few weeks ago, all with the stable outlook, mentioning OCI's financial policy, strong underlying performance and supportive market fundamentals. This follows the significant transformation of our capital structure and consistent deleveraging over the past 2 years with net leverage reaching 0.4x at the end of Q1, as Ahmed mentioned in his introductory remarks.
Our consolidated gross debt further declined by [Indiscernible] million during the first quarter to just over $3 billion. Net debt dropped by $960 million during the quarter to $1.26 billion. The ratings upgrade coincided with the successful refinancing in full of the Iowa Fertilizer Company existing bonds, previously existing sort of project finance like debt through an $835 million taxes at municipal bond offering. This refi extended the average life from -- of the debt from 7.5 years to 22 years with maturities through 2050, issued at a yield below 5%. The bonds received an investment grade rating, although issued by IFCo, [Indiscernible] giving us the benefits of the diversified debt in the U.S. tax-exempt municipal bond market, while pricing reflecting OCI business profile. This refi removes all previously existing restrictions on dividends from IFCo and dissolve all covered.
Simultaneously, we also successfully restructured our revolving credit facility, which we upsized to $1.1 billion from $850 million with a 43% reduction in costs. The RCF is currently fully undrawn. The restructure also triggers all our debt to become fully unsecured across all MV debt instruments, another milestone for the company.
Turning to the quarter's results. OCI's consolidated revenue increased by 108% to $2.3 billion, and our adjusted EBITDA rose by 115% to just under $1 billion in the first quarter compared to the same quarter last year. As we continue to benefit from higher prices for all our products. Q1 EBITDA can be considered higher than the fourth quarter of 2021. If we exclude the EUA gains of $90 million we made [Indiscernible] during the fourth quarter. Our consolidated adjusted income also saw a market improvement and reached $352 million for the quarter. Our reported net income increased by 316% to $410 million. We also generated $609 million of free cash flow during the quarter, excluding $375 million of gross proceeds we received in February for the sale of 15% stake in our methanol group, resulting in the aforementioned decrease of $960 million in net debt. We achieved this result despite net working capital outflows of $196 million during the quarter due to a buildup of inventories ahead of the application season.
With these results and balance sheet improvements, we are committed to returning capital to shareholders and balancing that with further value creation through looking at highly accretive opportunities, all of course, within the framework of continuing to maintain our investment-grade status. With regard specifically to return of capital to shareholders, we announced a distribution for the second half of -- based on the second half of last year of EUR 1.45 per share, which is on schedule to be paid in June. Based on our current outlook, expected free cash flow for H1 2022, we believe this can support a significantly higher cash distribution in our next payment to shareholders, which is scheduled for October 2022.
With regard to growth opportunities and our forward-looking CapEx, we continue to make good progress in efforts to capture various opportunities from emerging demand for blue and green hydrogen as we aim to leverage our existing sites, unique strategic advantages. We are continuously developing, evaluating and exploring such projects across our platform, and this could result in new investments translating into growth CapEx.
Looking forward, we estimate up to $350 million to $450 million of growth CapEx for 2023, which includes previously announced projects. However, ultimately, all projects will depend on factors such as governmental policies, incentives and market developments. And looking at such projects, this will be -- all our growth plans are subject to, of course, maintaining a commitment to remain investment grade, meeting our investment return thresholds. And our capital allocation strategy needs to ensure consistent distribution to shareholders while pursuing such growth opportunities.
There is no change to our 2022 guidance as we continue to expect around $300 million of maintenance CapEx. In addition, we expect to be within the range of $75 million to $150 million of growth CapEx depending on the various progress on existing projects. So with that, I invite Ahmed to provide further commentary and color.
Thanks, Hassan. We're excited about 2022 and beyond as the outlook remains positive for the foreseeable future. If I start with the outlook for nitrogen markets. The broader nitrogen market outlook for the next year is looking highly promising with several key drivers supporting a multiyear structural tightening and demand-driven market pricing that started in the second half of last year.
Firstly, strong crop prices and corn futures above $6 to the end of 2024, driven by decade-low stock-to-use ratios, which require more than 2 seasons or so to replenish assuming strong nitrogen application is one major driver from a demand perspective. These crop prices, as a result, healthy farm economics, highly incentivized farmers to increase acres across all crops and maximize yields by using more nitrogen in grain exporting regions such as the U.S., Brazil, Europe and Australia where demand is expected to be robust in 2022 and 2023.
In India, we also expect strong import demand for urea in 2022 with a series of tenders expected to be issued over the coming months, including one that's going on this week to replenish low stock levels and support kharif demand, which is expected to be higher than last year, given forecast of good monsoons and nitrogen subsidies in place supportive of farm economics. This obviously is important so that we can continue to produce as much crops, get higher yields, produce crops and add more supply and increase our stock-to-use ratios globally on the grain side.
Secondly, global input costs are raised for the medium term and as demand growth exceeds supply, pricing has supported -- support remain above these high marginal cost floors even during periods of high volatility. Gas price futures in Europe currently indicate approximately $30 MMBtu for 2022 and $23 an MMBtu for 2023 to 2024.
To put this in perspective, the higher feedstock prices are providing strong support for our product selling prices, with the marginal cost nitrogen producers in Europe, setting support levels for ammonia, to over $1,300 a ton in 2022 and $900 a ton in 2023 and 2024, and these costs include CO2. This is based on the forward curve. That's 4.5 -- 4 to 5x higher than the low 200s per ton support level we saw during the downturn between 2015 and 2020. Two other factors are tightening markets even further. 3 million tons of new capacity has been expected to start up in Russia in the next 3 years, but these are now subject to meaningful delays and potentially even risk of cancellation. Outside this, net urea capacity additions in the next 5 years is more than offset by demand growth resulting in a market deficit of 9 million metric tons over the medium term.
The Chinese government has also implemented China inspection quantity controls to curb exports and prioritize domestic supply until the second half of this year, and very recent reports suggest this could last until the middle of 2023, which has the potential to tighten the market even further. These inspection measures mean that Chinese producers can apply for export licenses, this currently, though takes 45 to 60 days, but only limited volumes of exports are likely to be allowed. As such, we expect that China will export some volumes over the second half of this year with the end of the domestic application season, which we typically see towards the middle of the year, but exports are expected to be significantly below the levels seen in prior years with recent developments like the one I just talked about here, suggesting exports for the full year 2022 may actually be under prior estimates, which have been in the market of around 3 million tons.
Finally, the merchant ammonia market is also structurally tightening with very limited supply growth, resulting in a supply deficit of 4 million tons over the 2022 to 2026 period, compared to a net surplus of 7 million tons in the 2015 to 2019 period. This does not even take into account the additional demand upside from emerging blue and green ammonia demand, which, as we've said previously, should start picking up quite significantly towards the middle of the decade and definitely towards the latter half or the end of the decade.
Now shifting our attention to the methanol markets. Methanol market fundamentals remain healthy, supported by higher oil prices and strong demand for several derivative segments, including MTBE, MMA and formaldehyde. There are also no new major methanol supply production points expected to come onstream in 2022.
Methanol to olefins or MTO operating rates in China have also recovered to more than 80% in the first quarter, and are expected to remain healthy in the quarters ahead with the affordability of methanol currently at very attractive levels. A new 1.8 million ton per year MTO facility is also starting up in China later this year, which should provide a further boost to demand.
Today, methanol can be used as a low-cost and cleaner alternative for multiple fuel applications worldwide, including heating and transportation as it is cheaper than LNG and gasoline. Methanol is easy to ship and store and is a clean burning fuel that produces fewer harmful pollutants such as SOx and NOx. The heating value of methanol, today where we stand is the cheapest it's been in the last decade, relative to LNG and some of these oil products like gasoline, which we think can result in significant potential demand upside as additional methanol blending in gasoline can, for example, meaningfully reduce fuel bills for major companies, blenders as well as governments. So basically, substituting in methanol for ethanol or subsiding in methanol for gasoline is a way where we could see more demand enter the market, and it also saves money for the ultimate end user. And as we said, it's an easily transported and stored product that's familiar to a lot of these major players.
And also, we also have strong visibility on the medium-term pricing environment as we continue to expect tighter methanol market fundamentals with incremental demand expected to exceed new supply by 8 million tons through 2026. This, like in the case of ammonia, does not consider the additional upside from hydrogen fuel demand, and we've obviously seen steps in that direction on the methanol side, particularly in the marine space.
To conclude, before we go into Q&A, we are excited about the prospects for the company. In 2021 and 2022 year-to-date, we saw the start of a strong and we believe sustained general improvement in nitrogen pricing after a protracted downturn. We expect prices to come down from today's levels over time, but a much higher marginal cost floors on the nitrogen side than we've seen in the past. OCI's nitrogen and methanol assets are favorably positioned on the global cost curve, and we are a net beneficiary of a higher and volatile global gas price environment. In addition, we have some long-term hedges in place for all our operations in the United States for the next 5-plus years that we believe were at attractive price levels, and obviously, we have the Fertiglobe advantaged gas pricing from a supply perspective.
Our end markets are looking positive into at least 2024, higher crop prices, healthy farm economics and feedstock spreads between regions give strong support for nitrogen prices to remain above historical averages. We also see large upside from additional demand emerging in a range of new applications and sectors due to the hydrogen transition on hydrogen economy, notably for road and marine fuel applications where ammonia and methanol are ideally positioned, as well as in the power markets. This represents meaningful long-term upside, and we continue to search for a value of opportunities to grow and decarbonize our business further.
We're growing our green fuels business, and we recently added low-carbon MTBE to our products portfolio. We are also expanding our geographic footprint across Europe with sales into Germany. This business has now become a high double-digit to low triple-digit annualized EBITDA contributor over a very short time frame, and I commend the team for getting us to this point. We're ideally positioned as we leverage our global -- our competitive global platform, world-scale young assets and strong logistics platform to harmonize our hydrogen strategy with our continued focus on shareholder value. With that, we will open the line for questions.
[Operator Instructions] Our first question today comes from Christian Faitz from Kepler.
Yes. Thank you. Good afternoon, everyone. Congrats on the results. Two questions, please. First, are you still shipping large amounts of ammonia from North Africa into Europe as we speak. And then the second question was, I was surprised by your robust volume performance in DEF. Is that due to more miles driven again or also due to market share gains?
2 very relevant questions. So on the first one, we have the supply chain where we've been kind of just quite ratably sending product into Europe from the Middle East, even prior to the H2 2021 period, leveraging the Rotterdam ammonia port terminal that we have. We significantly increased that volume in Q4. We did so as well in Q1 and we're doing so as well in Q2. In terms of how much we do it, it kind of depends on that spread, and we talked about it a bit with some of the investors, between where's ammonia and where's gas. You saw gas up double digits today, which is increasing the marginal floor on ammonia production. So we expect to see some more curtailments and potentially more ammonia demand. And when ammonia prices go back up, some people may restart for a period of time. So it's just having that flexibility with the storage there with our domestic consumption and production of ammonia in OCI nitrogen coupled with the supply points, whether it's ourselves or third-party traded product that we're there to try to meet that demand and reduce reliance on natural gas when it gets to elevated levels.
And obviously, that's a premium business because not only do we upgrade that to make more European fertilizer and industrial products for our customers, but we have also ammonia customers on demand as well for our distribution business in Europe.
On the second question with DEF. Yes, I mean, DEF has been a huge focus of ours at OCI, as you know. We've grown our market share significantly in the U.S. Our team, I think, is one of the best teams that are in the market via N7 marketing, not just IFCo's products, but also Dakota Gasification and Titanobel, urea liquor and DEF in the United States. So we've seen more vehicle miles driven, things that people probably look at diesel prices as well and the -- where there's an ability to have a little bit more DEF, which improves the fuel economy. I think that's going to be continually more a medium-term driver of demand as well to have higher dosage rates.
But we've seen good solid demand and a really tremendous team on the production side as well as on the distribution side for getting it out to all parts of the United States to serve the customer base. And that's been important because, obviously, the U.S. is still a net importer of DEF, but with the pricing level that you've seen for urea, the prices of DEF and some of the production in Europe, which was historically exporting into the United States, that's had more trouble. And I think we've -- the team has done a great job of getting more market share.
Our next question comes from [Indiscernible] from Citi.
I have 3, please, if I could. The first one is around the U.S. So through IFCo and N7, can give us an idea of the U.S. farmer sentiment currently. There have been reports of bad weather and maybe some high price hesitation. How do you see the U.S. market playing out over the rest of the year?
So on the U.S. side, I mean, we just are kind of completing what is typically the ammonia application season in the Midwest and the weather has not been very good in terms of wetness and cold weather. So we've had less ammonia go down from a nitrogen perspective, but if you recall, the fall was a very strong application season for ammonia. Nitrogen has been put in the ground already for this planting season. We're a bit -- so those have kind of gone towards nitrogen or kind of committed towards nitrogen to some extent. We're a bit tighter in terms of corn, wheat applications. Corn and wheat are planting at this point, so we're behind historical averages. But they can move quite quickly and weather has really improved over the last few weeks.
What we think that means is probably that nitrogen, which is going to be necessary to meet the grain and the yield ambitions of the farmers will come in the form of probably more urea in the Northern Plains, and quite certainly more UAN as well. And that could extend the season into July with more side dressing in the markets and some pivot applications for nitrates. So we think that there could be some substitution, but we still think that it will be a strong planting season overall. If the weather continues to look as it does here for the next several weeks.
And the margins on the farm side, while nitrogen prices are up significantly, grain prices are up significantly as well. And I think we've shared on our investor presentation today that farm economics, particularly the U.S. farmer, are extremely robust at today's grain prices and future grain prices.
That's great. My second is around methanol. Obviously, methanol U.S. performed pretty well. What went wrong historically with Natgasoline, and kind of what have you done to rectify that, you had a big turnaround. And sort of what steps have you taken to future proof it?
So in Natgasoline, I mean, [Indiscernible] started up 3 years ago. So 3 June ago, right? It was 2016 yes. So I guess they are almost 4 years now. And we had our inaugural turnaround there, which was -- which is long in the company and affected our Q3 and Q4 results last year, where we tried to address a lot of the issues. I think the team working with both sponsors, OCI as well as Proman, really looked hard about what we could address during this downtime, which was extended. And there were some of these issues that have been lingering since commissioning that we were studying and looking for opportunities to address.
So I think the team did a good job of addressing things that are associated with an external boiler. There were certain other pieces of equipment, which had a lot of focus. And the other element while these are large pieces of equipment and other large element is the people that run the plant. I mean, that's very, very important for all our 9 assets globally. And so we've continued to bolster the team, as well as the support from the sponsors to do so, and we hope to continue to improve volumes at the Natgasoline site over the next few quarters as part of our overall operational excellence program.
That's good. Just lastly, my final question was around nitrate. So your CAN are down 11% and your UAN up 18%. What's the story there? Is it just a straight product swap? Or is there something else going on, just an insight into the nitrate market sort of now and kind of for the rest of the year for instance.
So I think part of it was a bit of an inventory build. Although our order book looks quite strong for nitrate where we stand today as we guided to, whether it's UAN or CAN, we've kind of had sales several months out already where we stand today. But at the end of Q1, there's probably some inventory builds, I think at the end of Q1 it's part of it. And in terms of just kind of -- on the product side, we could have had a little bit more UAN versus CAN application as well. So we moved to more UAN funds in Europe. So I think it's both of what -- both of what you said there.
And overall, we're still seeing very low -- I mean, where we stand today in May, very low CAN inventories across the system. And like we just talked about in the U.S., very strong economics, extremely strong economics from a farmer perspective due to the high wheat prices. Also, CAN is much more of an on-purpose natural gas-based product when you think about that market in Western Europe and has been reliant on exports from Russia is one element and a higher marginal cost floor with the higher European natural gas pricing. So all of those elements plus the forward selling where we stand today, kind of give us good views on CAN, and we've seen kind of a relatively good price performance, measured with the higher costs [Indiscernible] we've seen and the tighter SMBs in the market.
Our next question comes from Adrien Tamagno from Berenberg.
Just to start, I would like to clarify a bit the CapEx figure. Can you confirm the $350 million to $450 million growth CapEx for next year? Comes on top of your $300 million or so of maintenance for '23. And this includes all of the projects you would have in your pipeline that would be sanctioned just to confirm that to.
Yes. We can confirm that that's the estimate for the guidance that we -- on growth CapEx holistically for next year, the $350 million to $450 million, and that will be on top of our maintenance CapEx.
And I will just say, I think in terms of $350 million to $450 million, that includes previously announced projects, right? And we consolidate Fertiglobe as you know. So that includes things like announced projects that are -- [Indiscernible] that they have a higher likelihood of FIP, obviously. And we're looking at projects that our low-hanging fruit or have the highest return overall, while maintaining that focus on the investment-grade commitment as well as returning capital to shareholders. So having that type of spending profile and deploying capital to grow our business and get good returns.
Okay. That's helpful. And in terms of the noncontrolling interest payment, I mean you already explained well before, but in terms of the payout in cash dividend of this amount, how should we think about it, subject to discretion. It's viable, 50%, everything, just to understand a bit better how to model this minority cash outlook.
Sorry, you're asking about the October OCI dividend?
No, the minority leakage in terms of cash outflow.
Well, in terms of the minority leakage. I mean, the most obvious one, of course, that we -- 50% of Fertiglobe is not held by OCI. So the cash leakage there takes place whatever the dividends paid out by Fertiglobe. There's a dividend that's been paid out by Fertiglobe in Q2. And there's, of course, the anticipated dividends in October which is the second sort of semiannual installment there. And I believe the Fertiglobe earlier today provided a guidance that, that dividend will be at minimum $700 million.
In addition to that, of course, we have now the 15% minority in Metco, which is sort of an additional minority leakage that will be seen depending -- and we intend to pay dividends quarterly in that business. And on top of that, of course, there is the minority interest associated -- or the cash leakage associated with the corporate dividend as well, which is sort of the next sort of significant number.
Yes. So I was referring to that one, in fact, and what sort of payout should it be.
Well, for surface, it's pretty clear because based on the 2021 financial statements, you can, I think, reduce that the leakage for corporate dividends in 2022 attributable to 2021 net income and declared dividends is around $360 million. That will be emanating just for . On top of that, you will have the 50% of dividend leakage from Fertiglobe.
Our next question comes from Faisal Azmeh from Goldman Sachs.
Just one question on my side. When looking at the European...
We have lost connection with Faisal. We move on to [ Kenny Pan ] from JPMorgan.
So firstly, I just want to follow up on the CapEx question earlier. So $350 million to $450 million growth CapEx. I just wanted to understand how much of that is related to decarbonization and if you can actually help us to identify that? And do you have a run rate going forward for decarbonization initiatives on that?
That's a very good question. I mean this is very much in line with what we had in our ESG Strategy Day last year, which is, we target 20% reduction in greenhouse gas intensity by 2030. And that's achieved through our operational excellence program, which, as you know, is underway. It's achieved through reduction in Scope 2 by switching to renewable electricity. And then another way is through low-carbon growth opportunities that meet our investment thresholds. So the overwhelming majority of the growth CapEx here we're talking about is decarbonization focus with our financial return and meeting those metrics.
There could be some logistics here or there or something like that on an enhanced basis, but the overwhelming majority, including the ones that have been previously announced, like Project Harvest, which is a 1 million-ton blue ammonia plant in Abu Dhabi, that one where we'd have a 30% stake as Fertiglobe or effectively a 15% stake as OCI and potentially have some SPV-related financing on that. So that's 1 of them. And for example, the carbon sequestration project in Iowa taking advantage of the 45Q that we're doing with Navigator, which is a BlackRock backed entity to sequester CO2 and generate a return and great blue ammonia in Iowa is another example of one of the ones that we've announced, which means that it's much more serious on the list there.
Okay. Just to also follow up on the dividend. So you mentioned the expectation is much higher than 1.45 for the last half year. so I mean, is it right to think you might want to cap it at a certain amount? I don't know if you would potentially think of that. Obviously, at this moment, you have a very positive cash flow and then you're able to pay that. But in preparation for the future, if the prices goes down, you would need to putting more cash into working capital, would you want to be more conservative paying out dividend, for example?
I mean we're constantly evaluating what is the right quantum for all sorts of capital deployment avenues and order all within the framework of continuing to maintain our investment-grade hardly earned investment-grade status. We had announced that we would like to -- we will be committed to be below 2x through the cycle, which was a further sort of conservative step-up in our financial policy. And we are obviously cognizant of the potential growth initiatives that Ahmed described earlier. And with that, we were able to identify what is a comfortable sort of dividend floor for us going forward, and that will be adjusted, of course, adjustable based on available free cash flow.
So this triangulation is a continuous one that we work on, and we feel that based on our balance sheet situation, based on the outlook in the market. And our outlook is not necessarily just a couple of quarters out. We're thinking longer horizon than that. And based on the -- how we see the various projects evolving we're comfortable with making that statement for the October dividends.
And I'll just add that as Hassan outlined, there are many -- we're looking at different opportunities across our entire asset base, leveraging existing infrastructure, synergies, things like that. So it allows us to be highly opportunistic because Hassan who is controlling the cash also within the business, we -- when we're looking at capital allocation, and we want to focus on investment-grade profile or investment grade -- being investment grade now that we're investment grade as well as continue to have that dividend. I think that shareholders appreciate, we're having competition for a limited amount of project, looking for the highest return and highest [Indiscernible] on decarbonization as well.
So that, we think, is a very good position to be in. And we recognize that we're in a volatile commodity market. But as I mentioned during the prepared remarks, there are higher marginal cost floors and strong demand drivers for the next few years that give us more comfort on kind of some of the high and lows that we see in market.
We return to Faisal Azmeh from Goldman Sachs.
Just a question on the European methanol business or segment. But when looking at the revenue figures compared to last year, it's actually quite a strong year. And that's mostly coming from clean fuels, to my understanding is correct. How much of that -- how much the contribution has been this quarter and when comparing it to last year? And where do you see this business and getting towards over the coming years.
Just if you can get a sense of the contribution from that particular part of the segment, and how it has grown year-over-year? And what should we expect for the remaining of this year because it has driven the profitability at the EBITDA line. So I'm assuming it is growing in terms of its importance for that segment.
Sure. I mean, there some definitely you heard what we said in the beginning, which is that looking to be on an annualized basis, high double digit, low triple digit million EBITDA per year. So I think you can kind of just see where that's at. We're not giving year-over-year figures, but it's been quite a significant growth. Part of the growth is also driven by the fact that it came from 2020 low industrial demand and everything like that. But this is going into fuels like low carbon methanol and TBE. And this is a second-generation biofuel in many cases. We're excited about it. We're continuing to look at the ways to grow the business on an aggressive basis. And we think it's a completely different pool of customers and end markets and more diversified than what we're traditionally. And so we're very much excited about that business, and it's a good launching pad as we think about the hydrogen opportunity across not just methanol, but also ammonia, which we see coming a little bit later.
And is that -- and you can't replicate this -- these efforts on the U.S. front as well, given your presence there. Is that something that cannot be, let's say, expanded or replicated...
No. I mean, actually, this is partly U.S. -- I mean, it's part of the U.S. driven as well in terms of some of this actual supply does come from the U.S., from our methanol business in the U.S., right? And actually, that's a big driver of the performance here. We're going to the European markets. I'd say that we're still scratching the surface on the opportunity for low carbon methanol. People looking at that being alcohol mix to decarbonize the [Indiscernible] market, whether it's low-carbon methanol low carbon MTBE. These are [indiscernible] biofuel targets. And they have advantages that unlike ethanol, they're considered second generation because they're derived from waste.
And our marketing team is pushing hard to enter into other regulatory markets globally so we can grow that. And I think it will dovetail well into the marine fuels market for methanol and ultimately, the marine fuel markets for ammonia.
Our next question comes from Lisa De Neve from Morgan Stanley.
I have 2. I just want to come back to the gross CapEx. There are some projects you have mentioned sort of on the clean ammonia side, and some projects in the FID stage, which are mostly in EMEA region. But are you also considering spending your footprint in a meaningful way in the U.S., whether it's on methanol, [Indiscernible] side, and this is next projects you just mentioned with Navigator. I thought I saw some sort of filing of documents regarding OCI Beaumont. So sort of any color on that would be great.
And then the second question is on methanol. I understand that demand for MTBE and fuel applications for methanol is very strong, especially in the light of higher miles driven. Can you share how methanol demand for formaldehyde is holding up, given we do see now a slowdown in construction and furniture markets? And how is demand from NTO in the light of renewed Chinese lockdowns holding up? So is there any sort of color here on how you square that with the tight supply backdrop would be great.
Sure, Lisa. I mean just starting with the first question, I mean, when you -- like some of the reports that are there is not something that kind of we came out with as a number. So in general, we gave this growth CapEx guidance, and Hassan went through it to kind of talk about how we think about things. I think some of the -- to your question, would we look at the opportunities in the U.S.? Yes, we're looking basically at almost all our sites, what makes the most sense and looking and competing them against each other for that capital to meet the thresholds that we're looking at for decarbonization and economic returns.
And so that's one element. The other is that just because there have been some questions on that, well, sometimes with some of the numbers that are out there, there could be scope that has nothing to do with OCI, particularly for or includes people with a lower cost of capital investing in them. For example, we talk about the project that was announced in Egypt green -- in Egypt or in Abu Dhabi looking at green hydrogen to green ammonia. Our scope of investment even at Fertiglobe, will not be that significant because we have the existing ammonia plant and we're going to bring in electrolyzed basically hydrogen from water, which also has an upstream renewable electricity business that's built to support that.
We're not going to be investing in renewable electricity. That's not our bread and butter. That's not our cost of capital. We're looking for higher returns on the OCI basis and participating in that hydrogen -- more on the hydrogen consumption side and going into those end markets that we've been developing that I just talked about on the question with Faisal. Your second question -- does that answer your first question?
Yes. Yes, it helps.
Okay. Your second question, MTBE -- your question was what on MTBE and methanol?
So the question, I would like to get some color on methanol demand because I can understand that everything that [Indiscernible] is doing very well right now. But on the other side, your MTO demand with Chinese renewed lockdowns, if you think about formaldehyde, which makes up a big share of methanol demand we see slowdown in construction in furniture markets at this point in time. So I'm just trying to circle that on how the full demand picture is looking and how we then square that with actually still quite a tight supply backdrop.
So I mean, specifically on the -- so I think we talked about kind of the oil related and then let's call it the non-oil-related more GDP-related methanol demand. On the oil-related side, methanol, whether it's for MTO, MTBE, the margins are very strong for those customers and methanol is extremely affordable. And I think we're still scratching the surface on what we can do for methanol to gasoline blending and having and pushing that heavily now because like I said, it has not looked this peak in over a decade in terms of how methanol can be blended on as it competes with things like gasoline.
On the non-oil side GDP-linked like formaldehyde, acetic acid, we're still seeing strong demand. In the U.S. Gulf, there's more kind of operational issues on acetic acid demand that's more operational rather than what we perceived to be end market related. And it's something we continue to monitor. So far, we're still seeing our ability to staff up, up there. And when you think about methanol itself, the price actually hasn't really gone up that much. When you look at something like ammonia, right? Ammonia is well over $1,000 a ton methanol sitting at $325 to $350 a ton. And so from our side, we haven't seen that kind of GDP-linked type business abate from an affordability perspective at this point.
We have no further audio questions. I'll now hand back to Hans Zayed for questions received from the webcast.
Yes. We've received a few questions, a few from [Indiscernible] to start off with. What is your target net debt-to-EBITDA ratio with 2022?
As we -- as I mentioned earlier, we're not giving specific guidance on such metrics for the year. However, I do point to our financial policy, which says below 2x of the cycle. However, given where we are and the results and the 0.4 leverage sort of baseline we're at today, I would expect it to be significantly better than that as we continue to experience healthy pricing above -- price levels well above mid-cycle levels in the markets.
Okay. And the next question is a market question. Do you see any signs of demand destruction because of high prices in certain regions?
I guess in general, not specific to project or product, right? I mean I think it's something that we have to always be on the lookout for, we've seen -- let's start with kind of nitrogen and go to methanol. Actually, we talked -- we just talked about methanol. On the nitrogen side, Melamine prices are still very strong. At some point, we think that they've gotten quite -- over EUR 3,500 a ton, we could see some -- that hit against some demand -- you could start seeing some demand structure on that point, but so far, the Q2 pricing is quite strong.
On the ammonia derivatives side, you think about caprolactam and acrylonitrile, we're seeing some -- like some brought down consumption from like 100% to 80% in some parts of the market, but there's more than enough demand to offset that, whether it's on melamine towards traditional urea uses or whether it's on ammonia itself with ammonia usage because of what we talked about earlier, which is when ammonia price dips a bit below the marginal cost for Europe, you're going to have to import ammonia and you're going to have more ammonia demand, where you have, what is it, 90 million ton worth of ammonia in Europe, 3 million ton have been taken off the market in the last 6 months and on an annualized basis, 7 million tons. I mean that's a pretty decent number in terms of additional demand compensating for potential manufacturing there.
When it comes to fertilizer and we see that as more inelastic overall. So there could be some reduction in demand if it doesn't come to market before the planting time, but that just means higher grain prices in the future and it's more of a demand deferral because you still have to generate the grains and ultimately produce the calories for a global population given how low the stock use ratio is. And I think -- the last on the nitrates, maybe to touch on DEF, we're still seeing very strong DEF growth. It's a bit seasonal with the driving season. But DEF continues to be quite robust.
It continues to grow year-over-year. You're seeing as new equipment comes online, higher and higher dosing rates. And we think that with the focus on smog and local pollution for nitrous oxide in particular submissions, demand outlook for DEF looks strong, not just in our traditional U.S. or the European markets, we think emerging markets will increasingly spend more time focused on getting DEF and selective catalytic reduction engines on the road to reduce smog in major countries like Brazil, India, China, et cetera. I think we talked about methanol on the prior question from Lisa from Morgan Stanley.
And the next question is what might be the impact on the Dutch plants if Russian gas supplies are stopped?
So I think on Russian gas, it comprises, I think, something 15% to 20% of Dutch gas in general. So it's a bit of a lower percentage versus more Eastern European markets. But Nevertheless, I think overall for OCI, a lot of our business is outside of Europe. And when we've seen our performance, whether it's Q4 or Q1 of this year, the results you saw in the last few quarters, the $1.8 billion of net deleveraging and the strong EBITDA and free cash flow performance, that's all done with only 1 of 4 natural gas consuming lines running, only 1 of 4 in Europe. We had 2 methanol plants that have been shut down since the middle of last year, and we have 1 ammonia plant that's been shut down over the last couple of quarters, we're operating at very curtailed rates, And you still have that type of results out of our European operations, and then obviously outsized results out of our U.S. and Middle Eastern operations.
The one area that we probably we think about if that happens is if you have both lines down on our Dutch facility, you may not have urea or you have to start curtailing urea. But then I think you have a very big problem globally, where a lot of urea production globally will be missing if European urea comes offline in a major way because you can't compensate that by importing urea in a very tight market. And nitrates as well -- that would -- I mean, nitrates which is very much supply-driven and a big part of the demand in Europe, that would also be very tight divesture.
The next question is, did you participate in the recent India tender. And so yes, what volumes against which prices that you offer?
I think that information is public in terms of what we've participated in as Fertiglobe and Fertiglobe entities. So I think that information is public. I think the pricing is actually public as well in terms of what we bid. I think the pricing just came out publicly in the last few hours. And what we end up deciding to participate in is more kind of a commercial strategic decision that we keep confidential before the bids come due.
Next question is for Hassan, I think. Could you elaborate on the upgrade to investment-grade level from all 3 agencies within a few days?
It's a good question.
It's a nice question.
It's really a convergence of fundamentals and how they perceive the company, of course, regularly in our pursuit of capturing, making sure that the improvements in our balance sheet are fairly reflected after every set of results. We actively meet with rating agencies and update them our results and our plans. And there was no difference as a setting for sort of these reviews. We're very pleased to see that all 3 recognized the significant deleveraging that we were able to achieve over the past 2 years, and of course, seeing where we are in terms of our leverage profile right now and having an undrawn $1.1 billion RCF as well. I think we're in a pretty good place in terms of our balance sheet strength, and that's been fairly recognized by the rating agencies.
Okay. what I think is the last question, the last webcast question. Do you expect consolidation by merger, acquisition within the sector to strengthen future growth opportunities?
I think we saw that 2015 -- 2016 to 2021 period where there was very low pricing and balance sheets are quite strained. I think that we could see overall in the market a bit of a step-up if people can meet on the bid-ask spread, just given their -- there could be consolidation opportunities. We're still quite a highly fragmented industry when it comes to nitrogen, if -- and so you could see some I think M&A would [Indiscernible] some M&A over the coming few years given just how fragmented the industry is and has been the last decade.
Our Q&A has come to an end. I'll now hand back to Ahmed El-Hoshy for closing remarks.
All right. Thanks, everyone, for joining the call today. Great questions, and looking forward to our next discussion. Thank you.
Today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.