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OCI NV
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Ladies and gentlemen, thank you all for standing by, and welcome to today's OCI N.V. First Half 2018 Results Conference Call. [Operator Instructions] I must advise you all that this conference is being recorded today, Friday, the 31st of August 2018. I would like to hand the conference over to your speaker for today, Mr. Hans Zayed. Please go ahead, sir.
Thank you, and good afternoon and good morning to our audience in the U.S. Thank you for joining us on the OCI N.V. First Half 2018 Results Conference Call. You can find all the details of our results in our press release and financial statements, which we posted on our website this morning.With me today are Nassef Sawiris, our Chief Executive Officer; and Hassan Badrawi, our Group Chief Financial Officer. On this call, we will review OCI's key operational events and financial highlights for the second quarter and first half of 2018, followed by a discussion of OCI's outlook. As usual, at the end of this call, we will host a question-and-answer session. As a reminder, statements made on today's call contain forward-looking information. These statements are based on certain assumptions and involve risks and uncertainties, and therefore, I'd like to refer you to our disclaimers about forward-looking statements.Now let me introduce our Group Chief Financial Officer, Hassan Badrawi.
Thank you, Hans, and thank you all for joining us on this call again. As Hans mentioned, we -- this morning, we posted our results for the second quarter and the first half of 2018 in which we achieved another record for our sales volumes, continued to demonstrate step-up in our EBITDA compared to last year and improvement in our leverage metrics. During the second quarter of this year, our self-produced sales volumes increased by 47% to 2.5 million tonnes. Our average realized selling prices improved over the same quarter last year. Because of the higher volumes and higher selling prices, second quarter revenues increased by 43% to around $793 million. Reported EBITDA increased by 92% to $215 million, and our adjusted EBITDA increased by 22% to 204 -- around $204 million. The delta is mostly due to the release of a provision for the insurance claim received for the Sorfert shutdown for which we received the first payment of $20 million in May. We also reported a net loss of $40 million and an adjusted net profit of $3 million in the second quarter of this year. The decrease compared to the same period last year is mainly due to the first time accounting for IFCo this year in 2018, which has resulted in higher depreciation and noncapitalization of interest. There were also around $29 million of FX translation losses that relate primarily to the appreciation of dollar debt in our euro-denominated statutory financials accounting representation. More importantly, on our primary measure of operational growth, we achieved a healthy free cash flow of $133 million during the quarter, representing a 62% conversion of our reported EBITDA. This takes the total free cash flow achieved during the first half of 2018 to $247 million compared to $20 million in the same period last year. The free cash flow number excludes the trailing end of our growth CapEx plans for which we have spent $51 million in the first quarter and around $74 million in total for the first half of this year.Turning to our balance sheet. Our net debt stood at $4.336 billion as of 30th June 2018, a decrease -- representing a decrease of $100 million from 31st of March. Our net debt was impacted by seasonally low EBITDA compared to Q1; total capital expenditures of $89 million, of which maintenance capital expenditure was around $38 million; and the balance of the growth CapEx was related mainly to BioMCN expansion in Europe. It was also impacted by the $20 million of cash received as down payment from insurance related to the shutdown of Sorfert; positive currency translation differences in the balance sheet of $73 million, which are the result of the appreciation of the U.S. dollars against the euro and the Algerian dinar during the quarter; and other nonoperating items of $44 million relating to a number of items, including debt restructuring costs such as the convertible, which we retired and some short-term loans to Natgasoline. During our last conference call, we discussed our extensive and successful refinancing activities that took place in the first and second quarters. Since then, we have further improved our capital structure through the buyout of the minority at OCI Partners. We have finalized this transaction on the 17th of July for a total cost of about $120 million, and this is now 100% owned subsidiary. This transaction allows for simplification of the group's corporate structure, streamlining of our methanol commercial operations and the elimination of public listing costs.At this point, I would like now to hand over the call to Nassef Sawiris, our Chief Executive Officer, for further commentary on the results and the outlook.
Thank you, Hassan. First of all, I would like to thank the entire team for all the progress we made during the quarter, both operationally and strategically. I'm pleased that we reported a healthy level of operational free cash flow and a reduction in our net debt during the quarter, which reflects our large $5 billion CapEx plan coming to an end. The benefits of our commercial strategy of limiting forward sales, coupled with our well-diversified portfolio, are clear as we achieved this improvement even with plant turnarounds at some of our plants during the quarter. We have started the second half of the year on a strong note. All our operations are running at good utilization rates at the moment. We continue to ramp up volumes, and our underlying end markets are looking increasingly positive. During the second quarter, we also made good progress with positioning the organization to capitalize on this growth. We strengthened our position in North America with the start of a marketing joint venture called N-7 with Dakota Gasification Company. This platform gives us an enhanced sales platform and extended geographical platform. We optimized our corporate structure with the buyout of the OCI Partners minorities.If we look at our prospects in more detail. First, with respect to our owned volumes. In 2018 compared to a year ago, we have seen a big step-up in volumes coming through from Iowa and our plants in North Africa. In addition, as I mentioned in May, we started seeing the benefits from some productivity improvements that will help us achieve higher run rates going forward. For example, it will increase utilization rates from just over 90% to above nameplate capacity currently following the short turnaround in April. Our new methanol capacity is also starting to contribute. We made excellent progress with the start of methanol production at Natgasoline at the end of June. This piece of the ramp-up has been impressive and exceeds the industry average for start-up plants. The plant has been running consistently at 100% in the past few weeks, and we already shipped significant volumes of methanol, around 200,000 tons. The plant is also proving to be very efficient and has achieved gas consumption that has been better than the design rate. We now have one growth project remaining, which is the refurbishment of BioMCN second line, which we expect to start production around the end of this year. If I now look at the developments in our end markets. First, I'll talk about nitrogen fertilizer. Our realized selling prices increased on average during the second quarter compared to a year ago, but ammonia prices remained depressed. It is only in the past few months that prices for all our products started to turn and are now at a much higher level than a year ago. Urea prices have moved to $310 per tonne or $100 higher than a year ago and up 25% from the average urea price of $244 reported in the second quarter.Other fertilizer products prices are witnessing the same momentum. Price dynamics in the nitrogen fertilizer markets are looking very positive, supported by healthy supply and demand fundamentals. We continue to believe that net supply additions have peaked and the demand will outpace minimal global urea capacity additions over the -- at least the next 4 years. We expect exports from China to stay at structurally lower levels going forward. Exports have been immaterial this year, so far, only 800,000 tons. Price increases are also supported by high production costs for marginal producers in China and Europe due to high coal and natural gas costs. Finally, exports from Iran, one of the largest urea exporters globally, are at risk of significant curtailments following the U.S. sanctions. As of now, Iran is fully exporting, but this situation could change. So what we see in current prices reflects full utilization of the Iranian capacity. So if that happens and Iranian exports all production get curtailed, that should have a significant result and an additional tightening of the supply-demand balance. The only product that we think has a mismatch and has further room to grow is ammonia, where ammonia is trading at the same level at -- of urea prices, which usually should not be the case. Ammonia typically trades at a premium to urea prices, given that it takes 1 ton of ammonia to make 1.8 tons of urea.I'll move now to the industrial chemicals market. In the second quarter, our industrial chemicals portfolio was once again a solid performer, and the outlook remains positive. We have good visibility for methanol markets for the next 4 years, where we expect limited capacity additions relative to demand growth in the high single digits. Like urea, some methanol capacity additions and exports from Iran may be at risk. The outlook for melamine remains healthy. Finally, we continue to enhance and grow our diesel exhaust fluid platform, positioning us for growth, above the 20%, which is the annual growth of that product consumption worldwide.In summary, our volume growth comes at a time when our end markets are on a positive trajectory and are most positive than most market participants we're expecting for this year. We are one of the lowest-cost producer in the industry globally. And as such, we believe we are best placed in the industry to take advantage of these improvements in our underlying margins.I'll now open the line for questions.
[Operator Instructions] And the first question comes from the line of Roger Spitz.
First, can you speak to North Africa's net profit versus Q1 '18? Why was it down versus Q1 '18?
On the segment, on the specific ones, we have to go on a plant-by-plant basis because EFC and EBIC and Sorfert while they're consolidated, some of them had turnarounds in the second quarter. EBIC, for example, had their 5-year turnaround in the second quarter. And other than that, EFC also had part of the turnaround that went into -- a little bit into the light that took place. So it's mostly -- and as we've said in the announcement today, each 2 has practically very little turnarounds planned -- limited maintenance that are sub-7 days.
Okay. And in terms of the $700 million OCI and the revolver, could you say how much of that was drawn on June 30? And how much is drawn now post the OCIP minority takeout, if that is how you finance the OCIP minority takeout?
No, we're not going to comment on numbers past June 30 and -- quite comment -- give you details of Q3. We'll have to wait for the Q3 quarter. But you can extrapolate from the free cash flow generation in Q2 at significantly lower prices. So Q3 pricing environment is significantly improved from Q2. So yes, we have that OCIP payment, but we also have higher cash flow generation in July and August as expected.
And June, the revolver, the $700 million OCI and the revolver, at June 30, what was the outstanding amount, please?
We don't segregate each significant credit line in general. So you have our net debt. But basically, the revolver we use has one facility that has the most flexibility, of course. So we reduce it as cash comes in, and we tap into it when there are needs. There is also a big impact of the gross debt versus net debt, and that is work in progress. It's improving now. We expect post the 20% acquisition of the Beaumont minorities and other milestones on some other plants that we will have significantly lower gross debt by year-end in relationship to the net debt. And that will be a positive also for bringing down the revolver. We are handling daily treasury in a completely different approach than we were when we had to take care of certain minorities or we had to take care of certain covenants like in Iowa during construction and all that. So you will see a collapse between the gross debt and the net debt. And overall, our aim is to finish the year with a significantly improved net debt number and significantly lower interest expenses moving forward for 2019.
All right. I guess, I have a request for you to consider. Is quarterly -- maybe consider providing us with the detail of your debt components each quarter and also why you give sales by sort of segment entities -- if it's possible to give D&A and EBIT by segment entities. I know you give that on an annual basis, but it'd be interesting to get that on a quarterly basis. You do provide the net profit, which gives some indication, but it would be nicer to have EBIT and D&A, just for your consideration to provide more color around your business.
Okay. We'll take that into consideration.
The next question comes from the line of Christian Faitz.
A couple of questions, if I may. First of all, can you give us kind of a sales bridge in terms of your volume, price and FX development in Q2 versus Q2 '17. I'm just trying to get my head around the price increases you saw of, I would believe, some 10% or so in the mix and your volume...
I'm sorry, on what product?
Yes, yes.
On which product? Sorry, I didn't hear you.
I would believe if I look at your mix sold, I would believe your prices would have been up probably in the high single-digit percentage range. And your volumes, I believe, were up 47%. So I'm just trying to get my head around the plus-43% group sales development. And then I'll follow up with another question.
Some of the negative that affected that could be the higher gas cost in Europe, number one. That took a bit of wind out of the second quarter earnings. So that came as that. Plus, the volumes included also some of the external -- own produced -- you are talking about own-produced volume or total volumes, including third party?
I was talking about own produced, yes.
Yes. Well, primarily, the key highlight is, first of all, the higher gas in Europe. And then on the net profit basis, you see also the start of the impact of the depreciation in Iowa, which -- the latter part of last year was still producing, but modern -- as part of the capitalization based on accounting of 2018 -- starting from '18.
Okay, perfect. Then as another question basket, so to speak. Can you give us an update on the performance of a couple of your plants like, for example, how is IFCo running at the moment, the methanol facilities in Beaumont, including maybe a comment on the Natgasoline ramp? And then finally, do you see any drought-related impact in Q3 in Europe simply because it was so dry that farmers couldn't apply any fertilizers in late Q2, potentially early Q3 so -- especially in the late-stage crops?
So on the -- first, I'll talk about the operational performance of the plants. We're very happy with the Iowa plant. Actually, we are excited about a lot of the potentials of improvements that continue to exist. To give you an example, on an average day, we will produce about 115% of the nameplate of urea, which goes down to the downstream DEF and granular urea as well as UAN. We also see a higher nameplate performance on ammonia, around 110% with a lot of room to improve, especially once the weather gets colder after the summer on the ammonia side. So we're very pleased with that plant. We are actually doing very small investments in Iowa as we speak. We're adding more storage capacity in DEF. DEF is our highest-margin product by far, and our intent is to grow that production platform. We have also introduced almost 300 railcars to be able to access more destinations for DEF. The beauty of DEF also is that product disappears from the ag market, so it tightens the ag market while it goes down into the trucks and disappears. So we're very excited about DEF as a product in general and the growth that we're seeing and new usage for DEF in construction equipment, in agriculture. So it's not just trucks and private diesel passenger cars. So on the Iowa side, there is a lot of work being done on the DEF front. We're very happy with where the plant is performing. Going back to Texas, both Beaumont has continued to run extremely well. And Natgasoline was a nice surprise that after start-up we had practically very little downtime from the day we started the plant, with the plant actually exceeding nameplate capacity and with a good potential to do so on a sustainable basis. In addition, too, a very important thing that we look at very clearly is energy efficiency. In the plant, it's below our calculations for how many MMBtus of gas we need to produce a ton of methanol. And we think that number also is going to be improving further with the colder weather.
Okay, great. And then as I said, finally, do you see any drought-related impact in terms of volumes in late Q2 or having gone into Q3 in Europe?
No, it was actually more from Q1 to Q2, but -- so winter came late in Europe. And judging by your accent, I assume you know. So the...
Yes, winter came late, but summer came soon. So that's why I'm asking at the back end of the growing season. Is there any volume impact, which you would have seen in your numbers?
No, because, I mean, a lot of it is quite normalized volume. But we did have a turnaround in OCI Nitrogen in Q2. So obviously with a turnaround, you dispatch less, you keep some for future commitments. So I wouldn't call it because of the weather, but the turnaround. And the turnaround, to be very honest, we opportunistically didn't shed a lot of tears on a prolonged turnaround on ammonia in Europe at higher gas prices, given that we have excess export ammonia at competitive pricing within our system. We actually bought some cargoes. And we're not the only ones who is doing that. Other producers are also curtailing some ammonia production and importing ammonia. So yes, while it has some effect on the OCI and standalone, but you can also look at what happens from end of June till today. You can see almost 20-some-percent price improvement in ammonia. And we think that ammonia prices have -- need to go even higher to justify continued production and to justify the arbitrage between ammonia and urea.
The next question comes from the line of Tom Wrigglesworth.
First question, just around the movements that we've seen in the urea market after $300 a tonne seaborne. Obviously, you're indicating that there's a potential for scarcity pricing in this market. Do you think that the prices today reflect just traders' speculation around that scarcity? Or is it sinking into the farming community as well now that there could be a shortfall in really the next -- for the next application season? And I guess -- and as a corollary to that, does that mean that actually we'll see urea prices disconnect from crop prices, which haven't actually done very much year-to-date?
Obviously, crop prices are something that everybody watches, but that's more on the U.S. side. A lot of emerging markets surprisingly became larger consumers of fertilizers post the currency devaluations. Because in terms of total cost of the agriculture production, like, for example, in Russia, we saw, of course, the big devaluation of the ruble, a higher increase in domestic consumption of fertilizers. We're seeing more demand in some LatAm countries post-devaluation. So because the other nonimported components of fertilizer, labor, ag, land and all that, our thinking -- and the proceeds from exporting, their products are becoming much more attractive in domestic currency terms. So that is one issue that is a bit different in emerging markets. An interesting statistic is that for the first time in the last 100 years that Russia exported more ag products in 2017 than military sales. So that's a key milestone to look at. We're seeing that also in the emergence of very aggressive new markets and interest in increased agriculture activity in East Africa. Now Ethiopia is growing its fertilizer imports. They have a population to feed, so they have 2 options: import the finished agricultural products or import fertilizers and do it at home and create jobs in the economy. So East Africa is going to be a significant new market. Now back on whether the prices reflect speculation or reflect dynamics, we don't know the answer. But what we know for sure is that, historically, the levels of fertilizers within the system in storage are extremely low. You have significantly lower fertilizers in India, which is a big market. You have significantly lower imports this year in Latin America than last year, and the same applies to Europe. And that is a key indicator. A country like Pakistan, for example, had 80,000 tons in inventory a few weeks ago, and they're considering how to deal with such a situation. So the -- what's clear really is that the system in storage is not reflecting any kind of speculation. Typically, when you have speculation, you would increase inventory and the cost and then the farmers are -- all this anticipation. We are entering this part of the summer with significantly lower inventory than we had last year.
Very good. A second question, if I may, on methanol and just how -- well, 2 parts, how you see the market outlook into year-end and into 2019? And secondly, noting that Natgasoline is a world-scale facility, are you going to -- will you take a price-over-volume strategy as you ramp that? Or is the market there, in your opinion, to actually -- to ramp -- not aggressively, not the right word, but ramp quickly without too much price impact?
First of all, I mean, methanol is a product that has been growing between 6% and 7% in terms of demand in the last 10 years, on average. So the emergence of a big demand pocket in MTO plants in China created even a new dynamic and increased the dependence on methanol pricing correlation with oil prices. So you have to take a view if current oil prices are sustainable or have room to grow to determine the methanol. We don't want to speculate on oil prices, and hence, we're not going to speculate on methanol prices. But what we can talk about is the introduction of Natgasoline and putting that product into the market at minimal impact despite it happening in the summer and despite a lot of MTO shutdowns in China. So in the foreseeable future, we see the methanol pricing as continuing to be very strong. The market absorbs the volume. There is no drama there in the launch, so we neither need to -- we will sell 100% of our production by virtue of being the lowest-cost producer with $2.60 or $2.70 gas in America and the most efficient U.S. plant. So we don't need to make that debate. And in general, methanol is quite tight at the moment.
And the next question comes from the line of Henk Veerman.
I still have quite some questions left actually, and I hope we can go through them one by one. Firstly, beyond the extent already discussed on your deposition, I mean, now that the expansion phase has been nearly completed, delevering is obviously quite an important strategic pillar for you. And given the dynamics in the first half of the year, can we still, more or less, expect you guys to sort of delever from 4 to 4.5x net debt-to-EBITDA towards, let's say, approximately 2x net debt-to-EBITDA in 2020 and then obtaining the investment grade? Has anything changed in that respect in terms of your expectations? And maybe you could also give us a little bit of a feeling how the trajectory into -- the end of '18 to '19, how it will look like.
So I'll start with some of the general items, and regards to specifics, I'll pass them on to Hassan. But our view is that we could -- given the trajectory of the second half, we could see a situation whereby the end of the year, our net debt-to-EBITDA is below 4x already by the end of '18. And that would be a very positive milestone. And looking forward, you can see our free cash flow generation at reduced prices in Q2. You can make the assumptions at current prices without doing too much. We could see generation of significant free cash flow in '19. So there are also some issues that we will talk about when we issue the bonds. Natgasoline is overcapitalized. And there's a lot of pockets on the improvements that will happen. So I would say, if anything, that trajectory has improved and might be shortened.
In terms of return to investment grade, the -- I think as demonstrated by the free cash flow conversion you saw in the second quarter, which is a seasonally low quarter, as prices improved, gas conversion only will be bolstered further, contributing to the deleveraging part. We still remain committed to achieving that deleveraging trajectory, as we've highlighted in every quarter so far.
And what helps the investment grade is not just reducing the debt, but actually increasing more the free cash flow generation. So we're hitting it by reducing the gross number. But we'll also -- you're going to see in '19 or later in this -- later this year a run rate that reflects an improvement in the credit metrics.
Okay. Well, very good to hear that's all running sort of ahead of expectations, at least ahead of my expectations. Maybe zooming in on one part of your cash generation, which is working capital. I mean, we've seen a partial reversal in Q2 versus Q1. How -- like how big is that sort of source of cash for you still in the upcoming years? Do you see a lot of room for improvement in your working capital? Maybe you could give some more color on your working capital movements in the -- let's say, as you now are fully ramped up in the remainder of the year or into 2019 dependent on what you can say, what you can't say, but just to give some more color on the long-term opportunity in your working capital position.
Well, we have changed our marketing policy. We started in Europe last year. So basically, we are not rushing to sell in July and August. We looked at pricing movements in the last 20 years. And with the exception of 2008, there has been a huge gap between the pricing in 2, 3 months and the remainder of the year -- the 2, 3 summer months. And we looked at where the products are going. The product was not going to the farmer. It was going to an intermediate, whether it's a coop or whether it's a trade house. And we said we don't need to be selling 3 months forward and 2 months forward and booking a lot of orders in June for July and August. We're going to be prudent about what we sell in those low-price environment months. And the stockers and the traders, they'll buy your product on the cheap in the summer, become your competitors later in the year. So that product hasn't actually sold. You've just obtained a refinancing at almost 20%, 30% cost by selling it early. So that obviously -- that plays on the working capital management. But 2 months later, you discover that, that was an increasingly very attractive business proposition because what you didn't sell -- I'll give you an example, CAN in June was at EUR 170, EUR 165. Today, it's closer to EUR 210, EUR 220. And these are only 2, 3 months. And part of the rationale is that we are not going to be giving the product to anyone who wants to buy it 3 months forward and 4 months forward and store it. We were going to manage to sell month by month. We started that last year to good results. We've done that in the U.S., where us and Dakota Gasification did not participate in the sale program. We sold only almost 1 month ahead. That's regular sales. So with that, you kind of assume a slightly -- a higher working capital during late spring and early summer. That goes away starting September, October. And so that management, it's not going to be strictly on autopilot. It's going to have to do also with our new very strict policy that we're not going to be -- we don't call it -- season. We call it the full season.
So basically, what we, as analysts, can conclude is that you guys have been, let's say, compared to the previous years, more strict on working capital movements and that we can expect at least like some positive numbers there or at least, let's say, some more efficient capital -- working capital management. Is that correct?
Actually, I would prioritize free cash flow over multiple quarters rather than quarter per quarter. So we're not going to fixate about working capital at the end of June and then -- and dump a lot of product that the market doesn't need in July and August. We're going to manage it to what is best for full year and not month by month. You also see working capital going up when you are producing more and when the cost of production in Europe goes up. So it's not only that one strategic shift. It has also to do with the cost of the products.
That's perfect. That's perfect. Then on interest costs, it was already discussed during the comments being made earlier. But the $182 million, when I sort of exclude the FX movements, well, it looks a bit high. And I understood there are some one-offs in there, such as debt settlement expenses. But now that all the, let's say, debt facilities are in place, could you share with us what's your expectation is of, let's say, this line item? And once again, like we can exclude sort of the FX impact because you have continuous movements there. But what is the underlying, let's say, interest expenses for the full year or at least maybe you can share with us what has been the interest expense on an underlying basis in the first half of the year.
Yes. It's a good point. I think maybe just focusing on the first half, which is the results are out there in the market. You are correct that the interest line was a little bit artificially raised during the first half by a number of one-offs, primarily related to debt restructuring costs across the system, whether it's a convertible and other facilities that we addressed in our last call as part of the successful refinancing. But we estimate that up to about $30 million of that line item was associated with the debt restructuring cost, including the convertible, the facilities in Egypt, some of the N.V. facilities and some cost of other bridge facilities that we had to put in place as we transition into our new capital structure. So that's the correct insight. Overall, our average interest rate on our gross debt for 2018 should be around 6% for this year. But obviously, we're very focused on, as Nassef mentioned earlier, on opportunities to further optimize our balance sheet and look for further reduction. As we generate a lot of cash flow, that -- the absolute numbers should also come down next year.
Yes. That's very clear. Very helpful. Another question I had, which may be a bit of a longer shot. But with the prices across your end markets moving up bit by bit, and many of your peers have actually discussed also during their calls that said the earnings potential they have in a more or less mid-cycle scenario or at least the sensitivities they see on their earnings when it comes to different prices -- and I think many of your shareholders are also looking at this when they invest in OCI. So maybe you could comment on what you guys see as an appropriate mid-cycle level or what you guys regard as a mid-cycle level. And what could be -- in, let's say, the steady-state OCI platform, what could be the EBITDA potential in such a scenario?
Quite significant. I don't want to give a number yet because we are still working on the new tweaking, which are quite significant at higher prices. If we produce 200,000 tons more of methanol as a result of optimization or 200,000 more in Iowa, you'll get the effects of that. And at higher prices, it becomes meaningful numbers. But I think we are well ahead of prices in '19, continue the trajectory that we are expecting them to do. We are expecting significant improvements in EBITDA next year. With our share of Natgasoline, that would be sizably more than 50% jump in EBITDA and a significant increase in free cash flow.
I mean, I made a lot of comments. One of the things that we've highlighted consistently in our previous interaction with our investors is that having a relatively young asset base, which means that your maintenance costs are quite low going forward, in the neighborhood of $150 million to $200 million, and with our effective tax rate also being competitive, this allows us, even in a seasonally low quarter like the second quarter, we're able to demonstrate 62% conversion of EBITDA to free cash flow. So above that, anything upside in prices, that's additional conversion into our free cash flow and obviously feeding into our trajectory of deleveraging.
One of our key metrics that we monitor is conversion of EBITDA to free cash flow. And that's something we take very seriously. And I think we have one of the best maintenance organizations, particularly in North Africa where we do everything in-house so -- at very reduced costs and plus the fact that the plants are young, so a turnaround that costs us in North Africa $10 million with costs, $30 million in Europe and an equal number in the U.S. And so that's also part of the free cash flow conversion is that you don't have better operating cost but your maintenance cost, which is highly labor intensive is benefiting from some of the locations we have.
Plus the energy efficiencies of a younger fleet of plants as well.
Yes, yes. I mean, if you look at the sensitivities of some of your other, let's say, likewise companies and I sort of apply these numbers on OCI and sort of assuming that the operational gearing on higher prices works in the same way, I mean, I can imagine it must be quite exciting for you guys now that the prices are creeping up already since the beginning of Q3 and that it's supposed -- I think you said it well, there's the large optionality you have on cash generation, on EBITDA. So yes, I mean, that's good, that's good. Maybe last question on DEF. I mean, you mentioned that you are aiming to increase your market share in the business. Obviously, the demand is growing about 20%, you mentioned. And you plan to outgrow the market in that sense. Just for my understanding, that does not involve huge CapEx investments, right? Those are marketing investments...
Mostly logistics. And all the railcars are leased, and the leasing is very efficient. Because again, DEF is our highest-margin project -- product, especially in Iowa. I would give you an example. We replaced one major truck stop, a source that was importing DEF from Poland, shipping 50% water across the ocean. So that's not efficient because DEF is sold with a lot of water. So logistics in DEF are key. And the fact that we are the largest DEF producer in the Midwest gives us access to the Chicago hub and all the Midwest traffic and all that. That's very positive. So we're very excited about that product. Because every time we ship a product from UAN or urea to DEF, our margins expand. So it's a very -- some of these decisions that we made have a payback of 6 months. So it's not a CapEx issue. It's more of a logistics management to be able to reach more customers of DEF.
And the next question comes from the line of Frank Claassen.
Frank Claassen, Degroof Petercam. Just one question left on DEF as well. How far are you with the plans in Europe to launch DEF? And you talked about run rate volumes in your press release. What is your targeted volume for DEF? And how and when do you expect to achieve this?
I mean, in Iowa, we are increasing DEF to where it could be in '19 our largest product sold in terms of margin contribution. So we are going in Iowa to the maximum. Holland, given the -- we're going to combine that with the turnaround in '19 to avail the DEF out of the Geleen plant. That's not a big CapEx. And we've already made some experimental shipments, 4 or 5 so far, of DEF produced in Egypt to Southern Europe. So we're taking DEF as a cold product that we like. DEF is growing at 20% per annum. That's the fastest-growing product, and that demand has to be filled, ideally, with plants that are new and young. It's very difficult to produce DEF from old plants.
Okay. And maybe one small question on you already received $20 million on the insurance payment for Sorfert. What is the way forward? Can we expect more in the second half?
That's correct. The $20 million was an upfront payment on the claim, which is part of normal procedure. We're aiming for finalization of the claim -- of the insurance claim, the entirety of the balance sometime between Q4 and possibly early Q1.
The next question comes from the line of Evgenia Molotova.
Evgenia Molotova from Pictet. Just one on Midwest premium. Obviously, now with more production in Midwest, actually, what do you think is going to happen to premium, which was quite considerable in the past?
There is no new production coming in the Midwest. Actually, there is no hole in the ground in the Midwest for someone constructing a fertilizer plant in the Midwest. And I would be surprised if we see someone digging a hole, in general, for a fertilizer plant in the U.S. given the high cost of CapEx required. Yes, you have an attractive gas price, but the entry ticket is painful in terms of CapEx, in terms of project finance availability and in terms of access to labor. So I think the premium in the Midwest is actually on the right trajectory and expanding. It's not just because of the supply/demand. You have other issues. The river is creating losures, we cannot have access to product from imports in New Orleans. The fact that also these long-dated trader contracts from the Arab Gulf, they don't make sense anymore for the Arab Gulf producers. They were done in the past when U.S. was exporting 2x to 3x what it's -- sorry, was importing more than double what it's going to be importing moving forward. So right now, the Arab Gulf has more demand in Asia, more demand in East Africa. They can achieve much higher netbacks than sending it on a blind formula to New Orleans and have a trader also sell to barges and lose money and manipulate the price. And the Arab Gulf producer can lose a significant amount of optionality as opposed to get a fixed price and go east. So we expect that moving forward, there will be less product coming from the Arab Gulf. None arriving from China, very little arriving from Venezuela and the traditional exporters into the U.S. So with that, that will also affect the Midwest premium.
[Operator Instructions] And no question at this time, sir. Please continue.
Thank you, ladies and gentlemen, and looking forward to our next call in 3 months.
Thank you.
This concludes our conference for today. Thank you all for participating. You may all disconnect. Have a good day, everyone.