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OCI NV
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Ladies and gentlemen, thank you for standing by, and welcome to today's OCI N.V. Third Quarter 2018 Results Conference Call. [Operator Instructions] I must advise you, this conference is being recorded today, November 16, 2018. I would now like to hand the conference over to your speaker today, Director of Investor Relations, Hans Zayed. Please go ahead.
Good afternoon, and good morning to our audience in the U.S. Thank you for joining us on the OCI N.V. third quarter 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 third quarter of 2018, followed by a discussion of OCI's outlook. As usual, at the end of the call, we will host a question-and-answer session. As a reminder, statements made on today's call contain forward-looking information. These statements are based on certain assumptions and involve certain risks and uncertainties and, therefore, I'd like to refer you to our disclaimers about forward-looking statements. Now let me introduce our Group Chief Financial Officer, Hassan Badrawi.
Thank you, Hans, and thank you all for joining us. I will start with a brief summary of the results we published this morning and then hand over the floor to our Chief Executive Officer, Nassef Sawiris. Briefly, we reported a 16% increase in sales produced volumes, which reached 2.3 million tons during the quarter. This includes our 50% share in volumes from Natgasoline. We achieved this increase despite a number of opportunistic maintenance work in IFCo and in some maintenance work in Europe. Our realized selling prices enjoyed positive momentum and improved the cost of work compared to Q3 2017. Because of the higher volumes and higher selling prices, third quarter revenue increased by 33% to the reported $774 million. Our adjusted EBITDA increased by 35% to $230 million, which again also includes our 50% share in Natgasoline. Our methanol commercial team has been effective in managing the distribution of our 50% share in Natgasoline's production as the plant successfully ramped up ahead of schedule. On our planned remeasure of operational growth, we generated free cash flow of $69 million before growth CapEx during the quarter. This takes the total free cash flow used to date to $316 million compared to a much lower number in the same period last year, around $17 million, which was a CapEx-heavy year.I would like to highlight a few items on our free cash flow. Firstly, there was some concentration of CapEx in the quarter. We had around $57 million of maintenance CapEx recorded during the quarter. We also had some growth CapEx, which for the continued refurbishment of BioMCN's second line and the installation of our -- of a new DEF tank at IFCo, total CapEx was around $95 million during the quarter. We have not planned any turnarounds during the fourth quarter, and we expect total CapEx to be in line with our guidance for the full year of around $300 million. Secondly, we paid most of our annual taxes that were due, a total of $32 million, during the third quarter as well. We expect some additional cash tax payments by year-end of $2 million to $4 million, which will take the total for the year to a maximum of $37 million -- $36 million. Finally, we also have first time working capital introduced, reflecting 2 new distribution operations: our OCI Methanol Marketing distribution arm; and our N-7, which is the JV with our joint venture partner, Dakota Gasification Company, also capturing the ramp-up in our methanol distribution of Natgasoline. Our net debt -- turning to our balance sheet now. Our net debt moved up around $80 million to $4.4 billion as of 30th of September 2018. But this was driven by $120 million of expenditure to buy out minority partners in OCIP in July. However, we continue the trend of significant improvement in our leverage ratios. Our trailing net debt to adjusted EBITDA stood at 5.5x at the end of September, down from 7x at the end of 2017 and on track to reach -- we are guiding for a range of 4 to 4.4x by year-end. We have continued our drive to optimize our balance sheet and cost of debt. Earlier this week, we closed another successful placement of $900 million at Natgasoline, including a $565 million Term Loan B Facility and $336 million of bonds in the U.S. taxes in that market. The proceeds have been used for the refinancing of existing debt of $252 million of taxes and bonds, also availing cash to shareholders. The new debt is also around 250 bps lower weighted average cost of debt than the financing it replaced. And with this initiative, we have completed our target refinancing plan for 2018. Overall, we remain committed to our financial policy with a focus on deleveraging and achieving an investment-grade profile as soon as possible, which we believe can be accelerated given the appropriate market conditions and as we continue to benefit from the full ramp up of our growth initiatives. I would like now to hand over to Nassef Sawiris, our Chief Executive Officer, for further commentaries on the results.
Thank you, Hassan. Let me first give an update on recent developments followed by the outlook for the fourth quarter and 2019. I'm pleased how our business is developing this year, especially in the past few months. We were disciplined and stuck to our commercial strategy of limiting forward sales during the low months in the beginning of the summer. As a result, we have entered the fourth quarter with an excellent inventory position and forward book. We can capitalize on the higher pricing environment that materialized in September and October, and expect these revenues to filter through in the fourth quarter results. This strategy was helped us -- has helped us both in the U.S. and in Europe. For example, U.S. Midwest UAN prices are up almost 50% since the beginning of July and CAN prices in Europe are up almost 30% from that. Going forward, we'll continue to limit forward sales to a maximum of 6 to 8 weeks. We will also expect a step up in volumes this quarter, and I would like to highlight both our methanol and fertilizer operations in the U.S. Our methanol business received a major boost from the introduction of Natgasoline, which started up at the end of June and has achieved much better production rates than anticipated so far. In recent weeks, performance of the plant has been even better, running effectively and efficiently at 104% utilization. Since the start of Natgasoline, it has produced to date over 0.5 million tons of methanol. IFCo is also looking very positive. In July, we took a shutdown opportunistically to optimize production, which made it possible to postpone a turnaround that was initially planned for October to 2019. Since the work was done, the plant has been running consistently at rates above nameplate. The plant stepped up production even more in October when we received the permit to increase allowable ammonia production from 110% to 118% of nameplate capacity. As a result, our operations team has done a great job in bringing the production rates of the ammonia plant to almost 115% in the past 4 weeks and the urea plant to 117%. Our DEF business in IFCo keeps growing at rates in the double digits from quarter-to-quarter, benefiting from a market that is growing in excess of 15% per year in North America. We have facilitated further strong growth and improved the reliability of supply with some small investments in logistics, adding new railcars and a newly constructed storage tank during this quarter. We are planning on doubling our current run rate of DEF during the course of 2019, so volumes for DEF for 2019 will be effectively double those of 2018. Now turning to the outlook. First, for our end markets. We expect that we can maximize the benefits of an expected continued recovery in our end markets. Firstly, our nitrogen markets are benefiting from tight supply despite some suggestion this week following the India tender that this was a different case. Not much spread capacity is currently available, and very few new capacities are coming into the market over the next 3, 4 years. These additions are further offset by expected plant closures and very low exports from China. Secondly, inventory levels across the system are very low and well below the levels at the same time a year ago, in particular in [ Asia-importing ] countries such as India and Brazil and even in Europe. And the demand outlook is favorable with an expected additional boost next year from an increase in corn acreage of potentially 4 million acres or -- in the United States that should provide an added boost that is not factored in. On -- before I go to methanol, the Iran issue will -- currently does not reflect in our outlook. The balances for both nitrogen fertilizer as well as for methanol do not reflect any change in Iran production or exports as a result of the recently imposed sanctions by the U.S. With at least 4 million tons each for each product, 4 million tons of urea and approximately 4 million tons of methanol, Iran is one of the largest exporters for both these products globally. To date, selling prices reflects full export capabilities out of Iran. So until Iran -- until now, Iran has not reduced exports for either product. But this may change in the coming months and after the 6-month waiver on oil is reviewed. On methanol in general, there are very few capacity additions coming in the next few years, and fundamentals remain robust even if there is some short-term volatility as a result of the fast drop in oil prices. And then I look at the shorter-term outlook for our business. We expect to end the year on a strong note and expect higher EBITDA and free cash flow in the fourth quarter compared to both the third quarter of 2018 and the fourth quarter of '17. Our commercial strategy is paying off. Our sales volumes are going up. We enjoy a first full quarter of Natgasoline, and we have no major turnaround scheduled for the remainder of the year. Our cost position is also favorable with a low blended average natural gas costs. We have a mix of long-term contracts with fixed gas prices in Egypt and Algeria at attractive pricing and spot prices in Europe and the United States. For our spot prices in U.S. plants, we are hedged primarily by our collars for more than 50% of our nat gas requirements to offset the risk of potential increases in natural gas prices over the periods between now and 2021. The collars have a bandwidth of $2.45 per MMBtu at the floor on average and $3.50 on the high side. In addition to those commitments, we selectively do forward fixed price purchase within that bandwidth. For example, we have hedged approximately 70% of our natural gas requirements over the next 12 months in the U.S. Specifically, we're pleased that IFCo has over 70% of its requirements hedged by a fixed price purchases at a price of around $2.40 per MMBtu. As a result of our favorable outlook, we are on track to reach a leverage metric between 4 and 4.4 net debt to adjusted EBITDA by year-end and expect to approach about 2.5x net debt-to-EBITDA towards the end of 2019. At that point, we will start the process of returning cash to shareholders in a combination of dividends and share buybacks. With that, we will open the line for questions.
[Operator Instructions] Your first question comes from the line of Roger Spitz.
I had a few questions on the Natgasoline accounting. First, am I correct that Natgasoline equity pick up is included on your balance sheet under the line item, income from equity accounting investees, net of tax?
Hassan, you want to answer that?
Yes. On an accounting business, Natgasoline will be accounted for using equity accounting. That's correct. But in our adjusted results, we're going to be reflecting our 50% share in the adjusted EBITDA going forward.
I understand that. I must come to that. But this quarter, you have equity income of minus -- of negative $3 million. That presumably includes the Natgasoline equity income pickup. Is that correct?
That is correct.
Okay. And then in your segment, you have Natgasoline equity and a pickup is included in -- is it included in IFCo in the segmentation?
No, no. No, no. It's not included in IFCo.
But we can get -- if you -- we can definitely send you -- if you can send us those questions, definitely on the accounting side, we can walk you through all the addition -- new accounting that's reflecting the new businesses coming into the...
Okay. Let me ask you one more broad question about it there. If you're including in your EBITDA the $17.7 million of Natgasoline EBITDA benefit, which is fine, but you're not including -- which is your share of the EBITDA of Natgasoline, but you're not including your share of Natgasoline's debt. Is that correct? So you're getting the EBITDA benefit, but you're not showing your share of the debt?
In our leverage -- yes, in our leverage calculations that we're talking about here, we're not reflecting our share of debt. Mind you that our N.V. debt on that HoldCo has about $600 million of financing that was attributable to our investments in Natgasoline.
On the same token, this is offset by the -- including the full share of the debt of other subsidiaries that have significant minorities. For example, our close to $700 million of Sorfert debt includes the portion of the debt that is attributable to our partner in Sonatrach. So if you adjust for that portion of the minority of Sorfert as well as that portion of the minority on EBIC, it becomes almost a wash.
Your next question comes from the line of Christian Faitz.
Two questions, if I may. First of all, can you talk a bit about current demand trends, particularly in Europe? My understanding is that the winter-seeded crops have massive drought-related problems, which also suggests that fertilizer application will be minimal in Q4. Can you confirm that from what you hear from your sales force? And then second question, just quickly, when in 2019 do you plan to conduct the turnaround in IFCo?
To -- excuse me, to announce what?
The IFCo turnaround. When about in 2019?
Okay. So on the first question, I can tell you that we do not see that in the demand in Europe. On the CAN side, we are practically sold out in line with our strategy for the 6 to 8 weeks forward, so we are sold out till year-end at current pricing of reflecting higher than EUR 235 netback on CAN. However, there were disruptions in sending the product out as a result of the lower river, which affected to some extent our September volumes and September sales out of UAN -- out of Europe. But those have started to pick up in the recent data in this, and volumes are going out. There is still a lot of demand. We see a lot of demand for January and February in Europe at current prices, and our reports from our distribution channels that warehouses on both CAN and urea in Europe are significantly lower inventory than last year. So that is how we see things on the European supply. The turnaround in IFCo, we will obviously try to time it with the lowest part of the season around summer.
Your next question comes from the line of Frank Claassen.
Frank Claassen, Degroof Petercam. Two questions. One, on Sorfert, can you update us on whether there's any insurance payment in the Q3? And whether you expect any in the future? And maybe also some comments on size of the insurance payments. And then secondly, on Natgasoline, now that you finished the refinancing, is there some upstreaming expected in the short term? And then when do you expect dividend payments? Or how does the upstreaming in the future will look like?
Hassan will jump on both questions even though I know the answers.
Regarding your first question on Sorfert, as you recall, we did record earlier in the year a $20 million down payment on the insurance claim for the shutdown that we experienced in 2017. We progressed the claim during the year. We believe we are now in the final stages of finalizing discussions with the insurance companies. The most likely -- the remainder of the cash that will be received in the -- for the balance of the claim will occur -- is expected to occur during the first quarter of 2019. And the -- we have not yet disclosed the amount. But we believe we're going to be within the guidance that we issued earlier to the market, which subject -- because we received -- if you factor out the gas, the force majeure on the gas, which we were successful in securing, then the balance of the claim should be somewhere in the neighborhood between $45 million and $65 million. On the...
Upstreaming.
On the upstreaming for Natgasoline, with the successful conclusion of the refinancing of Natgasoline last week, we will be -- we believe we're going to be unlocking cash in various forms with the prepayment of the existing shareholder loans or other working capital that the company provided during the start-up phase that will unlock anywhere between $100 million to $200 million over the next several months.
Your next question comes from the line of Tom Wrigglesworth.
Three questions, if I may. Firstly, Mr. Sawiris, I'm hoping that you might be able to share what you think -- I know you said you haven't include any shortfall from Iran in your balance assumptions. But is there -- could you give us some sense of how much of Iranian exports might be at risk? What will be going into 2019? Secondly, you obviously expressed confidence about the performance in the fourth quarter. I think the full-year guide -- full-year estimates on Bloomberg are $1.09 billion of EBITDA. Does that confidence -- could you -- do you think that consensus is in the right ballpark? If you could help us quantify that confidence you have in the fourth quarter, that would be very helpful. And thirdly, were there any ramp costs in Natgasoline's EBITDA in the third quarter numbers? I.e., for the pricing environment, is that the kind of right run rate for Natgasoline? Or were there hampering factors on that $18 million of EBITDA?
So first, I'll start with the question I won't answer so -- which is the guidance on the fourth quarter. We do -- we're not going to give numerical guidance 6 weeks before the quarter ends. But what we can say is that we entered the fourth quarter with a very -- with very strong visibility on our sales volumes. We have very little tons to sell until year-end to achieve what we think will be a good quarter. So on the Natgasoline issue, you have to remember that we -- in methanol, 85% of our production, including BioMCN, is contracted with long-term clients. So a lot of these contracts are 1 month trailing. So even a current drop in 1 month does not reflect until the following month because it's -- most of these contracts are 1 month after the formula prices are established or the benchmark price is established. So again, the pricing environment has come down a bit in the last few weeks as a result of erratic drop in oil. We think that this is overdone. There is very robust demand. We always hear the same story from the buyers about MTO in China and Asia, about MTO profitability and all that. Yet, MTO plants continue to run at reasonable utilization and additional MTO plants are earmarked for commissioning. So that side of the demand on methanol, we have good visibility also on methanol for Q4.
And Nassef, I will just add that just in addition to what the description that Nassef just gave on the market, that on the Natgasoline level, it is true that during the quarter, as we reported in our press release, the asset utilization rate was around 70%. So that captured the plant going through its ramp-up phase. But as Nassef indicated, by the end of the quarter, we're already above nameplate capacity. So the run rate will be much higher. The pricing also has improved [ at the ] Q4 versus Q3. And generally, so definitely, this quarter does not yet reflect the run rate potential for Natgasoline.
The last question I will answer, which is on Iran. What we feel right now is that Iran continues to export. They're putting tons on the market for December pricing. There is also an element of exports to the neighbors through trucks. Not a lot. But what we see now is that capacities have not come down, but it is going to become -- we don't want to speculate, but there is becoming a bit more difficult for shipping, for finance and transactions. One clear sign on the India tender yesterday, they wanted to tighten the screw so that reexported products from Iran that go to China cannot be reexported and rebranded as different country of origin. So they specifically beat cash against documents, payments and no LCs, so that a lot of people are starting to understand some of the loopholes that exist in the system. But for -- the current pricing environment reflects Iran producing and exporting 4 million tons of approximately urea and an equal amount of tons on methanol.
[Operator Instructions] Your next question comes from the line of [ Nathan Scudrick ].
So my first question, I didn't quite catch it. What was your leverage target for year-end 2019?
Around 2.5x net debt-to-EBITDA.
Okay. And then just on the commentary around pursuing an investment-grade rating, have you spoken with the rating agencies? And what was their commentary on what needs to happen in order for you to migrate to investment grade?
So what -- the first issue that, obviously, we have accomplished was that the plants, the end of the big CapEx cycle, the plant's starting operation and they see the cash flows from the operating plants, which they will see -- you will see from both IFCo and Natgasoline and all that. So that milestone, I think, is behind us. And then they would want to see the free cash flow conversion going into debt reduction. And so we benefit from 2 things, gross debt and net debt reduction as a result of the free cash flow as well as the rising EBITDA that improves our metrics as a result of higher volumes and the current pricing environment. So we are being -- we are constructive, but you have to remember that the rating agencies just rated us less than 6 months ago. So this is not an overnight event to get back to the investment grade. But we are in constant touch and committed to a highly disciplined financial [ pulse ].
Okay, great. And then just last one is on the overall debt reduction, how are you thinking about that? Is there any particular slugs of debt that you have identified in terms of paying first?
We have quite a lot of flexibility. We have a revolver that is not fully utilized, but it has -- it still has room. So that the first free cash flow, which will be in the fourth quarter, you will see it reflected and on the revolver at year-end coming down because that's the easiest tool we have and gives us that flexibility. And this was designed from the beginning, that a portion of the refinanced debt that we did before the summer was in the form of bonds and a portion was in a banking facility and revolvers. So the revolvers take the first priority because it -- for ease of execution at no cost.
You also have the benefit of the further interest rate stepdowns as we passed certain thresholds in our overall level of covenant leverage calculation. So based on -- as we get closer to the 2.5, this has also a material reduction in our cost of debt on these facilities.
And in the interest expansion genre.
Your next question comes from the line of Emrys Komen.
This is Emrys Komen from Kempen & Co. standing in for Henk Veerman in his absence. I have a couple on leverage structure. So firstly, you guide for a 2.5x net debt-to-EBITDA in 2019. What kind of explicit assumptions behind this figure? We estimate 2.5x net debt-to-EBITDA with an EBITDA of $1.3 billion in the next year. Is this a number we should bear in mind if the current market circumstances remain stable?
We used our forecast on pricing because pricing is not up to us on the consultants' view of 2019 pricing. But consultants have not -- are below current prices. Whereas what we see or what we forecast is that quite a rebound past December in pricing even beyond current prices. So on the pricing environment, we rely on the consultants with their view on that. We don't take our own view on pricing. So the target reflects what the average of the consultants reflect on pricing. And in that scenario, absent that they become -- they are proven to be right or wrong, that will have an impact on that. But that's our base case on pricing assumptions.
Okay. And just to follow-up on that. So you mentioned that share buybacks and dividends coming from this 2x net debt -- 2.5x net debt-to-EBITDA, should we assume that this is what management regards as the optimal leverage in a base case scenario?
I think 2 to 2.5x and 2x through the cycle is a fair assumption. And that also includes our assumption of all the volumes that are going to come out from the newly constructed facilities. You are going to see also we announced very smart minimal CapEx, and this is going to be a trend going forward. So, for example, we're adding 130,000 tons before next summer of methanol production in our Beaumont facility with a total CapEx of $10 million.
Your next question comes from the line of [ Joe Mears ].
I was just going to ask about whether there's an impact on the ethanol business from the sort of proposed tariff discussion. I'm not sure whether it's actually been applied yet between the U.S. and China in retaliatory tariffs. It doesn't look like from the prices it's impacted and you've never mentioned it explicitly. But I just wanted to just check up on that.
So the product is very fungible. Where it goes, people constantly can redirect Trinidadian volumes or Middle Eastern volumes to a country that -- to China and replace those customers with American products that goes into their end markets. Europe has almost a 7 million ton deficit. So there is a lot of arbitrage that will not make that have any impact. It's a global market and just having a tit-for-tat tariff between U.S. and China does not change the pricing. It's immaterial.
[Operator Instructions] Your next question comes from the line of [ Andrew Kurteen ].
I have 2 questions. The first one is in relation to benchmark pricing versus realized pricing. So throughout Q3, it looked like pricing on a benchmark basis came up sort of across the board. But it doesn't feel like there's really flow-through into your realized pricing. So if you can provide maybe a little bit more clarity of any laying impacts or anything else, which is sort of leading to that disparity? And the second question is around the Indian tender, which had quite a large amount of supply. And clearly, the equity markets pent it a little bit and across a number of stocks. So I'd like to have a little bit more clarity on how you, I guess, look at the 3 million tons of supply versus the tight market you know you've seen and if it can mean anything leading forward to Q4 and Q1 next year in terms of oversupply in the market.
I think, first of all, you have to take the 3 million ton number with a grain of salt because a lot of these offers were based on getting the supply from the same producer. So there is a lot of duplication. We know from our side that we will probably end up selling around 100,000 tons out of Adabiya in Egypt. And however, almost 300,000 or 400,000 tons of traders quoted the [ 300,000 ] tons. So there's a lot of duplication in that. In addition to that, the window allowed for shipment was completely different than their typical tender. They extended it by an extra 2, 3 weeks. So pro rata, you're going into a tender early -- before mid-November, but you're still allowing shipments in the 7th of January. This has never been the case before. So obviously, you get even production into January, which is not yet committed or marketed with a lot of producers. So you will get volumes for a lot of people that haven't sold the first week of January, and that also added. So a combination of multiple accounting of the same volumes and a longer duration. Your other question was?
Benchmark and realized.
Benchmark and realized. I mean, when you look at the trajectory of pricing throughout Q3, July, you came off from practically no demand, big discounts on the -- for the summer field program in the U.S. But then the market started to pick up late in August and September, so there is a timing effect. October prices are significantly higher than even those in September. And through Q4, you're going to see higher realized prices. A lot of also variance between pricing ex-factory and pricing that is delivered to customers. So that also is sometimes changes the final number. But all in all, starting from October through December, price variances have been quite predictable and small.
Your next question comes from the line of Faisal Al Azmeh.
This is Faisal Al Azmeh from Goldman Sachs. So firstly, congratulations on the ramp-up of Natgasoline. So 3 questions on my end. First, will the amount of expansion require a shutdown next year? And if so, for how long? And then on IFCo, you mentioned that the permits will allow you to achieve higher operating rates approximately, I think, 118% to 120% next year. Is this only for the ammonia line? Or is it for other lines as well? Finally, on your gas hedges, other than IFCo, what kind of hedges do you have in place for OCI demand as well?
Sure. First of all, the Beaumont project will not require a shutdown and should happen by summer this year, so it's an addition. I mean, we don't want to give out what we're doing, but we're introducing a booster product to upgrade the quantity that we can refine there. So this became a no-brainer for us. I mean, the project has less than a year of payback. The question on the permitting, we -- there are 2 positions on the permit. One is the upstream and one is the downstream. We are getting amendments to the permit to allow us to go up to 120% on urea and -- of nameplate and 120% of ammonia on nameplate. We are already achieving on some days 118% of urea. So the permits are cover also the upstream and the downstream. [indiscernible] Did I answer all your questions or you have another question?
Yes. I had a third question on the hedges, the natural gas hedges for OCI Beaumont as well.
Yes. So again, so we have this 50% overall collar. But we have opportunistically bought, for example, for Beaumont, I think we acquired the gas through up to 80-some-percent until February, March. So within the collar, we do some selective forward buying.
There is no further question at this time. Please continue.
Thank you very much for your time and for joining us, and looking forward to our next -- for the year-end results. Have a nice day, ladies and gentlemen.
Thank you, everyone. That does conclude our conference for today. Thank you for participating. You may all disconnect.