Ladies and gentlemen, thank you for standing by and welcome to the OCI N.V. Construction Industry Third Quarter 2019 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. I must advise you that this conference is being recorded today, Monday the 25th of November 2019. I would now like to hand the conference over to our speaker today, Director of Investor Relations, Hans Zayed. Thank you. Please go ahead.
Thank you. Good afternoon and good morning to our hosts in the U.S. Thank you for joining the OCI N.V. Third Quarter Conference Call. With me today are Nassef Sawiris, our Chief Executive Officer, Hassan Badrawi, our Group Chief Financial Officer, and also Ahmed El-Hoshy, our new Group Chief Operating 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. 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. Therefore, I'd like to refer you to our disclaimer about forward-looking statements. Let me hand over to Hassan.
Thank you, Hans, and thank you all for joining us today for the Q3 results call. As we flagged during our last conference call and in recent publications, we took advantage of the usual seasonal slowdown in the summer to execute planned turnaround projects, efficiency improvements, and various debottlenecking projects at 11 plants at four of our production sites, which included Egypt, Algeria, the United States, and the Netherlands. You can see from the results that this was an unusual concentration of plant shutdowns, as this was reflected in our production volumes, EBITDA, and in a higher-than-average CapEx for the quarter.
Nassef will elaborate on this a little bit more later. The program has been very successful and prepares us to transition towards our run rate and our next phase of volume-driven growth in 2020, reflecting a combination of facilities online, the step up from Iowa and Algeria versus the plant shutdowns that they had in 2019. These are two of our highest margin businesses and the effect of the normalization of our methanol plants following some extensive outages in 2019. If I look at our operational performance first, our total all-produced sales volume decreased by 5% to 2.2 million metric tons during the third quarter of 2019 compared to this last year. The concentrated impact of the plant turnarounds in Iowa, Algeria, Egypt, and the Netherlands offset the volume growth from the ramp-up of our new methanol capacities.
On the nitrogen side, I'd also like to highlight three nitrogen products in particular. Firstly, our North American UAN volumes improved despite the four-week debottlenecking project in Iowa as the U.S. application season was extended into early third quarter due to weather-related delays during spring season. Secondly, we sold 9% more CAN volumes in the first nine months of 2019 compared to the same period last year, which included a record second quarter as end users purchased product later in the season. There was some volatility and reallocation between the quarters, yet overall for the nine months, the volumes were up. Our Diesel Exhaust Fluid or DEF business in the U.S. continued a strong growth trajectory and volumes set another quarterly record. methanol volumes increased by 25% during the quarter.
We achieved full production from BioMCN's first line, which was down for a plant turnaround during the third quarter of 2018, and we had some initial benefit from the start-up of our new capacity in the Netherlands. As we had already planned during the launch of our new bonds and our press release today, Natgasoline was down from August until the end of October due to an isolated incident related to a waste heat boiler, but the incident was fully insured. Despite the shutdown, Natgasoline volumes were up year-on-year as it benefited from a full month of production in July. Turning briefly to the financial results for the quarter. Because of the lower volumes as well as lower methanol and ammonia prices, our third quarter revenues decreased to $634 million, and our adjusted EBITDA was $107 million.
European gas prices dropped considerably through the second and the third quarter, reaching record low quarterly levels. We did not get the full advantage of the lower gas prices in Europe because of a three-month hedge, which matured during the third quarter, resulting in a $28 million realized loss as a one-off. Looking to the results of our nitrogen platform, the adjusted EBITDA for the European and U.S. segments were up, with solid performance at Iowa across operations. The MENA region performance was down mainly because of the planned turnaround effect. Adjusted EBITDA of our methanol business, on the other hand, was down despite a year-on-year and quarter-on-quarter improvement at our methanol operations in the Netherlands. This was mostly because of the previously mentioned shutdown at Natgasoline, as well as the impact of lower methanol prices.
Turning to the balance sheet, our cash flow performance reached $4.1 billion as of 30th of September 2019, almost at the same level as of 30th of June 2019. Free cash flow before growth CapEx during the quarter was only marginally negative at $39 million. This was despite a heavy CapEx quarter of $139 million, of which $78 million pertained to maintenance CapEx during that period. Of which growth CapEx of $61 million was mostly for the refurbishment of our methanol expansion and for final settlement payments to contractors related to other growth projects in our units. We also consolidated the opening balance sheets for our newly concluded joint venture with ADNOC, or Abu Dhabi National Oil Company, for the first time as we closed this transaction on the 30th of September 2019.
This had a net positive effect on our net debt of around $46 million. Finally, I would like to highlight that we successfully completed a $1.4 billion equivalent refinancing through a dual tranche bond offering in US dollars and euros in October. The refinancing is a reduction in our cost of debt by about 90 bps for the portion of refinance debt, as we continue to optimize our cost of funding and maintain focus on strict financial policy geared towards deleveraging. I would now like to hand over to Nassef for further commentary.
Thank you, Hassan. With the extensive turnaround and debottleneck program behind us, I'd like to thank the whole team for the excellent and timely execution. We successfully completed this ambitious program and have already seen the effects. The program was extensive and covered almost all our nitrogen facilities. If I look on a like-for-like basis outside the plant turnarounds, production levels at all our nitrogen facilities were robust. We achieved material improvements in on-stream performance and cost efficiency. I'm particularly pleased with our significantly improved performance in Iowa. For example, the ammonia plant has beaten previous record utilization levels several times since it restarted in August and has been running at consistently high levels in the 116% of nameplate area on average during the past few months. The downstream plants are doing equally well.
Executing two sizable turnarounds within six months is a significant achievement by the management team in Algeria, and here we have also seen a positive effect. The plant's ammonia lines have reached higher levels than before the turnarounds, with one of the lines reaching above 100% and the second line above 93% of nameplate capacity. These numbers were never achieved since start-up and were a result of installing a brand-new waste heat boiler. Our methanol operations were negatively impacted by the unplanned shutdown at Natgasoline and low methanol prices. Natgasoline has a comprehensive insurance and has already received an insurance prepayment of $30 million for loss of business and repairs. The insurance proceeds will be reflected in the fourth quarter results. I'm pleased to say that the plant restarted at the beginning of November and is currently running at close to nameplate capacity.
Turning to our overall outlook. We are now reaching our run rate production levels as we have completed our growth capital expenditures program during the third quarter this year, and we expect to also benefit from the 2019 turnarounds and debottlenecking initiatives. As a result, we expect a meaningful step-up in production and consequently, our sales volume. In addition to benefiting from better conversion economics following the turnarounds. Our position on the cost curve is supported by favorable gas prices and a fully ramped-up production platform will be a main driver for our performance next year. Commenting on our nitrogen operations. Shorter term, our global order book for the fourth quarter is robust, based on commitments to supply urea to India and the fast-growing Ethiopian market, to a combined total of almost 700,000 tons for delivery over the next few months.
For next year, all the work we performed this summer has set us up to grow our volumes significantly. First, we expect a significantly lighter turnaround program in 2020 compared to this year. Importantly, as Hassan highlighted earlier, we expect the biggest increases in volumes to come from our lowest-cost plants in Iowa and Algeria. Iowa has the added benefit that we expect our DEF volumes to be robust in 2020. This product has low seasonality and high margins compared to urea. Our new JV, Fertiglobe, will also bring advantages. We have further strengthened our competitive position following the close of this transaction on 30th of September. The consolidation of the joint venture has resulted in the addition of 2.1 million metric tons per annum capacity to our platforms, and we expect to generate substantial synergies.
The India and Ethiopia tenders also show the benefits of the JV, as we can benefit from selling to other primary export markets. If I look to our methanol business. In 2020, like our nitrogen business, we expect a substantial increase in our production volumes as we benefit from the first full year of the new methanol capacities in the U.S. and Europe. Prices are at trough levels, hitting marginal cash cost floors, despite some recent improvements after the lows were reached in July. With the expected increase in volumes, especially coming out of Iran and our position at the low end of the global cost curve, we continue to be well-placed. Gas prices are looking very favorable for our operations.
In Europe, gas prices have continued to be at close to record low levels, and we believe there has been a structural shift in the European gas markets. As such, we expect prices to remain within a bandwidth of $3 to $5 per MMBtu, with the exception of weather-driven volatilities. This is a result of high liquidity in LNG markets competing with Russian imports. We expect to benefit fully from the low gas price environment from the fourth quarter onwards. In the U.S., Henry Hub prices are at multi-year lows and well below last year. The forward curve suggests this will stay like this for the foreseeable future. This will continue to keep our U.S. operations at the very low end of the global cost curve.
In conclusion, even if markets continue to be as volatile as they have been recently, we believe that our position on the global cost curve for all our operations, together with the volume growth, will allow us to generate robust free cash flow and continue this operation. With that, I will open the line for questions.
Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, star one to ask a question. Our first question comes from the line of Roger Spitz from Bank of America. Your line is now open. Kindly ask your question.
Thank you. Good afternoon. Starting with ADNOC Fertilizers, can you provide the LTM Q3 '19 sales and EBITDA of ADNOC Fertilizers? Not the JV, just ADNOC.
I wouldn't have those numbers readily available. The transaction closed September 30th. We'll have to give you that at another time.
Can you provide any update on the review of strategic alternatives for methanol? When do you expect the review to be complete, and have you started any auction process for methanol?
No. We never said that we're starting an auction process. We're just in the review, and we always said that this is going to be completed by Q1 next year.
Q1. At September 30th, 2019, how much is available under your revolver?
Right now, considering also some of the other initiatives, I think we have only $150 million drawn down out of over a billion. You can say that we have close to $800 million of undrawn under the revolver.
Okay. Last is, what was the Q3 EBITDA impact of all the outages and turnarounds?
It's tough to quantify given the pricing is tough, but you can fairly assume that between the turnarounds and the hedge on the gas, close to $100 million would be a rough number.
Thank you very much.
Thank you. Our next question comes from the line of Alisa Di Nisi from Morgan Stanley. Your line is now open. Kindly ask your question.
Good morning. Good afternoon, all. A couple of questions from my side. First on the hedges, you had a $28 million realized loss on European gas hedges in the quarter, I'm just wondering if you could provide a little bit more detail, if you have any additional outstanding hedges. Also how you opportunistically sort of broadly take actually positions in gas contracts going forward across the U.S. and in Europe. That's my first question. Second question is related to working capital.
Yes.
Over the last two years, you actually had quite some nice working capital inflows in the fourth quarter. I'm just trying to understand what the moving parts will be this fourth quarter, and if you can provide any sort of qualitative guidance around that. Lastly, on the back of your new bond, you have a number of covenants, and I know you've met all your covenants as per third quarter end, but I'm just wondering if you could highlight a little bit of whether there would be any risk to your covenants for the full year, or how you would easily meet them. Thank you very much.
I'll start by the last question. There are no risks.
Sure
for the covenants. We can confirm that. Back to the hedging strategy. We thought that when gas prices in Europe for the first time started to be under EUR 5 and in that range, that this was a feasible time to lock in that price. What we didn't figure out is a bit of weather impact and the quick ramp-up of U.S. LNG exports that happened as a result of some of the additional LNG capacity coming on stream without take or pay commitments, because some of those commitments kick off later, and it resulted in a flood of the gas market in Europe. That hedge did not play out very well. Going forward, we have limited hedges going forward.
I would say less than 10% of our 2020 needs are hedged, and some of them are in a collar form that actually has little impact on the actual realized price. Your third question was on the working capital. It has to do with seasonality. We typically see faster buying towards November and December, and that usually helps contribute to better working capital by year-end. That's a pattern on the sales. We're seeing with the India and Ethiopia tender coming in, that we have a very solid backlog. Working capital should be under control.
Okay. Thank you very much for that.
Thank you. Our next question comes from the line of Zenan Kiran from Mozini. Your line is now open.
Thank you. Just to confirm, the EBITDA impact of one-off from Q3 was around $100 million. Is that right?
Yeah.
Is there any expected?
I would say a bit more because some of it, the insurance. If you add the Natgasoline impact, it'll be a bit more than that. Again, those $30 million will come into Q4. The one-off yet.
Okay.
Closer maybe to like $130 million.
Okay. The impact was $130 million, which will be compensated by.
Yeah
the insurance payment in Q4. Are you expecting any further payments from the insurance claim?
We cannot comment on that because this is work in progress. Usually the insurance companies would pay an advance when they feel that the advance is a portion of the final claim. We cannot comment on that because it's still under discussion.
Okay. In Q4, because I think one unplanned outage run into Q4. As we stand now, are you able to give us a guidance as to the one-off impact for Q4?
The impact will be on Natgasoline for October, which we discussed, and we had a small outage, but not material. That has since had started up. Q4, we so far are very happy with the improved production levels in Iowa, in Algeria, in Egypt, in Abu Dhabi, in Holland, of course, debottlenecking. Most of the plants are running well.
Okay. Lastly, in terms of free cash flow generation for the last quarter of the year, you briefly touched on working capital. What should we expect in terms of free cash flow generation for Q4?
If you know the prices you can do the math. It's obviously a function of where prices will be in December. That will be one of the major items to look on the cash flow conversion.
Maybe specifically on working capital then, if we expect the prices are where they are today and do not move until the year end, do you expect working capital to be a source of cash or usage of cash for Q4?
I'd rather not comment on that because it has also to do with the uptake of deliveries and any weather impact. We have seen, for example, in the U.S., major drawdowns in last week. If that trend continues for the coming few weeks. These are all very time sensitive, and some of the demand might be shifted, in CAN, for example, from December to January, February in Europe. It's very difficult to exactly predict that. In general, the plants are running well and we have a good order book on urea, so the rest is pricing and dispatch.
Okay. Thank you very much for your time.
Thank you. The next question comes from the line of Devine Kular from Moon Capital. Your line is now open.
Hi, guys. Thanks for taking the questions. Two from my end. First, given we've seen weakness in nitrogen pricing lately, if this pricing environment persists, would you explore opportunities to acquire assets with ADNOC? The second question is: coming off a weak spring application season in the U.S., can you talk a little bit about customer inventory levels today relative to a normal fall season, and how this could maybe impact customer purchasing activity going forward?
On the first question, we don't like to comment on initiatives. When the opportunity came to consolidate the export market and we find like-minded partners, we created a JV. In the U.S., we created a JV with Dakota Gasification that was non-equity related but is already generating significant synergies for both partners. We continue to look at opportunities that make sense for us. On the inventory level, we believe that inventory levels, both in the U.S. and Europe, are significantly below where they were last year.
Okay, great. Thank you, guys.
Thank you. Next question comes from the line of Sam Perry from Credit Suisse. Your line is now open.
Hi. The equity story for you guys for a long time surrounded ramping to full capacity. For a number of quarters, you've had unplanned outages, delayed ramp-ups. How can we gain confidence into 2020 that these are non-recurring? I guess off the back of that, what do you estimate has been the total EBITDA impact for these outages year to date? Or what can we expect the incremental EBITDA from the lack of outages to be next year at current market prices? Thank you.
I think you have to differentiate between outages and turnarounds. Turnarounds are planned well in advance, almost a year in advance. We just made sure that most of the turnarounds happened in a time of the softest period of demand in Q3. Other than the unforeseen major outage in Natgasoline, which was insured, we cannot forecast that, we cannot give you an answer on it. You can get comfort in that we are covered for business interruptions and all that, against everything that is unforeseen. To give you some guidance, the number of days of planned turnarounds in 2020 is roughly half the number of days of the planned turnarounds we have for 2019 in terms of the loss of production as a result of these turnarounds.
In addition, our CapEx for maintenance for turnarounds for 2020 is lower than 2019, despite the addition of $60 million of CapEx for the ADNOC facilities, which was not included this year. On a like for like basis, we're looking at reduced maintenance CapEx. Shorter number of days without production and lower maintenance CapEx.
Great. Thank you so much.
Thank you. Next question comes from the line of Faisal Al-Azmeh from Goldman Sachs. You are through and kindly ask your question.
Yes, thanks. Hi, this is Faisal from Goldman Sachs. A few questions on my end. On Natgasoline, if you can provide some color on effectively what caused the unexpected shutdown and whether the issue is now behind us. On minority, obviously we've seen the numbers now are revised higher with the JV. A question on Sorfert's minority as part of the total number. Does that now reflect the economic interest in Sorfert or is it still effectively the ownership that was historically stated in that business? Maybe did the JV require you to effectively rethink how you account the minority interest of Sorfert on the balance sheet? Finally on urea outlook, maybe if you can shed some color on how you view supply growth next year, particularly Chinese exports as well. That'd be quite helpful. Thank you.
I'll start with the last question, because I was waiting for that question for a long time on the Chinese exports. What we see is a distorted number that is labeled as Chinese exports. A portion of the Chinese exports are labeled as re-exports, which are basically Iranian product that goes into China and comes out as Chinese exports. That number, which is labeled re-exports, in our view, is way understated from the actual re-exports because the Iranian plants are running at full capacity.
If we take what is in the public domain as having gone to Brazil, which is over 1 million tons directly to Brazil, and what has gone to Turkey, quite a sizable portion has gone to China, and some of it ended in the Chinese market and was replaced by exports from other plants that are coastal, that wouldn't have exported unless the Iranian product went into China, plus the volumes that are labeled re-exports. If you take away the Iranian impact, we think that Chinese exports are not materially different than last year, given the capacity utilization and the cost curve. The only thing that is different this year is that they have the ability to buy Iranian product at well under the market prices and repackage them to certain destinations as Chinese exports.
We basically see a situation where if one of two things happens, the outlook for urea will instantly improve. If the sanctions are lifted against Iran, actually we'll see urea prices go up because that 25%, 30% discount for Iranian exports covers the rain damage and the headaches of rerouting and issuing different bills of lading and changing sources and origins of the product is no longer needed. For example, in Brazil, almost 1 million tons that goes to a specific end-user, and those products are priced well under the market and have resulted in a significant disruption of the Brazilian pricing environment, or they come to China and are re-exported and create a distortion about incremental Chinese exports.
If sanctions are lifted, we actually expect not a single extra ton of urea to come to the market, but the same volume will come at higher price. If the sanctions are implemented and those volumes don't appear in the market, that's another story, and you will see a melt up in pricing on both fertilizer and methanol. The Iran situation is really the key determining factor on short term on Chinese and on pricing environment. The other question on Sorfert is that economic interest and change that as consistently as it was. The other question was-
Okay
On Natgasoline. On Natgasoline, there was a waste heat boiler, kind of, you can call it. This is a two, three million USD piece of equipment that is very intense, heart of every chemical plant. A total fail, totally unexpected. Was well covered for insurance. We had to go through a strict repair process with the original equipment manufacturer. Right now the plant has been up and running beginning of November, and we think that this problem is fixed.
Just maybe a follow-up question, given that you've highlighted effectively Iranian exports. Just when we're looking at methanol, are the dynamics very different there? How are exports out of Iran impacting the market?
No, in methanol, it is actually more blatant because 100% of Iranian methanol are destined to the Asian market, which is 5 million tons. Now there is actually an informal published price called sanctioned products. Certain publications would have a price for methanol and a price for sanctioned methanol. Obviously the sanctions are not being implemented or monitored.
Production out of Iran is, or plants are running also at full capacity in your view, at this stage, right?
Full capacity.
to come out of Okay.
Yeah.
Thanks.
Full capacity at heavily discounted price. Today's published sanctioned price is about $50 lower than the normal price, which is already affected by the mere existence of the sanctioned price.
Thank you.
On that note, Sinopec has stopped the process of trading in sanctioned products. They are the only ones who have done so in China.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone keypad. Our next is from the line of James Maxwell from Janus Henderson. Your line is now open. Kindly ask your question.
How are you? Good afternoon. I'm just wondering if we could go back to what actually happened in the third quarter in terms of volumes, more specifically in September. I'm conscious when you were marketing the bond, which was in the middle of October, so end of the quarter, you made a statement around the performance in the first two months of that quarter, and you're saying the volumes were up 7% year-over-year, so the first two months, the end of August. The inference being that the performance in September was really surprisingly weak. Could you explain that a little bit more? It seems to me that it wasn't, certainly the commentary that you're making there didn't point to the magnitude of the drop in volumes or the impact on EBITDA. I wonder if you could comment a little bit more about that.
The shutdown happened earlier, the sales volumes just tracked the shutdowns. You can't really pin it on a month because you have inventory issues and all that.
Sorry, in the middle of October, after the end of the quarter, you were marketing a bond deal talking about volumes up 7% in the first two months of that quarter. Now you're saying what exactly? That you couldn't tell what was going to happen in September, or you didn't know what was happening in September?
Actually during the bond marketing, this was factual information related to the performance of the two months. There was no guidance given for the quarter. What we're saying is that there were the significant effect of the turnarounds which started in various parts of the quarter, obviously has an effect on both sales and production. Hence the $130 million quantified impact, had we not had all these concentration of turnarounds. To give you an idea, for example, the Natgasoline shutdown occurred early August, during August, the volumes kept going. If you compare on a year-over-year basis, all the Natgasoline volumes are incremental increases because the year before they weren't there. The same for BioMCN in Holland. The volumes in Holland for 2019 did not exist for the second line in 2018.
Right. It just seems, from looking at what the market seemed to expect for your third quarter, and what you were saying at the time of the bond issue, that maybe talking simply about volumes for the two months was not giving the full picture of what you think was the likely expectation in EBITDA. Am I missing something, or is that fair?
No, we don't actually give guidance on EBITDA. We never have. What we did give as indications of, as you said, the market update, was the actual volume achieved during the two months at the time of the bond issue. We also alluded to a high concentration of turnarounds, and we mentioned facilities by name, that some of our most high-margin facilities and largest volume producers were under significant planned turnarounds. That was also part of the statement. I don't know, maybe you may have missed that.
No, I've seen that. I agree that's in there.
Okay. Can we move to the next?
The only number, sorry, just to confirm my figures.
If you have any additional questions, can you take them offline, please? We have quite a heavy lineup.
Fine. Okay.
Thank you. We will now be taking our last question. The last question comes from the line of Stef Abelli from BNP Asset Management. Your line is now open. Kindly ask your question.
Yes. Hi. Just a question on, first of all, whether you were surprised by the impact that the unplanned shutdown had. I think previously you were referring to this number impact on EBITDA of $130 million. You put in there, I think, planned turnaround and unplanned shutdowns, as well as the hedges. Can you also break it down in terms of how much was actually the impact of the unplanned outage? Sorry, just a quick one on that. In terms of volumes, what was the volumes increase or decrease during the quarter?
I'll give you the numbers that we have already mentioned. You can figure that the Natgas impact is pretty much not different than the insurance of $29 million, which is two months of production from beginning of August till end of September, plus minus $5 million. The hedges were clearly stated as $29 million. You can assume that the balance would be close to the volumes lost for the planned shutdowns, because these were mostly the turnarounds, with a very small portion coming out of our Beaumont unplanned turnaround. Other than the small portion on the methanol on Beaumont and the Natgasoline shutdown, everything else were planned turnarounds.
Okay. you were not, if I have to draw a conclusion, you're not surprised at the level of revenues and EBITDA that you have achieved in Q3 2019?
No, we're not surprised with the exception of Natgasoline.
Yeah
The hedges. Prices in Q3, there was no dramatic surprise on the fertilizer side.
On the methanol side, we saw the trough in July. Right now, for example, fertilizer prices are surprisingly lower than the summer tough months, but methanol prices are higher than July.
Okay. Thank you.
Thank you. There are no further questions at this time. Please continue.
Thank you very much, and looking forward to our next phone call. Thank you.
That does conclude our conference for today. Thank You for participating. You may all disconnect. Speaker, kindly stand by.