Ladies and gentlemen, thank you for standing by, and welcome to the Orozcom Construction Industry Industry Industry NB 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 1 on your telephone. I must advise you to this conference is being recorded today, Monday, 25th November 2018.
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
for all in the U. S. Thank you for joining the OCINV 3rd quarter conference call. With me today are Nassa Sarrears, our Chief Executive Officer Hassan Badrawi, our Group Chief Financial Officer and also Fatima Davoshi, our new group Chief Operating Officer. On this call, we will review OCI's key operational event 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 and therefore, I'd like to refer you to our disclaimer about forward looking statements. Now 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 plans, turnaround projects, efficiency improvements and various debottlenecking projects at 11 plants at 4 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 a higher than average CapEx for the quarter. Not to collaborate on this, a little bit more later, but the program has been very successful and prevents us to transition towards run rate and our next phase of volume driven growth in 2020, reflecting, combination specific to line the step up from Iowa and Algeria versus, the plant shutdowns that they had in 2019. And these were 2, these are of our highest margin businesses and the effect of the normalization of our methanol plants following some extensive outcomes in 2019.
If I look at our operational performance first, our total oil produced sales volume decreased by 5% to 2,200,000 metric tons during the third quarter of 2019 compared to this last year. The concentrated impact of the plant turnaround in Iowa, Algeria Egypt and the Netherlands offset the volume growth of the ramp up of our new methanol capacities. On the nitrogen side, I'd like to highlight 3 nitrogen products, in particular, Firstly, our North American UAN volumes improved despite the full week. We bought the Mexican project in Iowa as the US application season was extended into early, third quarter into weather related delays during spring season. Secondly, we sold 9% more CN volumes in the 1st 5 months of 2019 compared to the same period last year, which included a record 2nd quarter as end users purchase product later in the season.
So there was some volatility and reallocation between the quarters that overall for the 9 months, the volumes were up. Our diesel exhaust fluid or DEF business in the U. S. Continued strong growth trajectory and volumes are set another quarter in the U. S.
Methanol volumes increased by 25% during the quarter. We achieved full production from biopsyM's first line, which was down for a planned turnaround during the third quarter of 2018. And we had some initial benefits from the startup of our new capacity in the Netherlands. As we have already planned to bring the launch of our new bonds and our customers today, Magasirino was down from August until the end of October due to our isolated incidents, related to a waste heat boiler, but the incident was fully insured. Despite satellite, these volumes were up year on year as the best 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 and ammonia prices, our 3rd quarter revenues decreased to $634,000,000, and our adjusted EBITDA was $107,000,000. European gas prices dropped considerably through the second and third quarter reaching record low quarterly levels. Did not get the full advantage of the lower gas price in Europe because of a 3 month hedge, which matured during the third quarter, resulting in a $28,000,000 realized loss. I don't want to look into the results of the nitrogen platform. The adjusted EBITDA for the European and U.
S. Segments were up with solid performance at Iowa Corporation. The media region performance was down maybe because of the planned turnaround effect. Adjusted EBITDA of our methanol business on the other hand was down despite the year on year and quarter on quarter improvement of 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 $4,100,000,000 as of 30th September 2019.
Almost at the same level as of 30th June 2019. Free cash flow before growth CapEx during the quarter was only margin negative of $39,000,000. This was despite a heavy CapEx quarter of $139,000,000, of which $78,000,000 pertaining to maintenance CapEx during that period, maintenance expenses and CapEx. And of which, growth CapEx of $61,000,000 is mostly for the refurbishment of our methanol, excellence. And for final settlement payments to contractors related to, other growth projects than our east.
We also consolidated the opening balance sheets for our new joined newly concluded joint venture with ADNOC, Abu Dhabi National Company. For the first time, as we closed the transaction on the 30th September 2019, This had a net positive effect on our net debt of around $46,000,000. Finally, I would like to highlight that we successfully completed a $1,400,000,000, equivalent refinancing through a dual tranche bond offering in the US and, in U. S. Dollars and euros.
In October. The refinancing is the reduction of our cost of debt by about 90 bps for the portion of refund and debt as we continue to optimize our cost of funding and maintain focus, on a strict financial policy geared towards deleveraging. I would now like to hand over to Rudolfo for further commentary. Thank you, Hassan. With the defense of turnaround and defaults to net 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. But 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 significant improved performance in Iowa. For example, the ammonia plant has beaten previous secularization levels several times since the 3 started in August and has been running at consistently high levels in the 116 percent of nameplate area on average during the past few months. The downstream plants are doing equally well. Execute in 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 1 of the lines reaching above 100% and second line above 93% of mean plate capacity.
But, these numbers were never achieved in startup, and were a result of by the unplanned shutdown at Natgasoline and low methanol price. Natgasoline has a comprehensive insurance and has already received an insurance prepayment of US30 $1,000,000 for loss of business and repair. The insurance proceeds will be reflected in the 4th quarter results. I'm pleased to say that the plant restarted at the beginning of November and its currency running at close to nameplate capacity. Turning to our overall outlook.
We are now 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 con conception consequently our sales volume. In addition to benefiting from better conversion economics following the turnarounds. Our position on the coast 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 combine total at almost 700,000 tons for delivery over the next few months. For next year, all the work we performed at summer had set up up to grow our volume significantly. First, we expect a significantly lighter turnaround program in 2020 compared to this year. And importantly, as Hassan highlighted earlier, we expect the biggest increases in volumes to come from our lowest cost plant in Iowa and Nigeria. 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 Firsty Grove will also bring advantage. We have further strengthened our competitor position following the close of this transaction on 30th September. The consolidation of the joint venture has resulted in the additions of 2,100,000 metric tons per annum capacity to our platforms, and we expect to generate substantial synergies. The Indian Siopia tenders also show the benefits of the JV as we can benefit from that by selling to other primary expert marks.
Then if I look to our methanol business. In 2020, like our nitrogen business, we expect a substantial increase our production volumes, and we as we benefit from the 1st full year of the new methanol capacities in the U. S. And Europe. Prices are at trough levels hitting marginal cash cost flows despite some recent improvements after the roads were reached in July.
However, 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. Finally, gas prices are looking very favorable for our preparations. In Europe, gas prices have continued to be at close to record low levels and we believe there has been a structure shift in the European gas market. As such, we expect prices to remain within a bandwidth of $3 to $5 per MMBtu with the exception of weather driven volatility. 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, Hendi Hubgreen prices and well below last year. The forward curve suggests this will feel like this for the foreseeable future. This will continue to keep our US 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
Thank you, sir. Telephone and wait for your name to be announced. And our first question comes from the line of Roger from Bank of America.
Starting with ADNOC Fertilizers, can you provide the LTM q319 sales and EBITDA of the of ADNOC Fertilizers, not the JV, just just ADNOC.
I wouldn't have that those numbers readily available. I mean, the transaction closed September 30th. So we'll have to give you that just 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. How much was available under the September, at September 30th, 2019? How much is available under your revolver?
Right now considering also some of the other initiatives, I think we are, we have Only $150,000,000 drawdown out of over a 1,000,000,000. So, you can see that we have, an undrawn, close to $800,000,000 of undrawn under the revolver.
Hey. And last is, what was the q 3 impact, EBITDA impact of all the outages and turnarounds?
It's tough to quantify given, the pricing, that stuff, but, you can fairly assume that, between the turnarounds, and the hedge on the gas, close to $100,000,000 would be a rough number.
Thank you very much.
Thank you. And our next question comes from the line of Alisa Denezi from Morgan Stanley. Your line is now open.
So first on the hedges, you had a $28,000,000 realized loss on European gas hedges. In the quarter. And I'm just wondering if you could provide a little bit more detail if you have any additional outstanding hedges and also how you opportunistically sort of broadly take actually positions in gas contracts going forward across the U. S. And Europe.
That's my first question. And then second question is related to working capital. 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 sort of any sort of qualitative guidance around that. And then 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 3rd quarter end.
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 what how you would easily meet them. Thank you very much.
So I'll start by the last question. So there are no risks, for the covenants. We can confirm that. And then back to the hedging, strategy. So we thought that, when gas prices in Europe for the first time started to be under $5, and, 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, the quick ramp up of US LNG exports that happened as as a result of some of the additional LNG capacity coming on stream. Without take or pay commitments because some of them, those commitments kick off later. And the result is in a flood of the gas market in Europe, and, so that edge, 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 color, form that is actually, has little impact on the actual re realized price. Your third question was on the working capital. It has to do with seasonality. Typically see, faster buying towards November December. And that's usually, helps contribute to better working capital.
By year end. So that's a pattern on, on the system. You're seeing what the engine at Ethiopia. Tender coming in that we have a very solid backlog. So, working capital is should be, under control.
Okay. Thank you very much for that.
Thank you. And our next question comes from the line of Vinan Kieran from Mozini. Your line is now open.
Thank you. So just to confirm, the impacts, EBITDA impact of one of 23 was around $100,000,000. Is that right?
Yeah.
Is there any expected because I know,
I would say a bit more because, some of it, the insurance So if you add the Natgasoline, impact, it'd be a bit more than that. But again, those $30,000,000 will will, will come into Q4. So, the one offs yet, which is
close to maybe
to, like, $130,000,000.
Okay. So the the impact was 1 30, 30,000,000, which will be compensated by the insurance payment in Q4. Are you expecting any further payments from the claim?
We cannot comment on that because this is work in progress. But, usually the insurance companies would pay an advance when they, feel that the advance is a portion of the finite plate, but, we cannot comment on that because it's still, underling the discussion.
Okay. And then in q 4, because I think one unplanned outage run into, q 4 as we stand now, are you able to, give us a guidance as the one off impact for Q4?
No. I mean, the impact will be not Brazilian for October, which we discussed. And we had a small outage but not material that is, since it has started up. But Q4, we are so far are very happy with the improved production levels in Iowa, in Algeria, in Egypt, in Abu Dhabi, in Holland, of course, leave off the necking. So most of the plants are running wet.
Okay. And lastly, in terms of, free cash flow generation for the last quarter of the year. You briefly touched from working cap So what what should we expect in terms of free cash flow generation for Q4?
If you want the prices, You can do the math, but we, it's obviously a function of where, prices will be in December. And that will be, one of the major items to look on the cash to converge.
If, we, 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, I mean, we have seen, for example, in the U. S. Major drop downs in, last week, that trend continues for the coming few weeks, but 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. So it's very, difficult to exactly predict that.
But in general, the plants are running well, and we have a good order book on urea. So the rest is pricing and dispatch.
Thank you. And the next question comes from the line of, Dazeen Kumar from Moon Capital. Your line is now open.
Hi, guys. Thanks for taking the questions. So 2 from my end. First, so given we've seen weakness in nitrogen pricing lately. If this pricing environment persists, would you explore opportunities to acquire assets with ADNOC?
And then the second question is, you know, coming off a weak spring application season in the US, can you talk a little bit about customer inventory levels today relative to, normal fall season and how this could maybe impact customer purchasing activity going forward?
So on the first question, we don't like to comment on initiatives I mean, we, when the opportunity came to consolidate the export market and we find, like minded partners, we created the JV. In the US, we created a JV with a quota gasification that was non equity related, but is already generating, significant synergies for both partners. So we continue to look at opportunities, that makes sense for us. On the inventory level, we believe that inventory levels, both in the U. S.
Europe are significantly below where they were last.
Thank you.
Next question comes from the line of Sam Perry from Credit Suisse. Your line is now open.
Hi. So, the equity story for you guys for a long time surrounded ramping to full capacity, but for a number of quarters, you've had unplanned outages, delayed ramp ups, how can we gain confidence into 2020 that these are nonrecurring. And then I guess off the back of that, what do you estimate has been the total EBITDA impact for these out is 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 I think we have to differentiate between, outages and turnarounds. So, turnarounds are planned well in advance, almost a year in advance. So we just made sure that most of the turnarounds happened in that, in a time of the softest softest period of demand in Q3, other than the unforeseen major outage in Natgasoline, which was insured. So we cannot forecast that and cannot give you an answer, on it, but you can get comfort in that, we are covered for business interruptions and all that against everything that is unforeseen. But to give you, some guidance, the number of days of turn up, of planned turnarounds in 2020, is roughly half the number of days of the planned turnarounds we have for 2019.
So, in terms of the lost production as a result of the turnarounds. In addition, our CapEx for maintenance for turnarounds for 2020 is lower than, 2019, despite the addition of $60,000,000 of CapEx for, the ADNOC facility, which was not included this year. So on a like for like basis, we're looking at reduced maintenance CapEx. So shorter number of days without production and lower maintenance CapEx.
Great. Thanks very much.
Thank you. Next question comes from the line of Faisal Alal from Goldman Sachs. This is
Faisal from Goldman. Just a just a quick, a few questions on my end. Maybe I'm not gasoline. If you can just provide some color on on effectively what what caused the unexpected shut down and whether the issue is is now behind us. Then just on on minority.
So, obviously, we've seen the numbers now actually are now revised higher with the JV. Just a question on on Surfford's minority as part of the the total number. Does that now reflect the economic interest in Suffolk, or is it still effectively the the the the the ownership that that that was historically stated in in that business. And maybe did the JV require you to effectively rethink how how you account the minority interest of SORFET on the balance sheet. And then finally on on on your outlook, just maybe if you can shed some color on on how you view supply growth next year, particularly, Chinese exports as well.
So that would 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, an, an, a distorted number that is labeled as Chinese exports. A portion of the Chinese exports, are labeled as re exports which are basically Iran's Iranian product that goes into China and comes out as Chinese exports. Now 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 what is public in the public domain as having gone to Brazil, which is over a million tons, directly to Brazil. And what has gone to Turkey, at, quite and, sizeable portion has gone to China, and some of it ended in the Chinese market and were replaced by exports from other plants that are coastal. That wouldn't have exported unless they try the Iranian product went into China, plus the the volumes that are labeled re exports. So, 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. So, 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 reach package them to certain destinations as Chinese exports. So we basically see a situation where if one of two things happens, the outlook for urea will instantly improve. If the tensions are lifted against Iran, actually, we'll see your real prices go up because that 25, 30% discount for Iranian exports, covers the, brain damage and the headaches of, rerouting and, issuing different visual lading and changing sources of and origins of the product is no longer needed. So for example, in Brazil, almost excellent action of over 1,000,000 tons that goes to a specific enforcer, and those products are priced well under the market and has resulted in a significant disruption of the Brazilian pricing environment, or they come to China and are re exported and created a distortion about incremental Chinese exports. So if that, 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.
Now our presenters 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 the methanol. So, the Iran situation is really the key determinant factor on short term, on Chinese and on pricing environment. The other question, on economic interest and change that as consistently as it was. And the other question was on Natgasoline.
So on Natgasoline, there was a whiskey boiler, kind of, you can call it, This is a 2,000,000 dollars, $3,000,000 piece of equipment, but it's very different out of every chemical plant. A total failure, totally unexpected and was, well covered and we had to go through a strict repair process with the original equipment manufacturer. And, right now, the plant has been up and running the beginning of November. And we think that this problem is fixed for them.
And just maybe a follow-up question given that you highlighted effectively Iranian exports. Just when we're looking at methanol, are the dynamics very different there and and how our exports out of Iran impacting the market?
No. In Methanol, it's actually more blatant because 100% of, Iranian methanol are destined to the Asian market. And now there is, which is 5,000,000 tons And now there is actually, an informal published prize called sanctioned products. So, certain publications would have a price for methanol and a price for sanctioned methanol. So, obviously, the sanctions, are not being implemented or monitored.
And so production out of China, Toby Run is, or plants are running also at full capacity in your view at this stage. Right? So there's something we'd like to come out of. Okay. Yeah.
Thanks.
Thank you. I've got full capacity at every discounted price. So today's published, sanctioned price is about $50 lower, than the normal price which is already affected by the dear existence of the central trial.
Thank you.
On that note, single effect has, has stopped the process of, of trading in sanctioned products, but they are the only ones who have done so in China.
Thank And our next question is from the line of James Maxwell from Janice Henderson. Your line is now open. Can we ask your question?
Hello. Good afternoon. I just wonder if we could go back to what actually happened in the third quarter in terms of volumes. More specifically in September. Because I'm conscious when you're marketing the bond, which is in the middle of October, so end of the quarter, you made a statement around the performance in the 1st 2 months of that quarter, and you're saying the volumes were up 7%.
Year on year, so the 1st 2 months end of August. So the inference being that, the performance in September was really surprisingly weak. Could you explain that a little bit more? Because it seems to me that it wasn't, suddenly the commentary that you're making there didn't, point the magnitude of the drop in volumes or the impact on EBITDA. So I wonder if you could comment a little bit more about that.
The shutdown happened earlier. So, the sales volumes just track the shutdowns. So, you can't really pin it on a month, but you have inventory issues and all that.
But but sorry. So but in the middle of October, for after the end of the quarter, you were marketing a bond deal talking about volumes up 7% in the 1st 2 months of that quarter. But now now you're saying what is exactly that you you couldn't tell what what was gonna happen in September, or you didn't know what was happening in September?
No. Actually, on the during the bond marketing, this was factual information related to the performance of the 2 months. There was no guidance given for the quarter. But 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 hence the $130,000,000 quantified impacts have you not had all these concentration of turnaround.
To give you an idea, for example, the Natgasoline, shutdown occurred early August, but during August, the volumes kept going. And if you compare on a year over year basis, all the natural in volumes are incremental increases because, the year before, they weren't there. And the same for Vireo MCN in Holland. Both the volume in Holland for 2019 did not exist for the 2nd line in 2018. Right.
It just seems, I mean, from
looking at
what the market seemed to expect for your 3rd quarter, and what you were saying at the time of the bond issue that may be talking simply about volumes for the 2 months was not giving the full picture of what what you think was the likely expectation and EBITDA. I mean, am I missing some or is that fair? No.
We don't actually give guidance on EBITDA. We never have, but what we did give as got as, indications of So as you said, the market update was the actual volumes achieved during the 2 months, at the time of the bond issue. But we also alluded to a high concentration off turnarounds, and we mentioned facilities by name that some of our most high margin facilities and largest volume producers were under significant plan turnarounds. That was also part of the statement. I don't know if maybe you may have missed that.
No. No. I've seen that. I've I've pre that's in there. Okay.
Can we move to
the The only number the only number so I
can just comment. Questions, can you take them off line, please? Because mean, we have a quite a heavy lineup. Fine. Okay.
Thank
you.
We will now be taking our last question. And the last question comes from the line of Steph Abelli from BNP Asset Management. Your line is now open.
Yes. Hi. Just a question on, sort of like, first of all, whether you were surprised by the impact that the implant shutdown had. And I think previously you were referring to, this kind of, like, number impact on EBITDA, 113,000,000. And you put in the, I think, plant out plant turnaround and unplanned shutdowns as well as the hedges.
Can you also break it down, in terms of, you know, how much was actually the impact of the planned outage, and sorry, like, you know, just like a quick one on that. And, you know, in terms of the volumes, what what was the, sorry, what was the volume increase or decrease during
the quarter? I'll give you the numbers that we have already mentioned. So you can figure that the Natgas impact, is pretty much not far, not different than the insurance of 29,000,000, which is 2 months, of production from beginning of August. Till end of September plusminus $5,000,000. The other the hedges were clearly stated at $29,000,000 then you can assume that, the balance would be close to the volume as lost for the, plant shutdown because these are the most key, the, turnarounds with a very small portion coming out of a moment, unplanned turnout.
But other than the small portion on the metal on on Walmart and the Natgasoline shutdown, everything else were were planned turnarounds.
Okay. As so you were not, like, if I or, like, have to really conclude. You're not surprised that the level of revenues and EBITDA that, that you have, achieved in Q3 2019?
No, it must surprise you the exception of Natgasoline and the hedges. But prices in Q3, there was no, dramatic surprise on the fertilizer side. But on the methanol side, it was, we saw the drop in July. I mean, right now, for example, fertilizer prices are surprisingly, lower than the summer tough months, but methanol prices are higher than July.
Okay. Thanks.
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.
This is conclude our conference for today. Thank you for participating. You may all disconnect. Speaker, kindly standby.