Hi, good afternoon and good morning to audience in the U.S. Welcome to the OCI N.V. first quarter 2019 results conference call. Thank you for joining us on this call to discuss our results and outlook. 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 first quarter of 2019, followed by a discussion of our 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, thank you all for joining us today. I'd like to start today's call with some of the usual highlights covering our first quarter performance. During our last conference call at the end of February, we communicated to the market our intention to maintain a disciplined sales approach. This resulted in a large portion of our sales volume shifting, as you may have read in our press release from the first quarter into the second quarter. During the first quarter, we witnessed some of the worst weather conditions in decades in the United States, which caused a delay in nitrogen fertilizer applications and consequently weakened demand. In Europe, purchasing started quite late, with a resultant pressure on prices visible during the late part of the quarter.
Rather than selling at materially decreased prices in March, we implemented a strategy to hold back product until the start of the season, resulting in a significant buildup of the inventory towards the end of the first quarter. We actually reached a peak of more than 1.1 million tons of nitrogen fertilizer stocks at the end of March, well above the half million tons that we reported at the end of December. We had some major plant turnarounds for one of the ammonia lines at our Algerian operations of Sorfert, which was the first major turnaround since commissioning the plant in 2013. During the turnaround, we replaced a major piece of equipment and carried out various maintenance work. This line has been able to run close to its maximum design capacity since the completion of the works, well above its average 2018 utilization rates.
We discussed in February that Natgasoline was not running during part of the first quarter due to some external utility supply issues. We're glad to report that these have been fully resolved in February and the plant has been running very well since. To the financial results, we reported a 22% decrease in self-produced sales volumes, reaching 1.7 million tons during the quarter in comparison to the same quarter last year. The buildup in our fertilizer inventories was the main driver of lower sales volumes, as I mentioned earlier, offsetting volume growth in our industrial chemicals portfolio. Production levels at our nitrogen facilities were healthy during the quarter. Our plants in Egypt ran well above nameplate capacity. IFCO, our plant in Iowa, showed robust reliability despite a harsh winter, our Dutch operations ran at healthy operating rates.
Because of the lower volumes, our first quarter revenue decreased by 20% to the reported EUR 597 million and our adjusted EBITDA of EUR 129 million was below the EUR 235 million achieved in the first quarter last year. Our free cash flow was relatively neutral, a drop of EUR 60 million negative before growth CapEx during the first quarter, again due to the working capital outflow of EUR 105 million, which we expect to be reversed during the second quarter and Nassef will cover some of that topic. Our total CapEx was EUR 60 million in the first quarter, of which EUR 19 million was for maintenance. Gross CapEx was EUR 41 million, mostly related to the BioMCN second line, which is nearing completion, and a 13% methanol capacity expansion at OCI Beaumont. As a result, our net debt was approximately the same level as the end of December.
With the strong dispatches already underway in Q2, we expect to resume our de-leveraging path from Q2 onwards. At this point, I'd like to turn over the call to Nassef Sawiris, our Chief Executive Officer.
Thank you, Hassan. Let me start with the current market conditions and how the second quarter is shaping up. When we last spoke, demand was delayed due to the unprecedented weather conditions, and we had started to build up inventories, which continued throughout March. I'm pleased that we stayed disciplined. The season is now in full swing, and we have shipped record volumes in both the U.S. and Europe in the past weeks. As of this moment, we have successfully placed the extra buildup of inventories. We have sold many of our products at higher prices than if we would have sold them in March, confirming the merit of our strategy. For example, Egypt urea prices are up around EUR 40 since the lows in February. In addition, our strategic presence in the heart of the Midwest
Means that we are capturing high in-region logistical premiums as compared to products imported into the region from NOLA. We have faced urea tons at more than EUR 125 per short ton above NOLA levels in recent weeks. We could hold product until the second quarter and maximize netback prices due to our investment in on and offsite storage capabilities across the U.S., Midwest, and Europe. I would like to thank the whole team for sticking to our disciplined sales strategy and for making the logistics for these record product movements possible. As I look at our main markets, the demand for nitrogen fertilizer product is looking healthy and has been strengthening throughout the second quarter. The outlook for our U.S. business remains particularly good. Crop planting is behind where it has been in recent years, and wet weather has delayed some corn planting.
The poor ammonia application last fall and this spring means we are confident that we can continue to move urea and UAN into late June and possibly early July. We are shipping record volumes as we benefit from a shift of ammonia to urea or UAN. Despite this shift and the weak ammonia application season, attractive ammonia retake has resulted in record ammonia deliveries at strong price. We are also shipping record CAN volumes in Europe. This is due to both our decision to store significant volumes in anticipation of the season and the effect of low river levels in the second half last year. Demand is currently very strong, and several price increases have been announced in the past weeks. For the first half of 2019, we expect higher CAN volumes than during the same period last year.
Overall, across the industry, we expect ending stocks of nitrogen fertilizers to reach levels below the average of recent years by the end of June, before the seasonally weaker summer period. This will help a tightening of the global supply and demand balance, as we expect very few new capacity addition, and we expect exports from China to remain at low annual levels. Our industrial nitrogen portfolio is performing well and growing. Melamine prices have decreased slightly from the fourth quarter of 2019 into the first quarter of this year, but remain at good levels. I'm pleased with the continued strong growth of our DEF business, and we are well on track to more than double our DEF sales volumes in 2019. We also continue to assess how we can further expand and optimize the premium products we've built to the market. The final look at the methanol market.
Despite recent methanol price volatility, overall fundamentals of methanol markets remain positive. We expect new methanol capacity additions to remain limited in the next couple of years. Overall, economic growth and the current oil price environment are also supportive of methanol demand. MTO is coming back online and increasing operating rates, albeit slowly, partly due to trade war uncertainty affecting downstream demand in China. Two or three new MTO facilities are still on track for startup in the next few months, representing more than 3 million tons of additional methanol consumption. In addition, we are benefiting from significantly lower gas prices in Europe. Against this backdrop, we expect to start production at the second line at BioMCN in the early parts of June and are on track to increase methanol capacity at OCI Beaumont by mid-year.
Short term, we have also had a boost from Natgasoline, which despite an extended shutdown, built up excess inventory relative to normal levels during Q1. Product sales have accelerated during the second quarter and have now returned to normalized levels. Gas prices are also looking very favorable. In Europe, gas prices are now less than half the level of last year's highs, and we expect to see the full benefit from the current quarter onwards. In the U.S., we will also continue to benefit from low gas prices and hedges at our different operations. We have costless collars for the majority of our gas needs at OCI Beaumont and Natgasoline, and prices below $2.40 for almost 70% of IFCO's requirements this year. Finally, a look at OCI's light outlook for 2019 specifically.
We expect a record second quarter resulting in a higher adjusted EBITDA in the first half of 2019 compared to the first half of 2018. We reiterate our expectation of continued growth in adjusted EBITDA and improvement of our leverage metrics in the full year 2019. We're now open for questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. As a reminder, if you wish to ask question, please press star one on your telephone keypad and wait for your name to be announced. Your first question come from the line of Roger Spitz. Please ask your question.
Thank you. Good afternoon. Can you say how much was available to draw under your revolvers as of March 2019?
In excess of EUR 200 million, you can get the specifics after the call.
Thank you. Regarding Nitrogen U.S., why did Q1 2019 EBITDA moved up to EUR 40 million from EUR 21 million year-over-year, given your volumes were well down and ammonia prices were down? Was that driven by higher UAN prices? I would have thought with the volumes down that EBITDA wouldn't be up, even though I understand IFCO was up.
Which plant are you referring to?
I'm referring to the segment in your press release, Nitrogen U.S. The EBITDA was EUR 40 million in Q1 2019 and EUR 21 million in Q1 2018. I thought the volumes were well down.
Yeah. It's a combination also of volumes, gas prices, and selling prices. Despite the lower volumes and the build-up of inventories, we achieved those numbers.
I see. How about regarding Nitrogen, Middle East, MENA, as you put it.
Yeah
on the same page, Q1 2019 was EUR 50 million versus EUR 122 million year-over-year, or down EUR 70 million. Can you say how much was that due to Sorfert being under turnaround, and how much was that due to building your volumes at Sorfert and your two Egyptian facilities? Can you break down that EUR 70 million between those two issues?
The volume impact is more than EUR 35 million, and this is at cost. Obviously, we're selling it at higher prices now than on that. That should reflect in the second quarter. The turnaround would be part of the balance, and that's about it.
All right. Thank you very much for your time. Appreciate it.
Your next question comes from the line of Henk Veerman. Please ask your question.
Hi. Good afternoon, gentlemen. I have quite a few questions, so if I can, I'll ask them one by one. Firstly, in fertilizers, you produced about 1.16 billion tons of fertilizers in Q1, and you also produced for the inventory about 600,000 tons. Total production in the quarter is about like 1.7 billion tons. That's about the same level as last year. Is it safe to assume that, let's say, the ramp-up in IFCO was more or less offset by Sorfert, the production stop at Sorfert? Is that a fair assumption, just for an understanding?
Yes, the bulk of that assumption. Also, Europe had a good production. The bulk of it is Iowa ramp-up.
Yeah. Related to that, let's say from Q1 to Q2, let's take that 1.7 billion tons as a starting point. In Q2, you produce another 1.7 billion tons, you sell the 600,000 tons of your inventory, let's say Sorfert also produces a couple of hundred thousand tons. Is it then fair to say that, let's say sequentially in Q2 versus Q1, your total production more or less doubles? Is that how we should think about your seasonality?
Production. Not production. You mean outflows?
Yeah, sorry. Yeah, product sold. That's what I mean.
We'll have to do the I would say not doubles, but increases. If you add the 600 inventory built up and you assume the same production, that's not a double. That's almost like a 40%-50% increase.
Yeah. Okay. My second question is on Natgasoline. Natgasoline, EBITDA on a full ownership basis was about EUR 16 million in the quarter. EUR 8 million for you and EUR 8 million for your partner, where it only produced for one month, basically, in March. In that month, let's say the asset produced EUR 16 million of EBITDA. Can we then assume, let's say, if Natgasoline wouldn't have the supply constraints that you experienced, that, let's say, the quarterly run rate on the sort of pricing level that we're at is about EUR 60 million-EUR 80 million EBITDA for the remainder of the year, assuming we'll have a clean quarter? Is that how we should think about that?
You're not too far, also, you have to take into consideration the gas prices and all that, you're not too far.
Okay.
We've achieved that already in Q4. Prices have come down a bit, not a lot.
Okay. That's clear. On DEF production, you mentioned that year-on-year for the full year, your output will more than double, yet Q1 seems a bit, let's say, low, I'm assuming there's some seasonality in there. Could you maybe comment on that?
Yeah, we actually like the seasonality in the U.S. because peak driving season is at a time when there is a farm application in the summer. We're starting to see that comment. Usually it starts after Memorial Day. We see DEF demand picking up, yes, there is cyclicality in the DEF demand related to trucking and driving season.
Okay. My last question is on the press release you sent out on the fourth of March, where you say there has been inbound interest in the methanol assets. Could you confirm that discussions are more or less ongoing, given there has been no comments as of that date?
We're not going to comment on specifics on that. As a general statement, we do review our portfolio very vigorously, and methanol is taking an increased amount of time for us to evaluate all strategic options.
Okay. Let me ask one follow-up on that then. That's my last question. Let's say you put a replacement value on those methanol assets in the presentations of the company presentation. Let's say, in your view, would it make sense that in today's markets, the assets are worth more than the replacement value numbers you put in that presentation?
In a rational world without any tensions or trade or lack of predictability of the coming in the short term, replacement value means that you're giving away four years of cash flows. In a rational market, you should be expecting a higher value than replacement value because you're compounding also your cash flows, which otherwise would have been deferred until the completion of construction. That's our belief.
Okay. That's very clear. Thank you.
While assets could trade below replacement value in methanol, no transactions is likely to occur below replacement value.
Perfect. Thank you, gentlemen.
Your next question comes from the line of Thomas Rigelsford. Please ask your question.
Thank you very much. A couple of questions, if I may. Obviously, we've seen this big step up in the corn belt, nitrogen prices. Can we assume that you will realize this new level that's been achieved in May, rather than averaging in 2Q through, have you resisted selling tons in April? Noticing that we've seen the spike that you've indicated with the fourth quarter results. Secondly, I think you've been clear, but just to clarify, your point is that inventories are low, and even if we do lose some planting, it should lead to a good supply and demand balance, at least in country, in the U.S., as we go into year-end. Is that what I should understand? Thirdly, outside of the U.S., can you give us your thoughts on what pricing is going to look like over that summer period?
Obviously, we don't have the gas price support that we had during the summer season for those seaborne tons. Any insights you could share on how the summer's going to progress? Do you think China's going to step back in and start buying tons again from the seaborne market if prices go low enough? Thank you.
First on the question of April and May, this is really a week-by-week exercise. To give you an idea, this week, if you're calling from the U.S., there's a lot of wetness in the Midwest, so this week is different. That is expected to go away beginning of next week, and we expect demand to even accelerate even further next week to play catch up in a very time-sensitive period. It's very tough to give you an average of April and May, but for sure, all pricing in the Midwest is trading at historical premiums as well as, in general, urea is trading higher in April and May than it did in February and March. What we need to explain in general is that this strategy is not just opportunistic.
We consider a sale off-season to a stockist as a virtual non-sale because it did not hit the ultimate demand sources. It's merely placing volumes in the hands of an intermediate at a low price in the off-season, which is counterproductive once the season starts. We have invested in distribution and all that to prevent that from recurring. Now, as far as the summer, we expect that this summer pricing to be significantly higher than last summer on the back of multiple issues. Number one, the inventory levels at end of June are expected to be extremely low. People have delayed purchasing decisions. Yesterday, there is talk of another India and Asian tenders till June.
We go into the off-season, which starts in July with very little carryover, and the same in Europe, with very little carryover from May and June. With that in mind, we expect summer pricing or what some people in the U.S. refer to as full pricing, to be significantly higher than last year. We've seen that already in Europe with CAN prices announced for July, almost 20% higher than same time last year. For the second half, we believe pricing will be stronger. We don't see China coming back with big volumes. It just doesn't make sense for China to import energy, keep the pollution at home, and export a product that produces very little margin for the Chinese economy. That's our outlook for the second half.
Okay. Just to follow up, if I may. I think you said at the full year results that U.S. gas prices in 2Q would be $2.30 in MMBtu. Does that still stand? I appreciate there's probably some flexibility, that things may have marked, market developments may have changed. Is $2.30 the kind of right level for 2Q gas in the U.S.?
Not too far from that, yeah. Very close.
Great. Thank you very much. Very clear. Thank you.
Next question come from the line of Frank Claassen. Please ask your question.
Yes, good afternoon. Frank Claassen of Degroof Petercam. First of all, question on your CapEx guidance. Is that still EUR 200 million to EUR 220 million for this year? Secondly, on Sorfert, do you expect any dividend payments related to Sorfert for this year? Finally, related to DEF, we've talked about the U.S. Can you update us on your plans for DEF outside of the U.S., so Europe and maybe also Egypt? What progress are you making with launching DEF in those regions? Thank you.
DEF is still being launched in small volumes in the emerging markets yet. To give you an example, major introduction of DEF in China only happened last year. That's going to grow exponentially, but it's not as material as AdBlue in Europe or DEF in the U.S. What was the other question?
On the CapEx guidance.
The CapEx guidance hasn't changed.
Okay. On Sorfert, do you expect any dividend payments from Sorfert this year?
Yes.
What is your view on that?
Yes, we expect dividends to reflect 2018 earnings, and this is already agreed.
Okay, when will that happen? Is that Q2, Q3?
Summer, so kind of July, is where we expect that to happen.
Okay.
We still have to hold AGMs and all that, which are underway. Then the process starts. We expect probably, I would say, Q3.
Okay. Maybe coming back on DEF. I thought you also had plans to launch in Europe. Is that still the case, and what is your progress over there?
We have made a few trial shipments from Egypt, and we're still evaluating. It's merely based on the economics of granular urea versus DEF. This year in Europe, we realized higher net backs with granular urea.
Okay, that's clear. Okay, thank you very much.
Next question comes from the line of [Jeffrey Heer]. Please ask your question.
Hi, good afternoon. Thank you for the opportunity to ask the questions. Just got two. First of all, can you just outline what your pricing strategy is for nitrates in Europe? Will you be following Yara or have you got a different strategy from what Yara's announced last week? Then just on Q2 EBITDA that you've commented, if you could outline what gives you so much confidence that you can generate more than EUR 310 million of adjusted EBITDA in the second quarter, that would be very helpful. Thank you.
On pricing, I do not prefer to comment on competitor pricing, but all we can say is that we're extremely disciplined in terms of not offering product that is not needed at reduced prices. That is our strategy, and we think we're going to implement it. It worked for us summer and Q3 and Q4 last year. There will be no bargains offered in the summer of 2019, especially on the back of low inventory, ending inventory globally by end of June. Without going into numbers, we believe that this summer is going to be materially higher prices across all nitrogen products. The second question was the
The EBIT.
We're confident. Obviously, it helps that we are now almost end of May, and we've sold a portion of June production already. You can have that kind of confidence when you've locked in your gas price for the quarter, and you have a solid order book that gives you visibility. Yes, we are confident on that.
Thank you.
Your next question comes from the line of Hassan Ahmed. Please ask your question.
Hi. I just wanted to clarify, when you are saying you are looking to meet your methanol portfolio, do you have an advisor at the moment, and what's the timeline for this strategic review? Thank you.
We'd rather not comment on that, we typically engage advisors on transactions. We'd rather not comment on that now.
Timeline? Do we expect an update? Thank you.
We'll probably give a further update with the next quarter results late in the summer. Yes, ma'am. Can you hear me?
Thank you.
Next question comes from the line of Roger Spitz. Please ask your question.
Thank you very much for the follow-ups. First, I don't know if you'd be willing to provide this, but would it be possible to provide the Q1 2019 year-over-year volume declines in each of nitrogen U.S., nitrogen Europe, and nitrogen MENA?
I'd rather do this off the call so you can check with Hans, and some of it is already segmented. You can get that off the call, if you don't mind.
Of course. Would it be possible to provide the off-balance sheet accounts receivable securitization, the amounts outstanding as of March 31st?
Again, that would be probably easier for us to answer on a separate call. It's very specific, and the amounts vary obviously with the buildup in inventory. There is a decline because what we didn't sell in March, some of it has already been actually cashed.
Got it. My last one is regarding the ammonia prepaid program. Just for my edification, is this the same or different from the fill program? I feel like it's different. Also, if you delivered all this volume, but the U.S. farmers weren't planting because of the extraordinarily wet weather, what has happened to this ammonia? Is it sitting in warehouses along the Mississippi or somewhere, that will be sold down in Q2?
No, a lot of it is already being delivered and has been delivered in April and May, especially in early April. This is ongoing. It's orders that have been placed a few months earlier, with targeted dates, and a lot of it has already been shipped in April and May, at these higher prices.
Got it. Just so I'm clear, is this also known as the fill program, or is this different from the fill program that people speak of?
It's kind of different. Because ammonia doesn't store that well, so it's mostly a commitment for volumes yet to be produced. Whereas what we believe is the understanding on the fill program is that you sell to big traders, they put it in the warehouses, wait four months, and make 20%-30%. Something that, a practice that we have tried to avoid and consistently try to avoid.
All right. Thank you again for the follow-ups.
Your next question comes from the line of Harry Thiruvengadam. Please ask your question.
Hi. Thanks for taking my question. This is more in relation to trying to understand your business a little better. Obviously, it's comforting to see a very strong guidance for the second quarter, and that's great. Just in terms of trying to reconcile your guidance and confidence in terms of not only just hitting the EBITDA numbers, but also seeing good momentum in volumes. How do I reconcile that with the information that's released by the USDA, especially in relation to corn planted and soybean planted, especially in the Midwest, where we still see a significant backlog in relation to where the acreage is relative to where it was last year? For example, in places like Illinois, it's still way below what it was in mid-May, where it was about 95% planted, now it's still 25%.
I'm just trying to understand, how does it work in terms of your ability to shift volumes when acreage planted for corn and soybean in the Midwest continues to be low? Thank you.
First of all, we are now talking, we're already end of May. We do not have a lot of volumes to sell in order to meet our guidelines and enhance our confidence. What we have to sell from here till end of June are not a lot of quantities. That is one thing. You can look at it two ways. You can look at having 45% of the corn planting taking place as a potential significant uptick next week when the weather should dry up in the Midwest, and this is the current expectation. The volume is not placed exclusively in our plant, but it's also been distributed to a lot of leased storage facilities. On a single day, you're not capped by the logistical constraints of shipping out of one plant.
You're shipping out of, in that case, six or seven different locations, and the same in Europe. We've done a lot of work on logistics and we can ship a lot in a very short period of time. Again, on the guidance, we have not a lot of volumes to sell in June in order to meet our targets for a stronger H1.
That's helpful. Thank you.
Next question comes on the line of Henk Veerman. Please ask your question.
Hi. One small follow-up from my side. When you talk about the growth in EBITDA half year 2019 versus half year 2018, should we assume that includes the IFRS 16 impact of about EUR 25 million for that half year, which is helpful for your adjusted EBITDA? Or can we also expect the growth in EBITDA on, let's say, an IFRS 16 adjusted basis? Thank you.
It includes the IFRS adjustment.
Okay, thank you.
There are no further questions at this time. Please continue.
Okay. I would like to thank everybody, and looking forward to our next call. Thank you.
That does conclude our conference. Everybody, thank you for participating. You may all disconnect.