Good afternoon, ladies and gentlemen, thank you for standing by, and welcome to today's OCI N.V. 2018 Results Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a Q&A session, at which time, if you wish to ask a question, you will need to press star and one on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today, Tuesday, the 26th of February, 2019. I would now like to hand the conference over to your speaker today, Hans Zijderveld. Please go ahead, sir.
Thank you. Good afternoon, and good morning to our audience in the U.S. Thank you for joining us on the OCI N.V. 2018 Results Conference Call. 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 fourth quarter and full year 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 would 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. Thank you all for joining us today. I'd like to start today's call with highlighting our excellent safety performance that was achieved by all our facilities during 2018, and which will be detailed as usual in our 2018 annual report. Five plants achieved zero lost-time injuries, and the group's lost-time injury rate improved by a third compared to 2017, despite having several significant turnarounds during 2018. This is the third consecutive year in which we witnessed an improvement and continue to achieve one of the best safety records in the industry and something we're very proud of. Now, turning to our financial results for the fourth quarter. We're pleased to report a 20% increase in self-produced volumes to two and a half million tonnes during the quarter, compared to the same quarter in 2017.
As a result, we've achieved a record 9.4 million tonnes for the full year 2018, which is a continuation of our ramp-up and something that we will continue to see into 2019 and 2020 with the expected full-year impact of Natgasoline, the start-up of Vianen second line, and the expansion that is currently ongoing in OCI Beaumont production facilities. Despite some volatility towards the end of the quarter, we were able to capture selling prices that were on average higher compared to both the previous quarter and compared to the fourth quarter of 2017. Because of the higher volumes and the higher average prices, our fourth quarter revenues increased by 47% to $942 million.
We reported an adjusted EBITDA of $269 million during the fourth quarter, which is 102% higher than the fourth quarter of 2017 and 17% higher than the previous quarter in 2018.
This improvement was a result of the higher revenue as well as higher margins, which we have achieved due to high utilization rates. For example, at IFCO and our facilities overall in North Africa. During the quarter, our Iowa Fertilizer Company was one of the main drivers of our growth. Towards the end of 2018, the operating team in Iowa did an excellent job in increasing IFCO's production levels to a record 115% of nameplate capacity. We could achieve this as the plant benefited from optimization work that we carried out during the third quarter and as a result of the first part of a permanent increase for our production levels. Our methanol business performed well despite a short unplanned shutdown at OCI Beaumont in December.
The methanol segment was also affected by some repairs at our Natgasoline plant, which had run above nameplate during October and most of November.
This was caused by some utility supply issues that have now been fully resolved. Still a positive quarter for Natgasoline, exceeding its Q3 debut performance and faring well for its full year of production in 2019. Turning to a key measure of performance during the quarter. We generated free cash flow of $305 million before growth CapEx, which takes the total for 2018 to $620 million, and this is compared to only $115 million in 2017. Our positive free cash flow performance during the quarter was driven by a combination of higher operational performance and buoyed by a sharp focus on working capital optimization. We also received the first dividends and repayment of shareholder loans from Natgasoline to the tune of $58 million during the quarter.
Capital expenditures were $66 million in the fourth quarter, with only $21 million attributable to maintenance, bringing the total for the year to $293 million, which is in line with our guidance and indications during our last call in November. Finally, our quarterly cash flow was partially offset by interest of $105 million. This is higher than the quarterly average, as we mentioned earlier before, and interest is mostly paid out in the second and fourth quarters of the year. Because of our strong free cash flow performance, we saw a clear improvement in our leverage profile during the quarter. Net debt decreased by $295 million. We continue the trends of a meaningful improvement in leverage ratios.
Our trading net debt to adjusted EBITDA was at 4.4 times at the end of December, recalling that we had reported 5.5 times end of September, and has come down from seven times in December 2017. As I look ahead, the company remains highly committed to deleveraging for 2019. In addition to our expectations of higher operational results, we will continue our disciplined focus on working capital management and expect some positive contributions to our prospective cash flow. We expect some $50 million-$70 million step down in our interest expense in 2019 compared to the reported $341 million in 2018. Partially also benefiting from a 50 basis points step down, which we get with every half turn in net debt to EBITDA metrics on part of our bank facilities, and this was achieved based on our December covenants.
We also expect CapEx to decrease from $293 million in 2018 to a range of $200 million to $220 million in 2019. Out of this amount, around $150 million to $160 million is attributable to maintenance and the rest is the residual growth projects that we have, including the extremely attractive 13% methanol capacity expansion at OCI Beaumont. At this point, I'd like to hand over to our Chief Executive Officer, Nassef Sawiris, for further commentary.
Thank you, Hassan. I will first give an update on recent developments, followed by the outlook for 2019. I'm pleased that we ended 2018 on a strong note. We generated strong free cash flow, reduced our net debt by almost $300 million during the quarter, and made excellent progress on our deleveraging. We are now clearly starting to see the real benefits of our investments, and we also benefit from our disciplined commercial approach. We were able to capture healthy selling prices as we stuck to our commercial strategy. Our industry has been plagued by the practice of selling large quantities forward of product during low seasons, which we see as value destructive. This results in producers making significant commitments that restrict them from fully participating when prices rise.
It also allows traders to purchase product at typically seasonally low prices, and then become a competitor to producers when the season kicks in. This is why we have invested heavily in on-site and off-site storage capabilities and retained significant working capital flexibility to weather market fluctuations and help realize better value for our production facilities. In Europe, we are close to our customers, and we have facilities in North Africa that can efficiently export product to key demand regions. In the U.S., we have significant freight and logistical advantages, and we expect this to be especially beneficial at times when there are bottlenecks for product to be transported into the Midwest.
Our team has established excellent transport capabilities by truck, rail, and barge for our products, which coupled with our very flexible plant, allow for just-in-time production and delivery to respond to customer needs.
For example, we will have 1,100 leased rail cars in season this year from about 400 in 2017. We have global storage capabilities of almost two million tons and have invested in a network of strategically leased or owned warehouses in both Europe and the U.S. For example, in Western Europe, we have strategically located off-site urea storage, allowing us to position our product close to the customer for in-season usage in Netherlands, Belgium, France, and Spain. In the U.S. alone, we have almost half a million tons of storage via on-site and off-site storage that give us meaningful flexibility. Our significant on-site ammonia storage allows us to comfortably keep tons that were not placed in the fall for our customers and achieve a step-up for our spring pricing.
On UAN, we have over 150,000 tons of off-site storage in places across the Corn Belt, shared between 10 facilities.
Of course, the N-7 joint venture bolsters our storage and adds additional local marketing capabilities for urea in the Dakotas and Minnesota, the biggest consumption region for the product in the U.S., providing synergies not only with our U.S. production facilities, but also for our value-creating opportunities with our global production base. N-7 is a successful example of value-creating consolidation without any dilution to OCI shareholders. I firmly believe that we can maximize net back prices and outperform as a result of our logistics coupled with our discipline. As I look ahead first at nitrogen products. In the short term, we expect some shift to fertilizer sales from the first into the second quarter as seasonal demand starts picking up at the end of March or in April.
Our sales approach will result in some inventory build-up during the low season, which we will place in our key locations near our customers. We are particularly bullish on the outlook for the U.S. for the second quarter of 2019. Here, we expect a catch-up in spring from a poor fall application season, and the USDA is expecting a significant increase of three million additional acres of corn. Both factors are very supportive for a strong second quarter in the U.S. If I look at our industrial nitrogen products, we expect to continue to capture a healthy margin for our melamine business. This is a significant contributor to our Dutch operations. We also expect strong growth in our DEF business.
This market is growing at rates of more than 15% per year, and we have invested in our logistics to capture this growth.
Because of these investments on our N-7 joint venture, we have already signed contracts that represent more than double our 2018 sales volumes. If I now look at the methanol market, the supply and demand fundamentals continue to look favorable with very few new capacities coming into the market. We saw some price weakness at the end of the fourth quarter, but in the past few weeks, prices have rebounded. Markets in Asia have picked up with an increase in MTO operating rates to above 90% after Chinese New Year. Looking ahead, firmer oil prices and the expected addition of two new MTO facilities in China in the next few months will be supportive for methanol prices and demand.
The two new MTO facilities will create combined demand of three million-4 million tons of methanol, the equivalent of two times the capacity of Natgasoline.
Gas prices are lower than the highs, reached in the last quarter. In Europe, we expect to see the full benefit from the second quarter onwards, when our European winter exposure hedges will have expired. In the U.S., we benefit from hedges at 242 million MMBtu at IFCO for most of our gas needs in Q1. We have secured prices below $2.30 for Q2. Moreover, we believe both fertilizers and methanol prices have recently been negatively impacted by U.S. sanctions on Iran, which has resulted in Iranian product being sold at significant discounts into the market. Finally, looking at OCI's outlook for 2019 specifically, we expect our low-cost operations in the U.S. to be a key source of growth in 2019, with tailwinds from fundamentals of our end markets.
We are excited that IFCO reached record production levels in the fourth quarter.
For 2019, we're looking forward to the full effect of two increases in allowable operating rates and from the DF expansion. We also expect the full impact from Natgasoline, the doubling of capacity at BioMCN, and the 13% capacity increase of OCI Beaumont, which is earmarked for start-up this summer. As we continue to ramp up our volumes into 2019 and 2020, we expect additional step-ups in free cash flow, which bodes well positively for our future value creation. We will now open the line for questions.
Thank you, ladies and gentlemen. We will now begin the question and answer session. As a reminder, if you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A queue. This will only take a few moments. If you wish to cancel your request, please press the hash key. Once again, please press star and one if you wish to ask a question. The first question comes from the line of Christian Faitz from Kepler. Please ask your question.
Yes, good afternoon, Nassef, Hassan, and Hans. Three questions, if I may. First of all, can you talk a bit about current demand trends? I mean, where you talk about, obviously, a shift from Q1 and Q2 in the U.S. I would believe this is weather-related. Looking at the forecast, we will have deep freeze into, permafrost into mid-March or so in the Midwest. Can you confirm that? How is demand picking up, for example, in Europe, where we have much more moderate weather conditions? Second, can you give us an update on the planned turnaround in IFCO? I believe you are planning this for the summer in the off-season. You seem to be big fans of the DF business, rightly so.
I'll start by talking about the demand trends. We see it's not untypical for farmers wanting to see a bottom to pricing. Hence, no demand creates a vicious circle of buyers waiting to see where the bottom is, and that is a shift that is occurring on a normal pattern. However, having said that, we still see a strong demand. We monitor the warehouses and the volume sold. There is a lot of volumes yet to be purchased in Europe. A shift towards mid-March in the Midwest also will not create any issue. We don't look at our business on a per quarter basis.
The wrong thing for us to do is to put more product at a time when the demand has not kicked in at low prices, because that usually goes into a trader's warehouses. We value our disciplined approach.
I can tell you one very important metric that if you look three, four years ago, from the top three traders in urea, two of those top three have stopped trading in urea in Europe. Primarily because we took on warehouses and became directly supplying from North Africa into those warehouses. That big opportunity to buy in the low season and store became less attractive and more volatile, and some of them even incurred losses. Regardless of the time shift, we are looking at a strong H1, but not necessarily to be reflected in Q1 sales. Our working capital will probably increase towards the end of Q1 because we will have significant products in our own storage.
We see that prices bottoming where they are now and starting to rise in the coming weeks as barring a further delay in the spring planting. It's obviously almost mechanical.
On the issue of DEF is mandatory by law now since three years in America, meaning that every new truck that is sold in America will consume about 4%-5% of diesel consumption as DEF. Every time an old truck is replaced with a new truck, you will see DEF demand growing, not just in trucking and transportation. We are seeing the application of DEF into marine engines. We're seeing the application into farm equipment and construction and mining equipment. This is an area that we think through sales of DEF and transforming some of our production from urea to DEF achieves two things. First, DEF is our highest margin product. For only that reason, it's a no-brainer for us to max out DEF.
DEF is also protected from imports in America because you have to transport 50% water to bring DEF from Europe.
In addition to that, it helps some urea tons that the market doesn't need disappear into trucks and tightens the market, which we think at a period of oversupply is the right thing to do. We're strongly committed to DEF, and that has been our approach in the last six months. We invested heavily in building new storage facilities, more rail cars, and reached long-term agreements with the most important truck stops and the biggest buyers of DEF in the U.S., to where we are comfortably projecting to double our DEF sales in 2019 from 2018.
Okay, any comments on potential M&A in DEF?
No, we don't comment generally about competitors or M&A.
Okay, fair enough. Thank you. Thank you, Nassef.
Thank you, ladies and gentlemen. The next question comes from the line of Frank Claassen from Degroof Petercam. Please ask your question.
Yes, good afternoon, Frank Claassen, Degroof Petercam. Two questions, please. First of all, on Natgasoline, you saw the first of streaming of cash in Q4, $58 million. What can we expect going forward on that? Will there be a more regular dividend stream coming or, maybe even more repayments of shareholder loans? Then secondly, BioMCN. I saw that it slipped into negative EBITDA. What is the main reason? Is it the gas price or the lower methanol prices? Maybe operational issues? What can we expect going forward for BioMCN? Thank you.
On Natgasoline, this was a good quarter, and we expect continuous significant cash flow generation. Natgasoline is a plant that is located in the lowest gas price available all over the world today. Operationally, we're very happy with the start-up of Natgasoline. It has done extremely well and exceeded nameplate capacity. It was unfortunate that one of our offsite utility suppliers had a force majeure. Since then, they have been very proactive, and it has restarted the oxygen unit and has taken additional measures to prevent this from happening again. On Natgas, I don't want to give a specific number because it's obviously related to the methanol price. I can say that it has very strong free cash flow generation capabilities.
On BioMCN, we always knew that BioMCN, specifically in Europe, cannot sustain production at $10 gas for a long period of time.
We witnessed exceptionally high gas prices in Q4, that was really the primary reason. We had commitments, we actually operated the plant while almost cash flow neutral, to fulfill those commitments. We have seen since then gas prices drop by more than 35% in the last few months. At current pricing and current methanol pricing, BioMCN operates profitably, and we're looking forward to the second train coming on stream in Q2. The delay was partially due to also winter and some technical issues. Let's put it this way, we were not in a hurry to pay overtime to make up when gas prices are at $10 per MMBtu. Now that we think it's a good time to start by the second train in the second quarter.
Okay, thanks. Coming back maybe on Natgasoline, the dividend, will that be an annual event or will you be optimistically looking to upstream cash from Natgasoline? How does that process work exactly?
The upstreaming is done on a quarterly basis. You might have seen that in Q3, we completed a refinancing for Natgasoline, which reduced our interest cost. In line with our covenants, the upstreaming will happen on a quarterly basis.
Okay, that's clear. Thank you very much.
Thank you. The next question comes from the line of Tom Wrigglesworth from Citi. Please ask your question.
Afternoon, everybody. It's Tom Wrigglesworth. A couple of follow-ons, if I may. Firstly, just on the difference between the U.S. and Chinese methanol prices, a bit of a gap seems to have opened up between the two locations. Can you just confirm that you sell all of your U.S. methanol on the U.S. benchmark? Secondly, can you help me understand why there is this gap and whether you see the Chinese prices pressuring the U.S. or the U.S. dragging the Chinese prices higher? That would be very helpful. Secondly, just regards to the shift in demand from one Q to two Q, obviously, you've noted that you've built a significant amount of storage capacity. At the end of one Q, do you think you're going to be at fully utilize all of your storage?
Is that what you're saying, you're going to withhold those tons to the market until the demand really comes through in two Qs? Is that the communication I should understand from what you're saying about storage capacity? Thank you.
I'll start by the number one, two, and three reason for the shift in gap with China would be the sanctions on Iran. Most of the Iran products stopped coming into, less so into Europe and is mostly going east. That has created the situation that has happened recently in Asia. Having said that, MTO plants utilization rates going up to 90%, and the effect of two additional new MTO lines coming on in the next coming two to three months will tighten the pricing in Asia. We had the Chinese New Year, which was a two, three-week lull period. We would see that difference tighten to U.S. pricing. We have various swap agreements. Some of them with Methanex, some of them with others, to as much as possible keep most of the volumes in North America.
Some of the volumes do end up in Europe, where we market them through our own channels.
Shift.
On the storage, demand might start earlier in Europe. We can't speculate. We have the storage. We move product from North Africa to those dedicated warehouses, and we respond to market demand. We do have storage capacity, and we have access even to additional bonded warehouses in certain strategic ports in France to increase our capacity. As I said earlier, two of the top three trade houses that used to import from the Middle East have stopped doing so and are totally out of the urea distribution business in Europe.
Okay. Just as a follow-up, obviously, there has been weather effects in the U.S., and obviously, you have got the storage capacity. When you look at the market as a whole, if demand comes through too late, will there be lost tons in the market, or do you think actually the infrastructure is available in place to get all the necessary tons? I'm just wondering, could we see a scarcity issue going in through the U.S. because if demand comes too late through in the season, then actually the market as a whole won't be able to get those tons to their end customers?
We are located in the Midwest, we could practically sell our entire production of UAN within 200-mile radius from the plant. We have 10 locations with UAN storage around the plant in strategic locations. People can come and pick it up on a Monday and use it on a Tuesday. Where it will hurt is on imports coming into New Orleans. That will be weather-dependent and barge availability will become tougher in the coming few weeks. Yes, there could be some shortages on the import side, but not the domestic producers have infrastructure in place to cover the needs.
Okay. Very clear.
Thank you. May I just remind you, if you wish to ask a question, please press star one on your telephone keypad. The next question comes from Hari Thirumalai from Eaton Vance. Please ask your question.
Thanks for taking my question, gentlemen. Quick one, this is in relation to your leverage target. During the Q3 earnings call, you had very specifically guided to a leverage target of 2.5 times net debt EBITDA for December 2019. The Q4 statement is a little more nuanced, where you're talking of a two times leverage target through the cycle. Is there any change in leverage target or how should we read this?
No. The 2x leverage target is through the mid-cycle pricing, through the entire cycle. It's not times related. Across multiple years, not time related. Obviously, they're not inconsistent with each other. We are far from reaching mid-cycle pricing as of today. Obviously, you get the two effects on deleveraging, which is a higher EBITDA and stronger cash flow that reduces debt, and you go into a virtuous cycle as soon as we approach mid-cycle pricing. We are close to mid-cycle pricing on methanol, but not on fertilizers.
All right. If I understood you correctly, you still hope to reach something like 2.5x for 2019 on an adjusted EBITDA basis?
We obviously are subject to market conditions and product pricing. Our base case remains that prices now are below what we think will be the average for 2019, significantly below what we think the average for 2019 year. We might be proven wrong for some weather condition or something like that, but not for lack of pent-up demand. The pent-up demand is there. The amount supplied mechanically is insufficient to sustain the planting in the U.S. of an additional three million acres. We expect prices to recover as soon as we get closer to the demand time.
Understood. That's very clear. Thank you very much.
Thank you. The next question comes from the line of Ruben Noren from Kempen & Co. Please ask your question. Ruben, your line is open. Please ask your question.
Hi, good afternoon. This is Ruben Noren of Kempen & Co. As my colleague, Henk Veerman, couldn't attend, I have one remaining question from my side. You gave a lot of statements about capacity increase in 2019 over 2018, you gave us a range of where you think volume growth year-on-year in 2019 is going to be. Could you give us an indication about that, please?
Sorry, I didn't hear. You're talking about volume growth?
Yes. Could you give us a range on this volume growth year-on-year in 2019, as a group of total?
You will have to factor in four quarters of Natgasoline, an additional two quarters of BioMCN 2. These are the basics, and improved utilization in IFCO. That will come up to a sizable volume increase, but I can't pin down an exact number.
Okay. Clear. Thank you.
Thank you. The next question comes from the line of Paul Moran from Northern Trust. Please ask your question.
Good afternoon. Thanks for taking the question. I just wanted to clarify something on working capital. In the initial statements, was there a mention of an expectation for the full year 2019 of another working capital cash inflow? Is that correct?
With rising volumes, you typically would require to adjust your working capital because you just have more receivables. If we were hypothetically, I don't want to say a number, expecting 15%-20% increase in volumes, there would be some increase in working capital. I don't want to comment, again, on the volumes. Working capital discipline is something that we monitor regularly, and we'll continue to do so.
If not a number, then, I guess what I was expecting, given how strong 2018 was, that you would have a cash outflow in 2019. Is that still a fair assumption, or do you think that you could have a cash inflow in 2019? I'm just looking for whether we should have some unwind on the good 2018 number or not.
No, not unwind. It'll be about the same level. You're talking about working capital or just cash flow upstreaming?
I'm really talking about the cash flow. If the working capital
We expect stronger cash flows in 2019. The first question was related to the size of the working capital at year-end. That's why I commented that on a higher revenue base, you expect slightly higher working capital. From a cash flow, we expect stronger cash flows in 2019 than 2018.
Just to be crystal clear, on a cash flow basis in 2019, specifically in working capital, there will be a positive cash in rather than an outflow. It's not the same number as in 2018. There's still a cash inflow.
It's too minute of a detail to give you a guidance on the working capital. Our working capital is a factor of the level of inventory and the amount of receivables and multiple factors, and we try to do the best job on that, but we can't give a guidance from a working capital. Where we're comfortable on is that all in all, cash flows in 2019 should be stronger than in 2018.
Yeah. Okay, great. That's clear. Thank you.
Okay.
Thank you. The next question comes from the line of Emilia Abelev from Tikehau Capital. Please ask your question.
Yes. Hi. Can you please help me understand a bit better the performance on Fertilizers Europe, or OCI Nitrogen over the year, please?
I think OCI Nitrogen had a good year despite being impacted by higher gas prices in the fourth quarter. On the melamine side, they did extremely well and was a major contributor to the results. CAN prices year-over-year improved. I would say all in all, the partial drop in EBITDA, on Fertilizers Europe, the biggest bulk of it is in a higher gas price, and Q2, we had lower prices. In general, the trend for nitrogen was positive. We had also a little bit of an impact from the Rhine River. That's why we ended with more inventory, and the demand was impacted by that. We ought to capture that mostly late March and in Q2.
Okay. Thank you.
Thank you. We have got one last question, but before I take this question, may I ask you to press star and one if you still want to ask a question. The last question at the moment comes from Geoff Haire from UBS. Please ask your question.
Good afternoon, gentlemen. Just wanted to ask, is there any impact in Q1 to production levels in the North American assets given the cold weather we've seen, particularly in the Midwest?
No, no material impact from the cold weather in the Midwest.
Thank you.
Thank you. We have one more question. The question comes from Faisal Al Azmeh from Goldman Sachs. Please ask your question.
Hi. Thank you. This is Anirudh Patwari on behalf of Faisal. Two quick questions, please. The first is regarding IFCO. You have guided for close to 120% of operating rates for this year. Is there a chance that the operating rates might be higher for 2019, and what should we model in for 2020? The second question is regarding the North African operations. Can you please guide us about the expected operating rates for this year versus the last year? Thank you.
No. First of all, what we said is that the plant achieved 120%. We had permitting restrictions that no longer exist. We obtained a new permit from the state of Iowa that enables us to take the plant to its full potential. The run rate will be somewhere lower than the 120%, based on normalized maintenance and turnarounds. We do expect, in general, Iowa Fertilizer Company to have significant higher production levels in 2019 than 2018. Then probably by the end of 2019, most of the easy wins on debottlenecking would have been achieved, and we normalize at those levels. In North Africa, we just have a couple of turnarounds in Algeria, but other than that, most production metrics are very supportive of stronger volumes coming out of North Africa.
Thank you.
Thank you. There are no further questions at the moment. Please continue.
Thank you, gentlemen, and looking forward to our next call.
Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you for participating. You may all disconnect.