Ladies and gentlemen, thank you all for standing by, and welcome to today's OCI N.V. First Half 2018 Results Conference Call. At this time, all participants are now listening on the mode. There will be a presentation followed by a question-and-answer session, at which time, if you wish to ask a question, you will need to press star and the number one on your telephone and wait for your name to be announced. I must advise you all that this conference is being recorded today, Friday the 31st of August, 2018. I'd like to hand the conference over to the speaker for today, Mr. Hans Zayed. 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. First Half 2018 Results Conference Call. You can find all the details of our results in our press release and financial statements, which we posted on our website this morning. With me today are Nassef Sawiris, our Chief Executive Officer, and Hassan Badrawi, our Group Chief Financial Officer. On this call, we will review OCI's key operational events and financial highlights for the second quarter and first half of 2018, followed by a discussion of OCI's outlook. As usual, at the end of this 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 risks and uncertainties, and therefore, I'd like to refer you to our disclaimer about forward-looking statements. Let me introduce our Group Chief Financial Officer, Hassan Badrawi.
Thank you, Hans, and thank you all for joining us on this call again. As Hans mentioned, this morning we posted our results for the second quarter and the first half of 2018, in which we achieved another record for our sales volumes, continued to demonstrate a step up in our EBITDA compared to last year, and improvement in our leverage metrics. During the second quarter of this year, our self-produced sales volumes increased by 47% to 2.5 million tons. Our average realized selling prices improved over the same quarter last year. Because of the higher volumes and higher selling prices, second quarter revenues increased by 43% to around $763 million. Reported EBITDA increased by 92% to $215 million, and our adjusted EBITDA increased by 22% to around $204 million.
This delta is mostly due to the release of a provision for the insurance claim received for the Sorfert shutdown, for which we received the first payment of $20 million in May. We also reported a net loss of $14 million and an adjusted net profit of $3 million in the second quarter of this year. The decrease compared to the same period last year is mainly due to the first time accounting for IFCo this year in 2018, which has resulted in higher depreciation and non-capitalization of interest. There were also around $29 million of FX translation losses that relate primarily to the appreciation of dollar debt in our euro-denominated statutory financials, it's an accounting representation. More importantly, on our primary measure of operational growth, we achieved a healthy free cash flow of $133 million during the quarter, representing a 62% conversion of our reported EBITDA.
This takes the total free cash flow achieved during the first half of 2018 to $247 million, compared to $20 million in the same period last year. The free cash flow number excludes the trailing end of our growth CapEx plans, for which we have spent $51 million in the first quarter and around $74 million in total for the first half of this year. Turning to our balance sheet, our net debt stood at $4.336 billion as at 30th June 2018, representing a decrease of $100 million from 31st of March. Our net debt was impacted by seasonally low EBITDA compared to Q1, total capital expenditures of $89 million, of which maintenance capital expenditure was around $38 million, and the balance of the growth CapEx was related mainly to BioMCN expansion in Europe.
It was also impacted by the $20 million of cash received as a down payment from insurance related to the shutdown at Sorfert. Positive currency translation differences in the balance sheet of $73 million, which are the result of the appreciation of the US dollar against the euro and the Algerian dinar during the quarter. Other non-operating items of $44 million relating to a number of items, including debt restructuring costs, such as the convertible, which we retired, and some short-term loans to Natgasoline. During our last conference call, we discussed our extensive and successful refinancing activities that took place in the first and second quarters. Since then, we have further improved our capital structure through the buyout of the minority at OCI Partners.
We have finalized this transaction on the 17th of July for a total cost of about $120 million, and this is now a 100% owned subsidiary. This transaction allows for simplification of the group's corporate structure, streamlining of our methanol commercial operations, and the elimination of public listing costs. At this point, I would like now to hand over the call to Nassef Sawiris, our Chief Executive Officer, for further commentary on the results and the outlook.
Thank you, Hassan. First of all, I would like to thank the entire team for all the progress we made during the quarter, both operationally and strategically. I'm pleased that we reported a healthy level of operational free cash flow and a reduction in our net debt during the quarter, which reflects our large $5 billion CapEx plan coming to an end.
The benefits of our commercial strategy of limiting forward sales, coupled with our well-diversified portfolio, are clear as we achieve this improvement even with planned turnarounds at some of our plants during the quarter. We have started the second half of the year on a strong note. All our plants are running at good utilization rates at the moment. We continue to ramp up volumes, and our underlying end markets are looking increasingly positive. During the second quarter, we also made good progress with positioning the organization to capitalize on this growth. We strengthened our position in North America with the start of a marketing joint venture called N-7 with Dakota Gasification Company. This platform gives us an enhanced sales platform and extended geographical platform. We optimized our corporate structure with the buyout of the OCI Partners' minorities.
If you look at our prospects in more detail, first with respect to our own volumes, in 2018 compared to a year ago, we are seeing a big step-up in volumes coming through from Iowa and our plants in North Africa. In addition, as I mentioned in May, we will start seeing the benefits from some productivity improvements that will help us achieve higher run rates going forward. For example, EBIC increased utilization rates from just over 90% to above nameplate capacity currently, following a short turnaround in April. Our new methanol capacity is also starting to contribute. We made excellent progress with the start of methanol production at Natgasoline at the end of June. The speed of the ramp-up has been impressive and exceeds the industry average for start-up plants.
The plant has been running consistently above 100% in the past few weeks, and we have already shipped significant volumes of methanol, around 200,000 tons. The plant is also proving to be very efficient and has achieved gas consumption that has been better than the design rates. We now have one growth project remaining, which is the refurbishment of BioMCN's second line, which we expect to start production around the end of this year. If I now look at developments in our end markets, first, I'll talk about nitrogen fertilizer. Our realized selling prices increased on average during the second quarter compared to a year ago, but ammonia prices remained depressed. It is only in the past few months that prices for all our products started to turn and are now at a much higher level than a year ago.
Urea prices have moved to $310 per ton, or $100 higher than a year ago, and up 25% from the average urea price of $244 reported in the second quarter. Other fertilizer product prices are witnessing the same momentum. Price dynamics in the nitrogen fertilizer markets are looking very positive, supported by healthy supply and demand fundamentals. We continue to believe that net supply additions have peaked and the demand will outpace minimal global urea capacity additions over at least the next four years. We expect exports from China to stay at structurally lower levels going forward. Exports have been immaterial this year, so far, only 800,000 tons. Price increases are also supported by high production costs for marginal producers in China and Europe due to high coal and natural gas costs.
Exports from Iran, one of the largest urea exporters globally, are at risk of significant curtailments following U.S. sanctions. As of now, Iran is fully exporting, but this situation could change. What we see in current prices reflects full utilization of the Iranian capacity. If that happens, and Iranian exports or production get curtailed, that will have a significant result and an additional tightening of the supply-demand balance. The only product that we think has a mismatch and has further room to grow is ammonia, where ammonia is trading at the same levels of urea prices, which usually should not be the case. Ammonia typically trades at a premium to urea prices, given that it takes one ton of ammonia to make 1.8 tons of urea. I'll move now to the industrial chemicals market.
In the second quarter, our industrial chemicals portfolio was once again a solid performer, and the outlook remains positive. We have had good visibility for methanol markets for the next four years, where we expect limited capacity additions relative to demand growth in the high single digits. Like urea, some methanol capacity additions and exports from Iran may be at risk. The outlook for melamine remains healthy. We continue to enhance and grow our diesel exhaust fluid platform, positioning us for growth above the 20%, which is the annual growth of that product consumption worldwide. In summary, our volume growth comes at a time when our end markets are on a positive trajectory and are more positive than most market participants were expecting for this year.
We are one of the lowest-cost producers in the industry globally, and as such, we believe we are best placed in the industry to take advantage of these improvements in our underlying markets. I'll now open the line for questions.
Thank you, ladies and gentlemen. We will now begin the question and answer session. Again, as a reminder, should you wish to ask a question, you may press star and the number 1 on your telephone and wait for your name to be announced. If you wish to cancel that request, may press the pound or hash key. Once again, it's star and the number 1 should you wish to ask a question. The first question comes from the line of Roger Seip. Your line is now open. Please ask your question, sir.
Thank you, and good afternoon. First, can you speak to North Africa's net profit versus Q1 2018? Why was it down versus Q1 2018?
On the segment, on the specific ones, we have to go on a plant-by-plant basis because EFC and EBIC and Sorfert, while they are consolidated, some of them had turnarounds in the second quarter. EBIC, for example, had their 5-year turnaround in the second quarter. Other than that, EFC also had part of the turnaround that went a little bit into July, took place. It's mostly. As we said in the announcement today, H2 has practically very little turnarounds planned, limited maintenance that are sub 7 days.
Okay. In terms of the $700 million OCI N.V. revolver, could you say how much of that was drawn on June 30th? How much is drawn now post the OCIP minority takeout, if that is how you financed the OCIP minority takeout?
No, we're not going to comment on numbers past June 30.
Okay.
I mean, it's quite common with the few details of Q3. You'll have to wait for the Q3 quarter.
Okay.
You can extrapolate from the free cash flow generation in Q2 at significantly lower prices. Q3 pricing environment is significantly improved from Q2. Yes, we have that OCIP payment, but we also have higher cash flow generation in July and August as expected.
June, the revolver, the EUR 700 million OCI N.V. revolver. At June 30th, what was the outstanding amount, please?
We don't segregate each significant credit line in general. You have our net debt. Basically, the revolver we use as one facility that has the most flexibility, of course. We reduce it as cash comes in, and we tap into it when there are needs. There is also a big impact of the gross debt versus net debt. That is work in progress. It's improving now. We expect post the 20% acquisition of the Beaumont minorities and other milestones and on some other plants, that we will have a significantly lower gross debt by year-end in relationship to the net debt. That will be positive also for bringing down the revolver.
Okay.
We are handling daily treasury in a completely different approach than we were when we had to take care of certain minorities, or we had to take care of certain covenants, like in Iowa during construction and all that. You will see a collapse between the gross debt and the net debt. Overall, our aim is to finish the year with a significantly improved net debt number and significantly lower interest expenses moving forward for 2019.
All right. I guess I have a request for you to consider is, quarterly, maybe consider providing us with the detail of your debt components each quarter. Also, while you give sales by sort of segment entities, if it's possible, give D&A and EBIT by segment entities. I know you give that on an annual basis, but it'd be interesting to get that on a quarterly basis. You do provide the net profit, which gives some indication, but it'd be nicer to have EBIT and D&A. Just for your consideration to provide more color.
Okay. We'll take that into consideration.
Thank you very much.
Thank you for your question. The next question comes from the line of Christian Faitz. Your line is now open. Please ask your question, sir.
Yes. Good afternoon, gentlemen. A couple of questions, if I may. First of all, can you give us kind of a sales bridge in terms of your volume, price, and FX development in Q2 versus Q2 2017? I am just trying to get my head around the price increases you saw of, I would believe, some 10% or so in the mix.
Sorry, on what product?
Yes.
On which product? Sorry, I didn't hear you.
If I look at your mix sold, I would believe your prices should have been up probably in the high single-digit % range. Your volumes, I believe, are up 47%, so I'm just trying to get my head around the plus 43% group sales development. I'll follow up with another question.
Some of the negative that affected that could be the higher gas cost in Europe, for one. That took a bit of wind out of the second quarter earnings. Let's clean as that. The volumes included also some of the external own produced. You are talking about own produced volume or total volumes including.
About own produced for now yeah.
Primarily, the key highlight is first of all, the higher gas in Europe, and then on the net profit basis, you see also the start of the impact of the depreciation in Iowa, which at the latter part of last year was still producing but wasn't capitalized.
Just on accounting, et cetera
starting from 2018.
Perfect. As another question basket, so to speak, can you give us an update on the performance of a couple of your plants? For example, how's IFCo running at the moment? The methanol facilities in Beaumont, including maybe a comment on Natgasoline ramp. And then, finally, do you see any drought related impact in Q3 in Europe? Simply because it was so dry that farmers couldn't apply any fertilizers in late Q2, potentially early Q3 still, especially in the late stage crops.
On the first hand start by the operational performance of the plants. We're very happy with the Iowa plant. Actually, we are excited about a lot of the potentials of improvements that continue to exist. To give you an example, on an average day, we produce about 115% of the nameplate of urea, which goes down to the downstream DEF and granular urea as well as UAN. We also see a higher nameplate performance on ammonia, around 110%, with a lot of rooms to improve, especially once the weather gets colder after the summer on the ammonia side. We're very pleased with that plant. We are actually doing very small investments in Iowa as we speak. We're adding more storage capacity in DEF. DEF is our highest margin product by far. Our intent is to grow that production platform.
We have also introduced almost 300 rail cars to be able to access more destinations for DEF. The beauty of DEF also is that product disappears from the ag market. It tightens the ag market while it goes down into the trucks and disappears. We're very excited about DEF as a product in general, and the growth that we're seeing in new usage for DEF in construction equipment, in agriculture. It's not just trucks and private diesel passenger cars. On the Iowa side, there is a lot of work being done on the DEF front. We're very happy with the way the plant is performing. Going back to Texas, both Beaumont has continued to run extremely well, and Natgasoline was a nice surprise that after startup, we had practically very little downtime from the day we started the plant.
With the plant actually exceeding nameplate capacity and with a good potential to do so on a sustainable basis. In addition to a very important thing that we look at very clearly is energy efficiency in the plant, is below our calculations for how many MMBtus of gas we need to produce a ton of methanol, and we think that number also is going to be improving further with the colder weather.
Okay, great. Thank you. Then, as I said, finally, do you see any drought related impact in terms of volumes in late Q2 having gone into Q3 in Europe?
No, it was actually more from Q1 to Q2. Winter came late in Europe, judging by your accent, I assume you know.
Yeah, winter came late, summer came soon. That's why I'm asking at the back end of the growing season, is there any volume impact which you would have seen in your numbers?
No, because a lot of it is quite normalized volume. We did have a turnaround in OCI Nitrogen in Q2. Obviously with a turnaround, you dispatch less, you keep some for your future commitments. I wouldn't call it because of the weather, but the turnaround. We'll be very honest. We opportunistically didn't shed a lot of tears on a prolonged turnaround on ammonia in Europe at higher gas prices, given that we have excess export merchant ammonia at competitive pricing within our system. We actually bought some cargos, and we're not the only one who's doing that. Other producers are also curtailing some ammonia production and importing ammonia. Yes, while it had some effect on the OCI N stand-alone, but you can also look at what happened from end of June till today.
You can see almost a 20% price improvement in ammonia. We think that ammonia prices need to go even higher to justify continued production and to justify the arbitrage between ammonia and urea.
Okay, great. Thank you very much.
Thank you. The next question comes from the line of Tom Wigglesworth. Your line is now open. Please ask your question.
Good afternoon, gentlemen. Thank you very much. First question, just around the movements that we've seen in the urea market up to $300 a ton seaborne. Obviously, you're indicating that there's a potential for a scarcity pricing in this market. Do you think the prices today reflect just trader speculation around that scarcity, or is it sinking into the farming community as well now that there could be a shortfall really for next application season? I guess, as a corollary to that, does that mean that actually we'll see urea prices disconnect from crop prices, which haven't actually done very much year to date?
Obviously, crop prices are something that everybody watches, but that's more on the U.S. side. A lot of emerging markets surprisingly became larger consumers of fertilizers post their currency devaluations. In terms of total cost of the agricultural production, like for example in Russia, we saw post the big devaluation of the ruble, a higher increase in domestic consumption of fertilizers. We're seeing more demand in some LatAm countries post devaluation. The other non-imported components of fertilizer, labor, ag, land, and all that, are sinking, and the proceeds from exporting their products are becoming much more attractive in domestic currency terms. That is one issue that is a bit different in emerging markets. An interesting statistic is that for the first time in the last 100 years, that Russia exported more ag products in 2017 than military sales. That's a key milestone to look at.
We're seeing that also in the emergence of very aggressive new markets and interest in increased agricultural activity in East Africa. Ethiopia is growing its fertilizer imports. They have a population to feed. They have two options, import the finished agricultural product or import fertilizers and do it at home and create jobs in the economy. East Africa is going to be a significant new market. Back on whether the prices reflect speculation or reflect dynamics, we don't know the answer. What we know for sure is that historically, the levels of fertilizers within the system in storage are extremely low. You have significantly lower fertilizers in India, which is a big market. You have significantly lower imports this year in Latin America than last year, and the same applies to Europe. That is a key indicator.
A country like Pakistan, for example, had 80,000 tons in inventory a few weeks ago, and they're considering how to deal with such a situation. What's clear really is that the system in storage is not reflecting any kind of speculation. Typically, when you have speculation, you would increase inventory in the co-ops and in the farmers. There's always an anticipation. We are entering this part of the summer with significantly lower inventory than we had last year.
Very good. A second question, if I may, on methanol. Well, two parts, how you see the market outlook into year-end and into 2019. Secondly, noting that Natgasoline is a world-scale facility, will you take a price over volume strategy as you ramp that? Or is the market there, in your opinion, to actually ramp, aggressively is not the right word, but ramp quickly without too much price impact?
First of all, methanol is a product that has been growing between 6% and 7% in terms of demand in the last 10 years, on average. The emergence of a big demand pocket in MTO plants in China, created even a new dynamic, and increased the dependence on methanol pricing correlation with oil prices. You have to take a view if current oil prices are sustainable or have room to grow to determine the methanol. We don't want to speculate on oil prices, and hence we're not going to speculate on methanol prices. As we can talk about is that the introduction of Natgasoline and putting that product into the market had minimum impact, despite it happening in the summer and despite a lot of MTO shutdowns in China. In the foreseeable future, we see the methanol pricing as continuing to be very strong.
The market absorbed the volume. There is no drama there in the launch. We will sell 100% of our production by virtue of being the lowest cost producer with $2.60 or $2.70 gas in America, and the most efficient, newest plant. We don't need to make that debate. In general, methanol is quite tight at the moment.
Very good. Very helpful. Thank you very much.
Thank you. The next question comes from the line of Hank Zierman. Your line is now open. Please ask your question.
Hi. Good afternoon, gentlemen. Thank you for taking my questions. I still have quite some questions left, actually, I hope we can go through them one by one. Firstly, beyond the extent already discussed on your debt position. Now that the expansion phase has been nearly completed, delevering is obviously quite an important strategic pillar for you. Given the dynamics in the first half of the year, can we still more or less expect you guys to delever from 4 to 4.5 times net debt EBITDA towards, let's say, approximately 2 times net debt EBITDA in 2020 and then obtaining the investment grade? Has anything changed in that respect, in terms of your expectations? Maybe you could also give us a little bit of a feeling how the trajectory into the end of 2018 to 2019, how it will look like. Thank you.
I'll start with some of general items, and if you have specifics, I'll pass them on to Hassan. Our view is that, given the trajectory of the second half, we could see a situation where by the end of the year, we are net debt EBITDA, below 4 times already by the end of 2018. That would be a very positive milestone. Looking forward, you can see our free cash flow generation at reduced prices in Q2. You can make the assumptions at current prices without doing too much. We could see a generation of significant free cash flow in 2019. There are also some issues that we talked about when we issued the bonds. Natgasoline is overcapitalized, and there's a lot of pockets on the improvements that will happen.
I would say, if anything, that trajectory has improved and might be shortened in terms of return to investment grade.
I think it was demonstrated by the free cash flow conversion we saw in the second quarter, which was a seasonally low quarter. As prices improve, that conversion will only be boosted further, contributing to the deleveraging path. We still remain committed to achieving that deleveraging trajectory, as we've highlighted in every quarter so far.
What helps the investment grade is not just reducing the debt, but actually increasing more the free cash flow generation. We're hitting it by reducing the gross number, but you're going to see in 2019 or later in this data this year, a run rate that reflects an improvement in the credit matrix.
Okay, well, very good to hear. That's all running out of expectations. At least out of my expectations. Maybe zeroing in on one part of your cash generation, which is working capital. We've seen a partial reversal in Q2 versus Q1. How big is that source of cash for you still in the upcoming years? Do you see a lot of room for improvement in your working capital? Maybe you could give some more color on your working capital movements in the, let's say, as you now have fully ramped up in the remainder of the year or into 2019, dependent on what you can say or what you can't say. Just to give some more color on the long-term opportunity in your working capital position. Thank you.
We have changed our marketing policy. We started in Europe last year. Basically, we're not rushing to sell in July and August. We looked at pricing movements in the last 20 years, and with the exception of 2008, there has been a huge gap between the pricing in two, three months and the remainder of the year, the two, three summer months. We looked at where the product was going. The product was not going to the farmer. It was going to an intermediate, whether it's a co-op or whether it's a trade house. We said, "We don't need to be selling three months forward and two months forward and booking a lot of orders in June for July and August.
We're going to be prudent about what we sell in those low-price environment months." The stockists and the traders that buy your product on the cheap in the summer become your competitors later in the year. That product hasn't actually sold. You've just obtained a refinancing at almost 20%-30% cost by selling it early. That obviously does play on the working capital management. Two months later, you discover that that was an increasingly very attractive business proposition because what you didn't sell, I give you an example. CAN in June was at 170, €165. Today, it's closer to €210, €220. These are only two, three months.
Yeah.
Part of the rationale is that we are not going to be giving the product to anyone who wants to buy it three months forward and four months forward, and store it. We were going to manage to sell month by month. We started that last year to good results. We've done that in the U.S., where us and Koch Fertilizer did not participate in the sale program. We sold only almost one month ahead. That's regular sales. With that, you kind of assume a slightly higher working capital during late spring and early summer. That goes away starting September, October. That management is not going to be strictly on autopilot. It's going to have to do also with our new, very strict policy that we're not going to be. We don't call it the thin season, we call it the full season.
Basically what we as analysts can conclude is that you guys have been, let's say, compared to the previous years, more strict on working capital movements, and that we can expect at least some positive numbers there, or at least, let's say, some more efficient working capital management. Is that correct?
Actually, we prioritize free cash flow over multiple quarters rather than quarter per quarter. We're not going to fixate it about working capital at the end of June and dump a lot of product that the market doesn't need in July and August. We're going to manage it to what is best for the full year and not month by month. You also see working capital going up when you are producing more and when the cost of production in Europe goes up. It's not only that one strategic shift. It has also to do with the cost of the products you carry.
Oh, that's perfect. On interest costs, it was already discussed during the comments being made earlier. The $182 million one, I sort of exclude the FX movements. What looks a bit high, and I understood there are some one-offs in there, such as, debt settlement expenses. Now that all the, let's say, debt facilities are in place, could you share with us what your expectation is of, let's say, this line item? Once again, we can exclude sort of the FX impact because you have continuous movements there. What is the underlying, let's say, interest expenses for the full year? Or at least maybe you can share with us what has been the interest expense on an underlying basis in the first half of the year.
Yeah. No, that's a good point. I think maybe just focusing on the first half, which is the results that are out there in the market. You are correct that the interest line was a little bit artificially raised during the first half by a number of one-offs, primarily related to debt restructuring costs across the system, whether it's a convertible and other facilities that we addressed in our last call as part of the successful refinancing. We estimate that up to $30 million of that line item was associated with these debt restructuring costs, including the convertible facilities in Egypt, some of the MD facilities, and some cost of other bridge facilities that we had to put in place as we transitioned into our new capital structure. That's the correct insight.
Overall, our average interest rate on our gross debt for 2018 should be around 6% for this year. Obviously, we are very focused on, as Nassef mentioned earlier, on opportunities to further optimize our balance sheet and look for further reduction. As we generate a lot of cash flow, the absolute number should also come down next year.
Yeah. No, that's very clear. Thank you. Very helpful. Another question I had, which may be a bit of a longer shot. With the prices across your end markets moving up bit by bit, many of your peers have actually discussed also during their calls, let's say, the earnings potential they have in a more or less mid-cycle scenario, or at least the sensitivities they see on their earnings when it comes to different prices. I think many of your shareholders are also looking at this when they invest in OCI. Maybe you could comment on what you guys see as an appropriate mid-cycle level, or what you guys regard as a mid-cycle level, and what could be in, let's say, the steady state OCI platform. What could be the EBITDA potential in such a scenario?
Quite significant. I don't want to give a number yet because we are still working on the new tweaking, which are quite significant at higher prices. If we produce 200,000 tons more of methanol as a result of optimization or 200,000 more in Iowa, you get the effects of that, and at higher prices, they become meaningful numbers. I think we are well ahead of prices in A19 continuing the trajectory that we are expecting them to do. We're expecting significant improvements in EBITDA the next year. With our share of Sorfert Algérie, that would be sizably more than 50% jump in EBITDA and a significant increase in free cash flow.
I mean, adding to Nassef's comment, one of the things that we've highlighted consistently in our previous interaction with our investors is that having a relatively young asset base, which means that your maintenance costs are quite low going forward and in the neighborhood of EUR 150 million-EUR 200 million. With our effective taxes also being competitive, this allows us, even in a seasonally low quarter like the second quarter, we were able to demonstrate 62% conversion of our EBITDA to free cash flow. Above that, anything upside in prices, that's additional conversion into our free cash flow and obviously feeding into our trajectory of deleveraging.
One of our key metrics that we monitor is conversion of EBITDA to free cash flow. That's something we take very seriously, and I think we have one of the best maintenance organizations, particularly in North Africa, where we do everything in-house. At very reduced cost and plus the fact that the plants are young. A turnaround that costs us in North Africa, $10 million, would cost $30 million in Europe and an equal number in the U.S. That's also part of the free cash flow conversion, is that you don't have even better operating cost. What your maintenance cost, which is highly labor intensive, is benefiting from some of the locations we have.
Plus the energy efficiencies of a younger fleet of plants as well.
Yeah. Okay, thank you. If you look at these sensitivities of some of your other, let's say, likewise companies, I sort of apply these numbers on OCI and sort of assuming that the operational gearing on higher prices works in the same way. I can imagine it must be quite exciting for you guys now that the prices are creeping up already since the beginning of Q3. That is, I suppose, I think you said it well, that's the large optionality you have on cash generation, on EBITDA. Yeah, that's good. Maybe last question on DEF. You mentioned that you are aiming to increase your market share in the business. Demand is growing about 20% you mentioned, and you plan to outgrow the market in that sense. Just from my understanding, that does not involve huge CapEx investments, right? Those are marginal investments.
Mostly logistics. All the rail cars are leased, and the leasing is very efficient because, again, DEF is our highest margin product, especially in Iowa. I would give you an example. We replaced one major truck stop, a source that was importing DEF from Poland, shipping 50% water across the ocean. That's not efficient because DEF is sold with a lot of water, so logistics in DEF are key. The fact that we are the largest DEF producer in the Midwest gives us access to the Chicago hub and all the Midwest traffic and all that. That's very positive. We're very excited about that product because every time we shift a product from UAN or urea to DEF, our margins expand. Some of these decisions that we made have a payback of six months.
It's not a CapEx issue, it's more of a logistics management to be able to reach more customers of DEF.
Okay, perfect. Thank you very much for that. It's very helpful.
Thank you. The next question comes from the line of Franc Klaassen. Your line is now open. Please ask your question.
Yes. Good afternoon, Franc Klaassen, Degroof Petercam. Just one question left on DEF as well. How far are you with the plans in Europe to launch DEF? You talked about run rate volumes in your press release. What is your targeted volume for DEF, and how and when do you expect to achieve this? Thank you.
In Iowa, we are increasing DEF to where it could be, in 2019, our largest product sold in terms of margin contribution. We are going, in Iowa, to the maximum. Holland, we're going to combine that with a turnaround in 2019 to avail DEF out of the Geleen plant. That's not a big CapEx. We've already made some experimental shipments, four or five so far, of DEF produced in Egypt to Southern Europe. We're taking DEF as a core product that we like. DEF is growing at 20% per annum. That's the fastest-growing product, and that demand has to be filled, ideally with plants that are new and young. It's very difficult to produce DEF from old plants.
Okay. Thank you. Maybe one small question on, you already received $20 million on the insurance payment for Sorfert. What is the way forward? Can we expect more in the second half?
That's correct. The $20 million was an upfront payment on the claim, which is part of normal procedure. We're aiming for finalization of the insurance claim in its entirety, or the balance, sometime between Q4 and possibly early Q1.
Okay. Thank you very much.
Thank you. The next question comes from the line of Evgenia Molotova. Your line is now open. Please ask your question.
Hi, it's Evgenia Molotova. Thanks a lot for taking my question. Just one on Midwest premium. Obviously, now where there is more production in Midwest, actually, what do you think is going to happen to premium, which was quite considerable in the past?
There is no new production coming in the Midwest.
It was.
There is no hole in the ground in the Midwest for someone constructing a fertilizer plant in the Midwest. I would be surprised if we see someone digging a hole, in general, for a fertilizer plant in the U.S., given the high cost of CapEx required. Yes, you have an attractive gas price, but the entry ticket is painful in terms of CapEx, in terms of project finance availability, and in terms of access to labor. I think the premium in the Midwest is actually on the right trajectory and expanding. It's not just because of the supply-demand. You have other issues. The river is seeing closures. People cannot have access to products from imports in New Orleans. The fact that also these long-dated trader contracts from the Arab Gulf, they don't make sense anymore for the Arab Gulf producers.
They were done in the past when the U.S. was importing more than double what it was going to be importing moving forward. Right now, the Arab Gulf has more demand in Asia, more demand in East Africa. They can achieve much higher netbacks than sending it on a blind formula to New Orleans, and have a trader also sell two barges and lose money and manipulate the price, and the Arab Gulf producer can lose a significant amount of optionality, as opposed to get a fixed price and go east. We expect that moving forward, there will be less product coming from the Arab Gulf. None is arriving from China, very little arriving from Venezuela and the traditional exporters into the U.S. With that will also affect the Midwest premium.
Great. Thanks a lot.
Thank you again, ladies and gentlemen. It's star and the number 1 should you wish to ask a question. No question at this time, sir. Please continue.
Thank you, ladies and gentlemen. Looking forward to our next call in three months. Thank you.
Thank you. That does conclude our conference for the day. Thank you all for participating. You may all disconnect. Have a good day, everyone.