Hello, everyone, and welcome to the OCI N.V. Second Quarter 2022 Results Call. Thank you for your patience. My name is Daisy, and I'll be your coordinator today. You will have the opportunity to ask a question at the end of the presentation. If you would like to register a question on the conference call, please press star followed by one on your telephone keypad, or if you've joined on the webcast, please use the questions box. I would now like to hand the call over to Hans Zayed, the Group Investor Relations Director to begin. Hans, please go ahead.
Thank you. Good afternoon and good morning to our audience in the U.S. Thank you for joining the OCI N.V. Second Quarter 2022 Conference Call. With me today are Ahmed El-Hoshy, our Chief Executive Officer, and Hassan Badrawi, our Chief Financial Officer. On this call, we will review OCI's key operational events and financial highlights for the quarter, followed by a discussion of OCI's outlook. As usual, at the end of the call, we will host a question -and- answer session. The quarterly reports and the presentation are available on our IR website that we posted this morning. I would like to remind you that any forward-looking statements made on this call involve risks, and the actual results could differ materially from these statements. With that, let me hand over to Ahmed.
Thank you, Hans, and thank you all for joining us today. Hassan and I will provide some more perspective on the results we published this morning throughout this call. We're pleased that we continued our strong performance with an Adjusted EBITDA of $1.3 billion for the quarter and $3.8 billion for the LTM trailing 12-month period, and a reduction in net debt to a very low leverage level. This enables us to return almost $1.1 billion of cash to our shareholders this calendar year and pursue value-creating decarbonization and growth opportunities. However, we have to put these results in a global perspective, as the global and especially European macro environment faces many challenges. The uncertainty is particularly true for gas markets in Europe, as widely discussed.
Many European producers in our industry cannot recover their cash costs due to the high prices of gas, especially those that cannot import ammonia as an alternative. Yet we're able to deliver excellent results as we benefit from our flexibility and diversified platform across Middle East and North Africa, U.S. and Europe, and our leading position in the global ammonia market. This enables us to reduce gas consumption in Europe when necessary by replacing that with the ammonia from our global operations as well as third parties. Currently, we're running our ammonia lines at approximately 40% of our capacity in the Netherlands. All this is reflected in our results.
We recorded strong results in the U.S. and at Fertiglobe, and we're able to operate our downstream production in Europe profitably while we continue to provide essential nitrogen fertilizers to our European agricultural customers and nitrogen products to our industrial customers. The latter is even more important in the current environment. At OCI, we aim to address potential grain shortfalls and be part of the solution to help alleviate overall food security concerns by providing as much product as possible and fill in supply gaps that may arise. Our methanol operations, however, stopped production at the end of June last year, when gas prices were already high, making it difficult to run the plant economically.
You can also see this in our group's own produced sales volumes of 3.1 million metric tons, which were down 5% during the second quarter compared to the second quarter of 2021. This can largely be explained by the continued shutdown of BioMCN in Europe. Our overall European business also benefits from the sale of excess EUAs or CO2 credits, including $88 million recorded during the second quarter. As we discussed in our past conference calls, we are excited about our strategic growth opportunities that can both decarbonize and grow our asset base in a value-creative way in the emerging hydrogen economy. We're pleased with our progress on the various projects under development.
As always, and before I hand it over to Hassan, I'd like to cover our top priority, which is safety, as we want all our employees and contractors to go home safe every day. We also see safety as crucial for our business and ESG performance. As we improve occupational safety and process safety, reliability, and even energy efficiency will increase, all part of our operational excellence program. Our 12-month rolling reportable incident rate at the end of March was 0.37 incidents per 200,000 man-hours, slightly higher than at the end of Q1. Despite being below industry averages, we continue to stress our relentless focus on operational and process safety across all our facilities.
The whole OCI team is working hard to make this happen, and I'd like to thank all our employees for their strong commitment to safety as well as operational excellence and growing our business at the same time via commercial excellence and growth projects. I'll now hand it over to Hassan for further commentary on the company's results. Hassan?
Thank you, Ahmed. I'll begin with summarizing some positive developments for both OCI and Fertiglobe that occurred in the last few months. Following the earlier upgrade of OCI to investment-grade status with a stable outlook by S&P, which is a Fitch, all three credit rating agencies have now also issued first-time investment-grade ratings on our ADX, which is a subsidiary of Fertiglobe in June, recognizing its strong free cash flow generation, financial policy and robust outlook. We're also pleased that in the month of June, OCI was included in the MSCI World Index and the STOXX Europe 600 Index, making a return to some of the world's leading global equity indices, from which we dropped at the beginning of the prolonged downturn for our end markets in 2016.
The inclusion coincided with a noticeable step-up in the liquidity of our shares to a consistent $40 million-$50 million per day on average this year, compared to previous levels of $10 million-$15 million per day. Partially reflecting some share price appreciation and changes in our shareholding structure. In addition, Fertiglobe was also included in the FTSE Emerging Markets Index in June, following its March inclusion in the FTSE ADX 15 Index, which represents the 15 largest and most liquid companies on the Abu Dhabi Securities Exchange. We hope that such developments, combined with the prospect of a consistent offering of a dividend yield and the exciting growth prospects that lie ahead for OCI and the transition in the energy transition, should continue to broaden our appeal to the investor community. Turning to the quarter's results.
Focusing on the quarter results, OCI's consolidated revenues increased by 95% to $2.9 billion. As Ahmed mentioned earlier, our Adjusted EBITDA rose by 141% to almost $1.3 billion during the second quarter compared to the same quarter last year as we continue to benefit from higher prices for all of our products. All segments of the business contributed to this growth. In line with our guidance, our Adjusted EBITDA is also 33% higher than the first quarter. Compared to the same quarter last year, consolidated adjusted net income saw a marked improvement of 322% and reached $528 million for the quarter, and our reported net income increased by 226% to $478 million.
The primary difference between adjusted and reported net income is related to balance sheet FX translations and treatment of one-off refinancing costs. We also generated $928 million of free cash flow during the second quarter. Of note is that this free cash flow figure is after deducting $250 million of dividends paid to non-controlling interests. These include $170 million of semi-annual dividends to 30 global minority shareholders other than OCI, minorities in EBIC, which is a very close subsidiary, and some dividends to the methanol group minorities. Also after tax payments of $800-
Sorry. This is also after tax payments of $82 million, mostly in Abu Dhabi, which are up from a year ago due to the improvement in performance. This is also after interest payments of $51 million, which were down substantially from $91 million in the second quarter of 2021 as a result of our continued deleveraging. For the full year, we expect cash interest on gross debt to be below $120 million, which is a substantial reduction from 2021 interest level of over $180 million. Below the free cash flow line, we had costs to the tune of $65 million related to our successful refinancing of IFCO in April, which we covered in the previous quarter results and conference call.
We have successfully returned cash to shareholders of EUR 1.45 per share, or the equivalent of $320 million, the first cash payment to our shareholders since our listing in Euronext Amsterdam in 2013. Fertiglobe also paid an interim dividend to shareholders during the second quarter of $340 million, of which 50% was received by OCI and 50%, of course, to ADNOC, our strategic partner and the minority investors in Fertiglobe. After all these cash distributions and one-offs, net debt still declined by $553 million during the second quarter to $708 million as of 30th of June 2022. The net leverage of 0.2x based on the LTM EBITDA of $3.8 billion.
This is compared to a consolidated leverage of 0.9x as of 31st December 2021. Looking at proportionate leverage as of 30th June 2022 and based on OCI's ownership, so adjusted for all minorities and including off-balance sheet debts, at Natgasoline, the proportionate leverage at 30th June was 0.5x compared to 0.8x as of 31st March, and compared to 1.3x as of 31st December 2021. With regards to future returns of capital to shareholders, in early July, we announced a proposal for a cash distribution with respect to the performance of, our performance in H1 2022 of 3.55 EUR per share, or just over $760 million based on the FX rates today.
We have scheduled an extraordinary general meeting for this on the 19th of August. This distribution will bring total return to shareholders during the calendar year 2022 to EUR 5 per share or just shy of a total of $1.1 billion return to shareholders, implying a dividend yield of 15% on yesterday's evening closing price. You know, we saw some positive share price movement today, so that number will have changed. Separately, Fertiglobe also announced today in line with its dividend policy of distributing excess free cash flows to the shareholders, a cash distribution of $750 million for the first half of 2022, payable in October 2022. OCI's share of this dividend will be $375 million accordingly.
The two dividends, combined with the declared dividends and non-controlling interests in Algeria of $342 million, which relates to last year, will result in cash outflows of almost $1.5 billion in the second half of 2022. Even with these cash outflows, we are still poised to maintain a healthy balance sheet, which enables us to continue to return capital to shareholders while investing in strategic growth opportunities both within an investment grade framework as we have consistently laid out. On a pro forma consolidated net leverage basis as of the 30th of June, after taking into consideration all these proposed cash distributions and without giving any regard to cash generation during the second half, our leverage effectively would be at 0.6x on a consolidated basis and below 1x on a proportionate basis.
With regards to growth opportunities and CapEx, there is no change to our CapEx guidance for 2022. We continue to expect around $300 million of maintenance CapEx. In addition, we continue to guide for between $75 million-$150 million of growth CapEx, depending on the various progress on projects and potential FIDs in 2022. We also maintain our estimate of up to $350 million-$450 million of growth CapEx for 2023, which includes previously announced projects. However, ultimately, all projects depend on factors such as legislation, incentives, and market developments. Moving to natural gas. Regarding our natural gas procurement and hedging activities, as you will have seen in the press release, we covered that topic extensively with the prospectus.
As we saw the prospect of increasing LNG exports in the U.S. to Europe in the coming years, we have locked in a large part of our long-term gas requirements in the United States. As Natgasoline already has hedges in place, this applies mostly to the new hedges related to IFCO and our OCI Beaumont operation, and mark the change in OCI's policy with respect to long-term hedging. In the first half of 2022, Fertiglobe accounted for 60% of our global natural gas consumption. The U.S. accounted for 31%, including our proportionate share of Natgasoline, and Europe for only 9%, given that our BioMCN operations remains shut. We are also running our ammonia capacity in Europe at reduced rates around between 40%-60%.
Therefore, the hedging alongside Fertiglobe's favorable gas supply contracts gives good visibility on more than 90% of our long-term gas requirements and further enhances our cost resilience. For the period between 2023 and 2029, we have hedged circa 50% of our gas requirements from the U.S. and locked in natural gas prices at a weighted average price of $4.3 per MMBtu. For the period between August and December 2022, so the balance of the year, we are hedged, we have hedged circa 60% at a weighted average price of $5.30 per MMBtu, which compares to the Henry Hub price of $8.3 per MMBtu for the September-December 2022 forward curve.
Note that OCI does not apply hedge accounting on commodity hedges, therefore, mark-to-market gains and losses are recognized in the P&L statement, except for the physical purchase contracts, which are treated under the own use exemption methodology, and we're happy to provide anybody who requests some additional narrative on that. However, mark-to-market gains or losses are excluded from Adjusted EBITDA and our adjusted net income when we report them. Current mark-to-market as of the close of August 2022 indicates a gain of $184 million on these hedges. With that, I would like to invite Ahmed to provide further commentary on results, commodity market conditions, and the strategic initiatives of the company. Ahmed.
Sure. Thanks, Hassan. Our outlook for our end markets has not changed directionally since we last spoke in May, despite volatility that we've seen over the last few months. If I start with the outlook for nitrogen markets, we had expected we saw some declines in pricing over the summer in line with usual seasonality, but remained at much higher levels than we have seen in the off-season periods during the 2016 to 2022 to 2020 downturn, given the demand-driven environment we currently see ourselves in today. Going forward, we continue to see an environment with support for pricing for the medium term, driven by a few key items. Firstly, the prospect of structurally higher gas pricing environments in Europe for a prolonged period of time.
On today's gas price in Europe of $60+/MMBtu, the ammonia support level would be $2,100/ton for marginal costs, excluding CO2, which people are increasingly viewing as a variable cost. In our presentation, you can see that based on gas price futures, long-term support levels for ammonia, urea, and nitrate pricing for this year and 2023 are 6x-9x higher than the support levels we saw for marginal cost producers during the downturn period of 2016-2020. Pricing today is actually materially lower than these support levels, but it is not uncommon to see prices drop below such floor levels during off-season periods with low liquidity. Economics has historically prevailed when margins for producers remain negative for a longer period, triggering shutdowns, as we have already seen happening in Europe over the last 12 months.
In Europe, we estimate that around 7 million tons of ammonia capacity out of a total of 19 is currently shut due to high gas prices. Given elevated futures and risks associated with Russian gas supply, more capacity may be shut down should selling prices remain below gas-based production costs. In total, up to 19 million tons of European ammonia capacity is at risk of being shut if pricing remains materially below cost for a sustained period of time. Secondly, nitrogen supply is expected to be structurally tighter over the next several years between 2022 and 2026 compared to the previous five years, with limited new capacity additions. This is exacerbated by less supply from Russia on the ammonia side from the Black Sea, which impacts circa 2 million tons of ammonia, or 10% of the global trade.
The Chinese government continues to curb exports and prioritize domestic supply at least until H2 2023, which tightens the markets further. Exports are expected to be below the 3 million ton level per year over the medium term and even lower than that level in 2022. To put this into context, in January, the expectation was that China would export over 4 million tons in 2022. As we moved on to May, this number had reduced to 3 million, and now it has dropped further to 1.5 million for calendar year 2022. This 2.5 million drop in expectations since the beginning of the year represents approximately two world-scale facilities running the whole year out. Thirdly, crop fundamentals remain supportive for nitrogen demand to help alleviate critical grain shortages.
The global grain stock-to-use ratio remains a decade low and will take at least until 2024 to replenish stocks, assuming strong nitrogen application. Grain futures, with U.S. corn futures that are around $6 and wheat futures at $8 a bushel from the second half of this year until the end of 2024, remain at levels that incentivize farmers globally to maximize yields by using more nitrogen in grain exporting regions such as the U.S., Brazil, Europe and Australia, where demand is expected to be robust in 2022 and 2023. Furthermore, dry weather in the U.S., Europe and Argentina is expected to lower corn and wheat yields, which combined with lower corn production in Ukraine, tightens the agricultural cycle even further into 2024.
In India, we also expect strong import demand for Urea in 2022, with a series of tenders expected to be issued over the coming months to replenish low stock levels and support Urea demand. 2022 and 2023 is expected to be higher than last year, given high wheat prices, demand for Indian wheat on the back of the Russian grain conflict, good monsoons and nitrogen subsidies in place. In addition, there have now been news reports in the last day that India is rationing gas supply to fertilizer customers after imports were limited, given global LNG shortages into the country. Now moving on to methanol. The volatility in the macro environment has some effect on prices in Q2, but we've seen some improvements in the spot prices in the last few weeks.
Last week, U.S. contract price for August settled at $592 per ton, almost the same level as in July. Of course, we're monitoring the macroeconomic environment closely as part of the end-demand for methanol is linked to GDP, but we are currently seeing stable methanol markets into Q3 and continued downstream demand from a diversified customer base. Operating rates for major derivative segments, including formaldehyde, acetic acid, MMA, are reported to be at healthy rates in the United States and Europe. In China, in particular, economic development is expected to improve as a result of financial stimulus measures. Fuel consumption in China is picking up post-COVID lockdowns, and higher oil prices are supportive of methanol substitution for other fuels.
Supportive for MTO or methanol olefins economics as a result of higher energy and olefins pricing in China, and they're supporting operating rates that continue to exceed 80%. Methanol is currently also significantly cheaper than LNG and gasoline and other oil substitutes, and can be used as lower cost and as a cleaner alternative to multiple fuel applications worldwide, including heating and transportation. Looking at the medium term, we continue to expect tighter methanol market fundamentals over the period of 2022- 2026, with incremental demand expected to exceed supply by approximately 8 million tons and no new major supply expected to come on stream during this year.
This does not consider, obviously, the meaningful upside and additional upside we see from hydrogen fuel demand, notably for road and in particular marine fuel applications, that as you all know, is developing. This leads into some comments on our growth strategy in Alabama. We continue to make good progress with our pipeline of projects to capture value accreted opportunities from emerging demand for clean hydrogen as we aim to become one of the largest producers of clean fuels and feedstock. We see large upside from additional demand emerging in a range of new applications and sectors as a result of the hydrogen transition, notably for road and marine fuels applications where ammonia and methanol are ideally positioned.
In June, we announced the expansion of our Rotterdam Ammonia Term-Import Terminal, which is the only ammonia import terminal in Rotterdam, and we're tripling the throughput capacity to 1.2 million tons per year during 2023. This infrastructure has been crucial in our flexible operating model in the current high gas price environment, as discussed earlier. For the second phase, OCI has completed the basic engineering package for the construction of a new ammonia tank at the terminal, which, along with the scale-up in the jetty infrastructure, will allow a potential increase in throughput to above 3 million tons per annum.
The terminal is strategically located to facilitate emerging ammonia demand for bunkering to ocean-going vessels, and this unique supply chain is one we can also leverage in the future by importing low and no carbon hydrogen in the form of ammonia methanol, which can help decarbonize the EU as well as reduce reliance on imported natural gas during these difficult times. We're also pleased that Furec, a waste and biomass gasification project developed by RWE, was selected for funding by the EU Innovation Fund. This project will produce hydrogen at the industrial site in Chemelot, using household waste from Limburg in the Netherlands to replace natural gas. OCI is expected to be the offtaker for the circular hydrogen to use in our ammonia synthesis, replacing part of our steam methane reformer.
It's produced hydrogen, which would result in a reduction in our carbon footprint and lower the carbon intensity of our ultimate products. Throughout the value chain, the project will reduce emissions about 500,000 tons of CO2 per year, corresponding to the annual consumption about 26,000 households or 250,000 conventional passenger cars. Of course, the project is still under development, with FID expected in 2023 and subject to definitive documentation in commercial briefs. To conclude, we are excited about the prospects for the company. In 2021 and year-to-date 2022, we saw the start of a strong and we believe, sustained general improvement in nitrogen pricing. Shorter-term recent nitrogen price movements and the outlook for natural gas provide good visibility and set us up well for Q3 and Q4 this year.
OCI's nitrogen and methanol assets are favorably positioned on the global cost curve given feedstock spreads between the regions. The hedging in place at attractive pricing levels now in the U.S. gives us visibility on more than 90% of our long-term natural gas requirements. We are ideally positioned as we leverage our competitive global platform, world-scale young assets, and strong logistics platform, and harmonize our hydrogen strategy with our continued focus on shareholder and stakeholder value. With that, we'll open the line up for questions.
Thank you. If anyone would like to register a question on the telephone line, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure you are unmuted locally. Our first question is from Christian Faitz from Kepler. Christian, your line is open. Please go ahead.
Yes, thank you. Good afternoon, Ahmed, Hassan, and Hans. Two questions that were made. First of all, how do you see ammonia demand for the upcoming fall application in the U.S.? Do you have any early signs from your salespeople on the ground? Then second, can you give us an update on the gas cost situation for both your Houston methanol operations as well as for IFCO? Thank you very much.
Sure, Chris. Good. Thanks for the question. Obviously we know that we had pretty weak ammonia demand for the spring just given weather conditions that we saw in the U.S. For this coming fall, we've seen quite a lot of demand for fall prepay, which has helped soak up some of the excess inventory that was in the system following kind of the weak spring that we just ended. We also see obviously exports to Europe that make a lot of sense in this type of pricing environment. You know, Trinidadian U.S. Gulf ammonia makes its way to Europe rather than go through the Midwest. With kind of the reduction in those supplies over time, some of the fall prepay, if the weather cooperates, we should have a record season, and we'll.
I think the industry will start to work through a lot of the stocks that have been in place from the end of June.
Thank you.
Could you repeat the second question?
Yeah. Just update us on your gas costs set up in the Houston methanol operations and IFCO please.
You know, Hassan walked through you know, we've done quite a bit of hedging of the underlying gas exposure in the U.S. to the levels that we discussed. I think it was 60% through December, and then from the beginning of 2023 until 2028, approximately 50%. The way we buy our gas in Iowa is actually off of the ANR Southwest basis, which is on average usually for the year quite an attractive basis level. We would have hedged the basis across most of this hedging. With regards to OCI Beaumont, we're on the Houston Ship Channel, South Texas basis. We've been able to also hedge basis as well as the underlying dynamics. Are you asking about what we're seeing?
Okay.
Today in the market for that price?
Yeah. Yeah, indeed. Indeed.
I think I don't have them right in front of me, but basically, you look at the Henry Hub price and you know, to get the basis for ANR Southwest, because it's been relatively volatile, that will give you a sense of kind of the underlying gas that we're using to supply our IFCO plant, ANR Southwest Hub. We have some transport, long-term transport taken out with TC Energy, our pipeline there. I think generally we're about flat to Henry Hub when it comes to Iowa. With regards to Beaumont, Texas, we end up being a little bit of a discount to Henry Hub based on where the Houston Ship Channel and South Texas basis levels are trading.
You would look at South TX, the South Texas basis, and you'd look at Houston Ship Channel when it comes to OCI Beaumont.
Okay. Great. If I may, one last question on IFCO, and then I'll shut up. If I'm not mistaken, your last bigger turnaround in Iowa ended more or less exactly three years ago. When do you believe the next bigger turnaround is or maintenance is scheduled?
I mean, as you know, we don't give kind of guidance with regards to turnarounds. Typically, they happen every four years, depending on which plant you're at. We had a long outage, which we did a lot of turnaround activities on, as you know, last year. It's actually still reflected in our LTM numbers. Despite the strong LTM performance, Iowa, which is obviously a very important plant in Q3 of 2021, had a very, you know, low EBITDA free cash flow generation.
Mm-hmm.
Because of the outage we had there at that plant. You know, I think in future years, we'll see if we provide more guidance around turnarounds, but they're typically every four years. I guess I'll leave it at that for now.
Okay. Very helpful. Thank you, Ahmed.
Okay.
Thank you. Our next question is from Lisa De Neve, from Morgan Stanley. Your line is open. Please go ahead.
Hi. Thank you for taking my questions. I have two, and they're a bit related. First and foremost, can you follow me on from the last question? You discussed a little bit the demand trends on the ammonia side. But can you also share what you're seeing on the demand side for the other nitrogen products you're selling and where you're seeing still some levels of potential down trading or some levels of price elasticity or liquidity concerns and maybe where you actually see pickup in demand? And my second question is, in your presentation, you sort of detailed that nitrate stock levels are at pretty low levels. Can you share a little bit about how, for example, urea inventories are at a global level, high or low?
Any sort of indication on that, because there's no real data on these things, would be helpful. Thank you.
Sorry, I was speaking to myself on mute. Back on to your question, Lisa, with regards to the questions on how demand is looking. European farmers are seeing still very strong economics to continue to buy nitrogen for example wheat production. This is despite the drop we saw in pricing from on the grain side for both wheat down to $8 a bushel now and corn down to $6 a bushel on the futures for the next two years. You run those numbers and the math around that, they're still making a good margin, and that's why we're seeing increased hedging forward and some buying of fertilizer forward even in this off-season period.
Still seeing good demand there, and we've built kind of a healthy order book on nitrates here in the third quarter as we've seen some increased prices. I think we've talked previously as well about India, where we still see very low stocks. That's one where we see low stocks of about 11% lower than prior periods. Still need several million tons by the end of this year to support Rabi demand and replenish stock levels as well. We see imports closer to the 9+ million tons versus the 7 million tons or so last year. On the Latin America side, we've seen demand picking up. You know, Brazil needs another 4 million tons of urea yet, and farmer economics still look quite strong there.
Argentina will need a little over 500,000 tons, probably close to 600,000 tons, at that side. Across the system, we're seeing very low inventories globally at historically low levels for almost all nitrogen products. Some of what you talked about with regards to demand destruction, we think was not just a, you know, for example, commentary on Europe, was not a function necessarily of demand destruction for price, but actual availability. You know, Russia is a big provider of ammonium nitrate, and there were just. It is just difficult to get ammonium nitrate in enough stock and levels to get it to the market.
When it comes to other areas for kind of quote-unquote "demand destruction" concerns, you know, areas where it's difficult in accessing credit, Sub-Saharan Africa, some areas in South Asia outside of India have been a concern. We've seen multilaterals and governments transactions helping support the purchase of nitrogen fertilizer to help with replenish these levels. I think that covers most areas. Are there particular geographies you'd like to talk about or specific products?
No, sorry. That was actually very helpful. I just wanted to get your thoughts on inventory and I think the conclusion is that overall inventories have reached quite low levels across most nutrients. I think that's a fair assumption, isn't it? I mean, to the extent we can see that.
Yeah. I'd say that qualitatively, Lisa, I'd say that.
Yeah.
You know, we think it's historic low. You know, the fact that China's not exporting is a big deal. The fact that there's a lot of shutdowns in Europe is a big deal. There was some overhang in the U.S., as you know, with some UAN that didn't get put down in June. Now you look into Q3, they're getting into that turnaround season and, you know, others have announced some turnarounds in Q3. Probably we're seeing that combined with, you know, a decent build program, reducing UAN levels. On the ammonia side, as I said, in the past question, we've seen exports from the U.S. as well as all prepaid sales really work through some of the stocks there for UAN and ammonia.
Those are kind of the two levels, and I think now the next step is to see how harvesting looks and you know, where yields are at in terms of outlook.
Okay, great. I was going to take the following question offline because I think it's a really stupid one, but I'm gonna ask it anyway. In your presentation, in your statement, you say that you have now visibility on more than 90% of the company's long-term gas requirements. How do we get to the 90%? Is this just U.S. Fertiglobe, your hedges in place? I mean, how do I get to that 90%?
Yeah, that's exactly right. When you think about our overall exposure, it's the combination of where we're at in terms of gas exposure. We do not have long-term hedges or medium-term hedges on in Europe, but we're also not consuming much gas in Europe right now. With the outlook, it doesn't look like we're gonna be running, you know, methanol anytime soon, given, you know, how historically low methanol has been, and that's been the case for over a year now. With regards to ammonia, we're running at 40% right now.
With the disconnect between product pricing for ammonia and gas cost of producing ammonia, you know, we're assuming that it kind of, you know, that we've made assumption on that level, put that in the numbers as well as Fertiglobe with the long-term contracts and the U.S. hedging that Hassan talked through.
Okay. Yeah, that makes sense. Thank you very much.
Thank you. Our next question is from Mubasher Chaudhry from Citi. Mubasher, your line is open. Please go ahead.
Hi, guys. Thank you for taking my questions as well. Just to cover please, are you able to provide any guidance range for the second half, given that you had quite a strong first half as well, and then we're looking forward to what looks to be a relatively strong second half as well? Any comments around the cadence between the third quarter and the fourth quarter would be helpful. Just on the macro level, can you provide any thoughts around the quality of the harvest being reported on in the recent weeks, out of the U.S.? Then, just trying to gauge around your commentary on stock-to-use ratios not normalizing until at least 2024.
Yeah, just wanted to kind of circle those two comments, please. Thank you.
I can take the first question regarding guidance. I mean, it's. We have provided at times certain level of guidance, looking at a quarter ahead. However, like most of our peers, we usually don't give any specific guidance except for directional comments on the market outlook, which we hope we did. The ones we provided this quarter were helpful in that regard, focusing really on sort of pricing environments, the macro variables that underpin our business performance, increased predictability of our cost base and, most importantly, cost base. I think the combination of all these is sort of our attempt to give some directional guidance to our investors and to the market.
As we get closer, in November as part of our future results, we will be giving some more guidance on sort of the dividends, the next dividends, cycle, as we have a bit more visibility on our order book then that's relevant for the performance of that period. As we continue to sort of see how the markets unfold given the fast changing environment that we're in. Ahmed, want to add?
Yeah. I mean, in terms of your other question with regards to harvesting and everything, that's obviously a few months away in the U.S. In terms of kind of crop conditions today, they're a bit behind the five-year average and behind last year in terms of the corn ratings from what we can see at this point. You know, there are concerns on yield in terms of a little bit less nitrogen application that happened in the course of Q2, as you know, and you know, late planting combined with quite dry weather. There are concerns about what yield we'll see come kind of September, October timeframe and what that means for grain stocks overall.
This is similar to what we're seeing in Europe on the very dry summer so far here in Europe. Those two are areas of concern in terms of yield, but I think we'll see more and know more over the coming months. I think I did mention earlier, you know, LatAm dry conditions, particularly if you look at the wheat in Argentina. You know, those are some of the areas where there are concerns about the production there of crops.
When you look forward and what that means, that means potentially a more difficult time replenishing stocks of grains and driving some of the commentary we're saying about, I think your last question there, which is the need for replenishing grain stocks to get to more normalized levels because we are at decade lows where we stand today and have risks around the output and the yield that we anticipate seeing later this year.
Thank you. Our next question is from Chetan Udeshi from JP Morgan. Chetan, your line is open. Please go ahead.
Yeah. Hi. I had two questions. I'm just wondering on your comment that you are running your European ammonia capacity at, I heard 40% utilization. I'm curious why are you even running it at this point, even though it's really not gonna be profitable? The second question was, you know, you've talked about at least we've seen in the press filings on some, you know, greenfield projects in the U.S. Are you able to give us some color on how should we think about the CapEx roadmap for OCI over the next two, three years? Are we talking about a big step up, or are we talking about maybe a few $50 million increase per year till you get to a point where there is a peak CapEx on some of these greenfield blue-green ammonia or methanol plants globally?
Do you worry that maybe some of these new green and blue plants are coming way too soon compared to when the real demand will start to kick in?
Sure. No, very good question. I mean, your 40% question makes, you know, a lot of sense when you think about our capacity. You know, you're talking about 1 million tons per year of ammonia capacity we have in the southern Netherlands. We announced that we're at around 400,000. To your question, could it be zero given where we're at right now? It could be zero, and I wouldn't rule that out. But when we look at the products that we produce, some of the products we produce, as you know, like urea for the production of melamine or, you know, urea for the production of UAN, you need the CO2 from that ammonia line to run some of that.
That's some of the concerns people have and why it's not just an ammonia effect, but it's a UAN effect, it's a urea effect, it's high gas effect. The importance of imports is very important for us to be able to continue to buy ammonia from third parties at, you know, $1,000 a ton, when the cash cost of making it is still north of $2,000 a ton. That generates the margin of itself. You know, we have the ability to potentially shut down both lines and continue to potentially produce CAN because that doesn't need CO2 to produce. You just import ammonia, you run your nitric acid plant, and you produce calcium ammonium nitrate into that market.
Yes, it's a good question, and that's one of the areas you can find us in, depending on how pricing trajectory moves and how gas prices go. Is that clear on the first question?
Yeah.
Okay. With regards to your other question, so we have given CapEx guidance, growth CapEx guidance, I think in the prior conference call of $350 million-$450 million a year next year. That's informed by, you know, obviously being within our financial policy and subject to the FID of projects. If we FID a project, we'll obviously come to the market with that to announce that we've actually FID the project. You know, subject to our economic return focus, our focus on decarbonization, and then staying within our investment grade for financial profile targets. That guidance assumes that there's some forward movement in FIDs on potential projects. In terms of informing it.
Just to kinda give you a sense on the bookends of if growth CapEx were to get to that level.
Understood. Thank you.
Thank you.
Thank you. Before we take our next question, I would just like to remind everyone, if they would like to ask a question on the telephone line, please press star followed by one on your telephone keypad, or if you have joined us on the webcast, please write in the questions box. The slide presentation can also be found on the webcast under the meeting materials. Our next question is from Faisal Al-Azmeh, from Goldman Sachs. Faisal, your line is open. Please go ahead.
Yes. Hi, and congratulations on the strong set of numbers. Just a quick one or two questions on my end. The first one is on your stake in Fertiglobe. I mean, at some point, are you or ADNOC thinking about reducing your stake to allow the company to be included in MSCI and to increase liquidity? Is that something that is being considered or at no stage will you be reducing your stake in the business? That's my first question. My second question relates to the methanol market. I've been reading that effectively they're changing the contract from quarterly to monthly contract. How do you look at this development?
I mean, does it change anything if at all, or is this something that is better or worse from your perspective? Thank you.
Yeah. Faisal, with regards to your first question, obviously Fertiglobe is a strategic asset for OCI as well as for ADNOC. You know, we have the ability, you know, both ADNOC and OCI in the future to reduce the stake. Yes, there's the MSCI inclusion, but you know, we would come back to the market and announce plans to do so if we were intending to do so in the near term. There's a possibility to do it, continues to remain strategic to both the sponsors. We both enjoy the asset significantly and as you know is doing very well. Yeah, I wouldn't rule that out in you know, the long term.
For now, you know, we're comfortable with the stake that we have in place and obviously has a lot of synergies with OCI's existing products.
It's also a very important growth platform given the positioning of their business as an export platform at a time where exports are very important. The balance sheet is really under leverage, allowing us to look at both growth opportunities and continue to return a really good dividend to shareholders going forward. We're very happy with this partnership and this investment with ADNOC. Thank you.
Yeah. The second question.
Yeah.
Based on your second question, you know, it's in regards to the European contract price, which has been an interesting one, that is set quarterly. We haven't been a huge fan of that because, you know, as a European producer, we haven't been producing in 13 months, right? Out of our BioMCN plant. As a European producer, we thought that there'd always just kind of be this lumpiness and lag, and it's not good for the suppliers, and it's really not good for the customers. We've seen that the suppliers have gotten the short end of the stick often, right? You'll have a three-month period where global price and methanol change, where gas price in Europe change, as you see daily now, and you're set for an entire quarter.
Usually one side's, you know, relatively happy as a buyer, and one side as a buyer or seller, the other side, you know, conversely, happy, unhappy. We would likely, you know, see how that develops over time. We'd be in support of that and be in line with how monthly contract pricing is set in the U.S., and you wouldn't just have this disconnected price, you know, for example, where there could be a demand shock or a supply shock in either direction, and you're stuck in a quarterly pricing model.
Great. Thank you very much.
Thank you. Our next question is from Stijn Demeester from ING. Stijn, please go ahead. Your line is open.
Yes, good afternoon. Stijn Demeester, ING. My question is on the sale of EUAs. Is the entirety of the $ 88 million recorded in methanol? And should we expect you to continue this policy of selling credits as long as these operations are idle? And then maybe also a follow-up on the question of Mubasher on the cadence of Q3 versus Q4, which I think you haven't really answered. Maybe here on some color on this. Thank you.
Yeah. With regards to the $88 million EUA sale, that is not fully in the European methanol business. A portion of that is. I think the number is $68 million has gone into the European results. There's some costs obviously of BioMCN in the business itself. That's a negative. The OCI Clean Fuels business has done over a little over $20 million of EBITDA all factored into that. That leaves approximately $20 million that was not you know reported at the segment level. It was done at the whole- co level in Europe or GMV. To your question of whether we would continue to do so going forward, it kind of just depends on you know what we're doing operationally at the time.
Yeah, if we think that there's an excess or surplus of units that we have, we are able to sell that to offset the cost. Obviously, as you know, kind of as you have less production, you get less units over time. That's something we take into account. We're having, I think, quite constructive discussions about the green future of our methanol business in Europe with the Dutch government. They see us as one of the largest companies in the Netherlands. I think we're number one or two hydrogen producer consumer when fully running in the Netherlands.
As a partner in NortH2 with, you know, some of these projects in the northern Netherlands where our plant sits in Delfzijl with electrolyzer hydrogen off-takers in need, BioMCN is a prime candidate for that. We're working through what we can do on that to get to that green future and bridging some of the costs that we have associated with keeping the plant there via EUAs and I think the team's done a good job of repurposing some of our personnel to other parts of the business that have been very busy, like the Rotterdam import terminal or our OCI Nitrogen hydrogen plant. Good work across the board kind of collaborating during this difficult time. Your second question, I didn't fully understand. You said something about Q3 and Q4?
Yes. There was a previous question on sort of how we should look at the cadence or the strength of Q3 versus Q4. Not really guidance, but yeah, we're in sort of abnormal situations ourselves. Should we expect a typical seasonal restart in Q3, or should that be sort of dampened this year? Your view here.
Well, like we mentioned before, it's we're reluctant to give any specific guidance for the remaining quarters of the year. I think what we have shared is our view on the price, sort of the support level for nitrogen pricing and the recovery in methanol spot prices. We of course, what is it within our control is our continued focus on our manufacturing excellence program and to make sure that our plants are running best they can, not only for the financial results, but because we feel it's our responsibility to do so in such a volatile time where there is.
Inventory levels are low and there's clear shortages across the system, as Ahmed described earlier. The combination of those factors are big motivators for us. As you can see, the pricing environment continues to be tight and hopefully without any disruption in our operations of note that we should continue to perform well and continue to leverage our position in the global cost curve to generate free cash flow that allows us to you know move forward with our plans of being able to look at the growth opportunities that we already guided to in terms of the growth CapEx number for next year using judgment calls.
Hopefully continuing to meet expectations and generate excess cash flow that we can give back to shareholders as well. I hope that answers your question to some degree.
To some degree, yes. Thank you.
Thank you. We will now move on to the webcast questions. Over to Hans to read them.
Yes. Thank you. There are a few questions from Rutger Buitenhuis, and I'll read the first question, which is: In the press release, you mentioned that in a low seasonal period, prices can drop below costs of marginal producers. Do you expect a quick ramp-up in prices when demand picks up in Q3? That's the first question.
Yeah. As we covered in the call, we've seen good recovery in the nitrogen prices as Hassan has mentioned, kind of the start towards a recovery given the higher cash costs and still operating at a big deficit to cash costs right now in Europe with the production curtailments as well as the demand that we talked about, the different demand pockets, Australia, Brazil, India, Southern Hemisphere type demand that really needs to come up as well as you know some positive for you know grain-producing hedging going forward to buy some products in the fill period and a reasonably strong fall prepaid already on ammonia. We think that's supportive.
It's hard to give kind of month-to-month guidance, but definitely has a bit of a bullish trajectory from what we're seeing in the market and how we see transactions taking place. I think we talked about methanol spot prices also recovering a bit. That's obviously less affected by European gas, but there's been a recovery there, and I think a lot of outages globally on the methanol side has been part of the support into that spot market. Also we tend to obviously see later in the year, as you recall, some more methanol switching, for example, for industrial boilers. We expect to see that later this year. I think now methanol is the cheapest, as I mentioned on the last call.
It's been relative to other products, so we should see more of that, and that could give some support for demand in the East Asian markets and potentially the transport market over time.
Thanks. The next question is: Do you see any signs of recession by lower demands for industrial application of ammonia and methanol?
Yeah. With regards to the reduction in demand, it's also an important question. We have seen, you know, some at these kind of higher ammonia price levels. We've seen some demand destruction in some of our products, but overall, people are still consuming a reasonable amount of ammonia, and obviously there's more than enough demand to go around given the shutdowns that we're seeing on the macro side. Given the energy crisis and reductions in supply of kind of energy in the form of methanol and ammonia, you know, we're seeing a lot of supply related reductions offsetting the demand curtailment. It's something you have to watch, right?
The SMBs of, you know, if you have some demand destruction because they can't get access to energy, for example, in Europe or because of the recession, how does that affect overall SMBs? So far from what we've seen, it hasn't been something kind of that gives us a material concern, but it's something we'll continue to monitor, particularly for methanol and ammonia. I think I'll also mention that, you know, other industrial products, we're still seeing strong demand for spot diesel exhaust fluid for truck movements, but that's something, you know, if there's a recession, we could see some reduction in that. That's something that we're monitoring closely.
There's a natural increase year- over- year with just, you know, increased conversions to SCR engines and global DEF demand and less supply for DEF globally that helps support that market. We've seen also Melamine pricing continue to be relatively strong with, you know, potentially some demand destruction in certain areas, but at the same time, offset by outages in the United States as well as curtailments in Europe, which are, you know, obviously gas linked as well as in China. It's offset and offsetting some of the Chinese imports into Europe. Yeah. I mean, I think those cover the main areas.
Yeah. Thanks, Ahmed. The next question is, several U.S. producers note that they have large planned turnarounds in Q3. Are you going to respond to this in the U.S.?
I mean, you know, as we've stated before, our goal is to maximize production, particularly at these margin levels outside of Europe. We'll continue to maximize production where we can. I mean, we obviously have time-scheduled turnarounds, as you know. We have seen that there have been more turnarounds that have been kind of postponed from last year into the Q3 period, which is typically a bit slow. That's supportive for that first question that came in with regards to the trajectory of potential nitrogen and methanol price.
Thanks. The next question is: What is the current status of ammonia and methanol application as a shipping fuel? When can we expect real demand picking up for this?
Yeah, I mean, we have seen quite a number of vessels ordered by various players with methanol as a shipping fuel. We expect, you know, demand for non-traditional kind of methanol consumers going into, for example, container vessels, et cetera, to come on in 2024, 2025. We already have, for example, Methanex, which is the largest methanol producer in the world. Half of its fleet is running on methanol. Others in the market are running on methanol as well. We're starting to see that first. Absolutely, the retrofit, the engine possibility is there. We have them on the water already. We're very bullish on seeing a lot more methanol demand, you know, even as soon as 2024, 2025.
As I stated earlier, I think we have demand outstripping supply by 8 million tons between 2022 and 2026. That doesn't take into account the green fuels, which can be quite substantial changes, and we think we're just still at the tip of the iceberg given, you know, the movements with the IMO, EU focus on decarbonization, and people making big CapEx decisions on vessels now saying, "You know what? I need to have an alternative fuel that I can decarbonize," and Methanol is a good one. So that's what we see on the Methanol side. Ammonia, we see it coming later. You know, Ammonia has a few things kind of potentially going for it on the demand side.
You know, ammonia blending into coal-fired power plants to reduce emissions in Korea and Japan, which is moving along quite swiftly. We're gonna see, you know, a few million tons of demand of that probably by the middle of the decade and potentially much more by the end of the decade. We see increasingly more and more chatter in Europe of using ammonia as a feedstock for power plants, for gas-fired power plants.
I think we mentioned this in other investor interactions, but when you think about taking a ton of blue ammonia out of the Middle East, for example, the U.S., not even green, and its GHG footprint, where you sequester the CO2, you take that ammonia, you move it at -30 degrees, refrigerated on a tanker into Europe, and then you combust it in Germany in a power plant or in France in a power plant. The only CO2 emissions were very upstream, right in the beginning with the production of that ammonia, and you've reduced the carbon footprint of it already. But you're not producing CO2 to move it. You're not producing CO2 when you combust it, ultimately, in Europe as NH3, so there's no carbon. That compares very favorably to LNG.
LNG, you have to produce quite a lot of CO2 to liquefy it. You have to have boil off and produce CO2 on the way to Europe. In Europe, you're gonna have to produce CO2 again when you combust it for energy. Increasingly, more and more discussion of that, where ammonia can be a win-win, particularly with the advent of Carbon Border Adjustment Mechanism, to reduce CO2, as well as diversify away from natural gas, imported natural gas in particular, but potentially even LNG, having that as an alternative. Lastly, marine fuels I'd put at kind of 2025 is where that starts, to your question, and increasing potentially quite swiftly from there. There are a few elements that need to come in place. One is primarily and most importantly the engine, which we think will be ready in, call it, eight.
You know, 12-18 months, and then start seeing ship orders for 2025 and into 2026, so following methanol.
Thanks. The next question is, why such large dividends and not share buybacks? Do you think your valuation is too high? Would not opportunistic buybacks on share weakness and retiring stock not improve long-term per share value would be significantly more valuable?
I mean, we've started. I mean, this is the first year of we return capital to shareholders, as we mentioned earlier, since we listed on the Euronext Amsterdam in 2013. We're very pleased that we're out of the gate with such an attractive return and such a meaningful dividend yield. I think we're just shy of, as I mentioned earlier, of $1.1 billion of cash distributions in a very tax-efficient manner for all our shareholders. We wouldn't rule out any other mode of returning capital to shareholders. Everything's on the table. We'll be evaluating all available avenues going forward.
Normally I would not, and I actually am not gonna comment on valuation per se on the score, but I would point you to a new slide that we added in our results presentation, which we find interesting, and it's looking at just some facts on page nine of our results presentation, which shows that our market cap growth has been largely a reflection of our net debt reduction despite the underlying performance of the business, the de-risked balance sheet, and the improved outlook. I think it's a very interesting chart that we decided to include.
Hopefully that creates some content for discussion in terms of the outlook of the company. In terms of forward guidance and, I mean, we're reluctant to give any specific guidance per se, but I think the underlying drivers in the market, which we covered throughout the call, looking at pricing, looking at our focus on volume production, and looking at our continued focus on value creation. We believe we're in a good position, and we're relatively comfortable with the outlook for the year. We've reduced our gross debt by $1 billion since the beginning of the year.
Leverage is almost consolidated leverage at 0.2x. I think we're in a really good place and poised to really deal with any conditions that may come our way in the future while maintaining our ambition to grow and continue to return capital to shareholders.
Hans?
Yeah, thank you. The next question is, can you give an indication on third quarter EBITDA relative to the second quarter, given current spreads imply a big drop?
Unfortunately, we're reluctant to give this kind of guidance. As I mentioned earlier, the underlying drivers of our business continue to be relatively healthy for the remainder of the year.
Thank you. The next question is, can you talk about how you can promote the company as a clean fuel producer at the upcoming COP27 and COP28 conferences? Is there an opportunity to achieve a re-rating for the shares if ESG investors start to understand the story?
I mean, it's a good question. With COP27 and COP28, the stars have aligned quite well with our Fertiglobe business, right? COP27 is in Egypt, COP28 is in Abu Dhabi. Obviously we'll have a presence, a heavy presence in both those markets. I think increasingly OCI and Fertiglobe's profile has increased over the last year, and we are seeing increasingly more ESG investors looking at the value they can derive at, you know, by getting into a cash flowing business, trading at we believe to be quite low multiples and have the growth trajectory associated with, you know, sitting in the markets in which we sit in with the assets that we have that are advantaged to decarbonize and through the hydrogen economy.
You know, we think over time, you know, as ESG investors are looking at where to allocate capital, having an asset or an investment in a company like OCI and companies like Fertiglobe that are cash flowing, providing these, you know, stable, baseline dividends and have solid growth opportunities well below replacement costs, with good target IRRs, are ones where we know we're gonna showcase in both COPs in both those locations, working closely with governments. I mean, the government is a partner, is an equity investor in Egypt in our EBIC plant. It is a partner as the Sovereign Wealth Fund in Egypt in our EBIC green plant. We work closely with all the various ministries and stakeholders there.
In Abu Dhabi, I mean, it goes without saying that Abu Dhabi's government is a shareholder of Fertiglobe. It is a gas provider to Fertiglobe. We're doing blue and green ammonia projects together with Masdar as well as ADQ and ADNOC there. Quite a lot of opportunity over the next two COPs to showcase OCI and increase you know the already growing interest from ESG investors.
Thank you. I think that was the last question that came from one of our investors, 91 . I don't see any other questions on the web either.
All right. Bye. Thanks, Hans. Thanks everyone for your patience on the call today, so you get back to your summers. We look forward to catching up for Q3 results.
Thank you.
Thank you everyone for joining today's call. You may now disconnect your lines and have a lovely day.