OCI N. V. (OTC:OCINF) Second Quarter 2022 Earnings Conference Call August 2, 2022 11:00 a. m. m. ET
Participating companies
Hans Zayed – Director, RI
Ahmed El-Hoshy – Executive Director
Hassan Badrawi – Chief Financial Officer
Conference Call Participants
Christian Faitz – Kepler
Lisa De Neve – Morgan Stanley
Mubasher Chaudhry – Citi
Chetan Udeshi – JPMorgan
Faisal Al-Azmeh – Goldman Sachs
Operator
Hello and welcome to OCI N. V. ‘s 2022 quarter earnings call. Thank you for your patience.
My call is Daisy and I will be your coordinator today. You will have the opportunity to ask a question at the end of the presentation. [Operator Instructions]
Now I’d like to speak with Hans Zayed, the Group’s Director of Investor Relations, to get started. So, Hans, go ahead.
hans zayed
Thank you, good afternoon and good morning to our in the United States. Thank you for joining the so-called convention of the moment of OCI N. V. in the quarter of 2022.
With me today is Ahmed El-Hoshy, our Director General; and Hassan Badrawi, our CFO. During this call, we will review OCI’s key operational events and financial highlights for the quarter, followed by a discussion of OCI’s prospects. And, as usual, at the end of the call, we will ask a question: and answer session. The quarterly reports and filing are located on our IR online page that we published this morning, and I would like to remind you that any forward-looking statements made on this call involve hazards and that the actual effects will differ materially from such statements.
With that, let me talk to Ahmed.
Ahmed El Hoshy
Thank you, Hans, and thank you all for being with us today. Hassan and I will bring a little more attitude to the effects we released this morning in this call. We are pleased to have continued our strong performance with Adjusted EBITDA of $1. 3 billion for the quarter and $3. 8 billion for the 12-month era and net debt relief to a very low debt point. This allows us to return around $1. 1 billion in money to our shareholders this calendar year and pursue expansion and decarbonization opportunities that create value. However, we will have to position these effects in a global attitude because the global and specifically European macro-environment faces many challenges. The uncertainty is particularly true for fuel markets in Europe, as is widely discussed. Many European manufacturers in our industry cannot recover their money prices due to high fuel prices, especially those that cannot import ammonia as an alternative. However, we have been able to deliver the right effects as we take advantage of our flexibility and varied platform in the Middle East and North Africa, the United States and Europe, as well as our leading position in the global ammonia market.
This allows us to reduce fuel consumption in Europe, if necessary, by replacing it with ammonia from our global operations as well as third-party components. We currently operate our ammonia lines at around 40% of our capacity in the Netherlands. All this is reflected in our results. We performed well in the U. S. We were able to profitably operate our downstream production in Europe while proceeding to source essential nitrogen fertilizers for our European agricultural consumers and nitrogen products for our commercial consumers. The latter is even more vital in the existing context. At OCI, our goal is to fill potential gaps in organic products and be part of the solution to help mitigate overall food protection issues by offering as many products as possible and filling in gaps that may arise. Our methanol operations, however, halted production at the end of June last year when fuel costs were already high, making it difficult to run the plant economically.
You can also see it in the sales volumes produced across our organization of 3. 1 million metric tons, which are down 5% in the current quarter compared to the current quarter of 2021. But this was largely due to the closure ongoing BioMCN in Europe. Our overall European business also benefits from the sale of excess US or CO2 credits, totaling $88 million reported in the current quarter. As we have discussed in our previous convention calls, we are excited about our strategic expansion opportunities that can cumulatively decarbonize and grow our asset base in the emerging hydrogen economy. We are pleased with our progress on the various projects under development. But as always, and before I hand over to Hassan, I would like to address our most sensible priority, which is protection, as we need all of our workers and contractors to come home safe and sound every day. We also see protection as very important to our business, as ESG functionality, office protection and procedural protection, reliability, and even site power will stack up as components of our program of excellence. Operational.
Our 12-month reportable and continuous incident rate at the end of March was 0. 37 incidents consistent with 200,000 men discharged, slightly higher than at the end of the first quarter. Although we are below industry averages, we continue to focus on our constant concentrate. in safe or consistent operations and processes in all our facilities. The entire OCI team is working hard to make this happen. at the same time through advertising excellence and expansion projects. I will now give the floor to Hassan to take a closer look at the company’s results. Hassan?
Hassan Badraoui
Thank you, Ahmed. Je will begin by summarizing some positive developments for OCA and Fertiglobe that have occurred in recent months. After upgrading beyond OCI to investment quality prestige, there is a solid perspective through S
Let’s move on to the effects of the quarter. Focusing on quarter effects, OCI’s consolidated profit increased 95% to $2. 9 billion. And as Ahmed said previously, our Adjusted EBITDA is up 141% to nearly $1. 3 billion in the current quarter compared to the same quarter last year, as we continue to realize superior value advantages for all of our products. And all business segments have contributed to this growth. In line with our forecasts, our adjusted EBITDA is also 33% higher than in the first quarter. Compared to the same quarter last year, Consolidated Adjusted Net Income Source particularly advanced by 322% to $528 million for the quarter, and our Reported Net Income Source increased by 226% to $478 million. of earnings and reported net source of earnings relates to balance sheet foreign currency translations and remedy of one-time refinancing costs. We also generated $928 million of free cash flow in the current quarter. It should be noted that this free cash flow figure is after deducting $250 million in dividends paid to minority shareholders. This includes $170 million in semi-annual dividends to non-OCI minority shareholders of Fertiglobe. Sorry for the interruption. As I said, this is after deducting $250 million paid in doubtful interest, which includes $170 million in semi-annual dividends to minority shareholders of Fertiglobe other than OCI, minority interests in EBIC, which is Fertiglobe’s subsidiary, and some minority interests and some dividends met to the minority group.
Also post-tax bills of 800, sorry, also post-tax bills of $82 million, most commonly in [indistinguishable] which is higher than a year ago due to ‘steady improvement in performance’. And that’s also after interest bills of $51 million, which decreased to $91 million in the current quarter of 2021 due to our continued deleveraging. For the full year, we expect monetary interest on gross debt to be less than $120 million, which is a big relief from the 2021 interest point of more than $180 million. Matrix Below the free cash flow line, we had song pricing of $65 million similar to our successful IFCo refinancing in April, which we hedged in prior quarter effects and convention call. We managed to return €1. 45 consistent with the consistent percentage with consistent shareholders, the equivalent of $320 million. The first payment of money to our consistent shareholders is our board at Euronext Amsterdam in 2013. Fertiglobe also paid an interim dividend to consistent shareholders in the current quarter of $340 million, of which 50% was earned through OCI and 50%, of course, to ADNOC, our strategic spouse, and minority investors in Fertiglobe.
After all those distributions of money and one-time items, net debt decreased through an additional $553 million in the current quarter to $708 million as of June 30, 2022, representing a net leverage of 0. 2x based on last month’s EBITDA of $3. 8 million. This is compared to a consolidated leverage of 0. 9x as of December 31, 2021. Taking into account the proportional leverage effect as of June 30, 2022 and based on OCI’s shareholding, thus adjusted by all minorities and adding off-balance sheet debt in Natgasoline, the proportional leverage as of June 30 was 0. 5x versus 0. 8x at March 31 and 1. 3x as of December 31, 2021.
With respect to long-term capital repayments to percentage holders. In early July, we announced the proposal for a distribution of money relative to the functionality of our functionality in the first part of 2022 of €3. 55 consistent with the percentage or just over €750 million based on the day of exchange rate risk. To this end, we have scheduled an ordinary general meeting on the date scheduled for August 19. And this distribution will bring a global return to shareholders in calendar year 2022 of €5 a Depending on the percentage or just below a total of €1. 1 billion based on shareholders by applying a dividend yield of 15% on last night’s final value, but we saw a positive movement in the percentage value today, so that figure would have changed.
In addition, Fertiglobe announced today, in accordance with the policy of distributing excess loose money flow to shareholders, a $750 million money distribution for the first part of 2022 payable in October 2022. The OCI percentage of this dividend will therefore be $375 million. 2, combined with declared dividends and minority interests in Algeria, of $342 million, which were similar to last year, will result in outflows of money of nearly $1. 5 billion in the current part of 2022. Even with those outflows of money, we are still on the verge of maintaining a healthy balance sheet, which allows us to continue to return capital to shareholders, while investing in strategic expansion opportunities, either in a quality framework, as we have indicated.
On a pro forma consolidated net leverage basis as of June 30, after taking into account all proposed cash distributions and disregarding money generation in the current part of the year, our leverage would be 0. 6x on a consolidated basis and decrease from 1x on a proportional basis. When it comes to expansion opportunities and CapEx, our CapEx forecasts for 2022 are unchanged. We continue to expect approximately $300 million in CapEx maintenance. the progress of other allocations and possible FIDs in 2022. We also maintained our estimate of up to $350 million to $450 million of CapEx expansion by 2023, which includes previously announced allocations. However, at the end of the day, all allocations should end in points such as legislative incentives and market evolution.
Switch to herbal fuel. Our herbal fuel source, in terms of our herbal fuel progression and political activities. As you may have noticed in the press release, we only cover the issue clearly with perspective. As we have noticed the prospect of expanding LNG exports to the U. S. In the U. S. and Europe over the next few years, we have blocked much of our long-term fuel desires in the U. S. USA Since Natfueloline already had coverage, this basically applies to new IFCo-like coverages and our OCI Beaumont operation and the replacement marked in OCI long-term hedging policy.
In the first part of 2020, Fertiglobe accounted for 60% of our global herbal fuel consumption. ammonia capacity in Europe at reduced rates of around 40-60%. As a result, coverage throughout Fertoglobe’s favorable lifetime contracts provides intelligent visibility into more than 90% of our long-term fuel desires, further enhancing our carrying capacity. During the period from 2023 to 2029, we covered approximately 50% of our fuel desires in the U. S. We block herbal fuel values to a weighted average value of $4. 3 according to MMBtu. During the constant period between August and December 2022, so the rest of the year, covered about 60% at a weighted average value of $5. 3 according to MMBtu, which compares to Henry Hub’s value of $8. 3 according to MMBtu for the September and December 2022 futures curve.
Please note that the OIC does not apply hedge accounting or commodity hedging. Therefore, gains and losses at market place price are recognized at the origin of the income statement, with the exception of physical acquisition contracts, which are processed according to their own usability exemption methodology, and we are pleased to provide an additional explanation in this regard. However, gains or losses from one market location to another are excluded from adjusted EBITDA and our adjusted net earnings when we disclose them. The existing market place price at the close of August 1, 2022 indicates a profit of $184 million on those hedges. With that, I would like to invite Ahmed to comment more on the company’s results, commodity market situations and strategic initiatives. Ahmed?
Ahmed El Hoshy
Of course. Our outlook for our end markets has not changed course since our last verbal exchange in May, despite the volatility we have noticed in recent months. Summer in line with the same previous seasonality, but we remained much more consistent with the degrees we saw the consistent off-season between 2016 and 2020 given the demand-driven environment we currently see ourselves in. Going forward, we continue to see an environment with medium-term value-supportedness, driven by some key elements. First, the outlook is structurally superior to the fuel value environment in Europe over a constant period of time. With the current value of fuel in Europe at $60 according to MMBtu, the ammonia help point would be $2,100 per ton for marginal costs, excluding CO2, which other people increasingly see as a variable cost.
In our presentation, you can see that based on fuel futures rates, the long-term support levels for ammonia, urea and nitric rates for this year and 2023 are 6 to 9 times higher than the point of assistance we saw for fringe-fee makers during the recession. . it was from 2016 to 2020. Prices today are actually particularly below support levels, but it is not uncommon to see rates drop below those low levels during the low-liquidity off-season era. The economy has prevailed when manufacturer margins remain negative for a longer period, causing closures as we have already seen in Europe over the last 12 months. In Europe, we estimate that about 7 million tons of ammonia capacity out of 19 are currently closed due to high fuel tariffs. And given the major threats and futures related to Russian fuel supply, more capacity may be shut down if sales charges remain below fuel-based production charges. Overall, up to 19m tonnes of European ammonia capacity is in danger of closure if tariffs remain particularly low compared to the same time.
Second, the nitrogen source is expected to be structurally tighter over the next few years, between 2022 and 2026, compared to the last five years with limited capacity additions. This scenario is exacerbated by a declining source of ammonia in black seed, affecting around 2 million tonnes of ammonia or 10% of global sales. The Chinese government continues to curb exports and focus on domestic source at least until the second half of 2023, tighter markets. Exports are expected to be below the 3 million tonne year-on-year point in the medium term and even below this point in 2022. To put this in context, in January, China expected to export more than four million tons in 2022. As we go into May, that number had dropped to $3 million and has now dropped further to $1. 5 million for calendar year 2022. This $2. 5 million drop in expectations from the beginning of the year represents approximately two world-class services that coincide with the entire year.
Third, Propundamentals continue to solicit nitrogen to help alleviate critical grain shortages. about $6 and low futures at $8 per bushel from the current part of this year through the end of 2024 remain at levels that incentivize farmers around the world to maximize yields by using more nitrogen in grain-exporting regions like the U. S. In the US, Brazil, Europe and Australia, demand is expected to be physically powerful in 2022 and 2023. In addition, dry weather in the United States, Europe, and Argentina is expected to decrease corn and wheat yields, which, combined with declining corn production in Ukraine, tightens the agricultural cycle even further in 2022.
In India, we also expect strong demand for urea imports in 2022, with a number of tenders to be submitted in the coming months to fill low inventory levels and demand [for beer] for 2022 and 2023 is expected to be higher than last year, given the high wheat costs for Indian wheat due to the Conflict between Russia and Ukraine, smart monsoons and nitrogen subsidies in place. materials to fertilizer consumers after imports were limited due to global LNG shortages in the crisis.
Now let’s move on to methanol. The volatility of the macroeconomic environment had some effect on prices in the current quarter, but we have noticed a change in fair prices in recent weeks. Last week, the price of the U. S. contract as in July. Of course, we are largely following the macroeconomic environment for GDP-linked methanol, but lately we are seeing strong methanol markets in the third quarter and continued demand from a diversified visitor base. Our operating rates for key derivatives segments, adding MMA acid formaldehyde, would be at healthy rates in the U. S. In China, in particular, economic growth is expected to welcome monetary stimulus measures.
Fuel consumption in China is resuming after covid lockdowns and emerging oil costs are supporting the substitution of methanol for other fuels and supporting the MTO or methanol-olefin economy due to emerging energy and olefin costs in China and supporting operating rates to continue to exceed 80% Methanol is lately particularly less expensive than LNG, gas and other oil substitutes and can be used cost-effectively and as a cleaner option to power programs around the world, adding heating and transportation. In the medium term, we continue to expect methanol market fundamentals will adjust during the era from 2022 to 2026, and the source is expected to be exceeded by approximately 8 million tonnes and no major new source is expected to enter service this year. This evidently does not take into account the significant merit and additional significance of the hydrogen fuel request, especially for the road and marine fuel programmes that, as everyone knows, is being developed.
This leads us to some comments on our expansion strategy and prospects. We continue to make smart progress with our portfolio of projects to capture value-added opportunities from emerging demand for blank hydrogen as we target one of the largest manufacturers of blank fuels and feedstocks. We anticipate a strong uptick in incremental demand to emerge in a variety of new programs and sectors as a result of the transition from hydrogen to hydrogen, namely for on-road and marine fuel programs where ammonia and methanol are prominently positioned. In June, we announced the expansion of our ammonia import terminal in Rotterdam, which is the only ammonia import terminal in Rotterdam, and we are tripling production capacity to 1. 2 million tonnes in 2023, in line with the year . This infrastructure has been very important in our consistent style bendy and existing environment of higher fuel prices, as we have noted earlier. For the time being, OCI has completed the fundamental engineering package for the structure of a new ammonia tank at the terminal, which in combination with the expansion of the wharf infrastructure will allow a potential construction capacity of more than 3 million tons consisting with the addition . The terminal is strategically located to facilitate emerging demand for ammonia for oceangoing vessel bunkering and the exclusive supply chain is one that we can also leverage in the long term by charging low-carbon and zero-carbon hydrogen. carbon in the form of ammonia methanol, which can help decarbonise the EU and reduce dependence on imported plant fuel for [indistinguishable].
We are also very pleased that an allocation of waste and biomass gasification developed through RWE for the investment of the EU Innovation Fund has been decided. This allocation will produce hydrogen at the Limburg Family Waste Camila commercial site in the Netherlands to upgrade the herbal gas. OCI is expected to be the buyer of the hydrogen circular that will be used in our ammonia synthesis, replacing the component of our methane reformer with steam and to produce hydrogen. This would result in a relief in our carbon footprint and a reduction in the carbon intensity of our latest products. Along the entire price chain, the allocation will reduce emissions through around 500 000 tonnes of CO2 consistent with the year, corresponding to the annual intake of around 26 000 families or 250 000 traditional passenger cars. in 2023, topic of final documentation in commercial summaries.
To conclude, we are excited about the company’s prospects. In 2021 and since the beginning of 2022, we have noticed the beginning of a strong and lasting overall improvement in the value of nitrogen. Recent movements in short-term nitrogen values and prospects for Smart visibility of herbal fuel supply and prepare us well for the third and fourth quarters of this year. OCI’s nitrogen and methanol assets are favorably located on the global price curve given the distribution of stocks across regions. The United States gives us visibility into more than 90% of our long-term national fuel desires. We are preferredly located as we leverage our competitive global platform, young growth-level assets and strong logistics platform and align our hydrogen strategy with our continued shareholder and stakeholder value. With that, we’ll open the queue for questions.
Q&A session
Operator
Merci. Si need to record a query on the phone line, press an asterisk followed by one on your phone’s keypad. If you need to delete your query, tap Start followed by two. And when you’re ready to make your query, make sure you’re not in silent mode locally. Our first inquiry is from Christian Faitz of Kepler. Christian, his line is open. Please continue.
cristian fitz
Hello Ahmed, Hassan and Hans. Two questions, if I may. First, how do you see the demand for ammonia for the upcoming fall application in the United States?Do you have any symptoms of caution from your sellers in the field?And second, can you give us an update on the fueling scenario for your Did you use methanol and methanol operations as for IFCo?Thanks a lot.
Ahmed El Hoshy
Of course, Chris. Well. Thank you for the question. So obviously we know that we had a low demand for ammonia for the spring, given the weather situations we experienced in the United States. of autumn prepayments, which helped absorb some of the excess stock that was in the formula as a result of the weak spring we just completed. And we also see, of course, exports to Europe that make a lot of sense in this kind of value environment. So, Trinidad and the United States, the Gulf alone, must make sure that the Euro proband grows in the Midwest. So, with some kind of relief in the materials over time, part of the autumn prepayment, If the weather cooperates, we deserve to have a record season. And I think the industry will start operating with a lot of the stocks that have been in position since the end of June. Thank you. Could you repeat the question of the moment?
cristian fitz
Yes. Please keep us informed of the configuration of your fuel prices in methanol and IFCo use operations?
Ahmed El Hoshy
So, Hassan went through that, we did a little bit of coverage of the underlying exposure to fuel in the US. The U. S. in the degrees that discutimos. la way we buy our fuel in Iowa is outside the south at our southwest base, which is on average a few times during the year, a fairly hot base level, and we would have covered the base at the maximum of the canopys. And as far as OCI Beaumont is concerned, we’re in the Houston Shipping Channel, below Texas. And we were also able to cover the base and the underlying 99. Wondering what you see in the market today?
cristian fitz
Yes. Yes, indeed. By the way.
Ahmed El Hoshy
So I think I don’t have them in front of me, but you look at the Henry Hub Award and you get the base for A.
cristian fitz
It is ok. Super. So, if I could say, one last consultation at IFCo and then I close. If I’m not mistaken, his last big change in Iowa and about exactly 3 years ago. So when do you think the next primary overhauls or maintenance are planned?
Ahmed El Hoshy
I mean, as you know, we don’t give recommendations related to rotation, but in general, they are carried out every four years, depending on the plants you are in. As you know, we had an extended outage so that we did a lot of recovery activities last year. This is reflected in our LTM figures. So despite the strong performance of LTM, Iowa, which is evidently a very vital plant in the third quarter of 2021, had very low EBITDA and weak cash flow generation due to the closure we had there at that plant. In the coming years we will see if we offer more recommendations on deviations, but they are regular every four years. So I’ll leave it at that for now.
cristian fitz
It is ok. That’s very useful. Thank you Ahmed.
Operator
The following is by Lisa De Neve of Morgan Stanley. Your line is open, continue.
Lisa De Neve
Hello, thank you for responding to my queries. I have 2 and the bit connected as well. First of all, can you keep up with the latest consultation?You talked a little bit about the call for trends in the ammonia aspect. But can you also percentage of what you see in the appearance call for the other nitrogen products it sells?And where do you still see degrees of possible decline in the industry or degrees of value elasticity or liquidity problems, and perhaps where do you see a recovery in demand?And my question at the moment is, in your presentation, you kind of detailed that nitrate inventory levels are at pretty low levels. Can you tell us a little bit about how, for example, urea inventories are at a global point where they are very low?Any kind of indication about it, because there is no real knowledge about those things, would be useful. Thank you.
Ahmed El Hoshy
Sorry, I was speaking alone in silent mode. So let’s go back to your question, Lisa, in terms of questions about the evolution of demand. European farmers are finding that economic situations are still too strong to continue applying nitrogen, for example for wheat production. And that’s despite reducing grain costs for wheat to $8 per bushel now and corn to $6 per bushel for years to come. If you run those numbers and the calculations around that, they make a smart margin, and that’s why we’re seeing a buildup in the term coverage and advance purchases of fertilizer even in this off-season period. So, we’re still seeing a smart call there, and we’ve created a kind of healthy order ebook for nitrates here in the third quarter because we’ve noticed an accumulation in costs.
I think I also spoke beyond India, where inventories are still very low. This is one where we see inventories decreasing by about 11% over the previous period. It still needs several million tons through the end of this year to help demand [for beer] and rebuild inventory levels. Therefore, we see imports close to more than nine million tons compared to around 7 last year. On the Latin American side, we have noticed a call to pick up. Brazil still wants another four million tons of urea, and the farmers’ economy still looks pretty strong. And Argentina will want a little more than 0. 5 million tons, probably close to 600,000 tons on that side. Across the system, we continue to see very low inventories globally, traditionally low grades for almost all nitrogen products. Something he talked about in relation to the destruction of demand, we think it was not only, for example, the observation of Europe was not an affiliated function, the demand for destructuring the value matrix but real availability.
Russia is a large supplier of ammonium nitrate and there were only problems getting ammonia nitrate and enough stocks and securities to enter the market. And when it comes to other spaces for the kind of “demand destruction concerns,” spaces where access to credit is complicated, sub-Saharan Africa, parts of South Asia, outside of India, have been a concern. Therefore, we have noticed that government and multilateral transactions help to acquire nitrogen fertilizers with replenishment use levels. So I think it covers maximum of the other specific geographies that you would like to communicate or express products about?
Lisa De Neve
No, sorry, that was very helpful. I just wanted to get your opinion on the inventory. And I think the bottom line is that overall stocks have reached pretty low levels for those nutrients. I think it’s a fair guess, it’s rarely very?I mean, as far as we can see.
Ahmed El Hoshy
Yes, I would say qualitatively, Lisa, I would say that we think that historically, the fact that China doesn’t export is a big problem. The fact that there are many closures in Europe is a big problem. There were some surpluses in the U. S. , as you know, with some UAUs that didn’t show up in June and are now looking into the third quarter, they’re entering this recovery season and others have announced changes in the third quarter. So we see this combined with a decent filling program that generates UAN levels. And on the ammonia side, as I said in the last question, we’ve noticed U. S. exports. One minute. Those are kind of 2 levels. And I think the next step now is to see what the crop looks like and where the yields are in terms of prospect demand.
Lisa De Neve
It’s bien. Súper. Et I was going to disconnect the next query because I think it’s stupid, but I’m going to ask it anyway. So, in his presentation and statement, he says he now has visibility into more than 90% of the company’s long-term needs. Is it just the United States, Fertiglobe, its coverages in place?I mean, how do I get to that 90%?
Ahmed El Hoshy
Yes, that is precisely. When you think about our overall exposure, it’s the combination of where we are in terms of fuel exposure. We don’t have a long- or medium-term policy in Europe, but we don’t consume much fuel in Europe at the moment either. . And with the looks and feel, it doesn’t look like we’re going to use methanol anytime soon, given the way methanol has been stored, and has been for more than a year. And when it comes to ammonia, we’re shooting at 40% right now. And with the disconnect between the product price for ammonia and the ammonia production fuel charge, we assumed it made a [push] to that level, put that in the numbers, as well as Fertiglobe with long-term contracts and U. S. coverage. USA Hassan spoke.
Lisa De Neve
It is ok. Yes. Which makes sense. Thank you so much.
Operator
The next one is by Mubasher Chaudhry of Citi. Mubasher, his line is open. Please continue.
mubasher chaudhry
Hi, guys. Thank you for answering my questions. Just a couple, please. Can you provide a variety of recommendations for half the moment, given that you also had a pretty solid first half, and then look forward to what turns out to be a fake half of the moment?And any comments on the speed between the third and fourth quarters would be helpful. And only at the macro level, can you give your opinion on the amount of harvest reported in recent weeks in the United States?And I’m just looking to compare your comment on stock usage ratios that don’t normalize until at least 2024. Yes, I just wanted to stick to those two comments, please. Thank you.
Hassan Badraoui
I can answer the first query related to orientation. I mean, we’ve provided some guidance point for the next quarter. However, like most of our peers, we sometimes don’t provide any existing guidance unless it’s a directional view on the market outlook, which we expect the ones we provide this quarter to be strong in this regard, really focusing in some type of pricing environment, the macro variables that underpin our business performance, the predictability of our greater viability of our load base, the maximum vital load base. So I think the combination of all of that is sort of our attempt to give our investors some directional guidance in the market. But as we get closer, such as in November as a component of our current quarterly results, we will give more guidance on the next dividend cycle as we have a little more visibility into our order book that is applicable for the completion of this period. . And as we continue to see how the markets behave given the conversion environment beyond. What do you need to add?
Ahmed El Hoshy
Yes. I am referring to your other question related to the harvest and everything that is a few months away in the United States. But in terms of the type of growing situations today, they are a little bit behind the 5-year average and last year in terms of corn odds from what we can see right now. There are some performance fears in terms of a slightly lower nitrogen application that occurred in the current quarter, as you know. And the lease planting combined with a fairly dry climate. So there are fears about the performance that we will see in September, October and what does this mean for grain stocks in general? And it’s similar to what we see in Europe the very dry summer so far here in Europe. So those 2 are scary spaces in terms of returns, but I think we’re going to see more and not more in the coming months. And I think I discussed earlier the dry situations in Latin America, especially if we take a look at wheat in Argentina. Those are some of the spaces where there are fears about crop production there, and then when you look at the long term and what that means, it means potentially a more difficult time to fill grain stocks and fuel some of the comments that you we were talking about, I think, your last query there, which is the desire to rebuild grain stocks into more normalized grades because we’re in a down decade where we are today and we have dangers around production and yield that we hope to see later in this year.
Operator
The next one is from Chetan Udeshi of JPMorgan. Chetan, his line is open. Please continue.
chetan udeshi
Yes, hello. I had two inquiries. I wonder about your comment that it is operating its European ammonia capacity at 40% utilization. I’m curious why he’s running it right now, although it’s not going to be profitable. And the time of the consultation was, that you talked about, at least we’ve noticed the press kits about some Greenfield projects in the United States, can you give us a concept of how we deserve to be thinking about the CapEx sheet?address for OCI in the next two or three years?Are we talking about a big leap forward or are we talking about maybe $50 million accumulated a year until we get to a point where there’s an increase in CapEx in some of those green, green ammonia or methanol plants in the world?And are you worried that some of those new green and blue plants will arrive too soon compared to the time when the actual demand will start to take effect?
Hassan Badraoui
Of course. No, smart consultation. I mean your 40% query makes a lot of sense when you think about our capacity. He talked about about 1 million tons a year of ammonia capacity that we have in the south of the Netherlands. We announced that we were at around $400,000. At your query, it may be only 0 given where we are now, it may be only 0, and it wouldn’t change that. But when we take a look at the products that we make, some of the products that we make, as you know, like urea for melamine production or urea for UAN production, you want the CO2 from that ammonia line to execute some of that. And those are some of the considerations that other people have and why it’s not just an ammonia effect, however, it’s a UAN effect, which is affected by the chunk of gas.
The importance of imports is very important so that we can continue to buy third-party ammonia at $1,000 per ton, while the direct cost of its manufacture is still above $2,000 per ton. This generates the margin by itself. But we have the ability to potentially close any of the lines and potentially continue to produce CAN because you don’t want CO2 to be produced. So, it only imports ammonia, runs its nitric acid plant, and produces ammonium nitrate and calcium in that market. So yes, that’s a smart question, and it’s one of the spaces where it can place us based on the evolution of the value trajectory and the evolution of gas values. Is it clear on the first question?
chetan udeshi
Yes she is.
Hassan Badraoui
It is ok. Regarding your other question, we gave you capEx indications about expanding the CapEx forecast, I think on the last convention call, from $350 million to $450 million per year next year. And this is reported through being clearly in our monetary policy and sent to the IDF of the allocations. So if FID an allocation, we will come to the market with that to announce that we have FID an allocation issue for our economic recovery goal, our focus on decarbonization, and then stay in our objective investment category of monetary profile. Therefore, this orientation assumes that there is a future movement in the IDF on prospective allocations in terms of information. So, to give you a concept of bookends if capex expansion were successful at that level.
chetan udeshi
Heard. Thank you.
Hassan Badraoui
Thank you so
Operator
Before we move on to our nextArray, I’d like to remind everyone that if you need to ask a question on your phone line, tap the star followed by one on your phone’s keypad. Or if you joined us on the webcast, write in the box. The slideshow can also be found in the webcast below the assembly documents. Our next one is from Faisal Al Azmeh of Goldman Sachs. Faisal, your line is open. Please continue.
Faisal Al-Azmeh
Hello and congratulations on the set of counterfeit numbers. Just a couple of quick queries from me. The first considerations are your stake in Fertiglobe. I mean, at some point, are you contemplating whether or not you’re cutting your stake to allow the company to be included in MSCI’s increased liquidity?Do you reduce your stake in the company? That’s my first query. And my query at the moment is about the methanol market. I read that sure enough, they replace contracts from quarterly contracts to monthly contracts, how do you see this evolution?Or is it something bigger or worse from your point of view?Thank you.
Ahmed El Hoshy
So Faisal in relation to your first question, evidently, Fertiglobe is a strategic asset for OCI and for ADNOC. We have the ability of ADNOC and OIC in the long term to decrease participation. And yes, there is the inclusion of MSCI, we would still return to market position and announce plans to do so if we intended to do so in the short term. Therefore, there is a duty to do so, which remains strategic for any of the sponsors. Or we appreciate the particular asset and, as you know, it’s doing very well. But yes, I would not rule it out in the long run. But for now, we are comfortable with the stake we have in the position and it obviously has a lot of synergies with OCI’s position in business.
Hassan Badraoui
It is also a very vital expansion platform given the company’s positioning as an export platform at a time when exports are very vital and the balance sheet is leveraged, allowing us to take a look at any of the expansion opportunities and continue to generate a very smart dividend. Shareholders in the future. Therefore, we are very satisfied with this partnership and this investment is intense.
Faisal Al-Azmeh
Thank you so
Ahmed El Hoshy
And then the query for now. His moment of consultation considers the value of the European contract, which is attractive and which is constant each and every quarter. We haven’t been very fanatical about that because as a European grower we haven’t produced in thirteen months from our BioMCN, the European grower. We thought there would be ups and downs and lags and that wasn’t smart for vfinishors, and it wasn’t really smart for clients, however we did see vfinishors occasionally get the little finish off the stick, right? It will have a 3-month period in which the world methanol value will be replaced, in which the fuel value in Europe will be replaced every day now, and it will be ready for a full quarter. So sometimes one aspect is relatively satisfied, since the client is promoting the other aspect, on the contrary, dissatisfied. So we would probably see how that evolves over time. We would help you and align with the way the monthly contract price is set in the United States, and not just have that value disconnected, for example, where there could be a surprise call or a surprise source in any direction and you are caught in a quarterly value decline.
Faisal Al-Azmeh
Super. Thank you so much.
Operator
Thank you. The next one is from [Stinch Demeister] from ING. [Stinch], go ahead, your line is open.
unidentified analyst
Yes. Good afternoon. [Stan Demeisters] Eng. My query is about the sale of USA. All the 88 million euros registered in methanol?And do we deserve that we expect it to continue with this policy of promoting credits while those operations are inactive?And then, perhaps also a follow-up to Mubasher’s query about the third quarter cadence as opposed to Q4, which I think he hasn’t answered. So maybe here a little bit of color about it. Thank you.
Ahmed El Hoshy
Yes. So in terms of the $88 million in US sales that are completely lost in the European methanol business, some of that is lost. I think $68 million has been invested in the European results and obviously there is a cost of BioMCN in the business itself, which is negative. And then the Clean Fuels business had over $20 million in EBITDA, all of that included. That leaves about $20 million that was not reported at the segment level. This was done at the scale of the total co in Europe. And then to your inquiry as to whether we would continue to do this in the long term. It just depends on what we’re doing operationally at the time. But yes, we think there is a surplus of excess sets that we have. We can sell this to offset the cost. But obviously, as you know, as if they had less production, we receive [indistinguishable] more taxes. So that’s all we take into account. And we have, I think, quite constructive discussions about the long-term greening of our methanol business in Europe with the Dutch government. You see, being one of the largest corporations in the Netherlands, I think we are the first fully-functioning customer hydrogen manufacturer in the Netherlands. And as a spouse in [Norwich] also with some of those projects in the north of the Netherlands where our categories will be sold to hydrogen electrolyzer buyers who need it. The BioMCN buy box is a personal candidate for this. So we’re thinking about what we can do about that to get that wonderful long run and deal with some of the prices that we’ve associated with keeping your EUAs. And I think it’s a smart move that we’re doing moving some of our staff to other parts of the business that have been very busy, like the Rotterdam import terminal or our OCI nitrogen plant. of collaboration in this complicated period. Your query at the moment, I did not understand very well. Did you say something about Q3 and Q4?
unidentified analyst
Yes, there was an earlier question about what kind of shape deserves us to look at the cadence or strength of Q3 compared to Q4. A typical seasonal restart in the 3rd quarter or does it deserve to be mitigated this year?Your point of view here.
Hassan Badraoui
Well, as we discussed earlier, we’re reluctant to give a quick direction for the remaining quarters of the year. I think what we shared was our view on value, as a help point for the value of nitrogen and the recovery of the value of methanol stocks. And we, of course, what is within our control is our continued focus on our program of manufacturing excellence and making sure that our factories CAN run better not just because of the bottom line, but because we feel it’s our duty to do so. therefore, at such a volatile time when stock levels are low and there is an evident shortage throughout the system, as Ahmed described above. The mix of those points is therefore a wonderful source of motivation for us. But as you can see, the value environment remains tight and without any disruption to our trading, keep in mind that we deserve to continue to perform well and continue to leverage our position on the curve. global prices to generate a flow of free money that allows us to continue with our plans. to be able to envision the expansion opportunities that we have already targeted in terms of the amount of expansion CapEx for the next year using government calls and continue to meet expectations and generate excess cash flow that we can also return to shareholders. I hope it will answer your query in some agreement to some extent.
unidentified analyst
To some extent, yes. Thank you.
Operator
We will now move on to the questions of the webcast. So it’s up to Hans to read them.
hans zayed
Oui. Merci. Il are some questions from Richford [Backenhouse]. And I’m going to read the first question, which is in the press release, they discussed that in the offseason, the charges can fall under the charge of marginal producers, do you expect an immediate accumulation of charges when the selections are called in the third quarter?That’s the first question.
Ahmed El Hoshy
Yes. As we covered on the call, we’ve seen a smart recovery in nitrogen rates as Hassan mentioned, kind of a start towards recovery given the higher currency rates and still operating at the highest dispensed rate right now in Europe with production discounts also as a call for us to talk about the system. Australia, Brazil, India, the southern hemisphere ask that they really want to come with positive long-term grain production hedges to buy some products from the cash season and a fairly strong autumn prepayment already in ammonia. We think it’s helpful, it’s hard to give any sort of monthly guidance, but certainly the trajectory is a bit bullish compared to what we see in the market and how we see trading going. I think we talked about spot methanol charges going up a little bit as well. This is noticeably less affected by European gas. But there’s been an uptick there, and I think there’s been a lot of failure globally on the methanol aspect of the support for that inventory market. Also, we have a tendency to clearly see later in the year, as you may remember, a little bit more of a shift from methanol, for example, for commercial boilers, we expect that to happen later this year. And I think methanol is now the cheapest, as I mentioned on the last call, it’s relative to other products. So we deserve to see more of that and that may provide some call for help in the East Asian markets and potentially in the transportation market over time.
hans zayed
Merci. Et then the next one is, do you see symptoms of recession through a drop in demand for commercial ammonia and methanol programs?
Ahmed El Hoshy
So, in terms of the reduction request, that’s also a vital issue. We’ve noticed some of those higher value problems for ammonia. We have noticed a call for the destruction of some of our products, however, in general, other people still consume a moderate amount of ammonia. And, obviously, there is more than enough demand for everyone given the closures we are seeing on the macro side. Given the energy crisis and discounts on energy sources in the form of methanol and ammonia, we are seeing many discounts related to sources that offset the demand for [indistinguishable]. But it’s something to be careful of, is it rarely?Because SMEs are if they have any call for destruction because they do not have access to power, for example, in Europe or because of the recession, how is it that total SMEs?So far, from what we’ve noticed, it’s not something we’re really involved in, but it’s something we’ll continue to monitor, especially for methanol and ammonia.
I think I’ll also mention that in other commercial products, we still see a huge demand for diesel exhaust fluid for truck trips. But it’s anything if there’s a recession, if you see a reduction, it’s something we’re watching closely. But there is a year-over-year herbal accumulation with only an accumulation in conversions to SCR engines and a demand for global ES and less source of TDS globally that is helping this market. We have also found that melamine costs continue to be relatively higher, with potentially some demand destruction in some areas, but at the same time, offset by the way activity in the United States and discounts in Europe, which notoriously fear gas, as well as in China to offset some of China’s imports into Europe. Oui. Je means, I think we cover the main areas.
hans zayed
Yes. Thank you, Ahmed. The next thing is that several U. S. manufacturers are not able to do so. U. S. agencies say they expect significant changes in the third quarter. Are you going to respond to that in the United States?
Ahmed El Hoshy
I mean, as we’ve said before, our purpose is to maximise production, especially in the margin grades outside Europe’s doorstep. So, we’ll continue to maximize production where we can. you know. But we’ve noticed that there have been more changes that have moved from last year to the third quarter period, which is often a bit slow. Therefore, this supports the first query related to the trajectory of potential value. of nitrogen and ammonia.
hans zayed
Merci. Et, so the next one is, what is the current state of the application of ammonia and methanol as shipping fuel?When can we expect a real lawsuit to get this back?
Ahmed El Hoshy
Yes. I mean we’ve noticed a number of ships commissioned through players with methanol, the shipping fuel. We expect customers to request the arrival of non-traditional methanol, for example, container ships, etc. , to appear in 2024, 2025. But we already have, for example, Methanex, which is the largest ethanol manufacturer in the world. , part of its fleet runs on methanol. Others on the market also run on methanol, so we’re starting to see that quickly. Absolutely, the chances of modernizing the engine are there. We already have them in the water. We’re very confident that we’re going to see a lot more demand for methanol starting in 2024, 2025. And as I said before, I think we have demand to exceed supply through 8 million tons between 2022 and 2026. That doesn’t take into account. account marine fuels, which can be quite extensive changes, and we think we still have to comply given the moves with IMO, you focus on decarbonization and other people who make big CapEx decisions in [indiscernible] saying, “You know what I want some other fuel that can carbonize and methanol is smart. ” So that’s what we see on the methanol side.
Ammonia, we see it coming later. Ammonia has some long-term prospects in additional demand. Ammonia is ending up with coal-fired power plants to reduce emissions in Korea and Japan, which is developing rapidly, and we will likely see demand for a few million tons. in the middle of the decade and will prospectively release more until the end of the decade. We are seeing more and more debates in Europe about using ammonia as a raw curtain for a force elegance for fuel force elegance. And I think I’ve discussed it in other interactions with investors, however, when you think about removing a ton of blue ammonia from the Middle East, for example, the United States, not even green and that’s the GHG footprint where you asked for CO2, you take that ammonia, you send it at minus 30 degrees refrigerated in a tanker truck in Europe, then you burn it in Germany in a forced plant or in France in a forced plant.
The only CO2 emissions were long before the production of this ammonia began and you were able to reduce your carbon footprint, but you are not generating CO2 to displace it. No CO2 is produced when, despite everything, it is burned in Europe as NH3, so there is no carbon. It compares very favorably with LNG, you have to produce a lot of CO2 to liquefy it, you have to have evaporation and produce CO2 on the way to Europe. And then in Europe you will have to re-produce CO2 when you burn it to produce energy. So more and more, more and more are communicating that ammonia can be a win-win, especially with the advent of a carbon frontier mechanism to reduce CO2 and diversify away from herbal fuel. an alternative. Finally the marine fuels I put in 2025 is where your query starts and potentially grows quite temporarily from there however there are a few things that need to be in place. One, primarily and most importantly, is the engine, where we’ll be in a position, call it, 12 to 18 months, and then we’ll start shipping orders for 2025 and into 2026. So after methanol.
hans zayed
Merci. Et the next question is why such giant dividends and not consistent with percentage buybacks?Do you think your valuation is too high, with non-opportunistic buybacks on stock weakness and withdrawals consistent with percentages not long-term, the price consistent with the consistent percentage will be much more valuable?
Ahmed El Hoshy
Yeah. I mean, this is the first year of: we’ve returned capital to shareholders, we discussed this earlier since we indexed on Euronext Amsterdam in 2013. So we’re very pleased to be out of the bears with such a high and significant return. . dividend yield. I think we’re just shy of, as I mentioned earlier, $1. 1 billion in distributions of money in a very tax-efficient manner to all of our stockholders. We do not rule out any other approach to returning capital to shareholders. Everything is on the table. We will compare all available pathways in the future. Ordinarily I wouldn’t, and in fact I probably wouldn’t comment on the assessment itself on this call, but I would like to point out a new slide that we’ve added in our effects presentation that we find compelling. And look at just a few on page nine of our earnings presentation, which shows that our market cap expansion was largely a mirror image of our net debt relief despite the company’s underlying functionality, free balance risk sheet and staggered forward outlook. And I think it’s a very attractive selection that we decided to include. That provides some content to talk about in terms of the company’s prospects.
In terms of future orientation. And I mean we’re reluctant to give an express recommendation consistent with it, however, I think the underlying drivers of the market, if we get the call, looking for prices, looking for our focus on volume reduction and looking for our continued focus on price creation. I think we think we’re in a smart position, and we’re relatively comfortable with the outlook for the year. And also, we have reduced our gross debt by $1 billion since the beginning of the year and we have almost consolidated leverage at 0. 2x, I think we are in a very smart position and in a position to face any situation that possibly stands in our long-term path while maintaining our expansion condition and continuing to return capital to shareholders. Thank you.
hans zayed
Oui. Merci. La next query is, can you give an indication of EBITDA from Q3 to the current quarter given that existing spreads mean a sharp drop?
Ahmed El Hoshy
Unfortunately, we are reluctant to give that kind of advice. As I mentioned earlier, the underlying drivers of our business continue to be healthy for the rest of the year.
hans zayed
Merci. Et the next one is how can you promote the company as a blank fuel manufacturer at the upcoming COP 27 and COP 28 conferences?Is there an opportunity to get an inventory revaluation if ESC investors start to understand the story?
Ahmed El Hoshy
So that’s a smart question. With COP 27 and COP 28, the stars aligned quite nicely with our Fertiglobe activity, didn’t they? COP 27 is in Egypt, COP 28 is in Abu Dhabi. So obviously we will have a presence, a strong presence in those two markets. I think more and more, the profile of OCI and Fertiglobe has risen over the last year, and we’re seeing more and more ESG investors looking at the price they can get by embarking on a treasury business that has pretty low multiples and has the track record of expansion related to being established in the markets where we are established with the assets that we have that are used to decarbonize and throughout the hydrogen economy. So we’re thinking over time, as ESG investors look at where to allocate capital, have an asset or an investment in a company like OCI, companies like Fertiglobe that generate cash flow and provide solid-based dividends and have built opportunities of expansion while they are below replacement level. cargo with smart target IRRs are what we will provide at the two COPs in those two places, in close collaboration with the government. I want to say that the government is a spouse as a fair investor in Egypt and our EBIT aspect is a great spouse because of the wealth of Egypt in our EBIT green factory. And we work a lot with all the other ministries and stakeholders there in Abu Dhabi. I want to say that it goes without saying that the government of Abu Dhabi is a shareholder of Fertiglobe. It’s a fuel supplier to Fertiglobe, and we’re doing blue and green ammonia projects with [Postel], as well as ADQ and ADNOC there. So plenty of opportunity in the next 2 COPs to showcase OCI and build on the already developing interest of ESG investors.
hans zayed
Merci. Je I think the last inquiry that came here from one of our investors in 91. I also don’t see any other queries on the web.
Ahmed El Hoshy
It is ok. Thank you hans. Thank you all for your patience with today’s call. So, let’s go back to your summer and we can’t wait to catch up on the third quarter results.
Hassan Badraoui
Thank you so
Operator
Thank you all for today’s call. Now you can disconnect your line and spend a wonderful day.