OCI N.V. (OCI) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the OCI Investor Call. My name is Nadia, and I'll be coordinating the call today. [Operator Instructions] I will now hand over to your host, Sarah Rajani, Vice President, Investor Relations and Communications to begin. Sarah, please go ahead.

Thank you. Good afternoon and good morning to our audience in the Americas. Thank you for joining the OCI Global Investors and Analyst Call. With me today are Ahmed El-Hoshy, our Chief Executive Officer; and Hassan Badrawi, our Chief Financial Officer. On this call, we will provide an update on our strategic review as well as further details of our announced agreement yesterday to divest OCI methanol to Methanex. 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 those statements. Let me hand it over to Ahmed.

Thank you, Sarah, and thank you all for joining us today. I'd like to begin on Slide 4 by reminding the audience of the context for yesterday's announcement. Another successful step in the multifaceted global strategic review OCI initiated last year, with the objectives of closing the share price discount to OCI's intrinsic value and unlocking value for our shareholders. Since December 2023, OCI has announced 4 transactions in response to attractive opportunities in the market to realize value for shareholders with expected cumulative tax-free gross proceeds of approximately $11.6 billion proving our thesis correct. The competitive nature and broad spectrum of buyers involved in each of these 4 processes is unambiguous evidence of the intrinsic value held within each that was not recognized in OCI sum of the parts valuation nor reflected in OCI's share price. This transaction [indiscernible] to reinforce OCI's superior value creation track record exemplified -- exemplify the OCI team's superior execution capabilities and have delivered on our objectives to close the discount to OCI's fundamental fair value. OCI today is well capitalized with significant flexibility to achieve a net cash position by year-end to meaningfully return capital to shareholders in a tax-efficient manner in the near term and to invest in future value creative opportunities. Of note, we expect to return approximately $3.4 billion in cash to shareholders in a tax-efficient manner by November. Following the IFFCO closing last month and pending the closing of Vertical expected to conclude in Q4 this year. This morning, we announced the conditional notice of redemption for all our outstanding 2025 bond notes as well as the repurchase of our OCI methanol minority partner stakes of 11% and 4% from Alpha Dhabi or ADH and ADQ-Lunate, respectively. Hassan will comment further on the impact of these transactions shortly, but I'd first like to provide an overview of the key terms and strategic rationale for the sale of OCI methanol to Methanex. Turning to Slide 6. OCI has agreed to divest 100% of its holding in OCI methanol to Methanex in a cash and stock transaction for a total enterprise value consideration of $2.05 billion. Adjusting this enterprise value proportionately for $450 million approximately of net indebtedness and leases substantially all relating to Natgasoline's joint venture. The implied equity value for the transaction and expected gross proceeds to OCI are expected to be approximately $1.6 billion. This is comprised of $1.15 billion approximately in cash subject to customary closing adjustments and $9.9 million newly issued Methanex stock or approximately $450 million worth subject to a 4-month lockup post closing. On a net basis, proceeds to OCI are expected to be approximately $1.2 billion after adjusting for payments to OCI methanol's Minority Partners ADH, ADQ, Lunate and outstanding gas hedges and other items. Following the Methanex transaction, OCI will become the second largest shareholder in the enlarged Methanex. The transaction is expected to close in the first half of 2025 subject to legal and regulatory conditions and relevant antitrust approvals. The sale of OCI methanol's indirect 50% stake in the natgas joint venture as part of the transaction is subject to the resolution of a lawsuit regarding certain shareholder rights, which has been filed in Delaware Court of Chancery by Proman, who indirectly own the remaining 50% stake in Natgasoline. 40% of the enterprise value consideration and approximately 23% of the net transaction consideration taking into account net indebtedness or equity value is attributable to Natgasoline. The regulatory approval process for the sale of OCI methanol to Methanex will progress concurrently with the progression of Proman's complaint. If the dispute is not settled by the time regulatory approvals are received, Methanex has the option to not close on the purchase of the Natgasoline JV and closed only on the remainder of the transaction. In this situation, Methanex retains the right to acquire OCI's JV interest for a specified period at its sole option. OCI strongly believes that the Proman's claims are without merit and intend to vigorously defend the case. Moving to Slide 7. OCI Methanol is a highly strategic fit for Methanex. The combination of these highly attractive assets in a low-cost, low-risk jurisdiction with access to economic supply of natural gas feedstock greatly enhances Methanex's portfolio and augments Methanex's low-carbon capabilities and expertise within the methanol markets. The transaction leverages OCI's first mover credentials in green methanol with complementary low-cost diversification to ammonia. OCI, we've always found it to be a competitive advantage and have operational and distribution capabilities in both methanol and ammonia due to their complementary nature. This advantage has been even more significant in the last few years, where both molecules are in pole position to decarbonize hard to these sectors like power, marine and industrial sectors. As a reminder, OCI Methanol is the world's fifth largest global methanol producer and the only platform with production capabilities in both Europe and the United States. OCI Methanol is one of the world's largest -- one of the world's first and largest green methanol producers and distributors and one of the largest suppliers of low-carbon road fuels through our high fuels business. OCI's significant shareholding in the combined business provides upside opportunity for future operational improvements, supported obviously by Methanex's outstanding track record as an operator of industrial assets as well as potential upswing in the methanol industrial -- industry cycle. With that, I'd like to now hand it over to Hassan.

Thank you, Ahmed. Turning to Slide 8. The bridge on this slide illustrates the waterfall between the total transaction consideration and expected net proceeds to OCI. After adjusting the 100% transaction enterprise value of $2.45 billion or approximately $450 million of net indebtedness, and this is substantially all related to the Natgasoline JV. The entire equity value transaction, as Ahmed mentioned, is approximately $1.6 billion, of which Methanex is being approximately $1.15 billion in cash and circa $450 million in newly issued Methanex stock. Bridging from the implied $1.6 billion in equity value, net proceeds to OCI are expected to be approximately $1.2 billion after adjusting for the 15% ownership stake held by noncontrolling interest of ACH and ACQ units outstanding gas cash liabilities and other customary closing adjustments. Turning to Slide 9. As Ahmed mentioned earlier, the strategic review was initiated to address the persistent discount and OCI stack to the company's intrinsic value. The announced divestments are expected to culminate an approximately $11.6 billion of expected tax fee gross proceeds which will result in a robust and well-capitalized continuing business. This will afford OCI considerable flexibility to complete its clean ammonia projects, achieve a net cash balance by the end of the year, increased extraordinary cash distributions beyond the already communicated $3.4 billion and invest in future value creative accretive opportunities. We expect to provide further clarity on the future strategy of OCI around the time of our Q3 results, as we focus on completing the Fertiglobe and clean ammonia transaction closes. With that, I'd like to hand back to Ahmed.

Thank you, Hassan. Let me conclude by extending both our thanks to the entire OCI and OCI methanol teams for their contributions over the last 14 years in creating a global leader in the methanol space. We're incredibly proud of their achievements and are highly confident as a new significant shareholder in Methanex's ability to create enduring value. With that, we'll open the line for questions.

[Operator Instructions] And the first question comes from Andrew Keches of Barclays. Andrew, please go ahead.

Congrats on the announcement yesterday. A couple of just quick ones on the balance sheet. So you announced the 2025 both notes redemption this morning. I think in the past, you were messaging -- I think it was a substantial debt repayment at the parent level. In your view, just taking up the '25, does that satisfy that? Or should the market expect that there could be further debt repayment as all the proceeds come in. And then second, I just want to clarify again on those the 2033 notes that are still outstanding with U.S. methanol now sold. Do you think that this has triggered the all or substantially all cause, I believe, previously, when we've asked your stance was that it did not. Just trying to get a sense of whether you think you've stripped that at this point.

Yes, thanks for your questions. I mean I'll start by saying we don't comment -- we don't -- we're not going to comment on individual instruments on this call, but we would note that the group still retains substantial business, and we'll continue to evaluate opportunities for further investments in the group, as we mentioned earlier, as we talk about in due course, the future strategy of OCI going forward. On the 2033 specifically, we're assessing alternatives. And while the 2033 notes could remain attractive financing for the company, we may consider opportunistic transactions to further optimize our capital structure and reflect the requirements of the business going forward. In terms of the overall capital structure of the business, I think we're in a strong position today to consider to flexibly allocate capital. And as we mentioned during the call, we'll be looking to maintaining a conservative financial profile, the net cash position at year-end. We're going to be considering additional distributions. We've announced this morning the buyout of the minorities to accelerate their exits at this time. And we also have commitments to complete our Clean Ammonia CapEx, which is our obligation to deliver a fully operational projects.

Okay. So it sounds like you don't believe you're required to retire them, but you're going to evaluate opportunities if it makes sense.

The next question goes to Aron Ceccarelli of Berenberg.

Congratulations for the methanol transaction, also for the closing of IFFCO. I have 3 questions. So my first one is after divesting more than around $11.6 billion of assets, OCI would be mainly a stake in Methanex and the European nitrogen asset. So may you help us understanding a little bit what's the direction of travel here, please? The second question is on Fertiglobe. Share price of Fertiglobe is down almost 15% compared to the level of December last year when you announced the agreement with ADNOC. I was just wondering if within your agreement, is there a clause where they could potentially renegotiate the transaction price. And my final one is on tax implication on your capital return. Just wondering if you can shed some light on how your distribution will be taxed and what's the impact for shareholders, please?

Yes, sure. Just kind of answering those questions one by one. I think we're going to share in due course, more information around our capital allocation strategy and overall strategy with the remaining part of the business, as mentioned in the prepared remarks. So we'll be sharing those probably around, will give a more information on our Q3 results, it's a good time frame. On the second question with regards to share price of Fertiglobe. I don't think it's a 50% drop. I think it's something probably in the order of mid-20% drop in area, but as we -- 20% to 25%. But as we mentioned, we expect Fertiglobe to close in Q4. And we shared that with just said that earlier in my statements and the third question, can you repeat it again?

Sure. It was about tax implications for your capital return, your distribution to shareholders.

I'm happy to take that. As you know, we've been able to use a capital repayment mechanism that is associated with a share premium reserve that we established upon listing our business in Holland in 2013, that has afforded us the ability to do tax-efficient distributions. I think that continues to be the mechanism that we provide as an option to shareholders to either elect between a capital repayment or a cash dividend at their discretion. And I think for the upcoming distributions, which we have now confirmed to be at the upper end of the range of our original guidance at $3.4 billion, I think we're going to follow the same route and we will be sharing a more specific date in due course as we get firmer visibility on the fund closings that are happening right now, which are becoming imminent.

The next question, go to Roger Spitz of Bank of America Merrill Lynch.

Could you elaborate more on the particular shareholder right that Proman is coming over? And does consolidated Energy have a so-called ROFO rider first offer, rider-first refusal and/or tag-along rights with respect to the 50% interest in Natgasoline.

Yes. So obviously, with the first question, legal dispute. I mean, it concerns these certain shareholder rights, as mentioned, and we're not in a position to disclose further details at this moment with an ongoing legal dispute. And with regards to your other question, details around our shareholders' agreement with Proman are private. So we're not going to be commenting on individual shareholder rights with regards to our joint venture, particularly in light of the ongoing legal Dispute.

The next question goes to Chetan Udeshi of JPMorgan.

Maybe one for Hassan. So Hassan, I understand your comments on tax-free return so far. But can we assume that whatever you do in the future in terms of incremental cash returns, you would still have that flexibility to do that without having to for investors to not have to pay the withholding tax? Because I think there's a limit on -- it depends on how much share capital you have on the balance sheet at a certain point in time, right? So the question is after doing all these cash return that you've already announced with that flexibility still exist for the future cash return. The second question was, do you -- just a broader question, do you now have a clarity on what will be your new CapEx for the blue ammonia project? Because clearly, that's one of the key numbers that we need to have in mind as we think about potential of cash return in the future? And last point, I appreciate you will give us the strategic update along with Q3 results, but is it fair to say that you're also looking at, as we speak, strategic alternatives for your nitrogen business in Europe?

Yes, I'll take the first two questions. On the capital, you are right. I mean we did start out with the balance that has been partially consumed. So there is, I believe, a little bit around just over EUR 3 billion in terms of available balance for capital return that is usable by the company. After which then you fall back to conventional distribution avenues. And I believe that is usually part of our public disclosures and so forth. And in terms of our CapEx guidance, we would estimate that as of June, probably around north of $700 million remains and it cannot be very specific at this time. It's obviously a bit of a moving target. But I would say comfortably north of $700 million remains on the CapEx to complete clean ammonia. Of course, as we continue to own the business -- the OCI Methanol business as well and all the cash flows of that business are belong to OCI, and we have CapEx commitments there as well. And yes, also the Methanol business yes. So the Methanol business obviously continues to be under our ownership until the transaction and transaction closes which is expected to be sometime next year. On the third question, I think your third question was in regard to updates on everything [indiscernible] the same as before the strategic review, we'll share updates on the strategic review in Q3 and as we stated earlier, more visibility on kind of future strategy, including capital allocation, investment strategy, et cetera, in Q3.

Hassan, can I confirm, I look up myself as well, but EUR 3 billion headroom that you were talking about in terms of cash return, is that before the announced returns? Or is it post the announced return of EUR 3.4 billion.

Can you repeat that question? The line was cutting out.

I was just saying you mentioned the share capital flexibility of just over EUR 3 billion. Is that after all the cash that you intend to return next month? Or is that prior to that?

Prior.

The next question goes to Naga Sashank Pankaj Hana Lanka of Bank of America Merrill Lynch. Naga, please go ahead.

I have two questions. The first one is just related to the transaction, the methanol transaction. Do you foresee any antitrust issues that's the first question. And second question is, is it possible for to disclose a remain core net debt number, assuming the methanol transaction is complete?

Yes, with regards to the first question, I mean, it's going to go through the typical regulatory approval process in the U.S., Europe and the United Kingdom and we feel confident about this process as this Methanex, given methanol is a globally traded commodity and it's widely traded. In terms of the commodity itself, it's very easy to move. These assets sit in the U.S. Gulf Coast, which is exposed to imports also exports come out of the U.S. Gulf Coast. The cost curves are generally very flat. And as ammonia methanol quite crowded on a sales and distribution market perspective and quite interchangeable variable kind of change tanks and vessels to be able to move it around the world. So the globally traded nature of the commodity put in a good position with regards to regulatory approval process, which, as we stated, is expected in the first half of next year.

Yes. In regard to your net debt question, as at June 30, which was the last set of results that we shared in the market. Our net debt position was around $2.2 billion. We have, but as you've seen, we've announced a notice for redemption of the 2025 that become current in October. And in the meantime, we also used the proceeds received to zero out our revolver facility and other short-term financing instruments that we have in our books. So that figure obviously will -- and that's excluding IIFCO, which of course, was the fees this part that was set as part of the transaction. So we pretty much have settled have had a significant reduction in gross debt as a result of the transaction of closing of IIFCO.

[Operator Instructions] And the next question goes to Tiffany [indiscernible] of Jefferies.

Two questions on my side. So you mentioned a 20% to 25% drop in the low share price earlier. Can you elaborate how that might work? And then the second one, can you also elaborate on the future value accretive investment opportunities that you mentioned on Slide 9, especially with respect of the quantum of any net cash position that you expect to maintain.

Can you repeat the second question again? It wasn't entirely clear to us.

Yes. So can you elaborate on the future value accretive investment opportunities that you mentioned on Slide 9.

Okay. So I'm not sure actually with even your first question is just, I think I was responding to a question earlier where someone assumed that there is a 50% drop in vertical shares since the deal was signed in December. And like we said, I think it's more like a 20% to 25% drop. So I'm not sure what the comment on it around speculating around the reasons behind the drop. But as mentioned, we expect to close verticals in Q4 and pay a dividend in November as Hassan went through.

Yes. Notwithstanding, of course, that's also we -- in the -- in the instance of the Fertiglobe transaction, the economics of that deal stopped accruing to OCI as of the signing date in December other than the $100 million dividend that we received earlier in the year, attributable to the period prior to the transaction signing. So that transaction was ring-fenced from the time of signing effectively other than the dividend.

With regards to your second question, I mean, I think as we said on future allocations, investment strategy, et cetera, we'll provide more clarity on that in our Q3 results, which is in November. But we're going to be focused on closing the transactions, which we've signed earlier including clean ammonia and Fertiglobe here in short order and obviously, the process for the closing in H1 of next year for Methanex.

And we have a follow-up from Aron Ceccarelli of Berenberg.

It's on the repurchase of the minorities. Is it fair to assume so that you going to repay the minority cash? Or are they rolling into the Methanex stake? So in other words, the EUR 1.2 billion net proceeds that you mentioned in your slide, is it comprised of the EUR 450 million plus the cash? Or is part of the EUR 450 million that coming from Methanex are actually going to the minorities?

No, it's a good question. Your assumption is correct. It's going to be a cash buyout given that this is happening immediately, while obviously, the transactional with Methanex is subject to regulatory approval process.

The next question is to Charles Splena Of Lord Abbett. Charles, please go ahead.

Can you please disclose whether you expect the RemainCo to be investment-grade rated.

That's a good question. We've addressed that question in previous calls, and I think our answer remains the same. We continue to exercise a very prudent financial policy going forward. However, it is really up to the agencies to react to the somewhat change in profile as the company is going through. We have been very transparent and constructive and keeping them up to speed on the progress and our plans. So I think we will potentially get imminently from them where they stand in terms of how they view the company.

But is it your intention to maintain IG ratings?

I mean it's our intention to remain quite conservative in our financial policy, but whether that is sufficient to satisfy their view of an IG status that's something honestly we don't know at this stage.

We currently have no further audio questions. I will now hand back to Sarah to go over any webcast questions. Sarah, over to you for any webcast questions.

There are no further questions at this time.

Great. It appears we have no questions on the line. I will now hand back to Ahmed El-Hoshy for any closing comments.

Thanks, everyone, for joining this call, and thanks for your questions. Once again, we're really happy with this transaction that we announced yesterday and the -- move of the assets and our people to the Methanex team, and we're very optimistic about the future there and looking forward to being a shareholder at Methanex post closing.

Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.