May 13, 2018
Executives
Hans Zayed - Investor Relations Director and Compliance Officer Nassef Sawiris - Chief Executive Officer Hassan Badrawi - Group Chief Financial Officer
Analysts
Tom Wrigglesworth - Citi Christian Faitz - Kepler Cheuvreux Frank Claassen - Degroof Petercam Karim Sawabini - Moon Capital Management LP Rob Fong - Slocum & Associates Inc. Hari Thirumalai - Eaton Vance Management
Operator
Ladies and gentlemen, thank you all for standing by. And welcome to today’s OCI N.V.
First Quarter 2018 Results Conference Call. At this time, all participants are in a listen-only mode.
There will be a presentation followed by a question-and-answer session. [Operator Instructions] And I must advise you all that this conference is being recorded today, Friday the 11 of May, 2018.
I would now like to hand over to our first speaker for today, Mr. Hans Zayed.
Please go ahead, sir.
Hans Zayed
Thank you. Good afternoon and good morning to our audience in the United States.
Thank you for joining us on the OCI N.V. first quarter 2018 results conference call.
You can find all the details of our results in our press release and financial statements, which we posted on our website this morning. With me today are Nassef Sawiris, our Chief Executive Officer; and Hassan Badrawi, our Group Chief Financial Officer.
On this call, we will review OCI’s key operational events and financial highlights for the first quarter of 2018, followed by a discussion of OCI’s outlook. As usual, at the end of the call, we will host a question-and-answer session.
As a reminder, statements made on today’s call contain forward-looking information. These statements are based on certain assumptions and involve certain risks and uncertainties, and therefore, I would like to refer you to our disclaimers about forward-looking statements.
Now, let me introduce our Group Chief Financial Officer, Hassan Badrawi.
Hassan Badrawi
Thank you, Hans. Thank you all for joining us today.
As Hans mentioned, we posted our first quarter 2018 results on our website this morning. This is the first time that OCI issues condensed financial statements for the first quarter, typically in the past we have issued trading statements.
Going forward, we will be providing this level of disclosure for the first and third quarters as well. I am pleased to report that we had solid performance in the first quarter of this year.
We have achieved healthy utilization rates across our asset base and witnessed a meaningful step up in EBITDA and free -- more importantly, free cash flows. Our self produced sales volumes increased by 33% compared to the same quarter last year, which was about 2.2 million tons during the first quarter.
On, yeah -- on average, we realized selling prices at a higher level than those achieved in the first quarter last year, as the market discontinues to strengthen. As a result of the higher volumes and higher selling prices, first quarter revenue increased by 57% to $745 million and we reported an increase in our EBITDA by 9 -- of 95% to $252 million.
We also reported an increase in our adjusted EBITDA of 44% to $235 million. The delta between the reported adjusted EBITDA this quarter is mainly the insurance proceeds or the downpayment on our insurance proceeds from the Sorfert shutdown, which continues to positive progress.
At the bottomline, we had a swing back into profits from a net loss attributable to shareholders of $47 million in the first quarter last year to a net profit of $25 million this quarter. We have also achieved, as I mentioned earlier, a healthy free cash flow of $120 million during the quarter, despite an increase of $49 million in working capital, reflecting some market conditions, which Nassef will address.
The free cash flow represents a conversion rate of about 48% of our reported EBITDA and we believe our company is among the best-in-class going forward in free cash flow conversion. Turning to our balance sheet, our net debt stood at $4.435 billion as of March 31, 2018, the dollars reflecting some minor movement from the $4.47 billion as at 31st December, 2017.
This is mainly due to some adverse currency translation differences of $38 million, which are partially reversed in the Q2. The tail-end of our gross capital expenditure, which was $23 million during the quarter, mainly BioMCN and second line, the doubling of our capacity in BioMCN, which is the last piece of growth CapEx we have in our system.
There was also a one-off accounting adjustment of $90 million for the implementation of the new IFRS 9 rule, which impacts the value of the opening balance of debt with no P&L impact. And finally, the net effect of $29 million of several items mainly reflecting the expensing of the cost of debt repayments related to OCIP refinancing and the convertibles.
During our last conference call in March, we shared an update on our capital restructuring plans. I am pleased to report that we have now finalized all re-financings with a number of transactions successfully completed in recent weeks.
These include in April, we completed the offering of well oversubscribed debut bond consisting of $650 million tranche and a €400 million tranche of senior secured fixed rate notes due in 2023. The dollar notes have an interest rate of 6.625% and the euros are at 5%.
I am also pleased to say that for the first time in conjunction with this bond issue, OCI N.V. obtained corporate credit ratings from Moody’s Investors Service, Standard & Poor’s Global Ratings and Fitch Ratings of the Ba2, BB- and BB, respectively, all with a stable outlook.
Also in April, we entered into a new revolver and term loan facility as part of our overall capital restructure. The new RCF has a total commitment of $700 million, with up to five-year maturity.
The new term loan facility has a total commitment of $400 million equivalent denominated in euros with a four-year maturity, both facilities bear an initial interest rate margin of 4% over LIBOR, which declines as the company’s deleveraging profile continues onward. We also successfully concluded the buyback of our outstanding €339 million convertible, which closed a few days ago, and finally, yesterday, we closed the refinancing of our existing debt facilities at the Egyptian Fertilizer Company for a total equivalent of $445 million.
The transaction has received extremely healthy demand from commercial banks, both local and regional, and also included a commitment of $100 million from the International Finance Corporation and $60 million from the European Bank for Reconstruction and Development. This was the last piece of refinancing activity in our ecosystem that is now complete.
With our capital restructuring program now finalized, we do not have any major maturities in the near future and have meaningfully extended our average maturity profile going forward. We have lowered our average cost of debt this year, already by up to 35 bps, but expect more meaningful gains through expected step down provisions as our deleveraging continues.
We have reduced our sensitivity to rising interest rates due to increasing the proportion of fixed rate debt from previously 26% to around 50% of our total debt and just over 75% of U.S. denominated debt following the refinancing.
We believe we are now extremely well-positioned to achieve a healthy trajectory for deleveraging as we continue to target an investment grade profile. And at this point, I’d like to hand over the call to Nassef, our Chief Executive Officer for further commentary and outlook.
Nassef Sawiris
Thank you, Hassan. As I already mentioned on our last conference call in March, we started 2018 with all our plants operating well.
I am very pleased that we can now confirm that as a result, we enjoyed a strong improvement in our operational and financial performance during the first quarter. All our operations were contributing to this growth through a robust increase in volumes and our performance was supported by a well-diversified portfolio of fertilizers and industrial chemicals.
I am particularly pleased that we generated a healthy level of free cash flow of $120 million in the first quarter, despite a $49 million increase in working capital. Inventories ended at relatively high levels at the end of March as the spring application season in the U.S.
and Europe was delayed from the first into the second quarter due to the adverse weather conditions. Now, let me give you some insights on our two underlying markets.
First, the nitrogen fertilizer market, our realized selling prices increased on average during the first quarter compared to a year ago. We believe our commercial strategy is paying off as, we continue our strategy to limit both the quantity of forward contracted sales and the company’s participation in the annual fill season selling program in North America.
We believe that this could help to create a more stable environment for nitrogen fertilizer prices and stabilize price expectations for our customers. We continue to see a number of positive trends emerging for the nitrogen fertilizer market.
Firstly, for the first time in a number of years, we see grain fundamentals improving. Global consumption is outpacing production, grain inventories are expected to decline and farmers in the U.S.
may shift back to corn acres from soybeans. Overall, higher global grain price levels should boost the use of nitrogen fertilizers in U.S.
and other major markets. Secondly, we have seen strong demand in high growth regions this year.
In particular in East Africa, a trend that we expect to continue going forward, East Africa has some of the fastest growing urea markets in the world, including Ethiopia, Tanzania and Mozambique. Ethiopia alone is a urea market of 500,000 plus tons, which is expected to grow at double-digit rates in the coming years.
All the required urea is being important. Our plant in Egypt, EFC is particularly well positioned to serve the East African markets, as we have logistical advantages compared to our competitors.
Thirdly, as we discussed before, we continue to have the view that nitrogen supply additions have already peaked in 2017 and that new additions will be below incremental demand over at least the next four years. Finally, exports from China continue to fall in the first quarter.
Net exports amounted to less than 250,000 tons or a drop of almost 80% compared to the first quarter last year. We expect urea exports from China to remain at low levels going forward, if at all.
Then we move to the industrial chemicals market, our industrial chemicals portfolio continued to perform well with healthy volumes and further increases in selling prices for methanol and melamine, and the first contributions coming through from diesel exhaust fluid. We believe that each of our industrial chemicals market has a favorable outlook.
Methanol markets have been growing at rates of 8% to 10% on average historically and we believe the outlook remains positive. We have some visibility into the next four years to five years and expect limited new major capacity additions to come to market relative to expected continued solid demand growth in the high-single digits.
We are very well-placed to benefit. Our methanol portfolio will get another boost this quarter with the startup of Natgasoline within weeks from now.
Natgasoline reached the major milestone of mechanical completion in April and natural gas had already been introduced to the reformer. Our other growth project, BioMCN’s second methanol line is on track to start production in the fourth quarter this year.
Our melamine business continued a healthy trajectory and remains a good source of diversification. Melamine prices continued to increase in 2018 after consecutive quarterly price increases throughout 2017 and demand for the product remains healthy.
Finally, diesel exhaust fuel has been an exciting recent addition to OCI’s industrial chemicals portfolio, funneling the start-up of IFCo in 2017. Diesel exhaust fluid is a fast growing and high margin product, which has been growing at rates above 20% and is expected to maintain high growth rates in the U.S., Europe and in China.
We have been ramping up our DEF operations this year. We have been rolling out the product in the United States, where we have increased production capacity at IFCo and have boosted logistical capabilities with enlarged railcar fleet and more storage capacity.
Outside the U.S., we have been increasing DEF capacity as well. We executed the first shipments from Egypt in March and we are planning to start production of diesel exhaust fluid in the Netherlands next year.
To conclude, our first quarter results support our expectation that we are on track to achieve a significant step up of free cash flow generation. Our free cash flow of $120 million in the first quarter was a good achievement and combined with the strong increase in EBITDA, the first signs that we are on the right track are deleveraging driven by our -- building up to our run rate volumes.
This year, we will see a step-up in the volumes coming through from Iowa and our plants in North Africa, as well as the startup of our methanol facilities. We will have some turnarounds in the summer and have a large list of small production improvements.
But these will help us achieve even higher run rates going forward in 2019. We expect to have in 2019 all our facilities up and running for a full year.
With that, we will open the line for questions.
Operator
Thank you. [Operator Instructions] We have a question that came through across -- our first question comes from the line of Tom Wrigglesworth.
Your line is now open. Please ask your question, sir.
Tom Wrigglesworth
Nassef and Hassan, thank you very much and -- for the call and the opportunity to ask questions. I will start with three questions, if I may.
I got few kind of more strategic ones to start off with. Obviously, your commentary around nitrogen pricing in first we are kind of maybe passed the trough of the cycle.
In terms of the level of corporate activity that we have seen in consolidation, which, I think, you guys have said in the past that you think consolidation would take place, has it surprised you that there haven’t been bigger deals vast things have been more suppressed and how would you see that kind of continuing as maybe the cycle picks up? Second question, again is more focused on OCI, and obviously, as we exit kind of 2018, it looks like your organic growth and investments are delivered.
What should we expect next from OCI? You are not famous for a company to not be doing something?
And the last question kind of more on the first quarter performance and you note that the run rate was 110% for March for the IFCo facility. I think we all understand that the challenges of cold weather through the fourth quarter, probably, provided a bit of a low run rate entering the first quarter.
If IFCo had been -- if IFCo had an uninterrupted first quarter, how much more EBITDA do you think that would have delivered. Could you give us some sense as to because I appreciate it’s still in ramp-up?
Those are my questions. Thank you.
Nassef Sawiris
First, I will start by your question on consolidation. I am -- I tend to defer because you saw already last year the Agrium-PotashCorp transaction, which is a positive -- first step of a positive conservation, not just in potash but also in nitrogen.
Other players, who have high government participation in their shareholding are typically not able to take advantage of changing market conditions and hence were not active in that part of the consolidation. So we believe that moving forward from our standpoint is that we had to finish our major ramp up of the capacity expansion and that will be done by end of this year, and then our next priority would be to achieve investment grade and deleverage.
So from our side we will not be doing any major acquisitions in the short-term. On the issue of IFCo, yes, January and February has had some interruptions due to the extreme weather that probably did not change the fact that the market pull was weak as a result of the adverse weather conditions.
So we finished still despite that inventory build up with the high, sorry, we finished still despite the shutdowns with a higher inventory level than we would have expected. So it’s quite difficult to assume, but on a run rate basis, I can tell you that March EBITDA contribution was a multiple times more than January and February combined.
Tom Wrigglesworth
Okay. That’s very interesting.
Thank you.
Operator
Thank you, sir. Your next question comes from the line of Christian Faitz.
Your line is now open. Please ask your question.
Christian Faitz
Yes. Good afternoon, gentlemen.
Two questions, if I may. First of all, can you give us an indication of rough tax rate for the full year 2018, please?
And then second of all, given the shortened application season in the Northern Hemisphere due to adverse weather conditions, prolonged winter conditions, do you believe you can in terms of volumes catch up in the remainder of the season, despite the compressed application window? Thank you very much.
Nassef Sawiris
So on the tax rate, I will -- Hassan will give you the…
Hassan Badrawi
Yeah. On the tax rate, as you know, this is one of the areas of strength in OCI.
We have -- we are able to achieve quite a low effective tax rate. Our guidance for this year has been in the range of 15% to 18% effective tax rate.
Although, I will note here that our actual cash tax will be lower than that. And that, of course, is a reflection of a combination of some of the jurisdictions in which we operate, Egypt where we have no taxes on our EBIC asset, Algeria, which is tax exempt and some efficient tax structuring that we have done throughout the system where we are reaping the benefit of that.
Nassef, on the catch up of.
Nassef Sawiris
The catch up is actually might be in the U.S. slightly different than in Europe.
In U.S., the ammonia application was really hit by the shortened season. But we are seeing healthy UAN pick up.
So it’s a bit of a shift in the product mix in the Midwest where the ammonia demand was -- period was shortened, but accelerated UAN and the pickup. So we believe that we should have a reasonable -- no build-up of inventory by the end of the quarter.
Christian Faitz
Okay. Thank you very much.
Operator
Your next question comes from the line of Frank Claassen. Your line is now open.
Please ask your questions.
Frank Claassen
Yes. Good afternoon, gentlemen.
Frank Claassen, Degroof Petercam. Two questions please.
First of all on DEF, could you elaborate a bit more on your plants, how big could it be for you and how easily is it to switch existing plants from urea to DEF? And secondly, now that your refinancing is done, what will be the average cost of debt going forward?
Thank you.
Nassef Sawiris
I will start by answering your question on DEF. So a urea plant that is a modern plant built in 10 years, 15 years can produce urea liquid, which then you mix with high quality water, the demineralized water and then you have a product which is called DEF.
The challenge is more for the older plants and in our case having the youngest fleet of plants in the industry. In the case of Egypt, these are 10 years to 15 years older plants.
The process of producing DEF took us less than three weeks of calibration. The Iowa plant was planned from the beginning to have an element of DEF.
What we have done is that we increased the capacity with less than $1 million of investments in pumps and other pieces of equipment. But in essence, this was just a capacity increase, so we produced more liquid urea than granular urea, for example, or other downstream products like UAN.
So this is for new plants and this is why we could benefit from the expansion in DEF capacity. In the case of our Dutch facility, it requires a little bit more time and that’s why we are seeing it go into 2019, but not at a significant cost.
It requires some changes that are a bit more time consuming, but not that costly. So, our plan is that we will have a significant part of the Iowa plant service the busy Midwest trucking demand and now we are seeing also agricultural tractors using DEF in their tractors and harvesters.
So the demand is growing in Europe and North America by 20%. DEF for the first time made its mark in China and the first year, it only consumed like the equivalent of 100,000 pounds urea, but as new trucks get rolled out and due to the scale in China, we expect China to be a big contributor to the growth in DEF.
Our size of DEF in Iowa could reach a third of our total output in DEF. DEF trades at a premium to Midwest urea, which again trades at a premium to the rest of the world and particularly NOLA urea.
And the challenge in logistics in the U.S. is increasing.
There is a bigger shortage on barges, on trucks and all that, and we are very confident that the Midwest premium will continue to expand and go back to its historical differences.
Hassan Badrawi
Yeah. And regarding your question on cost of debt, it’s true we are realizing some gains of 35 bps, 40 bps of redemptions earlier in 2018, taking our weighted average cost of debt to be in the range of 5.5% to 6%.
But our new debt facility that we have introduced as part of the restructure allows us to capture further meaningful reductions in our cost of debt as our leverage begins to decline. So there is a built interaction that allows us to get further benefits 2019 onwards.
Frank Claassen
Okay. Thank you very much.
Operator
Thank you. Next question comes from the line of Karim Sawabini.
Your line is now open. Please ask your question.
Karim Sawabini
Hi, guys. My question is given the U.S.
renewed sanctions on Iran. I know that there was additional capacity of some end products of yours like methanol that were expected to come online from Iran.
Do you think that will impact pricing of methanol or any of your other end products?
Nassef Sawiris
I mean, it’s too early, Karim, to have a good view on that. This is early times.
The biggest impact really is on plants under construction. There is under the U.S.
sanctions still something like 180 days shipments in place. So definitely Iran is a big player in the methanol export market, as well as a big exporter of nitrogen.
What we can say is that in the past, sanctions have resulted in a couple of things. Number one, a complete slowdown of any new capacity additions due to the effect of not receiving critical parts, et cetera.
The second is that the operating rates of the existing plants dropped significantly. So it was kind of a double whammy for -- in the past.
So definitely it will have an impact, short-term will be small, there will be more clarity probably in the next 180 days.
Karim Sawabini
Great. Thank you.
Operator
Thank you. Next question comes from the line of [Jeff Haier].
Your line is now open. Please ask your question.
Unidentified Analyst
Hi. Thanks very much for the opportunity to ask the question.
I have a very basic question. I am just trying to understand the gap from volume growth of 25% to revenue growth of 57%, particularly when I look at the benchmark pricing that you have, obviously, prices aren’t up by almost 33% on average across the mix.
So I am just trying to understand what else is in the revenue line that’s giving you that growth beyond volume?
Nassef Sawiris
So you have higher realized prices this year in many product segments, higher methanol prices, higher month-to-month comparables of urea prices, even higher CAN prices. So a combination of volume growth as well as pricing growth and product mix.
So as you get to sell products like DEF, which are higher priced than a normal urea. So that correlation becomes a bit skewed towards the expansion of cash flow -- revenue and margin.
Unidentified Analyst
Okay.
Nassef Sawiris
And to complement, not in response, the positioning of our plants, as part of our investment thesis and the margin we are able to capture on our business through the commercial streamlining we mentioned couple of calls ago, that’s starting to come through our result as we now in the quarter like this have beaten the delta in the benchmark prices.
Unidentified Analyst
Okay. Thank you.
Operator
Thank you. Next question comes from the line of [Joe Meyers].
Your line is now open. Please ask your question.
Unidentified Analyst
Hi. Thanks for taking the question.
Just in terms of questions about the overall market, can you just talk a little about, I mean obviously the Chinese exports continue to basically drop almost quarter-on-quarter and month-by-month. And where do you think that levels out or what’s your view of the sort of is the current level sustainable or do you think you can continue to have decreases there?
And then, finally, if you can just give a little bit of color obviously on the corn versus soy consumption and question that you see among the farmers and what’s the sort of ratio that we should sort of or what are you thinking in terms of expectations in terms of that shift and how does that impact your business? Thanks.
Nassef Sawiris
So on the first question, I think, China will go to zero. I have no doubt about it.
It just doesn’t make sense to import expensive coal, leave the pollution in China and then export a product that only achieves the following. You leave the pollution in China and you leave pissed off trade partners who are complaining about the trade deficit and you make no margin.
So I don’t see Chinese exports continuing and while DEF was only 100,000 tons, everything happens in China big and fast. The fact that they are very much focused on environmental constraints and due to the fact that DEF affects cities more than CO2 emissions, because the NOx emissions are staying in each particular city.
We think that DEF in China will grow extremely fast and this is our own findings from China and that can take any slack and any excess capacity in urea. So we think urea exports are a thing of the past in the medium-term.
On your question about corn and soybeans, there are two issues related to that. One is the fear of Chinese sanctions the products that have been put on the list could play a big role in that change.
But, in general, higher grain prices will -- could result in an increased acreage to be planted with corn in the Midwest to the magnitude of creating an additional 1 million or 2 million tons of urea in the month and that’s just in the U.S.. So that is definitely a positive.
Unidentified Analyst
Okay. Thank you.
Operator
Thank you. Next question comes from the line of [Nitin Patel].
Your line is now open. Please ask your question.
Unidentified Analyst
Hi, everyone. Good afternoon.
Thanks for taking my questions. Just two, firstly, I saw obviously the corn volumes were down slightly in Q1.
I see and that’s obviously because of the cold weather, but I just wanted to get your view on the outlook for that market in Europe for the rest of the year, maybe what you think about the nitrate premium with respect to corn? And secondly, just a follow-up on the question on Iran earlier, do you think that if the sanctions do come to fruition that it could be a potential positive impact for your North African business, if the likes of say Turkey and some countries in Europe start to look away from Iran and move towards North Africa.
I know it’s hard to say, but just a few that would be good. Thank you.
Nassef Sawiris
So on the European business. They are kind of linked to the global nitrogen market.
I think the market is following very similar patterns to urea. This year weather played a big role.
The other negative that we saw on the European market was higher gas prices to -- and that puts a cap on where CAN prices can go down. Particularly what was very important was the lesson learned from our CAN strategy last summer, where we only sold product one month forward and we were witnessing late in the year and early next year, some of our competitors delivering old commitments, in some cases up to €30 and €40 cheaper than where we are selling our product.
So, basically, it’s a flawed strategy to sell to a trader or a stockist that merely leaves the product in warehouses for four months and you sell him that early product at a steep discount, four months later as the demand starts picking up, you have a competitor and the trader that you just sold the product cheaper earlier on in July and August. So part of the bigger problem of CAN is that rush to sell a lot of products in the off-season to stockists.
We consider stockists and traders as non-end customers and potentially competitors. So that is the big overhang on CAN.
Your other question on Iran and Turkey, as I said before, it’s early days, but definitely Iran supplied a lot of product competing with North African product in Turkey, should that situation change that would boost demand for North African products going into Turkey.
Unidentified Analyst
Great. Thank you.
Operator
Thank you. Next question comes from the line of Christian Faitz.
Your line is now open. Please ask your question, sir.
Christian Faitz
Yes. Thanks for taking a quick follow-up question.
Could you talk about -- talking different regional, the entire situation and how that is affecting potentially your assets in Beaumont? Thank you.
Nassef Sawiris
I think the methanol market is quite tight. So the outages and all that are playing an important role, but it’s really a demand story that is helping the methanol market.
You also think that methanol is very sensitive to oil prices. We are seeing a lot of the methanol go in China ending up in cars, for example.
So, the higher the oil price, the more demand for methanol as a fuel. The higher the oil price, the more competitive empty oil plants are that are using methanol versus using naphtha crackers.
So methanol is primarily a two story -- has two sides to the story right now. One is the higher oil price and the other one the tightness in the demand, I mean, a very strong demand.
Christian Faitz
Okay. Thanks a lot.
Operator
Thank you. The next question comes from the line of Tom Wrigglesworth.
Your line is now open, sir.
Tom Wrigglesworth
Thank you. Some follow-up questions if I may.
Corn Belt pricing has been at a premium to the NOLA price certainly through the first quarter. Is that something that you have been able to lock in for the second quarter, and I mean, obviously, we are looking at kind of trader prices?
I am just interested to know if that situation is going to be alleviated or if you think that that premium will continue throughout the course of this year and actually will never catch up. So that’s the first question.
Second question, if I may, following on from the questions around interest expense, I understand you have kind of stepped down mechanisms in some of the new debt instruments that you have issued. Could you just elaborate kind of what that means and because in terms of as we see the cash generation pick up and the net debt fall, was that actually due to -- will there be just a mechanical drop in your interest costs rather than you needing to reissue new instruments to capture your stronger balance sheets?
Thank you.
Nassef Sawiris
Okay. So I will start with the first question on the Midwest premium and I will leave Hassan to walk you through the step down process and the flexibility in the financing.
On the Midwest premium, the Midwest premium has a floor which is the logistical cost of moving product from NOLA into barges and all that. But there is an added premium because of the difficulty in logistics at peak season, the availability of barges, the availability of trucks and double handling, which is becoming a big issue more and more.
I mean a lot of other industries are starting to feel the pinch of increased logistics. So we always said that we think of the Iowa Fertilizer Company as a hybrid between a manufacturing plant and a logistics center, because we are located in a very attractive location in the middle of the biggest nitrogen demand, as well as the biggest trucking demand in the Midwest.
So as we see actually the Midwest premium growing rather than coming down and that will continue even in nominal terms, as far as the premium is concerned, we see a possibility that that is -- we will see more of it in the second quarter than we saw in the first quarter. We are seeing that right now.
Tom Wrigglesworth
Okay. Thank you.
Hassan Badrawi
And in regard, yeah -- and in regard to your question on the debt, all -- our new bank facilities at the holding company level, which have been issued in conjunction with the bond have basically a leverage based margin grid and that’s sort of the grid that I mentioned earlier, which allows us to benefit from the decrease that is naturally going to be happening to our leverage metrics as the ramp up of our EBITDA happens and as we continue to hit our run rates with our free cash flow conversion profile, which is quite unique. That means that deleveraging can occur very rapidly and we can approach being an investment grade profile within two years plus that could be then depending on pricing of course and this is fairly standard for this type of debt facilities.
And as you absolutely mentioned, this allows us to save on having to reissue future debt to capture that deleveraging benefits.
Nassef Sawiris
So it’s actually two benefits. One, is a step down in interest expense on the revolver, as well as the OCIP term loan B, but you also get a reduction in absolute debt, because the revolver is very flexible and sizable.
So as we deleverage we pay -- we don’t need to…
Hassan Badrawi
Issue…
Nassef Sawiris
… issue any new debt, just an on-demand facility.
Tom Wrigglesworth
So in terms of quantifying that if I may, so in two years if you were investment grade, would your interest expense be -- do you think that could be 20% lower than it is today or would it be more like 40%?
Nassef Sawiris
A lot of metrics including interest rates and all that, I think we will give you the basis of our loans and you do the math based on your expectation of where interest rates are going to be in two years.
Tom Wrigglesworth
Okay. Understood.
Nassef Sawiris
Yeah. Yeah.
Operator
All right. The next question comes from the line of Rob Fong.
Your line is now open. Please ask your question.
Rob Fong
Hey. Thanks.
One quick admin question first off. In your disclosure when in the segmental reporting, you give revenues and you give a net profit line.
But I think what will be very helpful to investors, especially as in the debt side, would be getting EBITDA by division just because obviously that’s the way that the deal was presented, we kind of had the breakdown and that will be really helpful in the reporting going forward, is that something that you think you can do in future reports?
Hassan Badrawi
We will look into it. I appreciate the comment and we will look into what we can do in terms of our disclosure.
There’s quite a bit of data already available on the various, of course, based on existing debt but we can look into that.
Rob Fong
Got it. Okay.
Thank you. That’s really helpful.
And then, obviously, at the time of that deal, you were talking about Q1 and I think you had strong expectations and is there any short-term guidance you plan to give on Q2 in terms of volume increases year-on-year or anything along those lines?
Hassan Badrawi
No. I think we made a statement that we expect overall in the year that our guidance didn’t change.
What we can say is that the -- we look at year-on-year performance in terms of plant reliability and in terms of the trends and prices, I would say that both metrics are supportive of our statement that we are not changing our guidance.
Rob Fong
Okay. Thank you.
Operator
Thank you. The next question comes from the line of [Shannon Fearon].
Your line is now open. Please ask your question.
Unidentified Analyst
Hi. You mentioned that investment grade is a possibility in the next two years or so.
Is it a target on its own right or you would be just happy to have a investment grade profile?
Nassef Sawiris
What is it? So…
Hassan Badrawi
Once again can you repeat the question as the line wasn’t very clear?
Unidentified Analyst
Yeah. You mentioned that you would get back in two years’ time you could potentially get investment grade profile so your metrics would be good enough.
But is it a target on its own right like if the right acquisition came along or you wanted to dividend out certain amount of the cash generation. Is it a strong target for you to become investment grade?
Nassef Sawiris
Yes. It is.
Unidentified Analyst
Okay. And then you mentioned that the average selling prices were higher in Q1 for most of your products, are you able to quantify what was the average selling price increase year-over-year in Q1 2018?
Hassan Badrawi
No. But we can tell you that the key products have had increases in pricing in magnitude of $30, $40 on urea.
You are talking about a significantly higher number on methanol, melamine is up 5%. But it’s a whole list of products.
I would say that across all products we are seeing improvements year-on-year.
Unidentified Analyst
Okay. And then you also mentioned that Natgasoline is about to start, it’s a commercial production, when do you think you would ramp up fully this site?
Nassef Sawiris
I mean, we have introduced gas to the reformers, it mechanically is complete, we have introduced gas into the reformer. So the process started towards production, as with any new plant, very difficult to predict, but so far the pre-commissioning, the commissioning and the startup is going very smooth.
So I wouldn’t put it an exact time on it, but sometime in the summer we think we will be in good shape to have steady operations.
Unidentified Analyst
Okay. And if the methanol prices were where they are today, what sort of EBITDA potential this operation has, I think during the road show, we were given maybe $300 million to $400 million kind of a range, obviously, it’s a bit of a range, but given the methanol prices stay where they are, what’s the contribution?
Nassef Sawiris
That range would be a good description.
Unidentified Analyst
Okay. And just the turnarounds aim that you expect to have enough Sorfert at the end of the year.
Is that a major turnaround? Do you expect to have it to have a big impact in terms of contribution to EBITDA?
Hassan Badrawi
No. The Sorfert turnaround is not necessarily going to happen.
This year might be pushed further down to next year. And it’s not a huge -- it’s not a multi-month stoppage, it’s a two weeks to three weeks, so it’s not like a major disruption.
Unidentified Analyst
Okay. I am guessing the EBIC turnaround that happened already that was also a small one?
Hassan Badrawi
Yeah. Yeah.
Unidentified Analyst
Okay. And just to comment on what Rob just said on the breakdown of EBITDA by operations that will be helpful for all of us investors?
Nassef Sawiris
I know that…
Hassan Badrawi
We will look into it but we -- we will look into it.
Unidentified Analyst
Okay. Thank you very much.
Operator
Thank you. The next question comes from the line of Hari Thirumalai.
Your line is now open. Please ask your question.
Hari Thirumalai
Hi. Thanks for taking my question.
I have two please. You mentioned that Natgasoline’s production could commence any time in the summer, assuming you have about five months to six months of clean run rate of production this year.
Do you expect recapitalization of the Natgasoline balance sheet to happen this year or do you think that’s something that you would consider for 2019? That’s the first question.
And the second question, you said that the insurance for the Sorfert claim that’s been settled at $20 million. Is that the final amount that we can expect or is there anything incremental that we can expect during the course of this year?
Thank you.
Nassef Sawiris
First, I will answer your first question. You are probably misunderstood.
We plan to hopefully start producing methanol in the coming two weeks to three weeks. We said that normalized production should happen this summer.
Depending on that we will see where we are and where the credit markets are and make a decision around the summer about the financial structure of Natgasoline. On the other...
Hassan Badrawi
On the insurance, yeah, the number that reflected in Q1 that’s a down payment or a prepayment on the insurance amount and we have not yet disclosed the full outcome of that insurance claim that continues to progress. But this is a partial payment.
Hari Thirumalai
Understood. Thank you.
That’s very helpful. Thank you.
Operator
Thank you, Hari. And there is no further question at this time.
Please continue, sir.
Nassef Sawiris
Okay. Thank you everybody for joining us for this call and looking forward to our next call.
Thank you.
Operator
Again this does conclude our conference for today. Thank you all for participating.
You may all disconnect. Have a good day everyone.