Yara International ASA
OSE:YAR
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Yara International ASA
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Okay, good morning, and welcome to the presentation of Yara's first quarter results, which will be made by Yara CEO Svein Holsether and CFO Petter Østbø. And after that, we will have a Q&A session as well.So I would like to then introduce Svein Tore Holsether.
Thank you very much, Thor -- if we can turn on the mic. Thank you very much, Thor. And good morning to all of you.And as usual, we will start the presentation with going through our safety, as this is our #1 priority in Yara. And in the first quarter this year, we had 21 recordable accidents. That's a reduction of 25% compared to the same quarter last year, and that takes us to a total recordable rate of 1.6. This is the lowest level we have been at so far, and I want to use this opportunity to extend a thank to all our employee as well for all the work that they put into making Yara a safer place to be. We work on safety according to our Safe by Choice program. And that's a systematic way working with safety much in line with how we do on continuous improvement. And when you combine that with passion and with looking after each other and ourselves, we get real results, as we see right here. But we still have accidents. We still have serious accidents, and we're working relentlessly to bring this number down to 0. Because now I've been talking about numbers, and it is important to remember that behind these numbers are real people that get injured at work. And it's someone's father, someone's mother, someone's sister, someone's brother. And that's the approach that we need to have at it, and every accident that we have is unacceptable.Moving then to the first quarter results that do reflect the business environment. And we will come back to most of these topics during the presentation, but in short, the nitrogen market, as you see here to your left, is still impacted by an oversupply situation. Food prices are starting to improve but not yet to an extent that has any impact on nitrogen demand. And in Europe both nitrogen deliveries and producer input costs are impacted this quarter by colder weather, so we get a double impact both because more gas is required for heating, which drives up gas prices; and then also due to colder weather, which means a later spring. I want to stress that we're highlighting these topics only to separate the uncontrollable factors that are impacting our results and also that we are not satisfied with our absolute financial results for the quarter. And we're working hard on all controllable parts of the operation, all levers, in order to sustainably improve our results.Our operational improvement program, the Yara improvement program, is on track at $275 million at the end of first quarter. And that's up from $240 million at the end of 2017, and we'll come back to more on that in our presentation.A positive aspect of the results this quarter is that nitrate margins have improved compared with a year ago. And on the left-hand side here we have highlighted European nitrate margin picture, and you can see the -- that the positive impact on the nitrate prices more than offset the increase in gas prices in the same period. However, as you also can see here on the right-hand side, our deliveries are impacted. So the industry deliveries are down by 7% for the first 9 months of the season and are down 22% compared to the same quarter last year. And for Yara we've had a reduction of 18% of our European deliveries in the first quarter, so somewhat better than the overall European market.In Brazil, first quarter deliveries are down by 1% in the industry, and Yara deliveries are down 12%. However, our premium product deliveries are up by 2%. The margins are weak in the broader Brazilian commodity and blend fertilizer market, and we have chosen not to compete in the lowest-margin segments in this first quarter. We do continue to focus on our premium product and to ensure growth there. And in that segment the value creation per tonne and the value added per tonne is significantly higher. For the second half of the year and, as you know, the main season in Brazil, the demand outlook is more positive given the stronger soybean prices that we're seeing now.Moving then to production. We have an increase in ammonia production of 13% for the quarter, and -- but that also includes the impact of our acquisition in -- of the Babrala plant in India, which was completed on January 12. And if you exclude that, the underlying improvement is 6% compared to first quarter last year due to higher reliability.Moving then to finished goods production. We were up 2% in absolute numbers, but in underlying numbers it's 2% lower than the same period last year. And it's lower for 2 reasons: a somewhat more complicated product portfolio, meaning that it takes more to produce the tonnes, which we have not adjusted for; and also due to somewhat lower reliability on finished goods production in the first quarter. But then we're also comparing to our other strong first quarter last year. Comparing to fourth quarter last year, we're in line with that quarter.I also want to say that we haven't sustainably achieved a high reliability on our total portfolio in Yara yet. This is something that will take more time implementing continuous improvement and lean operations. It's not something that is done overnight. We have to expect volatility in the implementation. This is about incremental improvements over time, but in total they will up -- add up to significantly better production and also a significantly better impact to our bottom line. So expect volatility, but we're off to a very good start. And that can be seen in our improvement program, which I mentioned was at $275 million now. And as you recall from the Capital Markets Day back in February, we did increase our target rate for this year from $300 million to $350 million to be achieved this year. And we are well on our way to achieve that.Moving then to EPS. Our underlying earnings for the quarter are 29% down compared to first quarter in 2017, and that decline reflects both lower deliveries and also a higher depreciation. Our reported earnings include an $8 million foreign exchange gain; and a $7 million of negative special items, which is mainly the impact of the stamp duty for our acquisition in India. Last year's reported earnings included a $69 million exchange gain and $14 million of negative special items. And both reported and -- earnings and EPS excluding currency and special items are impacted by higher depreciation. It's about $0.10 per share impact from this, and this is due to new expansions that are now coming onstream.2018 is a very important year of execution for Yara, and we're then talking about our growth pipeline. A total of 7 major projects are coming onstream this year including M&A, greenfield expansions and also brownfield expansions. So we will now take a look at these projects, which are going to give us an additional 1.4 million tonnes of ammonia production and 3.1 million tonnes of finished fertilizer production in our portfolio.3 of the 7 projects are -- have started or are in the startup phase now, starting with Babrala, as mentioned, that we acquired on -- from Tata Chemicals on January 12, which is giving a very strong production asset to our portfolio than in India but also a very strong footprint in India that we can build on to create a larger market for premium fertilizer. In Porsgrunn we are now ramping up our largest premium products plant and with additional capacity, and the ramp-up is progressing very well. Last week, we inaugurated the ammonia plant in Freeport in Texas that we own 68% of together with BASF, who own 32% of this plant. It's a very efficient plant both from an investment perspective where we buy hydrogen or source hydrogen straight into the plant, which eliminates the whole front-end CapEx of the plant. It also means that it has a very good variable cost performance. And then when you include that it's within the BASF facility, we also get synergies from that, so a highly efficient plant.Moving then to the 4 other major projects that are coming onstream in 2018. Sluiskil, I know several of you attended the Investor Day that we had in Sluiskil late last year. We are now approaching finalization of that project. It's a revamp of the plant. It's a de-commoditization of the product portfolio and also improving the product mix. In Salitre in Brazil we are continuing the construction of our mining operation in phosphate to have a stronger integration with the rest of our operations in Brazil. And we will get a larger and stronger impact from this when the chemical operation opens next year. Then Cubatão, the nitrogen assets that we are about to acquire from Vale, we're then integrating our Brazilian position, strengthening both the production and industrial footprint in Brazil. And we expect that to be done by midyear. And then lastly, Köping, where we -- it's a revamp and also an increase of TAN production capacity for the mining sector.In January, I had the pleasure of attending the opening of a smaller but still very important growth project in Brunsbüttel in Germany. And I will now show you a film about this project.[Presentation]
It is indeed a very interesting and exciting project where you combine good business but also doing something that is meaningful for the environment. And AdBlue is definitely part of the solution to clean air in Europe and in the European cities because it dramatically reduces NOx emissions. And with the SCR technology and AdBlue, you can take out up to 95% of NOx emissions from trucks and cars and provide for more healthy urban areas.Yara Brunsbüttel will then produce 1.1 million tonnes of AdBlue annually, 24/7 operation, meaning that we will have stronger reliability, stronger flexibility and even better quality to our customers in Europe and overseas. The AdBlue at this plant alone will reduce NOx emissions equivalent to the NOx emissions from the transport sector in Germany, Switzerland and Austria combined, so it's -- has some real big impacts. And when you look at the totality, this really works because, even if we have a larger increase in the number of cars in Europe compared to 1990, the NOx emissions in Europe have been reduced by 57%. So we see a positive future for AdBlue for 2 reasons. Even though fewer diesel cars are produced in Europe now, the number that are sold with SCR technology that uses AdBlue has increased. And also, stricter EU legislation and elsewhere in the world is still being implemented, which will further improve air quality and increase the need for AdBlue due to higher consumption as a result of this.Then I will hand over to our CFO, Petter Østbø, who will take you through more details on our results and also our improvement programs. So over to you, Petter.
Thank you, Svein Tore. And good morning.As Svein Tore talked about, the AdBlue business has grown quite well, and I would say overall industrial has delivered impressive results. Their EBITDA was $53 million, which is 17% up on last year's $45 million, which is an external result which I guess we wish we could have across the portfolio. Overall, the EBITDA was down 3% year-on-year, so even though it was higher than fourth quarter last year, comparable quarter, it was down. If you adjust for special items, it was down a total of 5%. And looking at the EBITDA bridge, it mirrors what Svein Tore says. The main effects for this was an increase in the prices and margins, which sadly were more than offset by lower deliveries, a higher energy cost as well as currency translation of the fixed costs.So if we jump into this. We saw that the analyst expectations for the variance and the scale of the variance more or less matched ours. The consensus estimate was $393 million compared to ours of $377 million, which is 4% below.
[indiscernible].
No, it's okay.Volume differences, again Svein Tore talked about it. The Brazilian reductions were almost offset by higher deliveries in Latin America, and the main impact here was nitrates and NPKs in Europe, 21% for nitrates and 14% for NPKs lower than first quarter last year. On the price side it was also predominantly nitrates and NPKs but this time on a global level. For energy costs, again we can blame the cold spell. We guided a $27 million increase, but sadly it ended up $46 million higher in Europe and the U.S. And the remaining $4 million came from outside. Currency, as I said, was mainly U.S. versus euro and Brazilian reais and the translation of the fixed costs. On the special items side, we have a positive variation of $7 million, but that was due to a negative effect of $14 million last year. The actual sum is minus $7 million. And that's due to the stamp duty in India, the Babrala acquisition; and the positive effects from derivatives.On the other side, we have 2 things, main things. We have white certificates, which is linked to energy reduction initiatives in Italy. And we have the underlying EBITDA of the acquisition in India. And as we have done earlier, for the remaining first year of that acquisition, those earnings will be put into the other category for the variance.All right, if you look into the cash position. The main impact this quarter was due to investments. And the main impact of the investments was the $435 million acquisition of Babrala, but the total impact and net impact was an increase in the net debt of $0.5 billion in the quarter.If you go into the individual items. The investments, as I mentioned, was chiefly Babrala, but it was also linked to the maintenance investments going on and to the expansion projects. The main investments here were the Freeport ammonia plant, which as Svein Tore said is in startup now. It was the Salitre mining project and the Rio Grande expansion. Net operating capital changed most due to the cost of the stock and the increased stocks that we have and also seasonal receivables increase. And then we have the -- a dividend from Qafco, which together with the cash earnings netted out the debt. If you look at -- or the debt's increased $0.5 billion, yes.If you look at the CapEx plan. This year's estimate is $2.2 billion and partly due to the acquisition of Babrala, as mentioned, but also the Cubatão complex, which we now believe will be consumed in the third quarter of the year. In addition, it's -- we need to mention that we have 5 major ammonia planned turnarounds. They will have an impact to have higher-than-regular maintenance CapEx but also to reduce the overall production by about 200,000 tonnes, a little bit more, mostly ammonia but a little bit also urea on that side. And they have already started. In the first quarter, you will have Tringen II in Trinidad. And you will have Belle Plaine. Then in the next quarter, you will have Tertre. And you will have triggered -- and at least, we have -- sorry. You will have the Dutch plant -- [indiscernible]?
[indiscernible].
Sluiskil in the fourth quarter. Thank you. Thank you for that.Yes, what we say is the guidance for the future is a little bit higher, but we will focus strongly on executing the projects we have already started. And there's a pretty high threshold to come in with new projects at this point in time. At the same time, as Svein Tore mentioned, we will focus on delivering on the improvement program. So we said that $275 million we have already captured, and we believe we will deliver on the $350 million. This is caused by basically all the projects in that improvement program, but the main positive deliveries are from the Yara Productivity System achievement, which has been in ammonia, but also the procurement excellence program. I want to mention that we are less than halfway through the program, so of course, we need to work on sustainability but also completing the rollout. And so at this point in time, we have completed the rollout of the YPS to 15 plants. We're currently rolling it out to 7 more, and we will do all of the plants by the end of the year. So at that time, you will see more of the continuous improvement journey. Also notice that we have reduced the CapEx. We estimate to use for the program this year by about $50 million but retain the upside, and that's driven primarily by the program we have to be more efficient and better at spending CapEx.Good. With this, I hand back to Svein Tore to talk a little bit about the future.
Thank you, Petter.Then I will move to the prospects. And I want to repeat the urea supply situation that we touched on at the beginning of this presentation. And as you can see here in the forecast for capacity expansions, this is according to the industry consultant CRU, that these are lower this year than last year and roughly in line with historic trend consumption growth of 3%. But in addition to the forecast, CRU's also has this black line where you see the actual production increase forecast. And due to high utilization in existing plants, you can see that, that will be higher this year. And this is primarily driven by increased utilization in Algeria. On this basis, we do not expect a fundamental improvement in the demand-supply balance outside China until after 2018. Looking further ahead, many of the projects that are included here and foreseen for the period 2019 to 2022 do carry a lot of uncertainty.I want to round up with a reminder of the growth and improvement program and the earnings effects that lie ahead for Yara. On the left-hand side we have added together the investments we are making both in the Yara improvement program and also for our committed expansion and growth projects. And now the right-hand side you will then see the combined projected earnings improvement from this on a 2015 baseline. And that's totaling $1.1 billion of EBITDA within 2020, which is equivalent to about $2.1 per share.So with this closing summary, I am going to hand it back to you, Thor. And then you coordinate the Q&A session.
Okay, thank you, Svein Tore.So for the Q&A session, we will have our CEO; CFO; and also our Head of Market Intelligence, Dag Tore Mo.
Yes.
So you if you have a question, please raise your hand. And we will bring a microphone to you, probably one of these. My colleague Nina Kleiv will come to you.Shall we start with Nordea?
Hans-Erik Jacobsen, Nordea. A question for [Dag Tore]. It might be a leading question...
Is the microphone on? Hans-Erik, I think...
[indiscernible].
Hans-Erik Jacobsen, Nordea, yes. I have a question for Dag Tore, maybe a leading question, but since we are now entering a period where supply growth will be below demand growth, and China is completely [ on the market ], could you draw some conclusions where we are likely to go and the possibility of China entering the export market again? I guess, in a couple of years, we're going to need Chinese exports again. And the impact that will have on price levels as Chinese feedstock costs remain very high. And China currently do not export because of the very high costs compared to the low price levels we are seeing also in China.
Yes, it's a central question. Yes, as we have been talking about now also for some time, that we have kind of expected more price volatility in the global market because of the lower volumes that are required from China, has been required from China due to the capacity expansions elsewhere. We had quite a low -- very strong volatility in 2017, where you can say that prices went from, let's say, an import logic into China in somewhere in the $200 to $250 range, while if you then turn to an export logic, pricing logic, from China, you're maybe more around $300, has been at the moment. So because of the VAT on imports, the switch on that and logistical costs et cetera, there is probably a $50, $70 at least spread between whether you are in an export logic or you are in an import logic. We are very close to that import logic at the moment. And we see that through the first quarter there hasn't been a need for Chinese urea exports. A number of factor has kind of coincided, I think. There's been a very strong production performance generally across the world, I believe. Most plants are running. In addition, you have a fairly slow Brazilian quarter. As we mentioned, we have urea imports down from 1.9 million to 1.3 million tonnes. And then you got -- get a late spring on the Northern Hemisphere, in addition, reducing the import need for first quarter. So we kind of went through this spring without really a strong spike as you can get sometimes. So -- and but of course, I totally agree with you. Given that -- the sensitivity, we are so close to a situation where we have 0 Chinese exports. That's just a -- fractions; and just small, small deviations in the main parameters, demand growth, production rates outside China. Small variations in those have quite huge substantial price effects in the global market. So this is -- I guess, gives a lot of ammunition for you guys to analyze this going forward because it's really key what will the success be on bringing these new capacities to the market. And as Svein Tore says, a lot of them are very uncertain and what will the demand growth be. And as -- I totally agree with you. It's a -- it's big factors for next years.
Okay, so we move to DNB.
Eivind Veddeng, DNB Markets. 2 questions, 1 for Dag Tore and 1 for Petter. One, on gas, European gas prices, they remain high. And you have guided up quite substantially for Q2 and Q3. And I just wanted to hear your thoughts on if this is a structural change we're seeing now with higher European gas prices or if it's just the aftermath of the cold European winter. And secondly, for Petter, the recorded P&L effect year-on-year in Q1 of the improvement program. Or to phrase it otherwise, what would the EBITDA in Q1 been if you did not have this improvement program?
Yes, on the gas side it's not entirely, It's not just the cold winter. It's also the fact that it's, yes, driven partly by the environmental developments or more focus on environmental developments in China, for instance. That's also a big factor, where they have cut down heating boilers based on coal; switched to as much gas they can acquire basically; and take in, I think, much more, import in much more LNG than most people expected. In addition, South Korea's also had a quite substantial increase in their imports. So let's say there has been less LNG available for Europe than what we would have hoped, let's say, from a just purely gas market standpoint. So -- and also, higher coal prices globally has also increased the trigger point between the gas and coal switching in Europe. And also, CO2 costs have gone up quite a bit recently, so -- and then with this lower availability and relatively low stocks, the -- of course, that cold spike in March got so much more influential than it would have done if it was, let's say, a couple of years back when the supply situation was easier. So yes. So -- but of -- we can say that those same factors have been positive in the sense that they've also raised urea prices in China, but unfortunately and as Hans-Erik was alluding to earlier, there has been a reduction in the need for that, so you haven't got full effect of that improvement in the global market for urea. And going forward, let's say, it's hard to say, but at least we -- the Europe is ending the winter with very low stocks. So there is now a competition for buying gas for direct usage and for storage for next winter. And I guess that's what keeps, let's say, the forward curve over summer fairly flat at around current levels. So let's see how that supply situation develops because there is still more energy coming and gas storage is primarily available in Europe. So it's, I mean, still an interesting element to follow going forward.
And we should add that, when we give then forward the prices or the outlook for gas prices, that's based on the forward curves. And over time, they tend to be higher than the actual prices, but as we saw in the first quarter, we guided -- it was $27 million higher energy cost, and it turned out to be $50 million because of a colder weather than expected. And then we have a 1-month time lag on our gas prices in Europe, so meaning that we will have some impact from higher gas prices also coming into second quarter.
[Okay]?
Okay, regarding the improvement program. Of course, the baseline is 2015. And there are many effects which go up and down, but what we did is estimate. If you took first quarter prices and costs, the program would have come in at around $230 million EBITDA, which is a little bit lower but not that much. So if you want to kind of calculate the forward for that, you can say a little bit above $320 million that will -- the result have been, all else equal. It's a little bit speculative, but those kinds of numbers.
Okay, I think we have a question from ABG.
Petter Nyström from ABG. Based on your historical experience, are there any chances for -- or how much of the volumes can be recouped in Europe in the second quarter due to the late spring? The second question is related to the Cubatão acquisition. I think I read that the competition authorities are looking more further into that. Is there any chances of it, the acquisition, not happening at all, or a delay? And I think that also, from the CRU slide, the key change there are two. It's the Nigeria plants and also the India. And we have talked a little bit about that the last years, that we've seen at least more press releases from India. And it seems that CRU has not taken that into their forecasts. What -- now you have guys on the ground there. What are your thinking about those plants?
Okay, I can start. When it comes to deliveries going into second quarter, as we showed before, we are -- or the whole industry is significantly behind last season in deliveries. I believe it was 7% lower season to date. And while some of that can be recouped, we have to be prepared that a full recovery is unlikely, so that we should expect a slight decrease in the volume for a season in full due to the colder weather. And when it comes to the acquisition of Vale's Cubatão assets, you're -- as you rightly point out, we did get a favorable ruling back in March 19. And then it's a 15-day hearing period. And there were some additional questions related to Petrobras' announcement that they would shut down some ammonia capacity in Brazil, which triggered then an additional review of this, but in my view these things should not impact our deal since it doesn't really -- it doesn't change the structure in Brazil. But it does mean a delay in the finalization of that acquisition. And then...
Well, may be also worth mentioning on Europe that in a, let's say, shorter season there will be -- probably be a little bit more appetite for nitrates. It's not good for the global urea balance, of course, but that's something that we are quite happy with. So I think that's also something to take into account. On the supply side, yes, you're right. CRU has revised up their capacity additions for India, and that's something we are following closely also. And it's been normal that the Indian government is announcing kind of willingness to expand capacity to a little bit reduce their reliance on imports. And we are also thinking that there could be some. We'd be very surprised if the speed of this is as fast as what CRU is indicating in their current balance, but this is something to follow.
Are there further questions? Yes, two. Yes, okay, we'll go back to Nordea first.
Jacobsen, Nordea. There has been a lot of changes in raw material prices due to the U.S. sanctions against China and especially Russia. So far, we haven't seen any impact on the fertilizer market. Do you see any potential for that happening?
I don't want to speculate on any impact to that. Russia is, I believe, the largest nitrogen exporter in the world. We've seen some sectors being targeted, but there has been none impacting the fertilizer sector. And I don't want to speculate on any impact to that.
Okay, we have another question at the front.
[ Bruce Dizen ] from [ FURNACE ]. There were some weather forecasters that put out a forecast in the middle of February that there would be a long period of unusually cold weather in Europe, but you ended the quarter with $300 million higher inventory. Don't you read the weather forecasts? Or how can you have such a -- built up so much inventory?
Well, still the timing of when the shipments happen will vary from year to year. And we have to take a long-term view on this and also look at the financials whether it makes sense to produce or not. And with what we see, it still makes sense to produce and store for inventory and then be ready to ship out rather than reducing production, so -- but yes, we do read the weather forecasts and -- but at the end of the day, it is a financial calculation. And we do what we think will create the largest value, and that was still to continue to run the plants and have inventory ready for when the shipments will take place.
Are the inventories related to sales in Europe or also to exports to Brazil?
This is mainly related to Europe, where the part of the -- I mean, first, Brazil, this is the lower -- or slower part of the season. And the main season is in the second half. And a lot of the volume that we reduced in Brazil is third-party sourced materials, so it's not Yara product.
Are there more questions? If you do think of any later on, we do have a phone conference at 3:00 this afternoon Oslo time, but for now thank you for attending our presentation.