Yara International ASA
OSE:YAR
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Yara International ASA
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Good morning. Good morning, and welcome to the presentation of Yara's second quarter results.Our presentation today will be by our CEO, Svein Tore Holsether; and our CFO, Petter Østbø. And it's now my pleasure to introduce Yara's CEO, Svein Tore Holsether.
Thank you very much, Thor, and good morning to all of you.As usual, we are going to start with safety. And the picture that I'm showing you right here is from our annual safety day that we had for the third consecutive year, and it took to -- place on April 26. And this is an event that really demonstrates how we work on safety in Yara. Safety is not something that you can dictate. It's about involvement. It's about engagement. And the way we conduct the safety day is that we have certain themes that are in common for all locations, but how we execute is different from each location. And then we start in with sending messages from New Zealand and then going from time zone to time zone throughout the day. And with hands-on engagement, we take the corporate management team and the direct reports. We were present at 70 locations this year and again very happy to see the engagement in the whole organization around this.Looking then at our total recordable rate, which is a lagging indicator, but it's still a good indication of how our performance has been on safety. And what we see here is that, at the end of the second quarter, we were at 1.4 or -- on a rolling 12-month basis, which is the lowest level we've been to so far. And behind these numbers are real accidents. We had 40 in the first half of this year, but it's down from 57 in the same period last year. So we can say that the improvement has meant that 17 fewer people have been injured, but still we have had 40 accidents. And we've had some serious accidents. And we do believe that it's possible to get to 0, and that is our goal and our ambition.Turning then to the results. And before I go into the details here, I would like to look at some of the fundamentals.And then we'll come back to most of this during the presentation, but in short and when we look at the demand side and here on the -- to your right -- or to your left side, on the grain price index, we can see that the stock levels are falling and are expected to continue to fall and that the price index is improving, although I should also note that this is from a low level. On the supply side, the projected production increase for 2018 is well above the demand growth, but after 2018, the picture is more positive. The energy price picture is challenging with strong LNG demand in Asia, and this is causing an increase in gas cost in all regions. And as you see here to your right-hand side, you see the increase in imports of LNG, where you see that in Asia it's gone from 106.2 million to 121.3 million tonnes. And that's mainly driven by South Korea and by China. And in Europe it's pretty much stable, but the result of this is significantly increased gas price.Looking then at the second quarter deliveries and starting with the European deliveries. They're up by 6% for the industry compared to a year earlier. And keep in mind also that the first quarter was quite slow in demand. So we see some picking up here in the second quarter. And the global urea price did rebound in June with a significant increase through the month, but this has had limited impact in the second quarter results. And this is normal due to time lags from order taking until delivery. And I want to highlight or to stress that we're mentioning these points to separate the uncontrollable parts that impact our results from the controllable parts of our results and that we're not satisfied with the absolute financial performance. And we're working hard on all the controllable part to improve those. And first among those are -- is captured in the Yara Improvement Program, which is on track. And I will come back to that later on in the presentation.And our total fertilizer deliveries were up by 11% compared to a year earlier; and that's with increases in all markets, except in Brazil. The acquisition in India and the acquisition in Brazil accounts for about 5 percentage points. And when we look at Brazil, the fertilizer deliveries are actually 19% lower than same period last year. And this is a result of the truck drivers' strike that took place in the quarter. And looking at the financial impact of that, that's approximately $15 million. And we expect a similar impact in the third quarter.Deliveries in Europe are up by 18%. And the larger increase compared to the industry deliveries of 6% is partly because of lower import, which again is mainly urea; and also due to the agronomic benefit of nitrates that are supporting then the demand for nitrates in a late spring, as what we have seen in Europe this year. I should also say that, the industry deliveries that I showed on the previous page at 6%, that's an estimate. So we don't have the final numbers for June yet, so that's still an estimate. So that -- there could be revisions to that, if you react to the big difference in our increase in Europe sales compared to industry sales.Turning then to the prices. And as I already mentioned, we have seen a global urea price pickup in June, but it had limited impact on second quarter prices. Yara's nitrate prices were up by 4%, while our NPK prices were up by 7%. However, higher energy prices more than offset the higher selling prices. The nitrate premium towards the end of the quarter, as we see towards the end there, to the -- to your left-hand side, was about $25. And since then -- and that's also due to increased urea prices through the quarter and new nitrate season prices. So at the end, $25. Since then, the urea prices have improved further, but so have nitrate prices, so today, the equivalent will have been approximately $50 for Germany.Then on the Yara Improvement Program. So far, it has delivered $310 million of sustained benefits, and we are on track on reaching our revised target of USD 350 million. As you might recall, when we launched the program, our ambition level for 2018 was to reach $300 million. And we already reached that, and we increased this at the beginning of this year to $350 million. We are doing quite well in all projects and particularly strong reliability improvements on -- within the NPK production. And also, our Procurement Excellence project is delivering good results. We've rolled out the program now to 21 of 29 sites, and by the end of 2018, this year, we will only have 3 sites left. But I still want to emphasize that implementing this way of working will take time. We will see volatility. We've had production setbacks as well in the second quarter and this year, but we are moving overall in the right direction. And that's what you see captured here in the improvement program, where we reached then $310 million now.And then looking at the impact in the last 12 months. And as you're -- I'm sure you're aware of, we have been hit hard with lower selling prices for fertilizer and by higher gas costs. And when we could take that combined effect, that's approximately $900 million negative if we compare with where we were at in 2015. And even if the Yara Improvement Program is long-term value driver, it is also helping us in the short term to improve the EBITDA results, also for the last 12 months, as you see indicated here. And when we try to put numbers on that, that's approximately $260 million impact from this, so 24% of the EBITDA in the last 12 months is driven by impact from the Yara Improvement Program. And the program will continue to deliver results, and we will have even more benefit as the cycle recovers.Then I will now hand you over to Petter, and he will take you through the financial results in more detail.
Thank you, Svein Tore. So I note that the stock is up 5% on these results, so they must be very good results compared to expectations. Svein Tore just talked about the $260 million actual improvement that the improvement program delivered using last 12 months' prices. In spite of that, the EBITDA and the earnings per share are somewhat down. This is mainly due to the energy costs but also that the depreciation from our new assets have started to come as well as the interest rates from the higher debt. So year-on-year, the reported EBITDA was 16% lower, or 5% if you look at the underlying EBITDA. On the EPS side that was about half. If you look at the reported earnings, that's of course impacted quite a lot by this negative result which is a currency translation loss. About 2/3 or $192 million of that concerns the value of the dollar-denominated debt. And $114 million of that concerns intra-Yara debt. And this is caused by a weaker -- sorry, stronger dollar, which is fundamentally good for Yara. So this effect, although it shows very negative in the accounts, it's actually good for the cash earnings of Yara year-on-year. This also includes a $44 million negative special item. The majority of that is a provision for restructuring which is a part of the Yara Improvement Program, but it also includes a tax adjustment for Qafco as well as some asset impairments.If you look at the variations on the EBITDA side. As mentioned, that was about 5% year-on-year. The price was up quite a bit, and the margin as well. The volumes were fundamentally positive, which reflects the season catch-up in Europe. Svein Tore mentioned that Europe was up about 18% year-on-year; and of course, partly offset by the truck strike in Brazil, which meant 19% lower volumes in Brazil. We guided for an energy cost increase of about $90 million. It ended up about $86 million. And then you have the currency effect which reflects the year-on-year weaker dollar, which is fundamentally negative for Yara in this case. We put our new investments and M&A in the other category. So Cubatão, Freeport and Babrala is in that category, but the earnings from those sites are more than offset by additional fixed costs, in particular from the digital venture that we have kicked off.So the analyst expectations, the consensus, that was about $329 million, which meant we come -- came in some 2% below that one.So we do not give guidance on results, but again I think it makes sense to have a look at the energy costs for the next 2 quarters. And if you take the 10th of July forward prices and you apply that to the number of MMBtus we buy in Europe and the U.S., you will end up with something like $100 million and $70 million higher gas costs year-on-year, respectively, for the third and fourth quarter. So of course, we hope we're wrong and that will be lower, but that's what the current estimates show. And this, of course, changes with the gas prices. So that's the gas price.If we look at the investments. And on the left side you will see the investments that we have planned and committed for. The peak of the investment cycle, so the peak of this chart, on $2.3 billion is for 2018. And the peak of the peak, so to say, has already been in the first half of 2018, where the majority of the growth investments and M&As came in. And for the second half, the majority of these investments as well, the $1 billion planned to -- yet to do, they are in the early part of that and mainly concern turnarounds that we have coming up. For 2019 and '20, there is a lower investment level plan, and there is a pretty high threshold to consider new projects and new M&A. So the focus will clearly be on delivering what we already have in the pipeline.As for the debt, the 10% increase on the net debt is driven primarily by the investments. And just to comment, it's on the last page of our report, the majority of the net operating capital change is driven by seasonal prepayments in Brazil as well.So that's the CapEx. Some details on the improvement program: Whereas the CapEx now is coming off, the improvement program is still ramping up. Svein Tore mentioned that we have delivered $310 million, so far, this year in recurring benefits. If you look at the first quarter, we said that you would have to take down about 30% if calculated on current prices. With the current prices and costs, the equivalent of those $310 million is about $300 million, so we are closer to the 2015 levels of savings but from different factors. So of course, costs are higher now and margins are lower.Still another thing worth to mention here is that, the investments we plan to have at about $140 million, we have so far invested $18 million. And it's likely that we will be able to capture the benefits without investing all of those $140 million. So we have high hopes for reaching the $350 million without those investments. You will also notice that most, so far, comes from production volume, reduction in consumption of gas and raw materials and variable costs. And the fixed costs will increasingly start coming in as of end of this year and next year. So that's on the improvement program.I'd like to hand back to Svein Tore then to take us through a little bit of the outlook.
Thank you, Petter. So then in terms of prospects. Demand growth is likely to pick up compared to the last 3 years, as global grain stocks are relatively low and especially if we look at them outside China. And there is a need for increased production in order to keep pace with the demand growth, and -- but remember that for Yara -- the grain is important for the whole fertilizer industry, but in our portfolio we are impacted by a number of crops, operating in 60 countries and across a lot of different crops and cash crops such as coffee, cocoa, citrus, to name a few. And this is due to our presence and our Crop Nutrition strategy, but certainly we are impacted by the fundamentals in the fertilizer industry, and this is important for that.On the supply side, although new capacity additions are almost halved compared to last year, higher utilization of existing facilities is impacting the production level. And that's mainly due to North Africa. And that means that also in 2018 we see a production increase that is above-trend demand growth. Beyond 2018, the urea demand -- supply-demand balance looks to be gradually improving. And nitrogen supply growth is, as you see here, forecasted to be reduced significantly after 2018. And current nitrogen price levels do not provide any economic incentives either for new investments.Speaking of the need to increase food production globally. Yara's solutions improve food production per hectare the -- through products that help lowering emissions and increasing the yields. And that performed better than the industry average. Yara's products have higher efficiency and promote a more optimal way of fertilizing. It's more profitable and at the same time also with less pollution. Today, the farmers are paid mostly based on quantity. And we'd like to continue to influence that in the direction where farmers actually get paid also for how sustainable they run their farms, also to get paid for the environmental footprint of the production. Today, 25% of greenhouse gas emissions are from agriculture, and half of that again is due to deforestation. It is possible to do something about it, but we have to have the incentives in place and the incentives in place for the farmers as well. And we'd like to have a CO2 footprint labeling on the food, which in turn would help the farmers to get paid for sustainable production.And promoting sustainable and efficient farming is very much at the heart of Yara's mission and vision, and that forms the basis of our strategy. And we have a strategy update by every summer, where we go through parts of our operation. This year, we've done a full revision of our strategy, and the overall conclusion is that we'll focus even more on the Crop Nutrition activity.Yara will be the crop nutrition leader. We will grow responsible solutions to the farmers, to the industry and to society while delivering superior return on the capital. And we'll do that through the following areas: through advanced operational excellence through developing a culture of continuous improvement. To -- by creating scalable solutions, we will sharpen our focus on farmers and the whole food chain and create differentiation for industrial customers. And then drive innovative growth by growing profitable -- profitably within existing and new business areas when we will position ourselves to continue to shape the industry.Then turning to examples of that. When we look at advanced operational excellence, it's -- as we already touched upon, it's the Yara Improvement Program, the journey towards continuous improvement. And it's about focus on safety. And in reality these two go hand-in-hand. There is no such thing as a good operation or a profitable operation over time that is not also a safe one. So these two are very much linked but examples of what we are achieving within this area.Then on creating scalable solutions. And we will sharpen our focus on the whole food value chain and create differentiation also for industrial customers. We have already created and we can create even more shared value for farmers, food producers and Yara in this way. For farmers this is about access to fertilizer technology and services that create higher quality, efficiency and crop revenues. And for the food industry it's to support the food industry on traceability, productivity, environmental footprint; and then also to get reliable supply. And for Yara this means better access to professional farmers, reduced financial risk and increased value pricing potential.As part of our focus on -- and strengthening our position in crop nutrition, solution selling includes digital farming tools and services. And these will be important growth vehicles for Yara going forward. And we have this year launched for the first time a planned digital farming solution called Atfarm in Germany and in France. And I'll pause now and show you a video of that application.[Presentation]
And for those of you that were here in the second quarter presentation last year: We launched our efforts going into digital which is really about transforming our agronomic knowledge into the digital age. And in this last year, we spent tremendous efforts to create this momentum. And I'm really pleased when I see the speed at which this is happening and also the reception that this has had with the farmers that have already implemented.Then on driving innovative growth. And we will grow profitably within existing and new business areas, and we will position ourselves to shape the industry. Yara's growth investments, and as Petter already highlighted, reached their peak in this year with the projects that we have listed up here both with the Babrala acquisition in India. We have the Cubatão acquisition in Brazil. And then also we opened the Freeport ammonia plant that we have together with BASF, and then also investment in our existing locations. And they will show a strong earning contribution but mainly then from 2019 and as these growth investments now come onstream in 2018. The annual improvement or increase from this would be 1.4 million tonnes of ammonia production and 3.1 million tonnes of finished fertilizer production.Then I'd like to round off with a summary of growth and improvement -- the growth and improvement program and the earnings effects that lie ahead for Yara. On the left side we have added together the investments we're making both in the Yara Improvement Program and for our committed expansion projects and growth projects. And on the right-hand side you can see the projected earnings from these on a 2015 baseline, totaling $1.1 billion within 2020 and equivalent to $2 per share.So with this closing summary, I would like to hand back to Thor, who will then facilitate the Q&A session.So Thor?
Okay, so we will then get ready for the Q&A session, where our presenters are joined by our Head of Market Intelligence, Dag Tore Mo. So if you have a question, please raise your hand, and my colleague Nina will bring the microphone to you. And please state your name and company as you present the question.
Bruce Diesen, Fearnley Securities. Germany is passing stricter fertilizer rules that increase the time for fallowing and make it harder to apply fertilizer, for instance, on frozen ground. And [indiscernible] passed the first implementation of these new rules. Will this have some -- a noticeable impact on demand for fertilizer in Germany next year?
I think we already see a slight decline in Germany already this season and -- of that. The late spring accounts for some of it, but we also think that this moves to more stricter regulations on nitrogen application also, already had an -- have had an effect, and it's this is -- and at least, it's to the benefit of nitrates application. There has been a sharp drop in urea consumption in an -- according to our preliminary estimates, because, I mean, urea without any form for additional inhibitors or something is kind of getting kind of more or less out of the question. So we actually had a very good season on nitrates in Germany because of these changes.
Okay. I have one more question. Praxair came with a force majeure declaration on carbon dioxide. And there seems to have been a shortage across Northern Europe partly tied to your Porsgrunn factory. Is this something that will have a negative impact or any impact on your third quarter results if you haven't been able to deliver the volumes that your large customer was expecting?
So well, the entire ammonia production in Europe has been impacted in second quarter. And as you pointed out, we had an unplanned outage in Porsgrunn, which further restricted the access to CO2 in Europe. The plant is back up and running now, and the financial impact to us from this is minimal.
Is there a next question? Should we go to DNB perhaps?
Eivind Veddeng, DNB. Just following up on nitrates in Europe. And we have seen very strong price increases for nitrates in Europe. We can also see in your slides that inventories for nitrates are quite low for this time of year. Is this just a catch-up from a late spring, or is there something else going on? And I can also see that French prices are up significantly, while we haven't announced something for a while in Germany. And can you please elaborate on that, please? And maybe second question and on to another part of the world: In Brazil you said the $15 million EBITDA effect in Q2 and guiding for the same in Q3. Can you share some additional thoughts on what's going on with the minimum freights increase and how volumes and demand is faring?
So I can start on Brazil, and then I'll hand over to Dag Tore on nitrates Europe. And clearly the strike had a significant impact to our operations in second quarter both in terms of getting the volume out but also the financial impact. From that we expect that this -- it will take some time to sort out, and that's why we're expecting also an impact of this in the third quarter as well, but beyond that we are expecting that this will come back to normal operations. So at the moment, we expect that -- once we get through the third quarter, that the impact of this will be limited.
Yes, on the European nitrates situation, let's say, I mean, as was said earlier, we had a weak first quarter because of the late spring. We had a very good sales in, let's say, first half of the season before Christmas, very strong interest in buying early, but then it slowed down because of the weather issues in the first quarter. So then we got very good phase in April, May, say, with very strong deliveries on nitrates and basically everything as a catch-up because of the spring. And then towards the end, when we set the first new nitrate price for the season, you had an Egyptian urea price at around [ 220, 230 ]; and a relatively negative sentiment in the urea market, at that time when we came with the first price. But of course, what happened then is -- in a very short period where the Egyptian price kind of increased from [ 220, 230 ] to reach roughly [ 290 ] in a very -- in a matter of relatively few weeks, you can imagine the interest in purchasing nitrates at those opening price levels. So then we got to these subsequent price increase -- fast price increases, but it also led to, of course, a lot of sales.
And Germany versus France.
Yes. There is some regional differences on short-term basis between the countries also in Europe. And we sometimes see a little bit more, let's say, a different buying pattern. Or let's say U.K. is a star example of a market where large professional farmers make their decision they want to buy a certain part of their needs early as a kind of a hedge. And they realize over time, as long as the -- as let's say 7, 8 seasons out of 10, it makes sense to buy early. They automatically just buy early. And you have a little bit of the same pattern also developing elsewhere, like in France. You also see it in -- like in Scandinavia and some also, but let's say Germany is sometimes a little bit less focused on the early-buying patterns in -- it's -- maybe it's a little bit different farming structures also. And that combined with also sometimes a little bit more competitive environment with the Polish producers, other producers in the neighborhood as well. So you can get on a short term a little bit different dynamics in the -- also in the various European markets.
Okay, we move to ABG.
Yes. Bengt Jonassen from ABG. A couple of questions. It seems like that there will be a higher-than-normal maintenance stops during Q3. How should we think about volumes and EBITDA effects of that? And secondly, at the last quarterly report we saw that CRU introduced several plants from India. And could you give a little -- since you have now [ guys ] on the ground there, could you give a little bit update on that, if you think they are progressing according to plan from your point of view?
So let me start saying something about India, and then I'll let Dag Tore give further information on that. But yes, there are plants in India in the CRU forecast, and yes, the indications are that at least some of these are being constructed. And struggling a bit to understand the profitability on an LNG-based greenfield urea plant in India at the moment, but it seems that some of these will actually happen. But there are more than that included in the forecasts, Dag Tore. So I don't know if you want to add further to -- maybe look a little bit further out in time on India.
Yes, I don't know. It's hard to be specific. I mean there are 4 plants that CRU has in that -- their capacity table at the moment. I don't know how much detail, but 1 of them, the Matix plant, which has been constructed already but has run into problems with their feedstock. They are now waiting for an [indiscernible] gas pipeline to be constructed. So I mean difficult, I guess, to assess the exact timing of that, but that plant is actually constructed. And then we understand there is particular activity on 1 other plant, the one that CRU has for 2019 that seems to be running -- where the construction seems to be running relatively well and when -- where there actually is gas in the area. The 2 remaining ones are also reporting some activity but more questions marks from our side to whether everything is kind of set up to function well with the -- from the feedstock and everything. So I mean our kind of assessment in general is that we will be surprised if this capacity is brought onstream according to the time line that CRU has indicated. That would, I mean -- and you can say that also purely based on empirical evidence in what usually happens to the developments of this nature.
Yes. So if you go back in time as well, there have always been quite a few Indian plants in the forecasts and very few of them actually happening, but you should take into account that some of this will actually happen.
Yes. And on the turnarounds, we have this year 5 major turnarounds, and 2 of them are completed, 1 is ongoing, and 2 will start. And the longest-time-line one is about to start. And in that context, the 2 that are completed are the most, let's say, profitable plants, the ones with the lowest gas costs, Belle Plaine and Trinidad. The one ongoing is Pilbara. And then you will have Sluiskil and Tertre. So in that context, I do not think that the material impact will be stronger in the third quarter than it has been.
We have another question from DNB.
Yes. There's 2 questions, please. And apologies for our many questions, but new expansions projects heading into the second half of '18. And should we expect a considerable contribution from the new expansion projects that ramped up in Q2? And also, on Industrial, on scrubbers, we are seeing Wärtsilä and Alfa Laval and the others talking about very solid order activity and new orders. Have you seen anything similar for the Industrial business?
[indiscernible]
Yes, yes. So as for the current projects, I mean, all the expansions that have been and will come online for the rest of the year. I think our current price guidance there is about $90 million EBITDA impact for this year, which is slightly down from earlier guidance of $150 million. So I guess that's the short on that.
Yes. And then comment on the scrubbers. First of all, I'm -- we are really happy that there was legislation put in place. It did take some time before activities started to pick up, but yes, there was a significantly higher activity level in that area. And we are experiencing the same thing.
Are there more questions? If not, there is also another opportunity at 2:00 p.m. Oslo Time today, when we will have a conference call, but until then, thank you for your interest in Yara and attending the presentation.