Yara International ASA

OSE:YAR

Earnings Call Transcript 2018-Q3

[Thor Giæver, Head of Investor Relations]

Okay, good morning, and welcome to Yara's Third Quarter Results Presentation. Our presentation today will be by our CEO, Svein Tore Holsether; and our CFO, Petter Østbø. And after this presentation, we will have a Q&A session. So it's now my pleasure to introduce Svein Tore Holsether.

[Svein Tore Holsether, President & CEO]

Thank you very much, Thor, and good morning to all of you.As usual, we are going to start with safety. And as you see here on the screen, the positive trend development is continuing. And at the end of third quarter, we're at 1.4, which is industry-leading level. But it is important that we reflect on safety, and also for me, safety is a core part of operational excellence. That's why we also spend a great deal of time going through to understand each and every one of our accidents. And so far to the year, we've had 68 accidents. And going through those and reflecting on them, I also want to take a moment now to thank our employees for all the efforts and the commitment on safety. Because equipment, tools, procedures and policies can only take you so far when it comes to safety. At the end of the day, it comes down to individual looking after their own safety and the safety of each other. And that's really the key driver behind getting to total recordable rate of 1.4. It's the caring part, and that's the essence of our Safe by Choice way of working.Behind these numbers, looking at recordable rate for our own employees, we're at 0.8 year-to-date, while contractors is at 2.1, so there's still quite a big discrepancy between our own safety performance and that of our contractors in our sites. But I should also add that the recordable rate for contractors, if you go back to the beginning of 2016, it was at 6. So it's still going in the right direction. As a percentage of our accidents now, more and more is happening outside our plants. We see quite a few accidents happening in the traffic, salespeople and agronomists heading out to the fields and being involved in traffic accidents. So we are working on this. We're working on defensive driving and on equipment as well in order to lessen the impact of the accidents and also lessen the number of accidents. 0 is possible. And I also take inspiration from what we saw last week in Tampa in Florida at the [ Romonial ] terminal. They celebrated 34 years without a recordable accident. And I was there myself a couple years ago, and it's quite interesting. You've probably seen these indicators where when you enter into the [ palms ] that count the days since the last injury, and they're usually [ off ] to 999, so they had to actually physically go up there and add 2 digits in order to measure the fact that they're now at 12,400 days. So it is possible.Turning then to the headline of our results. And before we go into the details, let me try to summarize the results and how we see the market situation now. We are delivering improved results this quarter, both compared with last quarter and with a year ago. Our operational performance is good, with our improvement program on track and a continued positive development on safety, as I just indicated.On the margin side, we see an uptick in the cycle and higher fertilizer prices that are impacted but not yet fully reflected in our results. Also higher gas prices in Europe remains a significant headwind for us. We remain focused on the controllable factors and working to improve our operations. On our growth projects, we are now passed the peak of investments and are now focused on ramp-up and integration of the newly acquired assets. Putting all this together, we're looking at an improved cash flow going forward as the cycle improves, our growth part has come onstream and also CapEx reduces.Let's now take a look at the market situation. On the demand side, grain prices are rising slowly; and stocks are falling, especially outside China and that is as production is set to fall short of consumption. On the supply side, the projected production increase for 2018 is somewhat above trend consumption growth. But after 2018, this is nearly -- the supply growth is nearly hot.The stronger demand signals and tighter supply outlook has already resulted in higher urea prices, as you can see here. And so far, the higher urea prices have not triggered a supply response from China. This leaves the energy picture as the main challenge, with strong LNG demand in Asia causing increased gas cost in many of the regions we operate in and including Europe.As already mentioned, our realized prices this quarter were only partly offset by higher energy cost. Looking then at nitrate prices. They increased by 9%, and NPK prices increased by 8%. Energy prices increased by 36% year-over-year, mainly reflecting the tighter LNG situation resulting in higher spot prices in Europe.Total fertilizer deliveries were 9% higher than a year earlier, driven by the inclusion of the Babrala plant in India and the Cubatão plant in Brazil. Adjusted for these portfolio effects, fertilizer deliveries were down 3%, mainly due to lower commodity product deliveries in Brazil and North America as we focused on margin optimization. Our premium product deliveries were up 8%, and our -- this is in line with our long-term effort to expand both production and sales capacity of the products which give the highest return to Yara but also to our customers.The Yara Improvement Program continues to deliver and has so far delivered $330 million of sustained benefits. We are on track to reach the $350 million target for the year, which we, as you recall, revised at the beginning of this year. Originally, it was $300 million. We are on schedule because we have good deliveries from all parts of this project and in particular strong reliability in permits for NPK production, but also in the last quarters we see stronger and stronger delivery from the Procurement Excellence project.The improvement in third quarter for the Yara Improvement Program could have been even higher, but of course, we focus on bottom line impact. And with the very high gas prices that we had in Europe in third quarter, we decided to run some of our plants at the lower load level. This means that we have poor energy efficiency, which then negatively impacts the Yara Improvement Program.So still the right thing to do for the bottom line, but it will have some -- or has had some negative impacts on the improvement program. But as I said, we're still on track. By the end of this year, we're going to finalize the main part of the rollout of the Yara Productivity System and then focus is on the continuous improvement part of this.As announced 2 weeks ago, Yara agreed to acquire the rest of the shares in the Galvani company for $17 million. It's a payment over 3 years plus a conditional payment and also transfer of some assets to the Galvani family. The main Galvani assets are in the Salitre phosphate mining project where the first phosphate rock production has started, and we're now working to finalize the project and start up chemical production towards the end of 2019.This streamlines our production in Brazil and secures also full ownership of a key operational production asset in Brazil. It's complementing our extensive network of sales capabilities in Brazil, and it achieves then a more integrated position in the Brazilian market.It will also help us to fully integrate the company within other activities in Brazil, and it will yield after-tax synergies of $15 million per year because of that from year 2020.I'm now going to hand over to Petter. He will take us through the financial part in more detail. So, Petter.

[Petter Østbø, Executive VP & CFO]

Thank you, Svein Tore. Yes, as Svein Tore mentioned, we are happy to then control fully the Salitre mine and with that be able to work with some exciting strategic options in Brazil, which hopefully we'll come back to. Hopping into the EBITDA and the earnings per share. You will see that with the exceptional quarter 1 '17, it's the highest earnings and EBITDA we've had per quarter of any quarter the last 2 years. And overall, it was 41% up on the EBITDA level or 16% up on an underlining basis. The EPS is up 39%. This includes a $70 million currency translation loss that's a noncash effect consisting of $45 million value of the U.S. dollar-denominated debt as well as $35 million of internal debt. There's a $25 million special item in EBITDA consisting of a contingent liability related to the Galvani transaction, and that is a liability which will now not come into fruition and the payment we will then not do. On the other side, there's an operating income special item of $11 million mainly due to impairments of assets also related to the Galvani transaction.And if you go into the variation in the EBITDA quarter-on-quarter, that's where the 16% comes from. This is driven by the price and margin effect, more than offsetting energy prices. And when it comes to the price effect, we want to comment that regularly we have said that you need to expect about a 1-month lag between what we produce and what we sell in the market. However, that lag can vary between regions and between industries. So if we compare to the consensus estimate, which was $458 million, we came in about pretty close to 14% below. And we believe that's partly driven by the lag in this quarter being closer to 3 months, and that's driven by what we call the order book effect, which is the difference from when we sell something to when it's actually delivered to the customer. So whereas the order book we're delivering at this point in time has a premium on urea of about $20 per tonne. What we're selling at this point in time has a premium of about $15. And as for the nitrate market in Europe, that consisted about $40 million in difference if you felt month -- 1-month [ total ] lag or 3-month lag. The other is industrial area. In some industries there, we also work with a moving average price, which also comes to about 3-month lag. Now last year fourth quarter, the lag was also about 3 months. And you should expect that also the fourth quarter of this year the lag will be approximately 3 months if you do an analysis of our results. As for price, the actual nitrate price and the actual cost of producing nitrates weren't that difference. Quite a lot of the margin difference here comes from the nitrophosphate NPK plants. Currency. That's the U.S. dollar predominantly a movement against the reais and then the volume effect. Svein Tore mentioned we produced [ reais ] about 3% less. However, there's a mix effect there, so the value impact is much lower because this consisted of a reduction predominantly in commodity volumes in Brazil as well as some from Belle Plaine but almost offset by an increase premium product in Brazil and premium NPKs. If we jump into the margin part. The actual realized nitrogen upgrade margin was about 4% up. If you take the upgrade margin from urea to nitrate and you use the publications month-for-month, the increase was 18%, whereas the increase we realized was about 9%. And that's due to this lag effect I mentioned earlier.The realized NPK prices are up about 8%, but the premium is slightly lower. And that's driven by the NPK prices are a little bit more stable. They go typically into more premium markets like cash crops in Asia, and they will, therefore, vary a bit less. So when nitrogen goes up quickly, then the prices don't react in the same speed. However, the demand for the compound NPK, which is our most premium product, was solid, with sales of 9% year-on-year. Looking at gas costs. The actual gas cost this year -- sorry, quarter came in at $92 million above year-on-year, which is slightly below our guidance of $100 million. If you use October 5 spot gas price, then our guidance is that for the third quarter and fourth -- sorry, the fourth quarter and the first quarter next year, the year-on-year's gas cost change will be $125 million and $100 million higher than last year. I wanted to touch quickly on the project we've added now on since last time also the turnarounds. So this year, we have had 2 large investments sort of categories. One is the M&As and the expansion projects, those 7 ones which are now all realized and in production with the exception of the [ Cedar 4 ] project in [ Xiaoping, ] which is in commissioning and imminent to start. But we also have 5 major turnarounds. And first of all, they consist a lot of CapEx but also take out the plant for anything between 4 to 8 weeks. And in that context, it's worth mentioning that the Tertre is now in turnaround and Sluiskil is about to start. And the tonnes that will come out of that is about 100,000 tonnes of ammonia and 70,000 tonnes of nitrates. So compared to not doing the turnarounds, there's almost 170,000 tonnes of product left for sale the next quarter due to those turnarounds. On the CapEx side and net debt. So the peak of the CapEx cycle was -- or is this year. If you look at next year, and this just we mentioned, this is not really guidance; but as it says, this is the committed growth and what we expect from maintenance and cost and capacity increase. So if there are very good project in mind that we think hard about efficient capital allocation, it could be more. However, you will note that this number is down by $200 million. And it's not exactly $200 million. It's slightly less, but it's also a rounding effect. But it's due to the Yara Productivity System, which we're applying and we're able to do the same for less. So it's not $200 million, it's less, but it's also a rounding impact. If you look at the net interest-bearing debt, we this quarter earned more than we spent on investments. But then the operating capital changed, which reflects a seasonal reduction in prepayments in Brazil. And then that the net debt then increased to an average of $3.4 billion in the quarter. So jump to the Yara Improvement Program. As Svein Tore mentioned, we are on track with the $330 million so far. You'll remember that we increased this year's target from $300 million to $350 million, and that's what we are on track to reach. If you calculate these benefits on today's, meaning end of quarter prices and costs, you're coming at $330 million. So it's pretty similar, although there's quite a lot of shifts towards energy reduction impacts and less towards, of course, production increases. Just to comment here as well, we did have what we said was a target to spend $39 million in costs to achieve this and $140 million in investments to achieve this, and that's been now taken down by $4 million in costs and $40 million in investments. So we'll be able to reach it without those investments, again due to the way we're working. All right. And with that, I hand over to Svein Tore to talk a bit about the strategy.

[Svein Tore Holsether, President & CEO]

Thank you, Petter. As mentioned in the second quarter presentation, we have run a full update of our strategy for the first time since 2012, bottom-up strategy process. And that's to both reflect and respond to the significant changes that have happened since then, both in the market but also in society. We are the Crop Nutrition company for the future, and we will achieve this by focusing on 3 strategic priorities: advanced operational excellence, meaning further developing a culture of continuous improvement, and to become both more productive and also more resilient to demanding markets. It's about creating scalable solutions, sharpening our focus on farmers and the food value chain and also to create differentiation for our industrial customers. And it's to drive innovative growth, growing profitably within both existing and new business areas, positioning Yara to shape the industry. So let's today take a closer look at scalable solutions. We have some unique strength in Yara. We have unrivaled knowledge of Crop Nutrition. We also have an unrivaled global reach, and we have a responsible business model. We want to work more closely with the food companies, help them and their farmers to increase quality and yield and also reduce their carbon footprints. We want to promote sustainable Crop Nutrition solutions and nitrate-based products. Today, 25% of the global greenhouse gas emissions come from agriculture, half of that is deforestation, and that's completely unnecessary. There's no need for clearing new land for food production, with the right input factors and the right concentration solutions. And today, 70% of the freshwater is used for agriculture. And we can have an impact on that, but then we need to make our voices heard on that. So we have the product, and we have the knowledge to lead the way in this. We want to scale up digital farming. Today, we meet face-to-face with 1 million farmers every year, which is actually, I think, quite a good number. But still, there are 500 million farmers worldwide. And the way to reach them, it's impossible to do that physically, but we can meet with more farmers digitally. And with digital, it also allows a more continuous dialogue with the farmers. Let's now take a look at an example of how we work with -- in this example, with PepsiCo. They're not only a provider of soft drinks. They're also one of the largest producers in the world of potato chips with brands like Lays and Walkers. [Presentation]

[Svein Tore Holsether, President & CEO]

So we can deliver value both to farmers and food companies by commercializing our knowledge and scaling up these solutions. And we'll do much more of just that, and we have a dedicated team, as you saw here in this video, within Crop Nutrition that is working on meeting with all the food companies and to promote this way of working. Before we round up today's presentation, I want to highlight the Yara Marine Technology business as a showcase of our strategy. We have developed our environmental abatement solutions and technology over time both through in-house development but also through acquisitions. And today, we offer a complete SOx and NOx abatement solution in a portfolio to the marine segment. We're pleased with how this business has developed and grown from Yara's core operations. But now for the next phase of growth, this business may benefit from a new ownership structure. We want to continue to both develop new businesses from our core and keeping an eye over time with regard to the future development of ownership. Here's a summary of the growth and improvement program earnings that lie ahead for Yara. On the left-hand side, we have added together the investments we're making both in the Yara Improvement Program and for our committed expansion and growth projects. On the right-hand side, you see the combined projected earnings improvement resulting from this on a 2015 baseline, totaling $1.1 billion of EBITDA, equivalent to $2 of net income per share. I want to round up with a summary of Yara's prospects. First of all, we believe the market cycle is improving, that it is likely to stay positive for some time. Supply growth pressure is easing after this year, and the demand side also looks positive given the tightening situation for grains. And as mentioned earlier, our cash flow is set to improve as a result of cyclical improvement and due to our CapEx having peaked and our growth and improvement programs delivering higher volume and revenues into 2019. Finally, we have a focused and sustainable long-term strategy to further advance operational improvements, innovative growth, scalable solutions as well as active portfolio management. And we consider these prospects both attractive and compelling. And with this closing summary, I'd now like to hand over to Thor, who will manage the Q&A session.

[Thor Giæver, Head of Investor Relations]

Okay, we are then assembling for the Q&A session where Svein Tore and Petter are joined by Dag Tore Mo, our Head of Market Intelligence. So if you have a question, please raise your hand, and my colleague Nina Kleiv will bring the microphone to you. So we start with Nordea, Hans-Erik. Please state your name and company if I fail to do so.

[Hans-Erik Jacobsen]

Hans-Erik Jacobsen, Nordea. With regard to the time lag, is this time lag something that's specific for Yara? Or is it something that has happened for most of your competitors in Europe this quarter?

[Petter Østbø, Executive VP & CFO]

No. This is not specific for Yara. I think we've seen a trend over last year, [ some ] all the time from the financial crisis in 2008/2009, the trend has been for farmers, particularly in Europe, to try to secure a certain part of their need early in the season. It's a very strong demand for early deliveries to cover that need for -- that's a kind a hedging for the farmers. So it kind of used to be that way in the U.K. particularly with, let's say, large farm compared to professional farms, and some of them quite well off. But it's developed same way also elsewhere. So this is not specific for Yara, and it was -- it has been the same actually for worldwide. So it's normal, thus you no longer lag in the fall than -- and then reduced as you get closer to the new season pricing in May-June.

[Hans-Erik Jacobsen]

And then a question on China. As Svein Tore mentioned, Chinese exports have been quite slow over the past year but has started to pick up quite substantially in [ 10 ] or a couple of weeks ago. In your view, are prices now high enough in order to lead to a sustainable increase in export or was that a one-off?

[Petter Østbø, Executive VP & CFO]

I think that depends on the production development to a great extent in China. As we've showed here, through September there hasn't been one. They're still year-on-year declines in production. Actually, the last number I have from the first week of October is the first week in a long, long time where there's actually been a year-on-year increase, slight one, in production. Because as now global demand has improved creating a quite substantial deficit x China, there is a need to attract urea out from China. But at the current production rates in China, that product isn't really available because the Chinese market is as tight as the rest of the world then. So what we see is that the Chinese prices are following higher as well. So that's a kind of a very interesting to see what -- how that will develop. And as we said, there's been more than 300,000 tonnes of Chinese urea sold in the last India tender, and that just tightens the domestic market further. And the outlook -- short-term outlook now is for continued exports rights from China. So how tight will then this become and that's -- so that's back to kind of my earlier comment that I think as you [ meet up ] global market stays in a deficit situation as no one knows what is the production response going to be in China, also elsewhere to some extent, but mostly in China.

[Thor Giæver, Head of Investor Relations]

Yes, over here. Okay we can maybe start with DNB first.

[Eivind Sars Veddeng, Analyst]

Eivind Veddeng, DNB. Just a follow-up on price realization. Thank you for the comments on Q4, but can you maybe also comment on how the lag looks for 2019 and how that stacks up versus last year and also into the new season maybe if you are seeing that this is a stronger trend, that more professional farmers are buying early. How will that affect your pricing strategy for early season? And also maybe a question on the strategy. You are now clearly stating that you are more a Crop Nutrition-focused company. And as we -- as you have said, you have without that [ scrubberdation ] for review to call it that. And then my question becomes what about the other assets in industrialization? The biggest earner in that [ situation ] to my knowledge is the AdBlue. What are your thoughts on that one please?

[Svein Tore Holsether, President & CEO]

All right. So regarding the first question on the lag into quarter 1. I think what you will see is that the new season typically starts in May. And depending on the stocks coming into that season, the apparent demand in the market based on, for example, core prices and so on as well as the supply-demand balance, the industry itself will see what is a -- have a good starting price and how [indiscernible] and make available for sale. And that means there are many factors that determine how long is that time lag at the start of the season. The last years it's been about 3 months, and that gradually reduces as you approach end of season and have more spot sales. So I would be I would probably will not guide on the quarter 1 line, but it will be lower gradually until we move towards spot at the early part of the second quarter. Think that's...

[Petter Østbø, Executive VP & CFO]

Just on industrial with regards to our new strategy. We are the Crop Nutrition leader. That's where we are. That's the core of our business. That's where we are leader in the industry. That's where we can shape the industry going forward. That said, we'll still have a lot of businesses that help us to optimize our product flows, that helps us to optimize our product portfolio to ensure the best possible cost position. Industrial has been a very strong contributor to -- both to our growth but also in terms of profitability. So we're pleased with how that segment has developed. But we'll always have an active view on that portfolio. And an example of that is when we sold the CO2 business a couple of years ago. Now we're looking at marine technologies. You mentioned AdBlue. That's -- it's been very helpful for optimizing our product portfolio and our flows and to optimize our margins. So it remains a significant part of industrial. But I think for -- going forward, we'll always have an active view on our portfolio without making any announcements on specific projects other than the one on marine technologies.

[Thor Giæver, Head of Investor Relations]

Okay. Next question from Fearnley.

[Bruce Diesen, Analyst]

Bruce Diesen here. Two Indian refiners said this week that they received waivers from the U.S., so they were going to buy oil in November after the sanctions take place. But what's happening with waivers for India on the fertilizer market? Are they completely cutting back on Iran? You didn't say so much about what the Iranians are -- who they're selling to?

[Dag Tore Mo, Head of Market Intelligence]

In the latest Iranian tender -- Indian tender, Iran product was excluded, direct shipment from Iran to India. So that's what we know. I don't -- what's going [ further ]. I really don't know more than you. I would also -- I'd would like to mention that so far fundamentally there hasn't been that much change. I mean, since September exports from Iran was more than 500,000 tonnes, a new record. Almost all of that went to India. And I know what they are doing is that if you see in the publications they are shipping to China for reload them for reexport. So they're selling now to China, $250, $260 fob at $80 below their colleagues in the other Arab Gulf countries for somebody to make money on this logistic. So it's a very diffuse situation, and how kind of the whole supply-demand impact will end up being I think is not yet clear.

[Thor Giæver, Head of Investor Relations]

Are there more questions? Yes. Let's go to ABG.

[Bengt Jonassen, Lead Analyst]

Bengt Jonassen from ABG. In the context of the clear Crop Nutrition strategy, where would you put fertilizer companies like yourself? In the context in the M&A, we see in the last years between seeds and pesticides companies, which would be as a complementary products for the farmers. Would you see fertilizer companies as an exclusive offer continued? Or would you likely to see some changes in that space as well?

[Petter Østbø, Executive VP & CFO]

I think that's a good question. There's definitely been a lot of consolidation within the seed and chemical space in the last few years. Within the fertilizer industry, it's been more consolidation within the industry. Obviously, there are ways that these -- on seed chemicals and fertilizer work together in order to optimize the results for the farmer. We have an approach to this where we work with several of the major chemical and seeds companies but more on a regional basis to -- based on our particular strength in that region to support the farmers. No one has really done anything in combination of the 3. The business models are fairly different even if the products are complementary. But you can achieve a lot through cooperation between the companies, so a full consolidation of this industry in order to reach the results. I don't see that as a necessary trigger to get the benefits to the farmer.

[Thor Giæver, Head of Investor Relations]

Any further questions? If not, there's another chance at 2 p.m. Oslo time when we have a conference call. But for now, thank you very much for attending our presentation.