Yara International ASA

Anders Lerstad - Head of IR Torgeir Kvidal - CEO Thor Giaever - CFO Terje Knutsen - SVP and Head of Downstream Dag Tore Mo - Head of Market Intelligence

Bengt Jonassen - Carnegie

Good morning to all of you and welcome to the presentation of Yara's second-quarter results. Today's presentation will be held by our CEO, Torgeir Kvidal, and CFO, and Thor Giaever.

After the presentation we'll also have a Q&A session where Dag Tore Mo, Head of Market Intelligence, will be joining to answer questions. With those words, I have the pleasure to introduce Torgeir Kvidal.

Thank you, Anders, and good morning to all of you from me too. It's a pleasure for me to present for you another strong quarterly result for Yara.

We call it strong not by feelings but by analytics, when the cash return on gross investment is about 10% in the quarter. And annualized in this quarter we had a CROGI of 13.7%.

That strong result was partly created by increased sales volumes. We increased the deliveries of fertilizer with 6% in the quarter compared with last year.

That is mainly explained by our acquisition of OFD and Galvani last year, but we also had increased deliveries in Africa, Asia and North America. In addition to increased volumes, Yara also strongly contributed from lower gas prices.

Our European gas prices were 19% below last year. But also outside Europe our gas prices decreased, both in Belle Plaine in Canada but also in Trinidad due to lower ammonia prices.

So gas prices outside Europe declined with also 14%. In addition to higher deliveries and lower gas prices, we also continued to contribute from currency rate changes from last year.

We contributed from a stronger dollar, as we mainly sell our products in US dollar or underlying in US dollar, while a big part of our fixed cost is in other currencies. So when the dollar increased or strengthened with 19% compared with the euro from last year, we improved our profitability in Europe.

And when the Brazilian decreased 38% compared with the dollar from last year, we improved the competitive situation in Brazil. We also had a positive start to the new fertilizer season in Europe.

Deliveries in Europe was in line with last year, but the last second quarter was very strong due to a late spring in Europe and tight deliveries due to production problems by us and some competitors last year. So we are very pleased that we were able copy last quarter's or second-quarter deliveries of last year also into this year.

And we increased the nitrate deliveries this year with 14% from last year, while NPK deliveries were lower, as we see that the market demand for phosphate and potash have declined somewhat, probably also due to the lower crop prices this year compared to last year. The lower deliveries of NPK in Europe was to a large extent compensated by the fact that with our global distribution system we have good opportunities to continue to grow profitable sales of those premium products overseas.

And we increased those sales in Latin America and Asia. And finally I would like to comment on the industrial segment, which continued to deliver very strong results.

In the quarter in isolation, industrial saw a CROGI of about 20% and they continued to increase their sales. It was up 9% compared to last year.

The main increase was in AdBlue, which is the NOx abatement for [automotive] we sell as a high-quality urea solution. That was up 30% from last year, increasing in all regions, but the strongest increase this quarter we had in the US and in France.

But we also saw improved deliveries of process chemicals, both in Europe, where the process industry is doing well, at least when we look at all deliveries, and also in Brazil, where we are selling process chemicals from our Galvani acquisition. If you then look at our earnings per share, we are reporting in the second quarter an earnings per share of NOK10.59.

If we adjust for currency gains, because even though the dollar has strengthened substantially from last year to this year, it had a small decline to the quarter, 3% to 4% compared to Brazilian real or euro, Norwegian krone, it gave us a small gain on our US-denominated debt. So that was positive currency gain of NOK342.

In addition, we had positive special items in the quarter of NOK124 million. If you take away those effects, the underlying earnings per share is NOK9.58 per share.

And that is up a nice 24% from second quarter last year. If I then focus on some highlights on the market development in the second quarter, I will start with China, which continued in a way to set the global nitrogen price.

And there we saw that a tighter domestic market in China triggered some urea price rebound late in the quarter. If you look at the total deliveries in Western Europe, the deliveries were down in the quarter with 5% on second quarter last year.

So total seasonal deliveries for the fertilizer industry in Europe on nitrogen were down 2% over the season. If you look at another important market for Yara, Brazil, the start of the season there was slow.

Total industrial deliveries were down 14% compared with a year earlier, and it's in the quarter and 10%, if you look at the full half-year being the full start of the season. Then a comment on the phosphate pricing.

Phosphate pricing is important for Yara, since it's the background of the value creation in the upgrading of phosphate rock in our NPK plants. And phosphate prices have continued strong at the same level as last year.

And finally, we continued to see strong demand after our value-added premium products, being nitrates, being NPKs and being micronutrients, in addition to the value-add we have in the industrial segment. If you then look somewhat deeper of some of these elements, I will again with China.

China continued to set the global nitrogen price. And if you look at the development over the season, full fertilizer season in China, what you see is that production in China has increased with 2%, which is significantly less than increased capacity in China.

So it shows that the capacity in China struggles with the cost level. So production has been up 2%, while you see that exports out of China have been up significantly more, up from 10.8 million tons of urea last season to 15.5 million tons this season.

So you see what is left for domestic consumption has declined significantly. What is available from this year's production is down 6%.

And we do not see that demand in China has dropped in the same magnitude. We don't see any indication of any significant shift in demand in China.

So we would expect the Chinese domestic market to become tighter and it has become tighter by the end of the season. And that you see reflected on the right side of this slide, where you see the green line is a proxy for the inland urea price in China, which has increased significantly by the end of the season and as such also pushed up export prices and influenced the global market.

I mentioned the development in Europe, that it was 2% down on the full season, 5% down on the quarter, but last year was also a very strong season in Europe with very favorable weather. So if you look on a five-year average, this year's deliveries in Europe were in line with that five-year average.

So normal deliveries all over in Europe. We would say the same also in US, although there deliveries from July last year were up 5%.

But a note there would be that two-thirds of that increased delivery came in the first quarter of the season. And as such due to the late spring in the US last year, a very cold winter in the US last year, quite a lot of what was delivered in the third quarter we believe was consumed in the third quarter.

And we also saw that [indiscernible] price development late in the season in US, as we saw prices picking up locally in US by the end of the season. Then a note on Brazil.

Brazil is now our biggest market. We deliver more fertilizer in Latin America than we do in Europe.

And as Brazil is in the southern hemisphere, the first and second quarter in the calendar year is the start of the new season there and still off-season compared to peak demand in the third of fourth quarter. And the demand in Brazil started this season rather muted, if I'm allowed to use that expression.

From a very good season last year the deliveries so far this season is down 10%. You could probably partly explain that by lower crop prices.

Global crop prices in the second quarter were down roughly 20% from a year ago. But it's probably also related to -- and then you can see that is measured in US dollar.

That's important to mention. And then, due to the weakening of the real, the prices measured in reais have actually gone up, because while crop prices are down on average 20%, the US dollar is up 38% compared to last quarter -- last year when you compare to real.

So you could say the local farmer should see better prices in reais, still he holds back on purchases. [Another] element of that is, even though we see higher prices on the crops in reais, you also to pay a lot more for the fertilizer due to higher dollar prices.

So it's a challenge to finance that. And that's an increased challenge in Brazil in today's market, where you have increased interest rates and you have more of a credit crunch due to macroeconomics in Brazil.

But we are quite positive, I would say, when it comes to the prospects of the remaining season in Brazil. And we have seen that already over the last couple of weeks into the third quarter.

And partly this is a phasing of fertilizer, where we anyway could expect farmers to come back after a while, when they have got some more credit and do the purchasing, but it's clearly also partly a reflection of higher crop prices over the last weeks. Over the last month, global corn prices or maize prices have increased roughly 25%, due to a growing concern about the harvest conditions, particularly in US but also in other areas.

And wheat prices have increased 15%. So this is a strong incentive for the Brazilian farmers to start to buy fertilizer, as they go into the peak season.

You see that, as the total deliveries in the first half-year dropped 10% for Brazil in total, Yara's deliveries in Brazil dropped 16%. Partly we have chosen to hold back some product, not to sacrifice margins as such also in the expectation of better market in the second quarter, but it's partly also explained geographically that Yara has a bigger market share in the south of Brazil, where grains are more important crops.

And the drop in prices over the last year has been biggest for grains, but recovery lately has also been biggest for grains. But while total deliveries for Yara in Brazil is down, what is very encouraging to see is that we continue to grow the sales of value-added products, which you see represented on the right side of this slide.

We have increased the sale of YaraMila, which is the NPK compounds, with YaraBela being calcium ammonium nitrate and YaraLiva, which is a high-quality calcium nitrate, with more than 30% from last year. Both YaraMila, YaraBela and YaraLiva have increased sales, but the biggest increase has been for YaraBela being CAM.

And it's only, as I mentioned also in the starting headlines, that it is in Brazil that we have been growing these premium products. We have been growing them also in other regions.

So can see here that over the last five -- sorry, last four years in this slide then, we have been growing YaraMila and YaraLiva with an average annual growth of 9% outside Europe. So we steady increase sales to high-paying cash crop margins, to cash crops segments mainly, outside Europe.

And in addition to Brazil, as you see on the right side, we also have steady increases in Asia and in other Latin America. North America, this period has been quite stable, where we sell into the cash crop markets on the east and west coast, while we see a small dip in Africa.

But Africa is swinging more, as most of those sales, or at least part of it, is based on governmental tenders, where you win one year and you lose another year. And also because we found better alternatives elsewhere than some of these tenders.

Then my last slide, I would like to focus on a product that you don't so often hear about. When you listen to Yara and study Yara, you hear mostly about nitrogen and you hear somewhat about phosphate and potash.

And these three nutrients are the primary nutrients, which the crops need in the biggest volume. But the crops also need several other nutrients, so-called micronutrients, which need to be delivered in much smaller volumes.

And to be able to deliver those small volumes precise to any plant we have developed a product over the last years that we call YaraVita. That's a liquid fertilizer, where you can mix in different micronutrients tailor-made for different soil conditions and crops.

And we apply this both full year as spray on the leaves, as you see on the top picture here, but you could also treat seeds with it and you can coat-fertilize with it. This is a growing application, which we use on [blending] to upgrade that from our other commodity products to a premium product in Brazil.

We are today producing this in a site in UK. Over the last year's growth we are now close to full capacity at that site, so we are investing in a new site to produce this in Brazil, which is the biggest current market and the faster growing market for this product.

And you can see over the last year this product has been increasing, growing with roughly 11% per year. So I'm now going to end my session with showing you a small video from our Strawberry Festival in a small village outside Oslo.

There in addition to see happy children eating strawberries, you'll see an almost even happier farmer, who will explain that by being advised on Yara and taking the right product from Yara, this YaraVita, he has been able to improve the iron or remove the iron deficiency of his strawberries. You maybe haven't thought about iron deficiency of strawberries before, but that is for this farmer and some other farmers a major problem to get the right quality.

So if the technology allows me, I'll start that movie. And after that movie Thor Giaever will pick up and go into more detail on the financial performance on Yara.

[Video Presentation].

Okay, perhaps you also want to eat strawberries immediately now but I'm intending to present the financial results in a bit more detail, but I'll try not to keep you too long. Focusing then on the EBITDA and the variances here, I think probably the main comment we deliver, roughly NOK5.1 billion EBITDA adjusted for the special items which is roughly in line with external expectations as far as we can see.

I think the overall comment to make is that we do this in an environment where over the last year or couple of years we've seen a decline in crop prices, we've also seen a decline in fertilizer prices. But we offset this partly with the growth actions that we're taking, the acquisitions, the new volumes from there, and as Torgeir has also commented on, of course the significant currency positive effect mainly of the stronger dollar and also the lower energy prices that we've seen in Europe and elsewhere.

So going a bit more into detail in the variance analysis here, we make first of all the comment on the volume, that the positive volume effect is more than explained by the acquisition of OFD based in Colombia and selling in Northern Latin-America, and also Galvani in Brazil, both of those were not in the results last year. When we adjust for that the rest of the volumes, deliveries, are down 2% and this reflects, as you've probably seen, mainly the decline in Brazil offset actually by a stable situation in Europe and also then an increase in the other overseas markets.

For Brazil in the quarter Yara's deliveries are down 24%. We've also included the split on the other which is where we have some of the fixed cost increases, just to give you the total picture then on OFD and Galvani, that the net positive contribution is around NOK200 million, in other words as you would expect the increased contribution more than covers the increased fixed costs.

I'll come back a bit on the energy improvement but, as you can see, the overall margin development in the quarter is negative and, as mentioned, because we do have lower fertilizer prices than a year ago, but within that the large positive effect of NOK588 million on the energy. The positive currency impact is then almost all dollar/NOK translation-related with the dollar then being almost 30% stronger versus a year ago against the NOK.

Small special items effects, just a brief comment that that is two items mainly this quarter, one related to so-called white certificates in Italy related to energy efficiency improvements we've made there, we've been able to sell these certificates as a result of that. And also an insurance compensation related to a fire in our Belgian plant, Tertre, this time last year, or actually in the first quarter last year.

Looking then at the segment, both the volume and the margin effects that I've described are split between upstream and downstream, whereas the energy effect of course is all in upstream and most of also the currency translation effect sits in upstream. I should add the comment then that, as some of you will be aware, we have changed the segment reporting slightly since a year ago with all the plants now being in upstream.

So if you wanted to make that adjustment in this result on downstream there's NOK57 million that would have been there if we hadn't moved their plants to upstream, and on industrial it's NOK32 million. Commenting briefly on industrial, as Torgeir mentioned, there volumes are up 9% but there is then a decline in margins, mainly related to technical ammonium nitrate with the slow situation in the mining industry there at the moment.

On the oil and gas cost in Europe then, as we focus on here, you can see that we down roughly $1.5 per MMBtu year-over-year, reflecting lower spot gas prices in Europe. And we then get a year-over-year positive impact also looking into the third and fourth quarter based on the current forward markets for European gas.

So we then have, particularly for the fourth quarter, roughly $1 lower expected gas cost year-over-year, or NOK350 million expected in energy cost improvement there. On the nitrate premium, I guess the first comment, as you can see on both charts in this slide, is that there's been a decline in nitrate prices relative to urea.

And you can see on the right hand side then that the premium is closer to $100 in the quarter whereas it was around $150 a year ago. And, as you can see also from the chart, it's probably the second quarter -- or it is the second quarter last year that was a bit unusual for several reasons, and that manifests itself in terms of the percent of the quarter's sales being made in June.

If you look at last year the nitrate sales in June made up 44% -- sorry 30% of the quarter's sales whereas in this quarter, the second quarter this year, it was 49%. Looking back two years and three years the respective percents were 45% and 42%, in other words last year was a bit unusual.

Why was it unusual? One, that we had a much higher granular urea premium versus prilled urea and that's important for the nitrate premium setting.

Two, that you had a late spring. And three, that Yara was relatively short of product after this, particularly the stop in the Tertre plant in Belgium.

All of those factors then meant that we both started the new season later, we set the new season price later and we sold actually relatively less in June at the new season price. So this, and just to reiterate then, we are back to a more normal level, as you can see, in relation to all the other quarters in this analysis.

As Torgeir already touched upon, on the phosphate we show here the DAP price versus ammonia and phosphate rock, the main input factors for DAP. It's not because Yara are a bit DAP producer or seller but because we have a similar value creation in our NPK production when we upgrade from phosphate rock into NPK.

That situation, as you can see, the DAP price is quite stable, whereas the upgrading margin is slightly higher mainly due to a lower ammonia price. On the NPK premiums the overall message is that these are stable.

You can see that our weighted average global price is up and that is mainly due to a regional shift, that we are selling more in Asia and other overseas markets compared to Europe. Whereas the cost picture below is a market reference that doesn't in a way reflect any mix shift, it's a global reference prices without any Yara volume element.

So the overall in margin terms the picture is quite stable for Yara. A comment then on the debt development.

The earnings I've already commented on. On the net operating capital this is the development in the quarter and it's exclusive of portfolio effects, in other words the effect of increased operating capital with the acquisitions is included in the investment part, or rather not in the net operating capital effect.

What we've seen in the quarter then on the underlying business is -- yes, my apologies, in the quarter we had the acquisitions on board so that isn't an effect it's more in the year-over-year analysis. But in the quarter we had an increase in inventories mainly in Brazil, as you would expect with the slower market there and Yara also having slower deliveries than the market, but it was offset by a reduction in receivables making the net effect small.

The investments I would say are more-or-less in line with our guidance, slightly below if anything, as we have guided about NOK6 billion in normal maintenance investments on an annual basis. Whereas, you can see detailed in the report, that we have roughly NOK400 million of growth-related investments here, the plant in Pilbara, also the new BASF joint venture plant under construction and the expansions in the Porsgrunn NPK plant that are ongoing.

We are then happy to, of course, payout the NOK13 per share dividend during the quarter, so that is a NOK3.4 billion outgoing affecting the debt. On the currency effects we've talked a lot about the stronger dollar year-over-year but in the quarter it's slightly weakened versus both euro and NOK and that gives us a small positive revaluation effect on our dollar debt which is the NOK342 million here.

All of which leaves us at a net interest-bearing debt, or debt-to-equity ratio of 15% versus 13% at the start of the quarter. If we add in the cash from the sales of GrowHow UK which is closing at the end of this month, on July 31, you will get a debt/equity ratio of 9%.

So we, suffice to say, have a strong balance sheet which puts us in a good position to find further profitable growth opportunities and also continue to payout an attractive dividend level and buyback shares. So on that note I would like to hand you back to Torgeir Kvidal for some notes on our prospects.

So this slide then summarizes the most important elements of Yara's prospect short-term as we see it. There are improved incentives for fertilizer application as grain prices have increased on supply concerns, as I already mentioned.

I mentioned that maize prices have over the last month increased with 25%, wheat prices were roughly up 15%. I also mentioned that growers in key regions for Yara benefit from the stronger US dollar, both the European farmers, both the Brazilian farmers, but you could say in most other areas than US.

We had a positive start to the season in Europe, nitrate sales were very strong in June after we announced the new season price for nitrate, so we've been able to increase that nitrate price after mid of May twice. And we have, as I say, a healthy order book for nitrates, we are where we want to be on the nitrate order book.

As I mentioned, we foresee a pick-up in deliveries in Brazil in the second quarter. But as I also have commented upon, the global market for nitrogen where we, of course, earn quite some value-added margins on top of commodities, but the global commodity market will still continue to be influenced by Chinese export.

But what we see there is that China exported a lot last year, more than 15 million tons, which is more than one-third of global trade of urea. So you can say China can represent a downside in the global market if they export more at lower prices but they can clearly also represent an upside in the global market if they start to export less than earlier.

And also, of course, if they're not able to cope with a [fly up] in demand if that happens if growing conditions continue to worsen compared to what we have seen lately. And then my final note then is on the closing of the GrowHow UK sales.

We expect that now to happen July 31, so cash will come in then. You could, of course, say that this is a business where there could be significant synergies with Yara and we looked upon that and we put significant synergies also into the valuation, but when somebody is offering even a higher price than what Yara can see it has a value in its own operation we happily sell.

And we sold this business with a price/earning ratio of 2014 earnings which you'll see in a note in the report, with a P/E of close to 20, so not too bad. So with that note I think we are ready for a Q&A session, so Thor can you please join me together with Dag Tore Mo, Head of Market Intelligence.

I stole your introduction Anders.

That's fine, no problem. If I can just add that if you have a question then Kjetil Storas, my colleague here, will hand you a microphone, so please wait until you get the microphone and then ask your question.

The first question comes from Bengt Jonassen.

On the NPK side, first on operations, bulk production seem to be flat or down q-on-q, and on NPK blends volumes, sales volumes, are massively down. So a comment on that.

On the Sumare micronutrients capacity expansions, what could you put in there on numbers when it comes to CapEx and when do you expect it to be finished? And have you seen any effects from the El Nino?

And finally, you have previously talked with CF Industries on a potential merger, now CF are in talks with OCI, so any comments on that as well.

That was an extensive list of questions and thank you for that. If I start with the production volumes then, NPKs.

You're right, it's a good observation that we didn't brag about our production volumes this quarter, we had quite a steady improvement in production volumes over many quarters, this quarter it's more flattish on complex NPK. And when it comes to bulk blend it's significantly down and that is related to Brazil, as you saw in the quarter we were down 16% total deliveries while we were actually up on premium products that we import mainly from Europe.

So bulk blend are significantly down. Margins there is also slightly down but that is more offset actually when we had some better margins in some other markets, and we also prioritized a little bit margins over volumes also, that we're expecting volumes to a large extent to recoup.

On the Sumare, YaraVita installation, as I touched upon, it is in the total Yara context of course a minor investment. We are in the first phase and we'll do this a little bit stepwise with the first phase being the biggest part of the investment, it is an investment of EUR13 million.

So it's quite an efficient investment also being integrated in our most modern blending unit in Sumare in Brazil, where it already was prepared for that installation when we built it and commissioned it a year ago. So it's a [$13 million] investment.

When it comes to when it's up and earning, I try to remember that, maybe Thor do you remember? Or we can even ask Terje Knutsen who is not only an expert on strawberries as you just recently saw, but also responsible for this activity.

Is it end 2016, do I remember right? Or are we into 2017 for a commissioning?

I think we are touching 2017.

Touching 2017, he says politely, when I started with late 2016, yes. El Nino, I think I'll refer to our also chief meteorologist, maybe Dag Tore, I don't know if you would like to comment on that?

I remember in the old days when it was 1997 El Nino it was I think one of the strongest that has been recorded and we did quite an extensive study at that time and found out that, well on a global level, El Nino affects are very small, so they don't really affect too much global pricing, but there are regional issues of course. And so I don't know whether the drought in Thailand, for instance, partly Australia, rest of South-East Asia, worries about -- India and so on can, it's at least consistent with a developing El Nino.

But I would say that so far we haven't seen much affects apart from maybe those elements.

Yes. On the CF merge talks then we should probably be careful commenting upon and interpreting other companies' ambitions and the effects, but you know that we were in talks with CF, we didn't succeed.

What we have seen of messages after this leak came out from both companies I think is confirming that they are in talks but not very precise in what they are as such talking about then. So we think we have to wait for that.

But I think a general comment is that this shows and illustrates that there are M&A opportunities in this business, it is still quite a fragmented business, there are clearly combinations possible where you could take out synergies, CF probably also has tax synergies which I shouldn't go into detail on, which they need to do, but also other opportunities. So it shows that there are opportunities and I also think that the reaction on the share market yesterday for them also showed that there are expectations that there can also be profitable synergies.

But there is still a lot of uncertainty if and how this will happen then of course. But having said, I shouldn't really comment on the probability and the prospects then.

Any further questions? Any final questions then?

It doesn't seem to be the case. Okay then, I would like to thank you for showing up and also remind you that we have a conference call this afternoon at 2.00 p.m.

for those who are interested to listen into that or ask questions in the conference call. Thank you and enjoy the strawberries outside.