Yara International ASA

Operator, are we live? Operator are we -- has the conference started?

Thank you very much operator. Good morning, good afternoon all and welcome to Yara’s Q3 Results Conference Call.

I'm sure most or all of you have seen our report and presentation from this morning, so I will limit my opening comments. The EBITDA excluding special items in IFRS 16 increased by 49% in the quarter, and the results reflect the lower energy costs, higher production and strong premium deliveries in line with our strategy where we prioritize value over volume.

We are delivering on our long-term targets operationally with higher production, reliability and energy efficiency and commercially with strong premium product sales and realized prices, improving sales and marketing EBITDA per ton. As you may also have seen, we this morning also announced the share buyback program.

This is the first quarter where we are within our targeted range of 1.5 to 2 times net debt-to-EBITDA, which we announced as part of our capital allocation policy at the Capital Markets Day in June. And we announced buyback program by the 30th September numbers bringing our net debt-to-EBITDA back to approximately 2x.

This means that we will buy back the approximately 0.5% of our outstanding shares by the end of the year. But this represents 0.8% of our shares outstanding when we also include the proportional redemption of shares owned by the Norwegian state or equivalent to approximately NOK 800 million at today's share price.

With this introductory remarks, we are ready for the Q&A. So operator can you please now open for questions.

Operator, it looks -- from our side it looks like there are several people waiting to ask questions. So, please go ahead.

Good afternoon. Thanks for the opportunity to ask questions.

Three, if I may. Firstly, on the share buyback, how should we think about this going forward?

Is it -- each quarter you're going to renew the buyback? Or will it be as we get towards the end of the year, you'll make a decision about top ups for buybacks?

How should we think about the continuity of a share buyback program? The second is with focus on near-term earnings, obviously, you started the fourth quarter we've seen a little bit of weakness in your urea prices.

But I wonder if you could give us an overall picture for the fourth quarter because it looks to me that the consensus is still relatively light on a full year basis, versus if you were to kind of repeat the same level of third quarter performance again in the fourth quarter, which looks sensible given the gas price benefit that you forecast? The third question sorry, is about Indian production.

So you highlight with your data on the supply growth, we've seen a very significant amount of capacity addition in India over the -- this year and last year, and yet production is weaker in India year-over-year in 2019. I wonder if you could share any insights as to what you think is happening with regards to the Indian level of production given that we all probably thought that was going to be a positive i.e.

production will be higher this year? Thank you.

Yes. Thank you very much for those questions.

If I may start on the question on the buyback as I alluded to in the start of the call. We have a new capital allocation policy from the Capital Markets Day in June, where our targeted range of net debt-to-EBITDA is to be within 1.5 and 2.

And this quarter, we are up 1.9 a little bit above that. And as such, what we're doing now is announcing a buyback program, which by the 39 will bring us back up to 2.

Going forward, we will base our decisions on this capital allocation policy. But what we have said is that under this policy, the current improved market fundamentals, combined with the extended improvement program and the increased hurdle rate for new investments may lead to increased dividend capacity beyond the ordinary payout ratio going forward.

This is Terje Knutsen, sales and marketing. On the market side for Q4, obviously, the Northern Hemisphere is in the low season.

So it's quite normal that this is a quarter, which is active sort of both ways either wait and have a relatively heavier weight in Q1 or we could see renewed buying now during Q4. So far quite normal season, a lot of market still remaining in Europe, relatively low urea position in the market in Europe, which is positive.

But exactly how this will play out between Q4 and Q1 obviously remains to be seen. Brazil, I think you will see that we will continue.

What we have tried to do, which is to optimize our portfolio and partly step out of the most marginal sales that would typically be low margin wins and we are continuously trying to position ourselves in segments where we can grow our premium product range. This has been successful during third quarter and we expect that we will continue this strategy into fourth quarter, which obviously is in season quarter in the Southern Hemisphere.

And on your India question it’s correct and that the table with new capacity stepped are not our own assessment it’s the CRU assessment that we use due to our own guiding policy that a large part of the presumed capacity growth for 2019 would be in India, while the facts are that production in India is stable so far this year compared to last year, it was actually lagging quite a bit but due to relatively strong production in August and September it’s kind of more or less got back to equal same period last year. And there are a number of issues, there is actually a new plant that has started off.

So that's not a wrong assessment, but they had problems on the production side partly due to technical issues with some other plants, partly due to weather issues, won’t have to close due to lack of water for instance, et cetera. Because of very hot and dry summer they had initially until the monsoon really hit.

And I don't know if you've also seen that one producer who just now announced that they are closing down everything temporarily because they do not have cash basically because of the delays in the subsidy payments from the government. So that's also kind of a gain that’s ongoing.

So I think it's important to see the whole India situation a little bit beyond just those plants that have been revitalized to put it that way. There are two more in the pipeline that are struggling with gas pipelines actually.

And it's unclear exactly when they will be able to produce. So India is with a strong demand development there have been very active buyers.

And you probably seen that just today they got approval from the Department of Fertilizer to buy 1.1 million tons of urea. And at least some of the consultants are actually think they were actually looking for more.

So -- which service could also be positive going forward.

Okay, great. Thank you very much.

Hi, this is Ziad Sada [ph] in for Ben, thanks for taking our call. So just on slide 30 of your presentation, you show how nitrogen supply growth is going to go down, but you do -- you're excluding China.

So could you just please talk a bit about how you see the development of the Chinese nitrogen market? Specifically, could you comment on their policy for negative demand growth domestically, I mean how you see permanent versus temporary plant closures?

How much new capacity you think is coming online and then what that all means for exports? Thank you.

There’s a lot of issues, of course, I mean, they -- China on the policy side under the [indiscernible] initiated a zero growth policy a couple of years back, which you could say is already a little bit outdated, you might say because the supply issues they've had over the last year and they produced 70 million tons of urea in 2015 and now just about 50 million tons at the moment. They had a huge rationalization because of cost pressures and even more important maybe the environmental concerns from a lot of these plants.

So they have nitrogen, they have basically achieved this political targets some of them on site and more. So I think that it's the market forces that is going to be the most important and there is very little new capacity in the pipeline and there are still plants that are we think due to close.

And a couple of key provinces again reiterated that there is going to be curtailment also this winter going forward, as there has been in the past. So yes, so it doesn't look good, like there is a lot of kind of the dynamics on either the demand versus supply side.

But of course, what you probably wanting to kind of assess is hold the kind of availability from China would kind of match the need for Chinese exports from the rest of the world is of course you don't have to tweak the parameters too much to get quite a wide range of, let's say outcomes. So, yes, it’s a key question.

And I think domestically in China this is positive for a company like Yara we tried to do more with less as we say and this is very much what's although the Chinese government would like to see in agriculture. So our more you could say high-end way of producing the premium products not at least the knowledge base we have, will open up opportunities for Yara going forward.

Hi, good morning Joel Jackson from BMO. I had a few questions, I will ask one by one.

Typically in the last few years we have seen nitrate price or CN price be strong in the third quarter and hold that strength in the fourth quarter. This is a bit of a different year, maybe you can comment a little bit about that nitrate pricing and a little bit different now than we've seen in the last couple of years.

First I think, as we said this morning, we feel that we got off on a good foot so to say in Europe on the pricing. I think we have seen a somewhat falling price trend on nitrogen during the second half of the quarter, which obviously influences the buying pattern.

I think we are, as was said in the introduction looking at value over volume and we keep believe that there is a lot of market left in Europe and we try to price our products according to the let's say return for the farmer on grain in Europe and there we have had a quite stable pricing on the nitrate versus grain. So we look at many parameters when we are pricing our product and we will continuously look at both the commodity underlying prices, but also for sure the farm economy in Europe.

Okay. And the NPK premium was I think strong again in the third quarter similar to second quarter end user some and strong NPK premiums you’ve had in a few years.

What is the trend on the premium there and what's affecting the market in the fourth quarter? Thanks.

Obviously on NPK we have had a falling price trend on particularly PMK and we're as Yara in many segments, which are much less exposed to the commodity pricing than the more extensive crops, which are typically more exposed. We are also working very deep in the markets, deep into the value chain where some of the volatility is let's say being less radical or less -- there is more slowness in it.

So I think it is part of our business model that we would see less volatility in our NPK than in the general commodities and in periods when commodities falls like they do now we would typically benefit and there is a slowness in the adjustments which obviously is by design. So we feel that we have had a good balance between margin and volume.

This is always something we look at very carefully and right now we have felt that we can hold price and continue to focus on those market segments that allow us to take out that premium.

Maybe I’ll ask two more questions. So how much of your gas is locked in right now in the both the fourth quarter and the first quarter?

So our policy and our exposure is spot, so what you have is you have a delay by one month to the spot prices into our system, but we are and we have always been spot on the gas prices.

Just making sure nothing changed into the first quarter. And then my final question would be, where -- what is your view on consolidation in the nitrogen industry right now?

Do you think another wave of consolidation is needed? We've seen some interesting moves in the last week they've been finalized here.

Do you think another wave of consolidation is needed? And what might that look like if you're able to comment?

So as we've said at our Capital Markets Day and many times before, our focus now is on increasing our returns for delivering on our strategy and delivering on our committed investments and our improvement program. So that is really the main priority that Yara has, which we believe is really what is the most important priority for us to have as a company.

And then we of course -- we are in the industry as everybody else, but that is our priority to deliver on that strategy.

Thank you.

Good afternoon, gents. Couple of questions, one short-term, one medium term.

Can I come back to the mix comment? I listened to the webcast this morning and you explain the gross margin improvement and the limited impact from the 5% drop in volume is the NPK element?

Is that just the reference to blends versus compounds? Is that what's happening there?

Even then I struggle a bit with the math so if you can help me just -- if it's the case that selling 50,000 more compound material, gives you that uplift in gross margin. I just -- yes, just anything you can help me on that.

Just struggling a bit squaring that. Secondly, the Nel JV on the Plaine [indiscernible] just wondered where you are with that from a chronological standpoint, from a capital commitment standpoint?

And I'm also interested in anything you can tell me about the process because it wasn't particularly clear to me? Thank you.

Yes. So NPK for us consists of the compound NPK but also some of the blended NPKs.

And typically, we would be much more exposed to the commodity pricing in our blended NPKs versus the compound NPKs that has to do with the market segments that we serve. With our compounds, we typically position them into cash crops or higher value crops.

Where, again, the farmers are more after productivity and quality of the end produce them necessarily, let's say, fighting for the cheapest input on the NPK. And I think you can find in the report, the split between compound and blended NPK.

Yes. But that was really my question, because I -- you've only sold an extra 50,000 tons so 3% growth and your total NPK portfolio is down 5%, which is in line with your total deliveries.

So I’m just surprised about it, I mean, if you tell me that margins are so good in compounds, then that's fine. But otherwise I struggle a bit with the math.

So, Andrew, hi this is Thor here.

Hi, Thor.

We have linked the NPK strength to this, but the mix effects more broadly, is describing that we have had a better development for our own produced products, which we normally have higher margins on compared to the more trade and commodity side. And so there is quite a wide range of let's say dollar per ton margin.

Let's say between a third-party sourced sale, trade sale and a higher margin NPK or for that matter, you reproduced in Belle Plaine. So it's a broader comment, which is about.

Okay.

NPK.

And maybe just for the second question, Andrew, would you mind repeating, because we picked up it was about the Nel Corporation, but could you repeat the full question?

Yes. Just looking for more background on it that'd be helpful.

Just what the production processes, what sort of CapEx would you be looking at, just where we are with the current JV, because I wasn't too familiar with it.

Yes. This is Lars, thanks for asking.

As you will recall from the Capital Markets Day, reducing our CO2 footprint that look out to the conversation is that one of our strategic priorities and this is not essentially joint venture, this is a collaboration agreement, which is really about looking into different pilot of technologies of R&D finalization and a renewable production of hydrogen and there is more material capital associated with that collaboration.

And would you put it on a timeframe that’s meaningful. So are we looking at the next few years or the next decade or is it too early to make.

What we've said is a 10% reduction towards the 2025 when it comes to CO2 equivalent and for us to be climate neutral by 2050. And this is one of many initiatives that we have within that space to support that.

Okay, thank you.

Hi, good afternoon. So most of my questions have been asked, but two small ones, so one could you walk us through the change in net operating capital for the quarter and in your improvement program a little bit more granularity on that and the main movements.

And I’m not talking about the prepayments which are unwinding but the other changes. And then back to the sales and marketing department, which was up 24%.

I’m just wondering you discussed the NPKs side but there are other movements that are worth mentioning in that.

Thanks, this is Lars answering your first question, as we said this morning in the quarter in isolation then from Q2 to Q3 the increase is actually lower than last year. But of course seasonal prepayments in Brazil a reduction in that and also related then to the gas subsidy payments in India, where is a time prime lag.

If you look at the KPI where we are measuring operating capital base on a rolling 12 month basis, the main driver behind that is an increase on the inventory side where we have made this -- I have talking about earlier deliberate commercial decisions about the tradeoff between value and volume in the market place in line with our strategy.

Okay. So you are actually saying that -- sorry on the first question, so the change in inventory it was mainly due by the fact that it’s higher own produced inventories rather than third party inventory, is that correct?

Yes.

Okay, thank you.

Sorry, there was follow up operator to that question.

And I think it was a question on prices whether this was only NPK or also in other areas, I think if you look at page five you will also see that the realized price on nitrates is clearly up from a year ago as is our NPK. So I would basically say that all our nitrate based products generally had a good margin increase.

Also in a falling nitrogen market we tend to get premium on the more differentiated urea products that we have light urea process. So generally, we have been able to have a lift in our margins on most of our premium products.

And Lisa, hi this is Thor. Just to add, just be aware that when you are looking at the side sales and marketing results in isolation there is kind of the flow through external factor here, which is as Terje describes higher realized prices relative to most of the reference.

But there is also an internal pricing element because when the production segment sells to sales and marketing is at the fixed premium. So if you like the variation in premiums it goes to sales and marketing.

And it's also an element here of the higher value products like the growth in YaraVita, which brings a quite interesting margin element although volume wise it is a small product.

Okay, thank you operator. We're ready for the next question.

Hi, thanks. Couple of questions from my side, first is just going back to the discussion on NPK compound.

Is it fair in your view to assume that given the decline in potash and phosphate pricing, you benefit from that in the short run given that your NPK prices on the compound side tend to be more sticky I guess? And is there a way you can quantify that impact at all in the next few quarters if possible, maybe it would be easier if you could give us how much potash and phosphate you buy from third-party suppliers annually.

Maybe that might be useful. Second question is, on your committed growth I'm struggling to see where is that visible in the numbers in third quarter, because if I look at your overall deliveries are down, you said it’s value over volume strategy, but even the premium deliveries, when I look at Q3 versus last year it’s essentially flat.

So, maybe can you help us understand where is the benefit from the committed growth programs visible in third quarter? Thank you.

So, on NPK, I think we have commented in the sense that we are in segments that are less exposed to the commodity nutrient side. We have also said that we have balanced value versus volume so we have to some extent prioritized to get out value.

But it's also important to say that obviously over time there is a price correlation. And over time, I think we will see that we are able to continuously take out the margins that we typically have seen there is for us short-term an advantage when PNK is dropping in the sense that we tend to be able to extract more of a fixed price policy if you like, in periods where the commodities, the underlying commodities are dropping.

So, it depends a bit on how the development, further development of PNK whether we will choose to adjust and maybe use that as an element to take back some volume or whether we hold price and would see that we can go through this period of decline in PNK, that really depends a bit now on the continuation of the PNK market.

Okay. And Chetan, hi this is Thor, I'll try to answer your second question.

I think the first disclaimer in that I think when you're looking at an individual quarter you will be normally more impacted by your sales rate and how the market -- what volumes the market can absorb that quarter. And it’s not -- I would say given the flexibility we will normally have on inventory is not normally whether an individual growth project has started up or not that impacts what we sell in the quarter.

But having said that, I think when you look at our -- for example, on slide four in the presentation, we have increased NPK sales of course we have been expanding our NPK plants so you can make the link there. We also have some urea expansions, we have higher urea sales on nitrates it's down a bit, but as we mentioned in the presentation third quarter last year was a record quarter.

So I think there we sold more than we produced. We will -- we’ve recognized the kind of need to make this link more stronger.

And I think you can expect us to do that in particular in connecting with the full year results. So that's probably about what we can say right now.

Thank you.

Yes, good afternoon. Two questions from my side.

The first one is, the dividends from associates, I noticed they were flat, broadly flat on a nine months basis while your own EBITDA is sharply up. I’m not aware of an investment project at Casco [ph].

So could you maybe explain why distribution hasn’t gone up? And the second thing is, I'm missing a bit in the regional market comments, any color on North American market you have deemphasized reporting a bit on the U.S.

market. So any input on the season to-date, deliveries and imports, et cetera would be helpful.

Thanks.

Sorry, go ahead.

Yes, I can maybe comment on our possession we were bit late in [ph] Canada that might be really different than the total North America market. But it struggle with the expansions in North America and the fact that we don’t really know how much nitrogen they have produced until let's say five months after the end of the quarter when they probably announced their numbers of course we follow trade, and so along we follow imports and exports and so far let's say for the two months this season that is reported July and August imports margin is roughly similar to same period last year, but that grounds in what was produced and then both numbers are not public yet.

So we don’t feel like there is any point in kind of for us to make kind of for current comments on the development in the North American market and then it would be so much guess work.

Yes, this is Lars. On the other question, if I look then to our note on page 14 of the report the dividends from equity account the investees are indeed in line with last year of $97 million this year versus $98 million last year.

And why is that?

Could you please maybe repeat the question, Christian because...

Yes, I mean, I’m wondering why that is given that everywhere else you're posting profit increases and we don't see -- it doesn't seem to be reflected at Casco. So is there any other things going on offsetting that or?

I think of course Casco’s business is quite different to Yara's business overall. So we're kind of mainly exposed to the urea price and producing and selling about the same that it did last year.

Yara has of course many other products, many other markets which in some have improved and for example the European gas situation is going to be positive for us and has not impacted. And I don’t know if others would add to that, but I don’t see the difference.

Yes, I think I can also add to that that the share on net income and equity accounted in this thesis also indeed in line with last year of $52 million this year versus $54 million last year.

One month urea price is basically same. So again if you look at page five you see that there we are using FOB Egypt, but it's practically exactly the same.

And given that gas cost probably is pretty stable as well in Qatar it is to be expected that the number is pretty much the same.

Okay, thank you.

Eivind Sars from DNB. Just two questions, one on the gas forecast for Q4, in Q2 you said you had $160 million expected benefit in Q4.

You repeat that now in Q3, how are you looking at the details in your slide pack, it seems like the underlying gas price assumption for Europe is roughly $1 or $0.80 lower, what’s driving that please?

Eivind, I think that’s one we'll probably need to follow up separately.

The amount we specify each quarter are just mechanically following our sensitivities on the forward price, but we're happy to follow up with that more separately to clarify.

Okay, thanks. Second question is on the market side in Europe.

We have heard a lot of press releases and talks lately about Romania restarting up 1.5 million tons. To my knowledge these are assets that have been curtailed for more than five years.

Have you seen any increased sales from Romania or what’s your thoughts on these restarts?

In January, I think you understand -- can understand the logic when gas -- the way gas prices in Europe has collapsed that people are looking at are there something that we can way of exploiting this, okay, here are -- there are some plants that have been down for some years, it kind of try to get them back into production. I guess that's a logical thing.

I think it can be too early yet to say how successful it will be in the end. As you say they've been down for many years and sometimes there are -- you don't just find let's say skilled labor and so forth easily.

So that’s of course -- that's never easy to put it that way. So -- but that's right, there are ongoing efforts.

And when it comes to the Yara side of that we haven't seen much movement yet. We -- as we always do, we balance out globally our position and we play with the stock position we have and we play with the overseas opportunities.

We have to try to balance out the market as best we can. And that's also what we are doing presently.

That is clear. Thank you.

Okay, thank you to everyone for participating and look forward to keeping in touch and watching the market and results develop. Thank you.

Bye.