Yara International ASA

Jørgen Ole Haslestad – President and CEO Dag Tore – Head of Market Intelligence Torgeir Kvidal – CFO

Ben Isaacson – Scotiabank Jeremy Redenius – Sanford Bernstein Joe Dewhurst – UBS Joel Jackson – BMO Capital Sophie Jourdier – Liberum Capital Andrew Benson – Citi

Thank you very much and welcome to the Yara First Quarter 2013 Results Conference Call. We very much appreciate your interest in Yara.

But before I open up for questions I’d like to briefly comment upon our results. We define quarterly result as strong if the annualized CROGI cash return on gross investment, is 10% or higher.

And the first quarter result clearly passes this test, with a CROGI of 16% excluding special items. Additional ammonia and urea volumes from Qafco Lifeco, and Yara Pilbara more than offset a small decline in Yara fertilizer deliveries, urea sales increased by 4%, while deliveries of Yara-produced compound NPK were up 4%.

And nitrate sales were in line with last year. The overall volume development improved results by approximately NOK 100 million compared with the first quarter 2012, while higher ammonia margins improved results by approximately NOK 450 million, partly offset by approximately NOK 100 million higher gas cost in Europe.

Ammonia prices increased by 37% while realized urea prices were 1% higher than a year ago and nitrate prices were in line of last year. NPK compound prices were down 2%, decreasing less than equivalent commodity nutrient values, as demand for value-added products remained strong.

NPK blend margins improved as the Brazilian market approached normal levels compared with a weak first quarter 2012. We expect to close the acquisition of Bunge’s fertilizer business in Brazil during the second half of 2013, subject to approval of Brazilian competition authorities.

Yara sees further potential for profitable growth going forward, in particular through regional M&A and Greenfield expansion and de-bottlenecking opportunities. Following a slow start in 2012-2013 seasons, Western Europe nitrogen fertilizer industry deliveries increased in the fourth quarter and were stable in the first quarter, leading season-to-date deliveries 4% ahead of last year.

Yara’s European deliveries were impacted by poor weather in March, which have recovered so far in April as the planting conditions have improved. With these introductory remarks, we are then ready for your questions.

So, operator, can you please now open for questions?

Thank you very much. We’ve spent a lot of time over the past couple of years discussing you’ll get capacity growth in the Middle East and China and what kind of impact that would have on the market.

I was hoping I could hear your views on two other regions; North America and India. In North America, there’s a long list of new projects obviously, Belle Plaine is one of those.

What are the prospects for self-sufficiency given CapEx creep recently, gas prices starting to rise a little bit and maybe also some color on the Texas explosion and whether that will impact permitting going forward? And then in India, we’ve seen a policy from the government indicating that new projects can earn a return of 12% to 20% after-tax IRR versus what didn’t work in the past which was sub-12% returns.

And so, is it possible that India move to self-sufficiency as well in the next three, four, five years? Thank you.

Well, thank you very much, Ben. Dag Tore will comment upon the two markets.

I just want to give one general comment before. We do not see any effect of the Texas explosion to the long-term development of volumes in the North America.

But, Dag Tore you can probably say generally about the U.S. and the Indian markets.

Yes. When it comes to North America and, in general, on capacity additions, we also see that there is a creep in costs because there is quite a lot of pressure on the main contractors, not only from our sector but also from other sectors.

I mean, we also see the list of projects. I don’t think it’s right of us to speculate in what projects are likely to come on-stream, when and with some more complicated.

I think we are just trying to follow low end as I’m sure you are. So, good point that you raised some relevant points.

Let’s see. Right now, North America if you include Canada, have roughly one-third of their nitrogen need imported.

And of course, if a large share of the announced project will come on-stream, they will definitely become self-sufficient. But as you say, there are a lot of factors that remains to be seen.

When it comes to India, there has been a large list of projects for a long time. In fact, that is not new.

The new is that there is a somewhat change to the policy has been expressed by the government I think when it comes to the returns and floor prices and ceiling prices and those kind of things. But what we see and what we’ve seen for many years is that it seems like it’s the natural gas allocation that is the bottleneck and the gas production in India has been – has actually been disappointing as of late.

So, I think the real issue is how India will deal with the gas allocation and which sectors will be given priority. So – I mean, so far and which had been constantly the case, all these projects have stopped when it comes to development because of the gas allocation issue.

So, I don’t think we are any closer to a realization of a lot of Greenfield or new projects in India, like has been the case in the past. Whether that changes or not, it’s unclear.

But at least, natural gas production in itself in India is not supportive of a huge development within the margins for a lot of sector.

Hello operator, we’re ready for the next question.

Yes, hi. This is Jeremy Redenius.

Thanks for taking my questions. Firstly, could you talk about the fertilizer development – your fertilizer development by region where you have fertilizer volumes that are down year-over-year in Asia and Africa?

I’m wondering if kind of the lower or stable year-over-year crop price is like for the more regional crops like cotton, rice and some fruits and vegetables have hurt your volume growth in those regions. Thanks.

Well, as Torgeir mentioned during the presentation, one of the reasons for the volume drop – or the main reasons, which is related to Africa, is the last – or the fact that first quarter last year, we had a DAP tender, quite substantial one...

Yes.

That we delivered based on third quarter products or Morocco DAP which we did not have this year. So, I mean, that accounts for quite a bit, I guess.

Otherwise, maybe we had a slight change in overseas a little bit when it comes to some of Asian markets as well. But I think in general, we’ve had very good development on our NPK business globally.

And also in Europe, it’s fairly stable, but a little bit different phasing than last year. We had very good months in January and February but then it slowed a bit in March due to the very cold and late spring.

But I don’t know if anybody else has a comment. I will comment when it comes to Asia, where you can see in our report that we already sold 484,000 tons, 610,000 tons last year.

One element, there is also phase – pure phasing of ships of NPK. We ship stocks from Europe in quite large-sized ships.

It could be ships up to 50,000 tons. For this volume ship goes just before a quarter last year and after the quarter this year, you can have swings of up to 100,000 tons of them scheduling like that.

And we have scheduling like this also this year where just over the quarter one ship went from Europe to Asia on NPK. So, there are no big market effects as it is or such in Asia.

Okay. So nothing specific to the Asian market, but I guess I’m trying to understand a little bit better the real driver behind volume growth in Asia, whether it’s high crop prices make volumes grow or is it really that the increasing of crop prices make volumes grow?

I think – when you mentioned rice and so on, I think that there’s nothing specific that I have picked up that have been causing any huge effect. There have been some weather problems like in Thailand and so on, but – I mean, that’s often the case that there are some fluctuations like that.

It’s nothing particular. I guess with palm oil price that is one of the main crops when it comes to the changes year-on-year, but that’s not the very nitrogen-consuming crops.

So, that has not had a very big effect.

Jeremy, this is Torgeir here. I could maybe add a bit.

When you’re talking nitrates and NPK, and Asia is, of course, a big value-added market for Yara, we are constrained on capacity as well. So, we – as we have said before and linked into our growth plans, that it’s important for us to secure more NPK volumes than nitrate.

Yes. And looking back at the – like the last four quarters and then the prior four quarters of the previous year, I noticed that Asia volumes went from about 2.3 million to – or sorry, 230,000 tons – no, 2,300 tons down to 200 – or 2,000 tons.

So, there’s been a drop of around 10% year-over-year, not looking at just the quarters, and I’m just trying to sort out if that’s due to weaker – soft commodity prices in those regions or if it’s just the fact that they’re not going up, like rice is flat year-over-year now.

Okay.

All right, thank you.

Yes. Operator?

Hello. Just a couple of – three questions here.

Just going back to the DAP tonnage, were that have been booked into NPK sales or was that into other products? And then without that, would that have meant if we took that out, we have actually growth in NPKs?

And then, secondly, just on your associates’ dividend payment, so looking in the cash flow statement, there have been – obviously, been a very significant increase in dividends now from joint ventures and affiliates there. I imagine a lot of that has to do with Qafco, but if there’s any other details you can give on that would be helpful.

And then, finally, just with the Chinese tax regime in July and probably seeing only about a 2% tax then, are you seeing any sort of changes out there in the market? In other words, any latest updates to sort of hold off on purchases just waiting to see what happens in July and how prices potentially adjust with the Chinese volumes?

Thank you.

May I just start and draw on the – it’s like good gain in the statistics of the DAP sales that we have Ethiopia last year. We have expanded our product information now.

So in the report on page 5, you see split variables, have splitted out DAP and MAP. And you see that’s why we last year sold 241,000 tons in the first quarter of DAP/MAP.

This quarter, sold 70,000 tons. And the explanation of the variation is the Ethiopia tender.

And all of these products are sourced from all the producers then as we do not produce ourselves DAP and MAP. So, the margin effect of it is quite limited.

On your second question then, dividend payment from associated companies, the big payment this quarter was from Qafco. They paid us $200 million.

So, you can say that is almost all what we received from associated companies this year. And as I commented on also in the webcast, going forward now, of course, depending on the urea price going forward, but for a given urea price, we would expect a higher dividend from Qafco going forward and we had for the last couple of years since Qafco now have finalized their expansion program, Qafco 5 and Qafco 6.

And on the Chinese situation, I think it’s a little bit difficult to know exactly what causes what. This is the third year or third season in a row where most buyers have gotten a quite uniform advice from also the market consultants, which is then to wait if you can wait basically the whole spring.

And that has kind of a – and then, the opposite things happened about two years ago and last year because, of course, if buyers do the same thing, then suddenly demand is very much stronger when you expected it not to be maybe. So, this is a game that is not so easy to kind of call.

What we can see is that last year – April, May last year was extremely high because of the lack of pre-buying in Europe and North America, et cetera. So, then, of course, we saw that some of the markets that could wait, they waited, like India, for instance.

Now, this year, India has already had their tender. They bought around 0.5 million tons last week basically and are a little bit ahead of – over last year.

And we saw that Brazilian imports have been very strong in the first quarter. Some of it is probably for immediate consumption, but some of it could also be linked to the coming season because I mean today’s prices of urea are $360, $365, which is, of course – I don’t think it look too different from what the expectations are.

And if you read the publication today, they are stating that the asking prices from China from July 1 are in the $350 to $360 range at the moment. So, yes, I’m sure there are a lot of reasoning back and forth from the main buyers, but I don’t think we see a very consistent and strong buying pattern that there’s more kind of tendency to be more lagging this year than last year at least.

But as I said, last spring, April, May, prices were considerably higher than today, so that could be a factor.

Thank you very much.

Hi. Thanks very much.

I just want to talk about the cost side on emerging markets right now. Maybe we could look at Eastern Europe and we could look at China.

In Eastern Europe, can you give us a sense of how much production capacity out there do you think is on oil-linked contracts and for feedstock? And where do you see those – that feedstock pricing going and maybe you can work in a bit if you see some consolidation on the Ukrainian side, which we’ve heard of, that maybe would lower the average feedstock cost among the Ukrainian production base?

Thank you.

Production.

Yes. Well, of course, if you would take Eastern Europe exclusive of Russia and Ukraine, I think most of the capacity in Eastern Europe is probably still oil-linked like in – like Romania, Poland, these countries where there seems to be more a discussion about what the constant element in the contract should be rather than those that have the gas versus oil-linked gas pricing because of the lack of alternative for the buyers there to buy on Henry Hub basically.

And as you know already, some speculation that, let’s say, Romania, for instance, are looking at maybe curtailing some of the production capacity and fixed prices remain – or will weaken further or will remain relatively compared to last year. When it comes to Ukraine, I mean there has, of course, been a very strong consolidation already, where the NS group or Firtash Group is owning most of the plants.

So, I guess what you are speaking of is the last piece of news that came in, that they are also not owning but they are marketing the urea and ammonia from the other main plant, the Odessa Port Plant. Whether that is going to have an effect on gas pricing for Odessa Port Plant, I guess we don’t really know, as we don’t really know what the development for gas pricing in Ukraine will be.

What we saw last year when ammonia prices dropped two levels considerably below this quarter as we discussed, we saw quite lot of curtailments from Ukraine, indicating that it doesn’t make sense to produce ammonia if the value of the gas is higher in other segments anyway no matter who sits on the gas basically but I think it is hard for us to speculate what the future there will bring. But, yes, I understand your question.

It’s clearly important for reversing cost could be easier to disregard the China situation.

Yes. Then, turning to the other high-cost market, China, you had a lot of commentary in your different releases today talking about the potential for larger exports in China this year, looking at all different factors.

I mean, is your assessment that China could produce 70 million pounds of urea this year or more than that, is your assessment they could export 8 million, 9 million, 10 million, 11 million tons? And in that maybe commentary, if – would you expect price have reached floors now?

Because of the Chinese product coming on, would you expect pricing to kind of skate along that floor for several months? Thank you.

It’s firstly impossible to know. There are different ways of looking at it.

One is that there have been signals from the Chinese government that they want the four-month export window to be four months this year and not as flexible as it was this previous season. That will, of course, have their limitations on how much they can export on purely logistical reason.

So, I see that there are some market consultants that are – that have opinion that exports from China will probably not be much higher this year than last year due to those factors. If you look at the production performance, they’ve produced quite a lot more this season than in the previous season.

And most of those products have ended up in the export market, leading up to 4 million tons more as you can see from page 23 in the presentation. January, February looks very fairly similar, but now you see that production rates have gone up again from March due to probably very healthy or good availability of both coal and natural gas at the moment in China.

And Chinese offer a little bit lower prices so that they are – also the producers are making margins. So, I think we just have to follow, I mean, the implementation of the export policy of domestic production rates with and the global pricing environment will, of course, be important for where volumes will end up.

So, I mean, even if it was 8 million tons to 10 million tons they order, I don’t think anybody would mind as long as it took fund very high global price level in order for that to be pretty good. But it’s impossible for us to give a forecast for this.

And finally, I want to ask the question about North American UAN. North American UAN prices have held and a little bit higher than the urea price over the last few months.

Certainly, you’ve had a bit of production outages at Belle Plaine. There have been in some production outages at PotashCorp in Geismar.

I believe there’s been production issues in Trinidad. Is your sense that UAN prices should trade more in line with urea in the next sort of while or do you think UAN prices could continue to outperform?

Thanks.

If you just look historically at this, you would see that it’s quite common that UAN prices have a period of relative strength when it’s in the middle of the season while in the off-season, it’s a bit weaker, also because of – probably linked to tank space and this kind of thing. I agree with you.

I mean, it’s really our situation with the curtailments there. And I mean, urea import at this season has been sharply up on last season.

That’s not so clear to the case for UAN. So, it could be, but it’s quite normal.

It’s not normal for UAN to be so expensive compared to urea for a long time as it had been recently.

Thank you very much.

Operator?

Yes, afternoon. Thank you very much.

I’ve got a few sort of, hopefully, quite quick questions, I think. First of all, on the Qafco dividend, you mentioned that it – the company is likely to pay higher dividends now, that the expansion of Qafco 5 and Qafco 6 have been completed.

Can you just tell us, do they have a dividend policy? Is there any way we can judge as to how those dividends will progress?

That’s the first question. The second question, back on China, I’m afraid.

I mean, just wasn’t quite sure what you were saying. I just wondered whether you could clarify where you see sort of incentive prices for the Chinese in terms of exporting based on the domestic price and, of course, the cost, where you see, I guess, floor price at the moment based on Chinese production.

And then, finally, you mentioned on the earlier conference call I think that you’re planning to make a decision on Belle Plaine expansion in June. Can you just remind me what decision that is?

I thought you’d already decided to go ahead with it. I just want a bit of clarification there.

Thank you very much.

Yes. Sophie, firstly, the dividend policy in Qafco, yes, we do have one.

But it’s not a listed company, so we are not informing about that to the public sector. But what Torgeir had said in the presentation was that we received 200,000 – $200 million, sorry, $200 million as dividend in February.

And you can expect that the dividend, going forward, will be in this range, depending on obviously the price of urea going forward because we have now finished the investments, the major investments, in Qafco which has eaten up our – the possibilities to give dividends.

And I think – sorry, I think also, Torgeir mentioned that there were typically two dividends paid per year. Is this – the second dividend, what sort of – is that similar sort of magnitude?

Depending on the development of the prices of urea, as we said. But otherwise, it is, yes, it’s the same magnitude.

Okay.

That will come in the autumn.

Yes, thank you.

Related to Belle Plaine, yes, we got an approval by the board under certain conditions and we communicated about that. And we do intend to actually sign the contracts in June-July time.

What we have seen, however, is the price or cost increase in Canada, which is above what we had expected. And we are now negotiating with the different contractors to see how we potentially can get the costs down.

If the costs are too high, we will not build. That goes as the same as we are also not buying or doing merchant acquisitions if we believe that the different targets are at a too high price.

We haven’t decided upon that, but if we are not able then to make it a commercial viable project, then we will not build. But hopefully, we will be able to.

And that’s why we have said that in principle, yes, we have decided but we haven’t made the final decisions, which we will do in June-July timeframe.

Yes. And on the China situation, if you look at the domestic prices today, China or, let’s say, in Shandong, which is the largest export province, it’s around RMB 1,950 to RMB 2,000 per ton domestically, which if you add some logistical costs and the 2% export duty, you get around $350, $360, which is kind of where the Chinese seems to be offering at the moment for July shipment.

When it comes to the costs, it’s, of course, very difficult because it’s not one cost. It’s a wide variety depending on what plant you’re talking about, where it is and so on.

And I must admit that we don’t have, however, a 100% accurate rate where you see sales cost through their supply curve for that capacity. But I mean, if you look at what we presented at Capital Markets Day, we kind of assumed that cost is around RMB 1,800 rather than the current price from RMB 1,950 to RMB 2,000.

If that is a relevant number, which we think it might be, but, of course, we don’t know if the Chinese market gets obviously really oversupplied, you are more down to the, I’d say, $320 to $330 range or something probably. But, yes, maybe knowing what that situation is.

Thank you, that’s really helpful.

The last one, we do not want to comment upon the – whether we are intending to buy shares or not. We are following it closely and then we will then decide at a later stage write-downs.

Yes, we have not made any write-downs of our mining projects as such. The reach of, when you do mining projects, clearly, the risk or the probability of success is smaller than you decide to build an ammonia plant.

Then, we decided to build an ammonia plant and start. We know that there will be an ammonia plant, but of course, mining is different.

There you do a lot and explore and make a decision later on. But we foresee these projects as promising that if it – if they’re going to happen, that will more than compensate for that risk.

If in the end, we’re going to conclude to build on these projects, all of them of course remains to be seen as such. But in a Yara context, you can say that the terms and the commitment into these projects, looking at, is hopefully our context is still minor as such.

Jean de Watteville – Nomura Okay, very clear.

Please go ahead.

Operator, I think we’re still trying to attempt the previous round of answers, so...

Yes.

So, one comment then, Jean, as you said, on the debt level in Qafco, I don’t have that in front of me as such. But it is available at our – at the Internet as such.

You have a link data location, but I don’t have a performance of that. And then on Trinidad, there are regular small curtailments that we expect for the time being.

But we have no reason to believe that it will dramatically change short term as such. Of course, all possible signals that it should improve over time but there are no substantial curtailments more in the level that we have seen over the last year.

Hello, operator, you can take the next question.

Thanks very much. Can you give us your assessment of the export capability of China, if it was to stick to its rules rather than what it appears to be doing now, would that still be in the order of 7 million tons?

Can you just explain what happened last? You had a big spike in urea.

Did all the other nitrogen-containing compounds go up as well? So, if we have a little – a weaker price year, and you’re flagging up quite clearly that you expect urea prices to be quite materially lower in the second quarter, that we should expect all nitrogen prices to be lower?

Because you set against your expectation earlier on in the discussions that you expect UAN prices to come down, but then you say you’re on allocation in NPKs and you’re working flat out, which would indicate perhaps the need to – and also NPK prices came down less than raw material costs, that you would expect those margins potentially to go up. So, can you just give us an idea of how those – your product portfolio pricing is likely to evolve given a much weaker urea picture versus last year?

China situation first. Well, if you look historically, I think that monthly exports from China has peaked at just about 1.5 million tons.

So, I mean, if you use four months, that’s 6 million tons. But whether you admit considerably slower start, but then it’s also, as you’re hinting at it, it depends on how they manage the situation after.

The export tax should be high again. That is November 1.

And to my knowledge, they note that the product should be in the ports and so on, which I don’t think was the case this year. So I think that’s why some of the consultants are adding up to 6 million, 7 million tons as the kind of reasonable level if they are already stricter on the implementation than they were this.

When it comes to the nitrogen prices last year, I would say that it was not uniform. I mean if you just look at, let’s say, the difference between prilled urea and granular urea, if you look back to our quarterly report from second quarter, for instance, where we’re very focused on that, you’ll see that it was actually – clearly a granular urea that spiked.

And the main reason was that the North American market was not properly covered. Of course, all the regions contributed a bit as well, but it was – the main driver was North America.

So, I think if you do the comparison, you will see that prilled urea, even nitrate, didn’t quite have that – as strong development as granular urea. It also matters in a way.

We already measured, the further away from the U.S. Midwest, that the weaker development in a way.

So, I think you need to look at the various nitrogen products and see if – the year-on-year comparison will be the strongest on granular urea and the strongest if you are comparing the Midwest prices.

And you can see – Andrew, you can see this illustrated if you look at the slide number 13. We showed the different margins over the last year.

And if you look at the second quarter there, you could see clearly urea prices are up, but you see actually that nitrate declined from the first into the second quarter as such. And you also see that NPK margins were quite stable then.

But where we will see an effect, I mean it’s largely that in the second quarter last year is that Belle Plaine did very, very good second quarter last year and if that price peak may not happen this quarter, the results on Belle Plaine will be somewhat lower. But, of course, that will not be huge as such in a total line of contract.

But some lower result you would have from Belle Plaine if you don’t have the same peak as the last year.

So, just perhaps a supplemental. How much do you think that peak was worth in terms of EPS?

Can you give us assessment just so we can – just to help us?

Actually, last year, we saw the spread between those prices in the second quarter reporting. It is not substantial for Yara as such I don’t have that number in front of me now then.

Okay.

Yes, you could say it’s about 200 – it’s about 1 million ton of urea capacity, 250,000 tons in the quarter. And if you then have less on that what you would presume of a difference in ammonia in the urea price already, then you will get that effect.

So, if you say if its $100 urea price effect, its $25 million before tax spent, as an example.

Okay, all right. Thanks very much.

Okay. Then, ladies and gentlemen, thank you very much for participating on this quarterly presentation for Yara.

And looking forward, then, to talk to you again in about one quarter’s time. So, thank you and good bye.