Yara International ASA

Good morning, good afternoon everyone and welcome to the Yara Q2 Investor Call. Thank you very much for dialing in.

My name is Las Rosaeg, I’m the CFO of Yara International. And I’m joined here by Thor Giæver from Investor Relations; Dag Tore Mo from our Market Intelligence Department; and the EVP of Yara Sales and Marketing, Mr.

Terje Knutsen. I'm sure most or all of you have seen our report and presentation from this morning, so I will limit my opening comments.

Our EBITDA excluding special items in IFRS 16, increased by 62% in the quarter. And the improvement was largely due to higher production and lower energy cost and also improvement in deliveries from Yara own-produced products and premium products in line with our strategy.

Our return on invested capital was at 5.4% on a rolling 12 months basis and actually exceeded a 7% in the quarter. This needs further improvement, but it is trending upwards as our operating cashflow is improving, while our capital expenditure is declining.

We remain focused on improving returns through strict capital discipline and driving operational excellence. With these introductory remarks, we are ready for the Q&A.

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

Hi, this is Robin on for Joel. Thanks for taking my questions.

I had a couple with respect to the potential industrial nature in IPO, so the first is, what percentage of the nitrogen production facilities are solely focused on industrial production and for those that are mixed, what are the likely steps to be taken to enable the industrial separation?

Yes, thank you for that question. As we announced at our Capital Markets Day, we are now entering an evaluation phase when it comes to the potential IPO or industrial assets and we aim to conclude that at the start of 2020.

These are of course very crucial questions in that process to ensure that we find the structures that are the most value creating to Yara also of course reflecting the carveouts perspective that we need to take into that continuation. So, we are in that phase now and we will need to and would like to use the time to do that in a thorough manner before we are more conclusive on that.

What we have said on sort of the indicative scope is that is in the ballpark of 10% to 15% of Yara EBITDA.

Okay. And just a follow-up to that.

Can you talk about the potential for dyssynergies from less scale if you sell the industrial segment and maybe talk about any potential positive offsets, maybe from being a more specialized, and actually an ag play, how should we think about that?

Our starting point here is that it is a natural evolution of our strategy as the crop nutrition company for the future and we think that this is a very interesting opportunity for value creation through creating a leading nitrogen-based company. When it comes to exactly the phase that we are now entering on scoping, that is about ensuring that we find the right solutions and the right trade-offs in ensuring that we optimize all perspectives of that value creation, of course also taking into account potential dyssynergies.

Okay. Just one last question, more of a modeling question.

Will the sensitivity table get updated or is it unchanged?

Currently, we are entering that scoping phase, means that Yara is today what Yara is, and I think that would be a question that would naturally follow from being through that scoping phase.

Sorry, I meant the sensitivity table that is typically updated every quarter, is that going to be – it doesn’t seem to be changed from Q1, is that going to be changed?

Okay. So, this is Thor here, from IR.

You are asking, this is not linked to the IPO, right? You are just asking, whether we’re facing our sensitivity?

And the answer is, we do have a quarterly checkpoint on that. It's not – we actually do it based on the last 12 months rolling production.

So, for example, when we introduced the new plants or an expansion, we don’t sort of immediately bring in the full effect, we actually bring it in gradually, really to avoid if you like over estimation of the points in-time when a plant like that comes in.

Okay.

So, the answer is, we do it continually, but it’s not based on start-up days, it’s based on actual production.

Alright, understood. Okay.

Thanks.

Hi, yes. It’s Christian Faitz from Kepler Cheuvreux.

Hi, Lars. Hi, Thor.

Just two quick questions please. First of all, would you believe the still high upgrading margins are sustainable if and when the straight fertilizer prices keep on rising?

And then second, why are your feedstock cost stable in Q2 with obviously admittedly higher production volumes, but at the same time gas prices on a spot base at least were significantly down, can you explain that? Thank you.

Christian would you – I’m not sure we entirely caught both questions, would you mind speaking up a little and repeating both of them?

Alright. So, I’m trying to be as close to the mike as possible.

So, first of all, would you believe the still high upgrading margins you are enjoying are sustainable if and when the straight fertilizer prices keep on rising? And then the second question is, looking at your feedstock cost, which are stable in Q2 with obviously, yes, higher production volumes, but at the same time gas prices on a spot base at least were significantly down, I’m just trying to get my head around that stability of your feedstock costs at around [2.4] billion or so.

Thanks Christian, that was much clearer. We've heard you now and we’ll embark on the answers.

So, I can start with the operating margins. Obviously, we look at the starting point where the different, let’s say commodity nutrients, but also very important is to look at the crop segments that we are serving.

So, I think very much will depend on let’s say how healthy the ag market is in terms of the crop prices and return for the farmers. We price our products very much depending on the benefit that we are able to create for the farmers.

And try as much as we can to disconnect from basically more cost-plus kind of thinking. We are particularly for the NPK, in a big variety of higher value crops that give stability and it gives also a certain hedge.

I think there we have seen over quite some time now that we are able to keep and partly grow the premium marking. The same I would say in most of the overseas markets for the other premium products.

When it comes to Europe and our nitrate markets, I think that depends on partly the competitive landscape and partly the let’s say, how healthy the farm economy is in Europe.

Christian, your second question was about feedstock prices, was it linked to the first one and – I am not quite sure I got 100%.

If I look at your cost position, the P&L, the cost of controls essentially, which is at roughly 2.5 billion, it hasn’t really changed versus Q2 level 2018 for example, it has just been up on the Q1 level, admittedly, obviously you are working for higher volumes, but at the same time gas prices have been significantly down, which I would believe is a good part of you of that cost, so why is it stable and not down, that’s the question?

Yes. I think this is one we can probably circle back on this one after the call as well Christian, but I think the short version is that Yara’s cost of sales and energy cost is actually not the largest component.

There are lots of other moving parts in it, and for example the fact that the major part of our business in Brazil, even though we are growing our premium products, still the largest part there is blend product where we are most of the time buying raw materials externally and they can be finished products, like urea, DAP [NOP]. And so, this is actually quite, there are lots of other expense categories in this line, so certainly understand the question but it’s important to differentiate between if you like Yara’s P&L and urea cash flows calculator where of course [80% of roughly] cost is gas.

In your case, if I remember it is well below 20% that is gas. But happy to circle back on that one offline Christian.

Okay. Thanks Thor.

And then we can perhaps just briefly add that compared to spot prices we have an average life of one month into our costs on gas.

Sure. I'm fully understood.

Thank you. Good afternoon.

Couple actually please. So, first of all, I was quite positively surprised by the volume leverage in the business for the 2% you talked about or 1% ex-M&A, it looks like a big drop through from the volume you’ve actually produced year-on-year.

I just wonder if you would agree with that, is there something specific in the mix, perhaps this quarter? How do you think about second half on that leverage, maybe there’s also some imprint from the efficiency programs, but just some color on that number that you provided in the bridge, which I think was 60 million EBITDA?

That’s the first question. Second question is more of a market question.

How you are feeling in – right now around the second half on Brazil and LatAm in general. I ask because at least from our side it’s been really choppy data from an important point of view.

So, some really good months and some really bad months, it just seems especially volatile the data. So, just wondered how you see the market right now?

I know it’s early, but just any early feedback on orderbooks et cetera? Thank you.

So, this is Terje Knutsen, maybe I can start with the increase of own produced deliveries, which as we have announced is 9% and actually goes across most of our product groups. I think it’s an explicit strategy that we would like to go for value rather than volume that means that we had actually decreased some of our third-party source commodities and tried as to grow and position our own-produced products.

We have seen in Europe, which was still after Q1 slow compared to the normal season. So, we have seen a pickup of some of our OPP products in Europe in second quarter.

We have had quite strong quarter in Brazil. Partly if you compare with last quarter because of the transport strike that was hampering deliveries in second quarter 2018, but also due to the trade conflict between U.S.

and China where we have seen positive effect for our products in Brazil. So, I think we have seen that we have been able to execute this strategy of growing OPP and growing premium products, which has grown 7%, and deliberately, and by design reduced some of the exposure to low value generating commodities.

Okay. So, I think from what you said, it sounds like there may be therefore some slightly higher than normal leverage because you're playing catch up in Q2 on deliveries versus Q1, is that the right interpretation of what you just said or are you saying that’s the level of leverage we now expect to see going forward?

I think you will always find let’s say quarter-to-quarter deviations, particularly in Europe. So, there it is important, I think, to have a view on season as such, but when it comes to our overall total growth rates, I think we can see that we have had a quite constant growth on a consolidated level.

And we have explained our targets for longer-term targets 2025, and I think that again illustrates the leap that we will be able to continue fairly stable growth rate. This quarter might have seen slightly higher due to some of the effects described, but overall, I think we are quite confident that we are demonstrating an ability to grow steadily.

And I think Andrew you were also asking how we were specifically seeing Brazil in the second half?

Yes. Indeed, I know it’s early days, just what you can see in the tea leaves the right now would be useful thanks.

Yes. I don't think we are as such guiding into second half, but what we have mentioned around the trade conflict with U.S.

China I think we can see that this is playing or bringing a positive element into the business in Brazil. There is a clear pool of products from Brazil and obviously we are now entering into season as such in Brazil.

So, normally Q3 is strong or important quarter in Brazil and we see a positive environment in Brazil this year.

Yes. And then maybe just adding to that thought of the working capital side.

We of course have significant prepayments in Brazil in the second quarter and although they are a little bit lower than they were last year what we’ve seen historically, but there is no correlation between the sides of the prepayments and the season as such and should probably also add on the working capital that we also have an effect on somewhat higher receivables in India, so technical lag effect on gas prices.

Perfect. Thanks a lot.

Hi. Thanks.

I just had a question on the prize element or price margin element in the bridge, which was just $5 million positive and I look at your realized prices for CAN, urea and both were up and even NPK is up, so I'm just sort of wondering why did we not see bigger positive impact on price margin in line of the bridge?

Hi, this is Thor. I’ll make a try.

I think the short version here is that, I'm sure, you like others have run the sensitivities that we provide and understand that you could have imagined a higher price margin this quarter based on observable prices. And I think this is something you should expect over time, but those sensitivities give you more of SR price margin over time, but in an individual quarter you can have other factors that play in short-term because this is not just about our revenue points, it’s linked to the whole margin, including costs other than gas, which we identify separately.

One example of the factor that has played in this quarter is when we’ve had a non-plant stop in stop in Pilbara. When you have planned maintenance, you can capitalize those costs, but when you have a non-planned stock you get extra costs that you can't capitalize.

So, that’s one example and as I say, over time you should have a good correlation, but in some quarters, including this one, you don't.

Thank you. And just following up on that previous question on Brazil.

It seems all of the growth in deliveries has just come from Brazil whereas most of the other regions have seen volumes flat to down. So, can you talk about what is happening in the rest of the regions, like Europe is flat, Asia down 12%, and LatAm is – Brazil is also down.

So, just the trends that you see outside of Brazil, clearly as you pointed maybe the trade war is helping the trade flows move from other regions to Brazil?

So, this is Terje. As we tried to explain also this morning, there is quite some volume mix or product mix changes.

So, if we start with the Europe, we have seen enough unexpected catching up on nitrates. That means that we have had a quite considerable growth in the quarter of nitrates.

Actually, if we take the core markets of Europe that was 12%, while other product groups like urea, which obviously for us also is lower returning product group has seen a clear decline. We have also seen decline in NPK’s, which we consider, if you like positive because that means that the NPK season has maybe not started as quick as it did last year and therefore there is more market to be expected.

So, Europe is really a mix of pluses and minuses, and in total the volume comes out as basically a zero change, whereas you can see from the graph in the presentation there is a certain increase of premium and there is a decrease on commodity. North America, I think we are actually fairly satisfied with having stable market because as you are aware there has been very bad weather conditions in the universe, and many of the players have struggled to be able to deliver out the product.

We have had a strong season from our Belle Plaine facility on urea and we are keeping up I would say, fairly well our premium products even under very difficult weather conditions. Where we have the biggest change is probably Latin America where as we have said this morning, we have reduced deliberately our commodity sales.

Those have been low yielding and return on capital limited. So, we have chosen to prioritize that capital for other purposes.

While we are keeping up and focusing and continuing to focus on the premium product range. Yes.

Africa has been positive. It’s a small, as such, volume, but has been positive, supported by several trade sales into Africa, in addition to the more domestic sales that we already do.

And in Asia, as also when – as we went through this morning, we have had a decline in urea trade volume. That’s the main reason for the drop in Asia, while we had a slight decrease on premium in China due to a somewhat tougher market environment with again a lot of that weather-related in China.

So, it is a mixed basket, but generally speaking, I think, we can say that we have been able to grow the premium products and grow where we see the value while we have given up some commodity positions in the quarter.

Thank you.

Thanks. Just a quick follow-up, can you remind us of the tax rate for the remainder of this year?

And on China, what currently do you see as in terms of experts coming out of China or how does that play a role and on the export situation can you also comment on what you see in terms of volumes coming out of Iran into various regions? Thank you.

So, we’ll take the China question first.

Well, as we’d said there has been an increase in the Chinese exports this year and it’s from [indiscernible] tons through May. And we now see that in the current India tender that there is quite a lot of those 1.7 million tons.

It will be sourced from China. So, it is pretty clear that there will be an increase in the Chinese exports this year, compared to the 2.4 million tons in 2018.

But I think it’s not – I don’t know, I don’t think [indiscernible] much point kind of just guessing at the annual figure at this stage. So, it depends on how the market will develop now in the second half because its [indiscernible] how much urea the world needs from China that will determine that number more so than availability from China.

So, that remains to be seen. And on Iran, it's like they are able to export large volumes.

I mean they are exporting more than 4 million tons in 2018. It will be probably dropped quite a bit, but they are – I mean they are very active in Turkey, very active in Brazil.

They are still exporting through China, etcetera, etcetera. So, there will be a significant Iranian export through volume also in 2019.

Also, I think it’s difficult at this stage to guess what that annual number will be precisely.

Okay. Thanks Dag Tore.

Good to hear your voice.

Yes, good morning. I have one question for Dag Tore Mo and that’s regarding the situation in India.

At the start of the year, I think several companies at least two companies said that they are commissioning new plants, but looking at actual production figures year-to-date, they are probably down around 4% [indiscernible] or 0.5 million tons. Could you give us some flavor on what’s happening on the ground there?

Yes. [indiscernible] commercial activity there.

But my understanding is that there is [indiscernible] plant that they will commission, and I haven't heard any details whether how well it’s running. But it – at least it was finalized one plant, but then there are also several other plants that have had problem.

There have been an explosion at one plant. One plant was closed due to water supply issues because it was dry there etcetera.

So, I’d just say that the overall production from India is actually down this year despite considering [indiscernible] capacity growth. Otherwise, on gas supply issues, I haven’t seen much problems there.

I mean LNG is cheap and they are not so complicated although. So, yes, I agree.

It is an interesting observation, but with the capacity increases in India, there actually production in going down [indiscernible].

I can maybe just add that it’s very difficult to get really good information in the sense that there seems to be a quite constant delay on connection to the gas for some of these plants, so they are – you know are basically, as far as we can understand, ready for production, but there is no connected gas yet. And again, it’s difficult to reach exactly where that situation stands.

So, I think it is connected with uncertainty when and how much will come into production. From the market side, we can see clearly that there has been a sound demand.

Even though the monsoon has been somewhat delayed and somewhat lower than – or less than they would hope for. We have seen a fairly steady and strong demand growth on urea, which I guess was illustrated in the last tender that came with us well.

Thanks.

Hi, it’s Eivind. Apologies if my questions have been answered, I just got [indiscernible] half of the call, but it relates to the dividend.

Given that now volumes led to the beat now in or better-than-expected results now in Q2, if you could where will be the case that your leverage drops below not only the 3.0, but also the 1.5 net interest bearing debt-to-EBITDA target. So, my question is I guess would you consider extraordinary dividends already in 2019 if that should be the case?

Yes, it’s Lars. Thank you for that question.

As you know, the policy that we stated at the Capital Markets Day is to have a mid-to-long term net debt-to-EBITDA of [1.5 to 2.0] as a targeted capital structure. Unfortunately, we do not guide on our year as such as to your question, but what we hadn’t said today is that under the revised policy the current improved market fundamentals combine with the extent of the improvement program and increased [indiscernible] investments may lead to increases in capacity beyond the ordinary pay-out ratio going forward.

Okay. Thank you.

Hi, good afternoon. And just a quick follow-up from the last question, in terms of broader like capital allocation, obviously, you've sort of come now to the finalization of your growth CapEx project.

But if you look a little bit beyond, what are sort of the ambitions in terms of internal CapEx? And where do you see opportunities to grow and expand geographically and product wise?

Thank you.

Yes. So, we have a significant number of projects now coming on stream and ramping up this year and next year and that provides us with quite a few opportunities ramping up that capacity and that is our primary focus.

We’re past the peak when it comes to expenditures and our primary focus now is really on successfully ramping up the ongoing projects on the – that we have in the pipeline already ramping up.

Okay. Thank you.

Hi, thank you. So, are you guys thinking about Q3 earnings compared to Q2?

You mentioned obviously that Q3 is a strong quarter for Brazil, gas costs are lower, but there are some offsets like higher inventory levels in North America potentially creating and/or competitive pricing dynamic, if you can just talk a little about those factors? Thanks.

Hi, Joel. This is Thor.

I mean we don’t guide on financial results as you know. I think the – with the one exception that you’ve already mentioned that we provide some guidance on gas, so we’ve said based on the forward curve that we used last week, $160 million improvement year-over-year for our [indiscernible] gas costs is the estimate.

So, I think that’s all we can say today, and of course, when we get near the time, we’re happy as always to kind of look through how the external variables have developed since then and check cost that we're kind of on the same page there.

Alright. Thanks.

Okay. Thank you.

Thank you, operator. And then, I think I just like to thank you all for participating and wishing you a continued nice day.

Thank you.