Good morning, good afternoon all, and welcome to Yara's Q3 result 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 and IFRS 16, increased by 49% in the quarter. The results reflect 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 a share buyback program.
This is the first quarter where we are within our targeted range of 1.5 to 2 times Net Debt/EBITDA , which we announced as part of our capital allocation policy at the Capital Markets Day in June. The announced buyback program would, by the 30th September numbers, bring our Net Debt/EBITDA back to approximately 2x. This means that we will buy back approximately 0.5% of our outstanding shares by the end of the year. 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 these introductory remarks, we are ready for the Q&A. Operator, can you please now open for questions?
Yes, sir. Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, just press star and one on your telephone keypad and wait for your name to be announced. Once again, star and one if you wish to ask a question. Once again, for those who want to ask a question, just press star and one on your telephone keypad. Ladies and gentlemen, if you wish to ask a question, just press star and one on your telephone keypad.
Operator, from our side, it looks like there are several people waiting to ask questions, so please go ahead.
As of the moment, sir, no questions that I'm seeing on the queue. Once again, for those who want to ask a question, please press star and one on your telephone. Okay, sir, we now have our first question. This comes from the line of Thomas Rengaswamy. Your line is now open. Please go ahead and ask your question.
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've started the fourth quarter. We've seen a little bit of weakness in urea prices, 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. You highlight with your data on the supply growth that we've seen a very significant amount of capacity addition in India over 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.
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 1.5-2. This quarter, we are at 1.9, a little bit above that. As such, what we're doing now is announcing a buyback program which by the 30th will bring us back up to 2. Going forward, we will base our decisions on this capital allocation policy. 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, it's quite normal that this is a quarter which could sort of go both ways, either wait and have a relatively heavier weight in Q1, or we could see renewed buying now during Q4. Quite normal season. A lot of markets still remaining in Europe. Relatively low urea positioned in the market in Europe, which is positive. 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 blends.
We are continuously trying to position ourselves in segments where we can grow our premium product range. This has been successful during third quarter. We expect that we will continue this strategy into fourth quarter, which obviously is in season quarter, in the Southern Hemisphere.
On your India question, it's correct and that the table with new capacity, that 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 caught back to equal same period last year. There are a number of issues. There is actually a new plant that has started up, so that's not the wrong assessment. They have had problems on the production side, partly due to technical issues with some of the plants, partly due to weather issues.
One had 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. I don't know if you've also seen now that one producer, Zuari, 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. That's also a kind of a power game that's ongoing. 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 pipeline, actually. It will be unclear exactly when they will be able to produce. India is with a strong demand development.
They've been very active buyers. You've probably seen that just today they got approval from the Department of Fertilisers to buy 1.1 million tons of urea. At least some of the consultants think they were actually looking for more. Which this could also be then positive going forward.
Okay, great. Thank you very much.
Thank you. We'll now take our next question, and this comes from the line of Ben Isaacson. Your line is now open. Please go ahead.
Hi, this is Ziad Saada in for Ben. Thanks for taking our call. Just on slide 30 of your presentation, you show how nitrogen supply growth is going to go down, but you are excluding China. 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? Maybe 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.
Yeah. That's a lot of issues. China, on the policy side, on the demand side, they 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 years, I mean, they produced 70 million tons of urea in 2015 and now just above 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. On nitrogen, they have basically achieved these political targets on the demand side and more. 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.
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. It doesn't look like there is a lot of the dynamics on the neither the demand nor the supply side.
What you're probably wanting to kind of assess is how the kind of availability from China would kind of match the need for Chinese exports from the rest of the world. If, of course, you don't have to tweak the parameters too much to get quite a wide range of, let's say, outcomes. Yeah, it's a key question.
I think domestically in China, this is positive for a company like Yara. We try to do more with less, as we say, and this is very much what also the Chinese government would like to see in agriculture. Our more, you could say, high-end way of producing with the premium products and not at least the knowledge base we have will open up opportunities for Yara going forward.
Okay, thank you. We will now take our next question, and this comes from the line of Joel Jackson. Your line is now open. Please go ahead.
Hi, good morning. Joel Jackson from BMO. I had a few questions, I'll ask one by one. Typically, in the last few years, we've seen nitrate prices or CAN prices 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 the last couple of years.
Yeah. 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. We keep believing 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. There we have had a quite stable pricing on the nitrates versus grain. 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. The NPK premium was, I think, strong again in the third quarter, similar to second quarter, and these are some of the strongest 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 P and K. We are, 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 there is more slowness in it. I think it is a part of our business model that we would see less volatility in our NPK than in the general commodities. In periods when commodities fall like they do now, we would typically benefit. There is a slowness in the adjustments, which obviously is by design. We feel that we have had a good balance between margin and volume.
This is always something we look at very carefully. 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. How much of your gas is locked in right now in both the fourth quarter and the first quarter?
Yeah. Our policy and our exposure is spot. What you have is you have a delay by one month to the spot prices into our system. We are and we have always been spot on the gas prices.
Just making sure nothing changed into the first quarter. My final question would be, 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 weeks that have been finalized here. Do you think another wave of consolidation is needed? What might that look like, if you're able to comment?
As we've said at our Capital Markets Day and many times before our focus now is on increasing our returns through delivering on our strategy and delivering on our committed investments and our improvement program. That is really the main priority that Yara has and which we believe is really what is the most important priority for us to have as a company. We are in the industry as everybody else, but that is our priority to deliver on that strategy.
Thank you.
Thank you. Your next question comes from the line of Andrew Stott. Your line is now open. Please go ahead.
Oh, 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 explained the gross margin improvement, and the limited impact from the 5% drop in volumes as the NPK element. Is that just a reference to blends versus compounds? Is that what's happening there? I struggle a bit with the math, so if you can help me, if it's the case that selling 50,000 more compound material gives you that uplift in gross margin. Anything you can help me on there. I'm just struggling a bit squaring that. Secondly, the Nel JV on the clean hydrogen. Just wonder where you are with that from a chronological standpoint, from a capital commitment standpoint.
I'm also interested in anything you can tell me about the process because it wasn't particularly clear to me. Thank you.
Yeah. NPK, for us, consists of the compound NPK, but also some of the blended NPKs. 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 than necessarily, let's say, fighting for the cheapest input on the NPK. I think you can find in the report, the split between compound and blended.
Yeah
NPK.
That was really my question, because you've only sold an extra 50,000 tons, 3% growth, and your total NPK portfolio is down 5%, which is in line with your total deliveries. I'm just surprised about the extent If you tell me that margins are so good in compounds, then fine. Otherwise, I struggle a bit with the math.
Andrew, hi, this is Thor here.
Hi, Thor.
We have linked the NPK strength to this, but the mix effect 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. 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.
Okay
A high margin NPK or for that matter, urea produced in Belle Plaine. It's a broader comment, which is.
Okay. Fine.
which is about NPK. Maybe just for the second question, Andrew, would you mind repeating? We picked up it was about the Nel Corporation, but could you repeat the full question?
Yeah, just looking for more background on it. That'd be helpful. Just what the production process is, 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?
Yeah. This is Lars. Thanks for asking. As you will recall from the capital markets day, reducing our CO2 footprint and look at the decarbonization is one of our strategic priorities. This is not essentially a joint venture. This is a collaboration agreement, which is really about looking into different pilot technologies around decarbonization and a renewable production of hydrogen. There's no material capital associated with that collaboration.
Would you put it on a timeframe that's meaningful? Are we looking at the next few years or the next decade, or is it too early to know?
Yeah, no. What we've said is a 10% reduction towards the 2025, when it comes to CO2 equivalents, and for us to be climate neutral by 2050. It is one of many initiatives that we have within that space to support that journey.
Okay. Thank you.
Thank you. Your next question comes from the line of Lisa De Neve. Your line is now open. Please go ahead.
Hi, good afternoon. Most of my questions have been asked, but two small ones. 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. I'm not talking about the prepayments which are unwinding, but the other changes. Then back to the sales and marketing department, which was up 24%. I'm just wondering, you discussed the NPK side, but are there other movements that are worth mentioning in that?
Yeah, 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. Of course, seasonal prepayments in Brazil, a reduction in that, and also related then to the gas subsidy payments in India, where there is a time 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, as Terje has been talking about earlier, deliberate commercial decisions about the trade-off between value and volume in the marketplace in line with our strategy.
Okay. You're actually saying that Sorry, on the first question, the change in inventories is mainly due by the fact that it's higher own produced inventories rather than third-party inventory. Is that correct?
Yes.
Okay. Thank you.
Thank you. Your next question? Yes, sir. The next one.
Sorry, there was a follow-up operator to that question.
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. I would basically say that all our nitrate-based products, generally have 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, like Urea plus S. Generally, we have been able to have a lift in our margin on most of our premium products.
Lisa, hi, this is Thor. Just to add, just be aware that when you're looking at the sales and marketing results in isolation, there's the flow through external factor here, which is, as Terje describes, higher realized prices relative to most of the reference. There's also an internal pricing element because when the production segment sells to sales and marketing, it's at a fixed premium. That if you like, the variation in premiums, it goes to sales and marketing.
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.
Yes, sir. Thank you. The next one comes from the line of Chetan Udeshi. Your line is now open. Please go ahead.
Yeah. Hi, thanks. A 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 term, given that your NPK prices on the compound side tend to be more sticky, I guess? 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 the third quarter. If I look at your overall deliveries are down.
You said it's value over volume strategy, even the premium deliveries when I look at Q3 versus last year is essentially flat. Maybe can you help us understand where is the benefit from the committed growth programs visible in the third quarter? Thank you.
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. It's also important to say that obviously over time there is a price correlation. 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 P&K 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 underlying commodities are dropping.
It depends a bit on now the further development of P&K, 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 P&K. That really depends a bit now on the continuation of the P&K market.
Okay, Chetan. Hi, this is Thor. I will try to answer your second question. I think the first disclaimer in that, I think when you are looking at an individual quarter, you will be normally more impacted by your sales rate and what volumes the market can absorb that quarter. I would say, given the flexibility we will normally have on inventory, it is not normally whether an individual growth project has started up or not that impacts what you sell in a quarter. 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 plant, you can make the link there. We also have some urea expansion. We have higher urea sales.
On nitrates, it's down a bit, but as we mentioned in the presentation, third quarter of last year was a record quarter. I think there we sold more than we produced. We recognize the kind of need to make this link more strongly, and I think you can expect us to do that in particular in connection with the full year results. That's probably about what we can say right now.
Thank you.
Thank you. The next question comes from the line of Christian Faitz. Your line is now open. Please go ahead.
Yes, good afternoon. Two questions from my side. The first one is the dividends from associates. I noticed they were broadly flat on a nine-month basis, whilst your own EBITDA is sharply up. Could you maybe explain why distribution hasn't gone up? 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, any input on season to date, deliveries and imports, et cetera, would be helpful. Thanks.
Oh, sorry. Go ahead.
No, Terje can maybe comment on our position with Belle Plaine and Canada, it might be really different than the total North American market. We 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, 5 months after the end of the quarter when I announce their numbers. Of course, we follow trade and so on, we follow imports and exports, so far, let's say, for the two months this season that it's reported, July and August, imports of nitrogen is roughly similar to the same period last year, that drowns in what was produced, those numbers are not public yet.
We don't feel like there is any point for us to make short-term comments on the developments in the North American market than when it will be so much guesswork.
This is Lars on the other question. If I look then through our notes on page 14 of the report, the dividends from equity account of the investees are indeed in line with last year of $97 million this year versus $98 million last year.
Yeah, why is that?
Could you please maybe repeat the question, Christian?
Yeah, I'm wondering why that is, given that everywhere else you are posting profit increases, and it doesn't seem to be reflected at QAFCO. Is there any other trend going on offsetting that, or?
I think that, of course, QAFCO's business is quite different to Yara's business overall. Where they are kind of mainly exposed to the urea price and producing and selling about the same as they did last year. Yara has, of course, many other products, many other markets, which in some have improved. For example, the European gas situation has been a big positive for us and has not impacted us. I don't know if others would add to that, but I.
Yeah, I think I can also add to that the share on net income in equity accounts with investees is also indeed in line with last year of NOK 52 million this year versus NOK 54 last year.
For that nine month, urea price is basically the same.
Yeah. Again, if you look at page five, you see that there we are using FOB Egypt, but it is practically exactly the same. 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.
Thank you. We'll now take our next question, and this comes from the line of Øyvind Særs. Your line is now open. Please go ahead.
Hi, David from DNB. Just two questions. One on the gas forecast for Q4. In Q2, you said you had a NOK 160 million expected benefit in Q4. You repeat that now in Q3. Looking at the details in your slide pack, it seems like the underlying gas price assumption for Europe is roughly NOK 1 or NOK 0.80 lower. What's driving that, please?
I think that's one we'll probably need to follow up separately.
Yeah, like I said, the amounts we specify each quarter are just mechanically following our sensitivities on the forward price. We're happy to follow up with that one 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 to 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?
Yeah. In general, you can understand the logic when the way gas prices in Europe has collapsed, that people are looking at a way of exploiting this. Okay, here there are some plants that have been down for some years. Can we try to get them back into production? I guess that's a logical thing. I think a bit too early yet to say how successful it will be in the end. As you say, they've been down for many years. Sometimes you don't just find, let's say, skilled labor and so forth easily. That's never easy, to put it that way. That's right, there are ongoing efforts.
When it comes to the Yara side of that, we haven't seen much movement yet. 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. That's also what we are doing presently.
That is clear. Thank you.
Thank you. No further questions that came through at this time, sir. Please continue.
Okay. I think thank you to everyone for participating. Look forward to keeping in touch and watching the markets and results develop. Thank you. Bye.
Thank you. That concludes our conference for today. Thank you all for participating. You may now disconnect.