Good morning, good afternoon, everyone, and welcome to the Yara Q2 investor call. Thank you very much for dialing in. My name is Lars Røsæg . I am the CFO of Yara International, and I am joined here by Thor Giæver and Nina Kleiv from Investor Relations, Dag Tore Mo from our Market Intelligence department, and the EVP of Yara Sales & Marketing, Mr. Terje Knutsen. I am 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 and IFRS 16, increased by 62% in the quarter. The improvement was largely due to higher production and lower energy costs, 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-month basis, and actually exceeded 7% in the quarter.
This needs further improvement, it is trending upwards as our operating cash flow 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. Operator, can you please now open for questions?
Thank you. We will now begin the question answer session. If you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. Once again, please press star and one. Our first question comes from the line of Joel Jackson from BMO Capital Markets. Your line is now open. You can now ask your question.
Hi, this is Robin on for Joel. Thanks for taking my questions. I had a couple with respect to the potential industrial nitrogen IPO. 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?
Yeah, 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 of 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 carve-out perspective that we need to take into that consideration. 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 it is in the ballpark of 10%-15% of Yara EBITDA.
Okay. Just a follow-up to that. Can you talk about the potential for dis-synergies from less scale if you sell the industrial segment? Maybe talk about any potential positive offsets, maybe from being a more specialized nitrogen ag play. How should we think about that?
Yeah. No, our starting point here is that it is a natural evolution of our strategy as the crop nutrition company for the future. 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're 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 dis-synergies.
Okay, just one last question, more of a modeling question. Will the sensitivity table get updated or is it unchanged?
Yeah. Currently, we are entering that scoping phase, means that the Yara is today what Yara is. 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. It doesn't seem to be changed from Q1. Is that going to be changed?
Yeah. Okay. This is Thor here from IR. This is not linked to the IPO, right? You're just asking whether we're updating our sensitivities. The answer is, we do have a quarterly check point on that. We actually do it based on the last 12 months rolling production. For example, when we introduce a new plant or an expansion, we don't immediately bring in the full effect. We actually bring it in gradually, really to avoid, if you like, overestimation at the point in time when a plant like that comes in.
Okay.
The answer is, we do it continually, it's not based on start-up dates, it's based on actual production.
Right. Understood. Okay, thanks.
Thank you. Our next question comes from the line of Christian Faitz from Kepler Cheuvreux. I am not sure if I pronounced it correctly, but your line is open, sir.
Hi, yes. It is Christian 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? Second, why are your feedstock costs stable in Q2 with obviously admittedly higher production volumes, but at the same time, gas prices on a spot basis at least were significantly down. Can you explain that? Thank you.
Christian, I am not sure we entirely caught both questions. Would you mind speaking up a little and repeating both of them?
I'm trying to be as close to the mic as possible. 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? The second question is, looking at your feedstock costs, 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 $1.4 billion or so.
Thanks, Christian. That was much clearer. We've heard you now, and we'll embark on the answers.
I can start with the upgrade margins. Obviously, we look at the starting point with the different, let's say, commodity nutrients. Also very important is to look at the crop segments that we are serving. I think very much will depend on, let's say, how healthy the ag market is in terms of the crop prices and the return for the farmers. We price our product 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 gives 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 margin.
The same, I would say, in most of the overseas markets, for the other premium products. When it comes to Europe and our nitrate market, 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? I'm not quite sure I got it 100%.
If I look at your cost position in the P&L, your cost of goods sold essentially, which is at roughly $2.5 billion, it hasn't really changed versus the Q2 2018 level, for example. In fact, it's been up on the Q1 level. Admittedly, obviously, you're working through higher volumes. At the same time, gas prices have been significantly down, which I would believe is a good part of that cost. Why is it stable and not down? That's the question.
I think this is one we can probably circle back on this one after the call as well, Christian. I think the short version is that Yara's cost of sales, energy cost is actually not the largest component. There are lots of other moving parts in it. 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 products where we are most of the time buying raw materials externally, and they can be finished products like urea, DAP, and MOP. There are lots of other expense categories in this line. Certainly understand the question, but it's important to differentiate between, if you like, Yara's P&L and a urea cash cost calculator where, of course, roughly 80% of the cost is gas.
In Yara's case, if I remember right, it's well below 20% that's gas.
Okay.
Happy to circle back on that one offline there, Christian.
Okay, thanks, Thor.
We can perhaps just briefly add that compared to spot prices, we have an average lag of one month into our costs on gas.
Sure. I fully understood.
Thank you. Our next question comes from the line of Andrew Stott from UBS. Your line is now open. You can now ask your question.
Thank you. Good afternoon, gents. A couple actually, please. 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-over-year. I just wonder if you'd agree with that. Is there something specific in the mix perhaps this quarter? How do you think about the 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. The second question is more of a market question. How are you feeling 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 import point of view, some really good months and some really bad months. It just seems especially volatile, the data. Just wondered how you see the market right now. I know it's early, but just any early feedback on order books, et cetera. Thank you.
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 is an explicit strategy that we would like to go for value rather than volume. That means that we have actually decreased some of our third-party sourced commodities and tried to grow and position our own produced products. We have seen Europe, which was still after Q1 slow compared to the normal season. We have seen a pickup of some of our own OPP products in Europe in the second quarter. We have had a quite strong quarter in Brazil.
Partly, if you compare with last quarter because of a 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 a positive effect for our products in Brazil. I think we have seen that we have been able to execute the 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. I think from what you said, it sounds like there may be therefore some slightly higher than normal leverage because you are playing catch up in Q2 on deliveries versus Q1. Is that the right interpretation of what you just said? Or are you saying, look, 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. There it is important, I think, to have a view on season as such. 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. We have explained our targets for longer term targets, 2025. I think that again illustrates a belief that we will be able to continue a fairly stable growth rate. This quarter might have seen slightly higher due to some of the effects described. Overall, I think we are quite confident that we are demonstrating an ability to grow steadily. 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 right now would be useful. Thanks.
Yeah. I don't think we are as such guiding into second half. 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 pull of products from Brazil. Obviously we are now entering into season as such in Brazil. Normally Q3 is a strong or important quarter in Brazil. Yeah, we see a positive environment in Brazil this year.
Yeah, maybe just adding to that also on the working capital side. We of course have significant prepayments in Brazil in the second quarter. Although they are a little bit lower than they were last year, what we've seen historically is that there is no correlation between the size of the prepayments and the season as such. Should probably also add on the working capital that we also had an effect of somewhat higher receivables in India as a technical lag effect on gas prices.
Perfect. Thanks a lot.
Thank you. Our next question comes from the line of Chetan Udeshi from J.P. Morgan. Your line is now open. Please ask your question.
Yeah, thanks. I just had a question on the price element or price margin element in the bridge, which was just $5 million positive. When I look at your realized prices for CAN, urea, both were up, even NPK is up. I'm just sort of wondering why did we not see a bigger positive impact on price margin line of the bridge?
Yeah. Hi, this is Thor. I'll make a try. I think the short version there is that I'm sure you, like others, have run the sensitivities that we provide and found that you could have imagined a higher price margin this quarter based on observable prices. I think this is something you should expect over time, that those sensitivities give you more or less our price margin over time. In an individual quarter, you can have other factors that play in short term, because this is not just about our revenue point, it's linked to the whole margin, including costs other than gas, which we identify separately. One example of a factor that has played in this quarter is when we've had an unplanned stop in Pilbara.
When you have planned maintenance, you can capitalize those costs, but when you have an unplanned stop, you get extra costs that you can't capitalize. That's one example. As I say, over time, you should have a good correlation. In some quarters, including this one, you don't.
Thank you. 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. Can you talk about what is happening in the rest of the regions? Europe is flat, Asia down 12%, and Latin America ex, Brazil is also down. Just the trends that you see outside of Brazil, where clearly, as you pointed, maybe the trade war is helping the trade flows move from other regions to Brazil.
Yeah. This is Terje. As we tried to explain also this morning, there is quite some volume mix or product mix changes. If we start with Europe, we have seen a not 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 a lower returning product group, have seen a clear decline. We have also seen a decline in NPKs, 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. Europe is really a mix of pluses and minuses.
In total, the volume comes out as basically a zero change. As 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 a stable market because as you are aware, there has been very bad weather conditions in the U.S., 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. 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. 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. In Asia, 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.
We have 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. It's a mixed basket. 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.
Thank you. Once again, if you have any other questions or if you wish to ask a question, please press star and one on your telephone. Once again, for any questions, please press star and one. Our next question comes from the line of Christian Faitz, again from Kepler Cheuvreux. Thank you. Your line is now open, sir.
Thanks. Just a quick follow-up. Can you remind us of the tax rate for the remainder of this year? On China, what currently do you see in terms of exports coming out of China, or how does that play a role? 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.
Should we take the China question first?
Well, as we say, there's been an increase in the Chinese exports this year, and it's from by roughly a million tons through May. 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. 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. I don't think there's any much point kind of just guessing at the annual figure at this stage. It depends on how the market will develop now in the second half, because it's really the world's deficit and how much urea the world needs from China that will determine that number, more so than availability from China. That remains to be seen.
On Iran, it seems like they are able to export large volumes. They exported more than 4 million tons in 2018. It will probably drop quite a bit, they are very active in Turkey, they are very active in Brazil. They are still re-exporting through China, et cetera. There will be a significant Iranian export volume also in 2019. I think it is difficult at this stage to guess what that annual number will be precisely.
Okay, great. Thanks, Thor. Good to hear your voice.
Thank you. Our next question comes from the line of Bengt Jonassen from ABG Sundal Collier. Your line is now open, sir.
Good morning. I have one question for Dr. Mo as well, that's regarding the situation in India. At the start of the year, I think several companies, at least two companies, said that they were commissioning new plants. Looking at actual production figures year to date, they are probably down around 4% or half a million tons. Could you give us some flavor on what's happening on the ground there?
Well, I can also add, it's a bit closer to our commercial activity there. My understanding is that there is one plant that at least was commissioned, and I haven't heard any details how well it's running, but at least it was finalized, one plant. There are also several other plants that have problems. There has been an explosion at one plant. One plant was closed due to water supply issues because it was dry there, et cetera. As you say, the overall production from India is actually down this year despite the country's on-paper capacity growth. Otherwise, on gas supply issues, I haven't seen much problems there. LNG is cheap and not so complicated to get hold of. I agree with you. It's an interesting observation that with the capacity increases in India, the actual production is going down.
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. They are basically, as far as we can understand, ready for production, but there is no connected gas yet. Again, it's difficult to read exactly where that situation stands. I think it is connected with the 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 they came with as well.
Thanks.
Thank you. Once again, if you have any questions, please press star and one, and wait for your name to be announced. Once again, for any questions, please press star and one. Our next question comes from the line of Eivind Sars Veddeng from DNB Markets. Your lines are open. You can now ask your question.
Hi, it's Eivind. Apologies if my questions have been answered. I just got kicked out of the call. It relates to the dividend. Given that now volumes led to a beat now in, or better-than-expected results now in Q2, it should very well be the case that your leverage drops below not only the 2.0 but also the 1.5 net interest-bearing debt-to-EBITDA target. My question is, I guess, would you consider extraordinary dividends already in 2019, if that should be the case? Thank you.
Yeah. It's Lars. Thank you for that question. As you know, the policy that we've taken on the Capital Markets Day is to have a medium to long term net debt to EBITDA of 1.5-2 as a target to the capital structure. Unfortunately, we do not guide on our EBITDA as such as to your question. What we have said today is that under the revised policy, the current improved market fundamentals, combined with the extended improvement program and increased hurdle rate for new investments, may lead to increased dividend capacity beyond the ordinary payout ratio going forward.
Okay. Thank you.
Thank you. Once again, if you wish to ask a question, please press star and one, and wait for your name to be announced. Once again, star and one for any questions. Our next question comes from the line of Lisa De Neve from Morgan Stanley. You can now ask your question.
Hi, good afternoon. Just a quick follow-up from the last question. In terms of broader capital allocation, obviously you've come now to the finalization of your growth CapEx projects. If you look a little bit beyond, what are the ambitions in terms of internal CapEx, and where do you see opportunities to grow and expand geographically and product-wise? Thank you.
Yeah. 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 that we have in the pipeline already ramping up.
Okay, thank you.
Thank you. Our next question comes from the line of Joel Jackson from BMO Capital Markets. Your line is open, sir.
Hi, thank you. How 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 a more competitive pricing dynamic. If you can just talk a little bit about those factors. Thanks.
Hi, Joel. This is Thor. We don't guide on financial results, as you know. I think with the one exception that you've already mentioned, that we provide some guidance on gas. We've said based on the forward curve that we used last week, $160 million improvement year-over-year for our spot-linked gas costs is the estimate. I think that's all we can say today. Of course, when we get nearer the time, we're happy as always to look through how the external variables have developed since then and check off that we're on the same page there.
All right, thanks.
Thank you. If you have any questions, please press star 1. If you wish to ask a question, please press star 1, and wait for your name to be announced. We don't have any further questions. Please proceed.
Okay. Thank you. Thank you, operator. I think I'd just like to thank you all for participating and wishing you a continued nice day. Thank you.
Thank you. That concludes our conference for today. Thank you all for participating. You may all disconnect.