Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Yara's First Quarter Results 2019 conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you will need to press star one on your telephone. I must also advise you that the conference is being recorded today, Friday the 26th of April, 2019. I would now like to hand the conference over to your speaker today, Lars Røsæg. Thank you. Please go ahead, sir.
Thank you very much, operator. Good morning, good afternoon, everyone, and Welcome to the Yara First Quarter Results conference call. I am sure most of you have already seen our report and the presentation from this morning, so I will limit my opening comments and make sure we have adequate time for Q&A. Our EBITDA, excluding special items and IFRS 16 effects, increased by 17% in the first quarter as improved margins and positive currency effects more than offset lower deliveries. The improvement was largely due to higher European nitrogen margins and a strong US dollar. We did experience technical issues after turnarounds in three of our largest plants, impacting our results and our improvement program performance in the quarter in isolation.
Our return on invested capital at 4.1% is improving. It is not at a satisfactory level while trending upwards. Our operating cash flow will cyclically improve, while capital expenditure spend is reducing and the cycle fundamentals are strengthening. We remain focused on improving our returns through strict capital discipline and driving operational excellence. With these introductory remarks, we are indeed ready for the Q&A. Operator, I kindly ask you to open for questions.
Thank you, sir. W e now have your 1st question from the line of Ben Isaacson. Your line is now open.
Hi, it's Oliver Rowe for Ben. Thanks for taking my question. Could you maybe just discuss your Brazil strategy? Are you still seeing opportunities for further M&A and consolidation, or are you happy with your positioning in that market once Salitre and Rio Grande are fully commissioned?
Yeah. In Brazil, we would come out of a period of significant structural changes, as you indeed mentioned, we also have two significant projects ongoing. Our main focus there, as is the overall strategy, is to focus on delivering on the ongoing project and also deliver on our strategy of value creation and value over volume.
Right. I guess, when we think about where the next sort of regional opportunities would be around the world, I know that you're still in cost improvement mode, when we get a few years out, where do you think that opportunities may lie?
Well, there could, of course, be opportunities in many parts of the world, in many regions. Our mindset is indeed that focusing on improving our underlying operations and our project is the right approach, regardless of how different opportunities may pan out.
Great. Thanks.
It's Terje Knutsen, sales and marketing. We could add that we recently acquired the Tata Chemicals business in India, as you know, one year ago. We are very much in the mode of scaling up, particularly our premium product sales into India, and that means that we are expanding even in our existing portfolio of markets.
Thank you.
Thank you. We now have your next question from the line of Joel Jackson. Your line is now open.
Hi, good afternoon. I had a few questions. I will go through them one by one. Obviously the lower European gas costs are really helping your margins and helping your costs. Can you talk about the impact on the overall nitrogen market as fourth quartile producers have some cost pressure relief here? How does that impact the overall market as you see it? Thanks.
Yeah. This is Terje Knutsen from our marketing analysis. I think it has a limited impact at the moment. Already before the drop in gas prices, as you mentioned, it was really the Chinese situation that set global prices, either through an export logic that we sometimes see when prices are very good, like during the last fall, when the global urea market was in a deficit ex-China, so that urea had to be pulled out from China. You have this export logic, which is currently would have had a price of, let's say, around $ 300. The market turned into a situation where the world ex-China had a small surplus.
What you saw then was that you didn't actually see any curtailment by, as you say, the fourth quartile producers outside China, because at an even higher price level than that cost level, the Chinese were starting to look at imports. They have actually imported at least three to five cargos just recently because the global market was sufficiently low compared to the Chinese price levels. Of course, now that the private market has moved up again, it seems to be again developing into a slight deficit outside China. Now the prices are kind of in between those price logics. I would say that the cost improvement for the fourth quartile producers, as you mentioned, outside China, has not led to a price drop for urea. It's led to increased margins for those producers.
If I decode what you're saying, you're saying that the utilization of European production was the same or is the same at NOK 5 gas versus NOK 10 gas. Is that what you're saying?
That's pretty close to reality. If you assume that Ukraine is out on both occasions, you could say, which they have been because of all kinds of other problems, that would have been an area where they would have struggled at 10 and probably produced at five, but you haven't seen any difference there. Then you have some producers in Eastern Europe that are in export-oriented nitrogen areas like in Poland, Romania, Lithuania, et cetera, that could also be swing factors at a NOK 10 scenario, but not at a NOK five scenario. There are some, but let's say for us in Western Europe, we also had positive urea margins, let's say half a year ago when the gas price was around NOK 9. Of course, when you get to NOK 10, then margins are, of course, very slim.
If you look at the reality over the last year or so, I don't think there's been many market-related adjustments to urea production anywhere outside China. You had some in the fall with Pakistan possibly reducing production a bit and importing some more urea, say maybe in Bangladesh. Maybe some adjustments. I don't think it's right to say that there were none, but I would say that it was limited, at least.
Thank you for that. Another question is, I want to talk about your digital ag partnership or platform partnership with IBM. 1st of all, I want to know how much should we expect you to put into an investment into this in the next few years? Maybe you could break it out by year. A lot of your larger crop input competitors and other competitors have put a lot of money into digital ag for the last decade in terms of cost investments and acquisitions.
As we know, they're not making money or they're losing money. They're not getting returns. They're not getting NOK 10 an acre or NOK 20 an acre from growers. They're getting maybe NOK one an acre. What I wanted to know is, what will you be doing differently? What services will you be offering differently? How will this make money? How will you differentiate things?
Yeah. This is again, Terje Knutsen, sales and marketing. I think this is important that this is not an ordinary supplier agreement. This is a partnership where two companies with very different but also very complementary competencies come together. What we actually bring in is primarily our competence. That means they bring in their competence, we bring in our competence, which obviously is in crop nutrition agronomy. Where the uniqueness here is that IBM is searching for a way to approach a farmer, have access actually to farmers. We have that access to the farmer and to the field. That also leads me to why is this different? Others have bought themselves into knowledge and competence. We have been building knowledge in this company for many, many years. We don't think the best way of getting into a digital position is acquiring such position via other companies.
We have chosen to do this more in-house by building and investing into own people in four regional hubs around the world. We are presently around 250 people working on that digital part. Then we rather complement that with partnerships in competencies where we don't think we should invest, like for instance, data management and the expertise and services that they have, for instance, in data analytics. Rather than talking money in terms of investment, this is bringing competencies together in a hopefully smart way that can make us come to market with high-quality solutions at a relatively low-cost investment.
Sorry, as a result of this announcement, is there an incremental investment Yara is making this year, 2020, 2021? Can you give us a little more elaboration on that?
It's very marginal, I would not even say it's relevant in terms of talking investment level.
Okay. Thank you very much.
Thank you, sir. The next question is from the line of Neil Tyler. Your line is now open.
Thank you. Hi, good afternoon. Might as well start with a follow-up question to the previous one on the IBM agreement. Just so we're clear, I understand you say that there's not going to be any meaningful incremental investment. The recent digital effort has led to a step up in operating costs that you've been quite clear about. Given that you're accelerating those efforts, can we just close that debate and can you tell us whether there'll be any further step up in operating costs related to the additional efforts you'll be investing in digital from this point? That's the 1st question, please.
Yeah. I think we said last quarter that we have, in a way, reached now a level which we think will be our level. We might have marginal adjustments to that, but we are in the magnitude of NOK 40 million - NOK 50 million spend per year. The focus we have right now is to commercialize the solutions that already are being launched, and partly scale up that commercialization, partly experiment a bit with different models.
We are, for instance, now on subscription models with our new YaraIrix, which is a small device that you can click onto a smartphone, where you can measure the needed nitrogen level for a crop. Let's say a low cost model of our N-Sensor and N-Tester. These are different tools that we now focus on commercializing. There are a slight shift from development cost to, let's say, commercialization capacity, in our digital area, but nothing significant. We think we can develop and grow the income side of the digital based on the cost or investment level that we have presently in simply human capital.
Okay, thank you. 2nd question is on the unplanned outages that took place in the period. Since the inception of your improvement program and capacity expansions, there's been a higher incidence of these sorts of outages as you've tried to bring the expanded facilities back on stream, for example. Do you think that's just coincidence, or how can we feel comfortable that actually the underlying operating rate is not going to remain hampered for the next year or two as that process continues? That's the next question, please.
This is Lars Røsæg speaking. You are correct that in the quarter as such, we have an impact from these three outages of a significant amount, while at the same time the remaining plants show an improvement. It is important to note that we still have a improvement to date of the improvement program of NOK 320 million of sustained improvement. To us, it is no doubt that this is the right track, that it is showing underlying improvements and we remain fully committed to the target of NOK 500 million by the end of 2020.
In addition to that, we have signaled that at our capital markets day we will come with new and even more ambitious targets for the program. While we will or have had these kinds of outages related to turnarounds in the quarter, I mean, from time to time we'll have outages in plant. The underlying improvement trend to us is very clear.
Okay, thank you. The last question, I suppose on a similar topic, the growth investments. You no longer disclose the anticipated EBITDA contribution and your CEO on the webcast this morning suggested that was partly because the calculation was slightly arbitrary. What I suppose isn't arbitrary is the volume contribution from those investments so far and more importantly, the return on capital on those growth investments at current prices. Can you give us an idea of what you anticipate that to be once all of those investments are brought on stream at current prices?
Yeah, you are exactly correct that we commented also a bit on this morning. Entering a new year now, we plan to launch an updated longer term earnings improvement ambition and an updated tracking methodology at the capital markets day on 26th of June. Highlighting, for example, that the current tracking is based on 2015 margins. I think if you, example, look at 2015 margins for ammonia, those were at a much higher level in 2015 than what they are today, impacting, for example, Freeport. We then want to make sure that the new methodology and reporting is more relevant in addition to current earnings and market conditions. For that reason, we don't really believe it's feasible, more meaningful to provide earnings guidance while that methodology effort is ongoing.
We're actually only a few weeks away from that one since there are significant disconnects between previous methodology and current earning and market conditions. What we have said is that we were able to put Freeport and Sluiskil on stream at the start of the second quarter while we had some delays on some of the others. We said that in total, we believe that has a slight negative impact in isolation on 2019, 2020.
Okay. Just to finish off, on Freeport and shipping investments, at the current prices, are the earnings from those two expansions clearing the return threshold that you set yourself?
These are indeed in its ramp-up phase now and in its early days of the profile. There is absolutely nothing about the fundamentals of those business cases where we have changed our view on that.
Okay. Thanks very much.
Thank you once again. If you wish to ask a question, please press star and one, and should you wish to cancel the request, you may press the hash key. The next question is from the line of Andrew Scott. Your line is now open.
Good afternoon. Thanks for taking my questions. A couple, really. Just wanted to pursue the slide that you put in on commodity versus premium volumes. You earmarked Brazil as an area that you've deliberately chosen to retreat from. I just wonder if you could walk through why that is. Is it purely the freight rate and so the net backs, or are there other issues about Brazil versus other export markets? That's the 1st question on the commodity volumes.
Sorry, actually, related to that, when do you actually think this will all level out? When do you think you've sort of taken the pain you want to take, if that's the right way of verbalizing it? The 2nd question was more market related. I see that China, in general, is exporting quite aggressively again. I saw a number about February volumes out of China being sixfold year-over-year. What do you think is behind that? Thank you.
Yeah. First of all, I think we are clearly not retreating commodities from Brazil. We still have a very significant share of our volume in Brazil being what you could call commodity products, being at least 75% of what we sell in Brazil. What we do is to look at the marginal tons we are doing and whether it makes sense or not to, let's say, at any point in time, commercialize the volume that we have done historically. Right now we have seen that there are pressure on commodity margins. These are third-party products that we sell in Brazil, and we are, by design, I would use the word even marginally reducing sales of blended products, because in the total picture, we are not here talking about big changes.
These are significant changes we are doing primarily in a combination of not satisfactory margin, but also being very disciplined when it comes to capital and therefore trying to optimize our working capital and spend that capital on products that will give us a better margin. We have mentioned Brazil explicitly in the presentation earlier today. I could also mention other Latin American markets where we have similar development, that if we are turning into a situation where we do not see an interesting return on that working capital, we, from time to time, choose to flex out, so to say, those volumes.
Fundamentally, I think it is clear that we are shifting gradually more to premium products and also more value growth versus maybe pure product growth. There is no doubt that also Yara needs scale and that some of that scale comes through commodity products. It's not a question of stepping out of commodities, but gradually trying to upgrade volume to volume that gives us a better return.
Hi, this is Thor Giæver, investor relations.
Hi, Thor.
I just wanted for anyone listening, because Terje mentioned it briefly, that the commodity part in Brazil is third-party product based primarily, that's an important difference from a lot of the rest of our business, that this is not about a big chemical production machinery that we need to keep utilized. The commodity part of our sales in Brazil, a lot of it is based on third-party imported product, that means that we have a very different and much higher flexibility to, as Terje has just described, choose where we compete and at what margins.
Okay. Yeah, thanks. Thank you. In other words, the vast majority of that lower volume in your commodity slide is actually a distribution margin, not a production margin.
Yes. Very correct.
Okay.
Your 2nd part question was China?
China exporting, yes.
Yeah. As we write in our reports, and we try to highlight the November, February period in the report, because then China exported 2.1 million tons. That's quite a lot in a four-month period. Now we also have the March numbers, which came in at 330,000 tons compared to 100,000 tons March the previous year. So 2.4 million tons in five months. As you say, it's a significant pickup. I think it's important to note that this is a demand pull, not an export push from China. This is because urea prices spiked during September, October, and into November last year, so that the world was actually calling on China to export urea, which they then responded to because the prices went sharply up and above the Chinese domestic prices.
China started to export, and they exported both, let's say, to spot buyers, but they also offered a lot of volumes into tenders in India, Bangladesh, elsewhere, that had quite long lead times when it comes to the shipment. That price spike, that was a fairly limited period, led to kind of extensive exports for many months. You could say, does that all cover all the way through March? Probably not. There are also probably some delays in the reporting during customs.
Shipments have probably taken place before. There could be payment timing and so on as well. I think the bottom line is that China exported 2.4 million tons in five months, the same as the annual figure for 2018, because the prices went up to a level where that made sense for them compared to the domestic market. It's actually good news. I'm hoping to get back to that position again. That the world outside China needs Chinese urea to cover the total demand. It's a positive, it's not a negative.
Okay. Thank you very much.
Thank you once again. To ask a question, press star one, and should you wish to cancel the request, you may press the hash key. It's a follow-up question from Andrew Scott. Your line is now open, sir.
Yeah, sorry, just still one more. Did you give a number for the effect of the three shutdowns in Q1 on volume? I know you gave this NOK 55 million number, and we need to adjust for that for current pricing. I get that. Did you give a percentage effect for volume?
Yeah. Hi, this is Thor, the Head of Investor Relations. Andrew, if I've got you rightly, you're asking the production issues that we had, whether we've quantified that in terms.
Yeah
I think I can maybe start the answer there, because what we've quantified is the impact on the improvement program, the way we measure it, which assumes two things. One is that prices and margins are at 2015 levels, and the other is that production equals sales. In other words, if you lose production, you lose sales.
Yeah.
The reality is rather different, firstly because we are in 2019 and not 2015. I would venture to say that probably for the ammonia shutdown in Pilbara, lost production equals lost sales, and we've quantified that to a roughly NOK 10 million effect. The other two finished products in Europe, I think it's an open question whether we lost any sales due to lower production and maybe at that point I can hand over to Terje.
I think for Q1, it's not right to say that we have lost sales.
Okay
from those-
You were able to sell from inventory is what you're saying?
Yes.
Perfect. Okay. That's all I need to know. Thank you very much.
Thank you, sir. There are no further questions at this time.
Okay. If there are no further questions, we should just thank everyone for participating and for your continued interest in Yara. Thank you very much. Operator, we can speak to you in the meeting room afterwards.
Yes, sir. Thank you very much. That does conclude our conference for today. Thank you for participating. You may all disconnect.