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. I must also advise you that the conference is being recorded today, Friday, 26th April, 2019.
I would now like to hand the conference over to your speaker today, Lars Brothag. Thank you. Please go ahead, sir.
Thank you very much, operator, and good morning, good afternoon, everyone, and welcome to the Yara 1st quarter results conference call. I'm 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 and A. Our EBITDA, excluding special items and IFRS 16 effects, increased by 17% in the Q1 as improved margins and positive currency effects more than offset lower deliveries. The improvement was largely due to IRF's Higher European Margins and Based on the U.
S. Dollar. However, we did experience technical issues after turnarounds in 3 of our largest stands impacting our results and our improvement program performance in the quarter in isolation. Our return on invested capital at 4.1 And 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 and A. And operator, I kindly ask you to open for questions.
Thank you, sir. Key. We now have your first question from the line of Ben Isaacson. Your line is now open.
Hi. It's Oliver Rowe on for Ben. Thanks for taking my question. Could you maybe just discuss your Brazil strategy? Are you still seeing opportunities further M and A and consolidation?
Or are you happy with your positioning in that market once Selle A Tre and Rio Grande are fully commissioned?
Yes. So in Brazil, we will come out of a period of significant structural changes. And as you indeed mentioned, we also have 2 year of significant projects ongoing. So our main focus there 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 Our volume.
Right. And so I guess, when we think about where the next sort of regional opportunities would be around the world, I mean, I know that you're still in cost improvement mode, but 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 and in many regions. And 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 Tariq Knutsen, Sales and Marketing. We couldn't add that we recently acquired the Tata Chemicals business in India, as you know, 1 year ago. And we are very much in the mode of scaling up our 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. And we now have your next question from the line of Joel Tsarfon. Your line is now open.
Hi, good afternoon. I had a few questions. I'll go through them 1 by 1. So obviously, the lower European gas costs are really helping ERR Margins and Helping Your Costs. But can you talk about the impact on the overall nitrogen market as 4th quartile producers have some cost pressure relief here, cost pressure relief.
How does that impact the overall market as you see it? Thanks.
Yes. This is Thadur here from Market 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, then you have this Yara's. Which is currently without other price, let's say, around $300 Then the market turned into a situation where the world It's China at a small surplus.
And what you saw then was that you didn't actually see any curtailment by, as you say, the 4th quartile producers outside China, because at an even higher price level than that cost level, the Chinese were starting to look at imports. I mean, they have actually imported at least 3 to 5 cargos just recently because the global market was sufficiently low compared to the Chinese price level. And of course, now that the pricing market has moved up again. So now it seems to be again a bit developing into a slight deficit outside China. So, no, the prices are kind of in between those price logics.
But so I would say that the cost improvement for the 4th 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.
So if I decode what you're saying, at $10 you're saying that the utilization of European production Was the same or is the same at $5 gas versus $10 gas. Is that what you're saying?
That's pretty close to reality. I mean, If you assume that Ukraine is out on both occasions, you could say, which they have been because of all kind of other problems, that would have been an area where Yara's. They would have struggled at 10 and probably produced at 5, 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, etcetera, That could also be swing factors in at a $10 scenario, but not at a $5 scenario. So there are some that they 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 9%. But of course, when you get to 10, then margins are, of course, very slim. IRF. But they were I mean, if you look at the reality over the last year or so, there has 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. So Maybe some adjustments.
I don't think it's right to see that there were none, but I would just say that it was limited at least.
Okay. Thank you for that. So my other question is, I'll talk about your digital ag partnership or platform partnership with IBM. So first of all, I want to know, how much should we expect you to put into an investment into this in the next feeders? Maybe you could break it out by year.
A lot of your larger crop inputs competitors and other competitors have put a lot of money into digital ag for the last this decade in terms of cost investments and acquisitions. And as we know, they're not making money or they're losing money, they're not getting returns, they're not getting $10 an acre or $20 an acre from growers, they're getting maybe $1 an acre. So what I wanted to know is, what will you be doing differently? What product what services will you be offering differently? How will this make money?
How will you differentiate? Thanks.
Yes. This is again, Tarek 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. And what we actually bring in is primarily our competence.
That means they bring in their competence. We bring in our competence, which Obviously, it's 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, and 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.
And 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 4 regional hubs around the world. We have presently around 250 people working on that digital part. And then we rather complement that with partnerships, incompetencies 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. So this is 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.
So sorry, just like as a result of this announcement, I mean, is there an incremental investment Yara is making this year 2020, 2021? Can you give us
ERS. It's very marginal, so I would not even say it's relevant in terms of talking investment level.
Okay. Thank you very much.
Thank you, sir. And 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, understand there's you say that there's not going to be any meaningful incremental investment. But 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 sort of 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 first question, please.
Yes. So 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 $40,000,000 to $50,000,000 spent 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 Yara IRIX, which is a small device that you can Click on to a smartphone where you can measure the nitrogen needed nitrogen level for a crop, Let's say, low cost model of our end sensor and end tester.
And 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
ERF. Okay. Thank you. And second question is On the unplanned outages that took place in the period, since the inception of the of your improvement program and There has been a higher incidence of these sorts of outages as you've tried to bring the expanded facilities back on stream, for example. How can we do you think that's just coincidence?
Or how can we feel comfortable that actually the sort of underlying Operating rate is not going to remain sort of hampered for the next year or 2 as that process continues. That's the next question, please.
Yes. So this is Lars Josek speaking. So you are correct that in the quarter, as Yara. We have an impact from these 3 outages of a significant amount, while at the same time, the remaining plants $1,000,000 of sustained improvement. So just it is no doubt that this is the A right track that it is showing underlying improvements, and we remain fully committed to the target of SEK 500,000,000 by the end of 2020.
And 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. So while we will ERF 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. And the last question, I suppose, on a similar topic, the growth investments. You no longer disclose the anticipated EBITDA contribution and Yara. The CEO on the webcast this morning suggested that was partly because the calculation was slightly arbitrary.
But what I suppose isn't arbitrary is if you could 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 ERS. Once all of those investments are brought on time at current prices.
Yes. So you're exactly correct that we commented also a bit on Good morning. And entering a new year now, we plan to launch an updated longer term earnings improvement ambition and unanticipated tracking methodology at the Capital Markets Day on 26th June, highlighting, for example, that the current tracking is based on year of 2015 margins. And I think if you example, look at 2015 margins for ammonia, those were at a much higher level In 2015, what they are today impacting, for example, then Freeport. And we then want to make sure that the new methodology reporting is more relevant in addition to current earnings and market conditions.
So for that reason, we don't really believe it's feasible, more meaningful to provide earnings guidance while that IRF. The bulk of the work is ongoing, and 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. But what we have said is that we were able to put Freeport and Shopping on stream at the start of the Q2, while we had some delays on some of the others. And we said That in total, we believe that, that has a slight negative impact in isolation on 20 2019 2020.
Okay. So if I just to finish off, on Freeport and Shipping Investments, At current prices, are the earnings from those 2 expansions Clearing the return threshold that you set yourself.
These are indeed in its ramp up phase now. I mean, it's early days of the profile, but there is absolutely nothing about the fundamentals of those business cases where we have changed our view on that.
Okay. Thanks very much.
Thank IRF. The next question is from the line of Andrew Stott. Your line is now open.
Good afternoon. Thanks for taking my questions. Couple really. I 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.
And I'm just wondering if you could walk through why that is. Is it purely the freight rate And so the netbacks or are there other issues about Brazil versus other export markets? That's the first question on the commodity volumes. I'm sorry, actually, related to that. When do you actually think this will all level out?
When do you think you should have taken the pain you want to take, if IRF. And then the second question was more market related. I see that China, In general, it's exporting quite aggressively again. I saw a number about February volumes out of China being 6 fold year on year. What do you think is behind that?
Thank you.
Yes. So 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. So 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 Historically, and right now, we have seen that there are pressure on commodity margins. These are 3rd 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 Yara's.
But these are significant changes we are doing primarily in a combination of not satisfactory margin, but also being not 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. But if we are turning into a situation where we do not see a 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. But there is no doubt that also Yara needs scale and that some of that scale comes through commodity products. So it's not a question of stepping out of commodities, but gradually trying to upgrade volume to volume that gives us a better return.
I'm just hi, this is Thuy de Abouve, Investor Relations.
Hi, Thuy.
As Thuy mentioned and I just want to for hi. I just wanted for anyone listening because Thaddeus mentioned it briefly that the commodity part in Brazil is 3rd party product based primarily, And 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 is a lot of it is based Yara's 3rd party imported products. And that means that we have a very different and much higher flexibility to, as Thade has just described, Choose the where we compete and at what margins. Okay.
Thank you. So in other words, the vast majority of that lower volume in your commodity slide is actually a distribution margin, not a production margin?
Yes, yes, very correct. Okay. Your second question was China.
China Exporting, yes.
Yes. As we write in our reports, then we try to highlight the November, February period in the report Because then China exported 2,100,000 tons, that's quite a lot in a 4 month period. Now we also have the March numbers, which came in at 300 and 30,000 tons compared to 100,000 tons March the previous year. So 2,400,000 tons in 5 months. And it's an as you say, it's a pickup.
It's a significant pickup. I think it's important to note that This is a demand coal, 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. And so then China started to export, and they exported both. You said, let's say, the 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 shipments.
So that price spike, that was a fairly limited period, led to kind of extensive exports for many months. And but you could say, does that cover all the way through March and probably not. There are some other probably some delays in the ERS. During customs shipments, we have probably taken place before. There could be payment timing and so on as well.
So But I think the bottom line is that China exported 2,400,000 tons in 5 months, I mean, 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 markets. It's actually good news. I hope we get back to IRF. That's a good position again. That's a world outside China needs Chinese urea to cover the total demand.
Thank
you. ERF follow-up question from Andrew Sutt. Your line is now open, sir.
Yes. Sorry, just still one more. Did you give the number for the effect of the free shutdowns in Q1 on volume. I know you gave us $55,000,000 number and we need to adjust for that for current pricing, I get that. IRF.
Did you give a percentage effect for volume?
Yes. So I can I Hi, this is Thord here with 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. And 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 2 things. 1 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. The reality is rather different, firstly, because we are in 2019 and not 2015. And I would venture to say that probably for the ammonia shutdown in Pilbara, lost production equals lost sales, and we've quantified that to roughly $10,000,000 effect. The other 2 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 Teja.
I think for Q1, it's not the right to say that we have lost sales
Yaris. So 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. And 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. And operator, we can speak to you in the meeting room afterwards.
Yes, sir. Thank you very much. And that does conclude our conference for today. Thank you for participating. You may all disconnect.
Speakers,