Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Yara's third quarter results 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 and one on your telephone and wait for your name to be announced. I must advise you this conference is being recorded today on Thursday, the 18th of October, 2018. I would now like to hand the conference over to your speaker today, CFO Petter Østbø. Please go ahead.
Good morning and good afternoon. Thanks for joining this call of the third quarter results presentation. I'm sure most of you have either seen our report and the presentation from this morning. I'll focus my introduction comments on one specific topic, which is the longer time lag in our pricing this quarter. There's been some questions around what did we actually mean by this. What we meant is that the nitrogen fertilizer markets, just over this last year, they have moved away from being supply-driven. In a supply-driven market, buyers had a tendency to wait to buy later rather than early, to a situation right now where there's a strong interest in buying early, where there is more of a demand-driven situation. This is not a structural shift. This happens depending on the market situation year by year.
At this point in time, we took a strong order book at the start of the season, which was in May. That means that today our realized delivered lags further behind the spot price than normal. This is a temporary effect. This can be the same next year, or it can change. It's wise at least to consider this three months lag, both for the third and the fourth quarter of this year. One other factor I want to mention is the Freeport Ammonia plant. This plant is still running at about 80% due to a pump failure. We expect this to be resolved by the end of the year, but it can be prudent to consider that Freeport will not produce any EBITDA contribution in the fourth quarter. Back to the big picture. We believe the cycle is improving now.
It's likely to stay positive for some time. It seems that supply growth pressure is easing after 2018. It looks like the demand side has started to pick up and that it will continue to be stronger over the coming years. The cash flow situation for Yara is set to improve. First of all, the cyclical improvement is coming, but we also have come over the CapEx peak this year. As mentioned in the report earlier, we are guiding $200 million, almost, lower CapEx for 2019 based on the Yara Productivity System, which makes us able to do more for less. We are focused fully now on realizing the value of our growth project in the market while driving operational improvements, implementing the crop nutrition-focused strategy, and maintaining efficient capital allocation. With those introductory remarks, we are ready for the question and answer. Please go ahead.
Thank you, ladies and gentlemen. We will now begin the question and answer session. As a reminder, if you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A queue. This will only take a few moments. If you wish to cancel your request, please press the hash key. Once again, please press star and one if you wish to ask a question. Your first question comes from the line of Christian Faitz. Please ask your question.
Yes. Hi, Christian Faitz here from Kepler. Just two minor questions, please. First of all, how have AdBlue sales developed in the quarter, and what is your view on Yara's market share in this segment? Second of all, can you please update us on Yara Pilbara Nitrates, the Titan plant and the production issues there? Thank you.
Hi, Christian. This is Thor. Would you mind repeating the first question? We faded out a bit on that one.
Okay. Just how have AdBlue sales developed in the quarter, and what is your view on Yara's market share at this point in time?
This is Petter. We don't typically comment on the market share of AdBlue quarter by quarter, but the sales has been as normal, a little bit up this quarter. If anything, we have maybe increased our market share a little bit, but there's not a major movement in that regard. With regards to Pilbara Nitrates, that plant is still standing still, and repairs are underway. It will need a major repair in about a year's time, but we plan to restart it once the temporary repairs have been done and to operate it slightly reduced for a period of time.
Okay. Very helpful. Thank you very much.
Thank you. Your next question comes from the line of Tristan Lamotte. Your line is open. Please ask your question.
Good afternoon. Three questions, if I may. Firstly, with regards to M&A in your EBITDA bridge, is that in the volumes or is that in the other line? If you could just clarify the M&A impact in EBITDA, that'd be helpful. Secondly, you note that the Brazilian market was up 12% in the third quarter, and yet Yara volumes were down 8%. Could you just explain a little bit, is that a function of the transportation costs? Could you provide a little bit of color around why you're stepping back so strongly from that market? Is that something we should bake in going forwards? Thirdly, obviously we've got very high commodity nitrogen prices. As you look forward into your order book, are you able to fully offset those in your specialties, or is there a risk that actually people start to downtrade?
How do you think about that going into 2019?
Okay, thank you for the question. With regards to the M&A in the EBITDA bridge, that's in the other category together with other changes. That's mainly an increase from the different M&As that have come this year and a slight downward revision due to higher fixed costs, mainly because of our quite significant digital business. Question 2 with Brazil. In Brazil, what we have done is to change slightly how we work in the market. What we have focused less on is commodity blends, because that is a third-party product. We basically buy straights from different producers and take them into the market, blend them, and send them on at a small premium. We are focused less on that and more on our own premium products. Whilst the volume is down quite a bit, the value in total is almost not changed.
It's sustainable in that the shift towards value over volume, we will continue. Whether the market will follow us or not, that we will see, I guess, in the quarters to come.
The third question about high commodity prices being passed through your premium products?
I guess I could take that one too. In general, the commodity nitrogen prices will be passed through. In terms of the nitrate order book, it is more or less passed through month on month. The only difference between realized and the publication prices is the lag we talked about earlier, meaning we have sold basically a little bit forward. When it comes to the other nitrogen products like nitrophosphate, NPKs, it passes through as well. It takes a little bit longer time due to, again, its value chain effect. Typically, it's produced in Porsgrunn and sold in Asia. It takes just some physical time to move the products.
Three months as well type of timeframe?
Yeah, at least in the fourth quarter, that's correct.
Okay. Very good. Thanks, Per.
You're welcome.
Thank you. Your next question comes on the line of Joel Jackson. Your line is open. Please ask your question.
Hi, good afternoon. A few questions. Just more on the lag. I understand the three-month lag that you're suggesting or you're saying for Q4. Can you talk about when you looked at your order book, did you do anything different than you normally would do? Was your order book a little bit earlier than normal and it's just the way the pricing worked out, or maybe just elaborate more? Thanks.
Okay. Basically what happens is in the May of each year, at the end of the season, we look at how do we set the starting price for next year and what volumes do we consciously allow for booking. It's a Yara decision how much we sell and what price to sell it for. This year, the consideration was that there was a lot of additional capacity coming in the market. The stocks, both on producer and the customer levels were fine. We got signals that there was a lot of buying interest. Based on that, we took the decision to set the price as we did, which was not low at that time. We also took the decision to sell a little bit forward in volumes, which now leads us to the three-month lag.
At that point in time, of course, we couldn't know how the prices went, but I think we were conscious. I'm not saying we were wrong. I think it was actually a pretty good decision to go that way. When that is said, next year, it can be completely different. We might sell much less or more. I guess that's the comment I have. What has caused this big attention on this topic is that there is more than NOK 100 increase in the urea price within a very short timeframe. If you didn't have that sharp increase in the urea price, this wouldn't have been a topic.
Fair. Second question on Galvani. Can you let us know roughly, for the non-controlling interest or what the run rate Galvani was, so we can in our models figure out how to model properly now that you control all of it? Thanks.
I'm sorry, what was the question you wanted us to answer?
Now that you control all of Galvani.
Yeah
What was the run rate of basically the non-controlling interest?
You want to know the run rate EBITDA of the non-controlling interest part?
Yeah. Basically, what's the incremental EBITDA at Yara for now controlling all of Galvani?
Sharp, shrewd question. Looking around table. Are we able to answer that now? What's the 40% of EBITDA of the Galvani part been? Yeah.
Consolidated.
Yeah. He's asking how will it change now that we've sold 40% or a part of it.
I think the
You said that the transfer, I don't have the
Okay. No, the short answer is we're not able to answer that right now. We, I guess, can-
Yeah, no, we can revert directly to you on that one, probably based on what we have in the annual report.
Okay.
We'll get to that.
Finally, in Brazil, as you talk about trying to focus less on commodity products, presumably the market in Brazil and other places going that way to be less commodity, more specialized, more custom. How is your plan to sort of address that? How will the market change? How will the competitive landscape change as maybe we move to more custom market?
Yara's strategy is to work towards precision farming, and that's good for the environment because you get less runoff and less evaporation and so on, and it's good for the farmer because you only put on what you actually need. In that context, the, what we call premium products and nitrate-based products are better. You would typically use more specialized products like the YaraVita foliar products and so on. When we say we have lesser focus on commodity, that basically means if we are to sell commodities, we need to make good money on it. Whereas previously, we have had a conscious decision to drive the premium volumes also to have a certain market share on commodities.
I think we're confident now that we reached a level of premium sales in the market where we no longer need to drive volumes, and therefore, kind of with the value focus. I'm not sure if that answers your question because I'm not able to talk about how Mosaic and others think in the market, but at least that's how we think.
Well, I would think as you have more custom products, the issue is if you're delivering a custom product and the demand for that goes down with a commodity product, you could ship the cargo somewhere else. If it's custom, it's going to that region, it changes how your supply chain, how your sales operations work. It creates a lot of more complexity or challenges or opportunities as well, it changes everything, doesn't it?
No, not really. We're not talking about having a custom blend that you then need to sell wherever that blend is popular. What you're talking about, for example, can be a nitrate product. You're saying that if we sell a blend in this region, we'll include a nitrate product in that blend, and it becomes more efficient. Should the demand for nitrate in that period go down slightly, what you'll do is just ship less nitrate in. This is actually easier from a value chain perspective than shipping around commodities.
Okay. Thank you very much.
Yeah. Thanks.
Thank you. Your next question comes from the line of Andrew Stott. Your line is open. Please ask your question.
Hello. Good afternoon, everybody. I think I've got a couple. Just wanted to come back to the bridge on slide 10 of the presentation. It sort of linked into what Thomas was asking, I think, in terms of that volume number. You're saying that doesn't include M&A because M&A is separate in the others line.
Yeah.
I'm just wondering how you end up with +2 from -3%, which was the underlying number. That's the first question. On the others, I just want to check my own math here. I was assuming a run rate quarterly for Cubatão and for Tata at around NOK 30 million. That would naturally lead to cost inflation underlying of about NOK 25 million. If you take in your six, right? I just want to check I'm right on that sort of balance, if you like.
Yeah.
Finally, question for Petter, you mentioned in your opening remarks about a Q4 impact from Freeport. I just wonder if you could quantify that, please. Thank you.
Okay. I'll start with question two first. Regarding the run rate impact from the new businesses, you're right in that it's about NOK 32 million, which is Babrala and Cubatão. You're right also that is offset by mostly changes in fixed costs, and that's what I mentioned in this digital business development we're doing quite forcefully. With regards to the first question about the volume, that's actually a -2 number. The reason the -2 is so low is that the reduction in volumes have been predominantly on commodity blends, which are third-party products with a low value, and the increase has been in micronutrient phosphates and also more specialty products which have a higher value. There's been a shift in portfolio at the same time.
Okay. There, yeah, there was a methodology question, really. It's volume/mix, price is only the average price year-over-year. Yeah. Okay. I get that. Thank you. Just sorry, just to come back to your first answer. Is a NOK 25 million run rate for cost inflation something to work with, or was this a particularly big quarter on the digital spend?
I think the digital is more or less fixed. That's around NOK 10 million per quarter. That's the kind of level we're going to stay at for some time in digital, if that answers the question.
Yes. Okay. It does. Thank you.
Yes. You also have quarter four on Freeport. I guess the assumption there for quarter four for Freeport is basically zero contribution from that plant in the fourth quarter.
What was it last year?
Well, it's a new plant.
It's just the construction. Okay, fine. All right.
Yeah.
Okay, super. Thank you for taking the questions.
Welcome.
Thank you. Our next question comes from the line of Neil Tyler. Your line is open. Please flash your question.
Good afternoon. Couple from me as well, please. Staying with Brazil. First of all, you mentioned, I think, the second quarter that you expected a NOK 15 million impact from the logistical interruptions in Brazil. Has that been the case and can you point us to whereabouts you've booked that, if you like, in that impact in the bridge? Is that in volumes? Secondly, back to Galvani and the minority buyout. Can you just share with us a bit more color on how that enhances your strategy in the region? What you are able to do with those assets that perhaps you weren't before that justify the investment you've made. Thank you.
Thank you for the questions. First, on the Brazil strike impact. We said second quarter about NOK 15 million. The actual for this quarter is slightly lower, but in the same range, between NOK 10 million and NOK 15 million. When it comes to Galvani, and that's of course, difficult to answer in full with what I can say, but what it opens up is strategic opportunities for us. Now our entire Brazilian operation is fully owned and we are able then to position it how we want and do what we want with it. Not able to say too much, but there are strategic thinking going on and let's say we might discuss that when that becomes relevant. In practice, why we bought Galvani was for this asset. It's a strong phosphate mine in the middle of Brazil, which is an import market.
In itself it's an attractive asset, but it also opens up strategic opportunities.
Okay. I suppose pressing a little bit on that. Have you been limited in what you've been able to plan to do by the fact that you hadn't owned 100%?
I think answering not directly, but of course when you own everything you are able to do more than if you own 60. Also if you do something clever, then you get all the value.
Okay. Thank you.
You're welcome.
Thank you. As a reminder ladies and gentlemen, please press star and one on your telephone to ask a question. Our next question comes from the line of Chetan Udeshi. Please flash your question.
Yeah. Hi, thanks. Based on your current status, can you give us some sort of guide on how to think about the impact from volume growth in Q4? Are there any outages that are planned which might have a negative impact on volumes? It's like you are starting the ramp up of some of your new projects, but still the volume contribution is negative, which is quite surprising to some extent. Any help there would be useful. The second question was based on your order book for nitrate as it stands and the delay that you normally have, can you give us some sense of how should we think about how much could be your potential realized pricing compared to what we might be seeing in the spot market right now? I think that would help us probably model the delta in pricing better.
Okay. The first question is concerning the volume growth in the fourth quarter. The first thing to note there is that the turnarounds mentioned on Titan and Sluiskil will take about 170,000 tons out. That's 100,000 of ammonia and 70,000 of finished fertilizer. I guess I hand over to Thor about the new growth project, how much that consists in the quarter.
Yeah, I think if you refer to our slide 13 in the presentation, by way of a comment on the plants. We've already mentioned Freeport, which until the end of the year is not adding much in terms of earnings. That will change from early next year. We have Verdal and Cubatão that are already in the results, and you can expect similar effects going forward too. Then you have the two new Sluiskil starting up this quarter, that starts to contribute in the fourth. Then the Swedish expansion is starting up during the fourth quarter, but probably the contribution will become meaningful in 2019. I guess, Chetan, you need to kind of sum up these effects and happy to go through it in more detail after the call if you want to.
Okay. Question two regarding order book realized compared to spot. If you look at our spot prices today, so to say, the current prices in the market compared to urea, there is approximately NOK 50 per ton average premium. What we have realized during the quarter there was an average premium of NOK 20. What you will see then, of course, during these three months, the current prices will start to come into effect at the end of the period, more or less.
When you say end of the period, you mean end of Q4 or end of Q3?
Yeah.
End of Q4.
Q4.
Okay, fine.
Current prices all else equal, you should see getting realized end of the quarter.
That's really the picture we paint for both the third quarter and the fourth quarter, is what you're selling today reflects the prices from about three months ago.
This year.
Yeah.
There's no impact on that for next year.
Okay. Understood. Thank you.
What you're delivering today. Yep.
Okay. Thank you.
Okay.
Thank you. Our next question comes from the line of Paul Walsh. Your line is open. Please ask your question.
Yeah. Hi, good afternoon, everybody. Thanks for taking two questions that I had. I wanted to ask the first one about the pricing delays or longer lead time or lag on the nitrate and NPK product categories, and the extent to which you think you can make up that NOK 40 million that you mentioned on slide 10 of the presentation in the fourth quarter, i.e., should we expect that to drop in Q4? The second question, just coming back to the digital spend that you've now flagged per quarter running at NOK 10 million. Was there digital spend in the P&L last year, and what's the focus of the projects here, and where do you think that will boost your productivity or business, i.e., where do you think you're going to get the return on that investment? Thank you.
Okay. Thanks for asking. Pricing delay, page 10. Are we talking about the NOK 40 million?
Yeah. Paul, I think the question you're asking is, what does the lag look like next quarter? We have communicated today that we expect a similar lag about three months or so in the fourth quarter.
Yeah. Of course, if you refer to page 10 and the NOK 40 million, that was a reaction from our side to the difference between the analyst estimate and how we have talked about the one month lag, and what was realized in the quarter. In order to figure out what the relevant NOK 40 million figure would be for next quarter, you need to know the urea price first.
Sure. You also say on the third page that, CAN prices are up 18% year-on-year, but you only realized nine. Are you basically insinuating that you'll get that delay caught up in the fourth quarter? I guess my point is, what's the purpose of the NOK 40 million? Are you flagging you're going to get it back, or are you flagging that there's just a three months delay now rather than the one month delay going forward?
Sure. Thank you. The reason for that was to explain the difference between the consensus estimate.
Okay
let's say explain our belief of the difference between that for the third quarter. For the fourth quarter, of course, what we will do is to try to catch up.
Yeah.
Right? That is to do with, because we invoice at delivery. We have sold things that we have not just delivered to the customer. You have the whole logistics chain, enough trucks and so on and so on. Definitely, we are working on reducing the three-month timeline.
Okay. Thank you. On the digital investments?
Yeah. Digital, the spend has ramped up quite a bit. That's one of our major pillars for the strategy going forward, and that's set up as a business unit in itself. It's there to make money, not to have just users for users' sake. However, the spend last year was not relevant in the P&L. Most of that spend has been ramped up through last year and into this year. It's kind of reached its correct level at this point, and it's getting quite some traction. Maybe we should get back to that properly in-
Sure
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Thank you, guys. Thank you.
Thank you. As a reminder, ladies and gentlemen, if you wish to ask a question, please press star and one on your telephone keypad. Our next question comes from the line of Alicia Azen. Please ask your question.
Thank you. This is John Tomasic from John Tomasic Very Independent Research. There's been a lot of newsreels in the U.S. of record inventories of corn and soybeans, and improvised storage devices, et cetera. If U.S. agriculture loses market share due to tariffs, where is the incremental offsetting demand for fertilizers from the other countries that are exporting more foodstuffs to China or other destinations?
Okay. To Øyvind.
Yeah. That's a big topic, of course, with the agriculture markets and these political issues. I would say that, let's say the first order effects are hard to see very negative because, Brazil and Argentina are having premium soybean pricing now, almost $100 above the U.S. export price at the moment because of what you say. In Brazil, they even put some nitrogen on the soybean acreage, while it's very positive if the American farmers turn to corn, as the current expectations are for a quite substantial increase in the U.S. corn acreage next year. It's early days yet, that's at least the current forecast based on a relative price between corn and soybeans that now favor corn in the U.S.
You also see that, a little bit early days yet, in China, if they struggle to import as much soybeans as they want to, they are probably looking at alternative sources of protein and
They are more likely to try to focus on their own corn production rather than soybeans, because it's more intense and more calories per hectare. That could also be potentially a positive. I guess the negative would be if calorie demand, if protein demand falls in total and less meat consumption and those kind of things. I don't really see that. I don't think we see much the effects of this in the nitrogen consumption globally.
Are you worried that U.S. farmers are simply not going to plant next year because they didn't sell the 2018 harvest?
No. There are some discussions about the export competitiveness on U.S., but even more on wheat than on corn, I think. We don't see a particularly strong problems with inventories in the U.S. and risk of that. No, that's not something we see. I think the U.S. market actually seems much more upbeat on the nitrogen side now than a year ago, with its stronger delivery so far and actually pricing that is at par with global values, while it was discounted quite heavily last year. I don't really see that situation that you are describing.
Thank you.
Thank you. Our next question comes from the line of Chetan Udeshi. Please ask your question.
Yeah. Hi. Thanks. I just wanted to check, how has been the sort of acceptance of the recent price increases that you and your peers have announced for CAN in Europe? Can you just sort of give us some color around that? Do you see potential to sort of raise it further at this point, given the urea prices have gone up even higher after you've last announced your CAN price increase? Thanks.
Okay. Thank you. Regarding acceptance in Europe is, of course, consisting of many so-called micro markets, it varies a little bit with where you are. On an aggregate level, though, the reception is quite good. That also impacts the potential to raise further. There's definitely a potential over time. The question is when and where and how much. I wouldn't expect no changes forever.
Thank you.
Thank you. Our next question comes from the line of Thomas Rigelwick. Your line is open. Please ask your question.
Thank you. Quick follow-up from me. Given the current levels of farm profitability are still relatively subdued, do you think there's a maximum urea price that the farmers can afford before they're effectively disincentivized to plant or have to reduce demand?
Yeah. That's always very difficult when you get into these situations that we'd like, of course, that we are close to full capacity utilization, at least short term, and that small shifts in the supply and demand balance has the potential to make quite a steep price volatility. It is hard to get right because the world consists of so many different markets. At what threshold will India try to do something? Now we saw Ethiopia, I don't know if you saw on Friday, there was some question mark about their tender. Didn't really affect the market, you have now a combination of a lot of public governmental supported tenders in India, Pakistan, Bangladesh, Ethiopia and so forth. You have buying from the northern hemisphere. Prepare for spring, what will the sentiment be there?
It's very hard to judge exactly where the threshold of this is and where they say If you need a certain demand rationing, which it seems like at the moment, it seems like you need at least a modest demand rationing. Where will that come from and exactly what price? Very hard to establish, I think, or to forecast. It's a nice situation to be in.
You said we're already in a place of demand rationing today. Is that what you're saying?
Everything is running. Short term, you have some idle capacity. You have some idle capacity in Ukraine, for instance, that is very high cost. You have some elsewhere, maybe a plant in Turkey. You have some plants in Bangladesh and Pakistan that's curtailed because of lack and expensive gas. You have China, which there is a question mark on the supply response. When you say that urea prices today are, let's say $340 from Egypt, it's hard to kind of say that there are not many that have negative margins at that price, right? Everybody has positive margins on paper. It means that the supply curve is basically vertical, right? That the demand curve goes up and down, that takes the price up and down, and you don't get really a volume effect.
It's a demand rationing in the sense that if the price had been $300, there would have been stronger demand and price would go up to $340 to force some of that out of the market. Don't take the numbers accurately, but just the concept, right? I don't know if that was understandable.
Okay. Thank you.