Good afternoon, ladies and gentlemen, and 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. I must advise you this conference is being recorded today on Thursday, 18th October 2018.
I would now like to hand the conference over to your speaker today, CFO, Peter Ofer. Please go ahead.
Good morning and good afternoon, and thanks for joining this call of the 3rd quarter results presentation. So I'm sure most of you have either seen our support and the presentation from this morning. So I'll focus my introduction comments on One specific topic, which is the longer time lag in our pricing this quarter. So there's been some questions around what did we actually mean by this. And 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 have 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. So this is not a structural shift. This happens depending on the market situation year by year. But at this point in time, We took a strong order book at the start of the season, which was in May.
And that means that today, our realized delivered lags Further behind the spot price than normal. But this is a temporary effect. This can be the same next year or it can change. But it's wise at least to consider this 3 month lag both for the 3rd Q4 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 4th quarter. So 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. And 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. And as mentioned in the report earlier, we are guiding $200, almost $1,000,000 lower CapEx for 2019 based On the Yara productivity system, which makes us able to do less Naha, do more for less.
We are focused fully now on realizing the value of our growth projects in the market, while driving operational improvements, implementing the crop nutrition focused strategy And maintaining efficient capital allocation. With those introductory remarks, we're ready for the question and answer. So please go ahead.
Thank you, ladies and gentlemen. We will now begin the question and answer session.
Christian Faitz here from Kepler. Just two minor questions, please. First of all, how have adBlue sales call. And what is your view on Yara's market share in this segment? And then second of all, can you please update us on Yara Pilbara Nitrates
Hi, Christian. This is Thore. Would you mind repeating the first Question, because we phased it out a bit on that one.
Okay. So just how have AdBlue sales developed in the quarter? And what is your view on Yara's market share at
Yes. Hi, this is Peter. So 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. So 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 Filbrand 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. And your next question comes from the line of Thomas Wriggleworth, your line is open. Please ask your question.
Good afternoon. Three questions, if I may. Firstly, with regards To M and A, in your EBITDA bridge, is that in the volumes or is that in the other line? If you could just clarify the M and A impact And EBITDA, that would be helpful. Secondly, you note that the Brazilian market was up 12% in the 3rd quarter and yet Yara volumes We're down 8%.
Could you just explain a little bit, is that a function of it, the transportation costs? Could you just provide a little bit of color around why you're stepping back so strongly from that market? And is that something we should bake in going forward? And 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 down trade. How do you think about that going into 2019?
Okay. Thank you for the question. With regards to the M and A and the EBITDA bridge, that's in the other Category, together with other changes. So that's mainly an increase from the different M and As that have This year and a slight downwards revision due to higher fixed costs, mainly because of our quite significant digital Question 2 with Brazil. So in Brazil, what we have done is to change slightly How we work in the market.
And what we have deep focused or what we have focused less on is commodity blends Because that is a 3rd party product, we buy basically buy straight 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. So whilst the volume is down quite a bit, The value in total is almost not changed. So that's well, It's sustainable in that the shift towards value over volume, we will continue. And then whether the market will follow us or not, We will see, I guess, in the quarters to come.
And the third question about high commodity prices Being passed through your premium products?
Yes, I guess I can take
that one, please. So in general, the 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. And then 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 nitrile phosphate NPKs, it passes through as well, but it takes a little bit longer time Due to, again, the Valjean effect, typically, it's produced in Porcelain and sold in Asia, and it takes just some physical time to move the products.
3 months as well, type of time frame?
Yes, in the Q4, that's correct.
Okay. Very good. Thanks, Patrick.
You're welcome.
Thank you. And your next question comes from the line of Joel And your line is open. Please ask your question.
Hi, good afternoon. A few questions. Just more on the lag. Is this I understand the 3 month lag that you're suggesting or you're seeing for Q4. Can you talk about when you looked at your order book, I mean, Did you do anything different than you normally would do?
Would your order book a little bit earlier than normal? And it's just the way the pricing worked out? Or maybe just elaborate more.
Okay. So 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. The Yara decision, how much we sell and what price to sell it for. This month sorry, this year, the consideration was that There was a lot of additional capacity coming in the market. The stocks, both on producer and customer levels were fine.
And we got signals that there was a lot of buying in Crust. So based on that, we took the decision to set the price as we did, which was not low at that time. And we also took the decision to sell a little bit forward in volumes, which now leads us to the 3 month lag. So at point in time, of course, we can know how the prices went, but I think we were conscious. And I'm not saying we were wrong.
I think it was actually a pretty good To go that way, when that is said, next year, it can be completely different. So we might sell much less
or more.
So I guess that's
So what that caused is the big attention on this topic It's more than $100 increase in the urea price within a very short time frame. I mean, if you didn't have that
2nd question on Galvani. Can you let us know roughly for the non controlling interests or what the Run rate Galvani was, so we can, in our models, figure out what to how to model properly now that you control all of it?
I'm sorry, what was the question you wanted us
to answer? Now that you control all of Galvani, Yes. What was the run rate of basically the noncontrolling interest?
You want to know the run rate EBITDA of the noncontrolling interest part? Yes. What's
the basically, what's the incremental EBITDA to
Yara for now controlling all of Galvani?
Short shoot question, looking around table. Are we able to answer that now? What's the 40% of EBITDA that go on in part with? Yes. But he's asking how we change another fixed 40% of margin.
I think you said that the transfer, I don't have the idea.
Okay. Now the short answer is we're not able to answer that right now. But we, I guess Yes.
So we can revert directly to you on that one, probably based on what we have in the annual report.
And finally, in Brazil, as you talk about trying to focus less on commodity Presumably the market in Brazil and other places going that way to be less commodity, more specialized, more custom. I mean, how is your plan to sort of address that? How will the market change? How the competitive landscape change as maybe we move to more custom market?
Yes. So Yara's strategy is to work towards precision farming. And that means that's good for the environment because you get less runoff and less The evaporation and so on, and it's good for the farmer because you only put on what you actually need. So in that context, the what we call premium products, the nitrogen based products are better. So and you will typically use more specialized products like the Yara Visa folder products and so on.
So when we say we have less 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've 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 that answers your question because I'm not able to talk about how Mosai can others Thank you. In the markets, 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 shift the cargo somewhere else. But if it's custom, it's going to that region, it changes how your supply chain, How your sales operations work? I guess it creates a lot of more complexity or challenges or opportunities as well, but changes everything, doesn't it?
No, not really. So we're not talking about having a custom blend that you don't need to sell wherever that blend is popular. What you're talking about, for example, can be a nitrate product. And you're saying that if we sell a blend in this region, we'll Great product. And 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.
So should the demand for nitrate in that period go down slightly, what you'll do is just ship less nitrate in. So this is actually easier from a value chain perspective than shipping around commodities.
Okay. Thank you very much.
Thank you. And your next question comes from the line of Andrew Stott. Your line is open. Please ask your question.
Good afternoon, everybody. I think I've got a couple. Just wanted to come back to the bridge on Slide It's sort of linked into what Thomas was asking, I think, in terms of that volume number. So you're saying that Doesn't include M and A because M and A is separate in the others line. I'm just wondering how you end up with Plus 2% from minus 3%, which was the underlying number.
So that's the first question. And then On the others, I just wanted to check my own maths here. I was assuming a run rate quarterly So Cubatao and for Tata at around $30,000,000 So that would naturally lead to Cost inflation underlying of about 25,000,000,000. I mean, if you take in your 6,000,000,000, right? So I just want to check I'm right on that sort of balance, if you like.
Yes.
And then finally, a question for Peter. You mentioned in your opening remarks about a Q4 impact From Freeport. I just wonder if you could quantify that, please. Thank you.
Okay. So I'll start with question So first, regarding the run rate impacts from the new businesses. You're right in that, that is about 32,000,000 Dollars, which is Babrala and Cubatao. And you're right also that, that is offset by mostly changes in fixed Scott, 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 minus 2 number. And the reason the minus 2 is so low is that the reduction volumes have been predominantly on commodity brands, which are 3rd party products with a low value. And the increase has been in nitrofos That's the case and also more specialty products which have a higher value. So there's been a shift in portfolio at the same time.
Okay. So yes, there was a methodology Question really, so it's volumemix. And so price is only the average price year on year. Yes. Okay.
I get that. Thank you. And then just sorry, just to come back to your first answer. So is a €25,000,000 run rate cost inflation Something to work with? Or is this was this a particularly big quarter on the digital spend?
Yes. So I think the digital is more or less fixed. So and that's around SEK 10,000,000 per quarter. So that's the kind of level we're going to stay at for some time in digital, if that answers the question.
Yes. Okay. Nice. Thank you.
Yes. We also had quarter 4 on Freeport. I guess, the assumption there for quarter 4 for Freeport is basically 0 contribution from that plant in the From that plant in the Q4.
And what was it last year? What was it last year?
Well, it's the new plan.
So it's just because of auction. Okay, fine.
All right.
Yes.
Okay, super. Thank you for taking the questions. Welcome.
Thank you. And our next question comes from the line of Neil Tyler. Your line is open. Please ask your question.
Good afternoon. A couple from me as well, please. Staying with Brazil. First of all, you mentioned, I think, the second quarter that the you expected a $15,000,000 Impact from the logistical interruptions in Brazil, is that has that been the case? And can you point us to whereabouts you've sort of booked that, if you like, in the that impact in the bridge?
Is that in volumes? Secondly, back to Galvani and the minority buyouts. Can you just share with us a bit more Color on how that enhances your strategy in the region and what you are able do with those assets that perhaps you weren't before that justified the investment you've made? Thank you.
Thank you for the questions. First, on the Brazil strike impact, we said second quarter about $15,000,000 The actual for this quarter is slightly lower, but in the same range, so between $10,000,000 $15,000,000 When it comes to Galvane, 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. So now our entire Brazilian operation is fully owned, And we are able then to kind of position it how we want and do what we want with it. So 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 call.
It's a strong phosphate mine in the middle of Brazil, which is an import market. So in itself, it's an attractive asset, But it also opens up strategic opportunities.
Okay. So I mean I suppose pressing a little bit on that. Call. 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 $60,000,000 And also if you do something clever, then you get all the value. Okay. Thank you. You're welcome.
Thank you. To ask a question. And our next question comes from the line of Chetan Udeshi. Please ask your question.
Yes, 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? Because call. 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, so any help there would be useful. And 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. So the first question is concerning the volume growth in the 4th quarter. So the first thing to note there is that the turnarounds mentioned on financial scale will take about 170,000 tonnes out. That's 100,000 of ammonia and 70,000 of finished fertilizer. And I guess I hand over to Tor about the new growth projects, how much that call.
Yes. I think if you refer to our
Slide 13 in the presentation, I mean, by way of a comment On the plants, we've already mentioned Freeport, which until the end of the year is not So sort of adding much in terms of earnings. That will change from early next year. Then we have Vibrala and Cubatao that Are already in the results, and you can expect similar effects going forward, too. And then you have the 2 new you have Slicekills starting up this quarter. That starts to contribute in the 4th.
And then the Swedish expansion is starting up during the Q4, but will probably the Contribution will become meaningful in 2019. So I guess, Tresan, you need to kind of sum up these effects, I'm happy to sort of go through it in more detail after the call if you want to.
Okay. Question to you regarding order book realized compared to So if you look at our spot prices today, so to say, the current prices in the market compared to urea, There is approximately $50 per tonne average premium. And what we have realized during the quarter, there was an average premium of SEK 20. So what you will see then, of course, during these 3 months, The current prices will start to come into effect at the end of the period, more or less.
So when you say end of the period, you mean end of Q4 or And of
course, yes. So current prices, all else equal, you should see getting realized End of the quarter.
So that's really the picture we paint for both the Q3 and the Q4. It's kind of what you're selling today reflects So the prices from about 3 months ago.
This year, yes. No impact on that product, yes. Okay. Understood. So what we're doing today, yes.
Okay. Thank you.
Thank you. And our next question comes from the line of Paul Walsh. Your line is open. Please ask your question.
Yes. Hi. Good afternoon, everybody. Call. 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 €40,000,000 that you mentioned on Slide 10 Of the presentation in the Q4, I. E. Should we expect that to drop in Q4? And the second question, just coming back to the digital spend That you've now flagged per quarter running at €10,000,000 Was there digital spend in the P and 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. So pricing, the late pitch 10, are we talking about the SEK 40,000,000?
Yes. So Paul, I think the question you're asking is what does the lag look like next quarter. And we have communicated Today that we expect a similar lag about 3 months or so in the Q4.
Yes. And of course, if you refer to Page 10, the SEK 14,000,000, that was a reaction from our side to the difference between the analyst estimates and how we have Talked about the 1 month lag and what was realized in the quarter. So in order to figure out what the relevant $40,000,000 figure would be for next quarter, you need to know the urea price first.
Sure. But you also say
on the 3rd page that can prices were up 18% year on year, but you only realized 9%. Are you basically insinuating that you'll get that delay caught up in the Q4? I mean, I guess my point is what's the purpose The $40,000,000 are you flagging you're going to get it back? Or are you flagging that there's just a 3 month delay now rather than the 1 month delay going forward.
Sure. Thank you. The reason for that was to explain the difference between the consensus estimate and our Let's say, explain your belief of the difference between that for the Q3. For the Q4, of course, what we'll do is to try to catch up, Yes. Right.
And it has to do with because we invoice at delivery. So we have sold things that we haven't just Delivered to the customer. And then you have the logistics chain, enough trucks and so on and so. But definitely, we're working on reducing the 3 month timeline.
Okay, Okay. Thank you. And on the digital investments?
Yes. Digital, the spend has ramped up quite a bit. So That's one of our major pillars for the strategy going forward. And that's set up as a business unit in itself. So it's there to make money not to have users for users' sake.
However, the spend last year was not relevant in the P and L. So 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, so maybe we should get back to that properly Sure. The 4th presentation to show the impact on what we're actually doing there.
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Thank you, guys. Thank you.
And our next question comes from the line of Alicia Azim. Please ask your question.
Thank you. This is John Tumazos from John Tumazos Very Independent Research. There's been a lot of newsreels in the U. S. Of record inventories of 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. Doug Dura? Yes. No, I'm sorry.
That's a big topic. Of course, A little bit there. I would talk to markets and it's political. It's just I would say that, let's say, the first Order effects are it's hard to see very negative because, I mean, it's Brazil and Argentina are having premium soybean pricing now almost call. Dollars above the U.
S. Price export price at the moment because of what you say. And And 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 FY substantial increase in the U. S.
Corn acreage next year. It's early days yet, but 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 it's a little bit early days yet. But in China, I mean, if they struggle to import that 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 They're on corn production rather than soybeans because it's more kind of intense and more calories per hectare.
So that could also be potentially a positive. So I guess a negative would be It's calorie demand, it's protein demand falls in total and less meat I don't really see that. So I don't think we see much The effects of this in our 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 20 18 harvest.
Now I mean, there are some discussions about the call. For competitiveness on U. S. But then even more on wheat and on corn, I think so. So there is we don't see a particularly Really strong in problems with inventories in the U.
S. And risk for that. Now that's not something we see. I think the U. S.
Market is actually seems much more up east on the nitrogen side now than a year ago with a Stronger delivery so far and actually pricing that at par with global values, while it was discounted quite heavily last year. So I don't really see that situation that you're describing.
Thank you.
Thank you. And our next question comes from the line of Chetan Udeshi. Please ask your question.
Yes, hi. Thanks. I just wanted to Check, how do you 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? And 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. So Europe is, of course, consisting of the so called micro markets. And Yara, it's a little bit where you are.
On an aggregate level, the reception is quite good. That also may impact the potential To raise further, there's definitely a potential over time. The question is when and where and how much. So I wouldn't expect No changes forever.
Thank you.
Thank you. Our next question comes from the line of Thomas Wrigglesworth. Your line is open. Please ask your question.
Thank you. A 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 The farmers can afford before effectively they're effectively disincentivized to plant or have to reduce demand?
Yes. That's it's always very difficult when you get into these situations that we'd like, of course, that we are close to full capacity It was a little bit short term and that small shifts in the supply and demand balance has a potential to make quite Deep price volatility. And I mean, this is hard to get right because the world consists of so many different markets. I mean, At what threshold will India try to do something? Now we saw a SEOP.
I don't know if you saw on Friday, there was a question mark about their tender. It didn't really affect the market, but you have now a combination of a lot of public Governmentally supported tenders in India, Pakistan, Bangladesh, Ethiopia and so forth. You have buying from the northern hemisphere Yes. Fair for spring, what will the sentiment be there? And it's very hard to judge exactly where the threshold This is and where, let's say, if you need a certain demand rushing, Which it seems like at the moment, at the moment, it seems like you need at least more and more this demand rationing.
Where will that come from? An executive op price, very hard Very hard to establish,
I think, our good forecast. But 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?
Well,
Everything is running. I mean, short term, you have some idle capacity. You have some idle capacity in Ukraine, for instance, that is very high cost. And you have some elsewhere, maybe a plant in Turkey. There you have some plants in Bangladesh and Pakistan.
That's okay because of Like an expensive gas and expensive gas. And then you have China, which is a question mark on the supply response. I mean, when you say that you re appraised it today are, let's say, dollars 3.40 of Egypt, It's hard to kind of say that, that there are not many that are have negative margins At that price, right? So everybody has positive margins on paper. So then it means that the supply curve is basically vertical, right?
And that the demand curve goes up and down that takes the price Up and down, and you don't get really a volume effect. And it's the demand rationing in the sense that if the price has been call. There would have been stronger demand and prices go up to 340 to force some of that out of the market. I mean, don't take the numbers to get proper
Thank you.