Good morning and welcome to Yara's third quarter results presentation. Our presentation today will be by our CEO, Svein Tore Holsether, and our CFO, Petter Østbø. After this presentation, we will have a Q&A session. It's now my pleasure to introduce Svein Tore Holsether.
Thank you very much, Thor, and good morning to all of you. As usual, we are going to start with safety, and as you see here on the screen, the positive trend development is continuing. At the end of third quarter, we're at 1.4, which is industry-leading level. It is important that we reflect on safety and also for me, safety is a core part of operational excellence. That's why we also spend a great deal of time going through to understand each and every one of our accidents. So far this year, we've had 68 accidents. Going through those and reflecting on them, I also want to take a moment now to thank our employees for all the efforts and the commitment on safety. Because equipment, tools, procedures, and policies can only take you so far when it comes to safety.
At the end of the day, it comes down to individuals looking after their own safety and the safety of each other. That's really the key driver behind getting to a total recordable rate of 1.4. It's the caring part, and that's the essence of our Safe by Choice way of working. Behind these numbers, looking at the recordable rate for our own employees, we're at 0.8 year to date, while contractors is at 2.1. There's still quite a big discrepancy between our own safety performance and that of our contractors in our sites. I should also add that the recordable rate for contractors, if you go back to the beginning of 2016, it was at six, so it's still going in the right direction. As a percentage of our accidents now, more and more is happening outside our plants.
We see quite a few accidents happening in the traffic. Salespeople and agronomists heading out to the fields and being involved in traffic accidents. We are working on this, working on defensive driving and on equipment as well in order to lessen the impact of the accidents and also lessen the number of accidents. Zero is possible, and I also take inspiration from what we saw last week in Tampa, in Florida at our ammonia terminal. They celebrated 34 years without a recordable accident. I was there myself a couple of years ago, and it's quite interesting.
You've probably seen these indicators where when you enter into the plants that count the days since the last injury, and they usually go up to 999, so they had to actually physically go out there and add two digits in order to measure the fact that they are now at 12,400 days. It is possible. Turning to the headlines of our results. Before we go into the details, let me try to summarize the results and how we see the market situation now. We are delivering improved results this quarter, both compared with last quarter and with a year ago. Our operational performance is good, with our Yara Improvement Program on track and a continued positive development on safety, as I just indicated.
On the margin side, we see an uptick in the cycle and higher fertilizer prices, that are impacted, but not yet fully reflected in our results. Also, higher gas prices in Europe remains a significant headwind for us. We remain focused on the controllable factors and working to improve our operations. On our growth projects, we are now past the peak of investments and are now focused on ramp up and integration of the newly acquired assets. Putting all this together, we're looking at an improved cash flow going forward as the cycle improves, our growth products come on stream, and also CapEx reduces. Let's now take a look at the market situation. On the demand side, grain prices are rising slowly, and stocks are falling, especially outside China. That is as production is set to fall short of consumption.
On the supply side, the projected production increase for 2018 is somewhat above trend consumption growth. After 2018, the supply growth is nearly halved. The stronger demand signals and tighter supply outlook has already resulted in higher urea prices, as you can see here. So far, the higher urea prices have not triggered a supply response from China. This leaves the energy picture as the main challenge, with strong LNG demand in Asia causing increased gas cost in many of the regions we operate in, including Europe. As already mentioned, our realized prices this quarter were only partly offset by higher energy cost. Looking then at nitrate prices, they increased by 9%, and NPK prices increased by 8%. Energy prices increased by 36% year-over-year, mainly reflecting on the tighter LNG situation, resulting in higher spot prices in Europe.
Total fertilizer deliveries were 9% higher than a year earlier, driven by the inclusion of the Babrala plant in India and the Cubatão plant in Brazil. Adjusted for these portfolio effects, fertilizer deliveries were down 3%, mainly due to lower commodity product deliveries in Brazil and North America, as we focused on margin optimization. Our premium product deliveries were up 8%, and this is in line with our long-term effort to expand both production and sales capacity of the products which give the highest return to Yara, but also to our customers. The Yara Improvement Program continues to deliver and has so far delivered $330 million of sustained benefits. We are on track to reach the $350 million target for the year, which we, as you recall, revised at the beginning of this year. Originally, it was $300 million.
We are on schedule because we have good deliveries from all parts of this project, and in particular, strong reliability improvements for NPK production. Also in the last quarters, we see a stronger delivery from the procurement excellence project. The improvement in the third quarter for the Yara Improvement Program could have been even higher. Of course, we focus on bottom-line impact. With the very high gas prices that we had in Europe in the third quarter, we decided to run some of our plants at a lower load level. This means that we have poorer energy efficiency, which then negatively impacts the Yara Improvement Program. Still the right thing to do for the bottom line, but it has had some negative impacts on the improvement program. As I said, we're still on track.
By the end of this year, we're going to finalize the main part of the rollout of the Yara Productivity System and then focus on the continuous improvement part of this. As announced 2 weeks ago, Yara has agreed to acquire the rest of the shares in the Galvani company for NOK 70 million. It's a payment over 3 years, plus a conditional payment and also transfer of some assets to the Galvani family. The main Galvani assets are in the Salitre phosphate mining project, where the first phosphate rock production has started, and we're now working to finalize the project and start up chemical production towards the end of 2019. This streamlines our production in Brazil and secures also full ownership of a key operational production asset in Brazil. It's complementing our extensive network of sales capabilities in Brazil, and it achieves then a more integrated position in the Brazilian market.
It will also help us to fully integrate the company within other activities in Brazil, and it will yield after-tax synergies of NOK 15 million per year because of that from the year 2020. I'm now going to hand over to Petter, who will take us through the financial part in more detail. Petter.
Thank you, Svein Tore. As Svein Tore mentioned, we are happy to then control fully the Salitre mine and with that, be able to work with some exciting strategic options in Brazil, which hopefully we'll come back to. Hopping into the EBITDA and earnings per share, you will see that with the exception of Q1 2017, it's the highest earnings in EBITDA we've had per quarter of any quarter in the last 2 years. Overall, it was 41% up on the EBITDA level or 16% up on an underlying basis. The EPS is up 39%. This includes a NOK 70 million currency translation loss. That's a non-cash effect consisting of a $45 million value of the US dollar-denominated debt, as well as NOK 25 million of internal debts.
There's a NOK 25 million special item in the EBITDA, consisting of a contingent liability related to the Galvani transaction. That is a liability which will now not come into fruition, and a payment we will then not do. On the other side, there's an operating income special item of NOK 11 million, mainly due to impairments of assets also related to the Galvani transaction. If we go into the variation in the EBITDA quarter-on-quarter, that's where the 16% comes from. This is driven by the price and margin effect, more than offsetting energy prices. When it comes to the price effect, we want to comment that regularly we have said you need to expect about a one-month lag between what we produce and what we sell in the market. However, that lag can vary between regions and between industries.
If we compare to the consensus estimate, which was NOK 458 million, we came in about pretty close to 14% below. We believe that's partly driven by the lag in this quarter being closer to three months. That's driven by what we call the order book effect, which is the difference from when we sell something to when it's actually delivered to the customer. Whereas the order book we're delivering at this point in time has a premium on urea of about NOK 20 per ton, what we're selling at this point in time has a premium of about NOK 50. That's for the nitrate market in Europe. That consisted about NOK 40 million in difference if you thought one-month lag or three-month lag. The other is industrial urea.
In some industries there, we also work with a moving average price, which also comes to about three-months lag. Last year, fourth quarter, the lag was also about three months. You should expect that also the fourth quarter of this year, the lag will be approximately three months if you do an analysis of our results. That's for price. The actual nitrate price and the actual cost of producing nitrates weren't that different. Quite a lot of the margin difference here comes from the nitrophosphate NPK plants. Currency, that's the US dollar, predominantly a movement against the rise. Then the volume effect. As Tore mentioned, we produced about 3% less. However, there's a mix effect there.
The value impact is much lower because this consisted of a reduction predominantly in commodity volumes in Brazil, as well as some from Belle Plaine, but almost offset by an increase in premium products in Brazil and premium NPKs. If we jump into the margin part, the actual realized nitrogen upgrade margin was about 4% up. If you take the upgrade margin from urea to nitrate and you use the publications month-on-month, the increase was 18%, whereas the increase we realized was about 9%. That's due to this lag effect I mentioned earlier. The realized NPK prices are up about 8%, but the premium is slightly lower, and that's driven by that the NPK prices are a little bit more stable. They go typically into more premium markets, like cash crops in Asia, and they will therefore vary a bit less.
When nitrogen goes up quickly, then the prices don't react in the same speed. However, the demand for the compound NPK, which is our most premium product, was solid, with the sales up 9% year-on-year. Looking at gas costs, the actual gas cost this quarter came in at NOK 92 million above year-on-year, which is slightly below our guidance of NOK 100 million. If you use the October 5 spot gas price, our guidance is that for the fourth quarter and the first quarter next year, the year-on-year gas cost change will be NOK 125 million and NOK 100 million higher than last year. I wanted to touch quickly on the project. We've added now since last time also the turnarounds. This year we have had two large investments, sort of categories. One is the M&As and the expansion projects.
Those seven ones, which are now all realized and in production, with the exception of the SIRA 4 project in Köping, which is in commissioning and imminent to start. We also had five major turnarounds. First of all, they consist a lot of CapEx, but also take out the plant for anything between four to eight weeks. In that context, it's worth mentioning that the Tertre is now in turnaround, and Sluiskil is about to start. The tons that will come out of that is about 100,000 tons of ammonia and 70,000 tons of nitrate. Compared to not doing the turnarounds, there's almost 170,000 tons of product left for sale the next quarter due to those turnarounds. On the CapEx side and net debt. The peak of the CapEx cycle was, or is this year.
If you look at next year, just to mention, this is not really guidance, but as it says, this is the committed growth and what we expect from maintenance and cost and capacity increase. However, you will note that this number is down by NOK 200 million. It's not exactly 200, it's slightly less, but it's also a rounding effect. It's due to the Yara Productivity System, which we're applying and are able to do the same for less. It's not 200, it's less, but it's also a rounding impact. If you look at the net interest-bearing debt with this quarter, earned more than we spent on investments.
The operating capital change, which reflects a seasonal reduction in prepayments in Brazil, meant that the net debt then increased to an average of NOK 3.4 billion in the quarter. If you jump to the Yara Improvement Program, as Svein Tore mentioned, we are on track with the NOK 330 million so far. You'll remember that we increased this year's target from NOK 300 million to NOK 350 million. That's what we are on track to reach. If you calculate these benefits on today's, meaning end of quarter prices and costs, you're coming at NOK 320 million. It's pretty similar, although there's quite a lot of shift towards energy reduction impact and less towards, of course, production increases.
Just to comment here as well, we did have what we said was a target to spend NOK 39 million in cost to achieve this and NOK 140 million in investments to achieve this, and that's been now taken down by NOK 4 million in costs and NOK 40 in investments. We'll be able to reach it without those investments, again, due to the way of working. All right. With that, I hand over to Svein Tore to talk a bit about the strategy.
Thank you, Petter. As mentioned in the second quarter presentation, we have run a full update of our strategy for the first time since 2012, bottom-up strategy process. That's to both reflect and respond to the significant changes that have happened since then, both in the market, but also in society. We are the crop nutrition company for the future, and we will achieve this by focusing on three strategic priorities. Advance Operational Excellence, meaning further developing a culture of continuous improvement and to become both more productive and also more resilient to demanding markets. It's about creating Scalable Solutions, sharpening our focus on farmers and the food value chain, and also to create differentiation for our industrial customers. It's to drive Innovative Growth, growing profitably, within both existing and new business areas, positioning Yara to shape the industry.
Let's today take a closer look at Scalable Solutions. We have some unique strengths in Yara. We have unrivaled knowledge of crop nutrition. We also have an unrivaled global reach, and we have a responsible business model. We want to work more closely with the food companies, help them and their farmers to increase quality and yield, and also reduce their carbon footprints. We want to promote sustainable crop nutrition solutions and nitrate-based products. Today, 25% of the global greenhouse gas emissions come from agriculture. Half of that is deforestation, and that's completely unnecessary. There's no need for clearing new land for food production with the right input factors and the right crop nutrition solutions. Today, 70% of the fresh water is used for agriculture. We can have an impact on that, but then we need to make our voices heard on that.
We have the products and we have the knowledge to lead the way in this. We want to scale up digital farming. Today, we meet face-to-face with 1 million farmers every year, which is actually, I think, quite a good number. Still, there are 500 million farmers worldwide, and the way to reach them, it's impossible to do that physically, but we can meet with more farmers digitally. With digital, it also allows a more continuous dialogue with the farmers. Let's now take a look at an example of how we work with, in this example, with PepsiCo. They're not only a provider of soft drinks, they're also one of the largest producers in the world of potato chips with brands like Lay's and Walkers.
Yara is not a fertilizer company. Fertilizer is part of our solution, but first and foremost, we're a solution company. We find solutions to help farmers to become more profitable and more sustainable. We have solutions to help the whole food production system to become more efficient and more responsible. If you look at the value chain, agriculture is changing a lot. The environment for the farmer and the framework for the farmer is changing. Now there are strong dependencies, starting from the consumer and the trends of what the consumer wants, being filtered through the food chain companies, and at the end of the day, the farmer needs to respond.
Food Chain and Global Solutions is a new business unit which is responsible for commercializing Yara solutions, both towards the food chain but also commercializing solutions which integrate our knowledge, products, and technology.
It's no longer just what is it that you are buying. You really want to understand, and you want to buy into something good or something that has no harm, or something that is environmentally friendly, or something that has social responsibility behind it.
Working with the food chain is a great way to leverage Yara's knowledge, whether it's quality, productivity, sustainability, and traceability.
My name is Cíntia Neves. I am responsible for value chain and strategic partnerships at Yara Brasil. We started this work with PepsiCo and with the producer, seeking to understand the needs of the food industry and the needs of our customer, how our nutritional solutions can help create value, bring profitability to the producer, as well as optimize the PepsiCo processes, our partner, and meet the increasingly demanding consumer market in terms of sustainability, and quality of the end product.
My name is Marcelo Ismael Pozzaro. I am a potato producer for PepsiCo. I work with Yara products because they help me, including increasing solids in my potatoes, which is something PepsiCo rebates financially and gives me more financial value. I earn more with it.
Working with the food industry and the food value chain is, for me, a very good way of responding to Yara's mission and vision. In terms of responsibly feeding the world, we can really work with the shapers of the industry and the end consumers, to make sure that we can scale solutions in a productive and efficient way.
We can deliver value both to farmers and food companies by commercializing our knowledge and scaling up these solutions. We'll do much more of just that. We have a dedicated team, as you saw here in this video, within crop nutrition that is working on meeting with all the food companies, and to promote this way of working. Before we round up today's presentation, I want to highlight the Yara Marine Technologies business as a showcase of our strategy. We have developed our environmental abatement solutions and technology over time, both through in-house development but also through acquisitions. Today we offer a complete SOx and NOx abatement solution in a portfolio to the marine segment. We're pleased with how this business has developed and grown from Yara's core operations. Now for the next phase of growth, this business may benefit from a new ownership structure.
We want to continue to both develop new businesses from our core and keeping an eye over time with regard to the future development of ownership. Here is a summary of the growth and improvement program earnings that lie ahead for Yara. On the left-hand side, we have added together the investments we are making both in the Yara Improvement Program and for our committed expansion and growth projects. On the right-hand side, you see the combined projected earnings improvement resulting from this on a 2015 baseline, totaling NOK 1.1 billion of EBITDA, equivalent to NOK 2 of net income per share. I want to round up with a summary of Yara's prospects. First of all, we believe the market cycle is improving, that it is likely to stay positive for some time.
Supply growth pressure is easing after this year, the demand side also looks positive given the tightening situation for grains. As mentioned earlier, our cash flow is set to improve as a result of cyclical improvement and due to our CapEx having peaked and our growth and improvement programs delivering higher volume and revenues into 2019. Finally, we have a focused and sustainable long-term strategy to further advance operational improvements, innovative growth, scalable solutions, as well as active portfolio management. We consider these prospects both attractive and compelling. With this closing summary, I would now like to hand over to Thor, who will manage the Q&A session.
Okay, we are then assembling for the Q&A session where Svein Tore and Petter are joined by Dag Tore Mo, our Head of Market Intelligence. If you have a question, please raise your hand and my colleague, Nina Kleiv, will bring the microphone to you. Should we start with Nordea, Hans-Erik? Please state your name and company if I fail to do so.
Hans-Erik Jacobsen, Nordea. With regard to the time lag, is this time lag something that is specific for Yara, or is it something that has happened for most of your competitors in Europe this quarter?
No, this is not specific for Yara. I think we've seen a trend over the last years, with all the time from the
The financial crisis in 2008, 2009, the trend has been for farmers, particularly in Europe, to try to secure a certain part of their need early in the season. It's a very strong demand for early deliveries to cover that need as a kind of hedging for the farmers. It used to be that way in the U.K., particularly with, let's say, large farms, some fairly professional farms, and some of them quite well off. It's developed the same way also elsewhere. This is not specific for Yara and it has been the same actually for a while. It's normal to assume a longer lag in the fall and then reduced as you get closer to the new season pricing in May, June.
A question on China. As mentioned, Chinese exports have been quite slow over the past year, they started to pick up quite substantially in the Indian tender a couple of weeks ago. In your view, are prices now high enough in order to lead to a sustainable increase in export, or was that a one-off?
I think that depends on the production development to a great extent in China, as we show here, through September, there hasn't been one. There's still year-on-year declines in production. Actually, the last number I have from the first week of October is the first week in a long time where there actually has been a year-on-year increase, a slight one in production. As now global demand has improved, creating a quite substantial deficit ex-China, there is a need to attract urea out from China. At the current production rates in China, that product isn't really available because the Chinese market is as tight as the rest of the world. What we see is that the Chinese prices are following higher as well. That's very interesting to see how that will develop.
As you said, there has been more than 300,000 tons of Chinese urea sold in the last India tender, and that just tightens the domestic market further. The short-term outlook now is for continued export rights from China, how tight will then this become? That's back to my earlier comment that I think assuming that the global market stays in a deficit situation as they know always, what is the production response going to be in China? Also elsewhere to some extent, but mostly in China.
Thank you.
Over here. Yeah. Okay, we can maybe start with DNB, yeah.
Thank you. Eivind DNB. Just a follow-up on price realization. Thank you for the comments on Q4, can you maybe also comment on how the lag looks for 2019 and how that stacks up versus last year? Also into the new season, maybe if you are seeing that this is a stronger trend, that more professional farmers are buying early, how would that affect your pricing strategy for early season? Also maybe a question on the strategy. You are now clearly stating that you are a more crop nutrition-focused company. As you have said, you have put out the scrubber division for review, to call it that. My question becomes, what about the other assets in the industrial division? The biggest earner in that division, to my knowledge, is AdBlue. What are your thoughts on that one, please? Thank you.
All right. Regarding the first question on the lag into quarter one, I think what you will see is that the new season typically starts in May. Depending on the stocks coming into that season, the apparent demand in the market based on, for example, crop prices and so on, as well as the supply-demand balance, the industry itself will see what is a kind of good starting price and how big volumes do you typically then make available for sale. That means there are many factors that determine how long is that time lag at the start of the season. The last years, it's been about three months, and that gradually reduces as you approach end of season and have more spot sales.
I would probably will not guide on the quarter one lag, but it will be lower gradually until we move towards spot at the early part of the second quarter.
Just to comment on Industrial with regards to our new strategy. We are now very clear we are the crop nutrition leader. That's the core of our business. That's where we are leader in the industry. That's where we can shape the industry going forward. That said, we'll still have a lot of businesses that help us to optimize our product flows, that helps us to optimize our product portfolio to ensure the best possible cost position. Industrial has been a very strong contributor to both our growth but also in terms of profitability. I'm very pleased with how that segment has
Has developed. We'll always have an active view on that portfolio. An example of that is when we sold the CO2 business a couple of years ago. Now we're looking at marine technologies. You mentioned AdBlue, it's been very helpful for optimizing our product portfolio and our flows and to optimize our margins. It remains a significant part in Industrial. I think going forward, we'll always have an active view on our portfolio without making any announcements on specific projects other than the one on marine technologies.
Okay, next question from Fearnley.
Bruce Thiessen here. Two Indian refiners said this week that they received waivers from the U.S., they were going to buy oil in November after the sanctions take place. What's happening with waivers for India on the fertilizer market? Are they completely cutting back on Iran? You didn't say so much about what the Iranians are, who they're selling to.
Yeah. In the latest Indian tender, Iran product was excluded as a direct shipment from Iran to India. That's what we know. What's going on further, we don't know more than you. I would also like to mention that so far, fundamentally, there hasn't been that much change. Even since September, export from Iran was more than 500,000 tons, new record, almost all of that went to India. What they are doing is that if you see in the publications, they are shipping to China for reload than for re-export. They are selling now to China at NOK 250, NOK 260 FOB at NOK 80 below their colleagues in the other Arab Gulf countries, for somebody to make money on this logistic. It is a very diffuse situation and how the whole supply-demand impact will end up being, I think it's not yet clear.
Are there more questions? Yes. Let's go to ABG.
Thanks. Bengt Jonassen from ABG. In the context of the clear crop nutrition strategy, where would you put fertilizer companies like yourself in the context in the M&A we see in the last years between seeds and pesticides companies, which would be, let's say, a complementary product for the farmers. Would you see fertilizer companies as an exclusive offer continued or would you likely see some changes in that space as well?
I think that's a good question. There's definitely been a lot of consolidation within the seed and chemical space in the last few years. Within the fertilizer industry, it's been more consolidation within the industry. Obviously there are ways that these seed chemicals and fertilizer work together in order to optimize the results for the farmer. We have an approach to this where we work with several of the major chemical and seeds companies, but more on a regional basis based on our particular strength in that region to support the farmers. No one has really done anything in combination of the three. The business models are fairly different, even if the products are complementary. You can achieve a lot through cooperation between the companies.
A full consolidation of these industries in order to reach the results, I don't see that as a necessary trigger to get the benefits to the farmer.
Any further questions? If not, there's another chance at 2:00 P.M. Oslo time when we have a conference call. For now, thank you very much for attending our presentation.