Okay. Thank you for joining this call. Good morning or good afternoon. My name is Petter Østbø. I am the CFO of Yara. A quick summary is that we report 13% higher deliveries despite the truck strike in Brazil, which led to a 90% drop in deliveries in Brazil standalone. However, the underlying EBITDA was 5% lower, primarily driven by higher energy costs than second quarter last year. The operating environment, primarily again driven by the higher gas cost, is quite tough at the moment and will probably be tough for some time yet. There is some improvement in the market balance coming gradually, and some of it's happening in 2018, but then over time, improving even more. For Yara's sake, we remain focused on the things we can control, which is primarily our improvement program, which delivered $310 million this quarter.
That's measured by 2015 prices, and if you measure it by current prices and costs, it's equivalent of about $300 million so far. With that, I open for questions.
Operator, could you please open for questions?
Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you have questions, just press star and number 1 on your telephone keypad and wait for your name to be announced. Once again, for questions, please press star and 1 on your telephone keypad. If you wish to cancel your request, just press the hash key. Thank you. First question comes on the line of Joel Jackson from BMO Capital Markets. Your line is open. Please go ahead.
Hi, this is Robin on for Joel. Would you be able to elaborate on the logistical situation in Brazil at the moment? More specifically, who's covering the higher freight costs? How will it impact margins in the business overall in Brazil in the near term? When do you expect things to begin to improve? Thanks.
Yeah. Hi, this is Thor Giæver, Head of Investor Relations. Very briefly, I mean, the situation from our side, as you saw in the results, we had roughly $15 million negative effect in the second quarter. We indicate that we expect a similar magnitude negative effect in the third quarter. Beyond that, we aren't expecting a further impact to our business. You could say a bit between the lines there is that we think that this extra cost, as it stands now, will be passed through in the market. Of course, it takes a bit of time, and hence we have some short-term negative effects. As you are probably aware, there is a possibility that there could be a change or reversal or a change to this minimum freight tariff. It's unclear if and when that will happen.
As I say, we think that even if nothing happens to the tariff, there's a fairly high likelihood that ultimately this can be passed through the whole value chain.
Great. Thanks. Just one more. How do you think the trade war environment will impact different regions?
Yeah. Of course, it's hard to judge how this might develop in total. I guess from a long-term fundamental picture, I guess it's the food consumption and the food consumption patterns that will kind of decide. Because if you need a certain number of million tons of food, that has to be produced, that even if it then should be produced less optimally, to say, it wouldn't negatively affect nitrogen or fertilizer consumption. You could even see a scenario for the opposite in the case if soybeans are targeted, for instance, that any kind of shifts away from proteins in the form of soybeans to protein in other forms would probably be positive for nitrogen. In our opinion, there can be short-term effects like financial investors shying away from agriculture and commodity markets, et cetera.
The long-term effects of such moves will only kind of make the situation even worse further down the road. I say as long as food consumption patterns are not affected greatly, then it's hard to see how this could, in the long term, affect nutrient consumption also. I guess if you assume that this trade effect, the prime effect will be higher prices in China and lower prices elsewhere, for instance, then it's positive elsewhere. Will then food consumption be affected in China? I would say probably less likely. So far, I think it's hard to see much fundamental effects.
Great. Thanks.
Thank you. Your next question comes on the line with Thomas Wrigglesworth . Your line is open. Please go ahead.
Good afternoon, gentlemen. Thank you very much. A couple of questions, if I may. The first one is with regards to the kind of price versus costs in the second half. Energy costs were actually beaten by prices in your first half bridge. You've obviously guided to $170 million of higher energy costs in the second half. At today's prices, noting that you've obviously announced some aggressive increases in nitrate pricing, and just taking commodity nitrogen at spot. At today's prices, have you covered all of those energy costs for the second half? A second question, if I may, just a confirmation. I think you said on the call this morning that the $150 million incremental EBITDA that we're expecting from M&A and new projects was now $90.
I just wanted to confirm that was the number now for 2018 and could you remind me what we should expect for 2019 on that basis as well? Thank you very much.
Thanks, Tom. Hi, this is Thor again. I can take the first one. I think, then we can, if needed, follow up on this after the call. I think if you start with the page seven in our presentation with the nitrogen margins, you can basically plot in, or if you like, on a cash cost basis, the current gas costs and current urea prices, nitrate prices and so on. I would suspect from the line of your questioning that you are expecting the net to actually be positive. I think that is quite likely, happy to kind of run through the exact numbers after the call. To everyone else on the call, a standard cash cost calculator will work here. Actually, Dag-Frode could be adding to this now.
I'm just looking at one way of maybe translating this $170 million into something that's easier to kind of relate to for Tom, because I'm looking at page 33 in the presentation where we show our historic gas costs, then there we see that we reported 5.7 for third quarter last year and 6.6 for fourth quarter. On average for the second half of the year, a little bit above six, while the current forward market is, let's say, around 7.5 or maybe slightly higher than 7.5 today. You have an extra cost per million BTU of, let's say maybe close to $1.5 per million BTU. If you just use the consumption factor, that would then translate into, let's say, you need a urea price increase of $30-$35 or thereabout, I guess, to cover that extra gas costs, something like that.
At least that's one way of, maybe that's an easier way of when you observe prices today, urea prices and also our nitrate prices, that maybe give you kind of at least an angle to see what kind of ratios we are talking about.
On slide 49 in the presentation, you can see the Egypt price in third quarter last year was NOK 234.
I guess, sorry, just as a follow-up to that, because there's some debate in the market as to whether urea prices will now fall back to their summer price, as it were, given that we've obviously had this late season, and demand kind of extended. We're starting to see U.S. prices soften, certainly last week. Is it your expectations that we won't now see urea go back to the summer lows? That's probably not a very good term, but will actually just stay flat here and then kind of pick up for the October more seasonal demand season.
We don't give forecasts ourselves on this, let's say that, as we've said in the presentation also that we expect the relatively tough market conditions also for a while. Let me just say that given that this market balance, it's fragile in the sense that there is almost zero trade with China, right? The difference between an export pricing logic from China and an import pricing logic to China is quite There are small shifts in the main factors, in demand, in production, in status on new plants. The relatively small shifts in these balances create quite strong price volatility as we have seen. Yeah.
Understood. Thank you.
Yeah.
Could I just ask for that clarification point on the M&A and the new projects?
Yeah.
Thank you.
The clarification is that those 150, that was based again on the 2015 prices and costs, and the 90, that's with the second quarter prices and costs. If prices and costs remain as they are today, then you should expect over the year a NOK 90 million from these acquisitions and new builds.
Okay.
Just as a comment, Tom, additional to that. You might sort of wonder about the relationship, because we also mentioned today, for example, on the improvement program, that at today's prices, it's very close to 2015 prices. There's, I think, a significant mix difference between the improvement program and the 2018 growth pipeline, and that is that we have the Freeport ammonia plant in the 2018 mix. Of course, right now ammonia margins are significantly lower than in 2015. If you look at our business as a whole and the wider growth portfolio on the improvement program, we get much more of a benefit on higher fertilizer prices as such, whereas in 2018 on the growth, the lower ammonia price weighs more heavily.
Okay. That's very helpful. Thank you, gentlemen. Thanks very much.
Thank you. Your next question comes from the line of Christian Faitz. Your line is open. Please go ahead.
Yes. Good afternoon, gentlemen. Thanks for taking my two questions. First of all, aside from the strike situation, can you please elucidate the current demand situation in Brazil a bit? What are your people on the ground saying about current business conditions going into the crop season? Then second, in your view, how much of a price push in corn, for example, would we need to incentivize farmers again to apply sufficient nutrition levels?
Yeah, Christian, we're not sure if we caught all the questions. You can maybe repeat the second one in a minute. I think the first one was on Brazil again and whether we see any sort of potential for a demand disruption ultimately this year. I think we can't, of course, fully predict this, but I think within the answer I gave earlier is that overall, we think that the industry and the value chain will work through this and without, in the end, any big effects overall. Could you maybe repeat the second question because we didn't fully catch it?
Yeah. I guess just a very general question. As we know, agriculture and commodity prices continue to be rather low. How much of a price push would we need, in your view, going into 2019, let's say, to price farmers again to apply sufficient nutrition levels?
I guess that's a gradual. Any improvement is, of course, positive. Back to the Brazil situation also, we can also mention that while, of course, it's very disruptive, that has happened with the transport side, but otherwise there's a quite optimistic attitude in general because of the soybean prices being quite good in Brazil. They are more depressed in the U.S., so the gap there has widened considerably. Also with the currency making their exports quite competitive. In Europe, of course, Europe is very stable. You seldom see very high demand volatility even because it's so mature. Even if grain prices went up some more, I am not sure that Europe would be the place that you saw the largest effects.
Okay, thanks. Very helpful.
Thank you. Your next question comes from the line of Patrick Lambert. Your line is open. Please go ahead.
Sorry, guys, all my questions have been answered. It was all about Brazil season. Thank you. Again, trying to get a view of how disruptive that strike could be in terms of deliveries into Q3. Can they catch up? I think you answered that. Sorry. Thank you.
Thank you.
Thank you. Next question comes from the line of Mr. Paul Walsh from Morgan Stanley. Your line is open.
Yeah. Hi, guys. Thanks very much for taking my questions. My first question is just on China. What are you seeing in China? What are your guys on the ground telling you about the capacity situation around the Blue Sky Plan? Is capacity just sitting there waiting for higher prices, or do you think there have been real capacity reductions on the ground? That's my first question. Maybe I'll let the answer come through on that, and I can ask a second, please.
Yeah, no, I think it is highly interesting that prices in China are not bad. They are $300 urea prices, and I think it opens up quite a lot of questions along the lines that you are hinting at because the supply curve in China is quite steep now. Those modern producers that have conveyed their production on brown coal and normal coal, they are doing excellent. They are making a lot of money. It's those that are anthracite-based, probably the non-integrated ones that are struggling the most with the margins. We also see that the gas-based sector is also struggling to get up their utilization rate. The production is very stable from month to month. It's around the same level as last year. Which means that they are producing somewhere between 50 and 55 million tons. That's almost 20 million tons less than two years ago.
They seem to be mostly concerned with covering their own domestic demand. It's a good question. It's kind of what happened to those 20 million tons that is lost and how much, as you say, might come up again. Some of it is anthracite-based, but there are others also. It seems like the environmental concerns and increased attention on that is also keeping production down. I don't want to speculate, but even just today's urea prices in China, I think it's very supportive and positive that not much has happened on the production side.
Can I just ask, when I look at slide six of your presentation and I look at the year-over-year delta in Q2 on volumes, Asia is the second-largest delta. Is that China or what's going on in that delta in Asia to make it look so large? Is it just weather related? Is it something more structural? Can you help me out? Is it just the acquisition?
The majority of that effect comes from the acquisition in India.
Fine. Okay. My second question was just more broadly around the demand picture. We've obviously seen some distortions Q1 to Q2 driven by weather. We're obviously seeing distortions in Brazil now, which has been talked about a lot. Where do you fundamentally see volume growth rates as we move through the year on an underlying basis if you X out some of these distortions? Are markets growing low single digits? Are you seeing lower prices incentivize higher demand? What's the general view on aggregate volumes? The reason I ask is the drop-through from volumes looks fairly modest to me on your EBITDA bridge for the second quarter, in terms of NOK 20 million from volumes, despite the fact that you have very significantly higher deliveries. That's the origin of my question.
When it comes to the market in total, of course, what has happened now in June, there's been a kind of an obvious pick up in demand. You can, of course, always speculate whether that's just a phasing issue or something more fundamental. Because it seems to be that there is kind of general across the world, a little bit more activity, in our opinion. That kind of course relates to the fact that the grain prices and food prices have improved a little bit through the year. Stocks are now reported from USDA to decline actually quite significantly outside China for the coming year, linked to the wheat, let's say, some production problems in Europe, FSU, Australia, et cetera. I would say it seems like the sentiment is a little bit more positive across the globe, I would say.
How it will affect our deliveries particularly, I guess that will be the different story. Of course, we do our job as good as we can try it on our OPP to allocate the rounds to the best markets and so forth. It's more a kind of question of availability often.
Just in case you didn't recognize the internal vocabulary there, OPP in Yara speak is own production.
Yeah, understood Thor. Thank you. Just maybe a final question. I know you guys won't comment on where consensus numbers sit and market expectations, but in terms of the two headwinds you're facing moving into the second half on gas costs and the Brazil issues, should we be thinking about a sort of similar run rate in terms of earnings for the back half of the year to the first half of the year?
Paul, we discussed, maybe you heard the earlier question. At least on urea, you can sort of look at based on our energy cost guidance, that take for third quarter, then you're looking at a gas cost of about two and a half NOK higher. In the fourth quarter, it's about NOK 2 higher, then it depends on your urea price view, which we're not going to give you. At least compared to current pricing, that looks like, as we said, for an efficient plant, NOK 1 on gas is NOK 20 per ton of urea. Right now, at least the Egypt price and most other prices, I guess, are up at least as much as the gas costs are up.
Yeah.
As you point out yourself, we don't provide earnings guidance.
I thought as much, okay. That is very helpful, Thor. Thank you.
Thanks.
Thank you. Your next question comes on the line of Andrew Stott from UBS. Your line is open. Go ahead.
Good afternoon, gents. Thanks for taking the questions. I've got three, sorry. First of all, on the maths of the NOK 90 million, I just wonder if you could help me. It goes back to Thomas' question. You did NOK 20 million from M&A EBITDA in Q2, and I was assuming with seasonality and just more months of consolidation, you'd have sort of north of 30 per quarter for Q3 and Q4. Clearly if my math is right, and that's why I'm checking, you're getting 80 plus out of your M&A this year from India and from Cubatão, which means you get nothing from your production-related growth. Is that correct math? That's the first question. The second question is India. I just wondered if you had any update on the Indian tender, any thoughts on that?
I see the rupee is now at an all-time low, at least against the dollar. I see that the tender has been delayed at least. I just wonder if you're hearing anything on the ground on that. The third question was CapEx. I think I'm right in believing you've raised your CapEx guidance. Looking at your previous documentation, it's NOK 100 million this year, NOK 100 million next year, and long range by as much as NOK 200 million. I'm just checking on that as well. If I'm right on that, why have you done that? Thank you.
Take that question, Thor.
On the first, hi, this is Thor. Andrew, on your first question, your math in principle is right. There's a few moving parts within there. The [inaudible] and the Cubatão earnings are for the argument of that exercise, you can assume are fairly flat from the acquisition date onwards. You have, as I mentioned earlier, you have the issue with Freeport, that the ammonia profitability is much lower than in 2015. That accounts for a lot of that gap between the value at 2015 prices and current prices. The remaining projects being Sluiskil and Skørping, the technical ammonium nitrate expansion, they will have a ramp-up, partly a plant-related ramp-up and partly a market-related ramp-up. They're not sort of unlike the acquisitions.
You don't just push the button or take them over and then have earnings more or less from day one. Coming back to your way of thinking about it is right. Hopefully with those additional comments, you can model it out a bit better.
Perfect. NOK 80 million-NOK 90 million wouldn't be far adrift on M&A is what you're saying?
Yeah. That's what we've said, that the 2018 at current prices is worth about NOK 90 million.
Okay. Perfect. Yep, got it. Thank you. Thank you, Thor.
Right. The second question regarding the capital expenditure, that is from two sources and one of them is that existing project at some point in time might have some additional costs come in, and here we have in particular the Granul project has some additional costs. The other thing is there is a constant stream of projects that are potentially of smaller scale that we also need to have a relook at. When we look at the capital expenditure, it has to pass a higher hurdle and we really scrutinize that very thoroughly. At the same time, there are projects with very high returns and short paybacks, for example, regarding the bottlenecking of existing plants that we still will do because they are very profitable to us. This is a reflection of those.
When that is said, as I mentioned, this is better now at the quarterly presentation, there is some, let's say down signs certainly, meaning we might invest a little bit less than what is committed, partly due to the scrutiny of CapEx, also due to the program we have to reduce CapEx and get more for the same money, also that we are looking at ways to achieve the same with less, for example, in the improvement program, which I mentioned specifically today. Although there is a slightly higher number there, we are hoping to come in below.
On the India tender, we don't really have any information beyond what is said in the publications. You can understand when looking at the normal sales and production patterns for July and August, there is a deficit of 1 million tons every month for those two months. It's understandable that the market expects a tender, that there should be a need for India to buy some more. How much of the delay that might be related to this Iranian payment issues and sorting out those and how much might be other factors, we don't know. We are just observing like you are.
Okay, got it. Sorry, one more, apologies because I know you've commented, but I missed it. Somebody asked earlier about Brazil and your order books, I missed your comment. Could you repeat that, please?
The order books in Brazil?
Yeah. Someone was asking about your short-term order patterns in Brazil. Away from the 15 million of costs.
Yeah
Are we seeing it? Yeah. I missed the comment. I apologize.
Okay. No, briefly, the comment was that we think actually we and the industry will work through this. I mean, you basically need a few months to reorganize and start to pass through these extra costs. That's why we've communicated we had some costs this quarter. We expect a similar magnitude negative effect next quarter. Beyond that, we expect we can work through this. The only other thing I mentioned, there is the possibility that the tariffs may change again. I mean, presumably not to be increased further, but maybe to be reduced or reversed. In a way, we think either way, this is workable.
I'm sorry. I think you misunderstood the question, Thor. I was asking about the volume impact, if any. I get the cost comment. I just wondered if.
Yeah
With a lot of the trucks being sat around, whether there's an impact on volume for Q3 or not?
No, within that, we don't see a fundamental volume impact from this. I mean, could this mean that you get a slightly different pattern between third and fourth quarter? Possibly. As you know, normally the big months in Brazil are August, September, October.
Maybe it affects that a bit, but fundamentally for the whole season, we see a big effect.
Yeah. Perfect. Thanks a lot. Thank you.
Thank you so much. Your next question comes from the line of Peter Testa. Your line is open. Please go ahead.
Thank you for taking the questions. Two, please. One is just on slide 16, where you give your global capacity additions. There is quite a change in the production line versus the last quarter when you are using the CRU numbers. I was wondering if you could give any thoughts on how this changed your mark of year in 2018 and H1 versus H2. Plus in there is the question around Iran and how you would feel Iran and sanction risk should be taken into account on this slide. I have one other question.
Yeah. There are some more kind of, maybe you cannot call it technical issues, but some of the reason for why the actual supply increase seen by CRU exceeds the capacities so much for 2018 is, of course, that there were delays to some projects that were presumed to be producing more in 2017 that have been gradually phased into 2018. That is one thing, but that is probably not the big change from last report that you were talking about. There are a couple of changes that are related to the assumed closures. You may know that there is a plant in Kuwait that has now closed, as far as we understand, from July 1st, but that was assumed to be closed earlier in the previous report, so that CRU had to add some more supply back from that plant for 2018.
The same with the assumptions on these two Petrobras plants that were announced closed earlier, and then there were some pushback from local governments to try to keep them running. That also forced CRU to put some more volume back into 2018 compared to their previous report. I think there are some factors like that that have beefed up the assumed actual supply increase for 2018.
Okay. Then views on H1 versus H2 in Iran?
On Iran? Yeah. Iran has, of course, struggled to export for many years and have been saved by India to a large extent, but also been able to sell elsewhere, whether it's to Mexico, to Turkey, to other places. That has often been involved with a discount, so there have been buyers for their tons, but at a cheaper price basically. That is one assumption going forward also, of course. If they were just forced to close, if they were not allowed to export anywhere, then you're talking about more than 3 million tons of export supply. That would, of course, be very tightening for the market if that were to happen. I don't want to speculate on probabilities here. Yeah, there is clearly an influential factor if they didn't find any outlets for their tons.
Yes. Okay. Then the other question was just you talked about the impact of urea prices lifting the end of the quarter versus gas. I was wondering if you could give any sort of further comment on the nitrogen upgrading margin impact you've seen, whether that's been coming up in support of that or somehow offset some of this move in the urea versus gas price recently. An extension of slide seven.
Just a minute.
Yeah. Did you hear our comments? Because we received a question earlier about sort of what this looks like.
Yeah. No, on the urea part. I was trying to understand how it focuses through also then on the upgrading margins and whether you've seen some of that also push through on some of the upgrading margins or just straight on the urea V gas.
No, if you're looking at urea, then as we mentioned, every dollar on gas is, let's say $20 to $25 per ton of urea, depending on whether it's an efficient plant or not. You can look at the price references year-over-year, what it should come out, what it looks like if you do that specifically for spot pricing now and our guidance for first quarter gas cost in Europe, for example, it looks kind of direction of a similar magnitude, the increases.
CAN pricing?
Well, the nitrates premium we mentioned during the presentation is higher now than it was at the end of the second quarter.
Right. Okay. That's fine. Thank you.
Your next question comes from the line of Neil Tyler from Redburn. Your line is open. Please go ahead.
Good afternoon. One left, actually. Financial question relating to the EBITDA bridge. In the others line, you referred to the negative impact there as reflecting principally a step up in fixed costs, some of which were talked about on the webcast this morning, specifically around your digital effort. Can you help me understand how that's likely to develop year-on-year over the remainder of this year and into next, and what the other components were? I was led to believe that there was some costs booked through that or reflected in that line last year relating to the Porsgrunn fire, but I can't remember which quarters those fell into, those additional costs. I think you're still due, at some point, the rest of the insurance payment from that, but I might be wrong there. Thank you.
Yeah. Right. There may be a few things in this, the question was fundamentally about the other category in the variance analysis.
That's right, yeah.
That we mentioned earlier included some positive with the added starters on the volumes, expansions in M&A, but also a negative effect from fixed costs, including digital. Of that, we have a roughly NOK 20 million is on the cost as such, of which about half is digital. We, I think, can add the comment that the digital cost is kind of we don't expect it to increase materially further from here. You can use those numbers as a basis looking forward. You are right that we have still some insurance payments outstanding from the Porsgrunn stoppage last year, but we don't have specific information yet on when they are due and what the amounts will be.
Am I right in thinking that you, in the fixed cost, the way you sort of reflect the fixed cost relating to the EBITDA improvement program, in the past has been through that line as well?
Yes.
That's helpful. Thank you.
Thank you. Next question comes on the line at Chetan Udeshi from JPMorgan. Thank you.
Hi, thanks. I just had one question on slide 16 where you discuss supply and demand, and my question is around 3% consumption growth. Correct me if I'm wrong, but the consumption growth in urea in recent years has been more like flat to up 1%. Is using 3% number sort of justified in the current environment where demand has grown much slower in recent years?
No, we try to be just passive kind of conveyors of the historic information here. You are right that probably 2017, it's a relatively meek year for consumption growth. The 3%, that refers to the trend growth for the last 10 years that we have kind of accurate information with, and it's stopping in 2016. Then we kind of leave it to the readers to make these kind of assumptions also going forward. We are just showing the historic growth rate. I would also then use the opportunity to say that we are, be aware that we are also, in a way, comparing apples and pears because we are showing historic growth rates, but we are then showing added capacity with assumption that that capacity runs at 100% and that nothing changes to the utilization rate elsewhere.
I think you also have, if you want to question the consumption growth rate we should use, you should also make some judgments on actual supply increase rather than just looking at these bars, which are kind of nameplate capacity from new plants and the whole factor of utilization rate in the industry. Otherwise, it's not even kind of considered in this graph, so it's not a complete picture in that sense.
Okay, thank you.
Thank you. We have one follow-up question from Andrew Stott. Your line is open. Please go ahead.
Hi. Sorry for printing one more. Just on your bigger scale ambitions in Africa, which you referred to back in February at the CMD. I just wonder if there's any progress updates on either Ethiopia or Mozambique or anything else. Thank you.
I guess the short answer is there is no particular thing to mention on both at this point. No.
Just to add to Andrew, I'm not sure we'd agree with that we stated large ambitions there on the capital markets day. I do recall there was some media attention on this earlier in the year, I think originating from a conference in Africa. Those projects are not in our pipeline today. They are not committed projects, and particularly the African one is quite some distance away from potentially being so. Dallol , as you know, is an evaluation that we need to conclude sometime in the next, let's say, 12-18 months, or expect to conclude at least. As of now, it's not in the pipeline.
Okay, clear. Thank you.
Thank you. There are no further questions at this time. Thank you. Please continue.
Okay. If there are no further questions, thanks from everyone here for your interest in attending the call, we'll look forward to keep you updated going forward. Thanks very much.
Thank you. That does conclude our call for today. Thank you all for participating. You all now disconnect.