Good morning, welcome to the presentation of Yara's second quarter results. Our presentation today will be by our CEO, Svein Tore Holsether, and our CFO, Petter Østbø. It's now my pleasure to introduce Yara's CEO, Svein Tore Holsether.
Thank you very much, Thor, good morning to all of you. As usual, we're going to start with safety. The picture that I'm showing you right here is from our annual safety day that we had for the third consecutive year, it took place on April 26th. This is an event that really demonstrates how we work on safety in Yara. Safety is not something that you can dictate. It's about involvement, it's about engagement. The way we conduct the safety day is that we have certain themes that are in common for all locations, but how we execute is different from each location. Then with an arc and with sending messages from New Zealand and then going from time zone to time zone throughout the day.
With hands-on engagement, we take the corporate management team and the direct reports, we were present at 70 locations this year. Again, very happy to see the engagement in the whole organization around this. Looking then at our total recordable rate, which is a lagging indicator, but it's still a good indication of how our performance has been on safety. What we see here is that at the end of the second quarter, we're at 1.4 on a rolling 12-month basis, which is the lowest level we've been to so far. Behind these numbers are real accidents. We had 40 in the first half of this year, but it's down from 57 in the same period last year. We can say that the improvement has meant that 17 fewer people have been injured.
Still, we have had 40 accidents, we've had some serious accidents, we do believe that it's possible to get to zero, that is our goal and our ambition. Turning then to the results, before I go into the details here, I would like to look at some of the fundamentals, I will come back to most of this during the presentation. In short, when we look at the demand side, here on the to your left side on the grain price index, we can see that the stock levels are falling and are expected to continue to fall, that the price index is improving. Although, I should also note that this is from a low level. On the supply side, the projected production increase for 2018 is well above the demand growth, after 2018, the picture is more positive.
The energy price picture is challenging with strong LNG demand in Asia. This is causing an increase in gas cost in all regions. As you see here to your right-hand side, you see the increase in imports of LNG, where you see that in Asia it has gone from 106.2 to 121.3, and that is mainly driven by South Korea and by China. In Europe it is pretty much stable. The result of this is significantly increased gas price. Looking at the second quarter deliveries, starting with the European deliveries, they are up by 6% for the industry compared to a year earlier. Keep in mind also that the first quarter was quite slow in demand. We see some picking up here in the second quarter. The global urea price did rebound in June with a significant increase through the month.
This has had limited impact in the second quarter results. This is normal due to time lags from order taking until delivery. I want to highlight or to stress that we are mentioning these points to separate the uncontrollable parts that impact our results from the controllable parts of our results, and that we are not satisfied with the absolute financial performance, and we are working hard on all the controllable part to improve those. First among those is captured in the Yara Improvement Program, which is on track, and I will come back to that later on in the presentation. Our total fertilizer deliveries were up by 11% compared to a year earlier, and that is with increases in all markets except in Brazil. The acquisition in India and the acquisition in Brazil accounts for about five percentage points.
When we look at Brazil, the fertilizer deliveries are actually 19% lower than same period last year. This is a result of the truck drivers' strike that took place in the quarter. Looking at the financial impact of that is approximately $15 million. We expect a similar impact in the third quarter. Deliveries in Europe are up by 18%, and the larger increase, compared to the industry deliveries of 6%, is partly because of lower import, which again, is mainly urea. Also due to the agronomic benefit of nitrates that are supporting the demand for nitrates in the late spring, as what we have seen in Europe this year. I should also say that the industry deliveries that I showed on the previous page are at 6%, that is an estimate. We do not have the final numbers for June yet, so that is still an estimate.
There could be revisions to that if you react to the big difference in our increase in Europe sales compared to industry sales. Turning to the prices, as I already mentioned, we have seen a global urea price pickup in June, it had limited impact on second quarter prices. Yara's nitrate prices were up by 4%, while our NPK prices were up by 7%. However, higher energy prices more than offset the higher selling prices. The nitrate premium towards the end of the quarter, as you see towards the end there to your left-hand side, was about $25. Since then, that is also due to increased urea prices through the quarter and new nitrate season prices. At the end, $25. Since then, the urea prices have improved further, so have nitrate prices. Today, the equivalent would have been approximately $50 for Germany.
On the Yara Improvement Program, so far it has delivered $310 million of sustained benefits, and we are on track on reaching our revised target of NOK 350 million. As you might recall, when we launched the program, our ambition level for 2018 was to reach NOK 300 million. We already reached that, and we increased this at the beginning of this year to NOK 350 million. We are doing quite well in all projects, and particularly strong reliability improvements within the NPK production. Also our procurement excellence product is delivering good results. We've rolled out the program now to 21 of 29 sites. By end of 2018, this year, we will only have three sites left. I still want to emphasize that implementing this way of working will take time. We will see volatility. We've had production setbacks as well in the second quarter and this year.
We are moving overall in the right direction, that's what you see captured here in the improvement program, where we reached then $310 million now. Looking at the impact in the last 12 months, as I'm sure you're aware of, we have been hit hard with lower selling prices for fertilizer and by higher gas cost. When we take that combined effect, that's approximately -NOK 900 million if we compare with where we were at in 2015. Even if the Yara Improvement Program is a long-term value driver, it is also helping us in the short term to improve the EBITDA results, also for the last 12 months, as you see indicated here. When we try to put numbers on that's approximately NOK 260 million impact from this.
24% of the EBITDA in the last 12 months is driven by impact from the Yara Improvement Program. The program will continue to deliver results, and we will have even more benefit as the cycle recovers. I will now hand you over to Petter, he will take you through the financial results in more detail.
Thank you, Svein Tore. I note that the stock is up 5% on these results, they must be very good results compared to expectations. Svein Tore just talked about the NOK 260 million actual improvement that the improvement program delivered using last 12 months prices. In spite of that, the EBITDA and the earnings per share are somewhat down. This is mainly due to the energy costs, but also that the depreciation from our new assets have started to come, as well as the interest rates from the higher debt. Year-on-year, the reported EBITDA was 16% lower, or 5% if you look at the underlying EBITDA. On the EPS side, that was about half. If you look at the reported earnings, that's of course impacted quite a lot by this negative result, which is a currency translation loss.
About two-thirds, so $192 million of that concerns the value of the dollar-denominated debt, and $114 million of that concerns intra-Yara debt. This is caused by a stronger dollar, which is fundamentally good for Yara. This effect, although it shows very negative in the accounts, it is actually good for the cash earnings of Yara year-on-year. This also includes a $44 million negative special item. The majority of that is a provision for restructuring, which is a part of the Yara Improvement Program, but it also includes a tax adjustment for KAFCO, as well as some asset impairments. If you look at the variations on the EBITDA side, as mentioned, that was about 5% year-on-year. The price was up quite a bit on the margin as well. The volumes were fundamentally positive, which reflects the season catch-up in Europe. Svein Tore mentioned that Europe was up about 18% year-on-year.
Of course, partly offset by the truck strike in Brazil, which meant 19% lower volumes in Brazil. We guided for an energy cost increase of about $90 million. It ended up about $86 million. You have the currency effect, which reflects the year-on-year weaker dollar, which is fundamentally negative for Yara in this case. We put our new investments and M&A in the other category. Cubatão, Freeport, and Babrala is in that category. The earnings from those sites are more than offset by additional fixed costs, in particular from the digital venture that we have kicked off. The analyst expectations, the consensus, that was about $329 million, which meant we came in some 2% below that one. We do not give guidance on results, but again, we think it makes sense to have a look at the energy costs for the next two quarters.
If you take the 10th of July forward prices and you apply that to the number of MMBtus we buy in Europe and the U.S., you will end up with something like $100 million and $70 million higher gas costs year-on-year, respectively for the third and fourth quarter. Of course, we hope we are wrong and that it will be lower, but that is what the current estimates show, and this, of course, changes with the gas prices. That is the gas price. If we look at the investments, on the left side, you will see the investments that we have planned and committed for.
The peak of the investment cycle, the peak of this chart on $2.3 billion is for 2018, and the peak of the peak, so to say, has already been in the first half of 2018, where the majority of the growth investments and M&As came in. For the second half, the majority of these investments as well, the $1 billion planned yet to do, they are in the early part of that and mainly concern turnarounds that we have coming up. For 2019 and 2020, there is a lower investment level plan, and there is a pretty high threshold to consider new projects and new M&A. The focus will clearly be on delivering what we already have in the pipeline. As for the debt, the 10% increase on the net debt is driven primarily by the investments.
Just to comment in the last page of our report, the majority of the net operating capital change is driven by seasonal prepayments in Brazil as well. That's the CapEx. Some details on the Yara Improvement Program. Whereas the CapEx now is coming off, the Yara Improvement Program is still ramping up. I want to mention that we have delivered $310 million so far this year in recurring benefits. If you look at the first quarter, we said that you would have to take down about 30% if calculated on current prices. With the current prices and costs, the equivalent of those $310 million is about $300 million. We are closer to the 2015 levels of savings, but from different factors. Of course, costs are higher now and margins are lower.
Still, another thing worth to mention here is that the investments we plan to have at about $140 million, we have so far invested $18 million, and it's likely that we will be able to capture the benefits without investing all of those $140 million. We have high hopes for reaching the $350 million without those investments. You will also notice that most so far comes from production volume, reduction in consumption of gas and raw materials, and variable costs, and the fixed costs will increasingly start coming in as of end of this year and next year. That's on the Yara Improvement Program. I'd like to hand back to Svein Tore to take us through a little bit of the outlook.
Thank you, Petter. In terms of prospects, demand growth is likely to pick up compared to the last three years as Global grain stocks are relatively low, and especially if we look at them outside China. There is a need for increased production in order to keep pace with demand growth. Remember that for Yara, grain is-- It is important for the whole fertilizer industry, but in our portfolio, we are impacted by a number of crops operating in 60 countries and across a lot of different crops and cash crops such as coffee, cocoa, citrus, to name a few. This is due to our presence and our crop nutrition strategy. Certainly, we are impacted by the fundamentals in the fertilizer industry, and this is important for that.
On the supply side, although new capacity additions are almost halved compared to last year, high utilization of existing facilities is impacting the production level, and that's mainly due to North Africa. That means that also in 2018, we see a production increase that is above trend demand growth. Beyond 2018, the urea supply-demand balance looks set to be gradually improving, nitrogen supply growth is, as you see here, forecasted to be reduced significantly after 2018. Current nitrogen price levels do not provide any economic incentives either for new investments. Speaking of the need to increase food production globally, Yara's solutions improve food production per hectare through products that help lowering emissions and increasing the yields, and that perform better than the industry average. Yara's products have higher efficiency and promote a more optimal way of fertilizing.
It's more profitable. At the same time, also with less pollution. Today, the farmers are paid mostly based on quantity. We'd like to continue to influence that in the direction where farmers actually get paid also for how sustainable they run their farms, also to get paid for the environmental footprint of the production. Today, 25% of greenhouse gas emissions are from agriculture. Half of that, again, is due to deforestation. It is possible to do something about it. We have to have the incentives in place and the incentives in place for the farmers as well. We'd like to have a CO2 footprint labeling on the food, which in turn would help the farmers to get paid for sustainable production.
Promoting sustainable and efficient farming is very much at the heart of Yara's mission and vision. That forms the basis of our strategy. We have a strategy update by every summer, where we go through parts of our operation. This year, we've done a full revision of our strategy. The overall conclusion is that we'll focus even more on the crop nutrition activity. Yara will be the crop nutrition leader. We will grow responsible solutions to the farmers, to the industry, and to society while delivering superior return on the capital. We'll do that through the following areas: through advanced operational excellence, through developing a culture of continuous improvement. By creating scalable solutions, we will sharpen our focus on farmers and the whole food chain and create differentiation for industrial customers.
Drive innovative growth by growing profitably within existing and new business areas, when we will position ourselves to continue to shape the industry. Turning to examples of that, when we look at advanced operational excellence, it's as we already touched upon, it's the Yara Improvement Program, the journey towards continuous improvement. It's about focus on safety. In reality, these two go hand in hand. There is no such thing as a good operation or a profitable operation over time that is not also a safe one. These two are very much linked, but examples of what we are achieving within this area. On creating scalable solutions, we will sharpen our focus on the whole food value chain and create differentiation also for industrial customers.
We have already created. We can create even more shared value for farmers, food producers, and Yara in this way. For farmers, this is about access to fertilizer technology and services that create higher quality, efficiency, and crop revenues. For the food industry, it's to support the food industry on traceability, productivity, environmental footprint, also to get reliable supply. For Yara, this means better access to professional farmers, reduced financial risk, and increased value pricing potential. As part of our focus on strengthening our position in crop nutrition, solution selling includes digital farming tools and services. These will be important growth vehicles for Yara going forward. We have this year launched for the first time, a planned digital farming solution called Atfarm in Germany and in France. I'll pause now and show you a video of that application.
Dear farmers, you are the ones that get up early. You are the ones that not just feed their families, but ours as well. You are farmers, but at the same time, so much more than farmers. You're forecasters, botanists, geologists, and chemists. As you shouldn't have to become a computer scientist as well, we developed the most simple digital tool to make your work easier and more efficient. A tool that is the most simple digital solution for fertilization and the creation of application cards. A tool that increases yield and brings higher quality harvests. A tool that analyzes relevant data that is unbelievably easy to use and creates recommendations powered by the Yara N-Sensor algorithm, enabling you to make the smartest decisions possible. Atfarm. Precise fertilization made simple.
For those of you that were here in the second quarter presentation last year, we launched our efforts, going into digital, which is really about transforming our agronomic knowledge into the digital age. In this last year, we spent tremendous efforts to create this momentum, and I'm really pleased when I see the speed at which this is happening, and also the reception that this has had with the farmers that have already implemented. On driving innovative growth, we will grow profitably within existing and new business areas, and we will position ourselves to shape the industry.
Yara's growth investments, as Petter already highlighted, they reached their peak in this year, with the products that we have listed up here, both with the Babrala acquisition in India, we have the Cubatão acquisition in Brazil, then also, we opened the Freeport ammonia plant that we have together with BASF. Then also investment in our existing locations. They will show a strong earning contribution, but mainly then from 2019, as these growth investments now come on stream in 2018. The annual improvement or increase from this would be 1.4 million tons of ammonia production and 3.1 million tons of finished fertilizer production. I'd like to round off with a summary of growth and improvement program and the earnings effects that lie ahead for Yara.
On the left side, we're making, both in the Yara Improvement Program and for our committed expansion projects and growth projects. On the right-hand side, you can see the projected earnings from these on a 2015 baseline, totaling $1.1 billion within 2020, equivalent to $2 per share. With this closing summary, I'd like to hand back to Thor, who will facilitate the Q&A session. Thor.
We will get ready for the Q&A session where our presenters are joined by our Head of Market Intelligence, Dag Tore Mo. If you have a question, please raise your hand and my colleague, Nina, will bring the microphone to you. Please state your name and company as you present the question.
Bruce Thiessen, Fearnley Securities. Germany is passing stricter fertilizer rules that increase the time for fallowing and make it harder to apply fertilizer, for instance, on frozen ground. Schleswig-Holstein's passed the first implementation of these new rules. Will this have some noticeable impact on demand for fertilizer in Germany next year?
I think we already see a slight decline in Germany already this season. Of that, the late spring accounts for some of it, but we also think that these moves to more stricter regulations on nitrogen application also already have had an effect. This season, at least, it's to the benefit of nitrates application. There's been a sharp drop in urea consumption according to our preliminary estimates, because urea without any form for additional inhibitors or something is getting more or less out of the question. We actually had a very good season on nitrates in Germany because of these changes.
Okay. I have one more question. Praxair came with force majeure declaration on carbon dioxide, and there seems to have been a shortage across Northern Europe, partly tied to your Porsgrunn factory. Is this something that will have a negative impact or any impact on your third quarter results if you haven't been able to deliver the volumes that your large customer was expecting?
The entire ammonia production in Europe has been impacted in second quarter. As you pointed out, we had an unplanned outage in Porsgrunn, which further restricted the access to CO2 in Europe. The plant is back up and running now, and the financial impact to us from this is minimal.
Is there a next question? Should we go to DNB perhaps?
Thank you. DNB. Just following up on nitrates in Europe. We have seen very strong price increases for nitrates in Europe. We can also see in your slides that inventories for nitrates are quite low for this time of year. Is this just a catch-up from a late spring or is there something else going on? I can also see that French prices are up significantly while we haven't announced something for a while in Germany. Can you please elaborate on that, please? Maybe a second question on to another part of the world, in Brazil, you said $15 million EBITDA effect in Q2, guiding for the same in Q3. Can you share some additional thoughts on what's going on with the minimum freight increase, and how volumes and demand is faring? Thank you.
I can start on Brazil, and then I'll hand over to Dag Tore on nitrates Europe. Clearly the strike had a significant impact to our operations in second quarter, both in terms of getting the volume out, but also the financial impact from that. We expect that this will take some time to sort out, and that's why we're expecting also an impact of this in the third quarter as well. Beyond that, we are expecting that this will come back to normal operations. At the moment, we expect that once we get through the third quarter, that the impact of this will be limited.
On the European nitrate situation, let's see. As was said earlier, we had a weak first quarter because of the late spring. We had a very good sales in the first half of the season before Christmas, very strong interest in buying early. It slowed down because of the weather issues in the first quarter. We got very good phase in April, May. Say we were very strong deliveries on the nitrates and basically everything as a catch-up because of the spring. Towards the end, when we set the first new nitrate price for the season, you had an Egyptian urea price at around NOK 220, NOK 230, and a relatively negative sentiment in the urea market at that time when we came with the first price.
What happened then in a very short period where the Egyptian price increased from NOK 220 to NOK 230 to reach roughly NOK 290 in a matter of relatively few weeks. You can imagine the interest in purchasing nitrates at those opening price levels. We have got the subsequent price increases, but it also led to, of course, a lot of sales.
Germany versus France.
Yeah. There is some regional differences on short-term basis between the countries also in Europe. We sometimes see a little bit more, let's say, a different buying pattern. Let's say U.K. is the star example of a market where large professional farmers make their decision. They want to buy a certain part of their needs early as a kind of a hedge. They realize over time, as long as, let's say seven, eight seasons out of 10, it makes sense to buy early. They automatically just buy early. You have a little bit of the same pattern also developing elsewhere, like in France, but you also see it in like Scandinavia and so on also. Let's say Germany is sometimes a little bit less focused on the early buying patterns in, maybe it's a little bit different farming structures also.
That combined with also sometimes a little bit more competitive environment with the Polish producers, other producers in the neighborhood as well. You can get on short-term, a little bit different dynamics also in the various European markets.
Okay. We move to ABG.
Yes. Good morning, Bengt Jonassen from ABG. A couple of questions. It seems like that there will be a higher than normal maintenance stops during Q3. How should we think about volumes and EBITDA effects of that? Secondly, at the last quarterly report, we saw that CRU introduced several plants from India. Since you have now guys on the ground there, could you give a little bit of update on that, if you think they are progressing according to plan from your point of view?
Let me start saying something about India, and then I'll let Tore give further information on that. Yes, there are plants in India in the CRU forecast. Yes, the indications are that at least some of these are being constructed. Struggling a bit to understand the profitability on an LNG-based greenfield urea plant in India at the moment. It seems that some of these will actually happen. There are more than that included in the forecast, Tore, so I don't know if you want to add further to maybe look a little bit further out in time on India.
Yeah, I don't know. It's hard to be specific. There are four plants that CRU has in their capacity table at the moment. I don't know how much detail, but one of them, the Matix plant, which has been constructed already, but has run into problems with their feedstock. They are now waiting for a gas pipeline to be constructed. Difficult, I guess, to assess the exact timing of that, but that plant is actually constructed. We understand there is particular activity on one other plant, the one that CRU has for 2019, where the construction seems to be running relatively well, and where there actually is gas in the area. The two remaining ones also reported some activity, but more question marks from our side to whether everything is set up to function well from the feedstock and everything.
Our kind of assessment in general is that we would be surprised if this capacity is brought on stream according to the timeline that CRU has indicated. You can say that also purely based on empirical evidence in what usually happens to the developments of this nature.
Yeah. If you go back in time as well, there have always been quite a few Indian plants in the forecast, and very few of them actually happening. You should take into account that some of this will actually happen.
Yeah. On the turnarounds, we have this year five major turnarounds, and two of them are completed, one is ongoing and two will start. The longest timeline one is about to start. In that context, the two that are completed are the most, let's say, profitable plants, the ones with the lowest gas cost, Belle Plaine and Trinidad. The one ongoing is Pilbara, and you will have Skellefteå. In that context, I do not think that the monetary impact will be stronger in the third quarter than it has been. We have another question from DNB.
Yes, there's two questions, please. Apologies for many questions, new expansions projects heading into the second half of 2018, should we expect a considerable contribution from the new expansion project that ramped up in Q2? Also on industrial, on scrubbers, we are seeing the others talking about very solid order activity and new orders. Have you seen anything similar for the industrial business? Thank you.
Yeah. As for the current projects, all the expansions that have been and will come online for the rest of the year, I think our current price guidance there is about NOK 90 million EBITDA impact for this year, which is slightly down from earlier guidance of NOK 150 million. I guess that's the short on that.
Comment on the scrubbers. First of all, we're really happy that there was legislation put in place. It did take some time before activity started to pick up. Yes, there is a significantly higher activity level in that area, and we are experiencing the same thing.
Are there more questions? If not, there is also another opportunity at 2:00 P.M. Oslo time today, when we'll have a conference call. Until then, thank you for your interest in Yara and attending the presentation.