Ladies and gentlemen, thank you all for standing by, and welcome to today's IRAS First Quarter of 2018 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. And I must advise you all that this conference is being recorded today, Friday, April 20, 2018. I would now like to hand the conference over to your speaker for today, Mr.
Izbankawi, Hall Seti. Please go ahead, sir.
Thank you very much. Good afternoon, and welcome to the Iara First Quarter Results Conference Call. We reported 3% lower EBITDA for the quarter as both Volumes and energy costs were impacted by the cold weather in Europe. And total fertilizer deliveries were down 7% compared to Q1 2017, which is driven by lower deliveries in Europe and in Brazil, while the industrial deliveries were in line with last year. Our Margins improved compared with a year earlier with higher realized prices for all main product groups, which more than offset the effect of higher gas prices in Europe.
The Iara Improvement Program is on track to reach at least USD 500,000,000 U. S. Dollars of annual EBITDA improvement by the year 2020 and of which $275,000,000 have been We realized that was Q1 2018. In addition, our ongoing and committed growth projects will generate a further USD 600,000,000 of annual EBITDA improvement by 2020 when we are fully operational. So With these introductory remarks, we're ready for the Q and A session.
So operator, if you then cleared, please So open up for questions.
Your first question comes from the line of Joel Jackson. Your line is now open. Please ask your question.
Hi, this is Fahad on for Joel. Thanks for taking my questions. I'll ask them 1 by 1. My first question, Back in February, you had mentioned that you thought China would need to import urea this year to meet its domestic demand. Since then, we've seen urea operating rates increase.
So I'm curious, what's your view now on the Chinese urea situation? How And whether they need to import or how that's trending? Thanks.
Yes. I mean, we think that the Chinese market, I mean, it's reasonably tight. And I'd say even in today's market, over the last couple of weeks, there's been a certain improvement. That volumes are running very well. But and the total supply to the Chinese market, if you look at production numbers and deduct the So far this season, I think, are in line with last year.
So with the presumably a little bit less in inventories, that's what led us to think that There might be some interest in imports and there has been interest in imports. Some cargoes have been bought, but nothing substantial. So it seems to us like they are kind of coping with the situation, and they are probably this is probably also going to lead to A certain decline in total nitrogen consumption because instead of urea, there is likely to be, let's say, an increase in NPK, for example, blended Form, very, very proud that we get a certain dilution of the nitrogen content so that we apply a product that is less than 46%. We think that In some instances, it's a kind of a likely kind of pragmatic solution that they will implement because of this tight situation on urea. Although remember that urea is Substantially more expensive this year than last year for the Chinese farmers and that's an effect as well.
So I think you know that we are in second half April. We don't think that there will be any kind of That is meaningful imports of urea for the season. It's not too late for that.
Okay, great. That's really helpful. And the second question I had was, volumes were down quite a bit in Q1 and much of that is due to the weather and potentially shifting those volumes into Q2. But how much of that I guess how much of the volume decline, how much of it can be recovered in the Q2? And how much of it is permanently lost, Meaning that perhaps it's too late to apply the urea or the ammonia.
Just trying to get a breakdown of how much We should expect to recover in Q2 versus how much is permanent demand disruption?
Well, I think we should mainly focus on Europe. And as we indicated In the presentation as well, I think for the season to date, we're about 7% behind last And then we're estimating a full seasonal impact to be So lower than last season, I mean, in the area of 3% to 5% down, which does indeed indicate that There will be increased deliveries in Q2 in order to reach that level.
And your next question comes from the line of Thomas Wrigglesworth. Your line is now open. Please ask your question.
Thank you very much for taking my couple of questions, please. Just carrying on from the 3% to 5% loss of volumes This year, would that then put is that what we should assume that Yara's impact will be? And does that leave your inventories back at kind of normal levels By the end of the season. A second question, if I may, is You obviously noted that you focused on premium markets in Brazil. But in the commodity grades, did you see increased competition?
Was that the driver of your kind of the weaker market there? Or was there something else explaining that? And the third question, if I may, just quickly, you very kindly give us on 2015 prices, the impacts from Effectively the growth and the M and A on Slide 19 of your pack at $230,000,000 of EBITDA. How should we think about that in terms of the actual spot prices today, noting that they are below? I mean, I know There's a range of products here.
You mentioned that they're below. What kind of is a mark to market for that 230? That would be very helpful. Thank you.
On your first question, I think I mean, in the Q1, the European producers took Some market share, I guess, and I would think that with the European industry also having A bit more nitrates in stocks, fairly close to farmers around in Europe. I will get that part of the business. Would that be in a better position to take, let's say, a more active nitrogen market also now in the Q2 when spring really Go ahead. So I would think that we and the rest of the European producer would at least kind of Get the same effect as the total market, but it comes to the deliveries. It would be not my expectation.
We're not speculating too much.
So Iara would be impacted negative 3% to 5%. You're not going to gain more share than the market?
Maybe some, but maybe not all. I mean, yes. And if you look at the seasonal, if you look back, Last year was also very strong. And this I mean and these have also a little bit of the deliveries we are talking about and In June, the day is already defined as the new season in France. And there are some elements there That shifts a little bit from season to season.
So I think, let's say, if we were back to minus 3%, just an example, then we are back to the exact same level as 2 years ago. So I would say there is nothing that dramatic in this if we end up 3% to 5% down.
Yes. And Tom, this is Thor. Just as a reminder as well, we are talking about the quarter As Arthaug has already alluded to it, but it's kind of arguably the most interesting one of the season in Europe Because that's when you set new season prices. So when you're starting to think about volume estimates, you have to bear in mind, it also depends on How global end market pricing is moving and how the what level the new season prices are set and how they are received.
Okay. And competition in Brazil, was that in the commodity grades? I know the premiums you said were up 2% year on year.
Yes. So bear in mind that this is This is not peak season in Brazil, so that you will have higher volatility at this But definitely, the competitive situation has been tougher This quarter and also in terms of farmer economics, it's been somewhat more challenged In the quarter, and this has especially impacted the commodity and the blend fertilizer Market and we have consciously chosen not to take part in sort of lowest margin segments In this quarter, and since a large share of our business in that area is done by TPP, our 3rd party products, so then we also have more flexibility To move there, so that's where we focus on profitability and value creation. While On the premium products, we're continuing to grow even though at somewhat lower rate in Q1 this year. Then back to farmer economics and looking into the second half of the year, which is the peak season in Brazil. And The farmer economics do look more favorable in Brazil and in particular For soybean, which is a major crop and why we follow very closely with regards to fertilizer demand Thanks a lot.
And lastly, sorry, the mark to market on the 230.
Yes. Hi, this is Nestkester. So regarding the new capacity, we haven't really calculated that, so we won't be able to answer correctly or Correctly, but a quick back of the envelope here shows that the reduction would be more or less similar to what we have Indicated for the improvement program, which was a €275,000,000 actual 2015 prices and then €230,000,000 with the 2018. So The similar kind of reduction we would assume is fair enough.
Yes. And we have provided sensitivities on Page 21 in the presentation, which are a rough approximation, but you can, in principle, use them for any price
Your next question comes from the line of Paulo Walsh. Your line is now open. Please ask your questions.
Yes, thanks very much. Good afternoon, guys. Just a couple of questions from my side. I think you mentioned that you were seeing some improving dynamics in China. I just want to know if I heard that correctly and if you are seeing some improving Dynamics in China, what is driving that?
Maybe I'll just ask that question first and then do the second one in a moment.
Yes. No, it's not something I think will have a huge impact in the global market. But over the last couple of weeks, there has been a price increase for urea in most of the provinces In China, also spring there has been coming arriving. And it's quite healthy demand there, we understand at the moment. But I mean, it's not something that is impacting trade too much.
They are neither importing or Four things. So it's more kind of a domestic Chinese situation. But yes, over the last few weeks, there has been More activity also with peak season.
Is it your view more generally that the impact of China on global pricing dynamics Today is just structurally less than what we've been used to in
the past. Is that fair?
Yes. Yes, absolutely. For a large part of the last year, the link the direct link between the export Pricing largely in China and the global market has been lost, been disconnected. So absolutely, that I think in China, it's still relevant to setting the prices for when they start looking at imports, but the more kind of The higher price level that you would achieve if they needed to export or let's say, they need to export if the word needed to Import from China would be very beneficial compared to the pricing that we had over the last year or so.
Understood. And my second question really is just about your earnings trajectory this year. So obviously, earnings are down year on year in the Q1. I know you guys aren't responsible for where consensus settles, but I'm just trying to get a feeling for where you think you can settle relative to current market expectations. And when I look at consensus, it's sort of €1,800,000,000 €1,900,000,000 of EBITDA and you're sort of down year on year or slightly down year on year in the Q1.
Do you think the industry is improving sufficiently that you will be able to make up some of the deficit as we move through the year, Either because pricing improves or the nitrates premium kicks in, because clearly the two headwinds are gas costs right now and currency. And I just want to get a sense for year on year, how much you think you can mitigate those headwinds with better pricing dynamics and better spread dynamics in the nitrates premium and the NPK premiums.
Yes. This is Tor. Everyone is pointing to me for the answer to this question.
Yes, it's an easy answer because for
a company with a non guiding policy, it's not going to
Saying what our view is on consensus.
I think we can as we've communicated today clearly, we are delivering a lot Of growth this year, with 7 projects in total coming on stream. Of course, the full impact of that will be even stronger Yes. Yes. The improvement program, we are working on the controllable items, but unfortunately, we can't control the Global fertilizer prices, gas prices, currency rates, etcetera.
No problem. And just last quick one from me. Should we expect at current spot rates from an FX perspective a similar FX headwind to what was experienced in Q1 in Q2? I think you've got $75,000,000 in the EBITDA operation in Q1, something similar in Q2.
I'm happy to catch up on this after the call, if you like. I think it's more of a modeling question than a
No problem.
No problem. Thanks very much, Guy. Thank you.
The next question comes from the line of Neil Tyler. Your line is now Please ask your question.
Yes. Hi, good afternoon. I'd like to come back to the volume Bridge. And specifically with regards to just trying to tie up some of the various comments you've made about the development in Brazil, First of all, you've talked about deliberately deemphasizing some of the commodity volumes and some of the 3rd party Produced product.
And I
wonder if you could help me understand how you To what extent the volume decline was deliberate versus what was competitive? And how the, I guess commercial decision is made as to what to forego in terms of margin versus overhead absorption And that sort of thing. So if you could sort of help me understand the relative importance of those three aspects of volume decline in Brazil, first of all, that would be very useful.
Well,
it's very clear, and I think I mentioned earlier as well that there are many things at the same time of impact to the first half market in So in the Q1, starting with farmer economics, but also with the competitive Especially on the more commodity products. And then for us, it is It's a commercial decision that we make cautiously that we monitor the markets and see whether it makes sense To focus on volume versus profits and so for the lowest margin price, we felt that It's a we rather not focused on maximizing volume and then looking So our reduction of 12% In the Q1 deliveries, it's very much
a
conscious and commercially driven position.
Neil Desai, this is Thor again. Bear in mind also the largest Part of both the Brazilian industry and our own business still volume wise is the blended products where you have a actually more flexibility On the volume side than a conventional, say, chemical fertilizer plant because you can vary the you have seen workers Depending on demand and so on. So there's a bit more and the margins are lower than For most of the full chemical production. So then you it's natural to flex that volume when you're facing lower margins sometimes.
I see. So it's a higher variable cost business and a lower margin business?
Yes. Certainly, in relative terms, higher variable costs.
Yes. And So if
I just think about
that in the second part of the same question really is if I look at the €31,000,000 negative that was in your EBITDA bridge relating to volumes, It seems presumably there is some component year on year of productivity improvement In that, so that's a net number, perhaps the gross number is slightly higher. But it would be fair to
Yes. It's probably important to point out there, Neil, because the P and L and the variance analysis are both It's clearly based on deliveries. And we so the particularly in a shorter time period And with the some of the weather disruption and so on, we get this quarter. You can have A good production reliability with activity flowing through into the banks now.
Yes. No, sorry, I understand that. Okay. Which simplifies it in that case. But of that figure, still the far greater majority simply because of the absolute volume level is but also The relative margin would be attributable to the European volume decline relative to the yes.
Thank you. The sales decline rather than production decline?
Yes, yes.
Thank you very much.
Your next question comes from the line of Ivan Tsars, Vadeng. Your line is now open. Please ask your question.
Hi, Thank you
for taking my question. I just had a quick one on natural gas and the urea. Do you think it's fair to assume that the year on year increase in European natural gas Prices would lift the cost floor and then profit also urea prices in the summer period? Thank you.
Well, I don't think at the present level that natural gas prices in Europe
Yes. If you take $7 gas at the price today in Europe, you multiply by somewhere between $20.25 To get variable cost of the urea production, and there are not that much other variable costs. So you get $2.50 to $2.75 So of course, you there is quite there is still quite a substantial gap between current EOI prices and variable costs In let's say Europe, but there are other regions around the world and that has to import LNG and Aurora on a kind of global LNG Pricing, which are more and more equalized around the world. So unfortunately, no direct link.
Okay. Thank
you. The
next question comes from the line of Patrick Lambert, your line is now open. Please ask your question.
Hi, good afternoon everybody. Thanks for taking. Two questions. The first one was, I think During the conference this morning, you mentioned turnarounds, a bit heavier turnarounds this year versus last year. Is that correct?
And If you could help us quantify a bit the impact, if you see any impact or if you're building enough inventories to go through those Without too much discussion. And the second one is, again, coming back to the dynamics of demand in Q2. How does your order book looks like going into Q2? Thanks.
Okay. This is Kansi taking the first question on the turnaround, the 5 turnarounds. I won't try to David Platz, but what we have clearly here is There's a difference between end product and ammonia. These are all in ammonia plants, but they have, of course, a downstream component. What we would say is it's about 200,000 tons in total of production that will not be produced due to the time of these The large majority is Euromon, a little bit of area from those tenants.
So it should not impact the more finished fertilizers per se, mostly the trading of ammonia. Is that correct?
Yes. So let's say about 10% of that is EORI. And for the other plants, we can substitute ammonia by imports. So that should be the finished product.
The order book, You were giving some colors on order books, maybe.
This time of year, it's lower. The book is usually quite slow anyway because It's a direct concern. A direct concern. A direct concern. Exactly.
So
I yes, I think it's you're right, Patrick, we do from time to time, hence, I think when it's more I think this for the Q2 and given the late spring, I think It's clear that we and the rest of the industry have quite some delivering to do in the Q2. But of course, You don't typically in that situation with a late spring, you don't start with a strong order book, but you still you will take orders and deliver through that quarter In a bit of a different way really from the rest of the season.
And maybe just a quick follow-up on the North American, the U. S, Do you have a sense of acreage and rotation in corn soybean already? Or it's again too early to
Well, we have I mean, we do have the prospective plantings report, I guess, from USDA, which is kind of the Richard, as you've seen, which is a little bit lower on both and a little bit stronger on rice and cotton and also a little bit weak, spring weak. But since then, I guess, the corn price has developed a little bit in an improved direction Based on the drought in Argentina, etcetera, but nothing major. So it's, of course, interesting to see that it's not only Also in North America, spring hasn't really started yet. I mean, they hardly planted anything so far. So yes, that's also that market is also behind there.
We see some final improvements also there at the moment.
So we have to wait for the wave report, I guess, in May.
Yes, right. Yes, yes.
Thank you, guys.
And no further question at this time. Please continue, sir.
Okay. Then I think we conclude there. And thanks, everyone, for calling in, and thanks, everyone, for asking questions. Thank you.
Thank you. And that does conclude our conference for today. Thank you all for participating. You may all disconnect.