Ladies and gentlemen, thank you all for standing by, and welcome to today's Yara's first quarter 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, at which time, if you wish to ask a question, you will need to press star and one on your telephone and wait for your name to be announced. I must advise you all that this conference is being recorded today, Friday, the 20th of April, 2018. I would now like to hand the conference over to your speaker for today, Mr. Svein Tore Holsether. Please go ahead, sir.
Thank you very much. Good afternoon, and welcome to the Yara first quarter results conference call. We reported a 3% lower EBITDA for the quarter as both volumes and energy costs were impacted by the cold weather in Europe. Total fertilizer deliveries were down 7% compared to first quarter 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 high gas prices in Europe. The Yara Improvement Program is on track to reach at least the $500 million of annual EBITDA improvement by the year 2020. Of which $275 million have been realized as of first quarter 2018.
In addition, our ongoing and committed growth projects will generate a further $600 million of annual EBITDA improvement by 2020 when they are fully operational. With these introductory remarks, we're ready for the Q&A session. Operator, if you then could please open up for questions.
Okay, we'll now begin the question and answer session. As a reminder, if you wish to ask a question, please press star and the number one on telephone and wait for your name to be announced. 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 will ask them one by one. 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 have seen urea operating rates increase. I am curious, what is your view now on the Chinese urea situation and whether they need to import or how that is trending? Thanks.
We think that the Chinese market, it is reasonably tight, and even in today's market, over the last couple of weeks, there has been a certain improvement, and we understand that volumes are running very well. The total supply to the Chinese market, if you look at production numbers and deduct the exports so far this season, we think are in line with last year. With presumably a little bit less in inventories, that is what led us to think that there might be some interest in imports and that there has been interest in imports. Some cargoes have been bought, but nothing substantial.
It seems to us like they are kind of coping with the situation, and this is probably also going then to lead to a certain decline in total nitrogen consumption because instead of urea, there is likely to be an increase in NPK or some blended form, where very commonly you get a certain dilution of the nitrogen content so that you apply a product that is less than 46%. We think that in some instances, 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 has an effect as well.
I think now that we are in the second half April, we do not think that there will be any kind of any meaningful imports of urea for this season. It is too late for that.
Okay, great. That's really helpful. The second question I had was, volumes were down quite a bit in Q1, much of that is due to the weather and potentially shifting those volumes into Q2, but I guess how much of the volume decline can be recovered in the second quarter, 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.
I think we should mainly focus on Europe as we indicated in the presentation as well. I think for the season to date, we're about 7% behind last season, we're estimating a full season impact to be lower than last season, in the area of 3%-5% down, which does indeed indicate that there will be increased deliveries in Q2 in order to reach that level.
Okay, thank you.
Your next question comes from the line of Thomas Wigglesworth. 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%-5% loss of volumes this year. 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? 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 the kind of weaker market there, or was there something else explaining that? The third question, if I may, just quickly, you very kindly give us on 2015 prices, the impact from effectively the growth and the M&A on slide 19 of your pack at $230 million of EBITDA.
How should we think about that in terms of the actual spot prices today, noting that they're below, I know there's a range of products here, but noting that they're below, what kind of is our mark-to-market for that 230? That would be very helpful. Thank you.
On your first question, I think in the first quarter, the European producers took some market share against. I would think that with the European industry also having a bit more nitrates in stocks fairly close to farmers around in Europe, I would guess that part of the business will then be in a better position to take, let's say, a more active nitrogen market also now in the second quarter when spring really goes ahead. I would think that we and the rest of the European producers would at least kind of get the same effect as the total market when it comes to the deliveries, would be my expectation without speculating too much.
Yara would be impacted negative 3%-5%. You're not going to gain more share than the market.
Maybe some, but maybe not all. I mean, yeah. Also, if you look at the seasonal, if you look back, last year was also very strong. These have also a little bit, it's deliveries we are talking about, and particularly June, let's say, is already defined as the new season in France. There are some elements there that shifts a little bit from season to season. I think, let's say if we were back to -3%, just an example, then we are back to the exact same level as two years ago. I would say there is nothing that dramatic in this if we end up 3%-5% down.
Yeah, Tom, this is Thor. Just the reminder as well, we are talking about the quarter that Odd has already alluded to, which is kind of arguably the most interesting one of the season in Europe, because that's when you set new season prices. 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 what level the new season prices are set and how they are received.
Okay. Competition in Brazil, was that in the commodity grades? I know that the premiums you said were up 2% year-on-year.
Yeah. Also bear in mind that this is not peak season in Brazil. You will have higher volatility at this time of the year. 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. This has especially impacted the commodity and the blend fertilizer market. We've consciously chosen not to take part in the lowest margin segments in this quarter. Since a large share of our business in that area is done by TPP or third-party products, so then we also have more flexibility to move there so that we focus on profitability and value creation. While on the premium products, we're continuing to grow, even though at a somewhat lower rate in the first quarter this year.
Back to farmer economics and looking into the second half of the year, which is the peak season in Brazil. The farmer economics do look more favorable in Brazil, and in particular for soybean, which is a major crop and one that we follow very closely with regards to fertilizer demand as well.
Lastly, sorry, the mark-to-market on the NOK 230.
Yeah. Hi, this is Petter. Regarding the new capacity, we haven't really calculated that, so we won't be able to answer correctly or fully 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 Yara Improvement Program, which was a NOK 275 actual 2015 prices and then NOK 230 with the 2018. That similar kind of reduction we would assume is fair enough.
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 scenarios.
Excellent. Thank you very much for answering my questions.
Your next question comes from the line of Paul Walsh. Your line is now open. Please ask your questions.
Yeah. Thanks very much. 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 wanted 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.
Yeah, it's not something I think will have a huge impact in the global market. Over the last couple of weeks, there has been a price increase for urea in most of the provinces in China. It's also spring there, has been arriving, and there's quite healthy demand there, we understand at the moment. It's not something that it's impacting trade too much. They are neither importing nor exporting, so it's more kind of a domestic Chinese situation. Yes, over the last few weeks, there has been more activity also with the 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, absolutely. For a large part of the last year, the direct link between the export pricing logic in China and the global market has been lost, been disconnected. Absolutely. I think China is still relevant to setting the prices for when they start looking at imports, the higher price level that we would achieve if they needed to export, or let's say not they needed to export, but if they were needed to import from China, would be very beneficial compared to the pricing that we had over the last year or so.
Understood. My second question really is just about your earnings trajectory this year. Obviously earnings are down year-on-year in the first quarter. I know you guys aren't responsible for where consensus settles, I'm just trying to get a feeling for where you think you can settle relative to current market expectations. When I look at consensus at sort of NOK 1.8 billion, NOK 1.9 billion of EBITDA and you're down year-on-year or slightly down year-on-year in the first quarter, 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?
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.
This is Thor. Everyone's pointing to me for the answer to this question. I guess it's an easy answer because for a company with a non-guiding policy, it's not easy for me to say what our view is on consensus. I think we've communicated today clearly we are delivering a lot of growth this year.
Yeah
We have seven projects in total coming on stream. Of course, the full impact of that will be even stronger next year.
Yeah.
The Improvement Programs, we are working on the controllable items, but unfortunately, we can't control the global fertilizer prices, gas prices, currency rates, et cetera.
No problem. 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 Q2? I think it was NOK 75 million in the EBITDA bridge in Q1. Something similar in Q2?
I mean, Paul, I'm happy to catch up on this after the call if you like. I think it's more of a modeling question than.
No problem. Thanks very much, guys. Thank you.
The next question comes from the line of Neil Tyler. Your line is now open. Please ask your question.
Yeah. Hi. Good afternoon. I'd like to come back to the volume bridge, 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 de-emphasizing some of the commodity volumes and some of the third party produced products. I wonder if you could help me understand 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. If you could help me understand the relative importance of those three aspects of volume decline in Brazil, first of all, that would be very useful. Thank you.
Well, it's very clear, I think I mentioned earlier as well, that there are many things at the same time that impact the fertilizer market in Brazil in the first quarter, starting with farmer economics, also with the competitive situation, especially on the more commodity products. For us, it is a commercial decision that we make cautiously, that we monitor the markets and see whether it makes sense to focus on volume versus profits. For the lowest margin products, we felt that we'd rather not focus on maximizing volume and then looking at margin instead. Our reduction of 12% in first quarter deliveries is very much a conscious and commercially driven decision.
Neil, just to add, 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 actually more flexibility on the volume side than a conventional, say, chemical fertilizer plant because you have season workers in the night depending on demand and so on. So there's a bit more. The margins are lower than for most of the full chemical production. It's natural to flex that volume when you're taking lower margins sometimes.
I see. It's a higher variable cost business and a lower margin business.
Certainly in relative terms, higher variable costs.
If I just think about that in the second part of the same question really is if I look at the NOK 31 million 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. It would be fair to assume.
It's probably important to point out there, Neil, of course, the P&L and the variance analysis are both squarely based on deliveries. Particularly in the shorter time periods and with some of the weather disruption and so on, we get this.
Okay. Yeah.
this quarter. You can have a good production reliability without typically flowing through into the variance analysis.
Yeah. No, sorry, I understand that. Okay. Which simplifies it in that case. Of that figure, still the far greater majority, simply because of the absolute volume level but also the relative margin would be attributable to the European volume decline rather than-
Yes.
Yes. Thank you.
The sales decline rather than production decline.
Yes. Yes. Thank you very much.
Again, as a reminder, should you wish to ask a question, please press star and the number 1 on your telephone and wait for your name to be announced. Your next question comes from the line of Eivind Sars Wedde. Your line is now open. Please ask your question.
Hi, guys. Thank you for taking my question. Just had a quick one on natural gas and the urea. Do you think it's fair to assume that the year-over-year increase in European natural gas prices would lift the cost floor? Possibly also urea prices in the summer period? Thank you.
Well, I'll hand over to Dagfinn, but I don't think at the present level that natural gas prices in Europe are at a sufficient level that it would have any meaningful impact on the urea prices on a global basis. Dagfinn, do you disagree?
No, I mean.
We're still some mark from that.
Yeah. If you take NOK 7 gas at the price today in Europe, you multiply by somewhere between 20 and 25 to get the variable cost of the urea production. There are not that much other variable costs. You get NOK 250-NOK 275. Of course, there is still quite a substantial gap between current urea prices and variable costs in, let's say, Europe. There are other regions around the world then that have to import LNG and are on a kind of global LNG pricing, which are more and more equalized around the world. 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? If you could help us quantify a bit the impact, if you see any impact or if you build enough inventories to go through those without too much disruption. 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 Petter taking the first question on the turnaround, the five turnaround. I won't try to say that fast. What we have clearly here is that 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 will say is it's about 200,000 tons in total of production that will not be produced due to the time of these plants. The large majority is pure ammonia, a little bit of urea from those turnarounds.
It should not impact the more finished fertilizers per se, mostly the trading of ammonia. Is that correct?
Yeah. Let's say about 10%. That is urea, and for the other plants, we can substitute ammonia by imports, so it shouldn't affect our finished product.
Okay. The order book? Historically, you were giving some colors on order books, maybe-
Yeah. This time of year, the order book is usually quite slow anyway because, obviously, it's a direct consumption. Exactly.
Yeah, I think you're right, Patrick. We do from time to time mention it. I think this, for the second quarter 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 second quarter. Of course, you don't typically, in that situation with a late spring, you don't start with a strong order book, but you will take orders and deliver through that quarter in a bit of a different way really from the rest of the season.
Maybe just a quick follow-up. On the North American, the U.S., do you have a sense of acreage and rotation corn, soybean already, or it is again too early to say?
You have the prospective plantings report, I guess, from USDA, which I guess 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 spring wheat. Since then, I guess the corn price has developed a bit in an improved direction based on the drought in Argentina, et cetera. Nothing major. It's of course interesting to see that it's not only also in North America, spring hasn't really started yet. They hardly planted anything so far. Yeah. The market is also behind there. We see some final improvements also there at the moment.
We have to wait for the WASDE report, I guess, more.
Yeah. Right. Yeah.
Thank you, guys.
Ladies and gentlemen, please press star and one should you wish to ask a question. No further question at this time. Please continue, sir.
Okay, I think we conclude there, and thanks to everyone for calling in, and thanks to everyone for asking questions. Thank you.
Thank you. That does conclude our conference for today. Thank you all for participating, and you may all disconnect.