Good morning. Welcome to the presentation of Yara's first quarter results, which will be made by Yara's CEO, Svein Tore Holsether, and CFO Petter Østbø. After that, we will have a Q&A session as well. I would like to then introduce Svein Tore Holsether.
Thank you very much, Thor. Thank you very much, Thor. Good morning to all of you. As usual, we will start the presentation with going through our safety, as this is our number one priority in Yara. In the first quarter this year, we had 21 recordable accidents. That's a reduction of 25% compared to the same quarter last year. That takes us to a total recordable rate of 1.6. This is the lowest level we've been at so far. I want to use this opportunity to extend a thank to all our employee as well for all the work that they put into making Yara a safer place to be. We work on safety according to our Safe by Choice program, and that's a systematic way of working with safety, much in line with how we do on continuous improvement.
When you combine that with passion and with looking after each other and ourselves, we get real results, as we see right here. We still have accidents, we still have serious accidents, and we're working relentlessly to bring this number down to zero. Now I've been talking about numbers, and it is important to remember that behind these numbers are real people that get injured at work. It's someone's father, someone's mother, someone's sister, someone's brother. That's the approach that we need to have at it. Every accident that we have is unacceptable. Moving then to the first quarter results that do reflect the business environment. We will come back to most of these topics during the presentation. In short, the nitrogen market, as you see here to your left, is still impacted by an oversupply situation.
Food prices are starting to improve, but not yet to an extent that has any impact on nitrogen demand. In Europe, both nitrogen deliveries and producer input costs are impacted this quarter by colder weather. We get a double impact, both because more gas is required for heating, which drives up gas prices, and then also due to colder weather, which means a later spring. I want to stress that we're highlighting these topics only to separate the uncontrollable factors that are impacting our results, and also that we're not satisfied with our absolute financial results for the quarter. We're working hard on all controllable parts of the operation, all levers, in order to sustainably improve our results.
Our operational improvement program, the Yara Improvement Program, is on track at $275 million at the end of first quarter, and that's up from $240 million at the end of 2017. We'll come back to more on that in our presentation. A positive aspect of the results this quarter is that nitrate margins have improved compared with a year ago. On the left-hand side here, we have highlighted the European nitrate margin picture. You can see that the positive impact on the nitrate prices more than offset the increase in gas prices in the same period. As you also can see here on the right-hand side, our deliveries are impacted. The industry deliveries are down by 7% for the first nine months of the season, and they're down 22% compared to the same quarter last year.
For Yara, we've had a reduction of 18% of our European deliveries in the first quarter, so somewhat better than the overall European market. In Brazil, first quarter deliveries are down by 1% in the industry, and Yara deliveries are down 12%. Our premium product deliveries are up by 2%. The margins are weak in the broader Brazilian commodity and blend fertilizer market, and we have chosen not to compete in the lowest margin segments in this first quarter. We do continue to focus on our premium products and to ensure growth there. In that segment, the value creation per ton and the value added per ton is significantly higher. For the second half of the year, as you know, the main season in Brazil, the demand outlook is more positive given the stronger soybean prices that we're seeing now. Moving to production.
We have an increase in ammonia production of 13% for the quarter. That also includes the impact of our acquisition of the Babrala plant in India, which was completed on January 12th. If you exclude that, the underlying improvement is 6% compared to first quarter last year, due to higher reliability. Moving to finished goods production. We're up 2% in absolute numbers, but in underlying numbers it's 2% lower than the same period last year. It's lower for two reasons. A somewhat more complicated product portfolio, meaning that it takes more to produce the tons, which we have not adjusted for. Also due to somewhat lower reliability on finished goods production in the first quarter. But then we're also comparing to our other strong first quarter last year. Compared to fourth quarter last year, we're in line with that quarter.
I also want to say that we haven't sustainably achieved a higher reliability on our total portfolio in Yara yet. This is something that will take more time implementing continuous improvement and lean operation. It's not something that is done overnight. We have to expect volatility in the implementation. This is about incremental improvements over time, but in total, they will add up to significantly better production and also a significantly better impact to our bottom line. Expect volatility, but we're off to a very good start. That can be seen in our improvement program, which I mentioned was at $275 million now. As you recall from the capital markets day back in February, we did increase our target rate for this year from $300 million to $350 million to be achieved this year. We are well on our way to achieve that.
Moving to EPS. Our underlying earnings for the quarter are 29% down compared to first quarter in 2017, and that decline reflects both lower deliveries and also a higher depreciation. Our reported earnings include an $8 million foreign exchange gain and a $7 million of negative special items, which is mainly the impact of the stamp duty for our acquisition in India. Last year's reported earnings included a $69 million exchange gain and $14 million of negative special items. Both reported earnings and EPS, excluding currency and special items, are impacted by higher depreciation. It's about $0.10 per share impact from this, and this is due to new expansions that are now coming on stream. 2018 is a very important year of execution for Yara. We're talking about our growth pipeline.
A total of 7 major projects are coming on stream this year, including M&A greenfield expansions and also brownfield expansions. We will now take a look at these projects, which are going to give us an additional 1.4 million tons of ammonia production and 3.1 million tons of finished fertilizer production in our portfolio. 3 of the 7 projects have started or are in the startup phase now, starting with Babrala, as mentioned, that we acquired from Tata Chemicals on January 12th, which is giving a very strong production asset to our portfolio in India, but also a very strong footprint in India that we can build on to create a larger market for premium fertilizer. In Porsgrunn, we are now ramping up our largest premium plant with additional capacity, and the ramp-up is progressing very well.
Last week, we inaugurated the ammonia plant in Freeport, in Texas, that we own 68% of, together with BASF, who own 32% of this plant. It's a very efficient plant, both from an investment perspective where we buy hydrogen or source hydrogen straight into the plant, which eliminates the whole front-end CapEx of the plant. It also means that it has a very good variable cost performance. When you include that it's within the BASF facility, we also get synergies from that. A highly efficient plant. Moving to the 4 other major projects that are coming on stream in 2018. Sluiskil. I know several of you attended the investor day that we had in Sluiskil late last year. We are now approaching finalization of that project. It's a revamp of the plant. It's a decommoditization of the product portfolio and also improving the product mix.
In Salitre, in Brazil, we are continuing the construction of our mining operation in phosphate to have a stronger integration with the rest of our operations in Brazil. We will get a larger and stronger impact from this when the chemical operation opens next year.
Cubatão, the nitrogen assets that we are about to acquire from Vale. We are integrating our Brazilian position, strengthening both the production and industrial footprint in Brazil, and we expect that to be done by mid-year. Lastly, Köping, where it's a revamp and also an increase of TAN production capacity for the mining sector. In January, I had the pleasure of attending the opening of a smaller but still very important growth project in Brunsbüttel in Germany, and I will now show you a film about this project. The DEF market is basically growing in every segment you will imagine having a diesel cylinder. Any diesel cylinder in Europe and U.S., its NOx emission needs to be treated. The best way to treat it, there is no other alternative, is to go through the SCR technology that will require AdBlue.
AdBlue is the key reagent for the SCR technology. It's also known as DEF, diesel exhaust fluid, in North America.
Having a new and upgraded facility here at Brunsbüttel will facilitate and support that ever-increasing demand, not only from the point of view of capacity, but also in terms of safety and security of supply.
For Shell, it's great news to see that our partner, Yara, invest significantly in AdBlue and further strengthen the AdBlue supply in Europe.
From a supply chain perspective, it was very important to create this facility.
The AdBlue facility here in Brunsbüttel has a very high capacity with its tank of 17,500 cubic meters. The total capacity can add up as much as 1.1 million tons per year.
Well, the loading facility for the deep sea vessels has this advantage that we can also load different grades. Whether the customer wants 50% solution or 32.5% solution, we can do the in-line blending while we are loading the vessels.
The Yara Brunsbüttel facility will mean more DEF for us in North America, greater supply, greater stability, and reliability of supply.
For the truck loading, it's a fully digitalized loading facility where you could do the training, the registration, and everything 24/7. The customer can get whatever concentration they would like, whatever volume, at whatever time.
We consider Yara a strategic partner of ours in North America. We collaborate on both supply and demand challenges that we face, and we are growing our businesses together.
We see the opening of the production facility at Yara Brunsbüttel as a lighthouse to secure supply security.
This project contributes to the mission and the vision of Yara, because we want to protect the planet, and the AdBlue product is exactly doing that. With the 1 million tons of AdBlue that we can produce out of this facility, we will reduce the NOx emissions into the air. That's a great achievement.
It is indeed a very interesting and exciting project where you combine good business, but also doing something that is meaningful for the environment. AdBlue is definitely part of the solution to clean air in Europe and in European cities, because it dramatically reduces NOx emissions. With the SCR technology and AdBlue, you can take out up to 95% of NOx emissions from trucks and cars and provide for more healthy urban areas. Yara Brunsbüttel will produce 1.1 million tons of AdBlue annually. 24/7 operation, meaning that we will have stronger reliability, stronger flexibility, and even better quality to our customers in Europe and overseas. The AdBlue at this plant alone will reduce NOx emissions equivalent to the NOx emissions from the transport sector in Germany, Switzerland, and Austria combined. It has some real big impact.
When you look at this totality, this really works because even if you have a larger increase in the number of cars in Europe compared to 1990, the NOx emissions in Europe have been reduced by 57%. We see a positive future for AdBlue for two reasons. Even though fewer diesel cars are produced in Europe now, the number that are sold with SCR technology that uses AdBlue has increased. Also stricter EU legislation and elsewhere in the world is still being implemented, which will further improve air quality and increase the need for AdBlue due to higher consumption as a result of this. I will hand over to our CFO, Petter Østbø, who will take you through more details on our results and also our improvement program. Over to you, Petter.
Thank you, Svein Tore. Good morning. As Svein Tore talked about, AdBlue business has gone quite well, and I would say overall industrial has delivered impressive results. Their EBITDA was $53 million, which is 17% up on last year's $45 million, which is an extraordinary result, which I guess we wish we could have across the portfolio. Overall, the EBITDA was down 3% year-on-year. Even though it was higher than the fourth quarter last year, comparable quarter, it was down. If you adjust for special items, it was down a total of 5%. Looking at the EBITDA bridge, it mirrors what Svein Tore says. The main effect for this was an increase in the prices and margins, which sadly were more than offset by lower deliveries, higher energy costs, as well as currency translation of the fixed costs.
If we jump into this, we saw that the analyst expectations for the variance on the scale of the variance more or less matched ours. The consensus estimate was $393 million compared to ours of $377 million, which is 4% below. No, it's okay. Volume differences, again, Svein Tore talked about it. The Brazilian reductions were almost offset by higher deliveries in Latin America. The main impact here was nitrates and NPKs in Europe. 21% for nitrates and 14% for NPKs, lower than first quarter last year. On the price side, it was also predominantly nitrates and NPKs, but this time on a global level. For energy costs, again, we can blame the cold spell. We guided $27 million increase, but sadly it ended up $46 million higher in Europe and the U.S., and the remaining $4 million came from outside.
Currency, as I said, was mainly U.S. versus EUR and BRL and a translation of the fixed costs. On the special item side, we have a positive variation of NOK 7, but that was due to a negative effect of NOK 14 last year. The actual sum is NOK -7, and that's due to the stamp duty in India, the Babrala acquisition, and the positive effect from derivatives. On the other side, we have two main things. We have white certificates, which is linked to energy reduction initiatives in Italy, and we have the underlying EBITDA of the acquisition in India. As we have done earlier, for the remaining first year of that acquisition, those earnings will be put into the other category for the variance. All right.
If you look into the cash position, the main impact this quarter was due to investments. The main impact of the investments was the $435 million acquisition of Babrala. The total impact and net impact was an increase in the net debt of half a billion dollars in the quarter. If you go into the individual items, the investments, as I mentioned, was chiefly Babrala, but it was also linked to the maintenance investments going on and to the expansion projects. The main investments here were the Freeport Ammonia Plant, which as Svein Tore said, is in startup now. It was the Salitre mining project and the Rio Grande expansion. Net operating capital change, both due to the cost of the stock and the increased stock that we have and also seasonal receivables increase.
We had a dividend from KAFCO, which together with the cash earnings, netted out the debt increase to half a billion dollars. If you look at the CapEx plan, this year's estimate is $2.2 billion, partly due to the acquisition of Babrala as mentioned, but also the Cubatão complex, which we now believe will be consumed in the third quarter of the year. In addition, we need to mention that we have five major ammonia plant turnarounds. They will have an impact to have higher than regular maintenance CapEx, but also to reduce the overall production by about 200,000 tons, a little bit more. Mostly ammonia, but a little bit also urea on that side. They have already started. In the first quarter you will have Tringen II in Trinidad and you will have Belle Plaine.
In the next quarter, you will have Tertre and you will have Brunsbüttel. At least you have a— Sorry, you will have the Dutch plant, Sluiskil, in the fourth quarter. Thank you. Thank you for that. What we say is the guidance for the future is a little bit higher, but we will focus strongly on executing the projects we have already started. There's a pretty high threshold to come in with new projects at this point in time. At the same time, as Svein Tore mentioned, we will focus on delivering on the Yara Improvement Program. We said the $275 million we have already captured, and we believe we will deliver on the $350 million.
This is caused by basically all the projects in that Yara Improvement Program, but the main positive deliveries are from the Yara Productivity System, chief of which has been in ammonia, but also the procurement excellence program.
I want to mention that we are less than halfway through the program. Of course we need to work on sustainability, but also completing the rollout. At this point in time, we have completed the rollout of the YPS to 15 plants. We're currently rolling it out to seven more, and we will do all of the plants by the end of the year. At that time, you will see more of the continuous improvement journey. Also notice that we have reduced the CapEx we estimate to use for the program this year by about $50 million, but retain the upside. That's driven primarily by the program we have to be more efficient and better at spending CapEx. Good. With this, I hand back to Svein Tore to talk a little bit about the future.
Thank you, Petter. I will move to the prospects, and I want to repeat the urea supply situation that we touched on at the beginning of this presentation. As you can see here, in the forecast for capacity expansions, this is according to the industry consultant, CRU, that these are lower this year than last year, and roughly in line with the historic trend consumption growth of 3%. In addition to the forecast, CRU also has this black line where you see the actual production increase forecast. Due to high utilization in existing plants, you can see that that will be higher this year, and this is primarily driven by increased utilization in Algeria. On this basis, we do not expect a fundamental improvement in the demand-supply balance outside China until after 2018.
Looking further ahead, many of the projects that are included here, foreseen for the period 2019 to 2022, do carry a lot of uncertainty. I want to round up with a reminder of the growth and Improvement Program, the earnings effects that lie ahead for Yara. On the left-hand side, we have added together the investments we're making both in the Yara Improvement Program and also for our committed expansion and growth projects. On the right-hand side, you will then see the combined projected earnings improvement from this on a 2015 baseline. That's totaling $1.1 billion of EBITDA within 2020, which is equivalent to about $2.1 per share. With this closing summary, I'm going to hand it back to you, Thor, you coordinate the Q&A session.
Thank you, Svein Tore. For the Q&A session, we will have our CEO, CFO, and also our Head of Market Intelligence, Dag Tore Mo. If you have a question, please raise your hand and we will bring a microphone to you. Probably one of these. My colleague, Nina Kleiv, will come to you. Shall we start with Nordea?
Hans-Erik Jacobsen, Nordea.
Is the microphone on?
Maybe a leading question.
Hans Erik, I think the Yeah.
Hans-Erik Jacobsen, Nordea. I have a question for Dag Tore. Maybe a leading question, since we are now entering a period where supply growth will be below demand growth and China is completely out of the market. Could you draw some conclusions, where we are likely to go and the possibility of China entering the export market again? I guess, in a couple of years, we're going to need Chinese exports again, and the impact that will have on price levels as Chinese feedstock costs remain very high and China currently do not export because of the very high cost compared to the low price levels we are seeing outside China.
It's a central question. Yes, as we've been talking about now also for some time, that we have kind of expected more price volatility in the global market because of the lower volumes that are required from China, has been required from China due to the capacity expansions elsewhere. We had a very strong volatility in 2017, where you could say that prices went from, let's say, an import logic into China in somewhere in the $200-$250 range. While if you then turn to an export logic, pricing logic from China, you're maybe more around $300, has been at the moment. Because of the VAT on imports, the switch on the logistical cost, et cetera, there is probably a $50-$70 at least spread between whether you are in an export logic or you are in an import logic.
We are very close to that import logic at the moment, we see that through the first quarter, there hasn't been a need for Chinese urea exports. Number of factors has coincided, I think. There's been a very strong production performance generally across the world, I believe. Most plants are running. In addition, you have a fairly slow Brazilian quarter, as we mentioned, where urea imports down from 1.9 million-1.3 million tons. You get a late spring on the northern hemisphere, in addition, reducing the import need for first quarter. We went through this spring without really a strong spike as you can get sometimes.
Of course, I totally agree with you, given that this sensitivity, now we are so close to a situation where we have zero Chinese exports, that just a fraction, just small deviations in the main parameters, demand growth, production rates outside China. Small variations in those have quite huge substantial price effects in the global market. This, I guess, gives a lot of ammunition for you guys to analyze this going forward, because it is really key, what will the success be on bringing these new capacities to the market? As Svein Tore said, a lot of them are very uncertain. What will the demand growth be? I totally agree with you. It is the big factors for the next years. Okay, shall we move to DNB?
Eivind Nadheim, DNB Markets. I have two questions, one for Dag Tore and one for Petter. One on gas. European gas prices, they remain high, and you have guided up quite substantially for Q2 and Q3. I just wanted to hear your thoughts on if this is a structural change we are seeing now with higher European gas prices, or if it is just the aftermath of the cold European winter. Secondly, for Petter, the recorded P&L effect year-on-year in Q1 of the Yara Improvement Program. Or to phrase it otherwise, what would the EBITDA in Q1 been if you did not have this Yara Improvement Program? Thank you.
Dag first. On the gas side, it is not just the cold winter. It is also the fact that it is driven partly by the environmental developments, more focus on environmental developments in China, for instance, that is also a big factor, where they have cut down heating boilers based on coal, switched to as much gas they can acquire, basically, have imported much more LNG than most people expected. In addition, South Korea has also had a quite substantial increase in their imports. There has been less LNG available for Europe than what we would have hoped, let us say, from a just purely gas market standpoint. Also higher coal prices globally has also increased the trigger point between the gas and coal switching in Europe, and also CO2 costs have gone up quite a bit recently.
With this lower availability and relatively low stocks, of course, with that coal spike in March, got so much more influential than it would have done if it was, let us say, a couple of years back when the supply situation was easier. You can say that those same factors have been positive in the sense that they have also raised urea prices in China, but unfortunately, as Hans-Erik was alluding to earlier, there has been a reduction in the need for that, so we haven't got full effect of that improvement in the global market for urea. Going forward, it is hard to say, but at least Europe is ending the winter with very low stocks. There is now a competition for buying gas for direct usage and for storage for next winter.
I guess that's what keeps, let's say, the forward curve over summer fairly flat at around current levels. Let's see how that supply situation develops, because there's still more LNG coming, and gas storage is primarily available in Europe. There's still an interesting element to follow going forward. We should add that when we give the prices or the outlook for gas prices, that's based on the forward curves, and over time, they tend to be higher than the actual prices. As we saw in the first quarter, we guided, it was $27 million higher energy cost, and it turned out to be $50 million because of a colder weather than expected. Then we have a one-month time lag on our gas prices in Europe, meaning that we will have some impact from higher gas prices also coming into second quarter. Okay.
Regarding the Yara Improvement Program, of course, the baseline is 2015. There are many effects which go up and down. What we did is estimate if you took first quarter prices and costs, the program would have come in at around $230 million EBITDA, which is a little bit lower. Not that much. If you want to kind of calculate the fourth of that, you could say, a little bit above $320 million, and the result have been all else equal.
It's a little bit speculative, but those kinds of numbers.
Okay, I think we have a question from ABG.
Bengt Jonassen from ABG. Based on your historical experience, are there any chances for, or how much of the volumes can be recouped in Europe in the second quarter due to the late spring? The second question is related to the Cubatão acquisition. I think I read that the competition authorities are looking more further into that. Is there any chances of acquisition not happening at all or a delay? I think that also from the CRU slide, the key change there are two is the Nigeria plants and also the India. We talked a little bit about that the last years that we've seen at least more press releases from India, and it seems that CRU has now taken that into their forecasts. Now you have guys on the ground there, what are you thinking about those plants?
Okay. I can start. When it comes to deliveries going into second quarter, as we showed before, the whole industry is significantly behind last season in deliveries. I believe it was 7% lower season to date. While some of that can be recouped, we have to be prepared that a full recovery is unlikely. That we should expect a slight decrease in the volume for a season in full due to the colder weather. When it comes to the acquisition of Vale's Cubatão assets, as you rightly point out, we did get a favorable ruling back on March 19th, and then it's a 15-day hearing period. There were some additional questions related to Petrobras's announcement that they would shut down some ammonia capacity in Brazil, which triggered an additional review of this.
In my view, these things should not impact our deal since it doesn't change the structure in Brazil, but it does mean a delay in the finalization of that acquisition.
Yeah.
Maybe also worth mentioning on Europe that in a, let's say, shorter season, there will probably be a little bit more appetite for nitrates. It's not good for the global urea balance, of course, but that's something that we are quite happy with. I think that's also something to take into account. On the supply side, yes, you're right. CRU has revised up their capacity additions for India, and that's something we are following closely also. It's been normal that the Indian government is announcing kind of willingness to expand capacity to a little bit reduce their reliance on imports. We are also thinking that there could be some. I would be very surprised if the speed of this is as fast as what CRU is indicating in their current balance. This is something to follow.
Are there further questions? Yes. Oh, two. Yeah, okay. We will go back to Nordea first.
Yeah, Jacobsen, Nordea. There has been a lot of changes in the raw material prices due to the U.S. sanctions against China and especially Russia. So far, we haven't seen any impact on the fertilizer market. Do you see any potential for that happening?
I don't want to speculate on any impact to that. Russia is, I believe, the largest nitrogen exporter in the world. We've seen some sectors being targeted, but there has been none impacting the fertilizer sector, and I don't want to speculate on any impact to that.
Okay, we have another question at the front.
Bruce Easton from Furness. There were some weather forecasters that put out a forecast in the middle of February that there would be a long period of unusually cold weather in Europe. You ended the quarter with NOK 300 million higher inventory. Don't you read the weather forecast, or how can you have built up so much inventory?
Well, still, the timing of when the shipments happen will vary from year to year, and we have to take a long-term view on this and also look at the financials, whether it makes sense to produce or not. With what we see, it still makes sense to produce and store for inventory and then be ready to ship out rather than reducing production. Yes, we do read the weather forecast. At the end of the day, it is a financial calculation, and we do what we think will create the largest value, and that was still to continue to run the plants and have inventory ready for when the shipments will take place.
Are the inventories related to sales in Europe or also to exports to Brazil?
This is mainly related to Europe or the part of Brazil, this is the lower part or slower part of the season. The main season is in the second half. A lot of the volume that we reduced in Brazil is third-party sourced material. It's not the Yara product.
Are there more questions? If you do think of any later on, we do have a phone conference at 3:00 this afternoon, Oslo time. For now, thank you for attending our presentation.