Ladies and gentlemen, thank you all for standing by, and welcome to the Yara's third quarter results 2017 conference call. At this time, all participants are now in 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 1 on your telephone. We also must advise you that this conference is being recorded today, Thursday, October 19, 2017. We'd now like turn the call over to our speaker, Mr. Svein Tore Holsether. Thank you. Please go ahead.
Thank you very much, and welcome to the Yara third quarter results conference call. Before we open up for questions, some brief comments on our results. Yara delivered a strong production performance, but our results also reflect lower commodity fertilizer margins. Our cash return on gross investment or CROGI was at 6% for the quarter, which is well below our target of 10% or more through the cycle. On the positive side, we posted several new monthly production records during the quarter, both at the plant level and also at Yara level. Our improvement program is ahead of schedule, thanks to strong delivery from all projects within the program. In particular, strong reliability improvements within production and our procurement excellence project is now really starting to gain traction.
While we are still early in our improvement journey, and we are proud of the good results we have achieved so far, we must also be prepared for setbacks along the way, for example, within production reliability, and we will therefore not adjust our targets based on a few quarters of strong delivery. With these introductory remarks, we are now ready for your questions. Operator, if you could open up for questions, please.
Yes. Thank you, ladies and gentlemen. As a reminder, should you wish to ask a question, please press star 1 on your telephone keypad now and wait for your name to be announced. Should you wish to cancel your request, you may press the pound or hash key. Once again, that is star 1 should you wish to ask a question. Our first question comes from the line of Joe Jackson. Please ask your question.
Hi, good afternoon. I have a few questions I am going to ask one by one. What sort of utilization rates can we expect in Q4 versus Q3 and versus year-over-year?
Yara utilization rates or market utilization rates as well?
For Yara.
Yeah, we are running full blast now. As we said in the call, we have a good order book. We don't have any market-related stops.
Porsgrunn's been running fine since October 1st. Is that right?
You said Porsgrunn?
Yeah.
We are ramping up and as in any ramp up, you have certain volatility in the production, but the ramp up is proceeding, and it is running.
Okay. My second question is, and I know you do this from CRU, but this is how you present it, that you're showing less urea capacity came on this year, and you've pulled out plants from Romania and Indonesia, or CRU has, and they're not showing back in 2018. I guess the question is, you talk about being a supply-driven market, yet you're using a consultant showing less new urea supply online, and the plants that are coming, not now in the model, aren't even coming back in the model. How do you see the market in 2018 and 2019 in supply? It seems like you don't think it's as bad as you thought three months ago.
I don't think that we have changed opinion that much. There is, of course, always uncertainty on how well these plants will run and exactly when they will come, et cetera. What we've seen now lately is that there's been a certain delays to several of these plants that were kind of intended for 2017. Look at the Bolivian plant hasn't really started up yet. The second one of the 3 Iranian plants hasn't really started up yet. We see that Algeria plants have been down for most of the year, the big one there, and so on. What we said also this morning is that these delays and these issues may, of course, continue, but there is also a potential for quite strong supply growth also in 2018. Let's say if everything should be running very well.
Certainly supply growth in 2018 and of course in 2019, it looks like there will be much less addition from new plants. The key will be what kind of utilization rate the industry will manage, basically.
Okay. I'm going to turn my attention to one more question. You've achieved $210 million run rate now, annualized EBITDA improvements. Your target was $150 for the year. Can you tell us about why you've been able to achieve more? Is your target still $150 for the year? Is some what we've seen more one-off? Just a little confused about some of the math you've presented.
Yeah. As I said, we're not changing the overall ambition level. I was talking about the $500 million target. Yes, we are ahead of the full year target for this year. I certainly do not expect us to have negative performance in the fourth quarter bringing us down to $150. We're continuing with the progress. When I was saying I wasn't going to change the overall target, it was about the $500 million. We're not as much focused on the quarterly and yearly targets in it. We are pleased to see that we are ahead with the $210, and we will continue to go full speed throughout this year.
Where have you found the extra 60 to be ahead of time, ahead of pace?
Well, it's a lot on Well, really in most categories. I think as I indicated in the last quarter's presentation and the one before as well, when we have a top-down target, or say, with some involvement in the organization. Then the next step is to go to plant level with full involvement of the workforce to get a sign-off that the entire plant would stand behind. As we've gone through that with the plants, they have generally come back with either at the top-down level or better. We have found more improvement potential in the plants where we have started the process and we see the effect of that. That's coming through in the numbers as well. I'd say most of it so far is on the reliability side.
In addition to the plant in the program delivering, we've had an overall improvement in most locations as well. Then we have a negative in the fact that the ammonia plant in Porsgrunn was out for pretty much the whole quarter. There are pluses and minuses, but more pluses than minuses certainly.
Thank you.
Thank you. Once again, that is star one for Q&A. The next question comes from the line of Christian Faitz. Please ask your question.
Yes, good afternoon, gentlemen. Christian Faitz here from Kepler Cheuvreux. Couple of questions, please. First of all, can you please elucidate the current demand situation in Brazil a bit? What are your people on the ground saying about current business conditions in Brazil? Then, can you please update us on the situation in Qatar in terms of your ability to ship products and so on in your joint venture? Third, talking about joint ventures or actually foreign operations, how is Pilbara performing at present? Can you explain the price step-up in natural gas there? Thank you.
Yeah. On current demand, as we said, in Europe, we have a long order book, we have enough to deliver on that. We also said that on new prices that is established, we have sold some volumes on that, we are not in any urgency to commit on that, neither is the customers with a long order book then. A good situation also with higher prices then. On Brazil is in line with last year, also a little bit up this quarter. What we have seen there is that it's a good appetite for premium products, we are able to continue to expand our premium sales there. They are actually up 15% compared to last year. While on bulk and the more commodity part of it, we have sold 13% less.
That's partly our product mix change, it's also, you could say, somewhat weaker crop prices and crop market in Brazil there. All in all, in line with last year. Of course, when we compare with previous years, there you had an increase of 11% in the quarter compared to the year before that again. It was a much tighter market last year than this year.
On your question on Qatar, we have a 25% share of Qafco. Qafco has its own harbor facilities, and it is business as usual. We're not impacted.
On Pilbara, we have a long-term gas contract where for the first year it was a lower price, and then it was contracted a step-up in that price by the end of last year. Actually in November last year, it was a substantial step-up there as expected. That you will see in our guiding then that we, last quarters, have assumed about NOK 180 million in higher gas cost per quarter there. You will see also for the fourth quarter, the quarter-on-quarter is reduced to NOK 100 million, since you already have part of that effect in the fourth quarter last year. Ammonia is running full blast in Pilbara. That's one of the major improvements from last year on production. We are also ramping up the nitrate plant now for technical nitrates, which started mid this year.
Thank you very much.
Thank you. The next question comes from the line of Neil Tyler. Please ask your question.
Good afternoon. Two questions, please. Firstly, on Brazil, could I come back to the competitive environment you talked about? I understand the comps were tough, but the release talks about a toughening competitive environment. Is that specifically in the bulk blends? Can you give us some indication of whether the drop in volume you saw there was in line with the market or worse than? The second question concerns the nitrate premium and development thereof in Europe. I understand that the lag in price increases is something that's been experienced by a lot of players, but are you at all concerned that Yara, during this improvement program, has become a bit more introspective? I suppose asking it another way, do you think the commercial end of your organization could have done better specifically in Europe?
I can address the last one first. When it comes to the commercial organization, I don't think that's always impacted by the improvement program in terms of making the right decisions. I think we have to view this also in the context of being ambitious in price setting as well at the start of the season. I think that organization has done a very good job. Obviously, the benefit of hindsight, you could always wish to have a lower order book when I see. When you refer to the competitive environment, it's more within the context of the customer's competitive environment than necessarily there's been a step up in competitive supply-
No, I think-
I also think with the value chain, you could say that last year clearly there was a tighter situation than foreseen, and this year is a less tighter situation than foreseen. You see competition increase among the blenders to have their product out there. You see that also some of the local competitors reporting their numbers, but profitability for this bulk blending has been significantly reduced this year.
Yeah. Okay. Thank you very much.
Thank you once again, that is star one for Q&A. The next question comes from the line of Andrew Scott. Please ask your question.
Yeah, good afternoon. Thanks for your time this afternoon, in fact. Just a couple of things, really. First of all, on India, the slide 17 is very useful in this respect, but I'm sort of wondering What about where you're strategically positioned now with this situation? Of course, you benefit when production falls in India, but I guess by the end of this year you will have closed the deal in India. Is there a chance that Indian total production improves next year, and maybe you're part of that improvement, and therefore next year we should think about maybe less import growth? That was the first question. The second question was on associates. I can see there's an improvement through the year on associates. You're still in loss in Q3. Can you just remind me, is Q3 normally a loss-making period for associates?
Is it just a seasonality thing? Thank you.
I take the last one on associates then. We have several associates, but the biggest one by far is Qafco, the Qatari joint venture. You could say clearly what influenced them most is urea prices then, which have increased lately, but were still at a quite low level during the third quarter. It's to a large extent related to commodity prices then, urea in Qatar and ammonia in Trinidad.
On the India situation, I guess what we are referring to here in this slide is the kind of increased need for imports if you assume that consumption is not negatively affected. That's more or less just a kind of a positive global impact on the commodity urea price, basically. It's not something that we would be directly exposed to in India, even if you have the plant. I guess there has been a slight drop in production in India this season after some years with the improvements up to the 24 million tons level. I think that going forward, you would expect maybe that production level to be relatively constant as an average. I guess the need for imports going forward will be mainly depending on the consumption developments in India.
Owning a urea plant in India is more of a kind of a margin position than anything else, because you're kind of guaranteed subsidies and the prices are set. It's not really market exposed in that sense.
Okay. Can I just follow up with a clarification question? The comment you make about a three-month lag is only for nitrates. That's how I read it. Can I just check that's the case, and therefore all your other products are on the normal one-month lag modeling?
The three months lag, as I mentioned, is for nitrate, yes.
Perfect. Thank you very much.
Thank you. The next question comes from the line of Stephanie Buffolo. Please ask your question.
Oh, hi. Thank you very much. Good afternoon, and thanks for the presentation. I've got two questions, both focused on capital allocation. If we look at slide 21 in the presentation, you set out your growth and CapEx pipeline. I just want to go through that CapEx pipeline. You've got CapEx coming down from around NOK 16.5 billion this year to NOK 10.9 billion next year, another decline to NOK 7.5 billion in 2019. I just want to get a sense in terms of how firm those numbers are actually likely to be, whether or not, as we move towards the year-end stage, there are other significant projects in the mix which are not yet board approved, which we should be thinking about in terms of future CapEx projections. The second question is on P&K. Within the presentation, you flagged that one of your growth priorities is to structurally secure supply of P&K going forward.
With the Salitre project coming online, it will give you an element of that. Could you give us a sense in terms of how comfortable you are when that project is up and running in terms of your own backward integration to P&K? There are a number of publicly traded assets out there at the moment which are now well below replacement cost on a per ton basis. It would be interesting to hear whether or not when you think about further backward integration, whether or not it would be through buy or indeed build. Thank you.
Yes. If I start on the CapEx pipeline, as you correctly point out, we have done NOK 10.9 billion included for next year. This is our expected maintenance CapEx, and in addition to that, committed and board-approved growth investments and cost or capacity improvements to start up type investments. In addition to this, there could be projects as well, but that are not yet approved by the board or that are still in the works. Again, if there will be any additions to this CapEx, it is projects that have to justify themselves through being value creating. In other words, having a return above our cost of capital. At the moment, this is where we are at on this, and we will come back to that later if we need to add to this, which is quite likely.
On P&K.
Sorry, go ahead.
Oh, sorry. If you have P&K, yes.
I was just going to ask in a bit more detail. At any one time, if you think about projects which have not yet been approved by the board, can you give us a range in terms of what the quantum would be on a financial level, just to get a sense in terms of what could potentially go into that growth pipeline for the CapEx spending?
I think what I could comment upon that is that on new potential projects that the board could approve, you wouldn't see much of construction costs next year, not a substantial construction cost, because the planning and the engineering part will, for most of these projects, take a year. You shouldn't see a huge increase, (inaudible), in what is called committed growth rate. What you could see, of course, is on M&A, but that will also typically take some time from when it is committed and announced until it is closed, and also due to approvals. Of course, M&A could happen somewhat faster. On expansions and construction, you wouldn't see a lot of things happening during next year coming into our CapEx. Your question on P&K, as you have said, that we have put up that as potential areas to invest in.
What we have also said there is that it's mainly for where we see a need to secure longer-term sourcing. Could be by contract, but could also be by assets. That has specifically been on more higher quality phosphate, meaning apatite, that we either would like to have long-term sourcing contracts, which we have today, or own production, which we also partly have today, with our phosphate mine in Finland. In addition to that, we see one area where we see quite a value creation by going backward due to logistical constraints, and that is in Brazil. That's also why we bought 60% of Galvani three years back and is building a new phosphate mine there. For phosphate, it's more Brazil, and it's apatite or special.
On potash, we are, I would say, in general, very comfortable on the supply-demand balance for commodity potash, meaning MOP, as we are on commodity phosphate. What we are looking more into there is also specialty potash, meaning the project that we have in Ethiopia, which is a very interesting project. I used to say to investors that it has a very promising profitability, but it also has quite some risk related to it being a greenfield in Dallol. That's the one potash project that we have under consideration, where we have not concluded any construction yet. We are discussing that with partners and with Ethiopian authorities.
Okay. Thank you very much.
Thank you once again, ladies and gentlemen, that is star 1 should you wish to ask a question. We have a follow-up question from Andrew Scott. Please ask your question. Hello, Andrew. Your line is now open.
Sorry. Thanks. Just still one more. On China, in the past, you've put up some data on what you see as capacity utilization for urea in China. Can you share your latest thoughts on that, and in particular, how much of what you're seeing is environmentally-led, so maybe more permanent rather than just coal price-led and therefore maybe more temporary?
I guess when it comes to capacity utilization in China, they have operated, I would say around 56%-57% in recent months. Now as we've seen an increase in urea prices, we've seen this number increase slightly in the last few weeks. I think if we were to give an estimate of that now, it would be around 60% at the moment. When it comes to reasoning for the curtailment or shutdowns that we've seen so far, I'd say that's very much driven by cash cost, that it's not economically feasible to run the plants, and that's why they've had the curtailments and that the environment side of it has been very limited in the impact on the production figures. Of course, we've seen in other industries that there have been shutdowns due to environmental concerns.
We do not see that as a major driver in the China numbers yet.
Okay. Thank you very much.
Thank you. The next question comes from the line of Chetan Udasi. Please ask your question.
Hi, Chetan from JPMorgan. Maybe one question, you mentioned about strong order book through 3Q. Do you have a view how much of this might be driven by customers restocking, given the price increases that we've seen through third quarter? Related question would be how easy it is or how feasible it is for customers to build a substantial level of inventory of, say, urea, for instance?
I can say what we commented upon was the order book in Europe then, and you can say all this restocking now into the consumption period, which I would say starts typically in February then. We also have a slide there attached in the presentation, which shows the producer's inventory, and that shows that producer's inventory in Europe is pretty much in line with the last five years average. Actually slightly lower than it was the two previous years, but higher than what it was three, four years back then.
Okay, thank you.
Thank you. There are no more questions. Please continue.
Okay, I will thank you all for participation in this call. Thank you. Thank you, operator.
Thank you, gentlemen. That does conclude our conference call today. Thank you all for participating. You may now disconnect.