Ladies and gentlemen, thank you all for standing by, and welcome to the Yara's Third Quarter Results twenty seventeen Conference 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 also must advise you that this conference is being recorded today, Thursday, 10/19/2017. And I would now like to hand the conference over to your speaker, Mr.
Wen Chodinhofer. 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 kroger was at 6% for the quarter, which is well below our target of 10% or more through cycle. And on the positive side, we posted several new monthly production records during the quarter, both at plant level and also at Yara level.
And 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. But while we're still early in our improvement journey, and we are proud of the good results we have achieved so far, I think we must also be prepared for setbacks along the way, for example, within production reliability and we'll therefore not adjust our targets based on a few quarters of strong delivery. So with these introductory remarks, we're now ready for your questions. So operator, you could open up for questions, please.
Yes. Thank you, ladies and gentlemen. Our first question comes from the line of Joe Jackson. Please ask your question.
Hi, good afternoon. I have a few questions I'm 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? Yara.
Yes. We are running through blast now. And as we said in the call, we have a good order book. So we don't have any market related stops.
Porous green has been running fine for since October 1. Is that right?
It's unfortunate. We are ramping up. And as in any ramp up, have certain volatility in the production, but the ramp up is proceeding and it is running.
So 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 where CRU has, and they're not showing back in 'eighteen. So 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. So I mean, 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's, of course, always uncertainty on how well these plants will run and exactly when they will come, etcetera. But 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. Mean, look at the Bolivian plant hasn't really started up yet. The Iranian the third or the second one of the two 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. So what we said also this morning is that, I mean, 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, everything should be running very well.
But I mean, it's certainly the supply growth in 2018. And of course, in 2019, it looks like there will be much less addition from new plants. But then the key will be what kind of utilization rate the industry will manage basically.
Okay. I'm going turn my attention to one more question. So you've achieved $210,000,000 run rate now annualized EBITDA improvement. Your target was 150,000,000 for the year. So can you give us tell us about why you've been able to achieve more?
Is your target still $150,000,000 for the year? Somewhat we've seen more one off. Just a little confused with some of the math you presented.
Yes. So as I said, we're not changing the overall ambition level. I was talking about 100,000,000 about the $500,000,000 target. And yes, we are ahead of the full year target for this year. And I certainly do not expect us to have, let's say, negative performance in the fourth quarter, bringing us down to the 150,000,000 So we're continuing with the progress.
So when I was saying I wasn't going to change the overall target, it was about the $500,000,000 And we're not as much focused on the quarterly and yearly target for this, but we are pleased to see that we're ahead of the $210,000,000 and we will continue to go full speed throughout this year.
Where have you found the extra 50,000,000 to be ahead of time, at pace?
Well, we it's lot on really in most categories. And I think as I indicated in last quarter's presentation and the one before as well when have a top down target or say with some involvement in the organization. And then we the next step is to go to plant level with full involvement of the workforce to get a sign off that the entire the plant would stand behind. And as we've gone through that with the plants, they have generally come back with either at the top down level or better. So we found more improvement potential in the plants where we have started the process and we see the effect of that.
So that's coming through in the numbers as well. So I'd say most of it so far is on the reliability side. And in addition to the plants in the program delivering, we've had an overall improvement in most locations as well. And then we have a negative in the fact that the ammonia plant in Forskjern was out for pretty much the whole quarter. So there are pluses and minuses, but more pluses than minuses certainly.
Thank you.
Thank you. The next question comes from the line of Christian Faitz. Please ask your question.
Good afternoon, gentlemen. Christian Faitz here from Kepler Cheuvreux. A 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?
And 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? And third, talking about joint ventures or actually foreign operations, how is Pilbara performing at present? And can you explain the price step up in natural gas there? Thank you.
Yes. On current demand, as we said, in Europe, we have low order book. So we have more we have enough to deliver on that. And we also said that on new prices that is established. We have sold some volumes on that, but we are not in any urgency to commit on that and neither is the customers with a long order book then.
But a good situation also with higher prices then. On Brazil, 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. So we are able to continue to expand our premium sales there. So they are actually up 15% compared to last year.
While on both land, the more commodity part of it, we have sold 13% less. That's partly our product mix change, but it's also, you could say, somewhat weaker crop prices and crop market in Brasilia. But all in all in line with last year, but of course, when you compare with previous year that there you have an increase of 11% in the quarter compared to the year before that again. So it was a much tighter market last year than this year. And then on your question on Qatar, you have a 25% share of Kafko.
Kafko has its own harbor facilities, and it is business as usual. We're not impacted. And on Peelbara, 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. So actually in November, was a substantial step up there as expected and that you'll see in our guiding then that we last quarters have assumed about NOK 180,000,000 in higher gas cost per quarter there. But you'll see also for the fourth quarter, the quarter over quarter is reduced to NOK 100,000,000 since you already have part of that effect in the fourth quarter last year.
And ammonia is running full loss in Pilbara. So that's one of the major improvements from last year on production. And we are also ramping up the nitrate plant now for technical nitrate, 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? The I understand the comps were tough, but the relief talks about a toughening competitive environment. Is that specifically in the bulk blends? And can you give us some indication of whether the drop in volume you saw there was in line with the market or worse than? And then the second question concerns the nitrate premium 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? And I suppose asking it another way, do you think the commercial end of your organization could have done better in specifically Europe?
Well, I can address the last one first when it comes to the commercial organization. I think that's always impacted by the improvement program in terms of making the right decisions. And I think we have to view this also in context of being ambitious in price setting as well as at the start of the season. So I think that organization has done a very good job. And then obviously, benefit of hindsight, can always wish to have a lower order book when the pricing progressing.
But when I look at what the organization has achieved in this quarter, I'm very pleased by that. And also going forward, any initiatives that we do in the improvement program that will not come at the expense of our, say, ability or focus on what is happening around us. And then back to the Rafiinden. Yes, as we have said that the competitive environment was tougher this quarter than the same quarter a year ago. I think a large part of it is related to the total fertilizer market where it was a strong growth last year.
As I said, we sold 11% more. And this was probably above most suppliers' expectations because they're quite long value chains into Brazil as a lot is imported. So if the volumes and the market supplies on the upside, you get an extra effect of those low value chains, making it positive. And this year, when it has been slower, it becomes a little bit negative on that. So we look more upon this as, you can say, a cyclical element related to crop prices, but also you can say currency then.
Over the previous years, they are weak and significantly compared to the U. S. Dollar, which increased the competitiveness of the Brazilian farmer. That has been moderated somewhat in the last couple of quarters. So they have moved back a little bit of that competitiveness, which make also demand a little bit more muted in Brazil.
When it comes to switch between both blend and premiums and the big switch we have this quarter where you could say both blend dropped 13%, Part of that, I think, is also cyclical. But very clearly for us, we have an underlying we clearly see an underlying trend in that direction that the market over time will take more premium products. And clearly, yes, Laida is pushing and developing that. But probably this year or this quarter increased by the cyclicality there.
I see. So when you refer to the competitive environment, it's more within the context of the customers' competitive environment than necessarily there's been a step up in competitive supply. No, think
yes. And I also think that the value chain, could say that last year clearly was a short there was a tighter situation than foreseen. And this year, it's a less tighter situation than foreseen. And then you see competition increase among the blenders to have their product open. And you see that also some of the local competitors reporting their numbers, but profitability for this boat lending has been significantly reduced this year.
Yes. Okay. Thank you very much.
Thank you. The next question comes from the line of Andrew Todd. Please ask your question.
Yes. Good afternoon. Thanks for your time this afternoon, in fact. So just a couple of things, really. So 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 because, of course, you benefit when production falls in India. But I guess, by the end of this year, you will close the deal in India. So 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's the first question.
The second question was on associates. I can see there's an improvement through the year on associates. So you're still in loss in Q3. So can you just remind me, is Q3 normally a loss making period for associates? Is it just a seasonality thing?
Maybe
if I take the last one on associates, then we have several associates, but the biggest one by far is Kafkaud and our Qatarian joint venture. And you could say clearly what influenced them most is urea prices then, which have increased lately, but we're still at a quite low level during the third quarter. So 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. And if you have the plant, I I guess there has been a slight drop in production in India this season after some years with improvements up to the 24,000,000 tonnes level. And I think that without going forward, you would expect maybe that production level to be relatively constant at an average.
So then I guess the need for imports going forward will be mainly depending on the consumption developments in India. But mainly owning a plant there, 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. So it's not really market exposed in that sense.
Okay. And 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 as a case and therefore all your other products are on the normal one month lag modeling?
The three months lag, as I mentioned, is on nitrate, yes.
Perfect. Thank you very much.
The next question comes from the line of Stephanie Buffwell.
I've got two questions, both focused capital allocation. If we look at Slide 21 in the presentation, you set out your growth and CapEx pipeline. I just wanted to go through that CapEx pipeline. You've got CapEx coming down for around €16,500,000,000 this year to 10,900,000,000.0 next year, another decline to $7.5 in 2019. I just wanted 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 and K. Within the presentation, you flagged that one of your growth priorities is a structurally secure supply of P and K going forward. Obviously, with the Solitre project coming online, it will give you an element of that. But 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 and K? There are a number of publicly traded assets out there at the moment, which are now well below replacement costs on a per tonne basis.
So it'd be interesting to hear whether or not when you think about further backward integration, whether or not it'd be through buy or indeed build? Thank you.
Yes. So if I start on the CapEx pipeline and as you correctly point out, we have then SEK 10,900,000,000.0 included for next year. And this is then our expected maintenance CapEx. And in addition to that, committed and board approved growth investments and cost or capacity improvements to start 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.
But again, if there will be any additions to this CapEx, it's probably that have to justify themselves through being value creating. So in other words, having a return of our cost of capital. So but at the moment, this is where we're at on this and then we'll come back to that later if we need to add to this, which is quite likely. On P and P
Sorry, go ahead. 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, but because the planning and the engineering part will for many most of these projects take a year. So you shouldn't see a huge increase Sachin, in what is called committed growth rate. What you could see, of course, is on M and A, but that will also typically take some time from when it is committed and announced until it is closed and also due approvals. But of course, M and A could happen somewhat faster. But on expansions and construction, you wouldn't see a lot of things happening during next year in coming into our CapEx.
And then your question on P and K, as you said that we have put off that as potential areas to invest in. But 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 contracts, but could also be by assets. And that has specifically been on more higher quality phosphate, meaning appetite that we either would like to have a long term sourcing contract, which we have today or own production, which we also partly have today with our phosphate mine in Finland. And in addition to that, we see one area where it's where we see quite a value creation by going backward due to logistical constraints, and that is in Brazil. And that's also why we bought 60% of Galvani three years back and is expanding building a new phosphate mine there.
So for phosphate, it's more Brazil and it's aqua type or special. And then on potash, we are, I would say, in general, very comfortable on the supplydemand 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 have quite some risk related to it being a greenfield in Dallong. So that's the one potash project that we have under consideration and where we have not concluded any construction yet, but 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 one should you wish to ask a question. We have a follow-up question from Andrew Todd. Please ask your question. Hello, Andrew.
Your line is now open.
Sorry. Thanks. Just still one more. So 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?
So I guess when it comes to capacity utilization in China, they have operated, we said, around 56%, 57% in recent months. But 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 give an estimate of that now, would be around 60% at the moment. And when it comes to reasoning for the curtailments or shutdowns that we've seen so far, I'd say that that's very much driven by cash costs, that it's not economically feasible to run the plants. And that's why we've had curtailments and that the environment side of it has been very limited in the impact on the production figures.
So of course, we've seen in other industries that there have been shutdowns due to environmental concerns, but we did not see that as a major driver in the China numbers yet.
Thank you very much.
The next question comes from the line of Chetan Udeshi.
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? And related question would be how easy it is or how feasible it is to for customers to build a substantial level of inventory of, say, urea, for instance?
Yes. I guess, want to comment upon what's the order book in Europe then. And because all this restocking now into the consumption period, which I would say start typically in February then. And then we also have a slide attached in the presentation, which shows the producers' inventory, and that shows that producers' 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.
Thank you.
Thank you. There are no more questions. Please continue.
Okay. Then I will thank you all for participation in this call. Thank you.
You, operator. Ladies that does conclude our conference for today. Thank you all for participating. You may now disconnect.