Earnings Call: Q4 2017

Feb 8, 2018

Summary

Q4 results improved and the improvement program was ahead of schedule, but CROGI remained below target. Current pricing reduced estimated growth-project EBITDA, while market shifts and weather affected regional demand.

Ladies and gentlemen, thank you for standing by, and welcome to Yara's fourth quarter results 2017 conference call. At this time, all participants are in listen only mode. There will be a presentation followed by question and answer session. At which time if you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. I must advise you, this conference is being recorded today, Thursday, 8th of February 2018. I would now like to hand the conference over to your speaker today, Mr. Svein Tore Holsether. Thank you. Please go ahead. Thank you very much, and welcome to the Yara fourth quarter results conference call. Before we open for questions, I'd like to make some brief comments on our results and the presentation today. We reported improved results with higher production and also that the Yara Improvement Program is ahead of schedule. However, fertilizer markets remain fundamentally supply-driven, and our cash return on gross investment or CROGI, was at 7% for the quarter, which is well below our target of 10% or more through the cycle. Today we also had our Capital Markets Day presenting our industry backdrop and strategy, improvement and growth programs, as well as financial scenarios. We remain focused on strengthening our own operations by delivering on the improvement program and the growth projects, and by growing knowledge through technology and innovation. With these introductory remarks, we're ready for questions. Operator, if you can now please open up for questions. Thank you once again, ladies and gentlemen. If anyone wants to ask a question, please press star and one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Our first question comes from the line of Joel Jackson. Please ask your question. Hi. Good morning. Or good afternoon. Sorry. I just have a couple questions. Can you help us out a bit on your 2020? Can you give some guidance about how much incremental earnings you can generate from the Yara Improvement Program and the expansions? You like to use a 2015 base of pricing, which is sometimes difficult to interpret. If we kind of hold 2017 fertilizer price levels constant, different floors for the next few years, what is the incremental earnings you would earn in the business the next three years from the Yara Improvement Program and the expansions? Right. I think I'll hand over to Per-Gunnar to go through that part. Yeah. If you look at the Yara Improvement Program, Joel, as we said, at 2015 prices, we expect at least $500 million, of which we have done $242 million now. We showed in the presentation that if we use 2017 prices instead, the volume effects are slightly less worth at those prices, and also a little bit on energy. So with 2017 prices, it's $180 million instead of the $242 million. So that's a reduction of roughly about 25%. If that remains going forward, you can have roughly the same reduction also on the $500 million in total. Probably the reduction is slightly less than that fixed cost will take a bigger part of it. We haven't detailed this is such a detail on volumes and so on, that we can calculate exactly price levels on it. But I would say that it's a plus minus 80% of what we have indicated at 2017 prices. Having said that, the current prices are higher now, so we have already come up somewhat again from 2017. On your question on the growth projects where we showed the setup saying that at 2015 prices, those add about $600 million on EBITDA. If there instead of 2015 prices take the current price level, then you could say the project most influenced by that which will take down profitability is the Freeport ammonia project. If you compare the current prices with 2015, the biggest deviation is on ammonia. We said that at 2015 prices, the Freeport project that is up and running would have an EBITDA of roughly about $100 million, and it will be more closer to $25 million at the current prices. Clearly at current ammonia prices, the profitability is not good at that project. It also said that it is hard to see that current prices are sustainable in the longer term. That is the biggest effect. Then we have some effect also on the phosphate prices, where phosphate prices still are lower while most of the other projects does not have any significant drop in the profitability as they are more premium margin projects. Actually, one project which becomes better today than 2015, and that is the upgrade, where we upgrade from ammonia to urea, and urea prices are relatively better today compared to ammonia than in 2015. All in all, we see a reduction with current prices compared with 2015 prices of roughly 25%. So from about $600 million to $450 million. That is really helpful. Thank you very much. My second question would be on Brazil. Looks like there might be a lower Safrinha planting this year. Lots of information out there that maybe consumption in Brazil the past year has been only flat to slightly up. Could you give me an idea of where you think, maybe give an outlook for the inventories and consumption on each nutrient, nitrogen, potash, and phosphate in Brazil, where we are? You are correct that there are some very specific challenges as well, but I will hand over to Dag-Tore to give more details on this. I really agree with your assessment there. Due to primarily the weather factors, the season has been delayed in some provinces in Brazil, and they are now troubled to plant the second corn crop in those provinces. So it looks like acreage will drop in total. We kind of expect that when we get the total delivery figures for, let us say, Q1, that those will be lower than a year ago when the opposite, where there is actually a very strong second Safrinha crop. Yes, I think that is correct. So Brazil is not particularly supported compared to other regions in today's market environment. When it comes to stocks by nutrients, I think this is too detailed for us to kind of give an assessment on that. Okay, thank you. Hold on. Thank you once again, ladies and gentlemen. If anyone wants to ask a question, please press star and one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. There are no questions at this time. Please continue. Yeah. If there are no more questions, the conference ends then. Let us maybe give the participants 10 more seconds if there are any follow-up questions. All right. Once again, ladies and gentlemen, please press star and one if you wish to ask a question. So. We have another question from Joel Jackson. Please ask your question. I might as well come back. I guess everyone has asked all your questions all day earlier today. I will use the time I have, if that is okay. I looked at some of the priorities in your Capital Markets Day presentation. One of the priorities, I think it was number 4, talks about trying to secure raw materials, and you spell out phosphate rock and SOP. I do not think that is necessarily a new priority, looking at what you have done in Brazil and the investments that you made in IC Potash, and I think it was called Ethiopotash. I do not think you have really progressed the SOP projects for a long time. Can you maybe give an update on if you are willing to put money into Ethiopia finally? Do you need a partner? And what are the conditions to make that work? Or is there something better for SOP in the world you can look at? As you correctly point out, there are no new projects into that priority. So it's two projects. Mainly, it's the one in Salitre in Brazil to secure phosphate supply at an attractive price locally in Brazil. The other one is the potash project in Ethiopia for SOP, which is really driven by a downstream strategy to secure SOP. We've been working on this for a number of years now, and it's been important for us that we have the right framework in place before we make any final decision. That has taken some time, but I would like to say that we've had a very good dialogue with the Ethiopian authorities as well in order to facilitate this process. We did reach one milestone back in November when we signed the mining agreement. That is a large step forward in the realization of this project to get that in place, and we do have partners on board in this now. We enter into the second phase, and that is to develop the detailed mining plan and do the final feasibility studies, and secondly, to also have the financing package in place. We anticipate that we'll use this year to get that in place before making any final decision to move ahead on this project. Okay. We're seeing obviously the U.S. market for nitrogen, for urea imports is obviously lower now because of capacity additions there. Chinese urea exports are falling. They're quite low now. Maybe they'll be an importer, maybe not. So on the nitrogen market, you have a big exporter and a big importer that sort of changed, the dynamic's changing. How does that change how Yara approaches its global nitrogen marketing sales program. Would Yara consider putting tons into Indian tenders? Maybe talk about how the whole dynamic is changing and how Yara has to play into that. I think let's start with the dynamics. As I said, it's extremely interesting times now with so many moving parts, and the trade patterns are changing. I'll hand over to Dag-Tore to go through more details on that as the first step here. Yeah. No, I think that's entirely true for the urea market in particular, and also some of the related markets like UAN, for instance, that there's been a large shift in trade flows in that the U.S. market is shrinking, as you say. Those that are users for that market have to look for other destinations. What you see now is exactly what you're saying, that they are actually then taking market share in the various markets from the Chinese, basically, and that the Chinese are forced out of many of these import markets. You clearly see now in the current market that the strongest pricing on urea is in Asia, where the market is actually quite tight, and that the buyers in Asia and also West Coast America now have to look for products outside the region from Africa or from FSU that they haven't been used to buying from earlier because of the strong supply in Asia. Those shifts are happening. I don't think that it doesn't affect us that much. I mean, we are not a very big player in the global trade of urea or these products, so I don't think- No. I think it's safe to say that this doesn't make any changes to our crop nutrition or production strategy either. You'll not see us moving towards becoming a very active player in Indian tenders. Certainly, we've made a significant move into India now with our acquisition of Tata Chemicals' Babrala plant. That gives us a significant foothold within India, and that is an interesting position by itself. Then we're working also on the crop nutrition side to build on that foothold to develop a premium product position as well. We're already present in India for some niche crops and where we have been able to show that we can create value for the farmers even outside the subsidy schemes because of the properties of our product and how it works under those crops. But with a stronger foothold, we will be able to build further on that going forward. That is really the key or one of the key reasons why we are moving into India with production assets there. That would not be a core part of our business. And maybe finally, the EU is going to look to phase out or to reduce cadmium content in fertilizer over time. How do you think that will play out for yourself and competitors? How is that going to phase the phosphate industry? What do you have to do to change your business to be compliant over the years? Yeah, you could say that if you look at the sources we have, we have a phosphate mine in Finland, which is cadmium free or very low on cadmium, so that is a good sourcing. Also from the other external sources we have, we are able to handle, if you say, cadmium limits in the foreseeable future then. So, of course, this has to be balanced between what is environmental needed and important and supply opportunities. Yeah. I mean, it is not yet clear what these limits are going to be either. I mean, there is a debate between the various organizations in the European Union and quite diverse opinions, and there is a trilogue process going on. It looks like the strictest suggestion, 20 milligrams, is, in our view, kind of unlikely, I guess, in today's the way it looks. I think if you end at 60 or 40, I think that would be manageable for a lot of the suppliers also, including ourselves. So that will not be that trade distorting as a 20 milligram limit would have been. But we do not know the outcome yet. Thank you very much. Thank you. Our next question comes from the line of Andrew Benson. Please ask your question. Yeah. Thanks very much. Just a couple of small ones, really. If you could just give us an update on the prospective tax rate for the group. Secondly, you've got in your CapEx guidance over NOK 5 billion of acquisition related costs. Obviously you've made the Tata acquisition this year, but what is the rest? The elimination of the, or substantial elimination of export tariffs on Chinese NPKs, how do you see that affecting your business in 2018? Yeah. If I start with the tax then we had a tax rate for 2017 in total of 17%. That was influenced by quite some special items in the fourth quarter where we actually had a tax income, where we were able to eliminate earlier non-realized internal currency gains. Currency gains that cross borders and as such had to be booked for, but which were eliminated by a simplification of our holding structure there and also some other one-off effects. So we had 17% there. What we have used in the scenarios and also what we have seen as an average rate earlier on is 25% tax rate. That should trend downwards with lower tax rates in many jurisdictions over the last years, latest by the reduction in U.S., which also gave us a reduction in the non-paid tax there. Over time, we could expect a reduction from 25%, some percentage point down. But for the time being, you could say an expected tax rate would be roughly 25%. Then second question on the guiding on the CapEx, and you are referring to one of the slides in the Capital Markets Day where we showed now a total expected CapEx for 2018 of NOK 5.2 billion. And that is constituting two acquisitions. It is the Babrala Indian one which happened in January as you pointed to. But the second one is the announced acquisition of Vale's Cubatão asset, which we will buy for $255 million. So that sums up to those 5.2 then. On the NPK side, I think there are several elements. One element is that we have a kind of a very high-value profile to our NPK base in Asia, targeting a very high-level premium markets. And a lot of the NPK capacity in China is all kinds of qualities, basically. So it is a question mark whether a lot of that will be attractive in those premium markets that we target. But I think even more so, I think that the NPK industry in China had to buy its raw materials, the input for its NPK locally, and none of this is cheap. Urea prices, which they use quite a lot, and this is among the highest around the world. Phosphate prices similarly. They import potash, and there is still an export tax, although it is reduced significantly. I have seen views also from consultants that question whether the Chinese are competitive in the export market for NPK, kind of regardless. And there are no signs of it now, but you could argue now the spring season is approaching, and they are busy with domestic delivery. So I guess the test for that will more be kind of third quarter. But, yeah, I don't think we are particularly worried for our business. Okay. All right. Thank you very much. Thanks. Thank you once again, ladies and gentlemen. If anyone wants to ask a question, please press star and one on your telephone and wait for your name to be announced. Okay. For the- All right. There seems to not be any further questions. Fewer this time than normal, but again, we have been through quite a few questions earlier today as well. I thank all of you for calling in, and I thank for the questions, and then I think we conclude with this. Thank you. Thank you. That does conclude our conference for today. Thank you all for participating in this.