© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Okay. Good morning, and welcome to Yara's first quarter results presentation. Today's presentation will be by our CEO, Svein Tore Holsether; our CFO, Lars Røsæg; and our EVP, Sales & Marketing, Terje Knutsen. And after the presentation, we will hold a Q&A.And with that, it's my pleasure to introduce CEO, Svein Tore Holsether.
Thank you very much, Thor, and good morning to all of you. We're going to start with safety. And as you see here on the slide, we have a stable development into this year, had a total recordable rate of 1.4. It's down from 1.6 a year ago. Our performance has improved significantly over the years, but we do believe that we can get to 0 injuries, and we are working continuously to push towards that goal.Now let's take a look at the first quarter results. And we have an EBITDA, excluding special items and IFRS 16, which is up by 17% year-over-year. Although deliveries are somewhat lower, improved margins and also stronger U.S. dollar more than offset this. However, we did not have a good quarter in terms of production. We had technical issues at -- after turnarounds in 3 of our largest plants. These issues have impacted both our Improvement Program and also our expansion project in Sluiskil. However, our earnings are improving, and this is our highest quarterly EBITDA for almost 3 years. And as you can see on the left-hand side, our 12-month rolling results are on an improving trend.Our capital turns -- returns are also improving, but further improvements are needed in order to generate satisfactory returns. Achieving this is a top priority in Yara.Our production performance this quarter was, as mentioned, unsatisfactory. We had technical issues in 3 of our largest plants accounting for losses of 200 (sic) [ 200,000 ] tonnes of ammonia and 100,000 tonnes of finished fertilizer. Although our production system has implemented significant and sustainable improvements over the last years, we cannot completely eliminate the risk of, for instance, equipment failure or negative impacts from major turnarounds, as was the case this quarter. Having said that, we are of course working systematically to reduce these risks and specifically to improve our planning and execution of major turnarounds.Excluding the issues in Pilbara, Sluiskil and Tertre, production increased compared with the year earlier for both ammonia and finished fertilizer. Our production performance improved towards the end of the quarter, and the March like-for-like production was higher this year than last year.As a natural consequence of the production issues, the Improvement Program performance this quarter was negatively impacted by the -- by these production issues at Pilbara, Sluiskil and Tertre and has a total impact of approximately $55 million. Our measurement of production improvements is brutally simple. We simply measure what we have produced, and the only adjustment that we make to that is for planned outages. In addition to that, we also have negative impacts on energy consumption as these outages increased consumption per tonne. The rest of the production operations generated approximately $20 million of further improvements this quarter.Following a year of high investments in 2018, spend is significantly reduced in 2019 and 2020 as our growth projects reach completion. And strict capital allocation rules are also enforced for any new proposals. We therefore maintain our $1.3 billion guiding for the committed CapEx for 2019.In terms of individual projects, I'm pleased to announce that we -- that the Freeport and Köping projects are now completed and integrated into regular production operations, both running at full capacity at the end of -- as of the end of April. Our Sluiskil expansion, however, needs further work to reach 100% production. The delay is partly a result of the technical problems that I mentioned earlier, so we expect to complete this project and be up and running at full capacity in the second half of this year.In Brazil, we're ramping up phosphate rock production in Salitre and expect chemical production to be up and running in the first half of next year. The Rio Grande consolidation and expansion project will be completed at the end of next year. Based on the current market conditions, the net effect of these changes compared to earlier guidance is most likely negative for 2019 and first half of 2020. However, we consider these effects as temporary, and we'll revert at our Capital Markets Day with an updated longer-term earnings improvement ambition and also tracking methodology.Even if we're not satisfied with our current returns, we are pleased to see the improving trend. Yara's first quarter earnings, excluding special items, are the best in 4 years, and our return on invested capital has improved for the last 3 quarters.I would now like to hand over to our CFO, Lars Røsæg, who will dive deeper into our financial performance. And following him, EVP of Sales & Marketing, Terje Knutsen, will provide an update on our commercial activities.Over to you, Lars.
Thank you, Svein Tore, and good morning all. Let me start by summing up some key financial metrics for the quarter compared with 1 year earlier. The quarter saw an increase in EBITDA, excluding special items, of 17% to $464 million. That's also adjusted for the positive effects of IFRS 16. The growth was the key driver for an increase in both earnings per share and cash flow from operations, the latter which landed just above $250 million.At the same time, Q1 saw the lowest quarterly investment level in 11 quarters reflecting that we are nearing the end of our investment program. Although of a very modest size, we therefore note that we present a positive cash flow before funding activities for the first time since the second quarter of 2016.While an increase in earnings and in capital returns is positive, as Svein Tore mentioned, it is in the context of absolute returns being at an unsatisfactory level at 4.1%, and our performance management mindset reflects a strong focus on expanding capital returns as a basis for shareholder value creation.Before we look further into the Yara results, let me provide a snapshot on the main market developments this quarter compared with a year earlier. And please do note that the publication prices in this overview are lagged with 1 month to better reflect the Yara P&L impact.Firstly, the nitrogen price development was positive as tighter grain markets and stronger buying activity have lifted the global urea demand and prices in most locations compared with a year earlier. In Q1 this year in isolation, however, we saw a negative urea price development, as most of you will have noted, throughout the quarter before prices regained positive momentum towards the very end of March. As regards other realized prices, Terje Knutsen will revert to that shortly.As most of you will know, energy prices in Europe were down approximately 20% in the first quarter compared with 1 year earlier. However, by using the 1-month lag into our accounts, the European energy cost decreased by approximately 3% while the U.S. energy prices were up 3% in the same period.And as mentioned, EBITDA excluding special items and IFRS 16 effects improved by 17% from the first quarter last year mainly driven by increased margins and a stronger U.S. dollar, of course, being positive for Yara, since most of our fixed costs are non-U.S. dollars. The margin improvement reflects higher nitrogen margins primarily in our European operations where the upgrading margin from ammonia to urea improved significantly. The phosphate upgrade in margins in our NPK plants were in line with last year.Our spot-based gas costs ended somewhat lower than the guided $20 million increase, which was based on 18 January forward rates as European gas prices declined further throughout the quarter.Yara's total deliveries were in line with first quarter last year. But excluding new volumes from our acquisitions in Cubatão in Brazil and the new plant in Freeport, Texas, volumes were down approximately 5%. This negative variance is mainly explained by lower deliveries of NPKs in Asia; Belle Plaine urea due to a very cold Spring in North America; and Pilbara, as mentioned, that was having technical problems in the quarter.The positive other variances highlighted in the slide includes the IFRS 16 effect of $24 million; the remaining part of a Tertre insurance settlement of roughly $6 million; the EBITDA from Cubatão and Freeport, in total $6 million; while the remaining part is mainly related to fixed cost increase in the quarter driven by our digital efforts and also conscious investments into our commercial excellence program.As you know, this is the first quarter that we report according to our new segment structure, which was effective the 1st of January, and the restated quarterly segment figures and special items for 2019 were made available at our web pages around 20th of March.The increased margins this quarter have mainly benefited the Production segment, but having partly offset by lower production due to the technical problems we've described in Pilbara, Sluiskil and Tertre.The Sales & Marketing segment was slightly down from last year on EBITDA, and Terje Knutsen will give more details on that in his presentation.The New Business segment is positively impacted by the Cubatão acquisition, and also the underlying development is positive mainly driven by the increased maritime activity.Yara's net interest-bearing debt was in line with the end of 2018, and that is due to the fact that the top level has been lifted by USD 409 million on the 2018 numbers, which is reflecting the implementation of IFRS 16 based on our lease portfolio as of the 1st of January 2019. It is important to note that leases that ends in 2019 will be expensed as before, and that means that net interest-bearing debt effect of IFRS 16 in isolation might increase during the year due to new leases being entered into.Higher working capital was driven by increased trade receivables in Europe in a soft market. And related to investments, the largest items are the Rio Grande plant organization and the Salitre mining project in Brazil. Working capital and investments were offset by cash earnings and dividends received from equity-accounted indices. Our debt/equity ratio was at 0.47 at the end of the first quarter 2019 compared with 0.43 at the end of 2018, where then 2018, according to our implementation, is not adjusted for IFRS 16.And by that, I have the pleasure of handing over to Terje to take us through the details of our commercial performance.
Thank you, Lars, and a very good morning to all of you. As Lars has already shown, the sales and marketing EBITDA, excluding special items, was down 4% from first quarter last year. And this is mainly reflecting a somewhat lower delivery level while margins were overall in line with the year earlier.Deliveries were down 1% from last year. And that, excluding the acquisition in Brazil, the Cubatão asset, deliveries decreased 1 -- 4%, reflecting a drop in all regions except for Europe.In the middle chart, we have split between deliveries of commodity products and premium products, where you can see that premium products deliveries are stable overall while commodity deliveries are somewhat down by design due to delivery -- lower deliveries of blended product in Brazil.On the right-hand chart, you can see our Crop Nutrition revenues increased by 4% from a year earlier or by 2% when excluding the acquisition effects reflecting somewhat higher prices for most of our main products.In terms of regional dynamics, our European deliveries picked up strongly in March, ending more or less in line with the quarter 1 year earlier, and that was following a very slow January and February in Europe.In Brazil, we have continued to reduce the commodity deliveries where margins are unsatisfactory. However, we continue to grow the premium product deliveries, and our overall margins in Brazil are up compared to a year earlier.And as mentioned earlier, the NPK deliveries in Asia were lower than a year earlier, and this is related to weaker crop and farmer fundamentals that are somewhat challenging but also due to some phasing effects.In North America, we have seen lower deliveries both of commodities and premium products. This is linked to the adverse weather and therefore, a delayed planting season, but that we expect to be a phasing effect and that we will catch up during second quarter.Also, in Latin America, we have by design reduced our commodity deliveries due to unsatisfactory margins while the premium product has modestly increased. The African deliveries were in line with last year.So before I hand over to Svein Tore again, I want briefly to comment on the very exciting partnership agreement that we presented this morning together with IBM. And this is a partnership which simply said, "Merged 2 very complementary set of competencies by combining Yara's extensive knowledge in crop nutrition and agronomy and with our solid global footprint with IBM's digital platforms, their expertise and services in data analytics, AI, blockchain and also their research capacity." So together, we will develop digital farming solutions both for the professional segment as well as for smallholder farmers. And obviously with the aim in a very sustainable way to increase yields, improve crop quality, and by that, improve the income of farmers. We will focus on all aspects of optimizing farming by combining crop insights, in-field data and digital agronomy to achieve worldwide coverage. And our aspiration is to reach 100 million hectares of farmland.We also see this partnership as an enabler to further integrate the food value chain. And in that way, paving a better way for us to create scalable solutions.Practically speaking, we will establish joint innovation teams collaborating in our digital hubs in Europe, Singapore, U.S., Brazil to develop new capabilities and solutions in precision farming, crop health, irrigation management and other related and relevant cases. The first deliveries are planned for end 2019.So with that, I will now hand on to Svein Tore for his closing remarks.
Thank you, Terje. And I want at the end to round up with a summary of Yara's prospects. First of all, we see attractive industry fundamentals. We have a growing population as well as resource and environmental challenges create business opportunities for Yara. In addition, the market cycle is improving with the supply-side pressure easing after this year, and the demand side also looks positive with a tightening situation for grains.Our cash flow is set to improve not only due to the cyclical improvement but also since our CapEx is declining significantly and our growth and improvement programs are delivering higher volumes and revenues going forward.Finally, we have a focused and sustainable long-term strategy to further advance operational improvements, crop nutrition value growth and also active portfolio management. We consider these prospects attractive and compelling and intend to lay down -- these out in more detail at our Capital Markets Day on June 26, which will be held at Tate Modern in London.We intend to focus the presentation on our strategy execution and specifically how we intend to improve returns by driving further value growth in our markets by continuing to improve our operations and by prudently allocating our capital.So with these closing remarks, I'd like to hand back to you, Thor, to coordinate the Q&A session. Thank you.
Okay. Our presenters are then assembling for the Q&A, and we are then open for questions. So if you have a question, please raise your hand, and my colleague, Nina, will bring the microphone to you. And please state your name and firm. I think we are starting with DNB.
Eivind Veddeng. I have a question or 2 on the markets. First, can you update us on the market balance on your [ ROCE ] for the industry? I can see that your supply growth for 2019 has been liquid compared to the fourth quarter of 2018. Or do you still expect a catch-up in the European Union for a possible risk for this first half until Q2 '19 based on your fourth quarter presentation? And finally on the strategic review [indiscernible]?
So thank you. For the first 2 questions, Terje, on the demand/supply balance. As you indicated, there was a change from the fourth quarter 2018 and until now for 2019 numbers. It's partly driven by Brazil, where some volumes that were supposed to be taken out hasn't been taken out yet, and there's the India impact. Perhaps, you could shed some more light on this, Terje.
I think, first, fourth quarter was a quite weak quarter in terms of supply/demand balance for urea. And it actually continued into first quarter and then has had lately a quite strong pickup on prices. And this is due to many reasons, but it seems like India is picking up demand. There has been a growth of roughly 1.5 million tonnes if you take the year March -- or April to March, which basically is import. And also some short-term shortages in the U.S., which maybe is more weather-related. And all of these factors together, they have caused a quite good pickup lately.The second question can you repeat it?
Yes, sure. Sorry about that. You expected the last time we met a pickup from the rather weak stock to the nitrogen deliveries in Europe. How is that faring as quarter-to-quarter or season to date? Deliveries are still down, I think, 6%.
So as I said in the presentation, the first quarter started very weak actually. January, February where we have to admit weaker than we thought while it picked up strongly in March. If we look at the season to date or to March, it's down, as you mentioned 6%, and we expect still an increase or closing of that gap. How far exactly that close will be? That remains to be seen. As you know, between second and third quarter, we kind of have the end of the old season and the beginning of the new, and it's a bit difficult to know exactly when the old ends and when the new starts. But so far, deliveries in April have been strong. And with the upswing now on the pricing, I think also we see that we have a lift in the market right now.
And with regards to your question on Environmental Solutions, I'd like first to say that historically that area has given strong financial returns. It continues to deliver in a very good way. With our updated strategy, we have been very clear on what is our core focus area, and then we will have a more open mind and more active approach to some of these businesses. But again, the key here is to maximize value creation. And we will do this step by step, so we'll give more communication around that when the timing is right, but there's nothing further to update compared to what we said earlier.
Next question from Nordea, perhaps?
Hans-Erik Jacobsen, Nordea. The cost connected to the technical issues is quite substantial. The amount you gave us was of USD 55 million. Is that included in the turnarounds? Or is it only related to the technical issues? Also, can you go some more into what the technical issues are about?
So the $55 million is directly connected to the lost volume from these technical issues. However, and this is important, it's sort of a technical calculation because we lost a lot of ammonia production. And when we measure the Improvement Program, it's based on 2015 margins. And the margins for ammonia in 2015 were significantly higher than what they are. Today, the real impact to our results in the first quarter is much less than the $55 million. When it comes to the issues, in Pilbara, we had some issues with the ammonia converter. And in Sluiskil, it was on the primary reform on the gas collection part of this. And in Tertre, it was more -- some of -- several small issues. All these 3 plants are back up and running. And I should also add that for Sluiskil, the ammonia plant that was out in January and February did set production records in March. So we see this as temporary issues, but the amount that hits the Improvement Program, and we want to be very consistent on this, is $55 million. That's how it's calculated, but the real impact then is much smaller one in the quarter.
Other questions? Yes, ABG?
Bengt Jonassen from ABG. I also have some questions. The first one is on the price realization on nitrates, which is up $2, $3 year-over-year. I think your leased prices are up more than 20, and the publication prices are up around 15, on average. So maybe talk a little bit about that?On the EBITDA bridge, on the $17 million on fixed costs in digitalization, is that the level we should expect going forward? And the final question is you talked about -- you talked a little bit more about the CMD, but you removed the guidance on earnings contribution from M&A and capacity from -- or capacity additions, but you indicated that will be somewhat lower. How much is somewhat lower?
Terje?
So on the price side, first of all, this is related to Europe. I would say we are very much on plan for overseas markets in terms of nitrate premiums. In Europe, we had a very, I would say, strange season because it was way behind. We thought it was going to pick up significantly in January, February. It didn't, so it created among all producers a lot of nervousness to move product. Again, in March, it picked up. Prices are again stabilizing and increasing. We have today gone out with a new price for Germany of 2 05, which of course reflects also the international level that now is picking up again. So I think it's fair to say that there was price pressure in the early part of the quarter simply because product really didn't move.
And with regards to the -- your question on the earnings guidance on the growth part, as I indicated in my presentation, there will be a slight negative impact from this in 2019 and going into 2020. We've also removed it now for -- because it's now transferred into regular operation. And it would be a fairly technical calculation. If you take Freeport as an example, which is then based on margins for ammonia, which are much higher than now, so rather than trying to make a very complicated technical coverage -- comparable number, we're just saying now that we're -- we see a lower impact partly because of the market conditions, but also because of the technical issues that we had in Sluiskil in particular. Then on digital?
Yes. When it comes to digital and fixed cost, the comps on digital are of course approaching a more neutral level. We've said that we had $10 million, $15 million a quarter cost on the digital side. But of course, you just saw we had a significant increase in the fixed costs in the quarter, and it is a natural part of the next generation of our Improvement Program.
Maybe I can just add on the nitrate prices that even though prices were under pressure, we have increased also in Europe the margin level about gas and about urea also in Europe. So as such, the lift has contributed positively towards the end of the quarter.
Are there more questions? If not, there is one more opportunity today at 2:30 Oslo time when we have our conference call. But until then, thank you all for attending our presentation.