Yara International ASA

OSE:YAR

Earnings Call Transcript 2018-Q4

[Thor Giæver, Head of Investor Relations]

Good morning, and welcome to Yara's fourth quarter results presentation.Today's presentation will be by our CEO, Svein Tore Holsether; our CFO, Lars Røsæg; and our EVP, Sales and Marketing, Terje Knutsen. We will have a Q&A after the presentation with the same participants.And with that, it's my pleasure to introduce our CEO, Svein Tore Holsether.

[Svein Tore Holsether, President & CEO]

Thank you very much, Thor. And good morning to all of you.I'm going to start with safety. Safety is our first priority, and a strong safety performance goes hand in hand with the operational excellence, driving profitability and value creation.Our TRI now at the end of 2018 is at 1.4, which is down from 1.8 1 year ago. This is, however, completely overshadowed by the fact that, on December 7, we had an accident at our facility in Montoir in France in the context of doing maintenance work at our NPK operation. And this had a fatal outcome for one contractor, and we had one seriously injured. This accident is a strong reminder of the importance of the safety work and why we have it at the top of our agenda. And our thoughts are with the family, friends and colleagues of those involved. Although we still experience serious accidents and near misses, we believe that we can get to 0 accidents and that we are on the right track.Let's start with a look at 2018, which in total is a year of improved profits.EBITDA excluding special items was up 7%, but the return was still below our cost of capital at a CROGI of 7.3% for the full year. The proposed dividend is at NOK 6.50 per share, which is in line with a year earlier as the 2018 earnings per share, excluding currency and special items, is quite close to 2017 level. In terms of capital allocation, we are following a strict policy focusing on executing on our ongoing committed growth investments, which are currently halved in 2019 compared to 2018.Finally, we've got our new strategy in place during 2018. And focus is now on execution, which is well underway, including launching a revised operating model and strategic evaluation of noncore units.Now let's take a look at the fourth quarter results.EBITDA excluding special items is up 21% year-over-year. And actually, this is our highest quarterly EBITDA for 2.5 years, and it is the best fourth quarter since 2014. And as you can see on the left-hand side, our 12-month rolling results are on an improving trend, but we have also invested significantly in recent years, so our earnings must improve in order to create satisfactory returns. And achieving this is a top priority for Yara. The result improvement mainly reflects improved margins, even if deliveries were down in a slow off-season market. Third quarter did, however, see operational challenges in several of our plants and in some cases, also lasting into January, also in relation to our growth projects.Consequently, we now expect a reduced EBITDA from our new projects in 2019. However, we maintain the target for 2020, suggesting a delayed ramp-up of the new projects from these operational challenges.The Yara Improvement Program remains on track with -- to reach a minimum of $500 million by end of 2020. And we've also identified further potential and plan to launch new targets by mid-2019, expanding the amount, scope and time line for the program. The Yara Improvement Program has so far delivered $355 million of annual sustained benefits, meeting the 2018 target of $350 million, which you'll recall, we increased from an initial target of $300 million for 2018. We're on schedule, thanks to good deliveries from all parts of the program but in the last quarter, in particular from our Procurement Excellence project through reduced spend on packaging, on logistics and also on travel. As mentioned, we have experienced some production problems in the fourth quarter and into the first quarter, which may impact the savings in first quarter, but we are confident that we will reach the full year target for 2019 of $450 million.As already mentioned, 2018 was a year of high investments while we were -- our commitments for growth investments in 2019 is halved. Some of you may have noticed that our 2019 investments are $200 million higher than we had for third quarter estimates. And this partly reflects phasing of investments. And as you can also see, the 2018 numbers are down $100 million. And then it's also reflects the acquisition of the remaining minority interest in the Galvani joint venture. Our 2020 investments are unchanged at $1 billion. While it's possible that smaller investments may be added, we intend to maintain a conservative investment level overall, also in 2020.On the right-hand side, you can see the significant volume growth resulting from our investments, adding more than 1 million tonnes of product this year compared to 2018 and with a further 1.8 million tonnes coming after 2019.Moving on to our strategy. We held -- we've had a comprehensive process starting with our mission and vision that we launched in 2017. And thereafter, we run a full process going through the whole corporate strategy, resulting in the launch of the "crop nutrition company for the future" strategy in mid-2018, as you already seen.As a consequence of the new strategy, we have simplified the Yara operating model to strengthen customer focus and value creation. A key element is to move to one sales and marketing segment, comprising all of Yara's existing Crop Nutrition business units, in addition to 3 business units which we have transferred from the former Industrial segment. The new business segment now comprises 2 main units, the first one being businesses which will be established to commercialize innovation with decarbonization, circular economy and autonomous logistics operations, including the Yara Birkeland ship. And the second is a portfolio of businesses, mostly the former Industrial segment, which now will be operated on a more independent basis with distinct strategies, including the Environmental Solutions business, which an evaluation of strategic options is underway. And the Production segment is unchanged.Yara environmental solution comprises 3 business areas: reagents, and this is Yara's AdBlue business for land-going vehicles; it's maritime, which is the global leader in SOx and NOx abatement for seagoing vessels; and then it's stationary, which is NOx abatement for land-based industry assets. This business has had healthy growth due to tightening emission regulations, with increased demand for abatement solutions both on land and at sea. The strongest growth is currently within maritime due to the IMO 2020 rules setting stricter standards for ships.I expect that some of you may be -- ask about the time line for this and other business evaluations that Yara plan to carry out. And I would like to underline that our main objective is to maximize value creation, and our conclusions will be drawn on that basis.So let me now hand over to CFO Lars Røsæg, who will take you through some more detail on results and financial objectives. And following that, EVP for Sales and Marketing, Terje Knutsen, will provide an update on our commercial activities.So over to you, Lars.

[Lars Røsæg, Executive VP & CFO]

Thank you, Svein Tore. Good morning, all, and thanks for the opportunity to share some details about the results with you.Let me start by some details on the market developments this quarter compared with the year earlier. Firstly, nitrogen price development was positive, with tighter grain markets and stronger buying activity lifting global urea demand and prices both in China and other locations like Egypt. Yara's realized prices were also higher, with nitrate prices up 16%, giving an increase nitrate premium over urea. NPK prices were up 7%, with premiums slightly below a year earlier. This leaves the energy prices as the main challenge where strong demand in many regions and in particular in Europe has increased prices compared with a year earlier. But I'm sure all of you have noticed that, at the start of 2019, the energy price in Europe have decreased again, however, with low visibility.Even if we are not satisfied with our earnings, we are happy to see the improving trend and this being a fourth quarter better than in a few years, but at the same time, it is important to highlight what Svein Tore said, that the EBITDA development has also been backed up by significant investments. And in rest -- it rests upon us now to deliver capital returns on those investments.If we go a little bit into the EBITDA development in the quarter. It improved by 21% compared to fourth quarter last year. That is mainly driven by increased margins and a stronger U.S. dollar, which is, of course, positive for us since most of fixed costs are non-U.S. dollars. The margin improvement reflects higher urea margins in the Belle Plaine plant in Canada and higher phosphate upgrading margins in our NPK plants. The European nitrogen margins were relatively stable as higher prices were offset by higher gas costs. The spot-based gas costs ended a bit lower than the guided $125 million increase, which was based on the 5 October forward rates. And the European gas price declined during the quarter, hence leading to that reduction.Total fertilizer deliveries were up 2% compared with the fourth quarter last year, and that is explained by new volumes from our acquisitions in Babrala in India and Cubatão in Brazil. Within other, the majority of the effect is the EBITDA contribution from Babrala, Cubatão and Freeport. And we also had a positive effect from an insurance settlement which has previously negatively impacted EBITDA. This was partly offset by an increase in fixed costs where that includes the planned buildup in the digital farming area which is proceeding in line with plan and cost.If we look a little bit into the segment results.The increased margins this quarter has mainly benefited the Production segment, but that has been partly offset by lower production due to plant turnarounds in sites like Sluiskil and Tertre but also unplanned outages negatively affecting production like Svein Tore also mentioned. If we adjust for acquisitions and expansions, ammonia production was down 11% while finished fertilizer production fell 2%.The Crop Nutrition and Industrial segments were both positively impacted by the volume growth from acquisitions. And as mentioned and as reported, we are now changing our segment structure, meaning that this will be the last quarter we present Crop Nutrition and Industrial as such. And we will provide restated figures for the years from 2017 and 2018 ahead of the Q1 release by 20th of March.Our growth investments are significant, and the investments have reached their peak in 2018. As mentioned, some of these are behind the original plan, and I would like to update you a bit more on the details of that.All the projects are now producing except for Köping, which started up beginning of November but is currently down due to technical issues. Freeport has also been running at a reduced rate during the fourth quarter, and it still is, but we expect both Köping and Freeport to reach full production during the second quarter of 2019. These will, however, lead to a reduced EBITDA impact from our growth investments in 2019 of approximately $100 million to $330 million, but we maintain the guiding for 2020 of around $600 million EBITDA.The Yara Improvement Program, which we are now looking into an expansion of, is defined as annual improvements of the company compared to the baseline of 2015. That means that the 2020 target of USD 500 million, and our quarterly and annual status reports are based on 2015 margins applied to the improved production volumes. In 2018, the sustained EBITDA improvements based on those 2015 margins amount to $355 million. If we were to base that on 2018 margins, the corresponding figure would be $310 million.The impact of the program in 2018 over 2017 amounts to $90 million, calculated on volume improvements realized plus additional improvements impacting margins through improved energy efficiency and procurement savings at 2018 margins. Netting out the additional one-off costs through implementations of the sustained improvements, the net effect in 2018 alone is $66 million.As we are at the end of the year, I would like to also shed some light on the full P&L and balance sheet. And I'll then focus on the items not in the EBITDA.The depreciation increased mainly due to our M&As, Babrala and Cubatão and also expansions. We also had an increase in impairment losses in 2018 in accordance with IFRS, mainly reflecting impairment on production assets in Australia and Italy. The split between depreciation increase and impairment loss increase is roughly 50-50 for the year.The U.S. dollar has strengthened against all of Yara's other main currencies in 2018. This is, of course, positive as our revenues are underlying U.S. dollars while a major part of our fixed-cost base is in other currencies. However, as we do have U.S.-denominated debt, we will see an immediate currency translation loss in our results when the U.S. dollar strengthens.On average, gross debt was $1.5 billion higher than in 2017, and that explains the increased interest expense. I'll come back to the interest-bearing debt developments a bit later.A low income before tax and also our presence across a wide range of tax jurisdictions explains that we have a net tax income despite a positive income before tax.Looking at the balance sheet.The increase in assets, both noncurrent and current, is strongly influenced by the acquisitions previously referred to. And in addition, we saw an increase in operating capital caused by higher market prices and slightly higher inventory, in particular in the fourth quarter following a slow off-season market. Furthermore, we issued a 10-year USD 1 billion bond, as you will recall, in May 2018 at an attractive rate.Our equity decreased as a result of declared dividends, currency loss recognized directly to equity and remeasurement loss of pension liabilities. All in all, Yara possesses a solid balance sheet, forming a good basis for a prudent capital allocation going forward.We have increased our net interest-bearing debt by around USD 1.4 billion since 2018, primarily funding the acquisitions in Babrala and Cubatão and the expansion projects in addition to increased net operating capital, as mentioned, due to higher prices and slightly higher inventory levels. Cash earnings from our operations funded around $1.1 billion of that investment.We've also received $155 million in dividends from our equity-accounted investees, and we returned $240 million to our shareholders as dividends and share buybacks.And by that, I'm pleased to welcome on stage the EVP of Sales and Marketing, Terje Knutsen.

[Terje Knutsen, Executive Vice President of Sales & Marketing]

Thank you, Lars. And good morning to all of you.Yara's global fertilizer marketing and distribution footprint combined with our complete product portfolio of differentiated products gives us really a unique and, I would say, unmatched position within our industry. And as you all know, we have production facilities on all continents. What is maybe less known is that we have about 200 terminals, warehouses and blending facilities that are spread around those 60 markets where we have feet on the ground. As you know, we sell to more than 160 countries.Oops. So while Thor is fixing that, our aspiration is to be the crop nutrition company for the future.So our aspiration is to be the crop nutrition company for the future. How do we do that? By delivering sustainable crop nutrition solutions and by that, supporting the farmers in driving their profitability. We do that through providing knowledge, which again gives productivity gains and quality gains for the farmer. And we -- to deliver on this aspiration, we need to go beyond products and crops. We need really to focus on the farmer and have a more holistic view on how we can fulfill the farmer's needs but also in a much more granular way. And obviously, different farmers have different challenges and needs and our growth success requires that we have an in-depth understanding on how we can add sustainable value for the farmers. And the farmer needs are not static. So the agricultural industry is impacted by global and local trends that shape the needs and requirements of both farmers and other players in the value chain such as the food companies and supermarkets. And to drive our long-term growth, we need to be close to those trends and follow those trends and build capabilities to deliver and respond to them. And therefore, we now work more and more close with food companies to identify and demonstrate how our solutions can respond and address to their challenges related to quality and traceability, for instance, how we can deliver better carbon footprint for their products. And that -- in combination with being really deep in the market with feet on the ground where we have agronomists around the world, that translates into solutions that provide value both for the farmer and the food chain companies.In this, it's also very important to take a leap change now into the digital solutions. We have worked hard to deliver and respond to the change of digitalization. That is now an integrated part of our offering to farmers, also to food chain companies. And it will provide a way for us to innovate our solutions and add more value beyond our products in terms of delivering services. So today, I will focus more on the differentiated products and give an overview of those, but first, let's take a look at the fourth quarter.As Lars already explained, the Yara Crop Nutrition EBITDA, excluding special items, improved by 14% from fourth quarter last year. And as was said, that was mainly due to the positive contribution from our Babrala acquisition in India. Deliveries were up 2% from last year, but this is entirely due to our acquisitions in India; and Brazil, the Cubatão asset. Underlying deliveries decreased 7%, mainly due to a 13% drop in deliveries in Europe and a 5% drop in Brazil. The development in Europe reflects a combination of production outages, especially for nitrates, but I would say even more so a weaker market, with the total industry nitrogen deliveries being down as much as 17% while the drop in Brazil was more by design where we decided to step out of some commodity sales as those were giving unsatisfactory margins. And as such, the result overall in Brazil has been better compared to last year.In the 2 charts to the right, we have split products into commodities and several layers of premium products. If we look at the volume chart in the middle. The gray color represents commodities, with a drop mainly due to the blends in Brazil. The blue represents differentiated N. Practically speaking, that's our nitrates and amidas. Amidas is urea plus sulfur, where the drop in nitrate sales can be seen. And the green, premium NPK, is our compound NPK. High-value premium, the orange color, is our calcium nitrate and fertigation products. Last but not least, we have YaraVita, which is our micronutrient portfolio. They are not included in the volume chart because we sell them in small quantities, actually in liters, but as you will see, they are later coming in the value chart.And as illustrated in the graph to the right, our revenues increased by 12% from a year ago or by 5% if we exclude the acquisition effects. That means that realized price increase for most of our product groups while the high-value premium revenues were slightly down from a year ago due to lower sales of fertigation in Asia and Brazil. Our realized nitrate premium were up per tonne from last year, and our NPK premiums were slightly lower than a year ago per tonne.In order to deliver on the aspiration of being the crop nutrition company for the future, we are selling, as mentioned, solutions to farmers to maximize their profitability. And that's where our offering of premium products are required. The growth is therefore really focused towards growing our premium products. And we build solutions combining the products, the knowledge and the services. And this is also where our more than 800 agronomists around the world are there to create demand for our premium products. And as you can see from the graph, the growth in the core premium products, by far, exceeds the overall growth of the Yara volume. Total deliveries increased by 7% from 2015 to 2018, while the increase for NPK, high-value premium and YaraVita were, respectively, 24%, 15% and 55%. In the same period, the global market for NP&K (sic) [ NPK ] increased approximately 4%, which means 1% annual growth.The value of growing the premium products is measured by comparing the premiums on top of commodities. In 2018, our NPK and high-value premium products, including YaraVita, generated premiums more than $1 billion above the commodity alternative. And we think these premiums can be sustained because they are based on delivering real, factual benefits to the farmers. Obviously, the relative growth in premium products will decrease volatility and reduce the impact of global commodity prices. So that means that also the focus going forward is very much about identifying those segments where we can deliver a value beyond the commodity value and grow those segments that have a higher growth than general in the marketplace. Such segments could be like our micronutrients and fertigation that, respectively, grow around 8% annually in the market.So let's take a closer look at our YaraVita. That's, again, the micronutrients that we sell, that we are talking about roughly 13 nutrients that are needed in order to give a balanced nutrition. And this is where we can combine both our global footprint but also very much our agronomic competence because these products, they require more of a technical sale. So while our normal feed -- field-grade premium products are targeted more towards what we call the higher-value crops, typically fruit, vegetables, coffee, et cetera, the YaraVita range is also applied in very much the more, call it, commodity or extensive crops like rice, soya, et cetera. And that gives us an opportunity to grow this product range faster and better than the other premium products. These products are relatively low in volume but high in revenue and hence focusing only on volume alone may not give the sufficient and accurate measurement of Yara's top line going forward. As an example, 2018, the total contribution from the YaraVita range was around $80 million or 2% of Yara's contribution. And we have an expected growth of -- over the next 5 years of 18% annually. So with that, I will hand over again to Svein Tore, who will give the closing remarks.

[Svein Tore Holsether, President & CEO]

Thank you, Terje.I want to round off then with a few summary of Yara's -- few remarks on this -- prospects for Yara going forward.First of all, we believe that we have attractive industry fundamentals, where a growing population as well as resource and environment challenges are creating business opportunities for Yara. In addition, the market cycle is improving and is likely to stay positive for some time. Supply growth pressure is easing this year, and the demand side also looks positive given the tightening situation for grains.As mentioned earlier, our cash flow is set to improve, partly as a result of the cyclical improvement but more importantly due to our CapEx having peaked and our growth and improvement programs delivering higher volumes and revenues into 2019.Finally, we have a focused and sustainable long-term strategy in place to further advance operational improvements, innovative growth, scalable solutions and also active portfolio management. And we consider these prospects attractive and compelling and intend to lay all these out in more detail at our Capital Markets Day on 26th of June, which will be held in London. We will revert with more details as we get nearer in time, but please do take note of the date now.With this closing summary, I'd like to hand back to Thor, who will coordinate the Q&A session.Thank you.

[Thor Giæver, Head of Investor Relations]

Thank you, Svein Tore. We are then just about ready for the Q&A, so if you have a question, my colleague, Nina Kleiv, will bring the microphone to you. Shall we start with Nordea?

[Hans-Erik Jacobsen]

Hans-Erik Jacobsen, Nordea. With regard to the nitrates sales, as you mentioned, they were quite slow in the quarter. Is that due to high prices compared to competing products and your competitors? Or are there any other reasons for the slow sales? Could you also comment on what you expect the total sales on nitrates is going to be in Europe this season compared to last one?

[Terje Knutsen, Executive Vice President of Sales & Marketing]

So I think this is something which has been across the -- all the players in the market. As mentioned, the consumption of nitrogen in Europe has been down 17% in fourth quarter. We have actually gained market share, which is an indication that we have been able to sell equally as others. So I would say, fourth quarter has typically been a very slow quarter. For this season as such, nitrates is down roughly 10% season-to-date. That means that there is quite a lot of markets still to be covered in Europe going into Q1. And obviously, right now with the snow and cold weather, it's always a very interesting period of time. Whether we get an early spring or a later spring, this can change 3 weeks from now and then suddenly Europe is in full speed again. So -- but there is no doubt that quarter 4 was a slow quarter for the whole industry in Europe.

[Thor Giæver, Head of Investor Relations]

Should we go and try DNB next?

[Eivind Sars Veddeng, Analyst]

Eivind Veddeng, DNB Markets. Just a question on Slide 29, where you elaborate on the EBITDA from new projects. You take down 2019 to $330 million from $450 million, and you take down 2018 realized from $150 million to $140 million. To my understanding, this is, as we said, it's mostly due to Freeport but also Köping, but as Freeport is a $70 million [ guide, I think ], for 2018, how -- and it has been down. Or using it have been producing at reduced operating rates for -- throughout 2018. How can the effect in 2018 be so low and the 2019 effect be so high?

[Lars Røsæg, Executive VP & CFO]

Yes -- no. You are correct that there are effects from Freeport and also from Köping. And there are also effects from some of the other project, and amongst those, there is a significant effect from the ramp-up in Porsgrunn, which is then driven by market dynamics and allocation of product.

[Eivind Sars Veddeng, Analyst]

Okay, so it's Freeport, Köping and Porsgrunn.

[Lars Røsæg, Executive VP & CFO]

Yes.

[Thor Giæver, Head of Investor Relations]

Do we have a next question? Yes. Let's go to ABG.

[Bengt Jonassen, Lead Analyst]

Yes. Bengt from ABG. To the -- back to the Freeport ramp-up. When you decided on the project, you decided on nonconventional technology. So is the ramp-up -- is it related to the technology not working? Or is it more of a technical issue that can and will be sorted out in the short term? Question number two, on the TAN write-down, what is the book value post write-down? And any plans to start the plant? And the third point, more from a strategic discussion, the high growth in your value-added segments plus 5%, 6%, 7% annually and even 18% annually in a 2% growing [ end ] market. There must be someone on the losing end of that. Where do you see the losers? And could it potentially also impact your upgrading margin in the long term for other product like nitrates and NPKs?

[Svein Tore Holsether, President & CEO]

Okay, I'll address the first one on Freeport. So yes, it's a different setup than the commercial ammonia. Plus the technology works, so this has -- as you also indicated, it could be on the technical side. So we've had some issues with first compressors and some pumps, but this is more of a technical nature. And we expect to resolve these in the coming months so that we will be up to full capacity utilization at our Freeport facility in second quarter or during second quarter.

[Thor Giæver, Head of Investor Relations]

And then TAN, Lars?

[Lars Røsæg, Executive VP & CFO]

Yes. On the TAN plant, the remaining carrying value is $340 million.

[Terje Knutsen, Executive Vice President of Sales & Marketing]

So on the growth rate of premium products, I think the loser here are the commodity products. We see a situation where the overall growth and also farmer profitability is under pressure, so there is a demand to see how they can improve their productivity and thereby their profitability. But I think the loser here is the commodities. We can use Brazil as the example. When we took over Bunge, we basically took over a complete commodity machine. We have been growing fast and converted those commodity tonnes to premium product tonnes. And we do think that there are huge opportunities to continue to shift basically more of the commodity tonnes to more of premium tonnes. In terms of do we think we can sustain that profitability and that margin, this is where I think the uniqueness of our knowledge and our competence comes in. We need to be sure that we can not only provide fewer products but truly provide the solution for those farmers. That means we need to know their crop. We need to know how we can drive the productivity, and we need to combine it with services. This is, among others, why we are so focused now on digital solutions. More and more goes into precision farming, and we need to be the player in contributing there as well with our digital solutions. So we think that we will be able to carry forward those margin and continue the growth.

[Thor Giæver, Head of Investor Relations]

More questions from the audience? If there are no -- yes, there's another one from ABG.

[Bengt Jonassen, Lead Analyst]

I had one question on the TAN. Is there a plan to start it up? And then follow-up on the carrying value is a $15 million write-down. Is that the cost of keeping the plant out of business for 1 year?

[Svein Tore Holsether, President & CEO]

So with regards to your first question. Our plans are definitely to start it up, but we've had a number of technical issues with this plant which requires quite extensive repairs which we are undertaking right now. And we'll get back with the exact start-up date. We will run campaigns to test it, but when it comes to stable 100% utilization, we still need some time to get a full overview of the repairs needed then.

[Lars Røsæg, Executive VP & CFO]

Yes. And when it comes to the annual effect, the write-down, it's reflecting an assessment of the impairment need relative to IFRS and as such, it's not directly related to that but to reflect the delays.

[Thor Giæver, Head of Investor Relations]

Are there more questions? There will be another opportunity in our conference call at 2 p.m. Oslo time today. And of course, we are open for business generally. If there are other questions, just give us a call, but with that, thank you for attending the presentation today and for your interest in Yara.