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Edited Transcript of YAR.OL earnings conference call or presentation 18-Oct-19 7:30am GMT

Q3 2019 Yara International ASA Earnings Presentation

Oslo Oct 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Yara International ASA earnings conference call or presentation Friday, October 18, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Lars Røsæg

Yara International ASA - Executive VP & CFO

* Svein Tore Holsether

Yara International ASA - President & CEO

* Terje Knutsen

Yara International ASA - EVP of Sales & Marketing

* Thor Giæver

Yara International ASA - Head of IR

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Conference Call Participants

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* Petter Nyström

ABG Sundal Collier Holding ASA, Research Division - Lead Analyst

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Presentation

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Thor Giæver, Yara International ASA - Head of IR [1]

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Okay. Good morning, and welcome to the presentation of Yara's third quarter results. Our presentation today is by our CEO, Svein Tore Holsether; CFO, Lars Røsæg; and EVP Sales and Marketing, Terje Knutsen. And we'll have a Q&A after the presentation. And I now then hand over to Svein Tore Holsether.

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Svein Tore Holsether, Yara International ASA - President & CEO [2]

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Thank you very much, Thor. And good morning to all of you. Before we go into the presentation, I want to give my overall reflection on the quarter, which is that Yara is delivering on its parts operationally with higher production, reliability and also energy efficiency, commercially with strong premium product sales and realized prices. And this is improving Sales and Marketing's EBITDA per tonne. And as a result of this, results continue to improve.

So now I'll go straight to the result. And as always, we start with safety. Very pleased to have established an industry-leading TRI rate in the last year. We have now reached a level where we have to accept that we cannot improve further each and every month. I'm pleased to see that the severity level of the injuries we've had this year are at a lower level than last year. We believe that we can ultimately get to our 0 target on injuries, and we will continue to push towards this goal, and we do this through our paid by choice weight.

Now let's take a look at our financial results. EBITDA, excluding special items and IFRS 16 is up 49% year-over-year. This reflects lower energy costs, strong premium deliveries and higher production in the quarter. We also saw a strong earnings improvement in the new business area.

Our earnings are on an improving trend. And as you can see on the -- on your left-hand side, so -- our capital returns, but further improvement is needed in order to generate satisfactory returns and achieving this is top priority at Yara.

Volume-wise, our total third quarter deliveries were down 5% to 9.8 million tonnes. However, we saw a positive mix effect on EBITDA as deliveries were up for NPKs and other high-margin products. The lower deliveries were mainly within commodity products where margins are lower.

We saw strong nitrate deliveries, still somewhat lower compared with a record high third quarter for 2018.

Before we go further into the result, let me provide some comment on market developments this quarter, starting with production cost. Gas prices in Europe were down 55% compared to the year earlier. And U.S. gas prices were down 23%. Nitrogen prices were stable, and it's fundamentally positive that prices in most locations have moved to a level where Chinese exports are increasingly in demand globally.

Yara's realized nitrate and NPK prices were also higher, both in absolute terms and in terms of premium as compared with urea and other commodity fertilizers.

The publication prices on the chart that you see here are lagged by 1 month to better reflect that -- Yara's P&L, where deliveries are -- that are made today -- typically are made at roughly 1 month earlier.

Even if they have not yet reached a satisfactory return level, we are pleased with the annual level, improving. Perhaps this is our highest third quarter result in 5 years, and our return on invested capital has improved for the last 5 quarters.

I'd now like to hand over to our CFO, who'll take you through our financial performance in more detail, and after this, it would be Sales and Marketing, Terje Knutsen will provide an update on our commercial activities. So over to you, Lars.

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Lars Røsæg, Yara International ASA - Executive VP & CFO [3]

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Thank you, Svein Tore. Good morning, all. Let me start by looking a bit at the key numbers. EBITDA, excluding special items, was at $630 million, representing an improvement of roughly 50% when we also adjust for IFRS. The underlying EPS improved significantly in the quarter, but the reported EPS was down in the quarter. That was driven by 2 main effects compared to the underlying, number one is special items, where we have a potential misinterpretation of an energy tax in one of our larger sites, which we have made a provision for, return back to the past 5 years of a total of between -- of $35 million. In addition, we have a negative effect on our USD loans, which are consolidated into a NOK entity when the dollar strengthens. The EBITDA growth was also the main driver behind the increased cash flow from operations landing at $285 million, which is significantly higher than a year ago and also positive net of investments.

As communicated, we have a significantly reduced investment activity as our focus is on ramping up current investments, and CapEx at the end of the year was up $750 million.

The increase in earnings and in capital return is positive. However, we are still well below our mid-cycle target of above 10% return on invested capital. The rolling 12-month return is at a little bit north of 6%, while the return in the quarter is just north of 8%, supporting the path towards that mid-cycle target.

If we look at the bridge, lower energy cost was a significant driver for the EBITDA improvement compared to a year earlier. And an improved mix in line with our strategy, prioritizing value over volume, provided a positive volume mix effect and better margins then also contributed to the net increase in EBITDA.

The energy cost decrease was in line with the Q2 guidance, driven by lower energy prices in Europe compared to last year. The other includes the IFRS 16 effect of the $29 million as well as certain negative portfolio effects from operations that had a contribution which was positive last year, and then we should remind ourselves that the Galvani transaction was closed in the third quarter on the 10th of July.

If we then move on to look at the different segments, there was a profit growth as expected in production, driven by the European upgrading margins with improved reliability as well as a positive contribution from growth projects compared to last year. The Sales and Marketing segment, which is less cyclical, was up compared to last year, and Terje will shortly provide more comments related to Sales and Marketing.

We saw a broad-based improvement across all business lines in New Business, with volume increased for AdBlue in both Europe and North America as well as higher margins mainly within Mining Applications, and maritime contributed a significant share to the result improvement in the quarter. The evaluation of an IPO scope is ongoing, in line with the previously communicated time line.

In accordance with the extended improvement program, which we launched at the Capital Markets Day in June. Underlying production performance increased 470,000 tonnes versus 2018, driven by increased finished product output and improved reliability relative to 2018. Of course with current operating margins, improved reliability being a key factor. Then as we can see from the past, output will vary on a quarterly basis around the positive long-term improvement trends. Our main focus is on turnaround performance, further reliability improvements and growth project execution.

The ammonia energy efficiency saw a positive development during the quarter and this, of course, supports our strategic targets on reduced greenhouse gas emission. The fixed cost trend remains flat in line with the announced target of beating inflation by around $300 million by 2023. And the overall payroll cost was at around $280 million in the quarter, which is actually the lowest level since the fourth quarter of 2017.

Working capital increased in the quarter on a rolling basis, both seasonally and in this quarter in particular, driven by deliberate commercial management of inventory levels relative to pricing in an environment with favorable operating margins.

In the quarter in isolation, the increase in working capital is driven by seasonal patents in Brazil, which is in line with the development last year and also timing of gas subsidy payments in India.

Our committed CapEx levels are unchanged in line with the communication at the Capital Markets Day. But although capital expenditures, as of the third quarter, is up $750 million, we maintain the commitment estimate of $1.3 billion for the year as CapEx is normally significantly higher in the fourth quarter than in the average quarter.

As you can see and as we've discussed before, our investment spend is significantly reduced in 2019 and 2020 as our growth projects reach completion and strict capital allocation rules are enforced for any new proposals.

Currently, we have 3 major growth projects still under execution, which is Sluiskil in the Netherlands, with completion in the second half of 2019, Salitre with completion of the first phase in the first half of 2020 and Rio Grande with completion by the end of 2020 as previously communicated.

Cash earnings in the quarter trended, both investments and the increased operating capital, leaving net debt slightly down from the second quarter and below $4 billion. The net debt/EBITDA ended at 1.9 at the end of the third quarter down from 2.5 at the end of 2018 and 2.2 by the end of the second quarter. As such, Q3 is the first quarter where Yara is in -- within its targeted range of 1.5 to 2. And reminding them from the Capital Markets Day, our revised capital structure target is a mid- to long-term net debt/EBITDA range on 1.5 to 2 and a net debt equity ratio below 0.6.

As you may have seen from our separate stock exchange release this morning, in line with this new policy, we are also announcing a share buyback program for the fourth quarter, targeting to buy back approximately 0.8% of outstanding shares, including the redemption from the Norwegian states. Adjusting for this buyback, net debt/EBITDA at the end of Q3 would be close up to 2x. As previously announced, the current improving market fundamentals, combined with Yara's extended improvement program and increased hurdle rate for new investments, may lead to increased dividend capacity beyond the ordinary payout ratio going forward. And with that, I hand over to Terje Knutsen for the commercial.

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Terje Knutsen, Yara International ASA - EVP of Sales & Marketing [4]

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Thank you, Lars, and good morning to all of you. Our Sales and Marketing deliveries decreased 7%, mainly due to reduced sales of commodities in Brazil and also some lower deliveries of industrial urea in Europe. Premium products deliveries were in line with last year as growth in Brazil offset lower deliveries in Europe and Asia.

Overall, we consider the premium deliveries strong mainly due to the NPK deliveries. And although nitrate deliveries were somewhat lower, this is compared with a record-high delivery last year.

Despite lower deliveries, EBITDA increased with -- 33% from third quarter 2018, reflecting lower fixed costs and margin improvements which more than offset the lower deliveries. And as you saw earlier in the presentation, prices were up both for NPKs and nitrates. And in premium terms, the performance is even stronger since comparable commodity reference, prices are lower compared to a year earlier.

Let me then quickly go through some of the regional developments. The season in Europe started really well, but not unexpectedly, demand slowed towards the end of the quarter following the negative price trend in global commodity nitrogen markets. But that is at the time where fertilizer application still is 6 to 9 months away. And despite that slow market in September, Yara's nitrate and NPK deliveries for the quarter were roughly in line with a year ago, while nitrogen deliveries in Europe for the industry as a whole was down 8%.

Growth for our premium products continue in Brazil, while the development in several other key premium product markets in Asia and Latin America has been somewhat muted in the quarter compared to a year ago. And that is due to a combination of challenging ag fundamentals and also unfavorable climate conditions typically related to water availability, and that has had a short-term impact on deliveries in several markets.

Despite these short-term setbacks in some markets, total premium product deliveries were for the quarter in line with last year, as already mentioned. And over the last 12 months, we have been able to increase the premium deliveries with almost 0.5 million tonnes. And as you can see, we also continue to grow our deliveries of the YaraVita product range at a high speed. And for those of you that do not follow us that closely, YaraVita is our micronutrient range for either foliar application or applied as a coated -- as a coating on solid fertilizer, a high-margin range, knowledge-intensive solution.

So all in all, we are very confident that our strategic direction is right and also that our medium- to long-term targets that we communicated at our Capital Markets Day remain. And as Svein Tore noted at the start of the presentation, we are delivering our targets within Sales and Marketing, with strong premium product sales and realized prices, thereby improving EBITDA per tonne. And then I will hand back to Svein Tore, who will give his closing remarks.

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Svein Tore Holsether, Yara International ASA - President & CEO [5]

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Well, thank you very much, Terje. Wrapping up then. We continue to consider our prospects attractive. Firstly, the industry fundamentals. So we're a growing population and agricultures and environmental and resource challenges create business opportunities for Yara. Better crop nutrition solutions play a key role in responding to volatile challenges.

In addition, the market cycle is improving with supply-side pressure easing, while demand fundamentals are positive due to a tightening situation for (inaudible). Our cash flow is set to improve both due to the cyclical improvement and that our CapEx is declining significantly, while our improvement program delivers higher volumes and revenues. And finally, we have a strong competitive position with a focus on sustainable long-term strategy to deliver improved sales.

As you may have seen, we launched our long-term targets to fulfill our strategy this summer. And as mentioned at the start of the presentation, we are delivering on these parts. And I hope you've seen this as well, as you know I have been through the results for the third quarter. Again, I would like to highlight that operational improvement with higher production reliability and energy efficiency, commercial and margin performance with strong premium product sales and realized prices, improving Sales and Marketing EBITDA per tonne. And as a result of this, our returns continuously improve.

I want to leave you with some recent examples of food chain initiatives. Improving the environmental footprint of agriculture is a top priority globally, and we are connecting with more and more companies along with the whole value chain to achieve this. We are collaborating with Nel to produce hydrogen with renewable energy, and our cooperation with Swedish Lantmännen leads the way towards the world's first certified fossil-free future.

We're also have several order multinational food chain projects with some of the biggest players in the industry. So with these closing remarks, I'll hand you over to Thor, who will coordinate the Q&A.

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Questions and Answers

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Thor Giæver, Yara International ASA - Head of IR [1]

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Okay. We are ready then for the Q&A. (Operator Instructions) Is there a first question we can kick off with? Yes, we go to ABG.

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Petter Nyström, ABG Sundal Collier Holding ASA, Research Division - Lead Analyst [2]

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Petter Nyström from ABG. The volume reduction within other and Brazil is that related to the Galvani transaction? And how much is -- how much volumes of that is related to those deliveries? And if we look at realized prices for NPK, given the significant price fall within phosphates, can you please have a comment on that? And also finally, how does the order book look it through Q4?

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Lars Røsæg, Yara International ASA - Executive VP & CFO [3]

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Yes. If I start briefly on the other, a main effect on the negative there as oppose to the positive on IFRS is related then to sales and profit from those assets in the third quarter last year, which gives you a delta. In total, when you also look at the notes of our report, you will see that the other items are actually lower than they were last year. When it comes more on the market question, I'll leave that for Terje.

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Terje Knutsen, Yara International ASA - EVP of Sales & Marketing [4]

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Yes. I think first it is important that we are with our NPKs primarily in market segments that are less exposed to the pure commodity pricing. So that means that we have more stability in the NPK price than I think many of our competitors. That is also due to the fact that we are much deeper in the market. And typically, you would have less of the swings when we operate as far out as we do. However over time, obviously we are exposed to the commodity prices and we would most likely see some more alignment. But I would stress that we are in many market segments that have much less price elasticity than typical commodity segment. And that's why we see the benefit in a phase like now when NPK is more volatile that we are able to sustain and keep margins. I that is a reflection of all the work we do in positioning ourselves deeper in the value chain.

Yes. And then it was the order book. First, I would say we are very pleased with how the European season started. I think we hit well on pricing. We got good traction. It's very natural that we have a falling off a bit now when price -- commodity prices have been more on the downward trend. There is substantial market left in Europe, urea has not yet come in with strong volumes. That means that we foresee that we will have a normal season in Europe, whether that will come exactly in Q4 or early Q1, that still remains to be seen. That's something we play by the week, but we are confident on where we are presently. We have maintained market share in Europe and consider that the season will evolve normally.

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Thor Giæver, Yara International ASA - Head of IR [5]

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More question from the audience. If not, there is another opportunity at 2 p.m. Oslo time today when we have the conference call.

With that, thanks for joining today at (inaudible). Thanks for joining the presentation.