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Edited Transcript of YAR.OL earnings conference call or presentation 16-Jul-19 12:00pm GMT

Q2 2019 Yara International ASA Earnings Call

Oslo Jul 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Yara International ASA earnings conference call or presentation Tuesday, July 16, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dag Tore Mo

Yara International ASA - Head of Market Intelligence

* 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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* Andrew Gregory Stott

UBS Investment Bank, Research Division - MD and Research Analyst

* Bengt Jonassen

ABG Sundal Collier Holding ASA, Research Division - Lead Analyst

* Chetan Udeshi

JP Morgan Chase & Co, Research Division - Research Analyst

* Christian Faitz

Kepler Cheuvreux, Research Division - Equity Analyst

* Eivind Sars Veddeng

DNB Markets, Research Division - Analyst

* Lisa Hortense Maria De Neve

Morgan Stanley, Research Division - Research Associate

* Robin Fiedler

BMO Capital Markets Equity Research - Senior Associate

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Presentation

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Lars Røsæg, Yara International ASA - Executive VP & CFO [1]

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Good morning, good afternoon, everyone, and welcome to the Yara Q2 Investor Call. Thank you very much for dialing in. My name is Lars Røsæg. I'm the CFO of Yara International. And I'm joined here by Thor Giæver from Investor Relations; Dag Mo from our Market Intelligence Department; and the EVP of Yara Sales and Marketing, Terje Knutsen.

I'm sure most -- all of you have seen our report and presentation from this morning, so I'll limit my opening comments.

Our EBITDA excluding special items in IFRS 16 increased by 62% in the quarter, and the improvement was largely due to higher production and lower energy cost and also improvement in deliveries from Yara own-produced products and premium products in line with our strategy.

Our return on invested capital was at 5.4% on a rolling 12-month basis and actually exceeded 7% in the quarter. This needs further improvement, but it is trending upwards as our operating cash flow is improving, while our capital expenditure is declining. We remain focused on improving returns through strict capital discipline and driving operational excellence.

With these introductory remarks, we are ready for the Q&A. So operator, can you please now open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Joel Jackson from BMO Capital Markets.

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Robin Fiedler, BMO Capital Markets Equity Research - Senior Associate [2]

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This is Robin on for Joel. I had a couple with respect to the potential industrial nitrogen IPO. So the first is what percentage of the nitrogen production facilities are solely focused on industrial production? And for those that are mixed, what are the likely steps to be taken to enable the industrial separation?

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

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Yes. Thank you for that question. As we announced at our Capital Markets Day, we are now entering an evaluation phase when it comes to the potential IPO of industrial assets and we aim to conclude that at the start of 2020. These are, of course, very crucial questions in that process to ensure that we find the structures that are the most value creating to Yara, also of course reflecting the carve-out perspective that we need to take into that consideration. So we are in that phase now, and we will need to and would like to use the time to do that in a thorough manner before we are more conclusive on that. What we have said on sort of the indicative scope is that it is in the ballpark of 10% to 15% of Yara EBITDA.

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Robin Fiedler, BMO Capital Markets Equity Research - Senior Associate [4]

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Okay. And just a follow-up to that. Can you talk about the potential for dissynergies from less scale if you sell the Industrial segment and maybe talk about any potential positive offsets from -- maybe from being a more specialized and actually an ag play? How should we think about that?

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Lars Røsæg, Yara International ASA - Executive VP & CFO [5]

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Yes. No. Our starting point here is that it is a natural evolution of our strategy at the Crop Nutrition Company for the future, and we think that this is a very interesting opportunity for value creation through creating a leading nitrogen-based company.

When it comes to exactly the phase that we're now entering on scoping, that is about ensuring that we find the right solutions and the right trade-offs in ensuring that we optimize all perspectives of that value creation, of course, also taking into account potential dissynergies.

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Robin Fiedler, BMO Capital Markets Equity Research - Senior Associate [6]

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Okay. And just one last question, more of a modeling question. Will the sensitivity table get updated or is it unchanged?

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Lars Røsæg, Yara International ASA - Executive VP & CFO [7]

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Yes. Currently, we are entering that scoping phase, means that Yara is today what Yara is, and I think that that would be a question that would naturally follow from being through that scoping phase.

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Robin Fiedler, BMO Capital Markets Equity Research - Senior Associate [8]

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Sorry, I meant the sensitivity table that is typically updated every quarter, is that going to be -- it doesn't seem to be changed from Q1. Is that going to be changed?

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Thor Giæver, Yara International ASA - Head of IR [9]

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Yes. Okay. So this is Thor here from IR. You're asking -- this is not linked to the IPO, right? You're just asking on whether we're updating our sensitivities? And the answer is, we do have a quarterly checkpoint on that. It's not -- we actually do it based on the last 12 months rolling production. So for example, when we introduce a new plant or an expansion, we don't sort of immediately bring in the full effect, we actually bring it in gradually, really to avoid, if you like, overestimation at the point in time when a plant like that comes in. So the answer is, we do it continually, but it's not based on start-up dates, it's based on actual production.

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Operator [10]

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Our next question comes from the line of Christian Faitz from Kepler Cheuvreux.

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Christian Faitz, Kepler Cheuvreux, Research Division - Equity Analyst [11]

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It's Christian from Kepler Cheuvreux. Lars and Thor, just 2 quick questions, please. First of all, would you believe still high upgrade in margins are sustainable if and when the straight fertilizer prices keep on rising? And then second, why are your feedstock costs stable in Q2 with, obviously, admittedly higher production volumes, but at the same time, gas prices on a spot base at least were significantly down. Can you explain that?

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Thor Giæver, Yara International ASA - Head of IR [12]

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Christian, would you -- I'm not sure we entirely caught both questions. Would you mind speaking up a little and repeating both of them.

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Christian Faitz, Kepler Cheuvreux, Research Division - Equity Analyst [13]

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All right. So I'm trying to be as close to the mic as possible. So first of all, would you believe these still high upgrade in margins you're enjoying are sustainable if and when the straight fertilizer prices keep on rising? And then the second question is, looking at your feedstock costs, which are stable in Q2, with obviously, yes, higher production volumes, but at the same time gas prices on a spot base at least were significantly down. I'm just trying to get my head around that stability of your feedstock costs at around $2.4 billion or so?

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Thor Giæver, Yara International ASA - Head of IR [14]

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Thanks, Christian. Really, that was much clearer. We've heard you now and we'll embark on the answers.

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Lars Røsæg, Yara International ASA - Executive VP & CFO [15]

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So I can start with the upgrade in margins. Obviously, we look at the starting point with the different, let's say, commodity nutrients, but also very important is to look at the crop segments that we are serving. So I think very much will depend on, let's say, how healthy the ag market is in terms of the crop prices and return for the farmers. We price our product very much depending on the benefit that we are able to create for the farmers and try as much as we can to disconnect from basically more cost-plus kind of thinking. We are, particularly for the NPK, in a big variety of higher value crops that gives stability and it gives us also a certain hedge. I think there we have seen over quite some time now that we are able to keep and partly grow the premium margin. The same, I would say, in most of the overseas markets for the other premium products. When it comes to Europe and our nitrate market, I think that depends on partly the competitive landscape and partly the, let's say, how healthy the farm economy is in Europe.

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Thor Giæver, Yara International ASA - Head of IR [16]

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Now the second -- Christian, your second question was about feedstock prices. Was it linked to the first one? I'm not quite sure I got it 100%.

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Christian Faitz, Kepler Cheuvreux, Research Division - Equity Analyst [17]

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Yes. If I look at your cost position in the P&L, your cost of controls essentially, which is at roughly $2.5 billion, it hasn't really changed versus Q2 level '18, for example. It had just been up on the Q1 level, admittedly, obviously, you have -- you're working for higher volumes, but at the same time, gas prices has been significantly down, which I would believe is a good part of that cost. So why is it stable and not down? That's the question.

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Thor Giæver, Yara International ASA - Head of IR [18]

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Yes. And I think this is one -- we can probably circle back on this one after the call as well, Christian, but I think the short version is that Yara's cost of sales, energy cost is actually not the largest component. There are lots of other moving parts in it and, for example, the fact that the major part of our business in Brazil, even though we are growing our premium product, still the largest part there is blend products where we are most of the time buying raw materials externally. And they can be finished products like urea, DAP, MOP. And so this is actually quite -- they're quite lots of other expense categories in this line. So certainly understand the question, but it's important to differentiate between, if you like, Yara's P&L and a urea cash cost calculator, where of course, 80-roughly percent of the cost is gas. In Yara's case, if I remember right, it's well below 20% that's gas. But happy to circle back on that one offline, Christian.

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Lars Røsæg, Yara International ASA - Executive VP & CFO [19]

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And then we can perhaps just briefly add that compared to spot prices, we have an average lag of 1 month into our costs on gas.

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Operator [20]

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Our next question comes from the line of Andrew Stott from UBS.

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Andrew Gregory Stott, UBS Investment Bank, Research Division - MD and Research Analyst [21]

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Couple actually, please. So first of all, I was quite positively surprised by the volume leverage in the business for the 2% you talked about or 1% ex M&A. It looks like a big drop through from the volume you've actually produced year-on-year. I just wonder if you'd agree with that? Is there something specific in the mix perhaps this quarter? How do you think about the second half on that leverage? Maybe there's also some imprint from the efficiency programs, but just some color on that number that you provided in the bridge, which I think was $60 million EBITDA. That's the first question.

Second question is more of a market question. How are you feeling right now around the second half on Brazil and LatAm in general. I asked because it's -- at least from our side, it's being really choppy data from an import of view. So some really good months and some really bad months. It just seems especially volatile, the data. So just wondered how you see the market right now? I know it's early, but just any early feedback on order books, et cetera?

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Terje Knutsen, Yara International ASA - EVP of Sales & Marketing [22]

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Yes. So this is Terje Knutsen, maybe I can start with the increase of own-produced deliveries, which as we have announced, is 9% and actually goes across most of our product groups. I think it is an explicit strategy that we would like to go for value rather than volume. That means that we have actually decreased some of our third-party source commodities and tried as -- to grow and position our own-produced products. We have seen Europe, which was still off the Q1 slow compared to the normal season. So we have seen a pickup of some of our OPP products in Europe in second quarter. We have had a quite strong quarter in Brazil, partly if you compare with last quarter because of a transport strike that was hampering deliveries in second quarter 2018, but also due to the trade conflict between U.S. and China, where we have seen positive effect for our products in Brazil. So I think we have seen that we have been able to execute the strategy of growing OPP and growing premium products, which has grown 7% and deliberately and by design reduced some of the exposure to low value-generating commodities.

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Andrew Gregory Stott, UBS Investment Bank, Research Division - MD and Research Analyst [23]

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Okay. So I think from what you said, it sounds like they may be there for some slightly higher than normal leverage because you're playing catch up in Q2 on deliveries versus Q1. Is that the right interpretation of what you just said? Or are you saying, look, that's the level of leverage we now expect to see going forward?

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Terje Knutsen, Yara International ASA - EVP of Sales & Marketing [24]

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I think you will always find, let's say, quarter-to-quarter deviations particularly in Europe. So there it is important, I think, to have a view on season as such. But when it comes to our overall total growth rates, I think we can see that we have had a quite constant growth on a consolidated level. We have explained our targets for longer-term targets 2025, and I think that, again, illustrates a belief that we will be able to continue a fairly stable growth rate. This quarter might have seen slightly higher due to some of the effects described. But overall, I think we are quite confident that we are demonstrating an ability to grow steadily.

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Thor Giæver, Yara International ASA - Head of IR [25]

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And I think, Andrew, you were also asking how we were specifically seeing Brazil in the second half?

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Andrew Gregory Stott, UBS Investment Bank, Research Division - MD and Research Analyst [26]

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Yes, indeed. Just I know it's early days, just what you can see in the tea leaves right now would be useful?

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Terje Knutsen, Yara International ASA - EVP of Sales & Marketing [27]

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Yes. I don't think we are as such guiding into second half. But what we have mentioned around the trade conflict with U.S.-China, I think we can see that this is playing or bringing a positive element into the business in Brazil. There is a clear pool of products from Brazil. And obviously, we are now in [premium] into season as such in Brazil. So normally, Q3 is a strong or important quarter in Brazil. And yes, we see a positive environment in Brazil this year.

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Lars Røsæg, Yara International ASA - Executive VP & CFO [28]

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Yes, and maybe just adding to that thought on the working capital side. We, of course, have significant prepayments in Brazil in the second quarter. And although they are a little bit lower than they were last year, what we have seen historically is that there is no correlation between the size of the prepayments and the season as such. And should probably also add on the working capital that we also have an effect of somewhat higher receivables in India, it's a technical lag effect on gas price.

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Operator [29]

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Our next question comes from the line of Chetan Udeshi from JP Morgan.

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Chetan Udeshi, JP Morgan Chase & Co, Research Division - Research Analyst [30]

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I just had a question on the price element or price margin element in the bridge, which was just $5 million positive. And I look at your realized prices for CAN, urea, both were up and your NPK is up. So I'm just sort of wondering why did we not see a bigger positive impact on price margin line of the bridge?

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Thor Giæver, Yara International ASA - Head of IR [31]

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Yes. This is Thor. I'll make a try. I think the short version here is that -- I'm sure you like others have run the sensitivities that we provide and understand that you could have imagined the higher price margin this quarter based on observable prices. And I think this is something you should expect over time that those sensitivities give you more or less our price margin over time. But in an individual quarter, you can have other factors that play in short term because this is -- it's not just about our revenue points. It's linked to the whole margin including costs other than gas, which we identify separately. One example of a factor that has played in this quarter is when we had an unplanned stop in Pilbara. When you have planned maintenance, you can capitalize those costs. But you have an unplanned stop, you get extra costs that you can't capitalize. So that's one example. As I say, over time, you should have a good correlation, but in some quarters, including this one, you don't.

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Chetan Udeshi, JP Morgan Chase & Co, Research Division - Research Analyst [32]

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And just following up on that previous question on Brazil. It seems the -- all of the growth in deliveries has just come from Brazil, whereas most of the other reasons have seen volumes flat to down. So can you talk about what is happening in the rest of the regions? I mean like Europe is flat, Asia down 12% and LatAm ex Brazil is also down. So just the trends that you see outside of Brazil there, clearly as you pointed, maybe the trade war is helping the trade flows move from other regions to Brazil?

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Terje Knutsen, Yara International ASA - EVP of Sales & Marketing [33]

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Yes. So this is Terje. As we tried to explain also this morning, there is quite some volume mix or product mix changes. So if we start with Europe, we have seen a not unexpected catching up on nitrates. That means that we have had a quite considerable growth in the quarter of nitrates. Actually, if we take the core markets of Europe that was 12%, while other product groups like urea, which obviously for us also is a lower returning product group, has seen a clear decline.

We have also seen decline in NPKs, which we consider, if you like, positive because that means that the NPK season has maybe not started as quick as it did last year. And therefore, there is more market to be expected. So Europe is really a mix of pluses and minuses. And in total, the volume comes out as basically a 0 change. But as you can see from the graph in the presentation, there is a certain increase of premium and there is a decrease on commodity.

North America, I think we are actually fairly satisfied with having a stable market because as you are aware, there has been very bad weather conditions in the U.S. And many of the players have struggled to be able to deliver out the product. We have had a strong season from our Belle Plaine facility on urea, and we are keeping up, I would say, fairly well our premium products even under very difficult weather conditions.

Where we have the biggest change is probably Latin America, where as we have said this morning, we have reduced deliberately our commodity sales. Those have been low yielding and return on capital limited, so we have chosen to prioritize that capital for other purposes, while we are keeping up and focusing and continuing to focus on the premium product range.

Yes, Africa has been positive. It's a small, as such, volume, but has been positive, supported by several trade sales into Africa in addition to the more domestic sales that we already do.

And in Asia, as also -- as we went through this morning, we have had a decline in urea trade volume. That's the main reason for the drop in Asia, while we have had a slight decrease on premium in China due to a somewhat tougher market environment, with again a lot of that weather-related in China. So it's a mix positive. But generally speaking, I think we can say that we have been able to grow the premium products and grow where we see the value, while we have given up some commodity positions in the quarter.

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Operator [34]

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(Operator Instructions) Our next question comes from the line of Christian Faitz again from Kepler Cheuvreux.

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Christian Faitz, Kepler Cheuvreux, Research Division - Equity Analyst [35]

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Just a quick follow-up. Can you remind us of tax rate for the remainder of this year? And on China, what currently do you see as -- in terms of exports coming out of China or how does that play a role? And on the export situation, can you also comment on what you see in terms of volumes coming out of Iran into various regions?

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Thor Giæver, Yara International ASA - Head of IR [36]

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Shall we take the China question first (inaudible)?

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Dag Tore Mo, Yara International ASA - Head of Market Intelligence [37]

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Yes. Well, as -- as we've said, there's been an increase in the Chinese exports this year. And it's from (inaudible) 10 million tonnes through May. And we now see that in the current India tender that there is quite a lot of -- almost 1.7 million tonnes. It will be sourced from China. So it is pretty clear that there will be an increase in the Chinese exports this year compared to the 2.4 million tonnes in 2018.

So I think it's not -- I don't think there's much point kind of just guessing at a annual figure at this stage. It depends on how the market will develop in the second half because it's going to be (inaudible) worlds that (inaudible) how much urea the world needs from China that will determine that number more so than availability from China. So that remains to be seen. And on Iran, it's like they are able to export large volumes and they put in more than 4 million tonnes in 2018. It will probably drop quite a bit. But they are -- I mean they are very active in Turkey, they are very active in Brazil. They are still really exporting through China, et cetera. So there will be a significant Iranian export volume also in 2019. Also that I think is difficult exactly at this stage to guess what that annual number will be precisely.

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Christian Faitz, Kepler Cheuvreux, Research Division - Equity Analyst [38]

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Okay. Great, Tore. Good to hear your voice.

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Operator [39]

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Our next question comes from the line of Bengt Jonassen from ABG Sundal Collier.

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Bengt Jonassen, ABG Sundal Collier Holding ASA, Research Division - Lead Analyst [40]

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I have one question for Director Mo as well and that's regarding the situation in India. At start of the year, I think several companies -- at least 2 companies said that they are commissioning new plants. But looking at actual production figures year-to-date, they are probably down around 4% or 0.5 million tonnes. Could you help give some flavor on what's happening on the ground there?

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Dag Tore Mo, Yara International ASA - Head of Market Intelligence [41]

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Yes, (inaudible) can also add. I mean if it's closer to our (inaudible) or commercial activity there. But my understanding is that there is 1 plant that they will commission, and I haven't heard any details whether -- how well it's running, but it -- at least it was finalized, the one plant. But then also several other plants have had problems, there have been an explosion at one plant, one plant was closed due to water supply issues because this was dry there, et cetera. So as you say, the overall production from India is actually down this year despite, at least on paper, capacity growth. Otherwise, on gas supply issues, I haven't seen much problems there. I mean LNG is cheap and not so complicated to get hold of. So yes, I agree. It is an interesting observation. But with the capacity increases in India, there actually production is going down (inaudible).

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Svein Tore Holsether, Yara International ASA - President & CEO [42]

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I can maybe just add that it's very difficult to get really good information in the sense that there seems to be a quite constant delay on connection to the gas for some of these plants, so they are basically, as far as we can understand,, ready for production, but there is no connected gas yet. And again, it's difficult to reach exactly where that situation stand. So I think it is connected with the uncertainty, when and how much will come into production.

From the market side, we can see clearly that there has been a sound demand, even though the monsoon has been somewhat delayed and somewhat lower than or less than they would hope for, we have seen fairly steady and strong demand growth on urea, which I guess was illustrated in the last tender they came with as well.

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Operator [43]

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(Operator Instructions) Our next question comes from the line of Eivind Sars Veddeng from DNB Markets.

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Eivind Sars Veddeng, DNB Markets, Research Division - Analyst [44]

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It's Eivind. Apologies if my questions have been answered. I just got pushed out of the call, but it relates to the dividend. Given that now volumes led to beat now in -- or better-than-expected results now in Q2, if it should very well be the case that your leverage drops below not only the 3.0, but of the 1.5 net interest-bearing debt EBITDA target. So my question is, I guess, would you consider extraordinary dividends already in 2019, if that should be the case?

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Lars Røsæg, Yara International ASA - Executive VP & CFO [45]

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Yes. It's Lars here. Thank you for that question. And as you know, the policy that we stated at the Capital Markets Day is kind of a mid to long-term net debt to EBITDA of 1.5 to 2 as a targeted capital structure. Unfortunately, we do not guide on our [years] as such as to your question. But what we have said today is that under the revised policy, the current improved market fundamentals combined with the extent of the improvement program and the increased hurdle rate for new investments may lead to increases in capacity beyond the ordinary payout ratio going forward.

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Operator [46]

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(Operator Instructions) Our next question comes from the line of Lisa De Neve from Morgan Stanley.

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Lisa Hortense Maria De Neve, Morgan Stanley, Research Division - Research Associate [47]

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Just a quick follow-up from the last question. In terms of broader like capital allocation, obviously, you've sort of come now to the finalization of your growth CapEx projects. But if you look a little bit beyond, what are sort of the ambitions in terms of internal CapEx? And where do you see opportunities to grow and expand geographically and product-wise?

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Lars Røsæg, Yara International ASA - Executive VP & CFO [48]

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Yes. So we have a significant number of projects now coming on stream and ramping up this year and next year. And that provides us with quite a few opportunities ramping us up capacity, and that is our primary focus. We're past the peak when it comes to expenditures and our primary focus now is really on successfully ramping up the ongoing projects and the -- that we have in the pipeline already ramping up.

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Operator [49]

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Our next question comes from the line of Joel Jackson (sic) [Robin Fiedler] from BMO Capital Markets.

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Robin Fiedler, BMO Capital Markets Equity Research - Senior Associate [50]

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So how are you guys thinking about Q3 earnings compared to Q2? You mentioned, obviously, that Q3 is a strong quarter for Brazil. Gas costs are lower. But there are some offsets like higher inventory levels in North America potentially creating a more competitive pricing dynamic. If you can just talk a little bit about those factors.

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Thor Giæver, Yara International ASA - Head of IR [51]

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Joel, this is Thor. I mean, we don't guide on financial results, as you know. I think the -- with the one exception that you've already mentioned that we provide some guidance on gas, so we've said based on the forward curve that we used last week a $160 million improvement year-on-year for our (inaudible) gas costs is the estimate. So yes, I think that's all we can say today. And of course, when we get nearer the time,, we're happy as always to kind of look through how the external variables have developed since then and check off that we're kind of on the same page there.

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Operator [52]

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(Operator Instructions) We don't have any further questions. Please proceed.

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Lars Røsæg, Yara International ASA - Executive VP & CFO [53]

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Okay. Thank you, operator. Then I think I'd just like to thank you all for participating, and wishing you a continued nice day. Thank you.

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Operator [54]

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Thank you. That concludes our conference for today. Thank you all for participating. You may all disconnect.