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Edited Transcript of YAR.OL earnings conference call or presentation 26-Apr-17 7:30am GMT

Thomson Reuters StreetEvents

Q1 2017 Yara International ASA Earnings Presentation

Oslo Apr 29, 2017 (Thomson StreetEvents) -- Edited Transcript of Yara International ASA earnings conference call or presentation Wednesday, April 26, 2017 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Dag Tore Mo

* Svein-Tore Holsether

Yara International ASA - CEO and President

* Thor Giæver

* Torgeir Kvidal

Yara International ASA - CFO and EVP

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Conference Call Participants

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* Anne Gjøen

Handelsbanken Capital Markets AB, Research Division - Research Analyst

* Bengt Jonassen

* Eirik Christian Melle

Danske Bank Markets Equity Research - Analyst

* Eivind Sars Veddeng

DNB Markets, Research Division - Analyst

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Presentation

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Thor Giæver, [1]

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Good morning, and welcome to Yara's First Quarter Results Presentation. Today's presentation will be by our CEO, Svein-Tore Holsether; and CFO, Torgeir Kvidal. And after this presentation we will hold a Q&A session. So I would then like to introduce Yara's CEO, Svein-Tore Holsether please.

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

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Thank you, Thor, and a very good morning to all of you. As usual, we will start with a look at our safety performance. And as -- this is always at the top of our agenda in Yara.

Yara must be a safe workplace for all our employees and contractors. A safe workplace is also a more productive workplace, providing further motivation to keep us moving towards our ultimate goal of 0 incidents.

We have seen an improvement in our TRI rate also during the first quarter, moving from a 12-month rolling average of 2.5 at the beginning -- at the end of last year to 2.3 at the end of first quarter. And this is our lowest level so far. But one thing is to look at the ratios. It's also very important to keep in mind that behind these figures are real people getting injured at work.

We had 28 recordable accidents in the first quarter, which is still way too much. However, we have improved significantly from 2015 and if we compare '15 to our performance now in the first quarter, we have reduced the number of accidents by half on a comparable basis.

But although our safety performance has improved, we do suffer from serious accidents and this is certainly not acceptable. And as most of you are probably aware, we suffered a serious process safety incident on Monday morning when a fire broke out at our ammonia unit at our plant in Porsgrunn in Norway. Thankfully, there were no personnel injuries as a result of this.

We are investigating the cause and material damage, but the damage is limited to the ammonia plant and the fertilizer plant at the site has the capability to produce based on imported ammonia and has already resumed operation.

It is too early to estimate the length of the ammonia plant stop, but we have insurance for property damage and business interruption, subject to a deductible of $13 million and 45 days of lost contribution.

Yara delivered weaker underlying results in the first quarter, reflecting lower realized prices and margins. We had increased productions and sales volumes, both for fertilizer and for industrial products. But our ammonia production was lower, underlining the need for ongoing efforts to improve operations.

Our Industrial segment delivered another strong result, with a cash return on gross investment, excluding special items of 29% for the quarter and 30% for the last 12 months.

The Yara Improvement Program is on track and has already delivered $90 million of the $500 million targeted of annual earnings improvement within 2020.

Yara's underlying earnings per share were 45% lower than last year and the decline mainly reflects lower realized prices and higher energy prices, which were only partly offset by stronger deliveries. Our reported earnings included a 585 -- NOK 584 million foreign exchange gain and NOK 119 million derivative loss.

The foreign exchange gain is due to Yara holding most of its debt in U.S. dollars, which have depreciated during the quarter.

Last year's reported earnings included a NOK 349 million foreign exchange gain and a small contract derivative gain.

As you can see, we had contrasting situations in ammonia and finished fertilizer production, which were respectively down 6% and up 4% for the quarter. Of the 120,000 ton reduction in ammonia production, 94,000 tons of this is due to reliability problems in the quarter. Of this, 85,000 tons were related to 2 plants: Pilbara in Australia and Le Havre in France.

The rollout of Yara's Improvement Program has not yet reached these plants, but the reliability problems we have experienced this quarter and also over the last 2 years demonstrate the need to strengthen our operations.

In contrast, the plants which have implemented our improvement program have had a clear positive development and I will come back to this a little later on in my presentation.

It is important to note that we're in the early stages of improving our portfolio of 30 production plants. While we are very pleased with the results of the rollout so far, we should expect reliability issues also in the foreseeable future as we work through our portfolio of plants.

Sustainable operational improvement across all plants will not be achieved overnight.

In Brazil, first quarter industry deliveries were up 4%, while Yara's deliveries were flat overall. However, Yara's premium fertilizer deliveries were up 8%, continuing our long-term growth trend and reaching now almost 1/3 of total Yara deliveries in Brazil. We will continue to focus on premium product growth in Brazil going forward, where the value creation per ton is significantly higher than in the broader Brazilian commodity fertilizer market.

Adjusted for the sale of the CO2 business in 2016, industrial deliveries were 17% higher than a year ago, with all products groups contributing. And deliveries of AdBlue were 19% higher. And as you can see here on the right-hand side, these sales have grown steadily over a long period of time now.

Since 2004, we have been at the forefront of the development of the AdBlue for the automotive sector, from heavy-duty trucks and buses to passenger cars and nonroad mobile machinery.

As the world's largest producer of AdBlue, our competitive advantage is based on product quality, guaranteed sourcing and reliable distribution through our large number of production plants and terminals.

And before I hand over to our CFO, Torgeir Kvidal, I would like to show a short video from Colombia about this business.

(presentation)

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Torgeir Kvidal, Yara International ASA - CFO and EVP [3]

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Good morning to all of you from me too. Our CEO has presented the highlights of the first quarter. It's -- I will then now provide you with some more detail of the financial performance of Yara in the first quarter.

Let me start with the development in our EBITDA and you may see here that our EBITDA this quarter was NOK 3,216,000,000, down from NOK 5,055,000,000 last year. So a decline of NOK 1.8 billion or 36%. And the CROGI in isolation in the quarter, if you analyze it, is 7.8%. So below our long-term target of at least 10% CROGI.

If you then go into more detailed explanations of why did our EBITDA decline with 36% from first quarter last year, you can see that, that is mainly explained by 2 effects. It is lower prices giving a reduction to the EBITDA of NOK 784 million and that is lower urea prices; or realized urea prices were down 5% compared with last year or realized nitrate prices were down 15%; and/or NPK prices were down 10%.

If you look at least at spot prices both for urea and for nitrate, you will see that realized prices are down more than the listed price development, and that is due to time lags between when we take an order and we are able to deliver the product. We typically, through the year have at least a 1-month time lag between taking order and delivering, and that is more a logistical effect.

But from time to time into the peak season, we also take orders more forward. And typically, by the end of the fourth quarter, we will like to build up order book where we are able to pass the holiday season during Christmas.

So in Europe on nitrates, we had roughly 2 months order book when we went into the first quarter. For urea, particularly in North America, we had an even longer order book due to very strong order intake in December. We had an order book when we ended the year of roughly 3 months on urea.

Then the other big negative effect in the quarter comparing with last year is energy prices. Energy prices are up both in Europe with 28%, and outside Europe with 28%. I come back with more information on those two.

Then we have a positive effect, as you see, on volumes. We are increasing our sales volumes from last year on fertilizer. On own-produced fertilizer, our sales volumes are up 3%. That is a 5% increase in Europe, both by higher nitrate sales and NPK sales. And we are also increasing NPK sales outside Europe in most markets. The most significant growth there is in China and Thailand.

In addition to that, as our CEO has already mentioned, we had a significant continued growth in industrial products. Industrial products are up 17% from last year. The biggest growth is in AdBlue, on 19% increase, but we also are growing all of the major product groups.

The technical ammonium nitrate going into explosives are increasing again with a pickup in the mining industry, so that's up 12%. But we also are increasing sales of urea and ammonia to the base chemical industry.

The effect of NOK 95 million is a net, which has partly been offset by lower ammonia sales due to the production problems that we had in the first quarter. We have a negative volume effect on sales of ammonia of about NOK 140 million. So you see that industrial and fertilizer sales in combination would have been NOK 230 million roughly, if it hadn't been for the production problems on ammonia.

Then other effects in the quarter compared to last year; we have so-called special items, which are derivative effects on our gas contracts; and then we have another element of minus NOK 279 million.

One part of that is the effect of the sale of our CO2 business last year. In the first quarter last year, the CO2 business had an EBITDA of NOK 55 million, which we clearly we don't have this year. So that's one explanation.

The other biggest explanation of the other element is increased fixed cost, but increase are lower than inflation. So it's reflecting a continuous improvement, but also that we're taking on some extra cost to drive our improvement program.

If we look at how these development in EBITDA then is influencing our 3 reporting segments. You can see that typically a drop in fertilizer prices will mostly hit our production segments, while Industrial and Crop Nutrition earn money on premiums above commodity prices.

And you see here that a major -- a big part of the drop is in production, both due to lower commodity prices, but also production take the hit on energy prices and they take the hit on weaker ammonia production volumes in this quarter.

But in this quarter, you also see that a major part of the decline in our results are in Crop Nutrition, and that is related to the nitrate premium. Crop Nutrition byproduct from production based on our transfer price with a fixed nitrate premium setup.

And due to the time lags, as I will come back to also, the nitrate premiums are significantly down. So you can say all the decline in the Crop Nutrition earning this quarter is related to Europe and is related to the nitrate premium.

While other business units outside Europe continued to improve, most notably we had continued improvement in earnings in Brazil and a good pickup in earnings in Asia linked also to the good NPK deliveries.

Then you see in this picture that Industrial is reporting, if you adjust for the CO2 sales, a flat or slightly improving EBITDA this quarter compared to last year. And that's a combination of a significant positive volume effect, as I mentioned, but partly then offset by lower premiums. And those lower premiums are fully related to time lags.

Industrial byproduct from production, you can say on a spot pricing basis. But a large part of the contracts with mining industry or with truckers or with oil companies on AdBlue on so on are with some longer pricing fixation, typically quarterly pricing. So this is a short-term, you could say, volume squeeze in the quarter for Industrial due to pickup in commodity prices during the quarter.

If you then go on and look at the development in energy prices. And I said that the energy prices year-over-year for the quarter increased with NOK 738 million. And the major part of that is related to Europe.

And you can see here on the left side of the slide that our average energy price in Europe increased from $5 first quarter last year to $6.5 this year. That gives a gas cost increase of roughly NOK 500 million.

Then we also had an increase in gas pricing in U.S. So in total, Europe and U.S. increased with about NOK 540 million approximately, but exactly NOK 543 million. That is lower than we guided a quarter ago based on forward prices.

So even when also forward prices were guided upon, we knew that Europe had a cold spell this winter, the realized prices came out slightly below forward prices, as it very often happen as forward prices typically also include a small risk premium.

So compared to the guiding of NOK 600 million, we came out at NOK 543 million. But in addition to that, we also had gas price increases outside Europe and that is linked to our ammonia plant in Pilbara where we have a long-term gas contract and where there has -- where there is a step up in gas pricing by the end of 2016, which we've also informed about earlier.

So first quarter of '17 is the first full quarter with this new gas price and that increased the gas price in Pilbara with about NOK 180 million. And Pilbara gas cost is now roughly in line with the cheapest gas sourcing we get in Europe.

If you go forward then and use the forward prices for the next quarter, we get a gas price in Europe forecasted for the second and third quarter of $5.5 per million BTU. That is lower than what the forward price showed a quarter ago, then the forward price also for the second quarter was at $6.5.

So a quarter ago, I said that forward prices give a cost increase for the second quarter of roughly NOK 700 million. Now we estimate only the half of that increase in Europe, NOK 350 million. But we remind also in the guiding that, that with the step up in the Pilbara gas price, for this year, quarterly gas prices in Pilbara will be roughly about NOK 180 million higher than last year.

If we then move on to fertilizer prices and how they have developed over this quarter, let us look at the premiums of nitrate and the premiums of NPKs.

And with the time lags, I talked about the premiums on nitrate in Europe did not increase from what we saw in the fourth quarter and they are substantially down, as you will see from the first quarter last year. And that is mainly explained by time lags.

As I said, when we went into the first quarter this year, we typically had a time lag of roughly 2 months. And then we increased rapidly nitrate prices by the end of last year as urea prices increased, but that means that a large part of NPKs delivered this quarter was delivered based on pricing before really urea prices started to pick up. So that is lowering nitrate premiums compared to what you will have in a more steady state.

If you compare that with last year, then you will see that the nitrate premium of first quarter last year was on the higher side of historical average, and there we had an opposite effect of the time lag. Because while urea prices increased into the first quarter last year, they started to decrease into the first quarter and decreased through the first quarter of last year. So there we had a positive time lag effect last year; this year a negative time lag effect.

In addition, you could also say that last year the nitrate market in Europe was tighter also due to supply constraints. Several of the plants in Europe on nitrates, both our plants but also some competitor plants, had production problems last year. This year, the plants -- nitrate plants have been running better.

If we then move on to NPK pricing and how NPKs create value for Yara. There are 2 value creations there I would like to highlight. One is the value that we create by upgrading phosphate rock to phosphate fertilizer in our NPK plants and that's what's illustrated on the left side of this slide. And there you can say that NPK fertilizer prices have moved seasonally up in the first quarter. While at the same time, phosphate rock has continued to decline from last year.

So we have year-over-year, even if phosphate prices are still slightly lower than a year ago, we have a higher upgrading margin on the phosphate part or NPK production now due to lower phosphate rock.

On the right side of this slide, you could say we are illustrating the premium that NPKs get on top of commodity fertilizer. And you see that, that premium is more stable than the commodity prices. But that's also slightly down in the first quarter compared to a year ago and that's also more time lags.

As you see that commodity prices, mainly urea listed prices, but also nitrate list prices start to increase, while NPKs are flat from the fourth quarter into the first quarter. So it's a more stable priced product, but with a higher premium but with time lags slightly down from last year.

Let me then end my part of the presentation by looking at how these results are creating cash for Yara. We have a cash earning in the quarter of NOK 2.1 billion. And then you can see that we continue to invest significantly in our business to grow our business in a profitable way.

In the quarter, we invested more than NOK 2.5 billion and you can see also in the handout, in the attachment, that we now guide that our total CapEx for 2017 based on announced projects will be roughly NOK 18.8 billion.

In addition, we also increased our working capital during the quarter. That is a seasonal increase in receivables due to peak season in Europe and that is -- and in addition, it's an effect that from fourth quarter into first quarter we also reduced prepayments from customers in Brazil, which was in a peak season in fourth quarter, but it's partly then offset by lower inventory values.

We have roughly the same inventories in tonnage as a quarter ago, but prices on those inventories, purchase costs are lower. So that gives a cash flow effect of close to NOK 1.2 billion.

So we are increasing our debts through the quarter, from a debt-to-equity ratio of 0.17 at the start of the quarter, up to 0.18 at the end of the quarter.

And that is still a very strong balance sheet, well positioned for future growth.

And with that comment, I hand the word over to our CEO again, who will present to you prospects and also the status on Yara's Improvement Program.

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Svein-Tore Holsether, Yara International ASA - CEO and President [4]

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Thank you, Torgeir. In terms of prospects, I want to provide an update on the ongoing urea capacity increases in the U.S. and elsewhere. And this looks set to peak during 2017, according to this latest update from CRU. And this incremental capacity could weigh on global urea prices for most of 2017.

As you can see, planned capacity expansions are in excess of trend consumption growth, both in 2017 and in 2018. Although these CRU projections have been revised downwards since their last edition, it is worth noting that project delays are fairly normal and that the actual development of these projects tend to be slower than the estimates assumed.

Specifically, for 2017, we consider approximately 2 million tons of CRU's projected capacity increase to be uncertain in terms of timing and execution.

Lower urea prices internationally have reduced export attractiveness for Chinese producers. And on the right-hand side, you can see the impact of that. Urea exports at 1.2 million tons for a period January through March, compares with 3 million tons for the same period last year.

Season-to-date, China exported 5.1 million tons, which is down from 10 million tons in the previous season. Chinese urea production and export cost continue to be the main reference point for global nitrogen pricing and these have increased over the past year, putting substantial pressure on producer margins and resulting in curtailments. As you can see on the left-hand side here, for the season-to-date, Chinese urea production is reported at 41.8 million tons, down from 51.7 million tons a year earlier.

So based on the decline in the production so far in the season, which is almost twice as large as the export decline measured in tons, domestic supply is down by 4.5 million tons or 13%. Chinese domestic urea demand has been soft so far in 2017 and this is likely due to low grain prices, which are resulting in lower acreage and also in lower fertilizer application.

I'd like then to turn to an update on the Yara Improvement Program, which we launched in connection with our last quarter's presentation. The Yara Improvement Program is about continuous improvement to position Yara for further growth and making the company fit for the future.

The effort is company-wide and it does involve all our employees and will deliver at least $500 million of EBITDA improvement through annual cost and operational efficiency improvements by year 2020.

Last week, I was in Finland to visit our Uusikaupunki plant, which has recently implemented the Yara Productivity System. And I was impressed by how the entire Uusikaupunki team is already fully involved in the change activities, transforming how they work on a daily basis.

The Yara Improvement Program is all about sustained improvement, which only can happen through employee-owned change. And I will come back to the result of our work in Uusikaupunki after I go through the overall program status.

We track the improvement program's progress against milestones related to -- and the related financial benefits of this. We are still at an early stage of the program. But I am pleased to report that we are on track to meet our targets. And here you see 2 examples from the largest contributing initiatives within the program: the productivity system is successfully rolled out in Sluiskil and Uusikaupunki and Belle Plaine is ongoing at this moment.

The rollout so far has confirmed and actually exceeded the initial improvement targets, as well as delivering real improvement to our bottom line.

Our Procurement Excellence project is in the early stages of implementation, but we're already now see that we're gaining savings within this area.

On the financial benefits side, the accumulated sustained annual EBITDA improvement totals $90 million so far, compared with our 2015 baseline. This includes improvements made through 2016 and in the first quarter of 2017. So we're off to a good start and still aim to reach $150 million in 2017, and $500 million within 2020.

As already mentioned, I want to stress that the improvement program is about making sustained improvements to our core operations, which takes time. And since the program is largely about volume increases and not just cost reduction, we also expect benefit realization to vary from quarter-to-quarter. But the longer-term steady trend towards our NOK 500 million target by year 2020.

In addition to the EBITDA improvement, we have realized accumulated $65 million of one-off cash effects since 2015, mostly from working capital release, and this is also contributing to the cash return of the project. This -- and while the one-off costs related to the program are on plan so far.

Going forward, we will continue to give you quarterly updates along the lines of today's presentation but in addition, we will provide more comprehensive updates at least once annually, including more detailed analysis of realized improvements.

As mentioned, I was recently in Uusikaupunki to witness some of the changes that are being made by our colleagues as they roll out the Yara Production System. The rollout in Uusikaupunki has already led to increased production through structured plant performance reviews and strengthened productivity focus.

Uusikaupunki delivered record production in the first quarter of 2017 while successfully ramping up its expansion project with sequential monthly production increases through the quarter. Although part of the production increase is driven by an expansion, we're still looking at one of the best quarters in terms of reliability for Uusikaupunki ever.

In Sluiskil, the other plant where the productivity system is rolled out, we also achieved record production. And, in addition, I would like to mention that Sluiskil just recently passed 12 months without any recordable accidents, confirming the strong link between safety and productivity performance.

Through the rollout of the production system in Uusikaupunki and Sluiskil, as well as Belle Plaine, that is ongoing now, we have been able to confirm the original improvement potentials and in fact increased the base case numbers for these plants as you can see here on the right-hand side.

So I want to then round up with a reminder of the significant growth investments we are making to generate further earnings growth, which come in addition to our improvement efforts.

On the left-hand side, we have added together the investments we are making both in the Yara Improvement Program and our committed expansion and growth projects.

On the right-hand side, you can see the combined projected earnings improvements resulting from these investments, totaling $1.1 billion of EBITDA within 2020, equivalent to NOK 16 of net income per share, as calculated based on today's currency rates.

For a full review of our planned investments, including maintenance CapEx, please refer to our second slide that we have included under Additional Information.

So with this closing summary, I'd now like to hand back to Thor who will conduct our -- and coordinate our Q&A session. Thank you.

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Thor Giæver, [5]

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Okay. We are then getting ready for the Q&A session, where our presenters are joined by Dag Tore Mo, Yara's Head of Market Intelligence. So if you have a question, please raise your hand and my colleague Kjetil Storås will get the microphone to you.

And please state your name and company when you ask your question. Should we start with DNB?

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Questions and Answers

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Eivind Sars Veddeng, DNB Markets, Research Division - Analyst [1]

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Eivind Veddeng, DNB Markets. Two questions. Can you walk me through the actual P&L effect of the improvement program in Q1 and how this was year-on-year? And also on the Crop Nutrition dynamics, if the nitrate premium stays flat, how will this perform going forward? I was unsure if I understood the dynamics of the improvement -- sorry of the premium, sorry.

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Torgeir Kvidal, Yara International ASA - CFO and EVP [2]

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Should I take the P&L effect of the improvement program then. As Svein-Tore showed, we have an annualized effect of $90 million. That's annualized. So if you say affecting the quarter, it's 1/4 of that. It's -- so let's say in Norwegian kroner then, to get it into Yara's P&L, it's roughly about NOK 180 million comparing 2017 towards 2015. Where that hits the P&L is, of course, related to how that is split between the different effects and as Svein-Tore has said, we're not going to provide all details every quarter because a quarter is also a short period to give that. So we'll have quite some fluctuations. But -- -- so having said that, I will not give you all details, I will give you some details then. And roughly you could say there are 3 elements with an effect so far, which was roughly the same magnitude. You can split NOK 180 million into 3. So you have roughly about NOK 60 million on production volumes, so improved production volumes. You have roughly about NOK 60 million on lower -- or lower energy cost or better energy efficiency. And you have roughly about NOK 60 million on procurement, lower cost on procurement. And that will hit the P&L on different elements there.

One complicating fact and it's of course that we are basing this and measuring it running on 2015 prices. But for procurement, that doesn't change anything, because there you have to compare with realized prices all the time. On energy, we used 2015 energy costs. So as energy prices, fortunately, are somewhat lower now, you get a slightly lower effect than that. And then production also get a lower effect due to lower margins in this quarter compared to 2015 and the program so far.

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Thor Giæver, [3]

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Next question then is from Handelsbanken? Sorry, you're not done yet.

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Eivind Sars Veddeng, DNB Markets, Research Division - Analyst [4]

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I'll rephrase the question, sorry. On Crop Nutrition, you said that a big part of the year-on-year decline was due to the nitrate premium with some -- due to some time lags. I wasn't sure if I understood the dynamics and how, if the nitrate premium stays flat, just so I understand how that will perform going forward.

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Torgeir Kvidal, Yara International ASA - CFO and EVP [5]

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Okay. If you -- it's easier to talk about the first quarter than start to talk about the second quarter, then the first quarter is realized and facts are such. And there, clearly, you have a time lag effect, as I said, that we have sold roughly 2 months forward. That means that the January and February prices was, to a large extent, concluded before urea prices went up then. If you look into the second quarter then, then you can always say that the second, I think Dag Tore (inaudible), if not always, so most of the time we can say that the second quarter is the most difficult quarter to estimate in a normal year, because it's an end of the season and there we said that you are expecting volume-wise a normal ending of the season. But that is the residual of the full year. So you have volume uncertainty clearly in the second quarter. And then part of the second quarter is also starting of the new season. So it will depend on when we start that season, when we set the new starting price for the season in Europe, and at what level that starting price is set then. And that we will tell our customers -- or I guess I will not tell that to you before we communicate it to the customers. Typically, that pricing is set sometimes during May. I don't think I upset Crop Nutrition by saying that typically it is May. But if it's early May or late May will totally depend on, you could say, market sentiment. And the nitrate premium will, of course, also depend on how the urea price is developing.

And the dip in the urea price over the last quarter you could say have improved nitrate premium. But that is the kind of improvement that we don't need or want. Dag Tore, if you have more to say on that. Not much more to say.

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Thor Giæver, [6]

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Okay. Then we move on to Handelsbanken.

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Anne Gjøen, Handelsbanken Capital Markets AB, Research Division - Research Analyst [7]

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Anne Gjøen. Could you comment a bit more about the operational issues related to the ammonia plants? Where is it? Or is it several plants? Or is this something that we should also be aware of lasting into this quarter, for example? And in relation to the incident that happened in Porsgrunn, if it's a prolonged downturn. Could you say something about the gas costs in Porsgrunn? Is that higher gas prices still compared to your European average?

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Svein-Tore Holsether, Yara International ASA - CEO and President [8]

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So I can start when it comes to the ammonia production. As you rightly point out, we had a number of issues in the first quarter. We lost 94,000 tons of ammonia production due to reliability issues. And 85,000 tons of those were related to 2 plants. It's Le Havre where we -- anyway, we're supposed to have a turnaround and the issues that we had were supposed to be addressed in the turnaround. Unfortunately, we had reliability issues that started 1.5 months before the actual turnaround. So the plant is now down and this will be addressed.

The other part was in Pilbara and this is a plant where we've had quite a few reliability issues over the last couple of years. And we haven't started the implementation of the productivity system there. So we are addressing it. We are strengthening the organization. But we will continue to see some variability in the production at that plant. When it comes to Porsgrunn and the stoppage of the ammonia plant due to the fire, it is still too early to tell. We had the fire on Monday. And before we can make an assessment of how long it will take to repair the plant, we need to be able to go in and inspect the, amongst others, the compressors, see how much recabling work is needed and so on. And at present, we're not allowed to go and open up the equipment to see how long time it will take. But definitely it will be past the 45 days, which -- where we will have business interruption insurance kicking in. In terms of production, that means around -- I would say around 40,000 tons of lost ammonia production for that period, for the 45 days. When it comes to gas costs for Porsgrunn, that is at market prices. So it would have same impact as if it was any other plant in Europe.

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Thor Giæver, [9]

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We will move to Danske then.

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Eirik Christian Melle, Danske Bank Markets Equity Research - Analyst [10]

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Eirik Melle, Danske Bank. Two questions. One is regarding deliveries. We can see that both nitrates, NPK compounds are growing quarter-on-quarter. But also if you look at Q4 and Q1 combined, there's a significant growth. I was hoping that you may comment a bit on how you see Q2 developing on the back of this quite significant growth then. And the second question is, looking at what is the revised CRU report looking at long-term urea capacity additions, net capacity additions, does this change how you look at beyond 2017? You said that the vast capacity additions seeing this year will probably weigh on prices, but do you see any changes to the long-term outlook and how do you see the general outlook?

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Torgeir Kvidal, Yara International ASA - CFO and EVP [11]

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Maybe if I start on deliveries then, as I try to explain the deliveries in Europe. You are right that the first quarter is high deliveries. It's also peak season in Europe, very much influencing nitrate, but also partly NPK then. And then as I indicated, trying to guide on the second quarter is even more challenging than other quarters, because it is the end of the season in Europe. So you had the residual uncertainty and it is a question about to what extent, how fast do you take 3 deliveries to the new season then. So it is, as always, an exciting period also for us, the next month. What is the end deliveries and how fast, at what prices are we able to pick up 3 deliveries. That's the European comment. Then you have another comment, which is not only European but also global. Of course, it's -- that deliveries will also relate to, you could say, price trends and, you could say, sentiment in the global fertilizer commodities. And there we have had a weakening over the last month, as we touched upon, in urea. That may typically make some customers sitting and hoping for further drop, but that's a question when they think it has dropped enough, they would as such expect to step in. That gives an uncertainty. On the phosphate, we had a little bit opposite situation where phosphate prices have straightened a little bit, but it gives -- it indicates that to guide on the second quarter is rather challenging. So we'll rather explain our deliveries in the second quarter than have to spend too much energy in the going forward to explain why our guidance didn't fit on that. Perhaps,Dag Tore, if you would say more on that or if...

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Dag Tore Mo, [12]

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On maybe more on the urea capacity. I mean we haven't changed our opinion. We don't normally do that based on whether there are revisions for CRU or not, but let's say this revision that CRU now did in March brings their numbers closer to ours, that I can say. But as Svein-Tore said, we are still based on what we see around the world, in these places, but also based on pure empirical evidence, we are very skeptical to whether the actual numbers, actually supply increases will be this high. I think it only -- you can just look at the first quarter where you can -- many of these countries see that you are very far from -- of course, there are plants that are due on stream during the year, but it's very hard to just see supply growth from these plants reaching 8 million tons for 2017. So -- but anyway, we haven't tied it either for a long time actually that we expect 2016 to 2018 period to be a period with supply growth exceeding demand growth. So that it is plenty of urea and that is Chinese supply cost basically set prices and a reduction in Chinese exports if needed. Like we saw last year, it went from 13-point-something to 8-point-something from '15 to '16 and also first quarter this year it's basically cut in more than half from 3 to 1.2 million tons. So I mean there is clearly an oversupply situation at the moment. But it is also interesting to see that these market conditions we have at the moment also limit new capacity investments. So I mean there is not that much happening around when it comes to initiating or starting new builds at the moment, which also you can see reflected a little bit in the CRU graph as well.

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Thor Giæver, [13]

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We have a question from ABG. At least one question I should say.

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Bengt Jonassen, [14]

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Bengt Jonassen from ABG. I think I have 4 questions, actually. Could you say something about how much restructuring charges did you accrue in the quarter? And how much fixed cost did you actually add in the quarter to achieve your cost improvement program? On the acquisition in India, can you say something about the progress there? And can you also say something about what you think after the statements from the government on increased domestic production, at least targeting a significant increase in domestic production? And the final question is for Dag Tore. It seems like Chinese demand down 10% or something like that. Can you say something about that if that is an inventory cycle? Or is this actual demand? And what are the drivers behind that?

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Torgeir Kvidal, Yara International ASA - CFO and EVP [15]

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If I start on fixed cost and as I said, in this day we have bridged from the last year to this year. We said that fixed cost was a major part of this other element and it's a fixed cost increase of roughly NOK 150 million. And as I said, that is lower than inflation or salary inflation as such. But it includes then, because there are costs related to the improvement program, which we estimate in the magnitude of $5 million to $6 million in the quarter.

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Svein-Tore Holsether, Yara International ASA - CEO and President [16]

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Then I can make with a couple of remarks when it comes to our India acquisition. That is progressing and it's going through the regulatory approvals, and we should expect a closing of that transaction towards the end of the summer, so say August, September time frame. When it comes to the statements from the Indian government, we can take note of that. We haven't -- that's not built into our base case. We had a certain outlook. We were doing this also in order to expand our premium offering in our reach in the Indian market. If this comes through, obviously, it would be a positive to domestic production, which again would support our investment.

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Dag Tore Mo, [17]

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On the China issue, yes, I think that's -- the developments within China has been one of the developments that have caught quite a few analysts or observers or those interested in this market the most surprised that this is in a way. So even you read publications or analysis on this that many expected these curtailments -- production curtailments to be sufficient to keep the Chinese market relatively tight as shown in the graph and mentioned by Svein-Tore of the 10 million tons that is produced. Less if you believe the public official numbers from the National Bureau of Statistics. Roughly half of that is less exports, but half of it around 5 million tons -- close to 5 million tons through February, it's a reduced supply into the domestic market. That's of course substantial 13% compared -- down compared to last year. The way we've been, of course, also digging a little bit into this, we think that part of it can be pipeline effects. That there have been some inventories that can be -- that has been drawn down. That's also what nitrogen association's opinion that some of it is due to that, but it's also probably due to its early days yet, but a consumption drop. Grain stocks have been very high in China and the Chinese government has taken initiatives to try to reduce the grain surpluses partly by lowering the prices of, for instance, compared with 1.5 years ago, the corn price is cut by 1/3. So there is talk about a quite substantial drop in corn acreage could possibly consume as much as 1 million to 1.5 million tons of urea only that loss of that corn acreage.

In addition, the lower prices and also urea prices after all are up from last summer, up RMB 400 or RMB 500, which is also squeezing a little bit the farmers, so that it could also be lower application rates on what area is actually planted. And we also, more kind of ad hoc here, that also fruit, vegetables, there's many more local markets, but that there is generally quite poor sentiments when it comes to fertilizer consumption in China this season due to price pressure on the crop side.

So I think it's not given that these are kind of very long-lasting effects. Of course, there are also ongoing initiatives to try to improve the fertilizer efficiency and those kinds of things, but that's more kind of slower developments I think than what can cause this demand drop that we are seeing this season.

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Thor Giæver, [18]

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Are there more questions? There will be another opportunity at 2 p.m. Oslo time today when we have our conference call. But for now, thank you for your attendance and interest.