Yara International ASA (OTCPK:YARIY) Q1 2020 Earnings Conference Call April 23, 2020 8:00 AM ET
Svein Tore Holsether – Chief Executive Officer
Lars Rosaeg – Chief Financial Officer
Terje Knutsen – Executive Vice President-Sales and Marketing
Thor Giaever – Senior Vice President Investor Relations
Conference Call Participants
Okay. Good morning, and welcome to the presentation of Yara’s First Quarter 2020 Results. We have a presentation today from our CEO, Svein Tore Holsether; our CFO, Lars Rosaeg; and our EVP-Sales and Marketing, Terje Knutsen.
With that, it’s my pleasure to introduce our CEO, Svein Tore Holsether.
Svein Tore Holsether
Thank you, Thor, and good morning, good afternoon and good evening depending on where you are dialing in from. We start with the safety and we’re pleased to say that we were reached a new low and industry-leading TRI rate of 1.3. We believe that we can ultimately get to zero and we will continue to push towards this goal. The COVID-19 situation gives us another dimension of putting safety first.
Safe by choice is about establishing best practice, but equally or I would say even more important is through this empowering the organization to take care of their – each individual taking care of their own safety and that of each other. And I’m in no doubt that the dedicated work of our organization over many years, and both through the safe by choice work and the operational improvements have managed through this to keep our operations running without significant disruption through this period.
By building on the safe by choice we’re working, we’ve been able to add the additional health dimension as a result of the COVID-19 situation, and we’ve been able to get that done almost overnight. I’ve been both impressed and inspired when I see all the safe and practical solutions that have been found throughout our organization. And I want to thank each and every one of our employees and contractors for your passion and for your dedication and it’s you that have made the difference.
Now, let’s take a look at the results. Our EBITDA increased 9% compared with a year ago, mainly due to higher delivers, which are up 8% within the sales and marketing segment. And this is due to strong deliveries that reflect a spring planting and application that is progressing well in Europe and on the Northern Hemisphere. And that our operations, as I mentioned, are running without material disruption. Sustaining operations through COVID-19 is a top priority for Yara and this means we will optimize project activity and maintenance in order to reduce the risk of unplanned or prolonged outages. We have decided to develop our industrial businesses within Yara with separate governance and increased autonomy. The decision is influenced by the COVID-19 situation as demand has softened, and visibility is lower for some of the industrial businesses. We’ll come back to all these elements through the presentation.
Before we go further into the results, let me provide some comments on market developments this quarter, starting with urea prices. These were around 15% lower, mainly due to lower input cost and local currency in China. Production costs decreased as well, especially in Europe, where gas prices almost halved compared with a year earlier and in the U.S. where gas prices were down 37%. Yara’s realized nitrate prices fell somewhat more than urea as we balance volume and margin considerations this quarter in a situation where urea prizes had fallen through most of the season before rising at the end of the season. And NPK prices also fell, but less so than for commodity products. Our NPK prices are typically more stable than other fertilizer prices and you can see this in the appendix to this presentation that are NPK premium compared with an equivalent blend of commodity fertilizer is up $11 per ton compared with a year earlier.
EBITDA excluding special items increased by roughly $40 million, higher deliveries and lower gas cost more than offset the impact of lower selling prices. And then in addition we had $36 million positive currency affect mainly due to our fixed costs in Euro, Norwegian Krone and Brazilian reals translating into a lower dollar amount. Thanks to the appreciation of the U.S. dollar.
The negative other variance includes smaller fixed cost increase, the portfolio effect of our Galvani consolidation and Trinidad closure, and a number of smaller items including higher insurance and white certification income a year earlier. Our discussion to develop industrial businesses within rather than outside, Yara is driven by value capture visibility. This decision is influenced by the COVID-19 situation as demand has softened and forward visibility is lower for some of the industrial businesses now.
We’re not going back to the old industrial, rather the IPO evaluation has highlighted new value opportunities and benefits from a more autonomous setup, which will be strengthened with the inclusion of several production plants into the new setup. This new model with separate governance will help focus both the industrial focus in this business and the crop nutrition focus elsewhere in Yara. Supporting the food supply to society is a top priority for Yara. Thanks to a very strong organizational effort and a good collaboration with authorities globally. We have so far managed to ensure continuity in the supply of agricultural inputs.
However, we and other industry players need to continue to support the food value chain at all levels. We are also seeing a strong demand growth for our digital offerings in a situation where physical farmer interactions are reduced. A good example of this is our Yara farm weather app, which has gone from 0 to 1.3 million active users in less than a year. Farmers need a reliable weather forecast, not for the closest town, not for the broader region, but for their farm. And what they need is hyper local weather, and this is what this app provides them with. And the value of that, I think, is clearly recognized in the number of active users and how that is continuing to increase.
Before I hand over to our CFO, I want to comment on the importance and resilience of nitrogen usage in agriculture and also during times of crisis. As you can see, dropping nitrogen application for one season is shown to almost half the grain yields. And this explains why nitrogen consumption patterns are typically stable as annual application is needed in order to maintain yields.
I’ll now hand over to our CFO, Lars Rosaeg for some further insights to our financial result. Over to you Lars.
Thank you very much, Svein Tore and a digitally very good morning, good day, and good afternoon to all of you depending on where you are. Let me start by going through some of the key financials. As mentioned EBITDA increased by around 10% year-on-year driven by strong internal performance as the net impact of external effects was negative in the quarter. The decrease in EPS excluding currency and special items was driven by a reduction in tax assets, which negatively impacted this number by $0.26 per share in the quarter. Accordingly adjusted for this affect the EPS excluding currency and special items would have been approximately $0.65 per share.
If we turn to the capital side, net operating capital increased seasonally, but both the absolute increase and working capital days improved compared to last year, and investments were also lower in this quarter.
Cash flow from operations was somewhat lower than last year, and this was driven by several one of the facts, which I will get back to; however, the level of cash generation in the business is lifted from recent years.
On the segment side. Production had a decrease in earnings driven by lower upgrading margins than last year. Sales and marketing saw strong deliveries in the quarter with increase in premium product deliveries in Europe, in line with strategy as well as the overall season in the Northern hemisphere progressing as expected.
For new business, AdBlue saw increased volumes driving improved results while we’re going forward as mentioned expect weaker demand for some industrial sectors based on the COVID-19 situation.
Yara is operating without significant disruption and made COVID-19 and this is our top priority. Consequently, some turnarounds are postponed and there is currently focus on reducing the risk of unplanned outages where the time to restore could be prolonged given the situation.
As discussed before, we will generally see quarter volatility around the long-term improving trend and the factor and in the quarter reflects the quite stable operations even in a demanding situation. The quarterly number on ammonia is influenced by the closure of a plant in Trinidad in the fourth quarter and adjusted for this the overall trend is quite stable.
For finished products, the quarter number is slightly down as the improvements have been offset by issues at some plants. In Q4, we provide an update on the projects already integrated into our operations, and also provided an update on the project still in the pipeline. For Brazil, both Rio Grande and Salitre have been temporarily stopped by government decisions, and the impact of that will of course be dependent on the duration of the stop.
On the non-production KPI’s, we saw development in Q1 in line with targets as the energy efficiency improved with increased reliability in some ammonia units as a portfolio benefit from the closure of the Yara’s Trinidad plant as well counted in.
We also noted a decline in operating capital base driven by lower inventories in Europe, and better payment terms in Asia and Africa. Depreciation on non-USD currencies contributed positively. There are no changes to the committed CapEx in the Yara’s pipeline. However, given the focus on sustaining operations and consequent postponement of certain project and turn around activities, CapEx may be faced a bit more out in time within these commitments.
As known we base our energy guiding on the forward market prices and Yara’s production schedule. We know that the forward prices have come significantly down also during the last quarter and this naturally has a positive effect on the Yara’s bottom line. Q1 operating cash earnings funded operating capital, investments and returns around 0.3 [ph] per share in Q1 through buybacks to keep the net interest-bearing debt unchanged in the quarter.
Yara keeps most of its debt in dollars given the positive correlation between dollars and the Yara’s long-term earnings. The P&L in Q1 does however contain non-cash currency translation effects on the U.S. debt generated in Yara companies with non-USD functional currencies, as well as a positive translation effect from Europe being provided by the parent company to Europe based subsidiaries. The effect is reported as financial items in the P&L, and it negatively impacts the reported EPS in the quarter, but it does of course not have any impact on Yara’s dividend capacity.
Furthermore, a stronger U.S. dollar is positive for Yara’s financial performance and the strengthening of the dollar in Q1, represents an annual cost saving of around USD160 million on fixed costs in isolation.
Yara has over the past year lifted its cash flow generation and maintain the running level in Q1. Underlying operating cash flow continued to increase however, they were certain negative one off effects in Q1, related to tax payments and [indiscernible] not fully reflecting the underlying situation totaling approximately $80 million.
Lastly, I’d like to note that Yara has a robust track record of cash returns. Basis our position in a resilient industry through strict capital allocation. We have also reduced our gearing significantly over the past year, and are now well placed within our target range.
Yara is committed to the capital allocation policy communicated at the Capital Markets Day last year or maintaining a mid to long-term net debt EBITDA of 1.5 to 2. And in line with this policy, Yara will continue to evaluate further cash returns in 2020.
And with that, I hand over to EVP of sales and Marketing Terje.
Thank you, Lars. A very good morning and good afternoon. And even maybe good evening to some of you in Asia. As already indicated, say some marketing had a strong first quarter and reported an EBITDA 27% higher than a year ago.
Total revenues declined 4% much less than the commodity nutrient values, reflecting strong deliveries during the quarter, while margins were roughly in line with same quarter last year.
Deliveries of commodity products were in line with 2019, while our premium products deliveries were more than 20% higher than a year ago. As you can see the growth in premium product was mainly related to a strong catch up in Europe. This should be seen in the context of a slow first half of the season where we were 6% behind as of December, while now we are 3% ahead of last season, driven mainly by very strong deliveries in the month of March.
The industry nitrogen deliveries are still roughly 2% behind the previous season. Relative to Europe, growth elsewhere was smallest, although we have seen positive developments in premium products in key markets in Asia mainly in China, and also in Latin America mainly in Colombia and Mexico.
Thanks to a strong first quarter. Last 12 months premium products deliveries have developed very well. We continue to see growth in YaraVita range and remain confident that we will reach our long-term strategic targets. So all-in-all a strong quarter for sales and marketing and for Yara.
And with that, I hand over again back to Svein Tore, who will give his closing remarks.
Svein Tore Holsether
Thank you, Terje. Riding up them, we continue to consider our prospects attractive. Firstly, the industry fundamentals. We’re growing population and agriculture’s resource and environmental challenges that create business opportunities for Yara. Better crop nutrition solutions play a key role in responding to all of these challenges.
In addition the market cycle is improving primarily due to an easing of the supply side pressure. Our cash flow is improving both due to the cyclical improvement and that our strategy execution is delivering improved cash flow from operations while our CapEx is declining significantly.
And finally, we have a strong competitive position with a focused and sustainable long-term strategy to deliver improved returns. Then we will turn to virtual Q&A this time Thor will manage that, and I will be joined by Lars and Terje as well.
A – Thor Giaever
Okay. Does the sound work on this? Very good. Okay. So we’re now ready for the Q&A session, and thank you to everyone who has sent in questions. We have received quite a lot and some of them came early, some of them came later. We won’t manage to cover them all, but IR is open for business also after this presentation. So just please get in touch with me or Celia afterwards, if you didn’t find your topic covered.
So, I’ve picked out quite a few, and I’m going to try and group them for the three presenters. So, if I can start with you Svein Tore. There are a few questions on the IPO and I would say the main topic is – well, it’s partly on the rationale, which I think you’ve covered in the presentation, but there’s – some specific questions are, is this a permanent decision and is an IPO completely off the table?
Svein Tore Holsether
Well, first of all, I’d like to say when we make this decision, we should view this as a long-term decision. And we have through this process found some interesting low CapEx organic growth opportunities within the area, but I would like to emphasize that the capital allocation principles and the return requirements are sound.
That said, with regards to your question on the whether an IPO is off the table. What I would like to say is that in Yara, it’s always value creation, shareholder value that comes first. And I’d like to refer back to then grow – our UK, our CO2 business which very much could say was close to the core of – or in the core of Yara, but when we had the opportunities where we could sell these at a value that creates shareholder value, we do that. And that is how we run the whole business including the industrial holdings and the rest of Yara as well.
Thank you. Then the next question is on or a couple of questions on CapEx. I think picking up on our remarks about potential deferrals of CapEx, there’s a question on whether this covers growth projects or also potentially maintenance, and also more generally, how much CapEx could be deferred in 2020?
Svein Tore Holsether
Yes, and as our CFO pointed out, there are some growth projects that are impacted by changes in the regulatory framework by the local authorities, which we, of course, will follow. And that means that we have a temporary halt to the expansion in Rio Grande and in Salitre. But clearly, there are many projects that are impacted and this is impacting the whole industry as well, where you need certain parts or experts into to do either repairs or build. So the whole industry is impacted by this. So, you will see some delay of our expansion projects.
And you referred to maintenance, yes, we’ve had to delay some turnarounds as well in order to maintain production at a high level, but also due to not bringing in a lot of people from the outside into smaller communities. So that means that there is a deferral in the CapEx, but I think, here it’s important to see both this year and next year in combination when evaluating this. But yes, there will be some deferrals, yes.
Okay. Yes. Is sound okay, good. I think the last one I want to ask you Svein Tore is on QAFCO. We’ve had the question on when are you expecting to receive the proceeds from sales of shares in QAFCO and what are we planning to do with the proceeds?
Svein Tore Holsether
Well, this agreement was entered into on March 8, and now this is going through the normal regulatory approval and customary closing conditions, and this is progressing as expected. When it comes to capital allocation, we made a very clear statement on that at our Capital Markets Day and as you heard from our CFO as well, that stands firm.
Thank you, Svein Tore. I then like to ask Terje Knutsen, our EVP-Sales and Marketing for some questioning. Plenty of questions on the market. Maybe start with a couple on deliveries. I’ll try a couple. One is how much of the first quarter volume performance is a timing effect? And how do you see second quarter as it stands? So that was in a way one question on deliveries. There’s also one on labor shortages at farms and whether this could impact volumes going forward?
As so if I take first quarter first, as I said in the presentation, in Europe, we were 6% behind last season in December. So, it was very much expected, and I think we basically expressed that also during fourth quarter presentation that we would expect a catching up during Q1 and Q2.
As we explain that went I would say very well in the sense that we are now 3% ahead of last season. And actually, I would like to use the opportunity to thank authorities and the whole value chain for making sure that all these elements that are needed in order to move product to farm in the period of our application, I really, think that has been a tremendous effort from all involved in making that happen.
When it comes to then second quarter, if we still stick with Europe, we have a healthy order book. We see still strong off-takes. But as you all know or those following us second quarter in Europe is a quarter where we kind of finish the application season. By the way, what we have delivered so far, we have really seen going straighter applications, so there is still not really a build-up for any new season or anything like that. It’s application. And – but second quarter is a quarter where we – in a way, finish off this season and start the new, exactly how that plays out volume-wise is always a bit difficult to say as early as we are now in the quarter.
I could also mention that we had a good quarter in Brazil. And looking into second quarter, we also in Brazil have a strong order book for the second quarter. So as such, with the visibility we have today, although, there are many uncertainties, I would say, things are looking fairly positive.
Then there was a question on shortage of labor. That is in a way, right now, more difficult to predict, because we see positives and we see negatives. Some of the very short cycled cash crops, vegetables, as an example. We have seen a dip due to restaurants being closed, et cetera, et cetera and consumption pattern changing. Labor shortage has so far not been a major problem, but we do follow each crop segments very carefully, so that we can, let’s say, move our efforts and our focus according to how the markets play out.
And this is one of the advantages of being as deep as we are in Yara in the markets, that we can try to be close to action and take actions late in the chain and move product where we see there is demand and traction. This we think will take some time before it normalizes, and it’s important that we are flexible and agile enough to respond.
Thank you. A couple more then, maybe you mentioned Brazil already, we have a question on whether logistics could be a concern during the second half of the season? Could we see a repeat of the issues caused by the trucking strike during 2018? So maybe – and I’ll ask one more just to, I think related also a bit to Europe, new prices – new nitrate prices announced by us today. Are these new season prices? And how do you see them compared to the start of the season last year?
Yes. So if we take logistics first, as I said in the previous question, I’m actually quite impressed how, in a way, the whole chain has been able to respond and so far, we have been able to cope with the logistics issues that we have had at hand. And in fact, at least in Europe, March was a very strong month from a delivery point of view, so certainly not below a normal March.
And we do think that this will be something we can manage together obviously with transport companies and logistical chain, and with continued support from national authorities, because it is an essential product to get fertilizer out to farms to feed the world. And in order to avoid that this becomes also a food crisis there is high priority in making sure that fertilizers move on to field, and we see that very much in place in many parts of the world. So, if we continue to play together and collaborate, I think we will hopefully see that we can handle also the logistics.
Then Europe starting price, what we have done is to announce today a price for ammonium nitrate in France of EUR 230. We see that there is already a need to give an indication for the June deliveries. What we typically do and this is nothing unique this season, is that we’ll look at the crop prices, we’ll look at the farm economy, we look at everything from raw materials to delivered cost. We look at alternative sources of nitrogen, and as such the EUR 230, I think reflect a situation that we continue to believe that nitrates is a strong solution for Europe, and that we will continue to see the demand for that product on this price level in France. So with the visibility we have now, we think this is the right pricing to launch for June in France.
Thank you, Terje. Last two for you. They’re not related, but just two at a time seems to work so far. One is, any color on the current market in China and India? And the other is more generally strong margins in sales and marketing. How sustainable are these levels? And why have we reached a higher level? Why we – how have we reached this level in sales and marketing?
Yes. So then quite different questions, but let me try China and India first. Obviously from a COVID-19 situation point of view, China is in a process of normalizing, maybe more than what we see in other parts of the world where which now are in complete lockdown. That means that we see some of the normal supply demand or supply patterns of our products coming in place again in China. As such, we think that the situation for us in China is normalizing. And as mentioned also in the presentation, we had a good first quarter in China.
India is in a bit of a different situation. Strong measures in India to handle the virus situation and that probably will have somewhat more effect on the ability to deliver product, and let’s say, market situation on those crops that we are active. But we see also that with time, some of the constraints there we have had is being lifted, and we think also in India that we will see a gradual normalization, but it will take time.
Then margins in premium products, I think we have demonstrated over some time now that we are able to deliver a strong order. I would rather say consistent margin picture on premium products. And at least I choose to believe that that is due to tremendous job done by a big organization in sales and marketing in working close to the market segments where we have experience that we can take out a margin, because we deliver strong benefits to the farmers.
With all the uncertainties we have now, I think the agility and the knowledge of the market sitting close to the farmers knowing where things have tractions and where not will enable us to continue to deliver on the margin picture. So with the present knowledge, there is no reason for me to believe that this picture will change significantly.
Thank you very much, Terje. It’s now time to ask some questions to our CFO, Lars Rosaeg. So if you can take Terje’s place. Thank you. Start a few different ones here. So let’s start with COVID-19. We’ve had a question on whether we have experienced or are experiencing delays and/or additional costs related to logistics and transportation of products due to COVID-19?
Yes. No, we have not experienced any material such costs related to COVID. And as we said, what we are of course careful with this that we are protecting our operations and as Svein Tore said we are then looking into turnaround schedules et cetera, but that is of course an operational continuity and on the CapEx side, but no material effects on the costs you mentioned.
Good. Next one is on the Improvement Program, specifically on cost savings. How can we expect the fixed cost savings to be phased during 2020 given the minus 10 contribution during Q1? There was also here a question of whether that is impacted by COVID-19?
Yes. Yes. So to answer the latter part first, there is no COVID-19 impact explicitly in that number. We discussed this a bit on Q4 as well. What I think we continue to see in Q1 in all the three non-financial or non-production KPI’s, is that we are progressing both on energy efficiency, on fixed cost and on operating capital days. When it comes to fixed cost, there will of course always be some minor volatility, but we do not expect any material facing effects as such and Terje alluded to is a rather small delta we have in the first quarter.
Okay. Thank you. And the last one I’m going to ask you, Lars, is on natural gas. Has the company considered locking in low natural gas prices for the rest of 2020, given where European gases are at and the margins we get in that case?
Yes. So Yara has over time had a policy of not hedging, and there’s no change to that policy. And I also note that if you look over the past year, we’ve had material positive effects to our earnings in line with that policy.
Okay. One comment from our CEO.
Svein Tore Holsether
Just an additional comment when it comes to the Yara Improvement Program and the productivity, and as mentioned by Lars, the production in totality has not improved in the quarter. But at the same time, we see a number of our operations setting production records even in March and even in Ferrara in Italy, we saw production record historically in March.
But what is holding back the numbers is that we’ve had some significant outages, Pilbara being one of them where we had an outage in November and the plant hasn’t produced in first quarter except at the very end, and it is this bigger one offs that really hold it back and we’re addressing that one-by-one, the journey on the productivity is something that will take time and we will see volatility around an increasing trend line. So we’re continuing with full force on this, but we will from time-to-time see some setbacks as we’ve done in the recent months.
Okay. That concludes our presentation and Q&A session for today. And as mentioned, if you do have further questions, please don’t hesitate to get in contact with IR, with myself or my colleague, Silia. Okay. Thank you very much.
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