Yara International ASA (YAR) Earnings Call Transcript & Summary

Good morning, good afternoon, everyone, and welcome to the Yara Fourth Quarter Results Conference Call. This is Lars Røsæg. I am the CFO of Yara International, and I'm joined by my colleagues here today for this Q&A session. I'm sure most of -- all of you have seen our report and presentation from this morning, so I will limit my opening comments. Our strategy execution is driving improved commercial margins and bottom line. As an example, our NPK premiums were up $62 per tonne. Production-wise, we are benefiting from lower gas cost by $170 million saving this quarter. But on the other hand, we saw an unsatisfactory performance in some of our plants, while others had improvements in the quarter. Our new business saw continued earnings growth, and our free cash flow improved $850 million compared with a year earlier. In addition to that, we are delivering on our capital allocation policy with a NOK 15 per share dividend proposed and a 0.8% buyback during the first quarter of 2020. In a minute, we will invite everybody for questions, but we did have one follow-up item from this morning, mainly a question on the progress of the project in Brazil. And for that follow-up, I leave it our EVP, Production, Tove Andersen. So Tove, please?

Thank you, Lars. So the question we received during that presentation was to give some explanations on why we are experiencing a delay at our Brazilian projects. So if I then start with the Rio Grande project, it's a fairly straightforward project on a technical perspective. However, we have experienced issues with other contractors. We have had to change contractors during execution, which has caused delay, and that has been due to both performance, but also financial situation of the contractor. We have also experienced not optimal performance by our various contractors, so less productivity than what we have estimated on low [indiscernible], and we have worked very close, especially with our construction contractor, to increase now the productivity of them. And this is now in line with our expectations and also in line with missing now our estimated completion by second half of this year. The Salitre project is a different situation. In Salitre, we have 2 main parts. We have the beneficiation plant and you have the chemical plant. The beneficiation plant was ready since last year and, as you know, prices since then. The issue that we are focusing on there is to increase the P recoveries, so that means how much what you're taking out of the raw materials. We have a target to reach between 60% and 70% recovery, and we have been up from 50%. But we have been working on different process optimization, but also reengineering solutions to increase the recovery. And this is very typical, actually, in this kind of projects. Different raw materials have different qualities. And it's very normal that you need to do quite some fine tuning before you get the intended recovery. On the chemical front, we entered into this project in 2014. And as we have been working on it, we have realized that it will take a longer time to realize the chemical plants versus initially estimated to make sure that it is in accordance to our standards and procedures. So that's why you're also then seeing a delay on that. So hope that answer the questions. But also, there could be a follow-up question. So if there was anything else, please let me know.

Okay. Operator, then I suggest you open up for questions as normal.

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

I had a few questions. I'll do them one at a time. Can you maybe quantify -- you've obviously had some production hiccups in the fourth quarter at a number of plants. Can you maybe quantify what you think the volume impact will be on 2020 and maybe what the EBITDA impact will be, whatever sensitivity you want to give?

Yes, Joe. It's Svein. Thanks for that. So what we've said is that while we had improvements in several plants, we also have some outages, which will impact the 2020 performance, but not impact the 2023 targets. For ammonia, we've estimated that to you at 360,000 tonnes. And for finished product, we've estimated that to 760,000 tonnes. As you will recall, we have moved to follow up on the underlying value drivers, which then is at any point in time can be valued at the concurrent margins in the market.

And is that net -- are those numbers net of any other improvements? And is that mostly a first half year impact?

That's the impact on 2020 from these outages and the projects, which we described this morning.

So just as a follow-up. So you can -- in case of any data, I mean, you can then compare these to the 2020 numbers that we put out in connection with the Capital Markets Day, and you'll also find in our second quarter report.

Two more for me. So NPK premium is at 5-year highs, was up in the fourth quarter from middle of the year. Is -- should we expect a drop back and have a more normal premiums? Would it be gradual? Would it be sharp in the first quarter? How should we model the next little while?

Yes. So I think some adjustment is probably to be expected. But to explain a bit why we come into this situation, first of all, we have a very thorough segmentation in our downstream operation, and that means that we target segments that are depending on the strong input and less volatile in terms of pricing. We also work deeper in the market and deep in the market. Normally, we have one level between ourselves and the farmer. In some markets, we even go direct. And that means that we, in a way, can be unopposed in a different way and -- than maybe other players that are much further back in the value chain. I think it's also fair to say that the price elasticity is such that we have had now, for a while, a quite clear price strategy in December that if we would really compete with, let's say, pure commodities, we would need to shift price very significantly in order to get volume. And for that reason, we choose to hold. We're taking some hit on volume by doing that, but we have evaluated a much stronger impact on the margin. Over time, there might come some, let's say, more correlation between the commodity drivers. But we think we have a quite resilient model, and we think this quarter really demonstrates the resilience of that model.

Okay. One more for me. Maybe just a sense of how to characterize what's going on in the seasons here in Q1 in different markets, South America, Europe, North America. I think it seems like the quarter has started out slower than usual for these different regions. Certainly, the U.S. had a late harvest. Can you maybe talk about that? Are we moving to a model of more just in time, purchasing closer to planting, how that changes in the different markets?

Yes. I don't think -- so it's Terje Knutsen from marketing again. I'm not sure we should comment too much on the specifics of, let's say, the -- a more extensive crop market in the U.S. because that is a market where we are relatively not so strong. But if I take Europe -- and I believe, actually, U.S., to some extent, is same kind of development that we see, as you say, a bit more just in time. There is a kind of a given pattern that we maybe had several years back now. It is a much more higher volatility in terms of when the market is ready to buy and the delivery pattern. So we see, to some extent, more just in time, and that means the commercial tactics is important. Right now we sit with a quite comfortable order book, so we think we have played this, so to say, tactically quite well and been able to take it out a margin so far, which has been healthy. And now it's more an execution game where, to some extent, the price is given for a certain period of time in Europe before we finally get the reset for the new season.

And our next question comes from the line of Lisa De Neve from Morgan Stanley.

I have 2 questions, and the first one is a bit similar to the one of Joel Jackson just now. So I mean, specifically on Europe, which is an important market for you, we sort of observed the shifts in buying patterns in the fourth quarter as well as ammonium nitrate -- calcium ammonium nitrate price adjustments, and that was partially due to lower urea prices and unfavorable weather for planting. But regarding this year, I would expect the sales to just -- that were foregone to come back. And you just mentioned that you're seeing more just-in-time buying, which means that you commercially. But on the webcast this morning, you said actually not all sales may come back in the first half. So I just wonder if you can give us some more color on the European market dynamics and appetite for specialties and sort of the timing across different geographies within Europe, different countries, where we can expect some movement, if that's possible.

So specifically to Europe, I'm not sure I agree with the statement you had that we saw buying in fourth quarter. Fourth quarter in isolation was a quite slow quarter for us as well as for the total market where the season-to-date total market is down 9%. After a fairly good start of the season early in the season, I would hope I neither said that we expected big deviation from a season point of view this morning. I think, at least, what we see is that we believe that there will be demand and there will be a catching up, I told you, in the spring. There might be some deviation for -- from the previous season, but we see that quite minimal and except that spring will come again this year, and fertilizers will be applied.