Q1 2005 YARA INTERNATIONAL QUARTERLY REPORT - FIRST QUARTER 2005 Strong financial results EBITDA (NOK million) High fertilizer demand and tight global market European market volume reduced, but Yara improved market position Important steps in growth strategy IFRS from 2004: Effects relatively small Earnings per share NOK Burrup, Australia Net interest-bearing debt/equity As Yara celebrates its centennial, the company enjoys a leading position in the fertilizer industry a position based on market leadership, global reach, cost leadership and the ability to manage cyclicality. These will remain the cornerstones as we embark on a new century of development and growth.
2 YARA FIRST QUARTER 2005 FINANCIAL INFORMATION Yara International ASA was demerged from Norsk Hydro ASA and listed on the Oslo Stock Exchange as a separate company on 25 March 2004. In the demerger, the assets, rights and liabilities primarily related to Hydro's activities in connection with fertilizer products and related chemicals and industrial gases were transferred to Yara International ASA. The agreed date of transferring risk and rewards in the demerger was 1 October 2003. On this date, Yara was allocated a net interest-bearing debt of NOK 8.5 billion and a shareholders' equity of NOK 8,108 million. USE OF PRO FORMA FIGURES The figures presented up to 25 March 2004 are pro forma figures. The only pro forma adjustment included in the 2004 financial statements is related to net interest expense. Net interest expense for the period from 1 January to 24 March was calculated based on actual net interest bearing debt level as of 24 March (NOK 6.8 billion) and the terms for the new Yara financing effective from 25 March 2004, adjusted for Yara's target to have a major part of the financing at fixed interest terms. In the calculation of pro forma net interest expense, it was assumed that Yara needs an average cash level of NOK 800 million for its operations. Tax is adjusted accordingly to reflect the interest adjustments. PRESENTATION OF FINANCIAL INFORMATION The information provided in this report is in compliance with the IFRS Standard for interim reporting (IAS 34). For more detailed information regarding the IFRS implementation in Yara, see page 17. In the following discussion actual figures for the first quarter 2005 are compared to pro forma figures for the first quarter 2004. The fertilizer season in Western Europe, referred to in this discussion, starts 1 July and ends 30 June. Yara's business is significantly linked to the USD, both with regard to the purchase of raw materials and prices of finished products. The discussion and analysis of financial performance expressed in USD is therefore by management considered as giving better understanding of the development in the underlying business. Profitability for the Downstream and Upstream segments are also explained by the EBITDA margin per tonne. For the Downstream segment, the denominator used is total sales of fertilizer in tonnes. The denominator used for the Upstream segment is the total production of ammonia and finished fertilizer measured in tonnes. In the income statement for first quarter 2005, Yara has re-classified freight expenses related to sales from Other to Raw materials, energy costs and freight expenses. In addition, the line Interest expense and foreign exchange gain/(loss) is now presented as two separate lines; Foreign exchange gain/(loss) and Interest expense and other financial items. Other reclassifications resulting from the transition to IFRS are described in the section Summary of significant changes in accounting policies on page 17. The results for previous periods presented have been revised accordingly. As a result of rounding differences, figures or percentages may not add up to the total. FIRST QUARTER 2005 FINANCIAL HIGHLIGHTS Actual Pro Forma Million, except per share information 1Q 2005 1Q 2004 Operating Revenues NOK 10 943 10 897 Operating Income NOK 1 271 1 049 EBITDA NOK 1 866 1 582 EBITDA USD 1) 297 229 Net income after minority interest NOK 917 985 Earnings per share 2) NOK 2.90 3.08 Earnings per share excl. net foreign exchange gains NOK 3.31 2.46 Avg. number of shares outstanding (in million) 316.4 319.4 CROGI (12-month rolling avg.) 14.9 % 11.3 % 1) Based on average NOK/USD rate for the quarter 2005: 6.28 (2004: 6.92). 2) Yara currently has no stock option compensation program that results in a dilutive effect on Earnings per share.
YARA FIRST QUARTER 2005 3 FIRST QUARTER 2005 KEY STATISTICS 1Q 2005 1Q 2004 Fertilizer Sales Europe kt 2,692 2,803 Fertilizer Sales Outside Europe kt 2,094 2,195 Industrial Sales kt 521 494 Total Sales kt 5,306 5,492 Whereof Yara's own produced product, incl. bulk blends kt 3,722 3,877 Whereof JV and Third Party products kt 1,585 1,615 Production ammonia 1) kt 1,280 1,312 Production finished fertilizer and industrial products, excl. bulk blends 1) kt 3,379 3,166 1) Including share of Tringen, Qafco and Rossosh. HIGHLIGHTS Yara's first quarter net income after minority interest was NOK 917 million (NOK 2.90 per share), compared with NOK 985 million (NOK 3.08 per share) in the first quarter last year. Excluding net foreign exchange gains/losses, the result was approximately NOK 3.31 per share, compared with NOK 2.46 per share in first quarter 2004. First-quarter operating income was NOK 1,271 million, compared with NOK 1,049 million in the same quarter last year. EBITDA for the quarter was NOK 1,866 million, compared with NOK 1,582 million in first quarter last year. Yara had another quarter with strong financial results. We continued to improve our competitive position within production and marketing of products for both fertilizer and industrial applications. Our leading position within the industry makes us an attractive partner, rich in opportunities to develop our business. This is clearly demonstrated by the four growth initiatives launched during the quarter; SQM, Qafco-5, Rossosh and Burrup, said Thorleif Enger, President and Chief Executive Officer of Yara. These four initiatives have an excellent fit with our strategic ambitions, and improve our competitiveness both in terms of cost of production and global product reach. For example, our recent acquisition of a 30 % equity stake in Burrup, the world s single largest ammonia plant, enhances our strategic position in the growing Asian market, said Thorleif Enger. GENERAL DEVELOPMENT IN MAIN MARKETS Continued strong demand has kept nitrogen fertilizer prices at a high level, well above swing producers' cash cost. In China, recent tax changes have reduced urea exports and improved domestic consumption. In Western Europe, Yara experienced a marginal decline in sales but gained market share as fertilizer imports to West Europe were down by 30 % from the same quarter last year (Yara estimates). Despite the strong decline, imports represented 28 % of total sales. Total nitrogen sales to West European markets declined by approximately 15 % compared with the same quarter last year. After a slow start, partly due to cold weather, the market picked up in March. Fertilizer season to date, Yara estimates that deliveries to the West European market were 9 % behind last season. However, deliveries from European producers were stable. The global market balance for nitrogen is more important for European producers than short-term fluctuations in the size of the European market. The strength of the global market has redirected potential imports for Europe to other regions. In the US, spring demand for nitrogen has been strong, following low application of ammonia in the fall of 2004. Domestic production and imports were lower than in the same quarter last year. Crop prices for most agricultural products were lower than last year as a result of the record 2004 crop, but stocks increased mainly in the mature markets of North America and Europe (wheat and coarse grains). In the developing world, which is witnessing strong fertilizer demand, stocks either declined or remained stable, with lower crop prices having a limited effect on fertilizer demand. DEVELOPMENT IN MAIN PRICES In mid-april, the Black Sea urea price surpassed last October's peak, as demand continued to be strong. The average first-quarter prilled urea price (fob Black Sea) was USD 198 per tonne, an increase of 45 % from the same quarter last year. Following stable development in January and February, urea prices increased substantially in March. After the introduction of the Chinese urea export tax from January 1, urea export was low in February and March. Demand from most emerging markets was strong, and North American and European import demand also increased towards the end of the quarter. The ammonia market has not shown the same strength as the markets for upgraded products. The average ammonia price (fob Caribbean) was USD 230 per tonne in the first quarter, a decrease of 10 % on first quarter 2004. Ammonia prices declined sharply in January, due to a temporary oversupply situation in the US. Prices recovered later in the quarter, but only enough to compensate for higher US natural gas prices. Prices stayed close to swing producer cash cost during most of the quarter. The CAN price in Germany was USD 201 per tonne, compared with USD 175 per tonne in the first quarter last year. The increase reflects higher urea prices.
4 YARA FIRST QUARTER 2005 FIRST QUARTER 2005 VARIANCE ANALYSIS NOK million USD 1) million EBITDA 2005 - actual 1,866 297 EBITDA 2004 - pro forma 1,582 229 Variance EBITDA in NOK 284 - Conversion (NOK vs. USD) 145 - Variance EBITDA 429 68 Volume (31) (5) Price/Margin 435 69 Effect of long position 118 19 Energy cost in Europe (100) (16) Currency effect on net fixed cost 2) (60) (9) Divestments 55 9 Other 14 2 Total variance explained 429 68 1) Based on average NOK/USD rate for the quarter 2005: 6.28 (2004: 6.92). 2) Net fixed cost is derived from fixed cost in NOK and Euro less NOK and Euro related revenues. First-quarter EBITDA was NOK 1,866 million, compared with NOK 1,582 million in the same quarter last year. The appreciation of the Norwegian krone against the US dollar had a NOK 145 million negative conversion effect on EBITDA for the quarter. Converted EBITDA was USD 297 million, up USD 68 million on the same quarter last year. Sales were down 186 kt on the same quarter last year and led to a NOK 31 million (USD 5 million) decline in EBITDA. The whole European fertilizer industry saw delayed sales, but the impact on Yara sales in Europe was limited to some 100 kt as market share increased. The rest of the decline occurred in Brazil and in South Africa. In both these markets fertilizer consumption was held back by drought and lower prices for agricultural products. Continued high nitrogen fertilizer price levels, combined with improved prices for technical ammonium nitrate, improved EBITDA for the quarter by NOK 435 million (USD 69 million). The NOK 118 million (USD 19 million) positive effect from Yara's natural long position in ammonia was primarily generated by increasing ammonia prices during the quarter. In first quarter 2004, the effect was negative as prices declined. Energy cost in Europe increased and had a NOK 100 million (USD 16 million) negative effect on EBITDA. The NOK 60 million (USD 9 million) negative currency effect on net fixed cost was primarily due to the appreciation of the Euro against the US dollar compared with first quarter 2004. Yara's competitive position is affected by changes in EUR/USD or NOK/USD exchange rates. For further details, see the variance analysis for each segment.
YARA FIRST QUARTER 2005 5 FINANCIAL ITEMS Actual Pro Forma NOK million 1Q 2005 1Q 2004 Interest income from customers 30 26 Interest income, other 13 3 Dividends and net gain (loss) on securities 0 0 Interest income and other financial income 43 30 Interest expense (88) (77) Return on pension plan assets 60 65 Interest expense re. Pension liabilities (77) (81) Net foreign exchange gain (loss) (188) 279 Other (11) (31) Interest expense and foreign exchange gain/(loss) (304) 155 Net financial income (expense) (261) 184 First-quarter net financial expense was NOK 261 million compared with an income of NOK 184 million in the same quarter last year. The net foreign exchange loss for first quarter 2005 was NOK 188 million, compared with a gain of NOK 279 million in 2004. During this quarter the US dollar appreciated approximately 5 % versus both the Euro and the Norwegian krone, affecting the part of Yara's US dollar debt established as an economic hedge of future cash flows against changes in foreign exchange rates. The hedge was kept in the range of USD 450-650 million and was mainly affected by the development of the US dollar against the Euro. Net interest-bearing debt at the end of first quarter 2005 was NOK 4,399 million compared with NOK 4,199 million at the end of 2004. The debt/equity ratio at the end of March, calculated as net interest-bearing debt divided by shareholders' equity plus minority interest, was 0.36 compared with 0.37 at the end of December 2004. TAX First-quarter provisions for current and deferred taxes were NOK 307 million, representing approximately 25 % of income before tax. Yara has previously stated that the expected tax rate should be approximately 26 % under a supply-driven fertilizer pricing scenario (Capital Markets Day, November 2004). With demanddriven pricing witnessed in first quarter 2005, the tax rate would normally have been somewhat higher as a result of proportionally higher income in high tax areas. However, the first quarter tax rate was 25 % as a result of utilization of tax loss carry-forwards previously not recognized as tax assets. CASH FLOW Net cash from operating activities for first quarter 2005 was NOK 344 million. Strong earnings and dividends of NOK 261 million received from the joint venture in Qatar were partly offset by a net operating capital increase of NOK 1,167 million. At the end of first quarter 2005, net operating capital was NOK 8,921 million. From 31 December 2004 to 31 March 2005, net operating capital increased primarily due to a shift of sales volumes towards the end of the quarter and higher nitrogen fertilizer prices. Net operating capital productivity, measured as capital turnover on a 12-month rolling basis, showed a slight decline from end 2004. Net cash used in investing activities for first quarter 2005 was NOK 257 million. The amount includes the acquisition of a 30 % stake in the Russian fertilizer plant Rossosh and the proceeds from the sale of Ballance Agri-Nutrients, New Zealand in December 2004. For first quarter 2004, net cash used in investing activities was NOK 211 million. On 7 February 2005 Yara acquired 39.79 % in Yaiberia, a holding company incorporated in Cyprus, which owns approximately 78 % of the shares in the Russian fertilizer producer OAO Minudobreniya ("Rossosh"). Yara has through this acquisition an indirect ownership of 30 % in Rossosh. The total acquisition costs amount to 49 MUSD, of which 45.1 MUSD already has been paid, while 3.9 MUSD is contingent upon future events. There was no goodwill recorded in connection with the transaction. Yara's share of the profits in Rossosh since the acquisition date was NOK 9 million. The announced acquisition of a 30 % equity stake in Burrup did not affect the first quarter cash flow or net interest-bearing debt since the funds were released in April. For 2005, Yara expects to have a substantially higher investment level than in 2004. The three expansion investments announced in the first quarter of 2005 (SQM, Rossosh and Burrup) together constitute roughly NOK 1 billion over and above other investments for continuity and organic growth.
6 YARA FIRST QUARTER 2005 DOWNSTREAM SEGMENT Actual Pro Forma 1Q 2005 1Q 2004 Operating Revenues NOK million 8,154 7,874 Operating Income NOK million 512 396 EBITDA NOK million 665 566 EBITDA USD 1) million 106 82 CROGI (12-month rolling avg.) 12.9 % 10.8 % Net Operating Capital Turnover 2) 4.5 4.6 Total Sales kt 4,742 4,956 1) Based on average NOK/USD rate for the quarter 2005: 6.28 (2004: 6.92). 2) Total external operating revenues last 12 months divided by average net external operating capital for the same period. Total Sales per product group 1Q 2005 1Q 2004 Nitrate kt 1,178 1,312 NPK kt 1,595 1,603 CN kt 189 261 Urea kt 950 946 UAN kt 229 245 Other products kt 602 589 Total sales kt 4,742 4,956 VARIANCE ANALYSIS FIRST QUARTER NOK million USD 1) million USD/tonne 2) EBITDA 2005 - actual 665 106 22 EBITDA 2004 - pro forma 566 82 17 Variance EBITDA in NOK 99 Conversion (NOK vs. USD) 52 Variance EBITDA 151 24 5 Volume (88) (14) (3) Produced in Downstream (75) (12) (3) Other (13) (2) - Margin 232 37 8 Margin excl. ammonia effect 171 27 6 Ammonia effect on margin 62 10 2 Divestments 35 6 1 Other (29) (5) (1) Total variance explained 151 24 5 1) Based on average NOK/USD rate for the quarter 2005: 6.28 (2004: 6.92). 2) Divided by volume sold in 2005. of NPK to China from Yara's new Russian partner Rossosh were made. This compensated for the continued decline in sales of low-margin third party products in Asia. Products produced by Downstream plants accounted for the majority of the sales decline, resulting in a USD 3 reduction in EBITDA per tonne. EBITDA per tonne increased by USD 8 due to higher margins. Higher price levels for nitrogen fertilizers combined with a temporary drop in ammonia prices had a strong positive impact on Downstream margins during the first quarter 2005. Gains on divestments improved EBITDA per tonne by USD 1 compared with the same quarter last year. The increase was due to several smaller divestments carried out during first quarter 2005. First-quarter operating income was NOK 512 million, compared with NOK 396 million in the same quarter last year. EBITDA was NOK 665 million compared with NOK 566 million in the same period last year. Converted EBITDA was USD 106 million, up USD 24 million compared with same quarter last year. EBITDA per tonne for first quarter 2005 was USD 22, significantly higher than last year. First-quarter fertilizer sales were 214 kt lower than in 2004. In Europe, Yara continued to improve its market share at the expense of imports. The European fertilizer industry saw delayed sales due to the cold winter, but the impact for Yara was limited to some 100 kt. The remaining decline was in Brazil and South Africa, where fertilizer consumption was held back by drought and lower prices for agricultural products. In first quarter 2005, the first sales Production performance in Downstream plants was in line with the level achieved in first quarter 2004. Net operating capital turnover, measured on a 12-month rolling basis, was 4.5 at the end of first quarter 2005, compared with 4.6 at yearend 2004. The change in capital turnover was mainly due to delayed sales in Europe and Brazil.
YARA FIRST QUARTER 2005 7 INDUSTRIAL SEGMENT Actual Pro Forma 1Q 2005 1Q 2004 Operating Revenues NOK million 1,336 1,298 Operating Income NOK million 152 102 EBITDA NOK million 207 164 EBITDA USD 1) million 33 24 CROGI (12-month rolling avg.) 14.9 % 13.5 % 1) Based on average NOK/USD rate for the quarter 2005: 6.28 (2004: 6.92). Sales per product group 1Q 2005 1Q 2004 Environmental Products kt 107 106 Industrial N-chemicals kt 432 400 VARIANCE ANALYSIS FIRST QUARTER NOK million USD 1) million EBITDA 2005 - actual 207 33 EBITDA 2004 - pro forma 164 24 Variance EBITDA in NOK 42 Conversion (NOK vs. USD) 15 Variance EBITDA 57 9 Volume (10) (2) Industrial gases (15) (2) Industrial N-chemicals 6 1 Margin 74 12 Margin excl ammonia effect 49 8 Ammonia effect on margin 25 4 Other (8) (1) Total variance explained 57 9 the majority of the USD 12 million margin improvement. N-chemical margins also improved, mainly due to an ammonia price temporarily lower than last year. The Other variance of USD 1 million was primarily due to currency effects on net fixed cost, due to the appreciation of the Euro against the US dollar, partly offset by gains on the sale of non-core assets. 1) Based on average NOK/USD rate for the quarter 2005: 6.28 (2004: 6.92). First-quarter operating income was NOK 152 million, compared with NOK 102 million in the same quarter last year. EBITDA was NOK 207 million compared with NOK 164 million last year. Converted EBITDA was USD 33 million, USD 9 million above first quarter last year. Sales of industrial gases declined compared with the first quarter last year and had a USD 2 million negative effect on EBITDA. The decision to extend the ammonia productionstop in the Porsgrunn plant reduced CO2 and argon volumes available for sale. In addition, sales were down due to last year's divestment of the gas activities in Malaysia and Thailand. In France, deliveries of CO2 to a new major customer for container cooling started. For industrial gases, the situation for the mechanical industry in Norway was positive with increased demand. N-chemical volumes continued to grow as new customers were contracted. The volume growth was achieved through increased emphasis on selling competence and services in addition to marketing the physical product. Sales of water treatment products grew in Southern Europe and in the US, with strong demand growth in large US cities. The strong market for technical ammonium nitrate continued during the first quarter, driven by high activity in the coal and metal mining industries. Technical ammonium nitrate prices continued to increase and accounted for
8 YARA FIRST QUARTER 2005 UPSTREAM SEGMENT Actual Pro Forma 1Q 2005 1Q 2004 Operating Revenues NOK million 4,617 5,061 Operating Income NOK million 627 653 EBITDA NOK million 1,004 961 EBITDA USD 1) million 160 139 CROGI (12-month rolling avg.) 15.4 % 12.5 % Energy cost (weighted avg.) USD/MMBtu 3.6 3.5 Production 1Q 2005 1Q 2004 Ammonia 2) kt 1,215 1,251 Finished Fertilizer 2) kt 1,965 1,760 TOTAL kt 3,180 3,011 1) Based on average NOK/USD rate for the quarter 2005: 6.28 (2004: 6.92). 2) Including share of Tringen, Qafco and Rossosh. VARIANCE ANALYSIS FIRST QUARTER NOK million USD 1) million USD/tonne 2) EBITDA 2005 - actual 1,004 160 50 EBITDA 2004 - pro forma 961 139 44 Variance EBITDA in NOK 43 Conversion (NOK vs. USD) 88 Variance EBITDA 131 21 6 Volume 67 11 3 Price/Margin 145 23 7 Effect of long position 118 19 6 Energy cost in Europe (100) (16) (5) Other (100) (16) (5) Total variance explained 131 21 6 dollar against the Euro and the Norwegian krone. First-quarter production of finished fertilizer was up 205 kt compared with 2004. The increase was mainly due to production in Qafco-4, inclusion of production at Rossosh, and increased NPK production in other plants. Ammonia production was 36 kt lower than last year. The extended stop at the Porsgrunn plant and maintenance stops in the Le Havre and Tringen plants were only partly compensated for by new production in Qafco-4 and Rossosh. 1) Based on average NOK/USD rate for the quarter 2005: 6.28 (2004: 6.92). 2) Divided by volume produced in 2005. First-quarter operating income was NOK 627 million, compared with NOK 653 million in the same quarter last year. EBITDA was NOK 1,004 million compared with NOK 961 million in the same quarter last year. Converted EBITDA was USD 160 million, up USD 21 million on the same quarter last year. EBITDA per tonne was USD 50, up USD 6 from the first quarter last year. EBITDA per tonne increased by USD 7 due to higher prices and margins. Prices for finished fertilizer products continued the upward trend from end 2004, more than offsetting the negative effects of a lower ammonia price. The urea price increase generated most of the improvement, but positive effects from nitrates and NPK were also substantial. The positive impact of Upstream's long position in ammonia was USD 6 per tonne. This was mainly the effect of increasing ammonia prices during the quarter, while prices declined in first quarter 2004. The average cost of purchased energy, including the share of energy cost in non-consolidated investees, was 3.6 USD/MMBtu, compared with 3.5 USD/MMBtu in first quarter 2004. The increase was limited to 0.1 USD/MMBtu as a result of Yara's recent strategic investments in regions with lower gas prices. Energy costs for European plants increased from last year, reducing EBITDA per tonne by USD 5. The increase was mainly driven by higher gas oil and naphtha prices. The item Other is mainly the negative effect on fixed cost due to the depreciation of the US
YARA FIRST QUARTER 2005 9 OTHER AND ELIMINATIONS Other and eliminations consists of Yara headquarters costs and cross-segment eliminations. First-quarter EBITDA was a negative NOK 9 million compared with a negative NOK 109 million last year. One-time costs (drop-down) of approximately NOK 30 million related to the establishment of Yara as a separate company were included last year. Unrealized profits from cross-segment sales were eliminated to show the correct consolidated earnings for Yara. As the level of unrealized profit in inventory was lower this year than last, this had a positive impact of NOK 35 million compared with first quarter 2004. OUTLOOK Fertilizer prices at the start of the second quarter were higher than a year ago. Low grain inventories, particularly in China and India, support good fundamentals for fertilizer demand. Chinese authorities have maintained the export tax on urea into the second quarter and exports may also be affected by logistic limitations. Key importing countries have postponed fertilizer purchases and reduced fertilizer inventories due to high prices earlier in the season, and these countries have now started buying at higher fertilizer prices. Even though the fertilizer volumes for the season to date (July 2004 - March 2005) in Europe have been somewhat lower than the previous season, the strong global fundamentals support solid European fertilizer prices. With the current strong global demand, this creates a positive sentiment for the coming European fertilizer season. The fertilizer market is currently demand-driven with a urea price considerably above the floor price established by US natural gas prices. If a weakening of the global supplydemand balance should occur, the high forward prices for US natural gas should support fertilizer floor prices. Due to the increased fuel oil prices, Yara's energy costs for the second quarter of 2005 are expected to be approximately NOK 200 million higher than in the second quarter of 2004. The forward price for fuel oil is sensitive to the spot price development. Based on the current forward market for relevant oil products (end April), Yara's energy costs for the second half of 2005 would be approximately NOK 700 million higher than in the second half of the previous year. A minor part of this increase is also related to an expected price revision of one of the European gas contracts. The estimate for the second half may change considerably depending on how energy prices develop. Oslo, 4 May 2005 Board of Directors USE OF NON-GAAP MEASURES In the discussion of operating results, Yara refers to certain non-gaap financial measures including EBITDA and CROGI. Yara's management makes regular use of these measures to evaluate the performance, both in absolute terms and comparatively from period to period. These measures are viewed by management as providing a better understanding - for management and investors - of the underlying operating results of the business segments for the period under evaluation. Yara manages long-term debt and taxes on a group basis. Therefore, net income is discussed only for the Group as a whole. Yara's management model, referred to as Value Based Management, reflects management's focus on cash flow-based performance indicators. EBITDA, which Yara defines as income/(loss) before tax, interest expense, foreign exchange gains/losses, depreciation, amortization and write-downs, is an approximation of cash flow from operating activities before tax and net operating capital changes. EBITDA is a measure that in addition to operating income, also includes interest income, other financial income and results from nonconsolidated investees. It excludes depreciation, write-downs and amortization, as well as amortization of excess values in non-consolidated investees. Yara's definition of EBITDA may differ from that of other companies. EBITDA should not be considered as an alternative to operating income and income before tax as an indicator of the company's operations in accordance with generally accepted accounting principles. Nor is EBITDA an alternative to cash flow from operating activities in accordance with generally accepted accounting principles. Yara management uses CROGI (Cash Return On Gross Investment) to measure performance. CROGI is defined as gross cash flow, divided by average gross investment and is calculated on a 12-month rolling basis. Gross cash flow is defined as EBITDA less total tax expense, excluding tax on net foreign exchange gains/losses. Gross Investment is defined as total assets (exclusive of deferred tax assets, cash, cash equivalents and other liquid assets) plus accumulated depreciation and amortization, less all short-term interestfree liabilities, except deferred tax liabilities. In order to track underlying business developments from period to period, Yara's management also uses a variance analysis methodology, developed within the Company ( Variance Analysis ), that involves the extraction of financial information from the accounting system, as well as statistical and other data from internal management information systems. Management considers the estimates produced by the Variance Analysis, and the identification of trends based on such analysis, sufficiently precise to provide useful data to monitor our business. However, these estimates should be understood to be less than an exact quantification of the changes and trends indicated by such analysis.
10 YARA FIRST QUARTER 2005 CONSOLIDATED STATEMENTS OF INCOME Actual Pro Forma Pro Forma Actual Actual 1Q 2005 1Q 2004 2004 1Q 2004 2004 NOK million, except per share information (25.3.-31.3.) (25.3.-31.12.) Operating Revenues 10,943 10,897 43,226 859 33,188 Raw materials, energy costs and freight expenses 8,154 8,149 32,653 610 25,114 Change in inventories of own production (45) 97 155 53 112 Payroll and related costs 834 838 3,444 67 2,673 Depreciation and amortization 336 359 1,427 22 1,091 Other 393 405 1,837 38 1,470 Operating costs and expenses 9,672 9,848 39,518 791 30,461 Operating Income before financial items 1,271 1,049 3,708 68 2,727 Share of net income in non-consolidated investees 214 142 768 12 637 Interest income and other financial income 43 30 171 3 144 Earnings before interest expense and tax (EBIT) 1,528 1,221 4,647 82 3,508 Foreign exchange gain/(loss) (188) 279 737 4 461 Interest expense and other financial items (116) (125) (399) (9) (284) Income before tax and minority interest 1,224 1,376 4,985 76 3,686 Income tax expense (307) (424) (1,211) (29) (816) Net income 917 952 3,775 47 2,870 Minority interest - 33 20 7 (6) Net Income after minority interest 917 985 3,794 54 2,864 Earnings per share 2.90 3.08 11.90 0.17 8.98 Average number of outstanding shares 1) 316,441,190 319,442,590 318,938,750 319,442,590 318,788,699 1) Average number of shares outstanding was reduced in fourth quarter 2004 due to the share buy-back program.
YARA FIRST QUARTER 2005 11 CONSOLIDATED BALANCE SHEETS Actual Actual Actual as of 31.03. as of 31.03. as of 31.12. NOK million, except for number of shares 2005 2004 2004 ASSETS Non-current assets Deferred tax assets 1,364 1,172 1,466 Other intangible assets 136 99 136 Property, plant and equipment 7,300 7,606 7,383 Non-consolidated investees 2,865 2,511 2,558 Prepaid pension, investments and other non-current assets 611 564 554 12,276 11,951 12,097 Current assets Inventories 5,631 5,110 5,526 Accounts receivable, less allowances 7,357 7,677 6,518 Prepaid expenses and other current assets 1,557 1,157 1,766 Other liquid assets 33 30 16 Cash and cash equivalents 1,627 1,501 1,230 16,206 15,475 15,056 Total assets 28,481 27,426 27,154 LIABILITIES AND SHAREHOLDERS' EQUITY Equity Share capital reduced for treasury stock 538 543 538 Premium paid-in capital 3,703 3,703 3,703 Total paid-in capital 4,241 4,246 4,241 Retained earnings 8,038 5,116 6,934 Total majority shareholders' equity 12,279 9,362 11,175 Minority shareholders' interest in consolidated subsidiaries 65 64 63 Shareholders' equity 12,344 9,426 11,238 Non-current liabilities Accrued pension liabilities 1,863 2,117 1,918 Deferred tax liabilities 1,010 938 1,051 Other long-term liabilities 376 496 378 Long-term interest-bearing debt 5,338 7,488 4,494 8,586 11,040 7,841 Current liabilities Bank loans and other interest-bearing short-term debt 665 406 776 Current portion of long-term debt 57 29 175 Other current liabilities 6,829 6,526 7,123 7,551 6,960 8,074 Total liabilities and shareholders' equity 28,481 27,426 27,154 Total number of outstanding shares 1) 316,441,190 319,442,590 316,441,190 1) Number of shares outstanding was reduced in fourth quarter 2004 due to the share buy-back program.
12 YARA FIRST QUARTER 2005 CONSOLIDATED STATEMENTS OF CASH FLOW Actual Pro Forma Pro Forma Actual Actual 1Q 2005 1Q 2004 2004 1Q 2004 2004 NOK million (25.3.-31.3.) (25.3.-31.12.) Operating activities Operating Income 1,271 1,049 3,708 68 2,727 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation and amortization 336 359 1,427 22 1,091 Tax paid (104) (61) (555) - (494) Dividend from non-consolidated investees 273 242 385-143 Change in net operating capital 1) (1,167) (607) (402) (236) (31) Other (265) 461 (467) 506 (422) Net cash from operating activities 344 1,443 4,096 360 3,013 Investing activities Purchases of property, plant and equipment (237) (178) (1,297) (17) (1,137) Purchases of other long-term investments (305) (42) (251) (1) (210) Net sales (purchases) of short-term investments (16) (1) 9-10 Proceeds from sales of property, plant and equipment 75 10 67 1 58 Proceeds from sales of other long-term investments 226 (1) 163-164 Net cash used in investing activities (257) (211) (1,310) (17) (1,116) Financing activities Net cash from (used in) financing activities 2) 255 (1,033) (2,851) - (1,818) Foreign currency effects on cash flows 55 149 142 16 9 Net increase (decrease) in cash and cash equivalents 398 348 77 359 88 Cash and cash equivalents at beginning of period 3) 1,230 1,153 1,153 1,142 1,142 Cash and cash equivalents at end of period 1,627 1,501 1,230 1,501 1,230 1) Operating capital consists of accounts receivable, inventories and accounts payable. 2) The Pro Forma figures for this item includes effects of demerger and pro forma adjustments to financial items, and is not indicative of actual cash flows from or to financing activities. 3) The Pro Forma figures for cash and cash equivalents in the balance sheets includes effects of pro forma adjustments.
YARA FIRST QUARTER 2005 13 CONSOLIDATED SHAREHOLDERS' EQUITY Ordinary shares issued for Premium Total Total Majority Total Yara International ASA paid-in paid-in Retained Shareholders' Minority Shareholders' NOK million, except number of shares Number Amount capital capital earnings equity Interests equity Balance 31 December 2003 1) 63,888,512 109 1,939 2,048 5 2,053 96 2,149 Demerger Yara 25 March 2004 255,554,078 434 1,764 2,198 5,425 7,623 (26) 7,597 IFRS implementation effects, 1 Jan. 2004 2) (368) (368) (368) Net income 25 March - 31 December 2,864 2,864 6 2,870 Foreign currency translation, net (752) (752) (4) (756) Other items recorded directly to shareholders' equity 37 37 (2) 35 Cash flow hedges (77) (77) (77) Purchase of treasury stock 3,001,400 (5) (5) (201) (206) (206) Dividends distributed (7) (7) Balance 31 December 2004 316,441,190 538 3,703 4,241 6,934 11,175 63 11,238 IFRS implementation effects, 1 Jan. 2005 2) (7) (7) (7) Net income 917 917-917 Foreign currency translation, net 200 200 3 202 Other items recorded directly to shareholders' equity (8) (8) (8) Cash flow hedges 2 2 2 Balance 31 March 2005 316,441,190 538 3,703 4,241 8,038 12,279 65 12,344 1) Represents equity balance in Yara International ASA. 2) For specification, see IFRS equity reconciliation, page 25. Ordinary shares issued for Premium Total Total Majority Total Yara International ASA paid-in paid-in Retained Shareholders' Minority Shareholders' NOK million, except number of shares Number Amount capital capital earnings equity Interests equity Balance 31 December 2003 1) 63,888,512 109 1,939 2,048 5 2,053 96 2,149 Demerger Yara 25 March 2004 255,554,078 434 1,764 2,198 5,425 7,623 (26) 7,597 IFRS implementation effects, 1 Jan. 2004 2) (368) (368) (368) Net income 25 March - 31 March 54 54 (7) 47 Balance 31 March 2004 319,442,590 543 3,703 4,246 5,116 9,362 64 9,426 1) Represents equity balance in Yara International ASA. 2) For specification, see IFRS equity reconciliation, page 25.
14 YARA FIRST QUARTER 2005 OPERATING SEGMENT INFORMATION Actual Pro Forma Pro Forma Actual Actual 1Q 2005 1Q 2004 2004 1Q 2004 2004 NOK million (25.3.-31.3.) (25.3.-31.12.) External Operating Revenues Downstream 7,942 7,553 30,436 581 23,463 Industrial 1,329 1,294 5,319 111 4,137 Upstream 1,582 1,985 7,302 157 5,474 Other and eliminations 88 65 169 9 114 Total 10,943 10,897 43,226 859 33,188 Internal Operating Revenues Downstream 212 320 1,005 35 720 Industrial 7 5 47-43 Upstream 3,034 3,076 11,301 231 8,456 Other and eliminations (3,253) (3,401) (12,353) (266) (9,219) Total - - - - - Operating Revenues Downstream 8,154 7,874 31,441 615 24,183 Industrial 1,336 1,298 5,366 112 4,179 Upstream 4,617 5,061 18,603 388 13,930 Other and eliminations (3,164) (3,336) (12,184) (257) (9,105) Total 10,943 10,897 43,226 859 33,188 Depreciation and Amortization Downstream 102 113 445 7 339 Industrial 53 60 238 4 182 Upstream 177 184 730 11 557 Other and eliminations 5 2 15-13 Total 336 359 1,427 22 1,091 Operating Income Downstream 512 396 1,381 11 996 Industrial 152 102 448 12 358 Upstream 627 653 2,200 (4) 1,543 Other and eliminations (20) (102) (321) 48 (171) Total 1,271 1,049 3,708 68 2,727 EBITDA Downstream 665 566 2,142 24 1,600 Industrial 207 164 696 16 548 Upstream 1,004 961 3,573 15 2,627 Other and eliminations (9) (109) (303) 49 (145) Total 1,866 1,582 6,108 104 4,630 Investments Downstream 105 65 413 14 362 Industrial 22 35 228 5 197 Upstream 399 74 751 25 702 Other and eliminations 13 44 183 8 147 Total 538 219 1,574 53 1,408
YARA FIRST QUARTER 2005 15 RECONCILIATION OF EBITDA TO INCOME BEFORE TAX AND MINORITY INTEREST Actual Pro Forma Pro Forma Actual Actual 1Q 2005 1Q 2004 2004 1Q 2004 2004 NOK million (25.3.-31.3.) (25.3.-31.12.) EBITDA Downstream 665 566 2,142 24 1,600 EBITDA Industrial 207 164 696 16 548 EBITDA Upstream 1,004 961 3,573 15 2,627 EBITDA Other and eliminations (9) (109) (303) 49 (145) EBITDA Yara 1,866 1,582 6,108 104 4,630 Depreciation (336) (359) (1,427) (22) (1,091) Amortization of excess value in non-consolidated investees (2) (2) (34) - (32) Interest expense (165) (159) (585) (6) (431) Capitalized interest - 1 1 - - Net foreign exchange (gain)/loss (188) 279 737 4 461 Other financial income/expense, net 49 34 185 (4) 147 Income before tax and minority interest 1,224 1,376 4,985 76 3,686 QUARTERLY INFORMATION Actual Actual Actual Actual Pro Forma NOK million 1Q 2005 4Q 2004 3Q 2004 2Q 2004 1Q 2004 EBITDA Downstream 665 477 526 573 566 Industrial 207 165 156 211 164 Upstream 1,004 965 910 738 961 Other and eliminations (9) (42) (114) (38) (109) Total 1,866 1,565 1,477 1,484 1,582 Quarterly results NOK million, except per share information Operating Revenues 10,943 11,305 10,885 10,138 10,897 Operating Income 1,271 914 834 912 1,049 EBITDA 1,866 1,565 1,477 1,484 1,582 Net Income 917 1,251 759 800 985 Earnings per share (NOK) 2.90 3.94 2.38 2.50 3.08 USD million, except per share information Operating Revenues 1,742 1,795 1,577 1,482 1,576 Operating Income 202 146 121 133 152 EBITDA 297 249 214 217 229 Net Income 146 195 110 117 142 Earnings per share (USD) 0.46 0.61 0.34 0.37 0.45
16 YARA FIRST QUARTER 2005 RECONCILIATION FROM OPERATING INCOME TO EBITDA Selected Operating Non-cons. Interest Financial Depr. and NOK million Income Investees Income Items EBIT Amort. 1) EBITDA 1Q 2005 Actual Downstream 512 15 35-561 103 665 Industrial 152-2 - 154 53 207 Upstream 627 199 1-826 177 1,004 Other and eliminations (20) - 6 - (14) 5 (9) Total Yara 1,271 214 43-1,528 338 1,866 1Q 2004 Pro Forma Downstream 396 17 38-451 115 566 Industrial 102 1 1-104 60 164 Upstream 653 124 - - 777 184 961 Other and eliminations (102) - (9) - (112) 2 (109) Total Yara 1,049 142 29-1,221 361 1,582 2004 Pro Forma Downstream 1,381 119 161 2 1,663 478 2,142 Industrial 448 7 3-458 238 696 Upstream 2,200 642 1-2,843 730 3,573 Other and eliminations (321) - 9 (5) (318) 15 (303) Total Yara 3,708 768 175 (4) 4,647 1,461 6,108 1Q 2004 Actual (25.3.-31.3.) Downstream 11 3 2-17 7 24 Industrial 12 - - - 12 4 16 Upstream (4) 8 - - 4 11 15 Other and eliminations 48 - - - 49 0 49 Total Yara 68 12 3-82 23 104 2004 Actual (25.3.-31.12.) Downstream 996 105 126 1 1,229 371 1,600 Industrial 358 6 2-366 182 548 Upstream 1,543 526 1-2,071 557 2,627 Other and eliminations (171) - 18 (5) (158) 13 (145) Total Yara 2,727 637 148 (4) 3,508 1,123 4,630 1) Including amortization of excess value in non-consolidated investees.
YARA FIRST QUARTER 2005 17 TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) From 1 January 2005 Yara International ASA and subsidiaries ( Yara ) is required to prepare consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). Yara's consolidated financial statements for first quarter 2005 are its first financial statements to be prepared and published in accordance with IFRS. A summary of significant changes to Yara's accounting policies resulting from the transition to IFRS is described below. Reconciliations between previously reported financial results and financial results restated in accordance with IFRS are also presented on the following pages. IFRS 1 First Time Adoption of IFRS was applied in preparing these financial statements. Yara's IFRS accounting policies, except for those related to Financial Instruments (IAS 32 and IAS 39), were consistently applied to all the periods presented. Yara has used the exemption available under IFRS 1 to apply IAS 32 and IAS 39 from 1 January 2005. Up to 31 December 2004, Yara's consolidated financial statements were prepared in accordance with accounting principles generally accepted in Norway ( NGAAP ). NGAAP differs from IFRS in some areas. When preparing its consolidated IFRS financial statements, Yara has amended its accounting policies compared to those previously applied under NGAAP. The comparative figures for 2004 were restated to reflect these adjustments. The financial information presented below is prepared on the basis of the IFRS standards and interpretations that Yara expects will be in force on 31 December 2005. The IFRS standards are subject to an ongoing review process that may lead to amendments to the accounting standards or to interpretative guidance. The financial statements presented could therefore be restated in the future. Yara will update the restated financial information for any changes to the standards or interpretative guidance when changes occur. The numbers in the tables are unaudited. SUMMARY OF SIGNIFICANT CHANGES IN ACCOUNTING POLICIES PENSIONS Yara has decided to use the exemption under IFRS 1, which permits that previously unrecognized actuarial gains and losses as of 1 January 2004 are booked directly to equity in the transition to IFRS. Furthermore, the unconditional part of unrecognized past service costs is recorded directly to equity at the date of implementation. In future, Yara will present its pension liabilities at fair value in the balance sheet. Actuarial gains and losses will be recorded directly to equity. Financial elements in defined benefit plans were reported as payroll and related costs under NGAAP, while they are reported as financial items under IFRS. SPARE PARTS Critical and major spare parts have been reclassified from Inventory to Property, Plant & Equipment in order to comply with IAS 16. CATALYSTS Catalysts used in the production of ammonia and nitric acid were previously classified as inventory in the balance sheet and recorded as product variable costs in the profit & loss statement. Under IFRS these catalysts are treated as Property, Plant & Equipment and recorded as depreciation expense. MAJOR INSPECTIONS AND PLANT MAINTENANCE SHUTDOWNS Accruals for major plant maintenance shutdowns were recorded under NGAAP. Provisions for plant maintenance shutdowns are not permitted under IFRS. Subsequent costs related to plant maintenance shutdowns are capitalized if the recognition criteria under IFRS are met, and depreciated over the period up to the next planned plant maintenance shutdown. DEFERRED TAXES The main implementation effects related to deferred taxes are explained by changes in temporary differences resulting from other IFRS implementation effects. In addition, deferred taxes related to elimination of profit in inventories are adjusted to reflect the tax rate of the receiving country. Under NGAAP the tax rate of the selling country was applied. CURRENCY TRANSLATION EFFECTS ON EQUITY Yara has taken the exemption under IFRS 1 that allows re-setting of cumulative currency translation effects to zero. Gains and losses related to sales of subsidiaries in 2004 have been restated accordingly. GOODWILL Under NGAAP, goodwill was amortized. Under IFRS, goodwill is not amortized, but tested for impairment at least once a year, and written down if impaired. DIVIDENDS Under NGAAP, dividends proposed at the end of the year and paid in the following year, were recorded as a reduction to equity and as debt. Under IFRS, dividends are accrued when declared. SHARE INCENTIVE RIGHTS Under NGAAP, the expense related to the share incentive program was calculated based on the intrinsic value method. Under IFRS, the share incentive program is recorded at fair value in accordance with IFRS 2. FINANCIAL INSTRUMENTS Yara has chosen to use the option under IFRS 1 to apply IAS 32 and IAS 39 from 1 January, 2005. The IFRS implementation effect is related to embedded derivatives, which are recorded at fair value in IFRS.
18 YARA FIRST QUARTER 2005 PAGE CONTENT 18 Pro forma 1Q 2004 Consolidated Statements of Income - reconciliation from NGAAP to IFRS 19 Pro forma 1Q 2004 Consolidated Balance Sheets - reconciliation from NGAAP to IFRS at 31 March 2004 20 Pro forma 1Q 2004 Consolidated Statements of Cash Flow - reconciliation from NGAAP to IFRS 20 Reconciliation of equity from NGAAP to IFRS at 31 March 2004 21 Consolidated Statements of Income - reconciliation from NGAAP to IFRS 2004 (Pro forma and Actual) 22 Consolidated Balance Sheets - reconciliation from NGAAP to IFRS at 31 December 2004 23 Consolidated Statements of Cash Flow - reconciliation from NGAAP to IFRS 2004 (Pro forma and Actual) 24 Consolidated Statements of Income - IFRS quarterly information 2004 25 Reconciliation of equity from NGAAP to IFRS at 1 January 2004 and at 31 December 2004 25 IFRS 2004 - Reconciliation of EBITDA to Income Before Tax and Minority Interest 26 IFRS 2004 - Operating Segment information 27 IFRS 2004 - Reconciliation from operating income to EBITDA Reconciliation 1Q 2004 from NGAAP to IFRS, are only stated for the Pro forma figures, as there are no IFRS-adjustments made for the period 25 March 2004-31 March 2004 CONSOLIDATED STATEMENTS OF INCOME NGAAP/IFRS Statements of Income Pro Forma Pro Forma Pro Forma NGAAP IFRS ADJ. IFRS NOK million, except per share information 1Q 2004 1Q 2004 1Q 2004 Revenues 10,895-10,895 Other income (4) 6 2 Operating Revenues 10,891 6 10,897 Raw materials, energy costs and freight expenses 8,205 (56) 8,149 Change in inventories of own production 97-97 Payroll and related costs 878 (39) 838 Depreciation and amortization 303 56 359 Other 405-405 Operating costs and expenses 9,888 (40) 9,848 Operating Income before financial items 1,003 46 1,049 Share of net income in non-consolidated investees 142-142 Interest income and other financial income 30-30 Earnings before interest expense and tax (EBIT) 1,175 46 1,221 Foreign exchange gain/(loss) 279-279 Interest expense and other financial items (108) (16) (125) Income before tax and minority interest 1,347 29 1,376 Income tax expense (418) (6) (424) Net income 929 23 952 Minority interest 33-33 Net Income after minority interest 962 23 985 Earnings per share 3.01 0.07 3.08 Average number of outstanding shares 319,442,590 319,442,590 319,442,590
YARA FIRST QUARTER 2005 19 CONSOLIDATED BALANCE SHEETS Actual Actual Actual NGAAP IFRS ADJ. IFRS NOK million, except for number of shares information as of 31.03 2004 as of 31.03 2004 as of 31.03 2004 Assets Non-current assets Deferred tax assets 1,047 125 1,172 Other intangible assets 242 (143) 99 Property, plant and equipment 7,120 486 7,606 Non-consolidated investees 2,511-2,511 Prepaid pension, investments and other non-current assets 1,060 (496) 564 11,980 (28) 11,951 Current assets Inventories 5,384 (274) 5,110 Accounts receivable, less allowances 7,677-7,677 Prepaid expenses and other current assets 1,157-1,157 Other liquid assets 30-30 Cash and cash equivalents 1,501-1,501 15,748 (274) 15,475 Total assets 27,728 (302) 27,426 Liabilities and shareholders' equity Equity Share capital 543-543 Premium paid-in capital 3,703-3,703 Total paid-in capital 4,246-4,246 Retained earnings 5,474 (358) 5,116 Total majority shareholders' equity 9,721 (358) 9,362 Minority shareholders' interest in consolidated subsidiaries 64-64 Shareholders' equity 9,784 (358) 9,426 Non-current liabilities Accrued pension liabilities 1,774 343 2,117 Deferred tax liabilities 945 (6) 938 Other long-term liabilities 576 (80) 496 Long-term interest-bearing debt 7,488-7,488 10,783 257 11,040 Current liabilities Bank loans and other interest-bearing short-term debt 406-406 Current portion of long-term debt 29-29 Other current liabilities 6,726 (200) 6,526 7,161 (200) 6,960 Total liabilities and shareholders' equity 27,728 (302) 27,426 Total number of outstanding shares 319,442,590 319,442,590 319,442,590