The fertilizer season in Western Europe referred to in this discussion starts July 1 and ends June 30. “Tons” in this document refers to metric tons, equal to 1,000 kilograms.
Several of Yara’s purchase and sales contracts for commodities are, or have embedded terms and conditions which under IFRS are, accounted for as derivatives. The derivative elements of these contracts are presented under “Commodity-based derivatives gain/(loss)” in the income statement, and are referenced in the variance analysis (see below) as “Contract derivatives.”
“Other and eliminations” consists mainly of cross-segment eliminations, in addition to Yara headquarters cost. Profits on sales from Upstream to Downstream and Industrial are not recognized in the consolidated Yara income statement before the products are sold to external customers. These internal profits are eliminated in the “Other and eliminations” segment.
Changes in “Other and eliminations” EBITDA therefore usually reflect changes in Upstream-sourced stock (volumes) held by Downstream and Industrial, but can also be affected by changes in Upstream margins on products sold to Downstream and Industrial, as transfer prices move in line with arms-length market prices. With all other variables held constant, higher stocks would result in a higher (negative) elimination effect in Yara’s results, as would higher Upstream margins. Over time these effects tend to even out, to the extent that stock levels and margins normalize.
In the discussion of operating results, Yara refers to certain non-GAAP financial measures including EBITDA and CROGI (Cash Return On Gross Investment). 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 – both for management and for investors – of the underlying operating results of the operating 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 writedowns, 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 equity-accounted investees. It excludes depreciation, writedowns and amortization, as well as amortization of excess values in equity-accounted 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 and cash equivalents, other liquid assets and fair value adjustment recognized in equity) plus accumulated depreciation and amortization, less all short-term interest-free liabilities, except deferred tax liabilities.
ROCE (Return on capital employed) has been included as an additional performance measure to CROGI to simplify benchmarking with other companies. ROCE is defined as EBIT minus tax divided by average capital employed and is calculated on a 12-month rolling average basis. Capital employed is defined as total assets adjusted for deferred tax assets minus other current 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 Yara’s business. However, these estimates should be understood to be less than an exact quantification of the changes and trends indicated by such analysis.
Due to it being impractical to obtain all financial reports at the same reporting dates as Yara uses, there is for some of Yara’s associated companies and joint ventures a lag of 1-3 months for the numbers included in Yara results.