The fertilizer season in Western Europe referred to in this discussion starts July 1 and ends June 30.
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 condensed consolidated interim statement of income and are referenced in the variance analysis (see below) as “Special items.”
“Other and eliminations” consists mainly of cross-segment eliminations, in addition to Yara’s headquarter costs. Profits on sales from Upstream to Downstream and Industrial are not recognized in the Yara condensed consolidated interim statement of income 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. These effects tend to even out over time, to the extent that stock levels and margins normalize.
In the discussion of operating results, Yara refers to certain non-GAAP (generally accepted accounting principles) financial measures including EBITDA and CROGI. Yara’s management regularly uses these measures to evaluate performance, both in absolute terms and comparatively from period to period. These measures are viewed by management as providing a better understanding - for both management and for 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 equity-accounted investees. It excludes depreciation, write-downs 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 an alternative to operating income and income before tax for measuring the company’s operations in accordance with GAAP. 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”), which 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 a less than exact quantification of the changes and trends indicated by such analysis.
Yara defines “special items” as material items in the results which are not regarded as part of underlying business performance for the period. These fall into two categories, namely “non-recurring items” and “contract derivatives.” “Non-recurring items” comprise restructuring-related items and other gains or losses which are not primarily related to the period in which they are recognized, subject to a minimum value of NOK 20 million per item within a 12-month period. “Contract derivatives” are commodity-based derivatives gains or losses (see above) which are not the result of active exposure or position management by Yara.
Due to the impracticality of obtaining financial reports that are fully synchronized with Yara’s own reporting dates, the results for some of Yara’s equity-accounted investees are included in Yara results with a one-month time lag.