Forecast of operating expenses

predictions in the industrial nitrogen market, a conservative revenue growth rate of 3% is predicted in the short-term. This is considered realistic, compared to the average of 5% the last three years.

As a stand-alone company, resources and focus on the industrial nitrogen business is expected to finally be prioritized. To become the “first integrated industrial nitrogen company”, NewCo is assumed to invest heavily in the development of its business. This, in addition to strong growth rates in the industrial nitrogen markets, increased demand from the Chinese market and relatively high historical average production growth, the revenue is expected to increase to an annual growth rate of 4% in the medium-term. This is supported by potential benefits from the carve-out, which are assumed to impact in the medium-term. The growth rate is arguably realistic as it is still below the average the last three years. Finally, the long-term revenue growth will converge towards the terminal growth rate of 2%.

The final forecasted revenue of both RemainCo and NewCo are presented in the table below.

of 84,4%, which provides a good indication for evaluating the future cost ratio. As previously explained, natural gas represents the largest production cost variable of Yara, making it the most important driver when forecasting the operating expenses. Figure 43 presents lower forecasted average prices on natural gas for both Hubs than historically, especially for the European, which advocates a lower cost ratio going forward. Phosphate rock and potassium chloride prices are also affecting the cost structure of RemainCo, but to a lower degree due to increased self-sufficiency in P&K (Yara, 2018). As prices of phosphate on average are forecasted to slightly decrease, while potassium is expected to increase, as shown in Appendix 23, the two prices combined are relatively stable (World Bank, 2019a). However, there are also other factors and drivers affecting the cost structure of RemainCo, which will be discussed below from a short-, medium- and long-term perspective.

As previously introduced, Yara has conducted several initiatives to develop a more efficient production of reducing costs, such as targeting an EBITDA improvement of at least USD 600 million from 2018 to 2023 implemented by YIP. In fact, already in 2018, Yara delivered an

improved EBITDA beyond its initial target (Yara, 2018). This, in addition to other initiatives by the new “focused strategy”, such as the first electric vessels for shipping of the deliveries, provides grounds for a leaner cost base. However, although the initiatives are already showing some

improvements, they are expected to be fully implemented more gradually. The same applies for the value effect and synergies of the carve-out. Although markets may react favorably to a divestment announcement, the benefits from divestments often have the greatest impact in the long-term (Deloitte, 2008).

Based on the argumentation, a cost ratio of 85% will be applied in the short-term, which is just above the average and current ratio. A rate above average is applied, as it is assumed to occur

USD millions 2012 2013 2014 2015 2016 2017 2018 2019 Average

Revenue 12 392 12 402 12 763 11 743 9 655 9 555 10 848 10 751

Revenue growth 0,1 % 2,9 % -8,0 % -17,8 % -1,0 % 13,5 % -0,9 % -1,6 %

Operating expenses -10 041 -10 591 -10 539 -9 275 -8 180 -8 443 -9 707 -9 071

Operating ex. growth 5,5 % -0,5 % -12,0 % -11,8 % 3,2 % 15,0 % -6,6 % -1,0 %

Operating costs % 81,0 % 85,4 % 82,6 % 79,0 % 84,7 % 88,4 % 89,5 % 84,4 % 84,4 % EBITDA 2 351 1 811 2 224 2 468 1 475 1 112 1 141 1 680

EBITDA-margin 19,0 % 14,6 % 17,4 % 21,0 % 15,3 % 11,6 % 10,5 % 15,6 % 15,6 %

RemainCo's operating costs

USD millions 2014 2015 2016 2017 2018 2019 Average E2020 E2021 E2022 E2023 E2024 E2025 Average

European Hub 10,1 6,8 4,6 5,7 7,7 4,5 6,6 4,0 4,7 4,9 5,1 5,4 5,6 4,9

% growth each year -32,1 % -33,1 % 25,3 % 34,4 % -41,4 % -9,4 % -12,2 % 17,8 % 5,7 % 4,5 % 4,5 % 4,5 % 4,1 % Henry Hub (USA) 4,4 2,6 2,5 3,0 3,2 2,6 3,0 2,7 2,8 2,9 3,0 3,2 3,3 3,0

% growth each year -40,2 % -4,6 % 18,8 % 6,6 % -19,2 % -7,7 % 5,9 % 3,9 % 4,2 % 4,0 % 4,0 % 4,0 % 4,3 %

Historical prices Forecast prices

some separation costs as a result of the carve-out (PWC, 2018a). In the medium-term, the cost ratio can arguably reach a lower level, and targeting a cost ratio of 83% is expected to be

achieved. This is supported by the introduced initiatives and the value effect of the carve-out and its synergies of focusing on its core business, which are expected to be incorporated in the medium-term. As shown in Appendix 24, RemainCo has one of the highest cost ratios among those of its peers, with and industry average of 79,9%. This indicates that there are still room for improvements. Therefore, a cost ratio of 83% is argued to be achievable also in the long-term period, as the improved efficiency from the implemented initiatives and the value effect from the carve-out are expected to remain.

NewCo:

As shown in the figure below, the historical changes in operating expenses and revenue of NewCo are, similar to RemainCo, following the same trend. In fact, the two growth rates are exactly the same in 2013, 2014 and 2015, which provides solid grounds for using a sales-driven approach.

Operating expenses for NewCo are historically higher than RemainCo’s, and have accounted for on average 90,7% of the total revenue which could be explained by their different production methods. Over the historical period, the cost ratio has been at a fairly steady level, except for a drop in 2016 and 2019, due to underlying volume and margin improvement as well as lower fertilizer prices (Yara, 2018). The average level is therefore a good indication when forecasting the future cost ratio. The fertilizer prices, which opposed to RemainCo impacts the cost structure of NewCo’s, are expected to experience a relatively small and stable growth, as presented in Section 4.11.1.1. Therefore, these prices are assumed to have less impact on the future cost ratio, and other factors affecting the cost structure of NewCo will therefore be discussed below from a short-, medium- and long-term perspective.

The initiatives taken by Yara to improve the efficiency and reduce costs through the YIP, is also assumed to apply for NewCo’s production process, providing grounds for a leaner cost base.

Although the cost ratio experienced a small improvement effect in 2019, the fertilizers prices are

USD millions 2012 2013 2014 2015 2016 2017 2018 2019 Average

Revenue 2 153 2 088 2 371 2 140 1 913 1 845 2 205 2 185

Revenue growth -3,0 % 13,5 % -9,7 % -10,6 % -3,5 % 19,5 % -0,9 % 0,7 %

Operating expenses -1 994 -1 939 -2 217 -1 998 -1 579 -1 716 -1 988 -1 910

Operating ex. growth -2,8 % 14,3 % -9,9 % -21,0 % 8,7 % 15,8 % -3,9 % 0,2 %

Operating costs % 92,6 % 92,9 % 93,5 % 93,4 % 82,5 % 93,0 % 90,2 % 87,4 % 90,7 % EBITDA 159,0 149,1 154,0 141,9 333,9 128,6 217,1 275

EBITDA-margin 7,4 % 7,1 % 6,5 % 6,6 % 17,5 % 7,0 % 9,8 % 12,6 % 9,3 %

NewCo's operating costs

the short-term of 90%. However, for NewCo to become an independent company on a stand-alone basis, cost considerations related to the carve-out are argued to be included. Annual stand-alone costs might encompass additional management costs, higher purchase prices as a result of new, uncertain customer agreements as well as other back-office services (PWC, 2018a). These costs are highly unpredictable but can arguably increase the cost ratio to 91% in the short-term. On the date of the carve-out, a one-off separation cost is also assumed to occur (PWC, 2018a), including costs such as IT & technology, marketing of its new brand, and movement of clients and

employees. Consequently, a higher cost ratio of 91,5% is expected in the assumed carve-out year of 2020. Although forecasted figures in general should not include non-recurring items (Petersen &

Plenborg, 2012), these costs are argued to be included, necessary for conducting a proper carve-out valuation on a stand-alone basis.

In the medium-term, the annual stand-alone costs are assumed to vanish, and the cost ratio is expected to return to the initial level of 90%. In the longer term, the cost ratio could arguably reach a lower level than the average, as in this period, the improved efficiency from the implemented initiatives and the synergies of the carve-out is expected to show its effect. This is, similar to RemainCo, supported by the fact that NewCo has not yet reached its full potential of an improved cost ratio compared to its peers. As shown in Appendix 25, the average industry cost ratio is 87,7%. Targeting a cost ratio of 89% is therefore expected to be achieved. This is still higher than the current cost ratio and in line with the EBITDA margin Yara expects for NewCo right after the carve-out of 10-15% (Yara, 2019b). Thus, this is considered a conservative estimation and hence realistic, and will therefore be applied in the long-term period.

The final forecasted operating expenses of both RemainCo and NewCo are presented in the table below.