Yara International ASA

OSE:YAR

Earnings Call Transcript 2022-Q3

[Anika Jovik, executive]

Hello, and welcome, everyone to Yara's third quarter 2022 Results Presentation. We have an exciting lineup for you folks today. We will start with Yara's CEO, Svein Tore Holsether, who will walk us through key messages on Yara's overall performance. We will then go to Yara's CFO, Thor Giæver, who will dive deeper into financial and operational metrics, and then Svein Tore will come back for closing remarks. If you want to ask questions, please do so. There will be an investor call following this presentation at 1 p.m. Oslo time. But for now, let's get started and I welcome Yara's CEO, Svein Tore.

[Svein-Tore Holsether, executive]

Thank you very much, Anika, and good morning, good afternoon and good evening, depending on where you're dialing in from. And as always, we will start with going through our safety performance. While we, over time, have seen a significant and improving trend in our safety statistics. Unfortunately, we continue to see an increase in accidents.

And this quarter, we had more accidents than we did in the same quarter last year. The direct causes of this are increases in, say, stability or ability to run on a stable basis in our plant. It's about risk preparation and also inadequate risk awareness. However, as I said last quarter, the current environment continues to add increased demands on our team, with frequent adjustments to our operations and also the production schedules and the mental stress also connected with that.

So while I'm pleased with our safety performance over time, which still remains at an industry-leading level, all injuries are avoidable. We don't like to experience that the trend is moving in the wrong direction, and we will continue our work towards our ambition of 0 injuries. So in preparation for this, I looked at the definition of the word resilient in the dictionary. And it said the ability to recover from a change or misfortune. And looking at what we've been through in the last 2.5 years, I can safely say that we have a resilient business model and organization.

And I want to thank all our 18,000 colleagues and our contractors for a massive effort. Considering what we've been faced with, it is of such a magnitude that you cannot detail plan for something like this. You cannot micromanage it when you're in the middle of it. And this is about, really, about every single employee doing whatever they can to a purpose-driven company. Everyone in our company understand why what we do is important. And the ones closest to the operations, whether that is running a plant, selling a product or providing agronomic advice, they are the ones at the front lines that know best what to do. So this is really about culture. And either you have that or you don't, and we do. And this is really enabling us to run the business when facing volatility and uncertainty, and this is also good for our shareholders, and it is also good for the world.

Moving then to the main messages for the third quarter financials. This is another quarter with strong financial performance with strong efforts to optimize our operations amid volatile gas prices and significant supply disruptions. We did see improved returns with the strong margins in all our commercial operations. However, our production performance was impacted by curtailments and reliability issues in a volatile environment. Given the strong overall performance, the Board proposes NOK 10 additional dividend to be paid in fourth quarter and will also consider further cash returns, including share buybacks in the coming quarters.

Yara's markets have never been more challenging than what we've seen in the past 12 months with European production costs reaching all-time highs at times breathing $2,000 per tonne of -- for producing ammonia and $1,500 per tonne of urea. The resilience of Yara's global business model is clearly demonstrated in the strong returns that it has delivered in recent years, both in periods with very low and also with very high natural gas prices. As a result, Yara has generated considerable shareholder returns over time, both in the form of dividends and in share price appreciation. Given this track record and currently low relative valuation, we're confident that Yara remains a highly attractive investment also for the future.

EBITDA is up by 31% from third quarter last year as improved prices more than offset the increased energy costs and lower deliveries. We have a negative impact then from lower deliveries in the quarter, mainly within the commodities segment. Our realized energy costs are lower than what we guided, mainly because prices at regional gas hubs like NBP and [indiscernible] trading significantly lower than compared with the forward curve at the time of guidance. Plus there was a positive margin effect due to using imported ammonia from outside Europe to replace producing with expensive gas in Europe. Fixed costs are up in the quarter. This is mainly driven by a ramp-up of new business areas and also inflationary pressure. Thor will come back to that in more detail later on and also addressing some of the other effects.

Yara's global footprint, flexible production setup and leading ammonia trade position has been invaluable also in this quarter, allowing significant optimization amid the major gas price volatility that we've seen in Europe in particular? But in Europe, this has meant curtailing ammonia production, resulting in production levels more than 40% below capacity in the third quarter. Although the optimization overall is clearly value creating for Yara. It impacts our production reliability and it's also a longer-term concern for European fertilizer and food self sufficiency. And we will come back to both of these issues later on in the presentation.

As already mentioned, the Board proposes a NOK 10 additional dividend to be paid in fourth quarter. And we'll also consider further cash returns, including share buybacks in the coming quarters. Yara's overall objective is to maintain a mid investment grade credit rating, that remains firm with a targeted mid- to long-term net debt-to-EBITDA range of 1.5 to 2 and a net debt equity ratio below 0.6. As our results over time demonstrate, we have a strong and resilient base model with a cyclical upside.

We also have a number of growth opportunities, and we are developing our portfolio, where Yara has a clear competitive edge and can enable the hydrogen economy and transformative areas within agriculture. These businesses are developed under portfolio development area that we established last year within corporate development. One such business is Yara Clean Ammonia, and this unit is delivering record results in a turbulent ammonia market. In a situation where curtailments across the auto production system where there's been a need to restructure sourcing due to war and sanctions, Yara Clean Ammonia has maintained their volume commitments, demonstrating their strong sourcing and distribution capacities and capabilities as the world leader in ammonia trade and shipping.

During the quarter, Yara Clean Ammonia has also further matured. It's a pilot project to produce green ammonia at the Yara Pilbara plant in Australia and entered into an LOI to produce blue ammonia based on carbon capture and storage from Yara's Sluiskil scale plant in the Netherlands. This shows that Yara Clean Ammonia both has a strong current business platform and also attractive growth opportunities. The evaluation of the Yara Clean Ammonia IPO also continues. However, due to the unfavorable market conditions, this is now planned for 2023. In the meantime, the development of the Yara Clean Ammonia business and growth portfolio continues with full strength.

So now I'll hand over to Thor to take you through the financials. Over to you, Thor.

[Thor Giaever, executive]

Thank you, Svein Tore. So as you can see from our key figures, we continue to perform well in a demanding environment with substantial underlying increases in EBITDA, earnings per share and return on invested capital. Our reported earnings per share was USD 1.57 with the difference compared with the underlying $2 per share, more than explained by USD 260 million currency loss, which is driven mainly by the impact of a stronger U.S. dollar on our debt portfolio.

Now this kind of currency loss is fundamentally positive for Yara going forward as our revenues and margins are U.S. dollar driven. And this is also why we hold most of our debt in U.S. dollars. Our 12-month rolling return on invested capital at 22% is more than double last year's level. This is both due to stronger earnings this year. And in addition, that last year's return was impacted by $355 million impairment charge. The outflow of operator capital this quarter was due to higher selling prices that increased our receivables in addition to a normal seasonal reduction in prepayments from customers in Brazil. And as you can see, we had a similar seasonal development in the operating capital last year.

Investments were also at a similar level to last year. While our cash from operations improved mainly due to the stronger operating income compared with a year earlier, but please note that the impairment loss last year impacted our operating income but not our cash flow.

Looking at our segment results. All commercial units delivered strong and improved results, while the impact of the high European gas prices can be seen clearly in our Global Plants segment. In Europe, EBITDA improved strongly as higher prices and continued strong premium deliveries more than offset the increased production costs. And as you can see in the bottom chart, only 20% of the Europe segment production of finished goods is exposed to European gas prices. And furthermore, in this quarter, that was reduced to 11% as we optimized our production.

In Americas, the EBITDA improvement mainly reflects increased nitrogen upgrading margins with tighter global nitrogen markets. Asia and Africa EBITDA improved mainly due to higher production margins in Pilbara and improved premium product margins. Our global plants EBITDA was $240 million lower than a year earlier as higher energy and raw material costs led to a significant drop in production margins. But the results should be seen together with the commercial segment results, and it shows the value of our integrated business model with a global downstream footprint complementing our flexible production setup.

Industrial Solutions EBITDA was $58 million higher than a year earlier, mainly driven by higher market prices in Europe due to increased production costs and supply shortages across the industry. And as Svein Tore already covered, YCA EBITDA was up $28 million, mainly due to higher ammonia prices. Overall, our fertilizer deliveries were 26% lower than last year, with the main reduction in commodity products, while premium product deliveries were more resilient.

In Europe, premium deliveries were stable or slightly up as farmers secured part of their fertilizer needs for the spring application. While the lower commodity deliveries were mainly in South Europe, due to a mix of production curtailments and drought. In Americas, the main reduction was in lower-margin commodity blends as sanctions imposed on suppliers from Russia and Belarus impacted our sourcing, while our premium product deliveries were relatively stronger. In addition, our commodity product sales were impacted by approximately 170,000 tonnes by the turnaround in our Belle Plaine plant and a further 150 kilotonnes by the partial closure of the Paulínia plant in Brazil.

In Africa and Asia, the reduction of 375 kilo tonnes was roughly evenly split between commodity and premium products where the latter was mainly driven by lower NPK deliveries in China, where domestic prices are significantly below global levels. And also by lower profitability in several key markets, including Thailand and Kenya. Deliveries in Industrial Solutions were strong overall but with some demand erosion in base chemicals, where high prices led some European customers to reduce or curtail production. And as covered earlier, YCA saw stable deliveries despite the volatile ammonia market.

Now let's take a look at our operational improvement status where our main challenge is linked to production reliability. Improving reliability in our production plants has been and remains a strong focus for Yara. However, we've also had to manage challenging operating environments in the last 2 to 3 years and made optimization decisions that impact our reliability performance in the short to medium term. Examples of this are maintenance turnarounds that were postponed during the pandemic due to the operational risk picture at the time and more recently, the significant curtailment and optimization activity in our plants, which is highly value-creating, but is also more demanding for our operational teams and does not create ideal conditions for longer-term improvement work. This situation has impacted both our production reliability performance and our energy consumption performance.

As already mentioned, our fixed costs have increased, driven partly by a challenging operating environment and partly by increased inflation. However, our total resource use guidance is unchanged as we continue to allocate dynamically between CapEx and OpEx within our total frame. On operating capital days, we are stable and on track to achieve our long-term targets. Back to the production performance, we continue our longer-term improvement work with several programs to increase long-term reliability through competence development, targeted critical equipment programs, operational excellence development and specific task forces to support critical assets. In addition, we have an increased focus on investments to improve plant flexibility and our ammonia logistics, both of which are particularly important in the current environment.

Looking at our net debt development. I've already covered the key elements within earnings, operating capital and investments. So I'll simply note that our cash earnings were strong this quarter, in particular, considering that the operating capital increase is due to higher prices and margins and normal seasonal patterns.

So on that positive note, I'll now hand you back to Svein Tore for his closing remarks.

[Svein-Tore Holsether, executive]

Thank you very much, Thor. As you have seen, Yara is effectively managing its operations also under very challenging conditions. But we are deeply concerned about the state of global agriculture. The world's food supply cannot be maintained without nitrogen. And as you see on this slide, Europe plays a very important role in global nitrogen production. But today, half of its capacity is curtailed because of high energy prices. In addition, there is also less supply available from China and several other locations as well.

To fight an escalating food crisis that is happening as we speak, the world needs all the food and all the fertilizer at its disposal. However, in the long term, it is critical for Europe to reduce our dependency on Russia, not only within energy, but also within fertilizer and food. We repeat our call for action to become less dependent on fertilizers from Russia, accelerate use of renewable energy and secured continued access to natural gas for the fertilizer industry.

As the world and Europe hopefully make these critical changes, Yara is not only strongly positioned to play a leading role in transforming agriculture, but also in the larger hydrogen economy. With a strategy focused on premium products sustainable solutions, operational excellence and innovation, we are well positioned to continue to generate strong shareholder returns.

So thank you, and then I'll hand back to Anika. Over to you.

[Anika Jovik, executive]

Thank you, everyone, for listening in today. As I said before, there will be an investor call in a little less than 40 minutes at 1 p.m. Oslo time. You can find the call-in details at yara.com under Investors and then under third quarter results or the financial -- under the financial calendar. And with that, we wish you a good day, and please join us at 1 p.m. Thank you.