Yara International ASA
OSE:YAR
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Yara International ASA
Earnings Call Analysis
Q3-2024 Analysis
Yara International ASA
In Yara's latest earnings call, the company reported a robust EBITDA of $585 million for the quarter, reflecting a significant 47% increase year-over-year. This growth is attributed largely to improved margins and reductions in fixed costs, though overall production volumes dipped approximately 4% compared to last year. Despite lower commodity nitrogen margins, increases in NPK margins and phosphate upgrading margins were key contributors to this performance, showcasing Yara's ability to thrive in a competitive and fluctuating market.
Yara achieved all-time high production levels for ammonia and finished fertilizers, with production rising 14% and 8% respectively over the past 12 months. This performance is remarkable, considering the company has navigated through operational challenges, including mixed raw materials and scheduled maintenance. Major sites such as Porsgrunn NPK have set consecutive monthly production records, contributing over $30 million to annual improvement, which illustrates the strength of Yara's operational framework and the dedication of its workforce.
The return on invested capital (ROIC) saw a notable spike from 3.6% to 8.9% for the quarter, underscoring improvements in overall financial health. The company's net debt-to-EBITDA ratio stands at a manageable 1.71, demonstrating prudent financial management. Despite facing challenges in the European market due to high energy costs and regulatory pressures, Yara's diversified geographical presence in the Americas and Asia is aiding in its recovery and growth story.
Yara is actively pursuing a cost reduction program with a goal of achieving $150 million savings by the end of 2025. In the last 12 months, the company has successfully reduced fixed costs by approximately $45 million, driving a shift from high fixed expenses to a more variable cost structure. The emphasis on portfolio optimization also highlights management's commitment to divesting low-return assets and focusing on high-potential projects.
Looking ahead, the nitrogen market appears to be tightening, with Yara expecting further improvements in fundamentals in the following years. Importantly, the company anticipates achieving higher nitrate and NPK margins due to EU carbon pricing policy shifts. Both Indian import dynamics and Chinese export limits are pivotal factors affecting the market, with Yara prepared to adapt its strategies accordingly. The management remains optimistic about achieving strong shareholder returns, particularly with ongoing projects in the U.S. aligning with the company's long-term vision for sustainability and growth.
In conclusion, Yara appears to be navigating through an increasingly complex landscape with a clear focus on improving operational efficiencies, driving margins, and optimizing their asset portfolio. The strong quarterly results, combined with a strategic outlook and cost management initiatives, suggest that Yara is well-positioned for future growth, reinforcing confidence among investors in the company's ability to adapt and thrive in the evolving agricultural sector.
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Welcome to Yara's Third Quarter Results Presentation. The presentation today will be held by our CEO, Svein Tore Holsether; and our CFO, Thor Giæver. There will be a conference call at 1:00 p.m. Oslo Time, where you can dial in and ask questions. Log-in details are found under the Investor page on yara.com. And with that, it's my pleasure to hand over to Svein Tore Holsether.
Thank you, Maria, and good morning, good afternoon and good evening, depending on where you're dialing in from. And thank you for joining the Yara third quarter results presentation. As always, we start by looking at our safety performance, and our TRI has continued to decline over the last 6 months.
In general, the severity of the accidents have been low in the third quarter, but still -- this year, we have experienced serious near misses. And this is a very clear reminder of how critical it is that we keep enforcing a strict focus on safety every day. I want to give credit to all my colleagues for the Safe by Choice way of working. It has really made a difference, and we are progressing towards 0 injuries.
Turning then to the main elements of the quarter. EBITDA, excluding special items, is $585 million for the quarter with improved margins compared to a year earlier. While commodity and nitrogen margins have been stable to slightly negative, we have delivered strong NPK margins this quarter, primarily due to improved P and also K pricing.
NPKs and other premium products are at the very core of our operations and deliver strong premiums above commodity pricing. We're also pleased to deliver all-time high production for both ammonia and finished fertilizer. And this is an especially strong performance following a period where we have -- and where we are running our plants on suboptimal raw materials mix with many start-ups and shutdowns and experimenting with different levels of utilization. And I believe that this clearly shows the resilience of our assets and even more so, our workforce.
It's a clear demonstration of the strength of a purpose-driven company. This also improves our ability to deliver products and returns in the coming quarters. Our earnings and returns are on an improving trend. However, we are still below our through-the-cycle target of 10%. Therefore, we continue to focus on cost and portfolio optimization.
Looking then at the EBITDA variance for the quarter, the main factors improving our earnings are increased margins and lower fixed costs. The margin increase is mainly driven by improved phosphate upgrading margins, more stable potash pricing and improved commercial margins in Brazil. Fixed costs are $36 million lower than last year, partly reflecting one-off items, but also $14 million of sustainable improvement, including divestments.
Volumes are down approximately 4% compared to last year. However, with a limited financial impact due to positive mix effects, mainly consisting of increased ammonia production and deliveries at good margins. With this, the return on invested capital for the quarter in isolation shows a strong improvement from last year, going from 3.6% to 8.9%.
As mentioned, production for the quarter has been strong. Actual production for ammonia and finished goods is up 14% and 8%, respectively, for the last 12 months compared with 2023. Production performance where volumes lost for major planned maintenance and market-driven curtailments are added back and then they are at an all-time high with 8 million tonnes of ammonia and 21.1 million tonnes of finished fertilizers produced in the last 12 months. The most profitable and strategically important sites have driven most of the improvement.
And let me give a few examples. Porsgrunn NPK has set a new monthly production record 9 months in a row leading to more than $30 million improvement on an annual basis. Belle Plaine continues to deliver strong performance where both ammonia and urea are running above recent years' performance with excellent reliability and margins. This gives us comfort in the robustness of our production system even with multiple curtailments, plant stop and starts and our plants are able to run at strong levels. Our production plants are really the backbone of our business and improving in the output of our plants reduces the production cost per tonne, and it also improves returns.
I'll now hand over to Thor to take us through the financials. So over to you, Thor.
Thank you, Svein Tore. So as you've already seen, we have a strong EBITDA this quarter, up 47%, mainly due to improved margins. The earnings per share increase was even stronger as it was positively impacted by a currency gain of $113 million while last year, we had a currency loss of $65 million. Net operating capital is negative for the quarter, but for positive reasons, reflecting both higher production and increasing margins.
Last year, we had a significant release of operating capital mainly due to significant price declines in the first half of 2024. The reduction in cash from operations is more than explained by operating capital developments with stronger operating cash flow offsetting some of the operating capital increase. Investments are lower, mainly reflecting that last year, we had major maintenance in our Pilbara plant in Australia. And as you've already seen, ROIC was 8.9% for the quarter in isolation. And on a 12-month rolling basis, it was 6.9% reflecting a positive trend given the quarter return, a positive trend in our financial performance.
Now let's take a look at our margin improvement, which this quarter comes despite lower nitrogen margins in the market overall. Firstly, nitrate and NPK premiums generated in recent quarters are strong, above the 5-year average, which includes a very strong period in 2022 and early 2023. We also have a significantly improved phosphate upgrading margin, which was almost 0 last year due to low DAP prices and high phosphate rock prices. While this year, the situation has reversed, and overall margins are closer to average.
The improved phosphate margins represent approximately $50 million positive EBITDA effect this quarter. Potash prices were on a downward trend this time last year, compressing NPK margins as we have a time lag typically of around 3 months from sourcing MOP to delivering NPK. The MOP price is more stable this year, generating a positive impact of approximately $20 million in the quarter.
In Brazil, Yara focuses on premium over volume and uses third-party volumes to balance out supply versus demand. Last year, the margins on these third-party products were negative while they've rebounded to more than $40 per tonne this year. We delivered approximately 1.1 million tonnes of these third-party volumes in Brazil this quarter, slightly down from 1.2 million tonnes 1 year ago. And this gives a positive impact of this margin improvement -- gives a positive impact of approximately $50 million EBITDA in the quarter.
Let's take a look at the status of our cost and CapEx reduction program, which we announced in the second quarter. For the past 12 months, fixed costs are down approximately $45 million or $36 million, excluding currency effects. $14 million of this variance is sustainable and includes the divestment of Yara Marine in addition to first wave savings on external cost and other immediately available actions across the organization. The remainder of the $36 million is a combination of one-offs and normal variations, which we will not count towards our target of $150 million cost reduction by the end of 2025.
The second wave of the cost project focusing on targeted structural actions is under development with execution starting in first quarter 2025. The main target realization is, therefore, expected during the second half of next year. And in the meantime, we'll have inflation effects and normal variations. So do not draw a straight line from our last 12 months' performance to the end 2025 run rate target.
CapEx is progressing as planned and in line with our updated guidance. And the fixed cost and CapEx reduction program is a top priority for the organization and is one part of several actions to future-proof core operations and increase shareholder returns which Svein Tore will summarize later in the presentation.
Turning now to deliveries. We had a decline in total of 4% compared to the same quarter last year. Crop Nutrition deliveries fell 7%, and this was mainly within commodity product deliveries. In Brazil, the third-party product deliveries decreased by approximately 140 kilo tonnes as mentioned as we prioritized margins over volume.
In Europe, deliveries were 8% down, mainly reflecting limited commodity product prebuying in Southern Europe. In Africa and Asia, deliveries were down also due to margin over volume focus and also some phasing effects in certain markets. Industrial deliveries were stable compared with last year, but lower than historical average, reflecting mainly a reduced industrial activity in Europe. Finally, ammonia deliveries increased 56%, reflecting strong ammonia production performance in the quarter.
Looking at the segment results for the quarter, we have improved earnings and returns in all segments, except for Europe. The combination of high energy costs, increased competition from imports and an ambitious regulatory environment is highly challenging for the European fertilizer industry. However, Yara is well placed to mitigate these challenges over time through cost reduction, portfolio management and utilizing our global ammonia sourcing flexibility. In Americas, the improvement mainly reflects improved commercial margins and positive currency impact.
In Africa and Asia, we saw higher margins in Asia and Asia Pacific and last year was impacted by downtime in Pilbara, Australia. In global plants, results increased due to higher production volume and improved margins and in clean ammonia, the results were up $19 million, driven by higher volumes, thanks to improved ammonia production. Our net debt is roughly stable compared to last quarter as improved cash earnings funded both investments and the operating capital increase in the quarter. And this brings our net debt-to-equity ratio, our net debt-to-EBITDA ratio to respectively, [ 47% ] and 1.71, both of which are within our financial policy range.
Turning now to our integrated scorecard. Most of the profit metrics have been covered already in the presentation. For our People and Planet KPIs, we continue to see an overall positive trend. GHG intensity is at a record low level of 2.9 CO2 equivalents per tonne of nitrogen produced, and this is on track to reach our target of 2.7 next year. The investments generating this improvement are profitable with an average payback period of 3 years. Absolute GHG emissions are up compared to 2023 due to higher production rates. The operating capital days increase is mainly due to higher inventory levels following high production rates and seasonally lower deliveries. And finally, our top priority is the cost and CapEx program and portfolio optimization to sustainably improve our returns.
Before I hand back to Svein Tore, let's take a look at the fundamentals for the nitrogen market. Nitrogen prices are demand driven, with prices above historical averages and reflecting a tight global market balance. There are 2 main factors impacting 2024, and these are Indian imports and Chinese exports. Chinese exports have been close to 0 so far in 2024, and this trend is expected also for the rest of the year. Supply growth elsewhere is also close to 0, as you can see. However, the demand side is also weaker this year, mainly due to lower Indian imports following strong domestic production and inventory building ahead of the election earlier this year.
We can expect further declines, both on the supply side and demand side in the second half of this year, as last year, China exported more than 3 million tonnes, and India imported more than 5.5 million tonnes. Looking beyond this year, with limited urea capacity additions in the pipeline, we expect nitrogen markets to tighten further. Chinese export policy remains a key factor to monitor also going forward with recently increased domestic consumption and lower exports, a clear positive.
With that, I'll now hand you back to Svein Tore for his closing remarks.
Thank you, Thor. As mentioned, portfolio optimization is at the top of our agenda. And I want to be very clear on how we review and manage our portfolio decisions. Any evaluation of our portfolio is exclusively driven by long-term returns. And the first step is to divest or optimize low-return and noncore assets. We've already made some progress here, divesting smaller market operations such as Cameroon and Ivory Coast. And we've also divested noncore businesses, such as Yara Marine and a terminal in North America and our Liquid NPK business in Brazil.
In terms of production portfolio optimization, we are in the process of repurposing our Montoir plant in France. And last week, we announced an intention to transform our Tertre site in Belgium. We're continuing to work on our plant prioritization framework and progress our company-wide asset portfolio review. Secondly, being a large competitive industry player and an attractive partner, Yara has a strong pipeline of potential growth projects. Here we're disciplined in only focusing on projects with a clear strategic fit, future competitiveness and strong shareholder returns.
We explore a number of projects and do not proceed when we do not see strong returns and strategic fit. A good example of this is that our completed greenhouse gas projects, which have been with an average payback period of 3 years, as Thor already mentioned. Examples of projects we have shelved are green hydrogen projects in Porsgrunn and Sluiskil, both with renewable ammonia but without attractive returns and both managed without material losses. However, where we do see strong potential, there we progress. And our current focus is U.S. upstream ammonia projects. The profitability of this is expected to be strong and with a very clear strategic fit to Yara's competitive edge and business model.
The U.S. ammonia projects can complement Yara's existing ammonia midstream position and our European premium production setup. First, our ammonia system is the world's largest and fully scalable. Secondly, as EU carbon pricing increases nitrogen pricing in Europe, nitrate and NPK margins will increase when upgraded from low-carbon ammonia. As all of Yara's nitrate and NPK production can run on imported ammonia, we can achieve a low carbon premium by importing ammonia.
In addition, we see further margin potential by having an upstream position in U.S. ammonia. Upgrading margin from gas to ammonia is an important element of Yara's upstream margins. By switching to production in the U.S., we get access to competitive gas pricing and also well advanced CCS infrastructure. Furthermore, with the large scale, we can significantly reduce our CapEx per tonne. And most importantly, we have offtake for these volumes internally from our European premium product plants. And in addition to growing external demand from new clean ammonia markets. The combination of this is expected to provide Yara with strong shareholder returns and also support a Fit for Future Yara. And let me be clear. we will not sanction these projects if we do not see double-digit returns.
To summarize, as mentioned, the key focus of the whole organization is now to optimize our core operations, to increase free cash flow and generate higher returns in order to fund shareholder returns and value accretive growth. We're making progress across all key elements. Our third quarter earnings are showing improved returns and also lower fixed costs. We're continuing to evaluate and refocus our portfolio. And the 2 largest projects announced are the repurposing of Montoir and also the intention to transform the Tertre site.
For the upstream ammonia projects, we are continuing to mature the projects and evaluating the most value-accretive path to a low-cost and low emission ammonia portfolio. We continue to see strong premiums and are actively optimizing volumes based on premiums, especially in Brazil and Europe. Nitrogen market fundamentals are improving with further tightening expected in the coming years.
Summarizing, we are very much on the right track to refocus our company to core operations and value accretive growth. And this will support a future-proof Yara with sustainable earnings and increased shareholder returns.
I will now hand back to Maria. Over to you.
Thank you, Svein Tore. I'd just like to give you all a final reminder that you have the opportunity to ask questions in the conference call starting at 1:00 p.m. Oslo Time. And that concludes today's presentation. Thank you for watching.