Yara International ASA

OSE:YAR

Earnings Call Transcript 2021-Q4

[Silje Ingeberg Nygaard, Acting Head of Investor Relations]

Welcome to Yara's Fourth Quarter Results Presentation. The presentation today will be by Yara's CEO, Svein Tore Holsether; and CFO, Thor Giæver. Shortly after the conference call -- shortly after the presentation at 1:00 p.m. Oslo time, there will be an audio conference call with an opportunity to ask questions to management. With that, it's my pleasure to hand over to Svein Tore Holsether.

[Svein Tore Holsether, President, CEO & Director]

Thank you very much, Silje, and good morning, good afternoon, and good evening, depending on where you're dialing in from. As always, we are going to start our presentation with safety. And our safety performance continues to be low and at an industry-leading level with the TRI rate improving to the best year on record in this fourth quarter.We continue our focus and our attention on safety every day, and one of our recent actions is the implementation of a major potential incident prevention program. Still, we do have accidents, and all of them could have been avoided. So our long-term ambition remains 0 injuries. Turning then to the financial results. We continue to deliver improved underlying results in a volatile environment. However, the reported earnings and the return on invested capital in the fourth quarter were impacted by the Dallol SOP project where we are still working on structural solutions for the next stage of development, but we are impairing the value due to the multiple uncertainties linked to the project, in particular, amid the current situation in Ethiopia. Excluding the impairments, return on invested capital is 11.7%, the highest since 2013 and above our mid-cycle target of 10%. We're also proposing an ordinary dividend for 2021 of NOK 30, bringing the total cash returns to shareholders to NOK 58 per share for 2021. We have seen unprecedented volatility in both input cost and market prices this quarter. And as you can see on the left-hand side of this chart, the average urea prices were almost 3x higher than a year ago. And the European gas prices increased almost 6x and reached more than twice that level some days in the fourth quarter. In this situation, our realized prices have also increased strongly, but not to the same extent as spot-traded prices. This reflects both normal seasonality as our order book tends to be longer in the autumn, and that in general, sharp spot price increases, if sustained, tend to take more time to feed through to all associated markets and products. For nitrates, we delivered most of our volume in the first part of the fourth quarter. Deliveries in Europe have been slower in December and January but are expected to pick up shortly as industry deliveries are 17% behind a year earlier, and the main application period is almost here. The expected pickup is further supported by the risk of product shortage for farmers due to challenging value chain logistics amid COVID-19 should the time line to application be too tight.For NPKs, prices have, as normal, moved more slowly than for single nutrient traded commodities. The sharp increases -- the sharp price increases this quarter mean that our price realization is particularly sensitive to the time lag from spot price to P&L impact. As a simple illustration using our financial sensitivities and lagging publication prices by 2 months instead of 1, the negative EBITDA impact is $480 million in the quarter. A key point to mention here is, however, that at peak price levels, the traded volumes have been very thin, making publication prices farther away from the majority of traded volumes. And also, please note that a number of other factors impact Yara's realized prices, which have not been modeled into this simple illustration. Although price realization has not fully kept up with the spot prices this quarter, margins have been attractive, and our EBITDA is up by 50%, mainly driven by higher prices, which more than offset the negative energy cost in the quarter. We were able to maintain normal finished fertilizer production despite ammonia curtailments in Europe as our flexible business model enabled us to switch to imported ammonia. Deliveries were therefore only slightly down from a very strong fourth quarter 1 year earlier.On fixed cost, as communicated earlier, we reallocated approximately $100 million from 2021 CapEx to fixed cost in order to ramp up farming solutions and other strategic initiatives. The fixed cost development from quarter-to-quarter will vary depending on both seasonal and operational factors. As mentioned earlier, the return this quarter was negatively impacted by impairments. Excluding this, the return on invested capital for fourth quarter in isolation would be 10.5%. We are proposing an ordinary dividend of NOK 30 per share for 2021. This will bring our total cash return paid and proposed for 2021 to NOK 58 per share, a new record for Yara. We will also consider further distributions in the coming quarters, in line with our capital allocation policy. Including this dividend payment, our pro forma net debt-to-EBITDA ratio at the end of fourth quarter is 1.67, which is in -- within our target range of 1.5 to 2. And at this point, I'll hand over to our CFO, Thor Giæver.

[Thor Giæver, EVP & CFO]

Thank you, Svein Tore. So happy to report a strong results improvement with both underlying earnings and capital returns increasing year-over-year. Underlying EBITDA was up 50%, and Svein Tore has already taken you through the main variances here. Our reported EBITDA was up 37% as we had negative special items, mainly a $65 million negative contract derivative effect. This item has a fundamentally positive driver, higher ammonia prices expected going forward. And where we have ammonia price links in our gas contracts, we are required under IFRS to mark-to-market all expected changes to gas cost going forward.The resulting and larger positive effect of higher ammonia prices on revenues will be accounted for in our actual results going forward. Our reported EPS decreased due to the low impairment and a translation loss on debt positions, mainly from internal funding positions in euro and Brazilian real against the Norwegian krone. Excluding currency and special items, EPS increased mainly reflecting the strong EBITDA development. Our return on invested income was flat on a reported basis. But as Svein Tore mentioned, it increased underlying to 11.7 on a 12-month rolling basis, excluding the impairments. Our operating capital increased in absolute terms due to generally higher receivable and inventory values due to the higher prices in the market. In addition, we had a NOK 450 million seasonal reduction of prepayments in Brazil, although absolute operating capital increased our efficiency within operating capital improved. More on this in a minute. Investments for the quarter were mostly maintenance CapEx, somewhat higher than a year earlier, but within normal levels and within normal phasing with a higher spend in the second half of the year. And given all this, our cash flow is negative due to the higher operating capital. But again, for a positive reason as higher prices mean higher receivable and inventory values per tonne. Looking at the results by segment. All our regions have improved results and returns due to the higher selling prices, more than offsetting higher raw material cost increases, including in Europe. The same is true for our global plant segment, although the return on invested -- return on investment is down due to the low project impairment, which represents about 10 percentage points on the ROIC. Similarly, in Americas, the ROIC is impacted by the Salitre project impairment that we took in the third quarter that represents approximately 7 percentage points on the ROIC. And for Africa and Asia, the ammonia contract derivative brings the ROIC down by about 3 percentage points. The lower results in Industrial Solutions mainly reflect phasing and internal factors. Firstly, internal emission rights cost, which has reversed at a group level, that's $19 million, and phasing of surcharges, these have a 1-month lag, meaning that the peak gas price in December are recovered in January, and that's about a $15 million effect. For clean ammonia, EBITDA was 43% lower than a year earlier, mainly reflecting increased external ammonia sourcing at higher prices, which are passed on to Yara's production plants with a time lag of approximately 1 month. So now let's take a look at our operational improvement status, where we focus on 12-month rolling rather than quarterly numbers to reflect the longer-term nature of our targets and work. For ammonia production, we have an unchanged 12-month rolling performance compared with the third quarter, but we've had several -- or rather we have had several reliability issues during the year and a significant gap to close in order to reach our 2023 target of 8.9 million tonnes production. Our reliability improvement program focuses, in particular, on turnaround and maintenance planning and execution, together with root cause problem solving, focused on the largest volume loss factors. The program covers all production plants but with focus based on value potential. And the Pilbara plant in Australia is a good example where we've had a priority focus with a significant reliability improvement in 2021. On finished fertilizer production, we've continued to improve this quarter, reaching an all-time high or, I should say, the highest point so far for 2021 with production records in several sites. For energy efficiency, our near-term performance is closely tied to our ammonia production reliability. And the 2021 development has been negative, therefore, due to both reliability issues and curtailments. On fixed costs, we are currently tracking above our 2023 target, mostly reflecting a planned $100 million reallocation from CapEx, as our new growth initiatives within Farming Solutions and other new business areas require relatively more cost compared and less CapEx. We also have some additional costs related to curtailments and COVID-related measures. As mentioned, we have a further reduction in operating capital days and this mainly reflects lower inventories in Europe compared with a year earlier. Now for our integrated scorecard at the end of the year. Svein Tore has covered safety. I've also commented on the financial KPIs on the production performance and emissions' intensity, and I'll revert shortly on the remaining people KPIs. For new business-related KPIs, including hectares under management and revenues from new business models, we are still in a trial and ramp-up phase for multiple initiatives where growth trajectories typically do not follow a straight line. We will take a closer look at these new business areas in the coming quarters. Premiums generated were down significantly in 2021, and this mainly reflects the major increases we've seen in commodity reference prices. And similarly to the quarter, if you adjust for somewhat longer time lag, the full year premium generated is closer to the 2020 level. As already mentioned, our emissions intensity has been impacted by ammonia reliability. However, the absolute emissions are somewhat lower. In addition to reliability improvements, our targeted 30% reduction by 2030 will be met through a number of greenhouse gas-reducing investments. We have a significant road map and pipeline with more than 70 different projects to deliver on these targets. And many of these are now moving into execution, as you can see from the ramp-up on CapEx. A recent example of this is our green ammonia demonstration plant in Porsgrunn Norway where renewable energy will replace fossil fuels and reduce CO2 emissions by about 41,000 tonnes per year. The plant will produce enough hydrogen to produce more than 20,000 tonnes of ammonia per year, which converts into between 60,000 and 80,000 tonnes of fossil-free mineral fertilizer. And we're pleased to have made further progress in '21 within employee engagement, diversity and inclusion. An engaged workforce with a diverse and inclusive culture is both a prerequisite to succeed with our transformation, and there's also significant assets in a year of continued pandemic effects and record market volatility. We'll continue our efforts here, working to achieve longer-term ambitions, both within gender diversity and more broadly, to fully integrate diversity, equity and inclusion in our strategy, culture and processes. Looking at our net debt development. We've already mentioned the key elements. But by way of a recap, our cash earnings have been more than offset this quarter by higher operating capital and investments. Our net debt-to-EBITDA ratio at the end of the fourth quarter was 1.36, and including the proposed NOK 30 dividend, the pro forma net debt to EBITDA is 1.67 at the end of the year, which is within our targeted range of 1.5 to 2. And in line with our capital allocation policy, we will consider further cash distributions in the coming quarters. Rounding up then with a look at the full year financials. First, on the P&L, we've seen an increase in both revenues and operating costs driven by higher prices. The margins have improved significantly, although operating income is somewhat down due to the impairments on Salitre and Dallol. The currency translation loss was at a similar level to 2020, reflecting both a loss on U.S.-denominated debt and other internal positions. The tax rate this year was high due to limited tax effect on the impairments, while in 2020, the rate was positively impacted by realized liquidation losses and currency gains on deferred tax positions. The balance sheet also shows the effect of higher prices, increasing both current assets and liabilities. The equity level has reduced somewhat during the year, mainly due to strong cash distribution to shareholders. However, we continue to have a strong balance sheet with a debt to equity at the end of the year ratio of 55%. So with that, I'd now like to hand you back to our CEO, Svein Tore Holsether.

[Svein Tore Holsether, President, CEO & Director]

Thank you very much, Thor. And before we conclude this presentation, I want to update you on how we're extending our ambition to incorporate nature-positive as well as climate-positive targets and actions. We're all aware that we're facing both climate and nature crisis. We also know that we won't achieve real solutions without a socially just transition. And we're therefore updating our ambition statement to go beyond climate to growing a nature-positive food future. As a part of this ambition statement, we will continue setting ambitious targets for decarbonization, but we'll also expand our ambition to incorporate regenerative agriculture as well as diversity and prosperity in farming communities, where precision farming and mineral fertilizer play a key role. This is not a change in direction, but rather taking further steps in line with our mission to responsibly feed the world and protect the planet. Over the coming year, the ambition will be further developed and reflected in our strategic targets and action plans. And one recent example of putting our ambition into action is the contract that we signed with Lantmännen. This is to bring the first fossil-free fertilizers to the market, and a major challenge in decarbonizing the food value chain is that farmers today are not incentivized to switch to more carbon-smart practices. Green fertilizer has a strong value proposition as it has a high impact on the carbon footprint of food, but without changing farmer practice. As an example, for a loaf of bread bought at the supermarket, it will only add a few euro cents to the cost of the bread to switch to green fertilizer. So there are huge opportunities to decarbonize if we find business models that enable each step of the value chain to contribute and to benefit. This is why the agreement between Yara and Lantmännen is important as we show that this can be done. The green fertilizer will be produced in Norway by Yara and marketed by Lantmännen in Sweden starting in 2023. Yara and Lantmännen are also collaborating on other projects to reduce the carbon footprint of farming in the field through crop nutrition solutions, innovative farming practices and also digital tools that enable the transition to a decarbonized and more sustainable food value chain. Rounding up, we continue to see our prospects as attractive. Yara's industry fundamentals are robust at the twin challenge of resource efficiency and environmental footprint requires significant transformation, both in agriculture and also in the hydrogen economy. Our leading food solutions and ammonia positions are well placed, both -- to both address and to create business opportunities from these challenges. We have a robust financial situation and a clear capital allocation policy and attractive cash returns. So with that, I'll hand back to Silje.

[Silje Ingeberg Nygaard, Acting Head of Investor Relations]

Thank you, Svein Tore. So just rounding up then to remind people that we have an audio conference call starting in about 35 minutes at 1:00 p.m. Oslo time. And if you don't have the details to this call, you can go to our website, yara.com and Investor Relations. And with that, we thank you for watching today's presentation.