Yara International ASA

OSE:YAR

Earnings Call Transcript 2022-Q4

[Anika Jovik, executive]

Hello and welcome to Yara's Fourth Quarter 2022 Results Presentation.We will start with Yara's CEO, Svein Tore, who will go through the highlights of the quarter. He will be followed by Yara's CFO, Thor, who will go deeper into quarterly financial and operational metrics as well as key annual figures. And then we will close with Svein Tore at the end. I will also provide you with some practical information on upcoming events and information on the conference call that will take place at 1 PM Oslo Time, following this presentation.Without further ado, I'll give you Yara's CEO, Svein Tore.

[Svein-Tore Holsether, executive]

Thank you very much, Anika, and good morning, good afternoon, good evening to all of you and thanks for joining our fourth quarter results presentation.And as always, we're starting with safety. And as we are summarizing 2022, we continue to be at an industry-leading level and have moved another step towards zero injuries. We had lower or in fact no TRIs in December and we had fewer incidents towards the end of the year. So I'd like to express my sincere appreciation to all of my colleagues for their efforts in an extremely challenging operating environment, continuing to provide society with vital products. The numbers also show that zero accident is definitely possible, and it confirms our ambition of no injuries. However, we are aware that the environment is still challenging with increased levels of mental stress and this represents a clear risk in terms of safety and this is something we're actively addressing.Turning then to the highlights of the quarter. Our business model is flexible and resilient and we continue to deliver strong returns in a challenging environment with strong cash flow. All commercial segments increased their returns, driven by prices offsetting higher gas cost and lower deliveries. On the production side, we've seen reliability improvements in fourth quarter on ammonia, in particular. However, total production is still impacted by proactive curtailments to optimally manage the market conditions. Deliveries were down in the quarter, mostly on the commodities side in the Americas and in Europe. However, price declines have led to improved key affordability ratios for farmers at the start of 2023, and there is catch-up demand potential in all regions except Americas.Overall, 2022 was characterized by strong organizational performance, where we optimized operations and maintained supply to customers amid significant raw material sourcing challenges and volatile market conditions. As a result, the Board will propose to the AGM NOK55 dividend, which brings total distribution for 2022 to NOK65 per share.EBITDA is up 39% from fourth quarter last year as improved prices more than offset increased energy costs and lower deliveries. We have had a negative impact from lower deliveries in the quarter, mainly within commodity products. Our realized energy prices are in line with what we guided with more normal spreads between regional gas hubs in Europe compared to what we've seen earlier in 2022. Fixed costs are up in the quarter. This is mainly driven by ramp-up of new business areas and also inflationary pressure. Thor will come back to discuss this and other effects shortly.As already mentioned, the Board proposes NOK55 ordinary dividend for 2022 and this brings the total cash returns paid and proposed for 2022 to NOK65 per share. Based on the share price yesterday, that gives a dividend yield of 15%. The strong cash returns reflect the resilience of our business model and our ability to keep operations running throughout a challenging period. Our overall objective is to maintain long term investment grade credit rating and 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. We will consider further cash distributions in the coming quarters in line with our capital allocation policy.So I'll then hand over to our CFO, Thor Giaever. Over to you, Thor.

[Thor Giaever, executive]

Thank you, Svein Tore.So our financial key figures have all improved year-over-year this quarter from EBITDA and earnings per share through return on investment, operating capital and cash flow. Svein Tore has already covered our EBITDA development. And for underlying EPS, the development was even stronger, more than doubling compared to a year earlier as in addition to strong cash earnings, recognition of deferred tax assets reduced our effective tax rate to below 20% for the quarter. While in fourth quarter 2021, our earnings per share was impacted negatively by impairment charges and increased valuation allowances on deferred tax assets. So the opposite development there on tax to this quarter. Our return on invested capital for 2022 was 25.7%, a record number reflecting strong earnings throughout the year and a stable capital expenditure level year-on-year compared with 2021, when operating margins were lower, and we also had impairment charges in that year of $666 million. Cash from operations of $1 billion reflects the strong operating income and release of operating capital, where the latter is mainly driven by the declining price environment, which has reduced receivable and inventory values more than offsetting the lower payables.Looking at our segment results, all the commercial units delivered strong and improved results with a combined 50% increase in EBITDA. In Europe, higher nitrate premiums and sales prices continued to offset higher feedstock costs and lower deliveries. In the Americas, higher production margins in North America more than offset lower margins and deliveries in Latin America. In Africa and Asia, EBITDA was positively impacted by higher ammonia production margins in Australia and higher sales in Africa, while margins were lower in Asia. For Industrial Solutions strong production and commercial performance continued as demand remained healthy and the production units achieved reliability improvements. Global Plants' earnings were impacted by curtailments, increased raw material cost and inventory write-downs, but also delivered some improvement on ammonia production reliability. Yara Clean Ammonia EBITDA benefited from higher ammonia prices, while volumes were down approximately 5% year-over-year.Taking a closer look at the volumes then. Overall, fertilizer deliveries were 25% lower than last year. In Europe, they were down 23% as declining prices saw farmers and distributors postpone purchases. In Americas, deliveries were down 34%, mainly for commodity fertilizers following sanctions on suppliers from Russia and Belarus. Africa and Asia deliveries were 4% higher, mainly driven by increased premium product deliveries in Africa. Industrial Solutions deliveries were down 13%, mainly in the base chemicals unit, which saw lower demand due to reduced industrial activity in Europe, and in the Transport Reagents unit compared with record deliveries a year earlier when customers bought higher volumes to secure supply. And as mentioned, volumes were down approximately 5% compared to year earlier when volumes were a bit above average levels.Now, let's look at our operational improvement status, where our production related metrics are running behind due to both reliability challenges and our proactive optimization efforts in continued challenging markets. The challenging operating conditions have impacted both our production reliability and energy consumption performance. However, 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 task forces to support specific high priority assets.Our fixed cost was above target in 2022 in order to safeguard operations and earnings in a demanding and high inflation environment. However, we have also had lower capital expenditure and maintain strong cost discipline also going forward with a target to beat inflation in existing business. Our capex guidance is unchanged at a maximum of $1.2 billion annual average and this may be inflation-adjusted going forward again to safeguard operations and earnings. Our capex has been well below guidance in the last three years. And our 2023 capex guidance is in line with policy including phasing from 2022 to 2023. Our operating capital days performance is good, on track to achieve the long-term target.Turning to net debt development. Our strong operating income and lower operating capital more than funded our investments and additional dividend payment during the quarter, reducing our net debt by approximately $300 million. As already mentioned, the release of operating capital was mainly driven by lower receivables and lower inventory values, both reflecting a combination of lower prices and deliveries. And this more than offset lower payables, which were mainly lower due to lower gas cost. The additional dividend of NOK10 per share paid in the quarter totaled $258 million.So now let's take a look at our emissions performance during the year. First of all, a reminder that although Yara has emission intensive production processes, we have also led the way within our industry in terms of reducing emissions over the past two decades, making major cuts to our emissions through technological innovation, including the development and installation of catalysts to reduce N2O emissions long before the introduction of public incentives and penalties to encourage such action. By 2019, we have reduced our Scope 1 and 2 emissions by more than 40% and we're continuing this journey to reach, say 2030 target of a further 30% reduction from the 2019 level. As of 2022, we have finalized projects to cut a further 700,000 tons of CO2 equivalents per annum and the catalyst installations continue to be a key factor to reduce emissions. For example, in our Sluiskil and Uusikaupunki plants, two such projects were completed during the year, reducing N2O emissions by 90% to 95%, equivalent to approximately 100,000 tons CO2 equivalents per annum per project. We are now approaching a level where further significant emission reductions will require new technologies and decarbonizing the ammonia production itself.On the previous slide, we looked at our absolute emissions and now we turn to emission intensity per unit, where we are running at a higher level than where we want to be, mainly due to the impact of lower ammonia production in key plants, which has resulted in a higher level of so-called unproductive gas consumption due to plants running below optimal rates. To reach our emission intensity targets, we therefore need to continue our work on improving reliability across all production assets. We have a project portfolio as part of our roadmap to achieve these targets and the effect from these GHG projects is not yet significant in our metrics since the major projects here are still in execution and represent about 1.3 million tons of CO2 equivalent savings to come. This portfolio includes projects with varying maturity and risk profiles. And as a result, we continuously develop the 2030 project roadmap to ensure we will reach our targets. Examples of contingency actions includes various electrification projects at our major sites in addition to accelerating clean power sourcing, exploring new carbon capture and storage projects and opportunities to source the higher volumes of Clean Ammonia.Looking at our people performance, we measure engagement diversity and inclusion across Yara through an annual survey with more than 13,000 employees participating in the 2022 addition. We maintained a strong engagement score, staying in the top quartile of surveyed firms, which we believe among other factors reflects our clear strategic direction, vision and mission.On diversity, equity and inclusion, we saw a 2-point decline in 2022 bringing us just below the top quartile of surveyed companies. We consider diversity, equity and inclusion a key enabler with significant untapped potential to deliver on our strategy and we'll continue to work with targeted actions to improve and return to the top quartile here. Our share of female leaders were stable in 2022 compared to a year earlier and we'll be redoubling our efforts here to reach our 2025 target of 40%.Now let's take a look at our full year profit and loss statement. First of all, the high price environment we've seen throughout the year is reflected in both revenues and raw material costs being significantly higher. Operating income more than tripled compared with 2021, both due to stronger margins and due to 2021 being impacted by, as mentioned $666 million of impairment charges. Payroll expenses were stable year-over-year, and no material new impairments were recognized in 2022. For the same year, we recognized a currency loss of $61 million, as loss on US debt positions was partly offset by internal positions in other currencies than US dollar. In total, our basic earnings per share increased from $1.75 in 2021 per share to $10.90 in 2022. And excluding currency and special items, the 2022 EPS was $10.89, up from $4.72 in 2021.Looking at the balance sheet. Total assets were fairly stable year-over-year. The $1 billion payment of dividends during the year was more than offset by strong earnings, giving an almost $1.5 billion increase in equity by year-end. Changes to liabilities were mainly due to changes in bond debt with some maturities during 2022, while we also issued a new $600 million green notes in November. All-in-all, Yara's robust business model has enabled us to keep a solid balance sheet in a year with challenging operating conditions and significant volatility.So we've been through many elements of our strategic dashboard already. But to round up on KPIs, we've performed well on prosperity metrics, delivering strong financial and cash returns. However, we clearly have further improvement potential with production reliability, a critical improvement area, to reach both our long-term production and greenhouse gas reduction targets. And also to reach our targets for revenue from new business models, we have significant further work to do. However, and as Svein Tore has already noted, we considered the organizational performance in 2022 as strong, delivering major optimization efforts to safeguard operations and earnings and maintaining supply to customers in the face of significant market volatility, while also replacing a major part of our raw material sourcing due to geopolitical unsanctioned developments.So on that positive note, I'll now hand you back to Svein Tore for his closing remarks.

[Svein-Tore Holsether, executive]

Thank you, Thor. Looking back at 2022, Yara has delivered strong returns, while making strategic progress despite a very challenging operating environment. And you see some of the highlights of this on this slide, where we show that we've entered into multiple partnerships and also grown our innovation portfolio through collaborations and investments through Yara Growth Ventures. We also made considerable progress towards an IPO of Yara Clean Ammonia last year, but capital market conditions have not been favorable. However, we have continued to mature the Yara Clean Ammonia project portfolio. Our investments continue to be directed towards assets that are well positioned for future aligned with the goals of the Paris Agreement. In 2022, we issued our first Green Bond and that's a good example of how we reflect our performance across people, planet and prosperity also into our financing.Finally, I wanted to mention Agoro, which has made significant progress in 2022, focusing on the US market. And at the end of last year, they were awarded procedures grant from the USDA to lead climate smart project and we continue to see carbon marketplace as a huge opportunity. UN Secretary-General, Antonio Guterres said we're on a highway to climate health. Many are focusing on the cost of fighting climate change being too high. However, it will be significantly higher if we don't act. According to the global risk report from the World Economic Forum, the biggest risk of all is climate in action. To succeed, we must have collaboration between the private sector and governments. And in Yara, we are convinced that we have to influence with our knowledge and solutions to be able to shape the future instead of passively waiting for a regulatory framework that may even be counter-productive both for climate and for businesses.And we are seeing a significant ramp-up now in government incentives. The real game changer is the Inflation Reduction Act in the US. It puts in place a very powerful and predictable framework for much needed decarbonization. We hope other regions also, including Europe, will do the same. For Yara, the Inflation Reduction Act and other policies represent significant opportunity, both to decarbonize our own production, but also to enable the hydrogen economy through Yara Clean Ammonia. And we have a unique starting point with our global production and distribution footprint. We have a flexible asset base and we have world-leading capabilities within ammonia transport and storage, where we are driving progress globally for the energy transition, climate crisis and food security.During 2022, farmers and distributors in some regions postponed purchases due to high prices. This created a supply overhang and contributed to price declines towards the end of the year. However, these price declines mean that the current ratios for cereal prices to nitrogen prices represent a supportive financial environment for farmers. Affordability is almost back to historical average and it's up more than 50% compared to a year earlier. Not only our optimal application rate is up, but healthy crop prices also mean farmer revenues are strong. And this is good news for the fight against the hunger crisis as nitrogen fertilizer is critical to support crop yields. However, the postponement of purchasing creates a risk of yields following which would worsen the food crisis. Also with fertilizer plants in Europe, we are running at a reduced rate, it will take some time to arrange for transportation and delivery. It's therefore crucial that farmers in Europe and elsewhere don't delay purchasing of fertilizer further.To conclude, Yara has made and is continuing to make significant steps towards transforming agriculture and the broader hydrogen economy, all while delivering strong returns.So thank you very much for listening and I'll hand back to Anika for concluding practicalities. Over to you, Anika.

[Anika Jovik, executive]

Thank you, Svein Tore and Thor for those valuable insights into Yara's performance.Now turning to some practical information. This is hot off the press, we will have a Capital Markets Day, June 26 of this year, 2023. It will be a virtual event, so we hope all of you can join. And for the immediate future, in approximately 30 minutes, we will have a conference call at 1 PM Central European time. You can find dial-in details on yara.com, on investors and under investors, you can either go to the latest quarterly report or the financial calendar. And you can pre-register online, and you will be connected automatically so that will save you some time or you can dial-in using a phone and you will be manually placed into a call with an operator. And we hope to see you there as well at 1 PM again, 30 minutes following this presentation.But for now, thank you very much for listening to Yara's fourth quarter 2022 results.