Yara International ASA (YARIY) Q3 2023 Earnings Call Transcript

Yara International ASA (OTCPK:YARIY) Q3 2023 Earnings Conference Call October 20, 2023 7:00 AM ET

Company Participants

Maria Gabrielsen – Head of Investor Relations

Svein Tore Holsether – President and Chief Executive Officer

Thor Giaever – Executive Vice President and Chief Financial Officer

Conference Call Participants

Christian Faitz – Kepler

Alexander Jones – Bank of America

Chetan Udeshi – JP Morgan

Rikin Patel – BNP Paribas

Bengt Jonassen – ABG Sundal Collier

Magnus Rasmussen – SEB

Charles Bentley – Jefferies

Aron Ceccarelli – Berenberg

Operator

Thank you and welcome to Yara’s Third Quarter Results 2023 Conference Call. Please note that this session is being recorded. I’d now like to hand the call over to Maria Gabrielsen, Head of Investor Relations, please go ahead.

Maria Gabrielsen

Thank you, operator, and welcome to everyone to this telephone conference for our Third Quarter Results. I’m here together with representatives from Yara’s management. We have our CEO, Svein Tore Holsether. We have our CFO, Thor Giaever; Head of Market Intelligence, Dag Tore Mo; and also other representatives from the IR team. So we hope you all saw the presentation that we showed today, and we will go straight into questions. So operator, please open the first line.

Operator, will you please let the first question?

Question-and-Answer Session

Operator

We have Christian Faitz from Kepler, his line is now open.

Christian Faitz

All right, thank you very much. Good afternoon, everyone. Thanks for taking my three questions if I may, short questions. Can I please ask whether you already have concrete plans in place to initiate the mothballing of certain ammonia plants in Europe as indicated this morning? That would be my first question. And I guess I ask number two and number three after that one.

Svein Tore Holsether

Yes. So this is Svein Tore, I could start on this one. I think through what we’ve been working on now for close to two years in terms of managing volatile gas prices and flexing our ammonia production accordingly, we’ve put in place procedures for that, so that we’re both efficient in doing that and also in how to optimize our finished goods production as well.

So we are — we were ready to flex quite quickly, so that — be needed. And as you’ve already seen, we were continuing to optimize globally as well, utilizing our number one position as the biggest ammonia trader in the world, utilizing our own vessels to get access to ammonia as well. And we’re also in the privileged position that we don’t necessarily need ammonia production in Europe for a large part of our production. We can produce that outside and bring it into Europe, and as already announced we have MOUs in place for two blue ammonia plants in the U.S. where we can both build on the energy cost in the U.S., but also through the Inflation Reduction Act have favorable terms for carbon capture and storage as well.

So I think that flexibility is a key strength in our system to begin with. And what we learned now through these two years in terms of operating, ramp-downs and ramp up. We’re in a solid position to react to both demand and also the energy situation in Europe.

Christian Faitz

Okay, great. Thanks Svein Tore. That would actually have been my question number two on the blue ammonia projects in Texas/the U.S.. Any use in terms of planning timing progress at this point? Thank you.

Svein Tore Holsether

So progress in terms of clean ammonia projects?

Christian Faitz

Yes, yes.

Svein Tore Holsether

Yes. So they are — we have sort of making progress on this. We have decision gates lined up, most likely for principal decisions in early next year and FID is around nine to 12 months later.

Christian Faitz

Okay, thank you very much. Last question please, if I may. Can you give us an idea of how the demand situation in Brazil has been into October for your fertilizer mixes? My understanding is from your remarks, Europe cut off to a slower start in the very early days season for 2024 but how’s that finishing off? Thank you.

Thor Giaever

Yes, it seems like many other places that there is kind of a last-minute kind of buying pattern in many places. I think that also goes for Brazil, where we heard that farmers have been reluctant to sell their crops early and are therefore not willing to have the muscles to buy fertilizer earlier so that there is likewise concentrated activity around closer to the season. So, yes, similar pattern as we see in many places that the high and volatile prices and uncertainty and also maybe interest — higher interest rates, et cetera, playing into that the whole — the whole issue around the working capital management and risk seems quite high on the agenda for many buyers including in Brazil.

Christian Faitz

Okay. Thank you very much.

Operator

Our next question is going to come from Alexander Jones from BofA. Your line is now open.

Alexander Jones

Great, thanks very much for taking my questions. Maybe the first, just following up on the prior one on demand. You talked a little bit about uncertain phasing of orders through the season. Can you give us or discuss any sort of hints you see in your order book today of when that might pick up at all or whether you’re seeing absolutely no signs so far that sort of the usual seasonal pickup will come soon?

And then the second question, just on CapEx guidance, I think at the midpoint, you revised it down for the year by $400 million, which Thor, you talked about uncommitted projects not going ahead. Can you talk a little bit about what those are and why you decided not to do them at least this year? Thank you.

Svein Tore Holsether

Yes. Hi, Alex. It’s Tore I can comment on both and others can add if needed. First of all, in terms of demand, it’s — as we comment on in the presentation it be — well, first of all, I mean, at this time of the year, it’s normal that this can ebb and flow a bit in the Northern hemisphere in Europe where we — where we have a significant position. The supply is close to the customers, so that it’s certainly possible to wait with buying until closer to application, but as we also highlight, of course, that does involve risk in any given season for higher prices as there if there is more of a squeeze towards closer to fiscal application, but particularly these days given the uncertainty around energy prices, particularly in the winter time. So we’re seeing, we’ve seen in the third quarter, you know, periods with swift order taking and periods with less so, and as mentioned, we started the quarter with a longer order book, approximately two months, and ended with a shorter order book. We are delivering now. We have an order book of between one months and two months, but that’s for the quarter as a whole and for the season as we highlighted the sort of phasing is uncertain. But as I said, in any given season, but particularly this year with the — with the volatility. In terms of the CapEx guiding, we’ve mentioned previously that not all of that was committed. We have had some small to medium size potential M&A in the plans for this year, which is not going to materialize. As you can appreciate, we will typically not comment on specific targets here, but that’s the main reason for the change in the CapEx guidance.

Alexander Jones

Okay. Thank you.

Operator

Our next question is going to come from Chetan Udeshi from JP Morgan. Your line is now open.

Chetan Udeshi

Yes. Hi, thanks. The first question I had was, I’m a bit confused, in terms of your volume leverage on the EBITDA bridge, you had a smaller number in Q2 even when you actually had higher volume growth in Q2 than you had in — sorry, Q3, you had volume growth of 6% for all of your deliveries and for crop nutrition, specifically, I think it was up more than 10%, which is actually much stronger volume recovery than what you had in second quarter, but in second quarter you actually had a bigger volume leverage on the EBITDA, so why is that even with the higher percentage volume growth in Q3, the actual EBITDA improvement for volumes is actually much smaller in Q3? The related question was just to understand how do you actually show us the energy cost delta in your EBITDA bridge, because I saw the footnote saying that it’s based on the production volumes as of last year, but if I’m not mistaken, your volumes are higher in Q3 in terms of production than they were in Q3 last year, so where is that additional gas cost then shown in the EBITDA bridge. And the last question was, I mean, again, you know, it’s a bit sort of slightly weird question in a way, but if I look at your total crop nutrition deliveries in Q3 versus 2021 or 2020 Q3 or 2019, you’re still sort of 15% down versus, you know, pre-2022 periods. What is driving that? Do you think this is the market consumption, which has been lower versus 2021, 2020, or is it Yara’s market share loss as you try to protect your margins in this volatile environment on energy? I’m just curious if we shouldn’t be seeing this sort of volume changes in fertilizer market given it’s a bit more like staple. Thank you.

Thor Giaever

Yes. Thank you, Chetan. It’s a nice bouquet of not entirely straightforward questions to answer, but we’ll give it a shot, and I’ll keep it high level and others can add as appropriate. And I think all of them are about, I think, kind of underlining that we are in a — it’s a different situation. I mean, you can start globally, geopolitically, higher volatility that means that for the last couple of years, we’ve seen different patterns, should we say, compared to pre-war, pre-COVID, et cetera. And then there is — on your first question on the volume effects, that plays in. And I would also — well, first of all, I mean, to everyone out there as well as our internal gets a challenging environment to estimate them to operate in.

Be careful with sequential comparisons because of the seasonality in this business. So we always try to focus our analysis on year-over-year because at least then, you’re talking about the same period of the season, a case in point being third quarter in the Northern Hemisphere, which is our European business and also in North America, then you’re in a prebuying season, you’re far away from application.

Second quarter at the end of the previous season, there’s — and very different price situation. So I think the short answer to your first question is — well, there’s a different margin and mix picture between those two parts of the season. So you can’t expect a given percentage volume to give you the same financial effect in the variance analysis.

In terms of the energy cost part, I mean, this is — and again, with the high volatility, this is — you’re not going to get the perfect answer either way. But there’s a choice in a way whether you start with calculating volume and then calculate margin price effects or vice versa, and we follow what I believe is the sort of normal convention is that you start with volume and then you calculate volume effects based on last year’s margins. And the next step is to then do the margin type effects based on this year’s volume.

And given the huge changes in energy costs over the year; in any case, this becomes a bit of approximation, and I know the IR team has over the last probably three, four quarters tried to support analysts with some additional information here, but we recognize this is challenging.

Finally, on the third quarter deliveries, back to my initial comments, it’s a different environment recently compared to those earlier years. I think specifically, we saw third quarter last year. I think I’m right in saying it was the lowest delivery third quarter in the last five years, certainly, maybe even going longer back. This year, it’s improved somewhat with — I mean last year, as you recall, was very high prices, energy costs and so on.

So understandable that in the off-season, both buyers and producers like ourselves were cautious. We have curtailments in place. So you kind of — you had cautious demand size and cautious producer size. Both of those are a bit better this year, but there’s still a high risk aversion in this market that has higher volatility, especially in the time of the season where you’re quite far away from the physical application.

Chetan Udeshi

If I just follow up on the last point, because this quarter is one, but if I even take all of last nine months, your crop nutrition deliveries is still down 15% from pre-war levels, if not slightly more, but I’m just trying to understand, do you think the consumption from farmers is down so much or is it just Yara specific because of the choices you might have decided to make to protect the profitability? I’m just trying to understand how much of this is more Yara-specific versus what might be the more underlying demand especially because I don’t think the underlying demand is down so much.

Thor Giaever

So — and I think you’re right. I mean — and you’re touching onto the dynamics of the previous season, where, as we described, I mean there was quite — we had our curtailments and also a strong influx of imports into Europe from other suppliers so and that would add as appropriate here, but that meant that the consumption overall was down somewhat in the season, but, you know, not by a large number, but there was a big shift in terms of local European production, especially nitrates, well, overall the European nitrate production having a degree of curtailment and a lot of that space was filled by imports. But then as we got into the end of last season, sort of into this year, that — and much lower curtailments, they’ve been more or less phased out this quarter, then the European producers’ market position is restored, but when you look back at in the last nine to 12 months they’re a significant factors that play in.

Chetan Udeshi

Okay, thank you.

Operator

Our next question comes from Rikin Patel of BNP Paribas. Your line is now open.

Rikin Patel

Yes. Hi, thanks for taking my questions. Firstly, just had a couple of follow-ups on the volume debate. So firstly, are you able to quantify the mix impact for Q3? And secondly, in response to the previous question, I suppose if I look, historically, volumes have been able to clear 7 million tons in crop nutrition quite comfortably in Q3, looking back sort of five, five years plus, what do you see now as a sort of normal level of volume, now the production, I suppose is normalized? And then just lastly, pulling up on CapEx, can you give any sort of insight into what we should be factoring in for next year given the cancellations this year? Thank you.

Svein Tore Holsether

Yes. Okay. I can — I mean in terms of CapEx, our normalized guidance is $1.2 million — max $1.2 billion average over time. So we haven’t issued the specific guidance for next year yet, but that’s the start point. Mix impacts third quarter, I think I’ll add we haven’t published a specific number, and it’s probably something that we can sort of helped with analytically offline, but if there’s any [indiscernible].

Maria Gabrielsen

There is also an increase for both premiums and commodities. But at least for Europe, the share of premium is slightly down. That gives you an indication. So I think there’s also a bit of technicalities when you look at the volume impact in the bridge because last year was so special. For example, you had some negative urea margins. So when you curtail this year, and that will be a negative volume impact because it has negative margins last year.

And on the other side, we produced a bit less ammonia and a huge margins last year. So that will also give a negative impact in the breakthrough. You’ll have all these effects offsetting each other. And of course, whether they’re in the volume or in the price margin, it’s the same effect on total, but that’s just how it will appear.

Svein Tore Holsether

Yes. Okay, thanks. Thanks, Maria. I think — can I ask you to repeat the second question, I think it was about a normalized level, but I didn’t fully catch it.

Rikin Patel

Yes, just a normalized level of crop nutrition deliveries on a quarterly basis.

Maria Gabrielsen

Volumes.

Svein Tore Holsether

Yes, I mean, we haven’t got any sort of guidance on this, you can refer to our production capacities and you have to make an assumption that operating rates. As we — as we described in the presentation, we had a low level of curtailments this quarter, but we see a risk into the fourth quarter due to the rising energy cost environment and they sort of — should we say hesitant demand side given that volatility.

Maria Gabrielsen

If anything, I guess, we can mention there might be a structural lower delivery in Brazil due to less sourcing from Russia and the rest of the [indiscernible].

Svein Tore Holsether

Right. But with a limited margin impact because those are low margin — those are low margin business for us.

Rikin Patel

Okay. Thank you very much.

Operator

Our next question comes from Bengt Jonassen. Your line is now open.

Bengt Jonassen

Yes, good morning. I just wanted to follow up on the price margin as has been alluded to earlier. You talked a little bit about the compression in trading margin for DAP. Could you tell us how much the impact was year-over-year? My second question would be on the fixed cost in your bridge, you’re stating $57 million year-over-year. If you analyze that, you end up at around $230 million and fixed cost end of 2022 was $225.2 million, so 10%. My personal view would be that you’re not beating inflation, but you’re stating that you do. Could you please elaborate a little bit about that?

And the final point would be, you’re running your EBITDA now closer to maybe $1.5 billion, $1.6 billion. Your net debt is currently around $3 billion, putting you in the high end of your capital structure targets of $1.5 billion to $2 billion. So how should we think about dividend for this year? Thank you.

Svein Tore Holsether

Yes. Thanks. First of all, on the DAP or phosphate upgrading margins, we — as you know, this is a — it’s difficult to be precise on this in short period like a quarter because we — it’s sort of — it’s an analytical observation trying to convert our NPK exposure into DAP equivalent because we produce NPKs not DAP primarily, but we’ve quantified that to directionally $80 million to $100 million negative in the quarter.

Bengt Jonassen

Thank you.

Svein Tore Holsether

On the fixed cost part, it’s important to note that the beat inflation target for us is on the core business, and then on top of that you will have growth activities. But we will as normal provide a more — a full breakdown of this for the full calendar year results. When it comes to net debt-to-EBITDA, that’s on a trailing 12-month basis at 1.47 for the quarter, and as you observe — well, so from that point of view at the lower end of our guidance, but of course, the trend has been that it’s increasing. Then, so when you — and then that brings you into dividend question, as you know, there is two main elements to that. One is what will — what will our full year net income be and then how do we view the net debt-EBITDA, not so much point in time, but how we see the development over the next six months to 12 months typically is what we will look at for the dividend decision. So I think I’ll refrain from guiding on what we see as a likely dividend and rather revert once we’ve delivered our full year results and had a chance to look into the, also the forecast elements of this before we have a recommendation.

Bengt Jonassen

Thank you.

Operator

Our next question is going to come from Magnus Rasmussen from SEB. Your line is now open.

Magnus Rasmussen

So, hi, everyone. Thanks for taking my question. I know that you like to speak about the year-on-year changes, although last year was very volatile and chaotic, which makes it a bit more difficult. So I was wondering whether you can just explain, if we just look Q-on-Q from the previous quarter, it seems like adjusting for the negative inventory write-down and position effects last quarter, your EBITDA is down despite higher volumes also in more or less all regions and product types, as well as lower gas prices. So if you can just explain sort of what’s — what changes on a quarter-to-quarter basis because I think it’s pretty clear that consensus was expecting an increase, so we need some help to understand that. And we — I also wonder about the working capital in the fourth quarter because you had a big release this quarter, is that something that you expect to reverse next quarter now that gas prices are up? Thank you.

Thor Giaever

Yes. So good that you introduced with our earlier comments that the quarter-on-quarter is challenging, particularly in this environment, and as you say year-over-year is challenging as well, so you don’t get an easy ride either way. I mean, this has to start with — I mean one element here is energy cost, which has been rising in the third quarter. And I mean there will be — there will be price effects here beyond the sensitivities too because we have a small number of sensitivities that are available for modeling, but the reality is that we have a wide range of markets and products that we’re selling into. So I would suggest that this is — this is an exercise that is probably not going to be resolved over this conference call but rather can be followed up individually. But as I said, the year-over-year approach is likely to be to — to continue to be our recommendation.

In terms of the operating capital release, we have — we have flagged — a normal seasonal pattern would see some increase in operating capital for the fourth quarter. I mean, for example, the normal is that we produce more than we sell in Europe in the fourth quarter and then the opposite in the first quarter, so that’s one effect. And then this is sensitive of course to the price developments during the quarter, but overall, you know, barring any major surprises, we would look for some increase, but not in the magnitude of the release that we had in third quarter.

Magnus Rasmussen

Thanks. And if I just can follow up quickly on the first question, if we’re looking year-on-year and we can — obviously it’s difficult to look year-on-year on last year, we can also look further back and do year-on-year from fourth quarters or third quarters in 2020 or 2021, and as you comment there — there are also other things changing than what’s in the sensitivity, can you just very shortly sort of elaborate a bit on outside the sensitivity, what has changed since before the massive volatility last year, so are there any special items we should be aware of looking versus 2020 or 2021 outside of, let’s say, general inflation?

Svein Tore Holsether

I mean, one we’ve touched on, which is the phosphate upgrading margin, that’s been a big swing year-over-year. It’s a proxy because we are not a DAP producer. We are an NPK producer, but that margin has shrunk significantly year-over-year. It has been improving in recent months again, but if you look back in previous years, that was typically not a factor that moved around a lot like that. Another one is that the — particularly last year, we’re using our flexibility a lot, meaning that on nitrogen, our production cost was not only about the gas price, far from it, it was also about ammonia pricing, we’re flexing a lot between producing gas and ammonia, that has typically not been a big factor in previous years.

Magnus Rasmussen

Okay, thank you. I’ll leave the floor to the next in line.

Operator

Our next question comes from Charles Bentley from Jefferies. Your line is now open.

Charles Bentley

Great, thanks so much for the opportunity to ask questions. So I’ve just got two quick ones. So just the kind of 10% discount that you’re getting to the realized pricing on CAN. Can you just — I mean, that seems to be pretty static historically. Do you think that is a reasonable discount, and we should be considering that on a continuing basis? And then secondly, just on the clean ammonia business. I mean, I guess, the interplay between Europe being more online and clean ammonia being softer. Is that — is there some link there in terms of producing more within Europe and within the global plants and therefore, importing less? Or like is there something else that I should be considering there? And just in terms of the results between the two parts of the business? Thank you.

Svein Tore Holsether

Yes. So first, on the thing, as we highlighted, it’s normal for us to build a somewhat longer order book over the summer off-season period. There’s more focus on harvest in that period. And so it’s — and typically not as much orders taking normally. So it’s good to enter the quarter with a longer order book. And that’s in the rising price environment, that will mean that there will be something of a discount versus should we say, real-time publication prices. But I don’t — I would advise against assuming a fixed percentage because it’s — that you’re exposed to both, okay, what’s the price trend through that quarter? I mean, it’s often rising, but sometimes it’s not. So that would be one element.

And then there’s what we’ve seen this quarter. You can have volume shifts one way or the other. So — and this quarter, it was both that we have that long order book, but then also that the order taking dropped off quite a bit when prices rose. So I’m afraid there’s no sort of easy rule of thumb here.

On YCA, we highlighted that a couple of our — a couple of our plants, specifically Pilbara and Freeport had less ammonia availability. So that is the — that was the main volume factor. But also keep in mind that the YCA segment earnings is strongly exposed to the absolute level of ammonia pricing as they get to commission on the sales. So it’s — both those factors played in.

Charles Bentley

Okay. So just thinking like sequentially, we should see a meaningful improvement on YCA?

Svein Tore Holsether

Yes, I mean we — you’re probably referring to both that we have a higher ammonia price now than the average for the third quarter and also that we have those plants operating now, so yes, that’s a fair assumption.

Charles Bentley

Thanks.

Operator

Next question is going to come from Aron Ceccarelli from Berenberg. Your line is now open.

Aron Ceccarelli

Hi, good afternoon. I have a quick one on energy cost, considering volatility in gas prices it’s going to stay higher for longer, would the company be open to hedging strategy here or make some changes to the current strategy that you have now?

Svein Tore Holsether

Yes. So we — it’s something we’ll always reconsider from time to time, but our basic approach for over time has been that we have limited or no hedging and it’s for a number of reasons. It’s starting sort of in the macro that there is a strong correlation over time between ammonia — energy ammonia and fertilizer and food prices. And then as a large sort of within our sector, a diversified company, you know, present in so many markets and with some of the different products, not only nitrogen, that we can live with some short-term volatility when we see that longer-term correlation. The other factor is the significant operational flexibility we have. And as you saw, particularly last year, specifically that’s ability to flex between ammonia and gas as a feedstock, means that we can also gain in these volatile high price energy environments. So they are the main reasons why we look have so far quite profitably over time chosen not to hedge.

Aron Ceccarelli

Thank you. Thank you very much.

Operator

[Operator Instructions] Looks like we don’t have any questions coming in, I’d now like to hand over back to the management. Thank you.

Maria Gabrielsen

I’d like to say thank you to everyone for calling in and for your questions. And if any follow-up, you can contact IR.

Operator

Thank you so much for attending today’s event. Have a wonderful day.