Yara International ASA

OSE:YAR

Earnings Call Transcript 2022-Q1

[Silje Nygaard, executive]

Welcome to Yara's first quarter results presentation. The presentation today will be by Yara's CEO, Svein Tore Holsether; and CFO, Thor Giæver. [Operator Instructions] With that, it's my pleasure to hand over to Yara's CEO, Svein Tore Holsether.

[Svein-Tore Holsether, executive]

Thank you very much, Silje. Good morning, good afternoon and good evening, depending on where you're dialing in from. As always, we're going to start with safety. And our performance continues to be at a low and industry-leading level. However, there has been an increase in potentially severe injuries this quarter, and the volatile market operating environment is causing more strain on the organization. This is both operationally, with demands of more frequent adjustments to production schedules, and sourcing, which also adds to mental stress. And all these elements combined add to an increased health and safety risk.

In March, we had a serious accident at our Ambès plant in France during ammonia loading of a truck. The accident caused a leak that was quickly controlled and did not go beyond the site, but a Yara France colleague and a contractor were injured and suffered burns. They were immediately taken to the hospital and taken care of by the fire brigade at the -- at our site first. This and similar accidents illustrate that we still have more work to do to reach our ambition of 0 injuries. So while I'm proud of the progress our organization has made over time, we absolutely cannot let our guard down and we'll continue to work on this amid the challenging operating environment.

I'm deeply disturbed by the horrific events unfolding in Ukraine, and I strongly condemn the Russian military invasion. In addition to the immediate suffering we're witnessing in Ukraine, we're moving into a global food crisis. The war in Ukraine is having a major direct and indirect impact on both the food and fertilizer industries. Russia and Ukraine are world powers in the global food value chain, representing a large portion of the world's production and export of grains and other key crops. Russia is also one of the largest producers and exporters of essential crop nutrients and natural gas. The war has driven up global food and fertilizer and energy prices and especially natural gas prices in Europe. This will make food more expensive for all of us, but for the most vulnerable, this is a question of life or death.

The impact of the war on global food security will be dramatic. It's no longer whether there will be a food crisis, but rather how large it will be. For Yara, the main priority is the safety of our employees and contractors. We have daily calls with our colleagues in Ukraine. Needless to say, the situation is extremely difficult for our colleagues and also for anyone who have friends and family in Ukraine. Our objective, which is also in line with our mission, is to continue to supply our customer wherever we can to secure continuity in the global food chain.

We continue to supply fertilizers into Ukraine, albeit small volumes due to logistical challenges. We have increased our monitoring and managing of risks and have, of course, stopped all sourcing from suppliers linked to Russian sanctioned entities and persons. We're providing digital tools free of charge in Europe to help farmers optimize their fertilizer application and maximize the yields.

We're working with David Beasley and we'll make a $25 million fertilizer donation in cooperation with the World Food Program in order to support access to food for the most vulnerable. But we need even more action to create a more resilient global food system. We, therefore, call on more government action. In the short term, this is about meeting urgent food needs in the crisis by supporting planting, keeping borders and markets open and releasing stocks in order to ensure liquidity. In the medium to long term, it's about building a more resilient food system and elevating the topic of food security by promoting efficient agriculture, closing the yield gaps in order to support smaller farmers, investing in clean renewable energy and regenerative farming, and also closing the nutrient loop recycling of nutrients. We also call for immediate and increased funding to the World Food Program. They were already $6 billion short before the war.

So now moving over to the financial results. Yara's business model is resilient and characterized by stability also in an operating market environment that is the most volatile we've seen in the company's history. And I want to give credit to our employees for their hard work to sustain our operations and deliveries amid a war, supply disruption and market price volatility.

Our margins are up as a result of the tight market situation, driven by high grain and input prices amid the supply disruption and low global inventories. Higher prices more than offset higher feedstock costs and lower deliveries in the quarter. Our return on invested capital is up to 12.7% from 8.6% in the first quarter last year.

The quarter saw a decline in delivery volumes. Overall, fertilizer deliveries are 11% lower than first quarter last year, and premium products declined 14%. The drop in volume is mainly in Europe, where total deliveries are down 24% overall, albeit from a relatively strong first quarter last year. The decline is a result of the high market prices, which have resulted in lower demand. In particular, this has affected the NPK deliveries, which in Europe were down 36% from first quarter last year as European farmers have cut application of P and K.

Looking at the season to date in Europe, deliveries so far in the season are estimated to be 17% behind last year at the end of the first quarter. Deliveries to industrial customers were at a similar level to last year as Yara continued to supplying essential products to a number of industrial users, including transportation.

So with that, I'll hand over to Thor to take you through the financials. Thor?

[Thor Giaever, executive]

Thank you, Svein Tore. So the quarter, I'll move on to the financial details, where you can also see that Yara's business is performing well. Our underlying EBITDA more than doubled compared with a year earlier, and earnings per share is up even more as we had a $223 million currency translation gain compared with a $256 million translation loss a year earlier. Now most of this gain originates from U.S. dollar-denominated debt as the U.S. dollar depreciated against the Brazilian real and Norwegian krone. And of course, against other currencies, too, but these are the relevant ones for our P&L. And we do keep most of our external debt in U.S. dollars as an economic hedge towards our mainly dollar-denominated business.

As Svein Tore earlier touched on, our return on invested capital also improved. And if you exclude also the write-downs we made in recent quarters on Salitre and Dallol, the ROIC is around 16.5%. The operating capital increase this quarter purely reflects higher market prices, while our operating capital days, in fact, have reduced somewhat during the quarter. Our cash flow from operations was lower than a year ago, mainly due to this operating capital increase. But it's still positive, thanks to strong earnings and a moderate level of investments.

So margin improvement is the main result variance compared with a year ago, with a net $870 million improvement despite gas cost increases in roughly the same magnitude. In the fourth quarter, our price realization did not fully keep up with spot market prices, while this quarter, the opposite is true. And I think this is a good example of how our business model tends to even out the effects of market volatility over time, so when you look beyond 1 quarter, for example, in this case.

And you can see this affecting our nitrate price information that we've included in the appendix. So in the fourth quarter, our nitrate pricing struggled or barely kept up with the high spot urea price increases, while in the start of this year, we've had a more stable price trend for nitrates while spot market prices, for example, for urea have fallen in the start of the year.

For the quarter, in general, we had strong nitrogen and phosphate margins. The NPK premiums were negative. However, our margins for NPKs are actually slightly higher compared with a year ago. So as a reminder, the premium is more of a measure versus the market, how your prices are performing, but it's not the same as the margin development for Yara.

A note on our energy costs. This came in a bit lower than what you will have been able to calculate based on our guidance and sensitivities. This is mainly due to the fact that we've utilized some opportunities to source feedstock at lower than European hub pricing. And also that prices on the NBP hub in the U.K. have been lower than normal, and we have an exposure to that as well.

As you've already seen, our volumes were lower, mainly in Europe. At first glance, this may seem counterintuitive as farm margins are better in Europe compared with several other regions. But Europe is also where the market volatility, especially including gas prices, has been highest, and that volatility can reduce buyers' willingness to take positions, at least in the short term. The other variance mainly reflects higher fixed costs, of which $8 million in nonrecurring related to the now divested Salitre project and the remainder is mostly driven by inflation.

So building on Svein Tore's earlier comments on the flexibility and resilience of Yara's business model, I think this has been well demonstrated in the past few quarters. Firstly, our diversified footprint includes significant operations outside Europe, which have delivered the main results improvement this quarter, since feedstock increases have been limited there compared with the market price increases for our main products. But also in Europe, we've delivered significantly improved results despite our gas cost being more than 4x higher than a year ago. This is thanks to a flexible production and sourcing setup, which has allowed us to continue operating and delivering essential products both for agriculture, transport and industrial purposes. It also reflects significant efforts within our operational and commercial teams to adapt and optimize our production, our order book and our commercial terms to optimize and manage our product allocation and to manage risk.

So now let's take a look at our operational improvement status. For ammonia production, we have an unchanged 12-month rolling performance compared with the fourth quarter, with reliability improvements in some sites, but also setbacks in others. So we still have a significant but achievable gap to close in order to reach our 2023 target.

Our reliability improvement program has a particular focus on turnaround and maintenance planning and execution together with root cause problem solving, focused on the largest volume loss factors and with a priority focus based on the individual production plants' value potential.

Finished fertilizer production has improved further this quarter, mainly as our Rio Grande plant expansion in Brazil is now ramping up. So overall, we are making good progress here towards our target on finished fertilizer production.

For energy efficiency, we have also improved modestly this quarter due to reliability improvements. But like for ammonia or similarly to ammonia production, there is a significant gap to close here to reach the target, too.

On fixed costs, as mentioned, we have some nonrecurring costs this quarter, but are also seeing the impact of inflation, in particular in Latin America. Also, safeguarding our operations has an even higher value in the current situation, and this can also drive some temporary cost increases. But as previously communicated, we are managing our total resource use across CapEx and fixed cost as a whole, and our guidance here is unchanged for the full year.

Finally, and as mentioned earlier, we have a further reduction in operating capital days this quarter, mainly within payables. Looking at our net debt development, we have already mentioned the key elements: higher operating capital due to increased market prices, but thanks to strong cash earnings and Salitre divestment proceeds, our overall debt decreased during the quarter. And this leaves our net debt EBITDA ratio at the end of the quarter at 0.94. And if you include the proposed NOK 30 dividend that the AGM in a couple of weeks is set to approve, the pro forma net debt-to-EBITDA is 1.17. The pro forma net debt-to-equity ratio is 0.59. And in line with our capital allocation policy, we will consider also further cash distributions in the coming quarters.

Now some comments on our integrated scorecard. Svein Tore has already covered safety, and I've also commented on financial KPIs, production performance and emissions intensity. On the premiums, the premium generated is low in the last 12 months, mainly reflecting low premiums in 2021, but with an improvement this quarter or so far in 2022.

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 several initiatives where growth trajectories typically do not follow a straight line. But we will take a closer look at our Farming Solutions business areas in connection with our second quarter results.

I'd like to conclude the presentation with the potentially obvious observation that high crop prices provide much-needed incentives to farmers and for global food production. Fertilizer is a highly profitable investment as farmers get the full revenue effect of the yield improvement, while fertilizer is a relatively smaller component of their margin. So while the price of nitrogen in this example is almost 2.5x higher than in 2021, a higher relative increase compared with the wheat price in this example, but the revenue increase per hectare is far higher than the cost increase for the farmer. The optimal application rate is approximately 10% lower, but the economic incentive to plant and apply is clearly stronger. Now this is a simplified example, assuming all other factors are held constant, but the conclusion is clear, given the magnitude of the year-over-year increase. I consider this is a positive message to end on, not only for Yara, but for global food production, that we are seeing the right market price incentives to improve food supply over time.

So thank you, and now I hand you back to Silje.

[Silje Nygaard, executive]

Thank you, Thor. So just rounding up then by reminding people that we have an audio conference call starting in approximately 40 minutes. And if you don't have the dial-in details to that, you can find them on our web page, yara.com, under Investor Relations.

So with that, thank you for watching today's presentation.