Yara International ASA
OSE:YAR
Earnings Call Analysis
Q3-2023 Analysis
Yara International ASA
The agricultural sector's cyclical nature has shown its effects on the company with realized nitrate prices being contracted at lower prices, about 10% lower than the average going rates, due to timing differences in contracting and delivery against market prices. This contributes to a 60% decrease in underlying EBITDA compared to the prior year, intensified by the notable decline in nutrient prices despite increased deliveries and cost offsets from lower gas prices.
Operational deliveries were up, with crop nutrition seeing a boost of 14%, but the sectors' performance was still sensitive to global market volatilities and uncertainties in delivery phasing into upcoming quarters remain. This is compounded by the risks of new nitrogen curtailments in Europe, though the company's position with a shorter order book could allow for responsive adjustments to slow demand and production economics.
While earnings are lower than the previous year due to shrinking margins, the company has seen a marginal sequential improvement since the second quarter. A major currency loss of $65 million was recorded, due to currency appreciation, and the return on invested capital dropped significantly from 22% to 6.2%. Nevertheless, operating cash flow remained strong, underscoring a resilient operational efficiency in strainful times.
Regionally, Europe's EBITDA plummeted by 70% due to a slump in selling prices which was only partially mitigated by reduced feedstock costs and increased deliveries. On the brighter side, global crop nutrition deliveries increased by 14%, showcasing a rebound in demand and lower production curtailments.
The company's financial health has seen an uptick with net debt decreasing by around $600 million by quarter's end, leading to an improved net debt-to-EBITDA ratio of 1.47 and a net debt-to-equity ratio standing at 45% .
Operating rates were higher than the previous year and environmental endeavors have seen success, with greenhouse gas emission intensities showing improvements due to emission reduction projects. The company has also successfully managed fixed costs in line with its guidance, beating inflation, though capital expenditures have risen as forecasted and anticipated.
The full-year tax guidance has been lowered to about $1.3 billion, reflecting the halting of uncommitted projects. Moreover, the overall operational capital demonstrates an improvement due to lower inventory volumes despite an expected increase towards the year's end.
The company made considerable progress with social metrics, such as increasing the proportion of female senior managers to 32%, while maintaining strong premium levels despite a slight decline from previous quarters. These efforts align with the company's commitment to corporate responsibility and sustainability.
In the face of a climate emergency, the company stands unwavering in its commitment to decarbonization, recognizing the financial risks associated with inaction and positioning itself to avoid costs and create broader societal value.
Pioneering for over six decades, the company is driving innovation in the field of sustainable agriculture, emphasizing the importance of high-quality, low-carbon fertilizers and is well-positioned to contribute to the food system's transformation for the better.
Yara not only aims to confront the food crisis and climate change but also propels toward enabling the energy transition while generating strong returns for shareholders. Its strategy remains centered around climate neutrality, regenerative agriculture, and prosperity as guiding principles for growth and value creation.
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Welcome to Yara's Third Quarter Results Presentation. Today's presenters are 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.
And with that, it's my pleasure to hand over to our CEO, Svein Tore Holsether.
Thank you very much, Maria, and good morning, good afternoon, and good evening to all of you joining our third quarter presentation.
And as always, we start by looking at our safety performance. Our TRI rate continues to be at a low and industry-leading level and quite stable the last 12 months, which given the challenging operating environment is a good performance. We continue to prioritize working with safety across all dimensions. An example of this, our training program for major risk prevention task force to develop a best practice on ammonia loading and unloading and psychosocial safety program to mitigate workplace-related stress and to improve well-being. Every accident can be avoided, and we continue to strive towards our ambition of 0 injuries.
Turning then to the main elements of the third quarter. EBITDA is down 62% compared to last year, which is due to reduced margins and reflecting a challenging operating environment in the quarter. The operating cash flow is $1 billion. And this is mainly due to a significant release of operating capital, which I will come back to later. Our realized nitrate prices for the quarter will reflect that most of the volumes delivered were contracted at lower prices, approximately 2 months ahead of spot market prices. Although the last few quarters have been operationally challenging at the low end of the cycle, ag fundamentals going forward are supportive. However, at this stage of the season, the phasing of deliveries for the remainder of the season is uncertain and sensitive to the volatility of market prices.
Underlying EBITDA for the quarter is down 60% as lower gas prices and higher deliveries were more than offset by strong price decline from third quarter of last year. Improved deliveries contributed $70 million with crop nutrition deliveries up 14%, while the Industrial segment deliveries were down 9%. The negative margin impact reflects the strong decline in all nutrient prices compared to last year, partly offset by a positive impact from lower gas prices.
The margin variance includes around $80 million to $100 million in negative effect on phosphate upgrading margin as DAP prices declined strongly, while phosphate rock prices were more stable compared to a year ago. Fixed costs are up in the quarter, in line with our guidance and mainly reflecting inflation and the ramp-up of new business areas.
As normal at this stage of the season, we built a longer order book ahead of third quarter, roughly two months to maintain deliveries and market position through the off-season summer period. In addition, order taking slowed mid-quarter when urea prices rose and later fell back. For third quarter, most of volumes were, therefore, delivered at the second quarter level of prices and the order book at the end of the quarter was significantly shorter. Yara's realized nitrate price for the quarter was, therefore, approximately 10% lower than average publication prices. We had a similar gap in third quarter last year in percentage terms, 9%. However, the difference in absolute number was almost double due to the higher market price level.
Looking at the industry in total, deliveries this quarter show a slow start to the season in Europe, as you can see on the left-hand side. However, farmer incentives are improved, as illustrated with the cereal to urea price index. Optimal application rates have also increased compared to a year ago. Therefore, the fundamentals for a season in total are supportive. But with the current market dynamics and being at this stage of the season, it is uncertain how deliveries will be phased in the quarters ahead.
With a little sense of urgency in the market and increasing European gas prices, there is now a risk of new nitrogen curtailments in Europe. However, with a shorter order book, we are well placed to react to a situation with continued slow demand and unfavorable production economics.
So now I will hand over to our CFO, Thor, who will take you through our financials. Over to you, Thor.
Thank you, Svein Tore. So as we've already seen, our earnings are below last year's level, mainly due to lower margins, a similar pattern to our results from earlier this year. However, although it takes time for today's improved market situation to feed into our results, we have a sequential improvement in margins and results compared with the second quarter. . The year-over-year decline is stronger for earnings per share compared with EBITDA as our operating and net income is at low levels. And in addition, we have a very high effective tax rate in the quarter due to tax rate differences between the countries we operate in and tax losses in certain countries not being recognized as deferred tax assets.
Reported net income for the quarter was also impacted by a currency loss of $65 million, which is mainly due to appreciation of the Norwegian krone against the euro, which affects our internal funding positions. Return on invested capital for the last 12 months is down from 22% a year ago to 6.2% this quarter, primarily reflecting the lower margin environment compared with the stronger levels last year. And as you've already seen, operating cash flow this quarter was strong with a substantial release of operating capital more than offsetting weaker operating income. Lastly, we had an increase in investments, mainly related to the maintenance projects and smaller production growth projects.
Looking at our results by segment. The lower margin picture is reflected in all commercial segments and regions. However, our Global Plant segment delivered improved results with improved production margins and higher volumes compared with a year earlier when record high gas prices in Europe negatively impacted margins and production volumes.
In Europe, EBITDA was 70% lower as lower selling prices more than offset lower feedstock costs and 11% higher deliveries. In addition to lower margins, Industrial Solutions and Clean Ammonia were impacted by lower deliveries and Asia and Africa was impacted by the maintenance stop at our Pilbara ammonia plant in Australia.
Increased crop nutrition deliveries reflect both a demand recovery and significantly lower production curtailments this quarter compared to a year earlier. We saw improved premium and commodity product deliveries in all regions with crop nutrition deliveries up 14% overall. The Industrial segment saw lower deliveries mainly due to lower industrial activity in Europe. For Clean Ammonia, deliveries were below last year due to lower product availability for trading amid maintenance and some technical issues at key ammonia exporting sites.
Our net debt ended approximately $600 million lower at the end of the quarter, mainly driven by the $800 million operating capital release mentioned earlier. I've already mentioned the operating capital release and higher investment level. The other item here includes withholding tax of $72 million on dividends paid in the second quarter. This all brings our net debt-to-EBITDA ratio to 1.47 and the net debt-to-equity ratio to 45% at the end of this quarter.
Turning to our operational performance. We have a higher operating rates compared with a year earlier when significant curtailments were in place due to the energy situation. As a result, we have improved within both production regularity and greenhouse gas emission intensity with the latter of these also reflecting progress on emission reduction projects both in our production plants and in our ammonia sourcing. The fixed cost increase is in line with our guidance, reflecting ramp-up of new business areas while continuing to beat inflation in our baseline cost. Similarly, CapEx has increased, but also well within our guidance and reflecting a period with production plant turnarounds, including Pilbara in Australia, Tertre in Belgium, and as mentioned, some smaller growth projects in our plants.
We have reduced our full year tax guidance to around $1.3 billion, reflecting uncommitted projects that will now not go ahead. The operating capital days increase is mostly a technical effect this quarter as we've had an underlying improvement linked to lower inventory volumes in particular. Operating capital may increase somewhat towards year-end due to normal seasonal patterns and as always sensitive to the price effects in the market for the quarter as well. So rounding up this section of the presentation, we've already covered many of the key elements in our corporate scorecard.
In addition, I would highlight progress on our female senior managers indicator, up to 32% from 29% in the second quarter this year. Also, our absolute GHG emissions Scope 1 and 2 indicator, it increased due to higher production output, but was also positively impacted by emission reduction projects and lower Scope 2 emissions, mainly within electricity sourcing. Finally, we had somewhat lower premium generation this quarter, reflecting the order book effect mentioned earlier, but still premiums remained significantly above historical levels.
So I'll now hand you back to Svein Tore for his closing remarks.
Thank you, Thor. I want to round up now with a look at the bigger picture and the purpose that we're working towards. At the end of -- or during the UN General Assembly, we got really depressing news from the Secretary General Antonio Guterres that only 15% of the sustainable development goals are now on track with several even going in reverse.
So does that mean that the work to decarbonize is now put at a pause? Absolutely not. The world community has an incredible ability to find solutions when faced with extreme challenges. And we saw that during the pandemic. And we see that the sense of climate emergency is gaining traction. And it is our firm belief that the cost of inaction is far greater than the cost of action.
Companies that are not positioned for this will be faced with severe financial penalties. In Yara, we are positioned for the future, not only to avoid costs and penalties, but to create value, both for Yara and for the wider society. And we have science on our side. A few weeks ago, we celebrated the 65th anniversary of our field trials in Dulmen and Germany. And for those who want to dive into the details of this considerable knowledge base, please get in touch with us.
But let me just give you the headline. Mineral fertilizers and balanced nutrition is absolutely fundamental for sustainable agriculture. There is no way around it. High-quality, low-carbon fertilizers will be an integral part of fixing the food system. In Yara, we are positioned very well to take this further and to drive the market side on that.
Yara will continue to play that leading role in tackling the food crisis and climate change while enabling the energy transition. We will continue to prioritize value creation through our three pillars of climate neutrality, regenerative agriculture and prosperity. And we'll also continue to drive sustainable farming practices while also delivering strong shareholder returns.
So thank you for your time. I will now hand back to Maria.
Thank you, Svein Tore. Just a final reminder from me on the conference call starting in approximately 40 minutes at 1:00 p.m. Oslo time. That concludes today's presentation. Thank you for watching.