Fertiglobe plc (FERTIGLB) Earnings Call Transcript & Summary

Hello, and welcome to today's Fertiglobe Q2 2023 Results Conference Call. My name is Bailey, and I'll be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to our host, Rita Guindy, Director of Investor Relations. Rita, please go ahead.

Good morning and good afternoon, ladies and gentlemen. Thank you for joining Fertiglobe's Q2 2023 Results Conference Call. With me today are Ahmed El-Hoshy, our Chief Executive Officer; Haroon Rahmathulla, our Chief Operating Officer; and Andrew Tait, our Chief Financial Officer. This call, we will review Fertiglobe's key operational events and financial highlights for the quarter, followed by a discussion of our outlook. The presentation will be followed by a question-and-answer session at the end of the call. The quarterly results report is available on our Investor Relations website, and I would like to remind you that any forward-looking statements made on this call involve risks and the actual results could differ materially from those statements. With this, I will now hand over to Ahmed El-Hoshy, CEO of Fertiglobe.

Thank you, Rita, and thank you all for joining Fertiglobe's Q2 2023 Results Conference Call. Before we go into the results update and market outlook, I'd like to start by first highlighting our strong commitment to safety, which remains our top priority. Our 12-month rolling recordable incident rate was 0.13 incidents per 200,000 man hours at the end of June 2023. Although this is significantly better than industry averages, we emphasize our continued focus on operational and process safety throughout our organization as we strive towards a culture of 0 injuries and take the safety and well-being of our employees very seriously. It's a top priority. Now moving on to Q2 2023 financial results. Fertiglobe's revenues and adjusted EBITDA decreased 63% and 72% year-over-year, respectively to $552 million and $218 million during the quarter. Our year-over-year performance during the quarter was impacted by a mix of factors. One, lower prices for our products on the back of strong swings in European natural gas prices leading to a lower global marginal cost environment. Significant demand deferrals from key importing regions as well as increased supply that ramped up in late 2022 and early 2023 that was being absorbed by the market. Effectively, while prices were dropping and trying to find the floor, buyers in the agricultural and industrial sectors, were sitting on the sidelines as long as possible to avoid printing a loss if they came in too early. The other major factor was lower sales volumes compared to Q2 of 2022, primarily due to a strong -- to a lower starting inventory level in Q2 2023 versus Q2 2022. It's important to highlight, however, that the lower sales volumes are not a reflection of reduced operating rates as our production was actually up 4% compared to the second quarter of last year despite a major turnaround in Algeria that we had in one of our ammonia lines in the second quarter of this year. And so that's thanks to great efforts by our teams to improve our plant efficiency and reliability levels as part of our manufacturing improvement plan. In terms of pricing, we're pleased to say that markets have recently turned a corner, supported by demand recovery, record low inventory levels post the application season in the U.S. and Europe and very tight supply. Prices bottomed in June of this year and have moved up materially since then. For example, in Egypt, urea prices are now approximately $470 a ton FOB, up 60% from their trough levels in June, with continued positive trajectory. We also remain constructive on the nitrogen price outlook in the medium to long term, supported by limited incremental supply additions over the next 4 years, coupled with healthy farm economics incentivizing nitrogen fertilizer application as well as elevated marginal production costs in Europe compared to historical periods. Going forward, we expect to hear more announcements on permanent closures at European marginal production facilities if ammonia pricing continues to persist at or below marginal production costs. similar to the several announcements already made in the U.K. and Germany over the last couple of quarters. Meanwhile, Fertiglobe continues to enjoy its first quartile position on the cost curve on our own production and distribution economics. On the commercial front, we believe that going into the second half of this year, we are well positioned to service demand emerging from key importing regions, leveraging our centralized distribution capabilities and targeting demand centers that offer the highest netback, further supported by the reinstatement of urea and ammonia import duties into Europe in mid-June of this year. These advantages are duty exempt, Egyptian and Algerian production. In terms of our sustainability focused initiatives, we're excited to continue to diversify our product offering via our DEF or AdBlue or diesel exhaust fluid sales from our plants in Egypt in to Europe, where demand for the product continues to be supported by increasingly stricter emissions regulations focusing on NOx and particulate submissions that DEF is able to ameliorate. We also continue to progress our sustainability focused projects, including the TA’'ZIZ, 1 million-ton low-carbon ammonia project and the low carbon ammonia pilot project we have in the UAE [ for deal ]. In addition, we expect to commence the front-end engineering design or the feed process for our green hydrogen production project in the UAE and our full-scale project for green hydrogen in Egypt during the second half of this year. Through these initiatives and projects, we continue to take serious steps towards achieving a more sustainable footprint for our production as well as a reduction in Scope 3 emissions for others, and we look forward to providing further updates to the market in the coming months. On the financial side, our solid balance sheet position and cash flow management allows us to pursue these growth initiatives while balancing shareholder returns. And we're pleased to propose H1 2023 dividend of at least $250 million or the equivalent of at least 11 fils per share, subject to Board approval in September 2023, after which we expect to pay these dividends in October of 2023, in line with last year. As previously highlighted, we are moving ahead with a number of active management initiatives aimed at supporting our free cash flow generation across cycles independent of pricing. One, which we announced last quarter was our cost optimization initiative to target $50 million in recurring annualized savings by the end of 2024, of which, and I'm happy to say, 25% to 30% are planned to be achieved this year on a run rate basis. Key focus areas will be operating model enhancements, improved logistical capabilities together between operations and logistics contributing 60 -- operating model logistics contributing 60% of that run rate savings as well as operational cost and spending initiatives. In addition, and separate from that, we are seeing strong positive results from our manufacturing improvement plan and are on track to deliver operational and cost efficiency improvements independent of cycle by 2025. the commitment of the Fertiglobe team to maintaining best-in-class safety, performance and excellent standards is a significant factor in driving our success, and I'm very thankful for their dedication. I also have to highlight we continue to benefit from the fact that we have 1 of the youngest fleets in the global markets for nitrogen, ammonia, urea and DEF production, which we tend to benefit from as part of this manufacturing improvement plan. I'd now like to briefly discuss the outlook for nitrogen fertilizer and ammonia markets. We have seen a critical turning point in nitrogen markets during the past 2 months following a turbulent period with rapidly declining prices. The global nitrogen sector started the second quarter with high inventories after this prolonged period of hand-to-mouth buying and deferrals of purchases until the last possible moment. Much has changed since then, nitrogen markets are tightening. And as I mentioned, urea price increases of around 60% have happened despite the usual summer lull of fertilizers we see in Q3. In the short term, there are several factors driving this recovery. Firstly, we've seen rapid demand recovery during the season. Farmer affordability remains a major motivation for buying our product for the third year in a row and shows no sign of abatement, grain prices and forward grain prices have been moving up recently, giving a further boost to farm incomes and incentivizing the application of nitrogen to be above historical trend levels, including the substantial pent-up demand from key importing regions. This, of course, is a significant change from the decline in demand we saw in 2022 and early '23. Secondly, the 2022 and '23 fertilizer application season concluded with record low inventory levels in some major key markets. This was particularly the case in North America, where carryout was down year-on-year for all nitrogen products, but also in Europe where demand cleared inventories. Brazil and LatAm in general is buying more nitrogen and earlier than usual. And in India, we continue to see the need for substantial volumes. We expect more than 4 million tons of urea to be imported in the balance of the second half of this year, which is up from 2.5 million tons in the first half period. This also includes the potential for an additional 1 million tons above that in demand in the second half, bringing the total import to 5 million tons in our productions. Following the robust rains and flooding we've seen in the Northwest parts of India prompting farmers to buy more urea and apply more nitrogen. Moreover, after significant increases in production in India in the year-to-date May 2023 period, reducing the need for imports, which we talked about -- which I just talked about a little bit earlier in terms of having less demand in the beginning because of the new production coming online. We've seen a reversal of that pattern where domestic production in June and July is actually lower compared to a year ago. This has prompted an earlier-than-expected India tender happening next week. Thirdly, supply started to tighten rapidly. In 2022, the 6 million tons of new urea capacity commissioned and most of those plants wrapped up to full capacity or near full capacity in the first quarter and into the first half of this year. All this new capacity has now been largely absorbed with limited major new capacity greenfield additions over the next several years. Additionally, as of late extreme heat this summer has resulted in production curtailments in various locations as gas usage is being prioritized for power consumption. To date, we have not been affected as Fertiglobe in any material way by such curtailments. As of mid-June, there was also a normalization of trade flows after the EU removed the import duty suspension on ammonia and urea now back to 6.5% duty on urea and 5.5% duty on ammonia. This materially benefits Fertiglobe's production sales starting mid-June 2023 as the product from Egypt and Algeria is exempt. This is after circa 1 million-ton urea and 450,000 ton ammonia imports into Europe from nontraditional origins that are now going to field effective duties making their way during the 6-month suspension period where there were no duties into Europe. Chinese exports remained capped and were at about 1 million tons during the first half of this year or almost 30% below the 2018 to 2020 average export lows. We expect another 2 million tons of urea exports during the balance of this year or approximately 3 million tons for the year in total. Ammonia imports in China have increased substantially year-to-date, demonstrating strong growth with an approximately 170% increase or more than doubling in the first half of this year, reaching 390,000 tons from 145,000 tons imported in the same period last year due to fertilizer and industrial demand recovery. As we look forward to the medium and long-term agricultural fundamentals, we believe it is a healthy backdrop for our business, underpinned by 20-year low grain stocks and during a period once again, a heightened concern on food security and increasingly volatile weather with El Nino this backdrop has raised the concerns about crop yields, which we believe will drive the use of nitrogen fertilizer over the medium term to help improve grain supply conditions. Industry experts estimate it will take at least 2 more growing seasons to replenish stocks to historical levels of stability. And this additional demand cannot be met and serve from just the new capacity. There are no major new greenfield announcements or greenfield additions until 2027, except for in Russia and a smaller plant in Turkey. This should result in a continued tightening of global supply and demand balances. Also a word on industrial markets. Ammonia markets have been particularly weak, but have appeared to have stabilized, and have seen some recent increases with higher cost economics, increased outages, particularly east of Suez setting a firm floor. Recovery in demand on the fertilizer side, both nitrogen and phosphates is also boosting ammonia use and imports in China, India, Turkey and Morocco have increased. The global ammonia trade has been at trough levels in 2022 and 2023 at approximately 7 million -- 17 million tons, but a recovery in both the fertilizer and industrial end markets should take this back towards historic levels of 19 million tons per year and should grow from there, particularly with the increase in clean ammonia demand over the course of this decade. Finally, cost curve economics should start putting more pressure on producers once again. European gas futures over the next winter and 2024 are implying ammonia cost support levels excluding CO2 costs of $590 a ton, which is materially higher than where we sit today. And if you do include CO2 costs, the full impact, that's $715 a ton, which could result in temporary -- further temporary and permanent closures of European marginal cost of production if pricing remains below cost for a sustained period of time as we've seen over the last few quarters. Let me now hand it over to Haroon for an operational review.

Thanks, Ahmed. Operationally, on the production front, we are pleased to end the quarter with higher urea and ammonia output compared to last year despite the 50-day turnaround and one of Sorfert's ammonia lines. This is a testament to our team's extensive efforts to improve our production efficiencies, which have already started to bear fruit. As previously disclosed, we had an active turnaround scheduled in 2022, and we are excited to now start to see the benefits of these turnarounds and a broader manufacturing improvement plan and expect to realize more efficiencies and positive progress over the coming quarters. On the sales front, our own produced sales volumes this quarter were 8% lower compared to Q2 of last year, driven by 19% lower own-produced ammonia sales volumes and 6% lower own-produced urea sales volumes. Meanwhile, our third-party traded volumes were down 37% compared to the year before at 148,000 tons. As a result, our overall sales volumes ended the quarter 12% below Q2 last year, mainly due to a high base effect due to the deferral of shipments as Ahmed alluded to, from Q1 2020 to Q2 2022. On an H1 basis, Fertiglobe's total own-produced sales volumes were down marginally by 1% compared to H1 '22, driven by a 9% decrease in ammonia own-produced sales volumes and relatively unchanged urea own-produced sales volumes. Trading third-party volumes were down 39%, this led to a total own-produced and traded third-party volumes being down roughly 7% in H1 2023 compared to H1 2022. Finally, with regards to our commercial strategy, we are pleased to have successfully shipped the 2 lots to Ethiopia, which were deferred from Q1 2023 at a weighted average price of $650 per ton and have been awarded further shipments in Q3 2023. We continue to emphasize our ability to direct volumes to the highest netback markets to our strategically located platform and centralized distribution capabilities and expect the reinstatement of urea and ammonia import tariffs into Europe to have a positive impact on our netbacks given the exemption of Egypt and Algeria sourced volume. With that, I would like to hand over to Andrew to discuss the financial results in more detail.

Thank you, Haroon. Let me start with some highlights of our performance in Q2 2023, which was impacted us, as Ahmed mentioned, by the lower selling prices for our products as well as the lower sales volumes compared to last year. Our revenues were $552 million in Q2 '23, that's 63% below the same quarter last year. Meanwhile, adjusted EBITDA decreased 72% to $218 million in Q2 '23 compared to $770 million in Q2 '22. That's leading to an adjusted EBITDA margin of 40% compared to 53% in Q2 last year. The adjusted net income attributable to shareholders was $84 million in Q2 '23 compared to $429 million in the same quarter last year. Now turning to the balance sheet and cash flow performance. We ended Q2 '23 with a net debt position of $66 million, and that's compared to $287 million of net cash as of 31st December 2022, after the payment of the H2 2022 dividend of $700 million in April. Our balance sheet and free cash conversion capacity, along with the management initiatives discussed before, allow us to continue to balance dividend distributions as well as pursue selective value-accretive growth opportunities. Now our free cash flow before growth CapEx amounted to $60 million in Q2 '23, compared to $789 million in Q2 '22. This is mainly driven by that EBITDA performance during the quarter as well as working capital outflows and dividends to noncontrolling interest and withholding tax. Our Q2 2023 capital expenditures, including growth of $35 million as compared to $15 million in Q2 2022, of which $31 million was related to maintenance. For 2023, we maintain our guidance for capital expenditures, excluding growth of 100 million to 130 million and 160 million, including growth is depending on our projects progress and FIDs, of course. Finally, we're pleased to announce management's proposal or H1 2023 dividends of at least $250 million or the equivalent of at least 11 fils per share. The dividends are subject to Board approved in September 2023 and are expected to be paid during October 2023. As a reminder, Fertiglobe has paid a total of $1.45 billion in cash dividends for 2022 and has so far returned $1.8 billion to shareholders since our IPO positioning the company as 1 of the highest in the sector in terms of dividend yield. I'll now hand back to Ahmed for our outlook and concluding remarks.

Thanks, Andrew and Haroon. As discussed at the beginning of our call, our medium- to long-term outlook for nitrogen remains positive, underpinned by demand recovery, record low inventories and tightening supply. Grain stocks continue to be at decade lows, driving higher crop futures, leading to favorable farm economics and thereby incentivizing increases in nitrogen demand and supporting prices. In the shorter term, the new capacity that started and ramped up last year and beginning of this year has largely been absorbed in our view with limited new supply additions over the next 4 years. To conclude, we are proud of what the team has achieved so far and for its continued support and commitment to the highest standards that allow us to deliver on our targets while adopting industry best practices. Further, through our low-carbon growth projects and initiatives, we reiterate our commitment to delivering on our sustainability agenda and are well placed to show serious progress towards a more sustainable production footprint for ourselves and others in the value chain. With that, we will open the line for questions.

[Operator Instructions] Our first question today is an audio question from the line of Faisal Al Azmeh from Goldman Sachs.

This is [ Welijimah ] from Goldman Sachs. Just asking a couple of questions on behalf of Faisal Azmeh. First of all, we saw a few news articles on the recent Egyptian urea capacity curtailments. So, just wondering how should we think about that impact of the fertilizer market in general? And second, on your feedstock agreement with Algeria. Just wondering what your thoughts are on that, given that it expires soon. How should we think about that impact as well?

I'll take the first question with regards to the capacity curtailments that were in the news, and then I'll pass it on to Haroon to talk about the Algeria gas contract. So with respect to the news articles in Egypt and that we've heard about it elsewhere as well, that there's been significant power demand on back of obviously, this very hot weather and El Nino events otherwise causing power demand to go up, and in some cases, gas to be redirected into the power space, other and outside of the -- and taking away from ammonia. So on a macro perspective, that ends up being kind of a lower supply of ammonia and potentially downstream products, where that's occurring. We think that could be occurring in some areas in South Asia in Egypt potentially in Trinidad. For Fertiglobe specifically, we did see lower gas pressures in Egypt in the month of July. And I think I mentioned in the prepared remarks as well, we haven't seen a material effect. So we've seen less than -- in the month of July, less than 3,000 tons of lost production of ammonia, but we're running at the normal rates that we can run at currently. Haroon?

Yes. Thanks, Ahmed. So on Algeria, the gas discussions -- those discussions are still ongoing, just as a reminder. We signed a 20-year contract starting 2013 and so that contract expires 2033. But it's a price revision that's what's being discussed this year. We can say that, look, any new price will be retroactively applied September 10. So there's no question on actual supply of gas. In Algerian context, extension beyond any contraction date in the contract, they're quite normal. As we've also mentioned in the past, some track in addition to the gas cost by virtue of the [ Echo margin, Super Echo march ] gets a significantly higher share of the dividend. So to put that in context, the dividend payment to Sonatrach that should happen in the next couple of months, is in the tune of about $875 million. So again, taking into account the [ echo march Super Echo march ] in the gas cost, as we've mentioned in the past, an all-in price to Sonatrach is quite a favorable number from their perspective.

[Operator Instructions] There are currently no audio questions waiting. So I'd like to pass it to the management team for any written questions you may have received.

Thank you very much, and thank you all for joining us today. Stay safe, stay cool and looking forward to our next discussion.

This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.