Yara International ASA (YAR) Earnings Call Transcript & Summary

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.

Thank you, operator, and welcome to everyone for this telephone conference for our third quarter results. I'm here together with the representatives from Yara's management. We have our CEO, Svein Tore Holsether; we have our CFO, Thor Giæver; 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.

We have Christian Faitz from Kepler.

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 2 and 3 after that one.

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 2 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 #1 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 2 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 2 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.

Okay. Great. That would actually have been my question number 2 on the blue ammonia projects in Texas/the U.S. Any use in terms of planning timing progress at this point?

So progress in terms of clean ammonia projects?

Yes.

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 9 to 12 months later.

Okay. 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, you're quite off to a slower start in the very early days season for '24, but how is LatAm finishing off?

Yes. It seems like many other places that there is kind of a last minute kind of buying pattern in many places. And 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 work out the muscles to buy fertilizer early, so that there is a quite concentrated activity around closer to the season. So yes, a similar pattern that we see in many places that have high and volatile prices, uncertainty and also maybe interest -- higher interest rates, et cetera, playing into it that the whole issue around working capital management risk seems quite high on the agenda for many buyers, including in Brazil.

Our next question is going to come from Alexander Jones from BOFA.

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?

Yes. Alex, this is Thor. I can comment on both and others can add as needed. First of all, in terms of demand, it's as we commented in the presentation, it'd 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 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 if there's more of a squeeze towards -- closer to physical application but particularly these days, given the uncertainty around energy prices, particularly in the wintertime. So we're seeing -- we've seen in the third quarter periods with swift order taking and periods with less so. And as mentioned, we started the quarter with a longer order book, approximately 2 months and ended with a shorter order book. We are delivering now. We have an order book of between 1 and 2 months, but that's for the quarter as a whole. We -- and for the season, as we highlight the sort of phasing is uncertain, as I said, in any given season, but particularly this year 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-sized 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.

Our next question is going to come from Chetan Udeshi from JPMorgan.

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 a higher volume growth in 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 a much stronger volume recovery than what you had in second quarter. But in the second quarter, you actually had a bigger volume leverage on the EBITDA. So why is that even with a higher percentage volume growth in Q3, the actual EBITDA improvement from 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 than shown in the EBITDA bridge? And the last question was -- again, 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 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 market share loss as you try to protect your margins in this high volatile environment on energy? I'm just curious as we shouldn't be seeing this sort of volume changes in fertilizer market even it's a bit more like stable?

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 2 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 3, 4 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 5 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.

If I just follow up on the last point because this quarter is one, but if I even take all of last 9 months for 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 the 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 specific? Because I don't think the underlying demand is down so much.

I think you're right and you're are touching on to the dynamics of the previous season where, as we described, I mean, there was quite -- we had our curtailments and also in a way a strong influx of imports into Europe from other suppliers. So Dag too would add as appropriate here, but that meant that the consumption overall was down somewhat in the season, but not by a large number, but there was a big shift in terms of local European production, especially nitrate, while overall, the European nitrogen production having a degree of curtailment and a lot of that space was still by imports. But then as we got into this -- 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 the last 9 to 12 months, there are significant factors that play in.

Our next question comes from Rikin Patel of BNP Paribas.

First, I just had a couple of follow-ups on the volume debate. So first, I was able to quantify the mix impacts in Q3. And secondly, and in response to the previous question, I suppose we look historically, volumes have been able to clear 7 million tonnes in nutrition quite comfortably in Q3 looking back sort of 5 years past. What do you see now as a sort of normal level of volume, now the production, I suppose, is normalized? And then just lastly, following 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?

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].

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.

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.