Yara International ASA (OTCPK:YARIY) Q3 2022 Earnings Conference Call October 20, 2022 7:00 AM ET
Company Participants
Anika Jovik – Head, Investor Relations
Svein Tore Holsether – Chief Executive Officer
Thor Giæver – Executive Vice President and Chief Financial Officer
Dag Tore Mo – Head, Market Intelligence
Conference Call Participants
Lisa De Neve – Morgan Stanley
Alexander Jones – Bank of America
Chetan Udeshi – JPMorgan
Andrew Stott – UBS
Adrian Tamagno – Berenberg
Magnus Melvær Rasmussen – Kepler Chevreux
Bengt Jonassen – ABG Sundal Collier
Operator
Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Yara’s Third Quarter 2022 Results Conference Call. [Operator Instructions] Thank you. Anika Jovik, Head of Investor Relations, you may begin your conference.
Anika Jovik
Hello. Thank you, again and welcome to Yara’s third quarter investor call. We won’t go through the presentation again. This is a time for you to ask questions. In the room, we have Yara’s CEO and CFO, Svein Tore and Thor, respectively. We also have the Head of Market Intelligence, Dag Tore and other key company representatives. And with that, I will let the questions begin. I will hand it back to the operator.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from the line of Lisa De Neve from Morgan Stanley. Your line is open.
Lisa De Neve
Good afternoon. Thank you for taking my questions. I will start with two questions. So the first one is, can you share a bit what you are seeing on the demand and the inventory side? I saw in your third quarter results and in your presentation comments that Europe saw higher demand, including for nitrates. At the same time, we do see from industry publications that some regions, including Brazil, France and UK appear to be quite well stocked, especially on urea. So could you give us some insight on buying and inventory levels across the different regions? That’s my first question. Maybe I will just stop here for a second.
Dag Tore Mo
Yes. We don’t think inventories in Europe, in general, are more higher than normal at this stage, because, I mean, the total deliveries that we are estimated are at the level at same quarter last year, third quarter last year, which was historically kind of very low. So we don’t think so. As we talked about earlier, and you are probably aware, so it’s really the Americas that has been the focus of attention around these issues. Because I think also in Asian countries, there has been quite a lot of careful buying patterns, I think due to the high prices in general and hard to imagine that players are sitting on very high inventories. But in the Americas, it’s been a bit different. Supply to the North American market was quite healthy last season and it ended up with a demand rationing that was a little bit stronger than maybe many expected. So they were carryover nitrogen stocks, also P&K for that matter, but we follow nitrogen more closely in the U.S. markets that led to the U.S. being a net exporter of nitrogen in both July and August, which I’ve never seen before. So I haven’t seen the September numbers yet, but I would imagine that the balance in the North American market is about to be restored to a more normal situation, because it was actually a large swing, 600 kilotons nitrogen reduction in net imports just for those 2 months. So now we have a little bit of a similar situation and speculation around Brazil. Brazil has imported at normal pace even above normal on the potash side so far this year. And there is a question mark of exactly how strong consumption will be. So both the industry association there, ANDA and others are now expecting carryover stocks from ‘22 to ‘23 above normal. So I would think that for your question there, I think Brazil is really the kind of the core region to follow this.
Lisa De Neve
That’s super helpful. Thank you very much. And my second question is you stated this morning that the Board will consider potential further special returns over the coming quarters. So what really needs to be in place for you to announce further returns beyond the leverage levels and what are the factors that will weigh in between choosing between a special dividend or a buyback? Thank you.
Thor Giæver
Yes, hi, thank you. This is Thor. I guess given where we are – as you know, of course, we will typically make that statement that we are – that we will consider further cash returns going forward. And of course, over the past years, we have generally had additional capacity so that we have paid both ordinary and additional dividends. Of course, we do have normally an ordinary dividend recommendation coming up in the fourth quarter, so that’s – you can expect that to be to be a consideration. But beyond that to your question, I mean, it is this – as we say in the presentation, our overall objective is to pay returns that also are in keeping with our goal to keep the BBB or investment grade credit rating. And we have defined the key metric in that respect as a medium to long-term net debt-to-EBITDA range between 1.5x to 2x. Now clearly, we are below that level now and that’s part of the background for why we proposed the additional dividend. But bear in mind, it’s not an objective to hit that number every quarter, but rather, as we say, to be in last corridor over time. So as we consider this at any time both in the past and going forward, the key will be to look at both where we are at now and what we consider the likely range looking, let’s say, 12 to 18 months ahead.
Lisa De Neve
Thank you very much for that. I will jump back into the queue.
Operator
And your next question comes from the line of Alexander Jones from Bank of America. Your line is open.
Alexander Jones
Great. Good afternoon. Thanks very much for taking my questions. I will stick to two as well, please. The first, just on energy costs and you made some comments in the presentation around being able to buy gas at below hub pricing. Can you give us a little more color on that and whether you expect that you will be able to continue at a similar magnitude in the fourth quarter? And then the second question, in the results or the release, it talks about given high prices, lower optimal application rates for farmers can you quantify that at all in terms of what you think say European farmers should in wheat be optimally applying less of nitrogen as a percentage? Thank you.
Thor Giæver
Yes. Hi, this is Thor. I can take the first one and maybe start on the second one and then hand over to Dag Tore. So on the energy cost, I think what you are referring to is that we do – it’s not buying below hub, but rather that we have several hubs in Europe. There is TTF, there is NBP, Zeebrugge and several others. And as you have probably seen, the spreads between these have been unusually high in the third quarter and also higher than what the forward curve indicated at the time of the guidance that we gave for third quarter when we reported second quarter results. And of course, we have plants all over Europe and they have exposures to different hubs. So that’s in a way the high level explanation why our energy cost has come in below our guidance. I think looking forward at least looking at the forward curve that spread is set to tighten as we go into winter. Contributing to the big spreads now is the fact that storage is very full in Europe and the consumption season hasn’t really started yet. But of course, we – again, we are capturing that spread in our guidance. So unless that turns out very different from what the forwards market is predicting, then our guidance should be – should give a good indication. Yes. And then in terms of application rates, I know that we have used an example in the past for European wheat farming. And Dag Tore, am I right in saying based on the latest data, that indicates that the optimal application rate maybe at 10% to 12% below a year earlier or something in that magnitude?
Dag Tore Mo
Yes, maybe a little bit careful with the year earlier, before this really started – I mean if you look at this season compared to last season, it depends very much on what price assumptions – what period you are talking about. Because spring 2022, just when the farmers were starting farming, then nitrogen prices were very high following the war and so on. So they have now come down a little bit actually. So, it’s a bit – what depends a little bit on the starting point. But let’s say compared to 2021 season, I think it’s correct to say that the optimal – if you look at the yield curve and optimal, a farmer that is already at optimum would probably reduce by 10%, 12%. And maybe he has done already that this year in a way. So yes, not necessarily the same effect in spring ‘23. We don’t know that yet how that will play out.
Alexander Jones
Great. Thank you.
Operator
Your next question comes from the line of Chetan Udeshi from JPMorgan. Your line is open.
Chetan Udeshi
Yes, hi. Thanks. I had a couple of questions. First was, I am just looking at one of the slides where you are talking about self-sufficiency for European fertilizer industry. And I think there is clearly some data just showing what is the dependency on Russia. I am just curious because there are no formal sanctions on exports of fertilizers from Russia in general. Maybe there are some sanctions on individuals involved, but are you as a company taking a stance here that even if there are no sanctions, Yara as a company will not source any material in the foreseeable future from Russia? Is that the message you are trying to give here to the politicians and hence, you want maybe more action in terms of reducing that exposure for the region as a whole? That’s the first question. The second question was, I guess the flexibility of Yara sourcing model probably worked well in third quarter when seasonally we were at low demand season, and hence, ammonia prices were probably more reasonable to import. Do you see a different scenario maybe in the next two quarters, where if you go in a peak season and ammonia prices rise, maybe the arbitrage that you enjoyed in Q3 might not be as profitable in next two quarters? Thank you.
Thor Giæver
Well, this is – Dag Tore can take the first question. And our main reason for talking about this is looking at the global food system. And if you look at how that has evolved over the recent decades, it’s done a fairly good job at feeding a growing population and where world hunger has been significantly reduced, though at a cost that we addressed before on – when it comes to emissions. And that’s something that’s been talked about for several years now and where we have also – from the other side, a portfolio of products and agronomics advice that could help to lessen this. What we’ve been – become much more aware of now is that there are significant political risk built into the food system, where Russia is a superpower in terms of not only energy production, but also food and fertilizer and raw materials to produce fertilizer. And the war in Ukraine is not only fought with military weapons. It’s being – it also is using energy as a weapon, crude as a weapon and fertilizer as a weapon. And that’s been clearly communicated from Russia’s side as well. And that creates an uncertainty in the food system that is not sustainable from a food security point of view. And it’s important that we raise the awareness around this.
Europe had too much of its energy portfolio dependent on Russia. Clearly, that’s worked for decades and the gas supplies were there even through political turmoil. But that all changed on February 24 and with Russia’s behavior. Now there are clear statements on what is being done to reduce the dependency on Russia for energy. But the world is also in need of Russia for food and fertilizer, and corridors are being established and product is flowing, which is needed in order to reduce famine. We’re in the food crisis right now. Every 4 seconds a human being dies because of hunger in the world, which is completely unacceptable in October 2022. That is not necessary. It is possible to solve this. But at the same time, we need to understand what kind of political risk we’re taking if we don’t build a resilient food system not dependent on Russia.
And we see the impact to European fertilizer producers and nitrogen in particular, with half of the production now curtailed in the third – at the end of the third quarter. The end result here is that if these operations are not competitive and that we are moving towards even more need of Russian fertilizer, that is a very risky move and provides Putin with an additional – or strengthening a weapon that he’s using in war. So this is what we’re talking about and where we’re trying to raise the issue so that it’s understood by policymakers that we need to ensure that food production is robust and that it’s able to deliver food to a growing population also without Russia.
Dag Tore Mo
I just at least have an observation, and maybe others will – without giving any forecast of where ammonia prices are going to go, I just want to kind of bring forward an observation that upgrading margins from ammonia to urea, for instance, have been very small. We have even seen that some producers have been curtailing urea production in order to send more ammonia to Europe. So in the scenario where you bring up where ammonia prices would go further up, it has to be in parallel with urea price increase, otherwise it will not happen. So I’m not too concerned about that scenario.
Thor Giæver
Yes. And maybe just to add that, of course, in the U.S., ammonia is still used to some extent as a fertilizer. So there is a seasonality there. And that’s an option. But in Europe, that’s not the case. So there isn’t – you could say, the agricultural application versus buying season, and there is not an issue for ammonia.
Chetan Udeshi
Understood. Thank you.
Operator
Your next question comes from the line of Andrew Stott from UBS. Your line is open.
Andrew Stott
Good afternoon, everybody. Thanks for your time. A couple of questions as well for me. So first of all, acquisitions, M&A in general, I see from news sources that you’re looking at the Petrobras asset, I wondered if you could comment on that. And if you can’t, could you just update me on your latest thoughts on acquisition ambitions, particularly with regard to moving away from European production? That’s the first question. And the second question was on production volumes outside of Europe. I think you had Belle Plaine out for some time, and there were other production cuts again away from Europe. Can you just update me on Q4 and then into FY ‘23? Do you expect any further curtailments outside of Europe? Thank you.
Svein Tore Holsether
Yes. So I can start on the curtailments. I mean we do not have our current curtailments on finished fertilizer now, are quite limited as the situation for now in Europe has improved with significantly lower gas prices. So at this time, we have curtailments in our Italian plants. But beyond that, the remaining issues of where we have lower production is more technical. And just to say that the Belle Plaine – Belle Plaine in the third quarter was a planned turnaround. It took longer time than planned, but that was certainly not a curtailment. As you probably know, the margins there are strong. On…
Andrew Stott
So that will be too – that will be back to full production then for Q4, Belle Plaine, yes?
Svein Tore Holsether
Yes, Belle Plaine is producing now. So that is…
Andrew Stott
Yes. Thanks.
Svein Tore Holsether
On the M&A, of course, we don’t comment on anything until such point where we might have an agreement. But being one of the largest players, we are – typically are able to look at most projects that are available. And broadly speaking, in terms of our strategy, we are – as you know, our focus areas are within – partly within new business areas, within farming solutions and other food solutions related activity, which, in an M&A connection, will sometimes entail areas that are not, if you like, the usual suspects or the type of assets that you mentioned now unless they have been on other calls in the past. And then there is the – of course, the hydrogen economy, the clean ammonia side, where we have had quite a lot of growth opportunities based on our existing assets, but there also there could be partnerships and, in some cases, acquisitions that are good opportunities.
Andrew Stott
Great. Thank you very much.
Operator
Your next question comes from the line of Adrian Tamagno from Berenberg. Your line is open.
Adrian Tamagno
Good afternoon. I have two questions, please. The first one is on the ammonia capacity in Europe. So there have been various commentaries that it was at around 30% to 35% operating rate at the peak of gas prices through the summer. And now what’s been implied by your curtailments for ammonia is that it should be around 65%, at least for Yara. So in other words, do you see evidence of plants being reopened in Europe with lower TTF prices? That’s the first one. And the second one is on the Clean Ammonia IPO. Yes, between the lines, it seems like it should still be ongoing. But if you can provide an update on what are the next steps and the time line could be helpful. Thank you.
Svein Tore Holsether
Well, it’s Svein Tore, and I can start. I think it was August 26 or 25, we sent a message or the release on the curtailment as a result of spiking gas prices in Europe and the impact on our ability to run these plants profitably. And what you’re referring to is the total production for the quarter. So the production for the quarter will be higher than what we announced at that point because that was from August onwards. And then we are doing continuous evaluations on how to optimize this based on both gas prices in Europe where we can – where our production cost is and our alternative that we have for importing ammonia from other parts of the world, and that’s something that we are doing pretty much everyday. And now with the gas prices coming down on the day-ahead prices, as Thor talked about earlier within not only lower, but significantly lower day-ahead prices, yes, the forward prices when we go into November and December are still at a higher level, and we need to evaluate compared to that as well. And then we have been able to run some of these locations also into September because of the developments in the different prices between the hubs as well. So, even if TTF prices have remained high and higher than the other hubs to tax companies as well, it has been possible to run some of the operations with lower that face lower prices. Then on your – on the adequate ammonia IPO, the process to set it up as an independent operation is very well advanced, and it’s made a really good progress. We have a very, very strong organization in place. The operational performance for the unit has been very good in the quarter. Also, as you see in the results. So, from an operational point of view, an organizational point of view, we are ready, but we also have to look at the financial markets and when the best timing is that we have the full flexibility on when we push the button on an IPO. And as it looks at the moment, this is now more realistic in 2023, and then we continue to evolve both our strategy and the way we run it with the same progress that we expected this to have when we started this.
Adrian Tamagno
Thank you.
Operator
[Operator Instructions] Your next question comes from Magnus Melvær Rasmussen from Kepler Chevreux. Your line is open.
Magnus Melvær Rasmussen
Hi. Thank you for taking the question. Two questions from me. Firstly, on the nitrate premiums, which are very high currently, and of course, you are benefiting from that. Can you share some thoughts on why we see such a high nitrate premium and whether you expect that to continue into the next year? And secondly, on the Yara Clean Ammonia IPO being postponed, as you mentioned, you have some exciting growth opportunities there. And I assume part of the reasoning for the IPO to get some capital and to share that CapEx burden. Is there a possibility that you will take a larger share of that CapEx burden in the short-term now that the IPO was postponed or how do you solve that? Thank you.
Svein Tore Holsether
Well, Svein Tore again. I can take the second question, and I will hand over to Dag Tore on the premiums. Well, I don’t see the situation we have at IPO yet that’s a barrier to continue to evolve the development of Yara Clean Ammonia. And as we have indicated on the CapEx potential and what could be done in terms of both organic growth and add-ons here that with the timeline going into 2023, there is really no change to our view on how that could or will be financed. So, we are still – we are not changing anything on our way of running that business, and I don’t see the structure if we maintain 100% ownership into 2023, that, that also changed anything with regards to our need to carry CapEx on our own balance sheet on additional.
Dag Tore Mo
Nitrate premiums, I mean as gas prices were increasing and increasing the cost of particularly the integrated nitrate production capacity in Europe, of course, on them on the non-integrated that would import ammonia, it’s a little bit different, but on the integrated side. I mean there was basically two choices, right, either increase the price or close down and as that happens, and there are risk of some closures were initiated also on the nitrate side, reducing supply and also the risk of the whole situation now through winter. I think we find it very logical that the nitrate prices had to be high. And of course, it’s not so easy for customers or users in Europe to substitute European-produced nitrate by imported product because it is primarily a European product. It’s not strong products in Russia, but they are also safeguarding their own domestic supplies. As you may have seen, they have export restrictions, for instance, last season themselves. So, there is some substitution to urea where that is possible. We see particularly UK and France. We have seen that now in the third quarter. But of course, nitrate is superior in most of Europe when it comes to the yield prospects and agronomic behavior. If it gets relatively cool, for instance, the transition of urea into nitrates and the soil is not working very well. It’s quite risky for farmers to switch and so forth. So, I would think that is – as you say, we write strong nitrate premiums is a consequence of cost, the cost level of producing in Europe basically and how it will develop going forward. We just have to kind of, I don’t think we will want to give a forecast on that.
Svein Tore Holsether
And just to add briefly, of course, the nitrate premium is also higher because urea prices have fallen. So and just a reminder that from a farmer’s point of view, it’s the more important relationship is that between the nitrate price and their revenues. And in the case of Europe, that’s often the weak price. So, as we touched on earlier, this does involve some lower application rates when you put this through – when you compare the weak pricing and the nitrate pricing, but still that’s a level where it’s certainly optimal and profitable for the farmer to purchase for their farm.
Operator
Your next question comes from the line of Bengt Jonassen from ABG Sundal Collier. Your line is open.
Bengt Jonassen
Thank you and thank you for taking my question. I just wanted to dig into the cash flow from operations. Tore you mentioned in the presentation that the working capital changes are in line with normal seasonality, but the mix seems to be different this time. You have a very high increase in trade receivables. So, volumes are down. Farmers are not buying and those who are buying are not paying. Should we be concerned about higher probability for not collecting this kind of accounts receivable or are you, let’s say, comfortable with your current situation?
Svein Tore Holsether
Hi Bengt. Yes. No, we are comfortable. This increase is mainly about the higher unit prices in the market. And of course, we have experienced that a lot over the last 12 months, but we have been able to manage that without seeing a significant increase in over dues or even bad debt.
Bengt Jonassen
Thank you.
Operator
Your next question comes from the line of Morgan Kroner [ph] from ICIS. Your line is open.
Unidentified Analyst
Hi there. Can you indicate which sites are likely to resume ammonia and nitrate production, if any, in the near-term and if they come online? And also, if you could comment on how you see demand for fertilizers developing, looking ahead?
Thor Giæver
Hi. This is Thor. No, we won’t give forecasts on demand. I think on the plant side, as mentioned earlier in the call, at this time, the only significant market-related curtailments we have are our Italian plants and then how we manage this going forward is given the high volatility, we do not want to and should not provide a forecast on that.
Unidentified Analyst
Okay. Thank you.
Operator
And there are no further questions at this time. Ms. Anika Jovik, I will turn the call back over to you for some final closing remarks.
End of Q&A
Anika Jovik
Thank you very much for calling in. If you do have additional questions that come to you later, please contact the Investor Relations team, and we will get back to you. Thank you.
Operator
This concludes today’s conference call. Thank you for your participation. You may now disconnect.
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