Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to Yara's third quarter 2022 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. Anika Jovik, Head of Investor Relations, you may begin your conference.
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. With that, I will let the questions begin. I will hand it back to the operator.
At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from the line of Lisa De Neve from Morgan Stanley. Your line is open.
Good afternoon. Thank you for taking my questions. I'll start with two questions. The first one is, can you share a bit what you're 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. Could you give us some insight on buying and inventory levels across the different regions? That's my first question. Maybe I just stop here for a second.
Yeah. We don't think inventories in Europe in general are no 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 is historically kind of very low. We don't think so. As we talked about earlier, and you're probably aware, it's really the Americas that has been that hidden focus of attention around these issues. Because I think also in Asian countries, like, there has been quite a lot of careful buying patterns, I think due to the high prices in general and hard to imagine that the 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. There were carryover nitrogen stocks, also NPK for that matter, but we follow nitrogen more closely in the US market. It led to the US being a net exporter of nitrogen in both July and August, which I have never seen before. 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 two months. Now we have a little bit of similar situation and speculation around Brazil.
Brazil has imported at normal pace, even above normal on the potash side so far this year. There is a question mark of exactly how strong consumption will be. Both the industry association there, ANDA, and others are now expecting carryover stocks from 2022 to 2023 above normal. I would think that, for your question, I think Brazil is really the kind of core region to follow this.
That's super helpful. Thank you very much. My second question is, you stated this morning that the board will consider potential further special returns over the coming quarters. What really needs to be in place for you to announce further returns beyond the leverage levels? What are the factors that will weigh in between choosing between a special dividend or a buyback? Thank you.
Yeah. Hi, Lisa. This is Thor. I guess given where we are, as you know, of course, we will typically make that statement that we will consider further cash returns going forward. 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. You can expect that to be a consideration.
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 a BBB or investment grade credit rating. We've defined the key metric in that respect as a medium to long-term net debt to EBITDA range between 1.5-2x . Now, clearly, we're below that level now, and that's part of the background for why we propose the additional dividend. Bear in mind it's not an objective to hit that number every quarter, but rather, as we say, to be in that corridor over time.
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 12-18 months ahead.
Thank you very much for that. I'll jump back into the queue.
Your next question comes from a line of Alexander Jones from Bank of America. Your line is open.
Great. Good afternoon. Thanks very much for taking my questions. I'll stick to two as well, please. The first, just on energy costs. 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 to be able to continue at a similar magnitude in the fourth quarter? And then 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.
Yeah. Hi, Alexander. This is Thor. I can take the first one, and maybe start on the second one and then hand over to Dag Tore. On the energy cost, I think what you're referring to is that we do. It's not buying below hub, but rather that we have several hubs in Europe. There's TTF, there's NBP, Zeebrugge, and several others. And as you've 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.
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 are capturing that spread in our guidance. Unless that turns out very different from what the forward market is predicting, then you know, our guidance should give a good indication. Yeah.
In terms of application rates, I know that we've used an example in the past for European wheat farming and urea. Am I right in saying based on the latest data that indicates that the optimal application rate may be at 10%-12% below a year earlier or something in that magnitude?
Yeah, maybe be a 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're talking about. Because spring 2022, just before when the farmers were starting farming then, nitrogen prices were very high, following the war and so on. They have now come down a little bit actually. It depends a little bit on the starting point. Let's say compared to a 2021 season, I think it's correct to say that the optimal, if you look at the yield curve, an optimal, if a farmer that is already at optimum would probably reduce by 10-12%.
Maybe he's done already that this year in a way. Yeah. Not necessarily the same effect in spring 2023. We don't know that yet, how that will play out.
Great. Thank you.
Your next question comes from the line of Chetan Sangoram from J.P. Morgan. Your line is open.
Yeah. Hi. Thanks. You know I had a couple of questions. First was, I'm just looking at one of the slides, where you are talking about you know, self-sufficiency for European fertilizer industry. I think there is clearly some data just showing what is the dependency on Russia. I'm just curious because you know, there are no formal sanctions on exports of fertilizers from Russia in general. Maybe there are some sanctions on individuals involved. 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, you know, 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, you know, 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.
Well, this is Svein Tore. I can take the first question. Our main reason for talking about this is looking at the global food system. 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've addressed before on when it comes to emissions. That's something that's been talked about for several years now, and where we have also an from the other side a portfolio of products and agronomic advice that could help to lessen this.
What we've become much more aware of now is that there are significant political risk built into the food system, and where Russia is a superpower in terms of not only energy production, but also food and fertilizer and raw materials to produce fertilizer. The war in Ukraine is not only fought with military weapons. It also is with using energy as a weapon, food as a weapon, and fertilizer as a weapon, and that's been clearly communicated from Russia's side as well. That creates an uncertainty in the food system that is not sustainable from a food security point of view. It's important that we raise the awareness around this.
Europe has 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. That all changed on February Twenty-Fourth and with Russia's behavior. Now there are clear statements on what is being done to reduce the dependency on Russia for energy. 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 a food crisis right now.
Every four 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. 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. We see the impact to European fertilizer producers and nitrogen in particular, with half of the production now curtailed in the third and at the end of the third quarter.
If the end result here is that these operations are not competitive and that we're 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. 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.
Yeah, on the second question, 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 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. In the scenario where you bring up where ammonia prices would go further up, it has to be in parallel and urea price increase, otherwise it will not happen. I'm not too concerned about that scenario.
Yeah. Maybe just add that, of course, in the U.S., ammonia is still used to some extent as a fertilizer, so there is a seasonality there in the consumption. In Europe, that's not the case. There isn't. You could say the agricultural application versus buying season is not an issue for ammonia.
Understood. Thank you.
Your next question comes from the line of Andrew Stott from UBS. Your line is open.
Yeah. Good afternoon, everybody. Thanks for your time. Couple of questions as well from me. 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. If you can't, could you just update me on your latest thoughts on acquisition ambitions, particularly regard to moving away from European production? That's the first question. 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 2023? Do you expect any further curtailments outside of Europe? Thank you.
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. At this time, we have curtailments in our Italian plants. But beyond that, the remaining issues where we have lower production is more technical. Just to say that the 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.
That'll be back to full production then for Q4 Belle Plaine, yeah?
Belle Plaine is producing now, so that's.
Yep. Thanks.
On the M&A, of course, we don't comment on anything until such point where we might have an agreement. We being one of the largest players, we are typically able to look at most projects that are available.
Broadly speaking, in terms of our strategy, we are, as you know, our focus areas are partly within new business areas, within farming solutions and other food solutions related activity, which is, you know, in an M&A connection, will sometimes entail areas that are not, if you like, the usual suspects of the type of assets that you mentioned now and that have been on other calls in the past. Then there's, of course, the hydrogen economy, the clean ammonia side where we have quite a lot of growth opportunities based on our existing assets. There also could be partnerships and, in some cases, acquisitions that are good opportunities.
Great. Thank you very much.
Your next question comes from a line of Aron Ceccarelli from Berenberg. Your line is open.
Hello. Good afternoon. I have two questions, please. The first one is on the ammonia capacity in Europe. There has been various commentaries that it was at around 30%-35% operating rate, at the peak of gas prices through the summer. Now what seems implied by Europe curtailments for ammonia is that it should be around 65%, at least for Yara. In other words, do you see evidence of plants being reopened in Europe with lower TTF prices? That's the first one. The second one is on the clean ammonia IPO. Yeah, 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 timeline could be helpful. Thank you.
Well, I thought I can start. I think it was August 26th or 25th. I think we sent the 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. What you're referring to is the total production for the quarter. The production for the quarter will be higher than what we announced at that point because that was from August onwards.
We're doing continuous evaluations on how to optimize this based on both gas prices in Europe, what our production cost is and our alternative that we have for importing ammonia from other parts of the world. That's something that we're doing pretty much every day. Now with the gas prices coming down on the day ahead prices, as Thor talked about earlier. Not only lower, but significantly lower day ahead prices. Yet the forward prices when we go into November and December are still at a higher level. We need to evaluate compared to that as well.
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. Even if TTF prices have remained high and higher than the other hubs to take advantage of this as well, it has been possible to run some of the operations with lower gas prices. On the Yara Clean Ammonia IPO, the process to set it up as an independent operation is very well advanced, and it's made 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. From an operational point of view, an organizational point of view, we are ready. We also have to look at the financial markets and the best timing is. We have the full flexibility on when we push the button on IPO. As it looks at the moment, this is now more realistic in 2023. 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.
Thank you.
Again, if you would like to ask a question, press star one on your telephone keypad. Your next question comes from Magnus Rasmussen from Kepler Cheuvreux. Your line is open.
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're 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? Secondly, on the Yara Clean Ammonia IPO being postponed, as you mentioned, you have some exciting growth opportunities there, and I assume parts of the reasoning for the IPO was to get some capital in 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 is postponed, or how do you solve that? Thank you.
That's where, again, I can take the second question, and I'll hand over to Dag Tore on the premiums. Well, I don't see the situation that we haven't IPO'd yet, that's a barrier to continue to evolve the development of Yara Clean Ammonia. 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's really no change to our view on how that could or will be financed. We're not changing anything on our way of running that business.
I don't see the structure if we maintain 100% ownership into 2023, that also changes anything with regards to our need to carry CapEx on our own balance sheet on this additional.
On nitrate premiums, I mean, as gas prices were increasing the cost of particularly the integrated nitrate production capacity in Europe, of course, on the non-integrated that could import ammonia, it's a little bit different. On the integrated side, I mean, there was basically two choices, right? Either increase the price or close down. As that happened, there was risk, some closures were initiated also on the nitrate side, reducing supply, and also the risk of the whole situation now through winter. I think you find it very logical that the nitrate prices had to be high. 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 production 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. There is some substitution to urea, where that is possible. We see particularly UK and France. We've seen that now in the third quarter. Of course, nitrate is superior in most of Europe when it comes to the yield prospects and the agronomic behavior. If it gets relatively cool, for instance, the transition of urea into nitrates in the soil is not working very well. It's quite risky for farmers to switch and so forth. I would think that is ni-
As you say, right, 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.
Just to add briefly, of course, the nitrate premium is also higher because urea prices have fallen. 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. In the case of Europe, that's often the wheat price. As we touched on earlier, this does involve some lower application rates. You know, when you put this through, when you compare the wheat pricing and the nitrate pricing. But still that's a level where it's certainly optimal and profitable for the farmer to purchase an NPK.
Your next question comes from the line of Bengt Jonassen from ABG Sundal Collier. Your line is open.
Thank you, and thank you for taking my question. I just wanted to dig into the cash flow from operations. Thor, you mentioned on 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 the higher probability for not collecting this kind of accounts receivable or are you, let's say, comfortable with your current situation?
Hi, thanks. Yeah, no, we are comfortable. This increase is mainly about the higher unit prices in the market. Of course, we've experienced that a lot over the last 12 months, but we have been able to manage that without seeing a, you know, a significant increase in overdues or even bad debts.
Good. Thank you.
Your next question comes from a line of Morgan Conan from ICIS. Your line is open.
Hi there. Can you indicate which sites are likely to resume ammonia and nitrate production, if any, in the near term, and they come online? Also if you could comment on how you see demand for fertilizers developing looking ahead.
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. 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.
Okay. Thank you.
There are no further questions at this time. Ms. Anika Jovik, I turn the call back over to you for some final closing remarks.
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.
This concludes today's conference call. Thank you for your participation. You may now disconnect.