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 to this telephone conference for our third quarter results. I'm here together with a representative 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 Yara team. We hope you all saw the presentation that we showed today, and we will go straight into questions. Operator, please open the first line. Operator, will you please let the first question know?
We have Christian Faitz from Kepler. His line is now open.
All right, thank you very much. Good afternoon, everyone. Thanks for taking my 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. I guess I'll ask number two and three after that one.
This is Svein Tore. I could start on this one. I think through what we've been working on now for close to two 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 good production as well. We were ready to flex quite quickly, should that be needed. As you've already seen, we were continuing to optimize globally as well, utilizing our number one position as the biggest ammonia trader in the world.
Utilizing our own vessels to get access to ammonia as well. 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. It's already announced. We have MOUs in place for two 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.
I think that flexibility is a key strength in our system to begin with, and what we learned now through this two years in terms of operating ramp downs and ramp ups, we're in a solid position to react to both demand and also the energy situation in Europe.
Okay, great. Thanks, Svein Tore. That would actually have been my question number two on the blue ammonia projects in Texas/the U.S. Any news in terms of planning, timing, progress at this point? Thank you.
Progress in terms of clean ammonia projects?
Yes. Yes.
[audio distortion]
Okay. Thank you very much. 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 kind of to a slower start in the very early days, season for 2024, but how is that ending, finishing off? Thank you.
Yeah. It seems like many other places, that there is kind of a last-minute kind of buying pattern in many places. 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 or have the muscles to buy fertilizer early, so that there is a quite concentrated activity around closer to the season. Yes, that similar pattern as we see many places that are high and volatile prices and uncertainty and also maybe interest, higher interest rates, et cetera, playing into it. The whole issue around the working capital management and risk seems quite high on the agenda for many buyers, including in Brazil.
Okay. Thank you very much.
Our next question is gonna come from Alexander Jones, from BofA. Your line is now open.
Great. Thanks very much for taking my questions. 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? The second question, just on CapEx guidance. I think at the midpoint, you've 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? Thank you.
Yeah. Hi, Alex, it's Thor. I can comment on both, and others can add as needed. First of all, in terms of demand, it's as we comment on in the presentation. Well, first of all, I mean, at this time of the year, it's normal that there's this ebb and flow of it in the Northern Hemisphere, in Europe, where we have a significant position. You know, the supply is close to the customers, so that it's certainly possible to wait with buying until closer to application.
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. We've seen in the third quarter, you know, periods with swift order taking and periods with less so, and as mentioned, we started the quarter with a longer order book, approximately two months, and ended with a shorter order book. We are delivering now.
We have an order book of between one and two months, but that's, you know, for the quarter as a whole. For the season, as we highlight, the sort of phasing is uncertain, but 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.
Great. Thank you.
Our next question is gonna come from Chetan Udeshi from JPMorgan. Your line is now open.
Yeah. Hi, thanks. 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 higher volume growth in Q2 than you had in Q1, sorry, Q3. You had volume growth of 6% for all of your deliveries, and for, you know, crop nutrition specifically, I think it was up more than 10%, which is actually much stronger volume recovery than what you had in second quarter. In second quarter, you actually had a bigger volume leverage on the EBITDA. Why is that, that even with the 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. Where is that additional gas cost then shown in the EBITDA bridge? The last question was, I mean, again, you know, it's a bit sort of slightly weird question in a way, but, you know, if you look at your total crop nutrition deliveries in Q3 versus, you know, 2021 or 2020 Q3, or 2019, you're still sort of 15% down versus, you know, pre-2022 periods. What's 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 because we shouldn't be seeing this sort of volume changes in fertilizer market, even if it's a bit more like staple. Thank you.
Yeah, thank you, Chetan. That's a nice bouquet of not entirely straightforward questions to answer, but we'll give it a shot. I'll keep it high level, and others can add as appropriate. 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, you know, for the last couple of years, we've seen different patterns, shall we say, compared to pre-war, pre-COVID, et cetera. 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 work, it's a challenging environment to estimate and to operate in. Be careful with sequential comparisons because of the seasonality in this business. You know, 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 is in the, you know, Northern Hemisphere, which is our European business and also North America. You're in a pre-buying season, you're far away from application. Second quarter is the end of the previous season. There's very different price situations.
I think that the short answer to your first question is, well, there's a different margin and mixed picture between those two parts of the season, so you can't expect a given % volume to give you the same financial effect in the variance analysis. In terms of the energy cost part, I mean, this is... Again, with the high volatility, this is, you're not going to get a perfect answer either way.
There's a choice, in a way, whether when you start with calculating volume and then calculate margin price effects or vice versa. 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. The next step is to then do the margin type effects based on this year's volume.
You know, given the huge changes in energy costs year-over-year, in any case, this becomes a bit of approximation, and I know the IR team has, over the last probably three, four 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, was the lowest delivery third quarter in the last five years, certainly, maybe even going longer back. This year, it's improved somewhat with...
I mean, last year, as you recall, was, you know, very high prices, energy costs, and so on. Understandable that in the off-season, both buyers and producers like ourselves were cautious. We had curtailments in place, so you kind of, you had cautious demand side and cautious producer side. Both those are a bit better this year, but there's still a higher risk aversion in this market that has higher volatility, especially in a time of the season where you're quite far away from the physical application.
If I just follow up on the last point, because, you know, this quarter is one, but if I even take all of last nine months for your crop nutrition deliveries, is still down 15% from pre-war levels, if not slightly more. I'm just trying to understand, do you think the consumption from farmers is down so much, or is it just 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. I mean, and you're touching on to the dynamics of the previous season, where, as we described, I mean, we had our curtailments and also, you know, a strong influx of imports into Europe from other suppliers. I'm sure we'll add as appropriate here, but, you know, that meant that the consumption overall was down somewhat in the season, but you know, not by a large number. There was a big shift in terms of local European production, especially nitrates, well, all the European nitrogen production having a degree of curtailment and a lot of that space was filled by imports.
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. When you look back at the last 9-12 months, there are significant factors at play.
Okay. Thank you.
Our next question comes fro m Rakeen Patel of BNP Paribas. Your line is now open.
Yeah, hi. Thanks for taking my questions. First, I just had a couple of follow-ups on the volume debate. First, are you able to quantify the mix impact for Q3? Secondly, in response to the previous question, I suppose if I look historically, volumes have been able to clear 7 million tons in crop nutrition quite comfortably in Q3. Now, looking back sort of five years plus, what do you see now as a sort of normal level of volume now that production, I suppose, is normalized? 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? Thank you.
Yeah. Okay. I can... I mean, in terms of the CapEx, our normalized guidance is $1.2 billion, max $1.2 billion average over time. We haven't issued a specific guidance for next year yet, but that's the start point. Mix impacts third quarter. I think I'll add in, we haven't published a specific number. It's probably something that we can sort of help with analytically offline, but if there's any others around the table here, if there are any sort of...
There was an increase for both premiums and commodities, but at least for Europe, the share of premium is slightly down. That should give you an indication. 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 curtailed less this year, and that will be a negative volume impact, because it had negative margins last year. On the other side, we produced a bit less ammonia, and at huge margins last year, that will also give a negative impact in the bridge.
You 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.
Yeah. Okay, thanks. Thanks, Maria. Can I ask you to repeat the second question? I think it was about the normalized level, but.
Yeah.
I didn't fully catch it.
Yeah, just the normalized level of crop nutrition deliveries on a quarterly basis.
Yeah.
On volumes.
Yeah, I mean, we haven't got any sort of guidance on this. You can refer to our production capacities, and you have to make an assumption about operating rates. As we described in the presentation, we had a low level of curtailments this quarter, but we see a risk into the fourth quarter due to the rising energy cost environment and a sort of, should we say, hesitant demand side, given that volatility.
If anything, I guess we can mention there might be a structural lower delivery in Brazil due to less sourcing from Russia and Belarus from the TPP that we saw then.
Right.
Yeah.
But with a limited margin impact.
Yeah.
Because those are low margin. That's a low-margin business for us.
Okay. Thank you very much.
Our next question comes from Bengt Jonassen. Your line is now open.
Yes Good morning I just want to follow up on the price margin have been talked earlier could you please tell us [missing transcript]
Your net debt is currently around 3x, putting you in the high end of your capital structure target of 1.5x-2x. How should you think about the dividend for this year? Thank you.
Yeah, thanks, Bengt. First of all, on the DAP or phosphate upgrading margins, as you know, it's difficult to be precise on this in a short period, like a quarter, because it's an analytical observation trying to convert our NPK exposure into a DAP equivalent, because of course, we produce NPKs, not DAP primarily. We've quantified that to directionally, $80 million-$100 million negative in the quarter.
Thank you.
On the fixed cost part, it's important to note that the beat inflation target for us is on the core business, and then on top of that, you will have growth activities. We will, as normal, provide a full breakdown of this for the full calendar year results. When it comes to net debt to EBITDA, that's on a trailing 12-month basis at 1.47 for the quarter. As you observe, well, it's from that point of view at the lower end of our guidance, but of course, the trend has been that it's increasing. That brings you into the dividend question.
As you know, there's two main elements to that. One is, what will our full-year net income be? How do we view the net debt EBITDA, not so much point in time, but how we see the development over the next 6-12 months, typically, is what we will look at for the dividend decision. I think I'll refrain from guiding on what we see as the likely dividend, and rather revert once we've delivered our full-year results, and have had a chance to look into also the forecast elements of this before we have a recommendation.
Thank you.
Our next question is gonna come from Magnus Rasmussen from SEB. Your line.
Hi, everyone. Thanks for taking my question. I know that you like to speak about the year-on-year changes, although last year was very volatile and chaotic, which makes it a bit more difficult. I was wondering whether you can just explain, if we just look Q-on-Q from the previous quarter, it seems like adjusting for the negative inventory write-down and position effects last quarter, your EBITDA is down despite higher volumes, also in more or less all regions and product types, as well as lower gas prices. If you can just explain sort of what changes on a quarter-to-quarter basis, because I think it's pretty clear that consensus was expecting an increase, so we need some help to understand that.
I also wonder about the working capital in the fourth quarter, because you had a big release this quarter. Is that something that you expect to reverse next quarter now that gas prices are up? Thank you.
Yeah, yeah, so good that you introduced with our earlier comment, but this quarter-on-quarter is challenging, particularly in this environment. As you say, year-over-year is challenging as well, so you don't get an easy ride either way. I mean, this has to start with, I mean, one element here is energy costs, which has been rising in the third quarter. I mean, there will be price effects here, beyond the sensitivity too, because we have a small number of sensitivities that are available for modeling, but the reality is that we have a wide range of markets and products that we're selling into.
I would suggest that this is an exercise that is probably not going to be resolved over this conference call, but rather can be followed up individually. As I said, the year-over-year approach is likely to continue to be our recommendation. In terms of the operating capital release, we've flagged that a normal seasonal pattern would see some increase in operating capital for the fourth quarter. I mean, for example, the normal is that we produce more than we sell in Europe in the fourth quarter, and then the opposite in the first quarter. That's one effect.
This is sensitive, of course, to the price developments during the quarter. Overall, you know, barring any major surprises, we would look for some increase, but not in the magnitude of the release that we had in the third quarter.
Thanks. If I just can follow up quickly on the first question, and if we're looking year-on-year... obviously, it's difficult to look year-on-year on last year. We can also look further back in the year-on-year from fourth quarters or third quarters in 2020 or 2021. As you comment on there, there is, there are also other things changing than what's in sensitivity. Can you just very shortly, sort of, elaborate a bit on, outside the sensitivity, what has changed since before the massive volatility last year? Are there any special items we should be aware of, looking versus 2020 or 2021 outside of, let's say, general inflation?
I mean, one we've touched on, which is the phosphate upgrading margin. That's been a big swing year-over-year. It's a proxy because we are not a DAP producer, we are an NPK producer, but that margin has shrunk significantly year-over-year. It has been improving in recent months again, but if you look back in previous years, that was typically not that moved around a lot like that. Another one is that the, particularly last year, we're using our flexibility a lot, meaning that on nitrogen, our production cost was not only about the gas price, far from it, it was also about ammonia pricing. We were flexing a lot between producing gas and ammonia.
That has typically not been a big factor in previous years.
Okay. Thank you. I'll leave the floor to the next in line.
Our next question comes from Charles Bentley from Jefferies. Your line is now open.
Great. Thanks so much for the opportunity to ask questions. I've just got two quick ones. Just the kind of 10% discount that you're getting to the realized pricing on CAN. Can you just... I mean, that seems to be pretty static historically. Do you think that that is a reasonable discount, and we should be considering that on a continuing basis? Secondly, just on the clean ammonia business, I mean, I guess the interplay between Europe being more online and clean ammonia being softer, is there some link there in terms of producing more within Europe and within the global plants, and therefore importing less?
Like, is there something else that I should be considering there, and just in terms of the results between the two parts of the business? Thank you.
Yeah. First, on the nitrate pricing. As we've, as we highlighted, it's normal for us to build a somewhat longer order book over the summer off-season period. There's more focus on harvest in that period, and typically not as much order taking normally, so it's good to enter the quarter with a longer order book. In a rising price environment, that will mean that there will be something of a discount versus, shall we say, real-time publication prices. I would advise against assuming a fixed percentage because you're exposed to both, okay, what's the price trend through that quarter?
I mean, it's often rising, but sometimes it's not, so that would be one element. Then there's what we've seen this quarter. You can have volume shifts one way or the other. This quarter it was both that we have that long order book, but then also that the order taking dropped off quite a bit when prices rose. I'm afraid there's no sort of easy rule of thumb here. On YCA, we highlighted that a couple of our plants, specifically Pilbara and Freeport, had less ammonia availability, so that was the main volume factor.
Also keep in mind that the YCA segment earnings is strongly exposed to the absolute level of ammonia pricing, as they get a commission on the sales. Both those factors played in.
Okay. Just thinking, like, sequentially, we should see a meaningful improvement on YCA?
Yeah. I mean, you're probably referring to both, that we have a higher ammonia price now than the average for the third quarter, and also that we.
Yeah
We have those plants operating now. Yeah, that's a fair assumption.
Thanks.
Next question is gonna come from Aron Ceccarelli from Berenberg. Your line is now open.
Hi, good afternoon. I have a quick one on energy cost. Considering volatility in gas prices are going to stay higher for longer, would the company be open to a hedging strategy here or make some changes to the current strategy they have now?
Yeah. It's something we will always reconsider from time to time, but our basic approach over time has been that we have limited or no hedging. It's for a number of reasons. It's starting sort of in the macro, that there is a strong correlation over time between ammonia, energy, ammonia, and fertilizer and food prices. Then as a large, sort of within our sector, diversified company, you know, present in so many markets and with so many different products, not only nitrogen, that we can live with some short-term volatility when we see that longer-term correlation. The other factor is the significant operational flexibility we have.
As you saw, particularly last year, specifically that ability to flex between ammonia and gas as a feedstock means that we can also gain in these volatile, high-price energy environments. They're the main reasons why we have so far quite profitably over time chosen not to hedge.
Thank you. Thank you very much.
If you'd like to ask any questions, please press star and number one on your telephone keypad. Looks like we don't have any questions coming in. I'd now like to hand over back to the management. Thank you.
I'd like to say thank you to everyone for calling in and for your questions, and if any follow-up, you can contact IR Bye.
Thank you so much for attending today's event. Have a wonderful day.