Public Joint-Stock Company PhosAgro
Q3 2021 Earnings Call Transcript

Published: 8 Nov 2021

[Operator:]

Good day and welcome to the PhosAgro Q3 and 9M 2021 IFRS Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Head of Investor Relations, Andrey Serov. Please go ahead, sir.

[Andrey Serov:]

Dear ladies and gentlemen, good afternoon and welcome to our third quarter and 9 months of 2021 IFRS results conference call. We are going to start with a short presentation, which will be followed by a Q&A session. And usually, we allocate 40, 45 minutes for the call. Let's begin. The presentation slides are -- we are using today during the conference call are available at our website, phosagro.com.ru. During the conference call, we are going to make forward-looking statements about future financial and operating results. These statements are based on the management beliefs and expectations as of today and are subject to significant risk. The actual results may materially vary from the current expectations. Let's start with the key highlights for the past quarter. It's a real pleasure to present such exceptional results. And in the third quarter of 2021, our financial results really were exceptional. Revenue grew by 64% year-on-year, and EBITDA spiked more than 2x to RUB 57 billion. It was the highest-ever generated EBITDA in the company's history. EBITDA margin was close to 50% compared to 39% in the third quarter of previous year. Free cash flow generation on the back of a positive market environment was strong. We posted close to RUB 21 billion of free cash flow, which was 7% higher compared to the same quarter last year. The great cash generation allowed us to decrease leverage. At the end of the quarter, net debt was around RUB 123 billion and net debt-to-EBITDA was below 1x. It was 0.83x. During the quarter, markets were really supportive for fertilizer producers. Global prices for the phosphate-based fertilizers increased from the beginning of the quarter, and the average MAP price reached $695 per tonne. Urea prices were also actively growing and at average in the third quarter, they reached $420 -- $442 per tonne. NPK premium in the third quarter recovered compared to the previous quarters and reached 7%. Global prices for key feedstocks were also growing during -- following the fertilizer price growth. Sulphur price in the third quarter reached $220, and ammonia-free Baltic price equaled to $578 per tonne. The key reason for ammonia price growth was high demand for commercial ammonia from industrial clients, combined with the lower production volumes due to maintenance. Growing gas price also influenced ammonia price, but the main effect from this side we'll see in the fourth quarter. Talking about global trends in terms of consumption and exports, I wanted to begin from Brazil. Imports to Brazil in third quarter were higher compared to the third quarter last year on the backdrop of strong seasonal demand. Demand was supported by good soft commodity prices and adequate affordability of fertilizers. Chinese exports in the phosphate-based fertilizers in the third quarter were high year-on-year and flat quarter-on-quarter. Improved situation with global phosphate fertilizer prices and growing demand from India supported Chinese sales. Now let's talk in more detail about the financials for the third quarter. The overall sales volumes in the third quarter stood at a level of 40.6 million tonnes, which was 7.7% lower year-on-year. But revenue in the third quarter this year spiked to RUB 116 billion, that was 64% high year-on-year. Thanks to higher fertilizer prices and ruble devaluation. Talking about revenue split by product, I wanted to draw your attention to stable share of NPKs and growing share of DAP/MAP as these grades were more marginal. On the next page, we present our cost structure. Cost of goods sold in the third quarter was equal to RUB 57 billion, which was 29% higher year-on-year. The main reason for this growth were growing prices of raw materials. Talking about the key cost drivers, the biggest were ammonia and sulphur. Costs for ammonia were high year-on-year by 275% due to higher international prices. As were already mentioned on the back of limited production, growing gas price, cost for sulphur were almost 5x higher year-on-year. In the third quarter, this year, we generated the highest in the company's history in EBITDA, which exceeded RUB 57 billion, and it was 105% high year-on-year. EBITDA margin was higher than 49%, and it positions PhosAgro as the most profitable fertilizer producer globally. On the slide you may see the key items that influence our EBITDA in third quarter. As you may see, EBITDA was greatly supported by the increase of sale prices but was negatively affected by lower sales volumes. On the next slide, you may see free cash flow analysis. In third quarter, free cash flow was mainly influenced by working capital buildup and tax payments. The main reasons for cash outflow for working capital were share of export sales and higher levels inventories due to growing selling price. Tax payments grew due to increased profitability of sales during the period. Total CapEx for the third quarter equals to RUB 10.6 billion. The main items for CapEx related to the construction of new capacities at our local production site. Assuming investment cash flow of RUB 11.6 billion in the third quarter, we generated quite sizable free cash flow in the amount of close to RUB 21 billion. The total debt at the end of third quarter stood at RUB 191 billion, but the net debt decreased to RUB 123 billion, which was RUB 33 billion lower compared to the end of 2020. Growth of total debt came from issue of Eurobonds at the end of the period in September. It was a 7-year bond with a historical lowest coupon rate of 2.6%. On the bottom right chart, you may see the maturity profile. Until the end of 2021, we need to repay or refinance RUB 27 billion approximately, and already EUR 25 billion were repaid using the issued Eurobond. Lower net debt and high EBITDA resulted in a net debt-to-EBITDA ratio decreasing to 0.83x. In terms of that breakdown, we have majority of that in American dollars, 95%, and euro-denominated debt is a bit lower than 5%. Talking about market perspective. In early fourth quarter, fertilizer markets saw a further price increase due to the escalation of energy crisis and precedented rise in natural gas prices in Europe and Asia, and the subsequent decline of fertilizer production as well as due to export restrictions from China in favor of domestic supplies. Prices have renewed multiyear highs and continue to rise, especially for nitrogen-based fertilizers amid approaching seasonal demand in key markets in North America, Europe and China. With that, I would like to finish the presentation part. And now we can go to Q&A session. Thank you.

[Operator:]

[Operator Instructions]. We can now take our first question from Joel Jackson of BMO Capital Markets.

[Bria Murphy:]

This is Bria Murphy on for Joel. How do you think about recent government export restrictions impacting your phosphate and nitrogen business from a volume, price, and cost perspective? Will these changes be positive, negative, or neutral overall for PhosAgro?

[Alexander Sharabaika:]

This question will be replied by Andrey Guryev, the CEO of PhosAgro.

[Andrey Guryev:]

Okay. So first of all, we see a very strong and positive dynamics in terms of the future growth of prices for all type of fertilizer. We see a deficit in the market, almost -- not almost, extremely low stocks on different continents in different countries. Basically, we've also seen 0 exports from China of phosphate and nitrogen fertilizer. We see deficits for nitrogen fertilizer in Europe, and it's not even the price -- not even the question of price, but it's a question of availability of the product, which will be produced in considering the high gas prices, high ammonia prices. And again, we -- it's only November. We're only at the start of the spring season. So if we're talking about the prices, like the prices, I might say, will continue to grow if none of the things that I explained will change. But -- so we will see. At the end, like we consider this growth fundamentally strong. Considering our company, we -- today, the limitations or restriction, which is imposed by the government, will not have a negative impact on financial operational results. Export quotas for nitrogen-based and complex fertilizers actually confirm the status quo in terms of the balance between export sales and the interest of Russian farmers, which are PhosAgro priority and the other company's priority. And in fact, the prices in domestic markets were different by the prices on export. And this may serve as another factor that will support the global prices, I would say. Our exports from Russia, the world's largest supplier of mineral fertilizer, will be limited at the time when export from China have also been -- come back and production capacities in the -- at the European Union have been partially suspended. So I would say that this could result in even higher prices and higher profitability for export sales of Russian fertilizer and the Russian fertilizer producer. And it's also important to note that the restrictions are temporary, and they will be lifted after 31 May 2022.

[Bria Murphy:]

Okay. And then just on your cost outlook, the costs are obviously up 30% year-over-year in Q3. How should we think about run rate costs in Q4 and into 2022?

[Alexander Sharabaika:]

Sorry, could you please repeat? I think we missed the first part of your question.

[Bria Murphy:]

Yes. Sure. Just costs were up, I think, around 30% year-over-year in Q3. So how should we think about run rate costs in Q4 and into 2022?

[Alexander Sharabaika:]

Well, that's Alexander Sharabaika, Chief Financial Officer. As for the cost side, we basically buy couple of feedstocks at the minimum export price. So as long as the market will grow, we are going to face higher pricing environment. Those feedstocks would be ammonia, sulphur and potash. So we are basically going to pay whatever the prevailing market prices. And as we are seeing very steady demand for all fertilizers that we produce; I do believe it will be more than offset by the revenue from our customers. But the trend is basically upward at this particular moment.

[Operator:]

And we can now take our next question from Sashank Lanka of Bank of America.

[Sashank Lanka:]

I have two questions. Firstly, on the export quotas. Just to clarify what the CEO mentioned, are these export quotas only on nitrogen fertilizers and nitrogen-based fertilizers? And I mean, if I look at your export split, it's about 75% of total fertilizers that are exported. So just wanted to understand what percentage of that will have the export quotas. That's my first question. And I mean I can go on to my second question after this is answered.

[Alexander Sharabaika:]

Yes. Let me pass the floor to Andrey Rubin, who is Head of Strategic Marketing.

[Andrey Ryabinin:]

There is clear regulation regarding export quota for nitrogen and phosphate fertilizer from Russia. According to legacy, there will be export quota for nitrogen fertilizers, such as urea, ammonium nitrate and ammonium -- urea ammonium nitrate solution. This quota for this fertilizer will be 5.9 million tonnes. Regarding phosphate fertilizers, such as MAP/DAP, NPK, the export quota will be 5.35 million tonnes.

[Alexander Sharabaika:]

And just a quick comment. It's quotas for 6 months. So we believe that the quotas will be set until actually May 31. So those volumes that include all Russian exports from oil producers until May 31, 2022.

[Sashank Lanka:]

And the second question is on the domestic fertilizer pricing freeze that we have seen. I understand that's been extended until December of this year. Again, is this applicable to all fertilizers? Or is it on specific nutrients?

[Alexander Sharabaika:]

Sashank, so the regulation on the -- sorry, the voluntary price fixation was aimed at 5 specific products and -- oh, sorry, 6 specific products. My colleagues corrected me. So it's ammonium nitrate, urea, MAP, and 2 brand -- 2 grades of NPKs, which is 15

[Sashank Lanka:]

Okay. And this is still the end of December, right?

[Alexander Sharabaika:]

Yes. That's intended to be until the end of December.

[Operator:]

And we can now take our next question from Sergey Garamita of Raiffeisen Bank.

[Sergey Garamita:]

Congrats on great results. I just have a couple of questions. My first question is on your recent dividend announcement. So basically, we see a payout ratio of more than 100% of free cash flow. So I just was wondering, do you internally target to keep net debt-to-EBITDA level of 1? Or is there any other logic behind that? And also, a question -- do you include working capital changes in that? And if you do, when do you see -- when do you expect to see a reversal in working capital effect? That's my first question. The second question is more bubble is on the price environment. When do you expect, finally, the feedstock prices and -- I mean gas and et cetera, and the world nitrogen product prices correction globally? Do you expect it to start it in mid-2022 internally? Or do you have any other forecast? And my last question is on your CapEx plans. So basically, when do we expect to see any update of strategic targets, including some details on new projects? So basically, some of the projects were already referenced in the media, but when do we expect to see any details?

[Alexander Sharabaika:]

All right. Let me take a couple of your questions, and then I'll probably ask my colleagues to help me with nitrogen question. So let me start with dividends. According to the newly -- well, newly adopted dividend policy, which was in place from September 2019, we are basing our dividends on free cash flow. And as long as we have low leverage, we can go even higher than 100% of free cash flow. Apparently, this quarter, we are at 0.83x EBITDA, which means that we are below 1, which leaves enough room to -- well, thinking a little ahead, seeing where the prices are today and seeing where the price is going to be in maybe a couple of months, we do feel that it's a very strong quarter, which will be followed with another -- probably another best quarter, which leaves us enough room to agree on higher dividend payout. Strategically, we already mentioned on a couple of occasions that our intention is to be somewhere between 1 and 1.5x, which -- in terms of leverage number, which leaves enough room to bring more debt in case we want to build something, or we want to buy something. And it also leaves enough room to make comfortable dividend payments without any covenant restrictions. As for working capital changes, current free cash flow does actually include the working capital change. And Andrey mentioned this in his comments on the reasons for working capital to be higher that -- than before. Obviously, the higher pricing and higher deliveries into certain geographies with extended period of payments increased our working capital need. I do believe that this working capital will probably stay at current level as long as we stick to the same geography of sales. Once we change them, there will be a significant release of working capital. I also will take the last one, which was the CapEx. I mean the CapEx for -- budget for 2021 was already communicated a couple of times. It's RUB 46.5 billion. We are on schedule and within the budget. So we don't really expect any significant deviations by the year-end. As for our strategic update -- or strategy update, that is due in Q1 next year as we are currently finalizing a couple of quite chunky and expensive tenders. Based on those results of those tenders, we will decide on the direction of the further development. So let's sit tight and wait for the Q1. Once it's ready, we are -- be more than happy to discuss it with more publicity. As for nitrogen, I'll probably ask Andrey Ryabinin to help me with the nitrogen question as you put it.

[Andrey Ryabinin:]

Thank you. Regarding nitrogen feedstock prices, we are not waiting there any significant changes in the near future. And because the stock of natural gas and energy in Europe and other parts of the world is rather low, and that is why we will see that high price will stay in the next 3-5 months.

[Operator:]

[Operator Instructions]. We can now take a follow-up question from Sashank Lanka of Bank of America.

[Sashank Lanka:]

So just following up on the export quotas for both the urea ammonium nitrate and the phosphate side. I just wanted to understand if you could give us some guidance on what these export quotas are as a percentage of normalized exports. So this 5.9 million tonnes for urea ammonium nitrate, how does that compare to what the normalized level of exports would be? And a similar question for phosphate DAP, where you said 5.35 million tonnes of export quotas. And again, I understand this is for 6 months, right? So how would that compare to a normalized level of exports?

[Alexander Sharabaika:]

Sashank, so these quotas that we mentioned on nitrogen and phosphate parts is basically full -- it's half of the last year export volumes. So exactly the 50% for all producers in Russia.

[Andrey Guryev:]

But I also want to add that, basically, it's a comfortable level of quotas. So basically, we took the level of consumption and domestic market and export for 2020.

[Sashank Lanka:]

So you're basically assuming the annual growth?

[Andrey Guryev:]

We will see. It depends like how much new volumes was came on stream this year. For instance, in our case, like we start production on our Volkhov facility, so this number is inside the export quotas as the new volumes of production. So we see that it's not tight, it's comfortable. So we'll be able to manage all the sales as in domestic market and to export. However, on some products like, for instance, nitrogen or ammonium nitrate, probably we'll see less product on export. On the first 6 months, considering the 31 May of the spring season, this amount might be very considerable.

[Andrey Serov:]

We also have one question from webcast from Nikolay Sosnovskiy. Can I please comment on your average realized urea export price? Have you already managed to capture $800-plus price per tonne?

[Andrey Guryev:]

I can say that, from my knowledge, nitrogen as urea, phosphate fertilizers, MAP and potash already touched the prices higher than USD 800 for today.

[Andrey Serov:]

Actually, we are ready to answer one more question. So if you were not able to ask a question, please welcome.

[Operator:]

[Operator Instructions]. We have no further questions over the phones at this time.

[Andrey Serov:]

Okay. If we don't have any new questions on the line, then thank you very much, everyone, for taking part in our conference call. Hope to see and hear all on the publication of our results in the quarter. And in case someone wasn't able to ask questions, you're more than welcome to ask us directly by mail, by phone. We'll be happy to assist. Thank you very much and have a good day. Bye.

[Operator:]

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