Yara International ASA (YAR) Earnings Call Transcript & Summary

So hello, this is Thor Giæver, Head of Investor Relations in Yara. So this is our fourth quarter 2020 results conference call. We are -- we have our presenters from earlier today here. So our CEO, Svein Tore Holsether; our CFO, Lars Røsæg; and our EVP, Farming Solutions, Terje Knutsen. So we are ready to take questions now. So operator, if you want to kick off the Q&A. Thank you.

[Operator Instructions] And your first question today comes from the line of Joel Jackson from BMO.

A couple of questions. There's been a lot of media press, Yara and what you might do for some buying potash from BPC from Belarus. Can you talk about that first of all, if you'll continue to buy about the same amounts? And also your comments on the potash market, you're a big buyer in Brazil, obviously. We're seeing a bifurcation of potash markets where Asian and South Asian prices are a lot lower than Brazilian markets. Of course, they're standard granular, but any comments you can offer there would be helpful.

Yes. So this is Svein Holsether, I can take the first part of the question, and then I'll hand over to my colleague on the second part. When it comes to our sourcing from Belarus, there's nothing new to report since our statements around this matter, we're continuing to work with Belaruskali and they've also made commitments as to what they will do in order to ensure safe operations and that they are producing according to our code of conduct. And they've also, last month, made a press release with regards to special initiatives that they are doing to fulfill that, and we stay in close dialogue with them, but nothing new from our side since these statements. Then with regards to the potash markets, Terje, perhaps you could share a few comments on that.

Yes. Yes, first of all, you could say that Yara has 2 main use of potash. We use it, obviously, as a key raw material for our premium NPKs. And secondly, we -- and particularly in Brazil, we are a big buyer of potash, which then is used either as direct application or as raw material to our blend business in Brazil. As I'm sure you are aware, the potash market has been relatively more stable than the price increases that we have seen in other commodities like nitrogen and phosphate. And being a significant buyer, we obviously make sure that we follow the cost curve and take care of our margin, both when it comes to [ the uses of ] raw material as well as in a more direct application into Brazil. Yes. So I don't think maybe there is that much specific to say around the potash market as such.

Okay. And my last question would be on the NPK premiums. You enjoyed very strong NPK premiums for a couple of years. We saw the premiums come down in the fourth quarter. Can you talk about what you're seeing into early 2021 here -- into early Q1, excuse me? Are you recovering some NPK premium or back to what you've seen the last couple of years? Or are you kind of holding similar conditions as we saw in the fourth quarter?

I think the advantage of Yara or what we really work hard to achieve is to position our NPKs as a premium product. And that means that you would typically see less volatility than you see in the commodities. And that means that when we have times of sharp increases like we have seen over the last few weeks, we obviously correct our pricing. We look very much at, let's say, the economy for the farmer depending on which crop is being produced and then we correct our pricing to make sure that we stay in those segments that we consider long-term being strong segments for us to hold. And this is exactly the phase we are now. It's typical that when prices increase as fast as what has been the case, we might have a time lag, but we are carefully monitoring all the segments we are in and adjusting as we speak. So the key here is that the fundamentals are good for the farmers. So we think that, yes, there could be a time lag, but farm economy is generally good and supporting the prices.

And your next question comes from the line of Thomas Wrigglesworth from Citi.

Yes, so just a follow-up on that. Given you've spoken for many years about the supply-led market, can we now assume that this is a demand-led market? And in light of that, have the price increases that you've already announced into the market for the first half more than offset the higher gas price outlook you provided with the results today? That's my first question. And my second question is -- focuses on the new division that you're carving out, the Clean Ammonia, how should we think about that division going forward? Will you allocate CapEx specifically to that division? Will you make -- kind of give volumes as to Clean Ammonia volumes going forward? How should we think about the evolution of that division over the next 3, 4 years?

Yes. So maybe I can take the first part, and then Svein Tore can answer the second part. Yes, so I think we are moving from a supply-driven market that we have seen in the last years to a demand-driven market, which obviously is very positive. We see particularly the demand increase outside of China, which then is attracting also the Chinese product, which again, we consider a positive. And this is -- many factors leading to this. But we see, obviously, the quite significant increases in particularly extensive crop prices, such as wheat and corn, et cetera, contributes to such a demand-driven market. When it comes to Europe, you are correct. We are adjusting price sort of continuously the last weeks, as you have seen from the publications, and we do believe that, that will offset the increase in energy cost.

So -- and I'll address the question on the new business area. And I think there are incredibly exciting opportunities within this space to enable the hydrogen economy. And there are huge investments ongoing and large projects to produce hydrogen across the world, and it's also being talked about as the backbone of Europe's zero emission energy transition. I think it's -- there's an important question that needs to be asked and that is, why do you produce hydrogen in the first place? And broadly speaking, the answer to that is that you have renewable energy at one place and you need to utilize it somewhere else. So you need to transport energy from one place to the other. And hydrogen has many positive properties, but also some disadvantages, especially by it being a very light molecule, in fact, the lightest molecule, which makes it challenging to transport over a distance because of the lack of energy density. And that's where ammonia comes in with a solution. So when you turn hydrogen into ammonia, you change the properties. It becomes liquid at minus 33 degrees Celsius instead of minus 253 degree Celsius. So to transport energy over long distances, ammonia is the solution. And that opens up opportunities for Yara because we already have an existing infrastructure by being the world's second largest producer of ammonia. But when you look at our global footprint, we have a leading global ammonia position. And we have an infrastructure in place with production assets, tanks and ships to enable this. And up until now, that's been used mainly to balance our own needs for ammonia, but it takes on a new role and a new opportunity to enable the hydrogen economy to grow. And we see opportunities to build on top of this. And as I say also, internally, if we believe in the hydrogen economy and the expansions in hydrogen, you have to believe in ammonia as well, and you can almost think about ammonia as the LNG of hydrogen, it enables transportation. And that's where we will play a role. And we're setting up a structure to manage this and to build our future position, but we see that we have to do this in partnerships as well. And we've already announced a smaller project in Australia in Pilbara, together with ENGIE. We have announced a project in The Netherlands, Sluiskil, together with Ashtead. And we're also now working on the complete conversion of Porsgrunn in Norway to 100% electrification. And also for that, we need to look for partners and for incentives to be able to get this done. So by establishing this entity, we have the structure to lead the way and also to help to put structures in place to enable this.

And just one, Terje, on that. Will those partnerships ensure that the return on capital is not -- return on invested capital is not dilutive for the group?

Yes. So we're approaching this differently than we would if we were to construct a greenfield or brownfield fertilizer plant. The dynamics in the renewable sector would be quite different. And I think -- I mean, you can look at what happened in the solar sector, the important role that Japan and Germany played in order to get scale in the industry, which in turn made it cost competitive, the grid parity. And when you look at the prospects from the hydrogen industry itself and the cost curves going forward, you can see a similar path. But that requires scale, and Yara can with our project create scale, and we could do that in an efficient way since we have some of the pieces already in place as we can repurpose parts of the ammonia plant. That said, it's -- in everything we do, it is with a solid business case to begin with. So it has to make sense financially as well so that it provides the right capital return. We'll work creatively around that, have it financially put that together and have a structured partner -- partnerships. But indeed, we also need financial incentives as we will then be an enabler to create scale. So the same rules for return apply also in this area, as in every area in Yara.

And your next question comes from the line of Lisa De Neve from Morgan Stanley.

So I had another question on the Clean Ammonia unit. So first and foremost, I mean, how do you see ammonia prices evolving as the end market opportunities are clearly growing in this area? And on that note, I mean, my understanding is that you have about 8.5 million tonnes of gross ammonia. But in terms of net ammonia, I believe you have about 2 million tonnes of annual capacity. So how do you see this net ammonia footprint evolving for yourself over time given the opportunity you see in this market? And how big in terms of ammonia volumes is this opportunity for you without expanding your ammonia footprint? Or would you consider expanding your ammonia footprint?

And it -- that inventory [ when ] this happened, and we believe that you have to make volumes available, and in parallel, develop the markets. But I don't think it's possible to first to develop the markets and then start to construct. But there are opportunities in many areas. One that is clear and with huge potential would be for shipping fuel. And when you look at the projections and the emission levels communicated by IMO, there has to be zero-emission ships in the future. And then what will they be fueled by, well then, ammonia has a clear advantage in that, and that could represent a huge part of future ammonia offtake. Also, as just a general energy carrier, as I mentioned initially, to move the renewable energy from one part of the world to another where it's needed. So you just -- it's a reversible process from ammonia back to hydrogen, if needed. And also, there are engines built that can use ammonia as feedstock as well and then obviously, within fertilizer as well. But the markets need to be developed, and it's important to look at the totality, including the emissions of producing and that's transparent and trace to the whole value chain and through that create opportunities for these products. And we've already seen major announcements from some of the biggest food producers in the world when it comes to reduction of emissions and that also includes what happens at the farm field. And it will only happen if the farmers are also incentivized to farm in that way. And through that, they will be able to pay for zero-emission fertilizer as well. Such the market opportunities are definitely there. I think it's important just to [ full ] value chain. And let me make one example of this. If you look through the whole value chain, if conversion of the plant in Porsgrunn to green fertilizer, what would that mean to the carbon footprint of our bread, for instance? Well, that alone could be reduced by 30%. And the extra cost for the consumer in the supermarket would be EUR 0.01. It's not structural to allow that now, but I think it's important to illustrate what will it take, and there's no doubt about where the world is going in terms of emissions. And we're willing to support that. It creates business opportunities, and then we'll continue to expand with the market as it develops, but this is our start to look into the possibility of making significant volumes available.

Okay. And just to clarify, can you just tell me how big your net ammonia position is? So if you produce 8.5 million tonnes of gross ammonia per year, how much are you net selling in the market? Is that 2 million tonnes? And two, you mentioned something very interesting on the Porsgrunn facility, that if you are able to convert it into green ammonia that the extra cost towards the customer would only be EUR 0.01. Did I hear this correctly?

Yes. If you convert that to the cost of a bread in the supermarket, if the world was ideal and our cost increase to do this just went straight to the consumer. It's not structured like that today because today, there is still too much silo thinking, too much cost-plus mentality. So with that, it would be much higher in the supermarket. But there's a lot of work happening now in the food systems to create greater transparency and link from the consumer all the way back to the farmer and the input. And through this product, we're helping to visualize this and to help the consumer also to make the right choices when it comes to climate impact.

And Lisa, this is Thor. Just on the net position. It's, of course, varies a bit with production levels. But directionally, about between 500,000 and 1 million tonnes long is where we are today.

Your next question comes from the line of Andrew Stott from UBS.

I have a few questions actually. The first sort of set was in the same theme, which is this issue that came from an earlier question from Thomas, which is around return on capital visibility. So can I check a few things? Firstly, the $1.2 billion midterm guidance, am I right in believing that doesn't include any of the potential plans on green ammonia? That's the first question. When you think about Porsgrunn, as an example, how do you get paid for that carbon-free product? Do you think it's possible to get a premium from your direct customers? Or are you really relying upon carbon credits, government funding, et cetera? Thirdly, I'm sorry, it's all linked to the same question. Would you suffer or would you take on a bit of return on capital dilution from those type of green projects if you felt you could have first-mover advantage? So if you could capture the high ground on volumes,through having this supply, but at the same price, would you do that? I know, Svein Tore, you just said that you're going to be disciplined. But for a period of time, would you be happy to accept a bit of return on capital dilution for a longer gain? That's the set of questions. I've got one more question, which is much more straightforward, which is Clean Ammonia division. Is there a chance here that you're going to spin that Clean Ammonia division midterm in order to make it easier to attract funding, in order to maybe monetize the green credentials? Or is it purely just a case of separating out within Yara and keeping control?

Yes. Thanks a lot for your questions. So this is Lars Røsæg. Our commitment to a maximum annual CapEx of $1.2 billion, that includes what we're doing in Clean Ammonia. So it's not coming on top of the $1.2 billion and then we've said that we are looking at, as Svein Holsether said earlier, establishing the right partnerships and the right structures around those projects. And then I think I'll hand over to you, Svein, to comment on a couple of the others.

Yes. I think when it comes to the ability to get a premium for green fertilizer, that's a market that needs to be developed. We can't put a burden straight onto the farmers as it is today, where the farmers have an important role to play but they don't have the sort of profitability where they can easily absorb that increase in cost. And that's the reason for all the work that is now ongoing in the food systems to create that supply chain view of it, what will it take to decarbonize food in total and then what happens at farm level becomes very important. But then we need to have incentives in place for the farmers, which partly could be paid from consumers and increase the awareness around the carbon footprint but also from regulators and from governments because do keep in mind that the planet is already paying a higher cost for food than what we pay at the cash register. And I encourage all of you to read the Food and Land Use Coalition report, which shows the total value creation in the food system on an annual basis, which is $10 trillion but the hidden cost of the food system is $12 trillion. And that's related to health but also emissions and environmental impact. So by redirecting some of that, it's possible to create incentives for farmers to enable them to farm differently and more sustainable without it necessarily meaning more expensive food for the planet. So we need to approach this holistically. And Yara is taking a key role also in this too to help to develop these markets. And I'm quite encouraged by everything that is happening now in the space and also looking at farmers as part of the solution not only when it comes to using green fertilizers, but also through carbon farming using the farm field to sequester carbon and also through farm productivity where more food can be produced on less land and freeing up land and turning it back into nature with the corresponding carbon sequestration from that. So a lot of exciting opportunities. And -- but again, we need to have a product in place in order to drive this. And then back to your question, are we willing to take a lower return? Well, if you look at other industries, including now you see offshore wind project and so on, some of the early movers actually had higher returns because they moved early. We will evaluate everything that we see and always with the financial return in mind. But indeed, we will also see the totality of the value of the first-mover position and so on. So -- but then, it would still have to make sense on the longer term, even if it didn't have the straight short-term returns. So I hope that answers the question, Andrew.

Yes. And on the last point, I mean, what we're doing here today is we're establishing a unit that we think entails some very exciting business opportunities. It's a $1 billion revenue and $120 million EBITDA business. And that's really our focus now on establishing that in the best possible way and certainly drive the value creation potential of that unit as good as we can going forward.

So to come back on that, apologies for my bluntness, but you didn't really answer the question. Is it a division you want to keep control of or would you look at spinning it?

We want to keep control of this unit. It plays an important role also in our existing structure and will so going forward as well. But we are open to, and we will be open for partnerships to drive this. And I think that's what you see across all areas when it comes to renewables that this is best done in partnerships, whether that's based on industrial or financial logic. So that's our approach to this as well.

And your next question comes from the line of Jaideep Pandya from On Field Research.

First question really is, could you give us some idea what is your net carbon exposure that you will have to purchase assuming there's no change in the regulation from 2021 onwards? And then subsequent to that, what do you expect -- so what are you budgeting sort of in terms of the next phase for 2020 onwards in terms of reduction of allowances? So do you think the 20% sort of headline number for nitric acid and ammonia applies? Or do you think that this is going to be sort of a case by case? I'm sorry, but a related question really is just all 3 parts of 1 question, please. Obviously, a lot of your competitors in Asia are coal-based. So do you expect that you will sort of see a carbon border adjustment that is being discussed in other industries to protect companies like yourselves against the carbon leakage disadvantage? And just one final follow-up is, considering what is happening in India with farm laws, do you think if the laws do go in place, will that make any difference to the way tenders are placed and the Indian demand?

Okay. This is Thor. I can start on the EU ETS side of things here, maybe in the end I will ask for help. But -- so we have now -- we now understand the ammonia benchmark for the -- for 2021 and the EU ETS is 1.57 tonnes of CO2 per tonne ammonia. That is -- with that reference point, we actually expect to be covered or even have a small surplus of allowances in 2021. And then the second question, I mean, we -- as you probably know, these benchmarks do get adjusted from year-to-year and it is -- it's a bit more technical than just kind of arriving on 1 benchmark. And there, a number of adjustments can be made, and it's not necessarily linear for any given company every year. But you're, of course, right, it's prudent to assume that the trend over time is that these allowances get tightened, and that's an important dynamic that we plan for as part of our broader strategy really, which is aimed at providing sustainable food solutions. So as part of that, we are constantly working and we set ambitious targets to reduce our carbon footprint over time, both in terms of the production side of things and as we've touched on earlier, including green ammonia and also in the market and on the field. And then the final -- on this topic, you asked about border tax, and I think, yes, there is -- this is still under, shall we say, construction and review in the EU. But yes, there is a carbon border tax under design aimed at dealing with examples that you mentioned, that if you have set limits for CO2 emissions within the EU on fertilizer production, then the intent of that regulation will be to then adjust for it if you have imports from elsewhere that have a potentially a lower price or lower cost as such but a higher carbon footprint. But these regulations are still at the drafting stage. So we don't know exactly how that will play out.

Yes. On India, this is Terje Knutsen. I don't think we will enter into a speculation whether the dynamics of the tenders will change as a consequence of what is going on. What we can say is that we work relentlessly every day on the ground in India to improve profitability of the farmers. We are successfully working with our concepts and now also very much integrating digital solutions into our total offering. And by that, creating real, you could say, solutions to again contribute to the target of the Prime Minister to double the income of the Indian farmers. And that work will continue. We are successfully growing our position and continue to focus on the farmer in a very farmer-centric strategy that we run in India.

Just one follow-up on the carbon topic. Would you be able to share what is your carbon price assumption for the longer term, especially linked to the green ammonia type projects?

Yes, we do not, as of today, have an internal carbon price in Yara. Having said that, though, for all our projects and including the green ammonia ones, we do have a specific carbon evaluation as part of the capital process. Yes, so it's absolutely as we said that we have not disclosed our carbon assumptions externally, but of course, an active part of our evaluations.

Your next question comes from the line of Chetan Udeshi from JPMorgan.

Yes. I just had three questions. First one was, there is a mention of some $100 million of fixed cost increase in 2021 and it says it's going to be a temporary increase. So can you maybe give us some more color on what you're spending on and why is this actually temporary? And again, I think the broader context here is, at what point do these temporary cost increases every couple of years become not temporary? I mean just on a broader strategic point, that would be useful. And the second question was, your deliveries in Q4 was very strong, have you sold much of your product forward for Q1 season or Q1 demand already in Q4 based on what you know at the moment? Or in other words, do we expect or should we expect rather any lag in terms of when you will see the full benefit of the price increases that we've seen so far in Q1? And the last question will be on freight costs. Do you have any sense of the impact we could see on Yara's freight cost, total cost on shipments, given the increase we've seen in general in the freight market?