Yara International ASA (YAR) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Yara Second Quarter Results 2021 Conference Call. [Operator Instructions] And please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, -- Thank you. Please go ahead.

Hi, everyone, and welcome to our second quarter conference call. I am Silje Ingeberg with Investor Relations. And since we've just had the presentation, we are okay to go straight into the Q&A. So moderator, if you can please open up.

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

This is Bria Murphy on for Joel. Can you just talk a bit more about your outlook for... [Technical Difficulty]

Sorry, could you please repeat the question?

Yes, sure. I'm just wondering if you could talk a bit more -- give a bit more color about your outlook for the nitrogen market in the second half?

Yes, sure. This is Thor Giæver. I think the first point is, I mean, it's obvious, I suppose that the market has tightened a fair bit this spring, and it's already a bit unusual when you see prices firming through the second quarter because that's often a period where prices can drop off a bit when you sort of -- when you're closing the main application season in the Northern Hemisphere. So it certainly -- it points to the value chains globally, although there will be regional variations. But globally, it looks like the stocks in the value chain are limited and then the price pressure is sort of -- at least in part coming from -- yes, they're not being a lot of volumes available and also some of the buyers probably looking to secure a product early ahead of the next season. And then also, as we comment on, I mean, supply-wise, there has been very little in the way of new supply additions. -- you've seen in the presentation, we've put the CRU estimates in there that show that there is a lot of supply coming this year and next year. But I think our comment to that is -- it seems fairly obvious that those numbers, particularly for this year are simply not going to happen. There could clearly be some new capacity coming in towards the end of the year, but that could be at a lower rate. And most likely also for next year, it's probably going to be lower than what's forecast. And then back on the demand side or in a way, why -- another reason why there is tighter situation, now is the farmer incentive side of the food prices being higher. So those of you who have followed this industry for a while, of course, will know that there can certainly be volatility from quarter-to-quarter and month-to-month, but the factors I've mentioned, I think explain the strong decrease and it probably indicates that we can expect tight markets in the season ahead of us as well.

Okay. And then just can you talk about what will be higher prepayments in Brazil in the quarter?

Yes. I mean it's [Technical Difficulty] these prepayments, I suppose it's important to say initially this isn't so much a -- which we say Yara controllable. I mean, or at least the prepayments will vary from season to season. It depends a bit on the appetite of buyers but you can probably link it a bit to the situation just touched on, but as another way of saying it, I guess, is the Brazilian market that's been relatively alert to the situation unfolding and has been keen to to book product. Some of it is probably ahead of the higher prices that we've seen so far. But yes, as we stated in the presentation, the prepayments on our books are roughly NOK 0.5 billion, a normal level for this point of the season. They will most likely normalize over the next couple of quarters. As you probably know, the main delivery season in Brazil is in the third quarter, a bit into the fourth quarter as well. So -- and most of this is related to the current season. A couple of -- worth noting then when we talk about, for example, operating capital efficiency, we do not include prepayments on that because we are aware of the seasonal variations there. And as mentioned, it's not really a sort of the Yara initiated or Yara controlled parameter. And also, we mentioned in connection with the net debt-to-EBITDA ratio that if you adjust are the 1.05 that we have reported for this quarter. You just adjust that for normalizing the prepayment and also the additional dividend we proposed then the pro forma number is 1.5.

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

So I have 2 questions. The first one is around the European Commission, which has set out it's 455 package. So the EU CBAM is proposed to apply to fertilizers, missing nitrogen fertilizers and may enter and enforced in 2026. Also, do you have announced a number of changes for the maritime sector, including the fuel Maritime. That encouraged the use of alternative fuel in European shipping. So how does Yara think about the implications of the CBAM for your operations in Europe? And how do you think about the maritime policy and how it will foster your path for ammonia to be adopted as a maritime fuel substitute?

First of all, I would like to say that the communication around 455, it's very much needed. And it's good to see that Europe takes a leadership when it comes to sustainable development and on environmental targets. It's a rather comprehensive communication and it takes some time for us to fully analyze and see all the implications for us. But it's important to see that there is some adjustment in place to also safeguard European industry, which in many sectors is the most energy efficient and least polluting in the world. Also important, and as you highlighted, to look into the business opportunities that come as a result of new regulations. And that's across a number of sectors, definitely within core of crop nutrition, the importance of growing more food on less land and with a lower footprint, Yara has done a lot already. If you look at our emission reduction since 2005, we are down by 45% through a number of actions taken in our plants and throughout our value chain. But -- and we have very clear targets towards 2030 with an additional 10% and then towards climate neutrality 2050. But in order to get there, we need to have a value chain approach to it so that it's recognized throughout, from Yara to farmer and then to all the way to the food companies, retailers and consumers, and this also opens up opportunities for that and new value pockets for Yara, as well. Today to a great extent, our premium is from what we can do in terms of additional yield, higher crops with the farmers. But when farmers also start to be paid based on the environmental footprint of farming on nutritional content and so on. There are some very interesting new value pools that we can tap into, and I encourage you to also read the report from the Food and Land Use Coalition where this is described very well, also the hidden cost of the food system. And I think Yara is very well positioned to both support and drive this forward. Then on the shipping sector, as you mentioned this also highlights the opportunities within green ammonia and green ammonia being an energy, both carrier and for storage to enable green hydrogen use. And with the ambitions of the maritime industry, if they are to reach their emission targets, they have to move to zero-emission ships. And in that regard, ammonia is very interesting and a very good alternative to get there. And we're setting up to support amongst others, that industry through Yara Clean Ammonia, where we have as a first step set up a JB here in Norway to convert our Porsgrunn facility to green hydrogen together with Aker and StockCross and we're working on that also with the authorities. And then we signed cooperation agreements like with Trafigura as one example and also with JERA in Japan in order to start to develop the markets as well. So really interesting and then we'll get back to more granular comments on the EU 455 as we have been able to study that in more detail.

Okay. That's great. And then second question is a simple one. Just can you provide us an update on your capital allocation? And particularly where you are with the Brazilian Salitre project in terms of the time line of completion. I know that's COVID related for the some of the delays, but would just be keen to get an update on that.

Yes. I can start and then I hand over to Thor. But in our approach to the new businesses that we're establishing like Yara Clean Ammonia and also with Agoro to find ways to fund them and allow the growth and still managing within our capital allocation policy. And the way we've done that in the Porsgrunn plant is that we've taken the ammonia plant that will be a contribution in kind at the value of $450 million, and that manages of the CapEx from our side, that's a contribution currently, you can expect that we will look into JVs and structures in order to make conversions enable a green transition, but also within the policy and are way forward when it comes to capital discipline and capital allocation. And Thor, I like you to add further to that.

Yes, not very much to include. I think as you've already heard me, so this is -- even as we expand into these -- expanding our core new businesses, we are aiming to do that within our existing capital guidance. You asked about the Salitre project. It is progressing as you as you know, it's been impacted by the COVID situation. We haven't been able to man the project anywhere near 100% over the last 1.5 years. So we are still progressing, but also reevaluating the time line on that project. We don't have a new completion date to communicate at this stage. But the work is progressing, and we'll need to come back to that.

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

So a couple of things I wanted to explore, please. First of all, on China, just appreciate your insights into how you read China at the moment. There's been plenty of speculation about export tariffs being put back in. I think that would be for the first time since 2014. There's also quite a lot of subsidy packages being handed out to the ag economy. So just the puts and takes on China, the risks and the opportunities for Yara on that? And the second question was a bit more mechanical. I'm trying to scale the scope for further special dividend/buybacks. You said Thor that you're at 1.5x ex the prepayment effect. So your target ratio is 1.5% to 2%. If we think about further cash returns, are we thinking about the middle of that range given that you're already at the bottom or at the top end of that range?

Okay. I guess I'll have to start with both of these, Andrew. I mean, on China, I mean that's another factor that I could have mentioned, of course, on the outlook, the supply/demand. Within this, as you know, I mean, China been a significant, still are a significant exporter, but at the lower level than some years ago. So -- and as you also know, so they have both on the soft commodities and on the fertilizer inputs being becoming more restrictive on the one hand, importing more grain than on the other hand, exporting less fertilizer. So it's contributed to the tight situation and that means that prices lately have been far above also Chinese costs, even though they are most of the time the highest-cost producer. And they have been cutting back on production. So it doesn't look like something that is about to change. But at the same time, of course, very prudent of everyone in the market to keep an eye on this. But so far, the trend has been that, I mean, many of us have been watching to see if they expand again in production with the higher prices, but we haven't really seen that so far. So I think it's what we say, looks like a sort of stable trend at the moment. In terms of the dividend, I mean, we -- you're right, our capital allocation policy says that we should be aiming for over time, 1.5 to 2x net-debt-to-EBITDA. We have indicated in the past sort of where you are. Well, first of all, this isn't a sort of spot evaluation from quarter-to-quarter. It's corridor that we're aiming for over the time. But you can also -- and we've mentioned in the past that when you're in a higher price environment, you would tend to be towards the lower end of that range and vice versa because you also want to avoid volatility in your -- with this metric, of course, when -- in the situations where your EBITDA changes -- your EBITDA level changes, the metric changes too. So we are not going to beyond that sort of guide any more specifically. But I think it's fair to say that we are in a relatively positive price environment. So it's not the timing where we would move to the top of that range, certainly.

Okay. And can I just stay with another, sorry, on the nitrate deliveries or just the European delivery is down 16%, your remark is is totally logical. I'm guessing that there is a risk here that it's not all about delayed consumption from here to next year. The other risk, we've always got I guess, need to think about is market share. So how are you comfortable that you haven't lost market share in Europe, and it is just delayed purchases?

Yes. I mean, yes, Terje, do you want to comment?

Yes, maybe I can take that. It's Terje Knutsen. Yes. So as -- Thor said in the presentation, there has been a 16% drop. But over the season, 3%, our market share is stable, which we consider positive. And really, the quarter has been very unusual in the sense that we have had repetitive price increases while normally in the second quarter, as everyone who follows us or the European market would know that typically, you kind of reset the price for the coming season. And that means that it has really been about supplying application for this season and there has been a waiting and see regarding next season. Positive into this is that stock levels are low. In fact, they are [Technical Difficulty] last 5 years. So that we consider being a positive starting point for a situation where we have had a quite sharp price increase over a short period of time.

And just to add briefly, Andrew, there's also been some you may have seen there some production issues amongst other companies in the industry during the quarter. So -- There's also an element of the supply hasn't been great either. And then finally, also, you mentioned consumption. I mean, I don't think we have any reason to believe that consumption is down, but the deliveries are down, as Terje said, 3% for the season as a whole, which is a great scale and probably most or even all or even more than accounted for by the fact that we think is very low.

Next question comes from the line of Mubasher Chaudhry from Citi.

The first one is just around the premiums that you mentioned have squeezed because they tend to get [ stuck in ] with the increase in pricing as a kind of squeeze in premium. Looking forward, do we think those premiums come back to the normal average that we see at Yara? Or do we expect that squeeze to remain into third quarter? Just some comments around that would be helpful. And the second question is around the prepayments that you took that kind of implies that there's been prebuying. Does that kind of indicate your confidence in the pricing dynamic at the moment to be able to kind of lock in the pricing and the volumes today as opposed to kind of continue to supply on a spot market or as you name would and therefore, taking in or locking in volumes earlier to lock in the place of current prices? Just some thoughts around that would be helpful.

Maybe I take the first half of that. On the premiums. We said in the similar call after Q1 that we expect premiums to normalize. We repeat that message. And I think second quarter has been, if you like, a demonstration that we are moving in that direction. We are closing a gap. I think it's important to consider the difference between the different players in the industry, you have players that are pretty much what we internally call FOB producers, mainly selling sort of ex-factory or export, we are very different. We are in 60 countries. We run a lot of our commercial operation all the way down to retail, even in some markets, direct to pharma. That means that we typically have a time line but we also are in a variety of segments and crop segments, which do not necessarily work exactly the same over time. So we are confident with how this is developing. And we see it, obviously, the underlying is very positive that prices are increasing and also that the crop prices are are up to the level where we see them now. So we are moving in the right direction, and we think this will normalize.

Yes. And on the prepayments, as mentioned, I mean, this is mostly Brazil, and it's mostly then, as you probably know, in Brazil, the large volume is blend NPK. This is a business where we -- at any given time, you have forward sales, but we do have a fairly strict risk management on the price exposures there. So you shouldn't expect any big price impacts from that.

And the next question comes from the line of Adrien Tamagno from Berenberg.

I have 2. The first one is on the potash side. With the recent price increase and the [ Brazil ] situation -- How do you think about your project in Ethiopia? And the second question is with regards to clean ammonia. As you learn more about the sector and the developed and you have more discussions with partners. Do you see more interest on the green or the blue side of ammonia?

Should I take the whole. Yes. So this is Thor again. Yes, the Ethiopia project is clearly, I mean, the higher potash prices is positive for any potash projects. On the other hand, for Yara, there's also, as we've touched on earlier in the call, we have a CapEx guidance that we are fully intent on staying in. So a bit irrespective of price developments. It's important for us to have a very good, what should we say balance between capital deployment and and exposure across our portfolio. So -- and we've said in the past for that project, we continue to think this is a good viable project, but we are keen to find ways to progress that without putting in a lot of more capital from Yara side.

I'll -- certainly, I'll address the ammonia question on green versus blue and I think with the interest now in hydrogen and the amounts potentially needed of the product. There is room for developing both and it depends a bit on the sectors where it's going on better, there is more interest for green or blue, and we have Yara Clean Ammonia further because we will be in both blue and green, so it's equally interesting. In some sectors, there's a very clear demand that it should be produced with renewable energy assets would be in green and in some sectors it's emission part that is most important that is produced with net-zero emissions. And then carbon capture and storage comes into place. We will be in both. But the majority of the work that we're doing at the moment is within green ammonia linked to our project in Porsgrunn, which is the largest one, but we're also working with Ørsted in Sluiskil in the Netherlands and with [ MG ] in Australia as well on products for green hydrogen and green ammonia. So I think I'll keep it there. Not sure if I fully answered your question, if not, let me know.

Next question comes to the line of Rikin Patel from Exane BNP Paribas.

Just a couple from me. Firstly, on first-line affordability. You mentioned in the release that in Europe, some buyers had maybe just looked to cover the existing requirement for the season because of the rise in fertilizer prices. Just curious, going into H2, how you see affordability developing in Europe and in Brazil, given, I guess, soft commodities a little bit softer than what they were maybe a couple of months ago and all 3 of the nutrients are still, to an extent, continuing to rally? And then just secondly, on CapEx in the first half, I think we spent around $330 million and the guide for the full year is at $1.3 billion. Can you just remind us what the key components of spending are for H2, that would be great?

Yes. I mean I can start on the first comment at this if you like, I think the -- my reflection on the sort of -- it's not that fertilizers weren't affordable to European farmers in the second quarter. I think it's more -- I think it's at least a -- before this year, we've had quite a long period, at least 3, 4 years where broadly speaking, prices have softened. And so it's been quite a good strategy to wait with purchases. And I think we've all, to some extent, all of us following this market have been surprised a bit by how strongly and fast prices rose in the second quarter. So I think this is more of a yes, surprise factor in a way than an affordability factor. You're right that, of course, input prices have risen strongly as well as food prices. But remember that those input prices are quite a small proportion of the farmer revenue. So I wouldn't see enough affordability as a big concern in the second half.

No, I agree, still good economy for the farmers to invest in fertilizers. If we lifted a bit to sort of global level, if you take the [ grain balance ], for instance, it has now declined -- the stock level has declined 4 years in a row, it's now down to 55 days if we exclude China. And looking at the price food index it has had a very strong development, June to June, 34% up. And I think in a way, it's important to keep that in mind when evaluating and doing the calculations on the farm economy. There might, of course, see some segments, some crops, some geographies that are exceptional, but overall, the fundamentals are strong. And then on the CapEx, I mean, this is mainly normal maintenance, but also some running projects, well, mainly in Brazil, actually with Salitre and certain other smaller growth projects. There is a -- I mean, in any given year, we tend to have more maintenance activity in the second half often in the third quarter. Also there's a bit more this year compared to last year because we did for the first part of the pandemic, we we did postpone some maintenance activity. And as of caution, partly and to avoid, because the risk of disruption is always higher when you take down a plant, you can run into issues when you stock up again. So we did some risk adjustments of that. But yes, I mean, it's -- I understand the question there is a seasonal pattern here but we -- our guidance for the full year is unchanged.

Maybe I can add to [Indiscernible] of investments that we have in these 1.3 are investments that are not growth investments, but investments in efficiency and increased output and also a reduction of emissions as well that's the third category.

Next question comes from the line of Chetan Udeshi from JPMorgan.

I was just going back to one of the previous questions on European deliveries. And I also had -- I think we also see the same pattern in Brazil that the deliveries of Yara in Brazil are down in second quarter when frankly, when we look at the statistics of Europe -- sorry, Brazilian imports. So all of the ag inputs are up very, very strongly. So I mean I think the broader question to me is when I look at Yara's targets for production, and I think there is a slide which shows that on the slide pack, I think it's 11. I mean, the ammonia production hasn't grown from 2018 to last 12 months, it's flat. And so to achieve that 2023 target, you need like 13% growth now in the next 2 years. And if the production is not rising and one of the best demand be in the ag, I'm just trying to understand what will drive that growth for Yara in the next 2 years in terms of volumes? And why are the volumes not growing even on a global basis for Yara today is a key question I have? Any insights there would be useful.

Yes. I mean this -- so a bit on demand and on production. First of all, the Brazil deliveries partly linked to the prepayments. I mean there is slightly different phasing this year. Last year for us, at least the deliveries started earlier. This year, there's been a bit more prepayment that for delivery basically in the third quarter. So overall for the season as a whole, probably not a lot of variation there. On the production, of course, particularly when you look at ammonia basis, we mostly upgrade that into other products, we also buy ammonia to upgrade. So the fact that production is flat doesn't mean that you can't, for example, increase on finished fertilizer production, even if you're flat on ammonia. But having said that, you're correct that we have more work to do on our improvement program. We do have a positive trend over the last 12 months compared to 2020, but we've had some setbacks in '19 and '20. So this is a focus area for us to get back on track there. But we are still sticking to our longer-term targets, and we'll continue to report on that as we go forward.

I can just add on Brazil that really, the delivery is coming now into third quarter normally. So it has been strong imports of all new prints. In anticipation of really a strong market, strong fundamentals in Brazil. So I don't think second quarter should be the quarter to judge the performance in Brazil.

Next question comes from the line of Bengt Jonassen from ABG Sundal Collier.

Can you allude a little bit about price realization in Europe on the CAM side on the nitride side? I think prices were above what you realized -- And yes, a little bit color on that, please.

Yes. I think you followed us obviously very closely. So you know that we have a time line. One can also add maybe an element here, which is normally the published prices are referring to Germany, while we sell into a basket of countries, both in Europe and outside of Europe, where in some markets, we have a quite tight time line between publication and realization. And in other markets, we are also deeper in the market and might have a longer time lag. I think we consider that we have been actively pursuing price in Europe. We have as you have seen, published frequently lately, latest today with 298. And Yes, there is a time line, but there is nothing systematic the current year or so. I think we are moving with the market and sometimes not so easy to read the market. But right now, we are continuing to drive price into Europe.

And I think just -- I mean, overlapping with Terje's comments here. And I think Bengt, if I remember right, you've even hypothesized on this issue before that when there are recent price increases, the lag moment temporarily does tend to widen a bit. And it is logical. I mean this isn't like a 100% golden rules, but I think most of the time, when you see us increasing prices frequently, it's because the orders are coming in quite well. And then your order book does tend to go a bit longer and that's in a way why you're increasing prices because you're trying to find the balance where you can price.

[Operator Instructions] And next question comes from the line of Alexander Jones from BofA.

Two if I may, please. Just to follow up on the EU proposals yesterday. I think under the current CBAM proposal was no export rebate, so you'd be paying full CO2 costs on European production in the export. Could you remind us how much production you do exports out of Europe? And how you expect that to evolve going forward as you consider these proposals? And then the second question would just be on the decision to do a special dividend rather than the buyback, whether you could give any color on your thought process between those 2 tools for shareholder distributions?

Alex, this is Thor. On the first one, I guess we don't have published numbers on on our exports. But -- and we can follow up from this a bit with you offline as well. But -- and because you can look at some of our plants, I mean, for example, the slow scale plant and the Porsgrunn plant do export a lot, but they do also sell in Europe. So it's not a simple exercise. But we can probably catch up on that after the call. Now the second question. Yes, dividend. Well, I think the -- well, in fact, I know the -- a key reason for going for a dividend now is that we do -- we are at 105, it's 1.5 to 2x net-debt-to-EBITDA. And actually, as I mentioned, pro forma and adjusted for the prepayments, we reached 1.5 with the dividend. You can't do buybacks, you cannot return less amount of cash in the form of buybacks over that. So that's a key consideration. Also, as you know, in our return policy, dividends are to be the main distribution mechanism. So it's certainly, buybacks are something we'll continue to use, but the dividends will be the main route.

No question at this time. [Operator Instructions]

I think, operator, if there are no further questions now, I suggest we can windup now. So just thank you to everyone who's attended the call and for continuing to follow Yara.

This concludes today's conference call. Thank you for participating. You may now disconnect.