Yara International ASA (YAR) Earnings Call Transcript & Summary

Good day, and thank you for standing by. And welcome to Yara's Fourth Quarter Results 2021. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I'd now like to hand the conference over to your speaker today, Silje Nygaard. Please go ahead.

Yes. Hi, everyone. Thank you for dialing in, and welcome to the conference call for Yara's Fourth Quarter Results Presentation. I hope you all had a chance to watch our presentation today. So we will just open up for questions. I am here together with our CEO, Svein Holsether; CFO, Thor Giæver; and we also have Dag Tore Mo on the line with us, our Market Intelligence. So with that, operator, if you could please open up for questions. Thank you.

[Operator Instructions] And your first question comes from the line of Alexander Jones.

Great. I've got 2 questions, if I can, please. The first on NPK premiums, Clearly, they got significantly compressed this quarter by rising nitrogen and potash prices. Could you talk about sort of the path to recovering those margins and whether you would expect to get back to sort of the $80 a tonne that we saw in the first 9 months of 2021 in the next few months or whether it could take a bit longer and whether there's a volume trade-off as well. That's the first one. The second question, just on power prices. Clearly, natural gas prices have been very visible but electricity prices have also gone up significantly, and you don't necessarily disclose the sensitivity for that. So could you help us with how much that's contracted for you versus on the spot market and whether there could be a year-on-year cost impact for you in 2022?

Yes. Alex, this is Thor. I can comment on both and then the others may add. On the NPK premiums, as you know, nothing unique for NPK, we see it at the same in nitrate that we very sharp increases on commodity reference prices this quarter than the, what should we say, second -- follow-through effects on other prices, products and markets takes more time. There's also the element of the highest prices we've seen as you know, certainly for nitrogen prices have fallen back a bit. And so in a way, the peak is quite small volumes limited trades. But more generally, on NPK, the prices move more slowly there, both on the way up and on the way down. And you can see on the -- in the illustration in the chart that the prices are moving, have moved up, but more slowly. It's -- so recovery, I mean, given the volatility we have now, it's -- we can't really sort of pinpoint a number where we'll be next quarter, for example, in terms of a premium. But overall, these prices are increasing but more slowly. But just keep in mind that the -- some of the -- what we've seen in the fourth quarter, certainly on nitrogen, prices are lower now than they were towards the end of the fourth quarter. On power prices, as we [indiscernible] and the range is, again, here due to time line because this -- how this feeds into our cost of sales varies a bit by product and so on, but it's in that range.

And your next question comes from the line of Andrew Stott.

Two questions. First is a similar theme on realized prices. Depending on exactly how you calc the NPK impact on the quarter, it seems to me like you're booking, I don't know, somewhere between $600 and $650 per tonne for urea, which would suggest that you're near that 2-month lag than that 1 month, how much of that you're going to recover in Q1? So how is realized pricing looking now versus Q4? That's the first question. Second question is on ammonia. Is there a number you can attach to the exceptional costs related to ammonia imports for Q4? And is there any guidance for '22? And sorry, I said 2, I'm going to steal a third. Any thoughts on China and its return to the export market?

I can -- Andrew, this is Thor again. I can start on the realized prices. a bit sort of linked to the comments I just made. We've illustrated clearly the rough timing effect in the quarter, I think the result of probably non-spot prices taking somewhat longer to move and also the fact that we sold relatively more in the first part of the quarter than at the end. As you may have seen in the report, we've also stated that sales were slower in December and in January. We are now particularly in Europe, right ahead of the peak season, but -- and that is also with industry deliveries being 17% behind a year earlier at the halfway stage of the season. There is clearly a lot of demand to come. And that's the normal period sometime between -- so we say mid February and early March, weather-dependent and a bit sort of market-dependent, that's where the peak deliveries come in Europe. But given all of the above, I mean we're also in line with what is normal. We have a shorter order book typically in the spring in the first half of the year, a longer order book in the second half of the year. So when you ask about recovery, I would say the symmetry factor here when you talk about price lag is not necessarily so much within a season, but within some periods, you have price appreciation; other times, it goes the other way. So in this situation, when prices move fast up then the other price references do not react as quickly. But when it happens the opposite, we tend to benefit. So we've seen that, for example, on NPKs. When raw material prices fall, NPK prices do take longer to adjust the other way. Yes. Your question -- I think the second question was on the cost of ammonia sourcing in the quarter. We haven't quantified this in the report, but it's in the region of $50 million to $60 million. And the final question, could you repeat the question on China?

Yes. Of course. But can I just pick you up on that second answer first? Is there any particular communication on 2022 on those ammonia imports. I mean are you still -- maybe about asked another way, are you still actually importing ammonia at these levels?

Yes. I mean we are always importing ammonia because we are structurally short in Europe and long outside Europe, and we don't necessarily always sort of do that much internally. We do always have some external sourcing. But it's at a lower level now than in the fourth quarter because we -- as you know, we had quite material impairments particularly in October, November time. But now most of our production is running normally, so we are sourcing ammonia.

Okay. And then the final question was, when do you expect China to return to the export market?

Yes. That one. No, I think we do -- Dag Tore, if you are on the line, you can maybe comment on this one.

Yes, can you hear me?

Yes.

I have not picked up any signs that there will be a change to the water signal static that the restrictions will last through June, I'm not seeing anything there. There are some small volumes going out, but nothing major. So through June is our expectations, and there is also a taker market in China that is also behaving as if there is not going to be significant exports until the second half of the year, that's the current information we have.

Thank you. And your next question comes from the line of Chetan Udeshi.

The first question I had was there is a chart in your presentation, which is the usual chart, which shows that the stocks of the inventory of nitrate producers as of December and most of Q4 last year was below the levels we've seen through last 7, 8 years. I was just wondering if you had any sense of how is the stock situation in the supply chain outside of the producers' stocks? Do you have any tracking of that metric, given that is also a key part of the puzzle in terms of how the demand might behave in the next couple of months, especially as we go into the peak season. And second question was -- thanks for quantification of the decarbonization CapEx in the slide, which is close to $100 million. Is that sort of a run rate we should expect going forward per year for Yara, at least for the next few years? Or is that not necessarily the case and that it could be lumpy from one year to the other?

Yes. Okay. I can start on the nitrate stocks and Dag Tore. Maybe speak up if you have anything to add. But -- as you say, Chetan, it would be nice to have data here, unfortunately, particularly for Europe, which is for nitrates, that's the reason you're mainly talking about. There are no more -- yes, there are no public statistics on the rest of the value chain stocks. But having said that, I think the situation now and has been the case for a while is -- there's, I would say, nothing to indicate that those stocks are significant. We've had, I would say, quite a few years in a row of relatively more just in time buying compared to history. We do -- and then we do know that delivery is at the half of stage of this current season were 17% behind. Demand and application rates have generally been normal to strong. So I would say there's nothing to indicate that those stocks are significant. Dag Tore, I don't know if you want to answer that.

No, I think that you're right, because we have auto indication that the opening inventories or let's say, storage inventories from last basis we think we're also very low as prices were increasing. So I think you're absolutely right, Thor.

And in terms of the GHG reduction CapEx, we have guided on a spend of -- not per year, but over the period up to 2025 of $250 million to $450 million.

To add, this is Svein. To keep in mind that there's an income component to this as well as the food system is a need to decarbonize since it represents 25% to 30% of greenhouse gas emissions, while Yara is already leading when it comes to carbon footprint, both in our own production, but also in agronomic device and application of our products. There are further opportunities here. And where the major food companies have made commitments to decarbonize their supply chains, an important component of that is what happens in the field of the farmer, but also how products are produced. And it's about creating the incentives for the farmers as well so that the farmers are not only paid for a crop, but also how the crop is produced. And this will generate more and more income in the years to come. We see it also as a significant breakthrough on the new contract with the Swedish company, Lantmännen, where we made the first contract for fossil-free fertilizer based on a value chain impact. That's an illustration of what is possible here when you do a full value chain thinking on it. And based on studies done by Boston Consulting Group together with the World Economic Forum, the overall response to decarbonize the food system isn't that large, it's about a 4% cost increase. So if you look at the totality, this is doable. But obviously, if we work it and sold it only in our P&L, it will be too high for a farmer, it would be too high for them to absorb it as well, but we will see the full value chain. This is both doable and as Thor said necessary in order to reach the Paris agreement.

Thank you. And your next question comes from the line of Truls Engene.

Yes, one. I think Thor has touched upon it, but just to be clear on these realized prices also on market there, we saw them being on a roughly [ 130 ] below the 1-month lag and much closer to the 2-month lag market reference price. How should we think about this for Q1? Will it be then -- I think you mentioned shorter timeline again, that it should be more like a normal situation, so closer to the 1-month lag for Q1?

Yes. Truls, this is Thor. I think that's the correct way to think about it. And as mentioned earlier, it's not anything unusual as such given that it's normal seasonally to have a longer order book in the start of the season in the second half of the year and shorter in the spring time. But of course, as you are aware and as we've shown in the presentation, the sort of dollar impact of this are higher with the higher price volatility.

Right. And just a follow-up on the demand part. You mentioned the expectations and how this is developed for nitrogen Europe. We saw that deliveries in Africa and Asia were down 27% year-on-year in Q4. Do you see more pushback from customers outside of Europe? And Americas might be more price sensitive on the current still high prices there?

Yes. I would maybe not think of it so much. I mean, there is a reason element here, but it's probably fundamentally more about the types of the structure of agriculture because where you have the big commercial and export-oriented or should we say, fully market-exposed agricultures and then you're talking Europe, U.S., most of Latin America and especially Brazil. Of course, they will -- I think there -- that is where you see less demand destruction when prices go really high because they have a better ability to pass on and are exposed to also higher food prices that we're seeing. Then when you see it in Africa and Asia, that's probably where you have more markets that are less global market exposed. So if it's a nonexport-oriented pharma that's selling domestically, then you -- the cost increases you're facing for inputs, there's less ability of from them to pass on the cost in your revenue.

Thank you. And your next question comes from the line of Rikin Patel.

Firstly, you announced earlier in January that you'd be winding down, you saw some potash from Belarus. Just curious if you've been able to fill your requirements there for NPK production in both Brazil and Europe? Or is there still any sort of shortfall? And secondly, on costs, in the bridge, you booked a $54 million headwind on fixed costs. Could you just remind us what the breakdown there is between the spending on growth initiatives versus any underlying impacts from overhead inflation?

Yes, I can start on the -- yes, I mean, I can start from Belarus actually. This is -- we have a number of other suppliers. And as you know, we've what should we say, the risk picture has been evidenced with regard to Belarus for some time. So we've prepared contingency plan for that, and we are able to source from other suppliers here to be able to operate our NPK plant. So that is working well. In terms of the fixed costs, most of the increase that we're seeing now is the 1 that we've flagged and planned for, the roughly $100 million per annum that we've reallocated from CapEx to fixed costs, reflecting that our most of our new business growth initiatives require relatively more fixed costs compared to CapEx. But then on top of that, we've had some extra costs related to the higher curtailment level we saw in the fourth quarter, some of it is related to the pandemic. And of course, there is increasing inflation in several parts of the world now. But still the main part of this is the planned element.

Thank you. And your next question comes from the line of Adrien Tamagno.

Just curious about your ammonia production target for '23. Is it going to be all achievable with the bottlenecking of fuel capacity, or you would need to achieve this target externally or this may have to be revised? And secondly, can you elaborate on the potash impairment in Ethiopia because that's still surprising given the commodity price trajectory?

Would you mind repeating the second question? I heard it was related to Dallol, I didn't quite catch the question.

Yes, it is just a bit more clarification about the impairments on the Dallol mine, which seems a bit surprising given the potash commodity price trajectory.

Okay. So I can -- starting first, I mean you've correctly observed that on ammonia production is where we have a bigger gap to close for our 2023 target, different from finished fertilizer where we are very much on track to meet the target. But we are -- so it's a -- yes, we have a job to do to reach that target, but we still consider it within reach during these next 2 years. As mentioned on the webcast, we have a company-wide program to improve, particularly on the turnaround planning and execution, maintenance related and also in our root cause analysis follow up. And we've had -- we've been targeting this only towards the sort of highest value plants, but we are following this up closely at all plants. And we've had good results. And I mentioned Pilbara during 2021 has been a real improvement. And of course, we need this in other plants. But that's -- so -- but it's not the case of meeting -- this objective is not sort of going to happen through acquisitions, for example.

Actually, I should add that It happened from a resource perspective, as in the last 2 years, both with regards to -- I mean the travel restrictions, the ability to get spare parts at the right time, maintenance experts and so on for specific issues. so we had to make a very strict allocation of where we put our resources and that's based us to mention on where do we see the biggest impact. And we have for a number of locations, demonstrated that. We will reach this level, but we still have some sites that are lagging behind and hopefully now with better ability to transfer resources and an important part of this is the training of our employees and transfer of best practice as well that this will improve going forward.

Yes. And on Dallol, I mean, you're correct that the potash market prices have been improving, this write-down is not about the global market, but more specifically about the project and the location. And as you're probably aware, the -- this is in Ethiopia and the situation there is sufficiently uncertain to that. Although this -- we still intend for this project to go ahead, but we are looking for structural solutions to limit the CapEx that we put in going forward. But given most importantly, the situation in Ethiopia, we see this project as having a high level of uncertainty too.

And your next question comes from the line of Mubasher Chaudhry.

Just one clarification from a question earlier, around the impact of ammonia sourcing. So I think you said it was around $50 million to $60 million in the fourth quarter. And now you think that you're operating or importing as per normal. But does that mean that there shouldn't be a negative impact for the first quarter. Is that the right way of thinking about it? And then secondly, you talked about the lower business in -- or the low volume and demand in the fourth quarter on a year-on-year basis, and you've talked about the 17% behind on inventories. I think your urea volume in the fourth quarter was down 18% year-on-year. How much of this was due to shutdowns and how much of this was slower demand? And given the need to -- given that the farm is behind 17%, should we be assuming that negative 18% volume, or the volume loss in fourth quarter comes back in the first quarter, second quarter, and therefore, we should be expecting a strong uplift on a year-on-year basis in the urea volume?

Yes. So on the ammonia sourcing, I mean, yes, if at all, it will be a small effect in the first quarter, I think, is the correct way to read that. And I should add that we can discuss whether we're actually -- I mean, yes, the cost we've given the cost of the ammonia sourcing. But -- of course, we're doing this because it's profitable. The alternative would be to either have less ammonia and upgrade less production or produce ammonia unprofitably. So I wouldn't, as such, call it a negative. But yes, correct, we are producing at a normal level now. So the sourcing level should be more normal. In terms of the demand question, I mean, and as we've mentioned also in previous quarters, the high price levels we've seen through a big part of this season, there's no doubt that there's some demand destruction that will take place as a result of that. You will see estimates, I think often in the region of 5% to 10%, but varying by location. But for Europe, as you were talking about the 17% where we are behind, it certainly seems likely that's a lot of that will be caught up. But where we end for the full season is still an open question and depends on the price development also at the back end of the season.

Sorry, just to clarify. So on your own urea volumes, which are down 18% in the fourth quarter, the current expectation is that given the demand remains strong that you should be seeing a stronger volume picture in the first and second quarter?

Yes, I think that's a reasonable assumption. And sorry, you did ask also that whether this was due to curtailments. And I would say to a limited extent because we are finished, product production has broadly speaking, not being impacted by any of the curtailments since we've been able to source.

[Operator Instructions] And your next question comes from the line of Joel Jackson.

I'll ask a few questions one by one. I wanted to ask about something you had in your release, "publication prices are far away from the majority of traded volumes." So you're basically saying that a lot of your list price looks the venture prices out there, research prices were not really transacted liquids like we're not liquid. Can you elaborate on that? Have you seen this before? which nitrogen commodities or NPK with this mostly affecting and have this stopped in Q1 are the benchmarks correct in liquid?

Yes. I think, actually the main point we were trying to get across, Joel, is that the -- there is a difference sort of reference why then timing-wise, between, for example, an FOB Egypt or Black Sea for that matter, and an inland set for CSR price that we are typically selling at. So that's one part of it. And then it's also linked to the price movements have been quite a record high this quarter and that some of the highest price quotations are a few trades at what looks like, at least for now, a peak that we saw in around November, December and that, that has -- doesn't necessarily feed through to a lots of other locations and products. So those 2 factors, I think, go some way to explaining then this time lag factor that we highlighted in the quarter where if you run the sensitivities, you get this almost $500 million effect or difference between a 1-month lag and a 2-month lag in the quarter.

Okay, my second question is, I'm sure you would agree and tell me that obviously European gas is setting cost curves now for nitrogen production or nitrogen market. And it seems like ammonia is following more sort of around the cost curve, whereas urea prices in different markets around the world are trading below what you think would be European cash cost support levels. And so ammonia looks quite expensive versus urea and typically, it's kind of reverse. So can you comment on some or all of that, please?

Yes. And I think maybe let's start there. This is a more or less pure external market comment. Let's get Dag Tore to open on this one.

Yes. I mean, it goes a little bit in ways it cyclical as well, right, with the curtailments and so on products. When the spike started in fourth quarter, the urea price reacted much faster and with ammonia prices were lagging, so we had several months of a record strong operating margins. But as the ammonia market has tightened, as you mentioned, currently, there is basically no upgrading margins from ammonia to urea. And you're right in that this is even negative. But right now, if you would find the curtailments logical, I agree. It has been more likely that we get on the urea part than on ammonia in the current market. So that's a correct observation.

My last question is a follow-up on the Ethiopian assets. So I'm someone as store probably knows who is fortunate to visit these assets a decade ago just before you bought out the majority of the control from, I think it was called EPO Potash or something like that at the time or [indiscernible]. Anyways, what would -- and also, I know that history, right, like Yara and its predecessor company have been looking around Ethiopia for potash concessions for, I don't know, 20, 30 years, a very long time and never really advanced anything. And there's lots of reasons why, right? You've got geology issues, geography issues, you're near [indiscernible], you've got railway issues that never got built, you have war. So I guess what I want to ask the question, do you still say it's attractive projects? What would have to happen for Yara to actually go in now and want to build this Ethiopian potash and SOP assets? Is it the railroad finally gets built to that area?

No. I think, Joe -- and it's a good list of all the factors contributing here. But I think on the other hand, in a way, it's quite simple, and this is the message we've had for some time on Dallol is that we are and have been looking for structural solutions where we are able to progress the project without it being a significant further CapEx on our part. So that's in essence what it will take. But of course, all the other factors you list remain challenges and do heightens and that's why we've taken the right one.

And your next question comes from the line of Magnus Rasmussen.

As you've said, NPK premiums have been -- they are according to your slide, even in the negatives. If we have a situation here where we have persistently relatively high urea prices over time, how do you see sort of willingness among your customers to pay up for nitrogen premiums and NPK premiums in such an environment relative to what we've seen over the past years where urea prices have been quite depressed?

I think there's -- I mean, there's 2 factors to bear in mind. I mean, one is the cost side in a way that you mentioned or sort of if the commodity reference prices are high in general, that does tend to, over time, also lift NPK and other prices. But then it also depends on the income side for the farmer. Because if that's the only thing that happens, if their incomes remain stable, while their costs go up, then you tend to get demand destruction. So the answer tends to be there that, yes, prices will go up, but you will lose some demand. Now, that doesn't seem to be the case now. As you've seen food prices are rising as well. They haven't risen as metrically as some of the input prices so far. But they are rising and we've seen the FAO price index reached a record just recently. So -- the other side of this then, if food prices, farmer incomes rise, then you certainly have a situation where the -- you will be able to potentially maintain the demand volume at higher prices and even higher margins and premiums.

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

This is Lisa. I have 2. So providing an update on some of your carbon initiatives and the income you may see from that -- can you provide a bit of a broader update on your $300 million to $600 million EBITDA program by 2025? And how much we could actually see from that this year? That's my first question. And then I have a small follow-up on the sort of cost questions we've seen today. We talked a bit about power prices. But some of your other costs, including payroll also appear to be going up quite a bit. So how should we think about inflation of sort of the fixed cost base and beyond that for Yara in 2022, so there an overview and sort of maybe percentage guide would be very helpful or anything for that matter.

Yes. I mean, Lisa, the $300 million to $600 million we touched on in the presentation, well, not the numbers as such that the on our KPIs that we are, in a way, still in the first phase on these a lots of our new business development, and that goes for new revenues as well as measures like textiles under management. So these are not meaningful bottom line numbers in 2022. We do have a number of initiatives that we are in the say, ramp-up and portfolio management phase. They are, I would say, for most or all of them the ramp-up will not be linear. It will start very small and can increase quite rapidly when it starts to grow. But we will revert in one of the next few quarters where we provide on the status there and including how we see the $300 million to $600 million. In terms of inflation, I mean, it's -- I would say, so far, that hasn't been a way outside of our planned ranges. But clearly, we're in an environment now where that could become an increasing factor I think it underlines the need for us to continue with continuous improvement efforts throughout the whole business to be able to do what we come in to offset that inflation. We can't guide you on a specific number for this year. As you know, our business is -- we are the most global players present in more than 60 countries and with different kind of fixed cost profiles in those. But again, a topic that we will be reversing on through the year.

Thank you. We will now take our last question, and it comes from the line of William Wilkes.

William Wilkes from Bloomberg. I was just wondering about energy contract renegotiations. Is the rise in your energy prices due to renegotiating contracts at higher prices? And how do you see that developing going forward?

No, the energy cost, I mean, we have -- most of our -- certainly our production in Europe, and that's where you've seen the cost increases reflect the spot market level. We have -- our contracts that we buy typically our gas on the day ahead terms. We get as one of the large if not the largest industrial buyer in Europe, we have competitive terms, but it's -- we choose to have a spot link also due to the flexibility it gives us as we saw, particularly in the fourth quarter to stop production from time to time if it is more economical to source. So that means that we are -- when we produce fully exposed to the spot price development, which, as you probably know, have been quite volatile in the fourth quarter.

There are no further questions from the phone lines, sir.

Okay. So thank you all for dialing into the presentation. Feel free to reach out to the IR team. If you have anything else you want to discuss with us, and have a nice day. Thank you.

Thank you. That does conclude our presentation for today. Thank you all for participating. You may now disconnect. Please stand up.