Yara International ASA (YAR) Earnings Call Transcript & Summary

[Audio Gap]

[Audio Gap] Yara Clean Ammonia. My name is Silje Nygaard from Yara Investor Relations, and I am here together with Yara's CEO, Svein Tore Holsether; and CEO of Yara Clean Ammonia, Magnus Ankarstrand together with several of the members of our team. So with that, we are happy to open up for questions. Operator, can you open up for questions, please?

[Operator Instructions] The first question is now ready.

It's Andrew Stott from UBS. Thanks for the slides. I suppose looking at the growth opportunity out to the long term, it's hard to dispute. I suppose where I'm struggling is to know how much capital you're going to have to commit to this. So that's the first question. How do we think about the CapEx that you need to secure the growth? And then the second question is much more simple. Can you, at this stage, give us an idea of a timetable? And also, would it be the intention of Yara to keep a majority ownership?

Yes. Thank you for the question, Magnus Ankarstrand here. I can -- I can start with the first one, but we will not comment specifically on CapEx needs at this stage in the process. What we have communicated is that our project portfolio as we look at it, has a volume target of 2.5 million tonnes, 2 million tonnes of blue ammonia, 0.5 million tonnes of green ammonia towards 2030, which, of course, projects that will need to be funded. But other than that, we don't comment on the capital at this stage [indiscernible] ownership?

Well, on the ownership side, as we stated in the press release and also in the presentation is that we will maintain majority ownership. And with regards to timing, we're going to get back to that later, but this is the first phase of the evaluation of the potential IPO.

Okay. That's clear. Can I just go back, sorry, to the CapEx? Can you -- if you can't give me numbers, can you give me an idea of the type of assets you need to put down to secure that growth. I mean, obviously, I get the fact that you've got a production and shipping in print, but I'm just wondering what specifically will take up most of the dollar spent.

Yes. I think in terms of -- that question is obviously the -- I mean, production facilities needed for this. So the new projects that will make up the last part of the CapEx needs, whereas the midstream element is far or less CapEx intensive in comparison.

So predominantly Yara Group takes the CapEx for upstream, and this particular entity will be more about storage, shipping, et cetera. Is that right?

This is Svein Tore. Thanks for asking to clarify that. So as we're moving into, say, to take a green hydrogen project, green ammonia project when we establish new production facilities to feed into our plants as an example, that would be a project that will be done through Yara Clean Ammonia. So that's how the structure will be, and it is to enable them to accelerate that transition that -- as one of the key reasons why we're setting up Yara Clean Ammonia as a separate entity to enable that.

Okay. So in simple terms, grey stays with Yara Group and green and perhaps blue go with Yara Clean Ammonia. Is that how to think about it? Is that too simple?

Exactly right. So green would be Yara Clean Ammonia, grey stays in Yara and then the blue depends on whether it's on existing assets or on potential new projects. But in essence, you're describing it exactly right.

The next question is now ready. Please then state your first and last name before you ask your question.

Rikin from Exane. Just one on competition. I suppose a few of your peers as well have announced projects in clean ammonia. And if you look at the pipeline over the next 10 years, depending on where you look, there is a fairly sizable amount of capacity that could come online. So I'm just curious how you square that against your expectations for demand growth and whether you see a risk of this markets ultimately becoming oversupplied in the long term? And then just on business mix. I mean, if you look at Slide 5, where you've got the [indiscernible] demand growth. I'm just curious if that sort of 2050 mix is indicative of where you see the Yara Clean Ammonia entity sitting in the long term as well?

Yes. Thank you for the question. We don't comment specifically on competitors or their projects, but I think sort of operating in a world with supply projects and sort of supply-demand balance is something that we have long experience with. I think we will develop our projects based on sort of what we perceive to believe solid business cases. And that, of course, includes projections on demand. And to the extent, we believe we will be able to sell the tons at the right price as well as those are evaluations that we do -- reach in every project. But of course, an important element of Yara Clean Ammonia is the midstream, but also the downstream segment towards the new segments for the demand creation activities that we do and also the work we do across the value chain to secure customers for specific projects, which is, of course, particularly important in a market such as this, which is completely new. Other than that, we will, of course -- or in addition to that, we will, of course, look for competitive in a relative matter of projects, which is, of course, from a commodity perspective, important to make sure that we achieve profitable projects. In terms of the business mix, it's, of course, difficult to say [indiscernible] will look like. But we do believe that the 3 segments that we've illustrated have -- I mean, roughly the growth potential could look roughly like what we've illustrated in 2050, although we do think that particularly the power segment, so ammonia for power production is one that could come somewhat earlier. So that's one that we focus on. We also signed several agreements in Japan and MoUs to facilitate that growth. And of course, that's something importantly, what would sort of be the demand growth, say, the period 2025 and 2030 as well and they believe that, that's [ secured ] potential. And also, we are involved in several pilot projects on the shipping side that will also generate demand for our first project. But we are following this very, very closely, and we have a very close dialogue with the major players in all these segments, and we will use that information, of course, to time our projects and position our projects as [indiscernible] you can. It's hard to give a sort of a firm split given that these are [indiscernible] markets that are nonexisting today. And of course, not to forget the fertilizer industry, which is also very important in this context. We are -- and Yara Clean Ammonia have a unique opportunity in the [ tenants ] that we already have, the value chain and logistics for that established.

The next question is now ready. Please then state your first and last name before you ask a question.

It's Mubasher Chaudhry from Citi. Just a couple of questions, please. You've hopefully provided your target that to 2030 by, I think, 2.5 million tonnes production capacity, but kind of looking forward, would it be -- if you could provide some color on time lines and FIDs and kind of the more of a detailed view on the actual projects themselves from this point forward as to when we actually get the project start-up and ramp-ups. I understand you can't talk about CapEx, but it's kind of from a [indiscernible] and volume perspective. And then related to that, with regards to the 2030 target, have you already got customers interested in these projects in the volumes and they're looking to secure long-term supply with yourselves? Or is it for you to prove that you've got a consistent supply of product before they commit to anything in terms of a supply agreement for themselves. And finally, do you envisage those customers who are looking to secure the long-term volumes? Do you envisage them are taking in the CapEx as all of these projects to share some of the risk? Just kind of keen to understand how the dynamic will work with regards to the capital intensity of this business.

Yes. Thank you for that question. I think -- I mean, in terms of our portfolio, that will be indicated with the 2.5 million tonnes. Obviously, a small piece of that is already -- as we've already taken FID, which is our pilot project, 24 megawatts in Norway, which, of course, sounds small, but it does give us very significant learning knowledge both on the technical side but also on the market side and not the certification side as these are tons that we believe will be out there in the market by the end of 2023. In terms of time line for other projects, we will get more into detail on that later in the process. And also, in general, we are, of course, -- we -- as [indiscernible] as well, don't communicate too early about the time line on these projects before we sort of have material news to report on that progress. So -- and that's sort of a policy that we continue in Yara Clean Ammonia. In terms of -- on the customer side and long-term contracts, I would say that -- there is a significant interest out there for long-term contracts for ammonia within all the segments that we've talked about. Of course, the maturity of those customers in regard to how mature they are in terms of commitment and so on, varies quite significantly. But there are, I would say, major players within important players, leading players within all those segments that are clearly displaying significant commitments, and that will be an important element when we make FIDs in this project as well to make sure that we have that showed up at an appropriate level. And then finally, CapEx side, I believe that's not something that we can and to the extent that the customers are willing to share into that. That's not something that we want to comment on right now. That is, of course, a feature in the energy industry and it could be so in this industry as well. But at this point, we don't have a comment to that.

And just as a follow-up. In terms of the offtake -- that you have for all the offtake agreements that you have, will you be willing to work with competitors who are able to produce green ammonia and help them ship it around? Or is it going to be exclusively for Yara's own production?

Yes. No, I think we're definitely open to that. We do -- I mean, Yara, we do that today both within ammonia, but also within the range of other products. So when that makes sense for both parties, that's absolutely something that we look into do.

Svein Tore here. Just to emphasize that, I think that's one of the key competitive strengths that we have. This is not only about products, it's about optimization and infrastructure to do this globally and support the hydrogen economy and then we need to move the product from the point of production to rates consumed in this industry to have the -- both the physical capabilities, but also the organizational capabilities to do that is a key strength and we have that globally. So yes, to also -- if it makes sense to source from competitors to enable that, that will be [indiscernible].

The next question is now ready. Please then state your first and last name and the company name before you ask questions.

Hello, can you hear me?

Yes.

Chetan here from JPMorgan. I just wanted to explore the topic of the competitive advantage for Yara. I can see how the know-how of shipping ammonia -- trading ammonia is an advantage. But I'm not entirely sure how would you characterize the competitive advantage of ammonia -- sorry, of Yara in green and blue ammonia production. So are you guys going to evolve the strategy to maybe leverage the know-how on shipping and just the ecosystem that you guys have built and focus more on the midstream? Or are you guys going to be as interested in terms of also building the sort of upstream capabilities to produce most of your green and blue ammonia yourself? I mean I think the key question is the production process of blue ammonia is entirely different, more or less. So like what are the competitive advantage for Yara in that upstream side?

Yes. Thank you for the question. I think maybe first of all, it's important to highlight that the value creation from Yara Clean Ammonia, also sort of in the historic numbers than -- historic [indiscernible] Yara comes from the integration of upstream, downstream and midstream. So it's not just a logistics company. It's the ability to optimize between a large system of plants, being able to handle swings in production, swings in demand, et cetera, both in terms of, of course, achieving scale and lower cost, but also in terms of being a reliable supplier, whether that's for Yara or for external customers as such. And I think when it comes to production and projects, I mean, construction projects of the ammonia plants [ in itself ], that's something that building on the base of Yara, we have a very, very strong starting point, both in terms of picking the best projects and picking the best locations for those projects. As an example, Yara's latest ammonia plant was finished in 2018 in Freeport, Texas. And we have a lot of experience building plants. And we are -- the actual -- to sort of take the distinction between green and blue, of course, when it comes to -- not we get into too much technical detail, but when it comes into blue projects, the actual capturing of the CO2 is something that we [indiscernible] today in our ammonia plant. And we have had several projects on that before. The storage part, of course, -- is, of course, a new element, but that's largely sort of with other players. We don't foresee a big role there. When it comes to green, that's, of course, new technology, which is -- but it's closely linked in many ways to what we currently do. And I think that the major part when it comes to green ammonia project and [indiscernible] not actually the electrolyzer itself, it's actually the handling of the hydrogen which is a critical core component, which we deal with hydrogen in all our plants today at a large scale, which is probably from the technical side, the most important part, much more important than the electrolyzer side in itself. And of course, the ammonia part of the ammonia plant, whether it's green or blue is exactly the same for both types. So all in all, we believe that we have our knowledge and sort of our experience on the assets and productions and project side will also be very, very important going forward, although that's something that we will rely on the [indiscernible] to a large extent.

Do you -- so I think just follow up or following up on your response then. So I mean, are you going to be as backward integrated into green hydrogen production yourself as is the case today? Or do you see the green hydrogen supply, you are open to maybe sourcing it from others, if that happens to be a low value-add business over time?

Yes, absolutely. I think that's part of the strength and flexibility of our systems that we can certainly source hydrogen directly. In fact, we already do that today, both in the U.K. and in the U.S. So when that idea favorable, we will do that and where we need to produce it ourselves and the conditions are favorable, we will do that. And of course, also, that would also apply to sourcing third-party ammonia as well as [ Svein Tore ] pointed out.

The next question is now ready. Please then state your first and last name and the company name before you ask a question.

Apologies, Andrew Stott from UBS. Just wanted to follow up on the assumptions on the shipping opportunity. I know they're not your own, but I couldn't access the study you quote in the slides. Do you happen to know what assumptions they're making on how successful green ammonia is in displacing current and other alternative fuels for the shipping industry? Do you know what assumption they made on market share?

I think in terms of specific numbers and so on, we would have to get back to you on that to the extent we can share it. But I think what we do know in general terms is that, of course, that number is a 2050 number. So there's no real uncertainty to that. But what I can say is that in our business plan, the key focus for us is, of course, to -- based on the knowledge that we have about the value chain, both in terms of the time it takes to build ammonia pants, what it takes to -- what it takes to actually make the changes required within the shipping sector, technically engines and so on. So all of those factors have been taken into place. And of course, a vital part is also government regulation, IMO regulation and sort of other drivers. So -- but for sort of specific details, we would have to get back to that. What we do think is that there is an assumption that -- which is, I think, in line with many analyses of this market, green, of course, over time, will become cheaper and ultimately, could become competitive with blue, but that blue will have -- blue ammonia will have the chance to become a competitive factor. That's why we sort of have that focus as well.

The next question is now ready. Please then state you first and last name and company name before you ask your question.

Sorry, guys, I wasn't sure whether I was able to ask questions. So I have 3. So first and foremost, I know you're very early in the time line, but can you please share the steps that are required to be fulfilled for you to move ahead with this IPO? I mean what are the milestones. And can you share them with us? That's the first question. And then secondly, can you share some details of how you think about pricing and how that will develop for ammonia prices in general over the next sort of 3 to 5 years? And also, what do you expect about how we should think about the premium price that you can potentially derive from selling blue and green ammonia. And then the last question I have is how should we think about the returns for the distribution of [ clean ] ammonia? Again, I'm sure you can't give us much because we don't get details on CapEx and so forth, but just a bit of a color or ballpark or direction would be super helpful.

I can start, it's Svein Tore, on the timing. As we mentioned in the press release, we were now evaluating a potential IPO. And we need to go through that -- the next steps there. But of course, given where we are today, it's safe to say that this is a post-summer event. We're not in a rush and we'll definitely take the necessary time to go -- to thoroughly go through the -- and evaluate the options. But by now announcing this, it also is an opportunity to test the appetite for investing in this. And then Yara Clean Ammonia will update the market more on the time line in due course.

And I think in terms of your second question, pricing, we cannot give any guidance on the ammonia pricing in the next [indiscernible] years. I assume your question was around grey, but -- so unfortunately, that's not something we can share here. When it comes to the premium at this stage, we're not in a position to share specific numbers there as well. Although I think what we can generally say is that we see an increasing understanding in the market that there is a willingness to pay premium both compared to sort of normalized grey ammonia prices but also compared to alternative fuels and in particular, fossil fuels plus whatever carbon price that can eventually [ come on top of ] that, which is, of course, key element. But also, I think we see a clear trend and quite a momentum also on the cargo owner side as an example that there is an understanding that there needs to be a premium and the willingness to pay the premium. And of course, if we're able to distribute that through the value chain, the cost for freight to ship goods and so on per unit is considerably lower. So all these things we want to consider, but we can't -- we don't have a specific number for you, unfortunately.

And just to add on that, Svein Tore again. [indiscernible] full value chains as we saw in the U.S. Climate Panel [indiscernible] is alarming. And that requires a significant shift in production of many products where -- and also transportation of products, whether it's in agriculture or in shipping or other industries, we need to think differently around that and what seems like large barriers when you look in isolation, if we look at total value chains, it is doable and [indiscernible] to read the reports from Boston Consulting Group on how much it takes to decarbonize certain sectors, if you look into the U.S. State Department and World Economic Forum initiative on the [indiscernible] takes to create fully -- full new supply chains. When you look at the totality of this, the cost increases are not that large and -- but it requires a different way of thinking. And we have signed our first contract for green fertilizer with the Swedish [indiscernible] and I think that's a -- it's very interesting case because that's a farmer crop that owns also consumer-facing brands, so they go all the way from farm to the supermarket. And with converting to green fertilizer then produced by -- from green hydrogen, then reducing the carbon footprint by 20% without -- and it's the same product for the farmers. So it's about simplifying this for the farmers as well. And when they are able to see the totality, then this is doable. And this is ongoing work in the entire food industry that we need to get away from the commodity cost plus silo thinking and the full value chains get consumers involved in this demand to know how the food is produced to get authorities on board as well to see the potential in this and there are a lot of activities. We're pleased to see now more and more companies stepping up with new targets across the food industry. Comment to most of them is that the only way it's possible to achieve is to now also focus on the field of the farmer where a significant part of the emissions take place both in the field, but also the inputs going into the field. And this is one of the necessary steps in order to reach the net 0 targets.

So we are almost out of time now, but we will take one final question. So Bengt, I think you're the last one now. Go ahead, please.

Yes. Bengt Jonassen from ABG Sundal Collier. Could you elaborate a little bit about the scope? I think Yara today has around -- I think there are 3 ongoing green ammonia pilot projects. Will those be included here in the clean ammonia segment or remain in Yara? And also a little bit on the strategy on your target. Would that only be organic? Or -- and would you be willing to look into other projects and co-invest in other projects? Or will all be organic?

Thank you for the question. When it comes to the projects, all green and blue ammonia project in Yara will be a part of the scope. And to your second question, we are both looking at organic but also new projects to go at that. So the answer is yes, we would have to be willing to do that. And also in partnerships like we've done before, for instance, with BASF, but also several of our other existing ammonia plants.

Okay. Thank you. So this concludes our call today. Thank you, everyone, for dialing in, and we wish you a nice day.