Yara International ASA (YAR) Earnings Call Transcript & Summary

Good day, and welcome to Yara International's Fourth Quarter 2022 Results. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Anika Jovik, Head of Investor Relations, to begin the conference. Anika, over to you.

I'd like to [ welcome ] you to your conference call for the fourth quarter results. In the room with us we have the Investor Relations team, key members of the finance and accounting team and last but not least, we have key members of our management team, including Lars Rosaeg, Deputy CEO amongst other things; and Thor Giæver, CFO; and Svein Holsether, CEO. And with that, we can start with questions.

[Operator Instructions] And your first question comes from the line of Christian Faitz from Kepler Cheuvreux.

First of all, can you give us some feedback on what you're currently seeing in terms of demand conditions in the Northern Hemisphere in your fertilizer offering that is, i.e., the nitrogen value chain, but also [ NPNKs ]. And then can you also share with us your view on how you see cash flow evolving for this year Free cash flow, that is, sorry.

On the first question, Christian, it's Thor. On the first question, I mean I can note as you've probably seen in our report and presentation, we note that both for ourselves and generally in the markets, we've seen lower activity towards the end of the year. It's not quite anything unusual in itself. So December is not usually the most action month in this industry. And we've said basically the same for the start of the year. Again, it's not unusual. I think in the context of the price declines we've seen over the past month, it's not surprising either. So that's the kind of headline observations from our point of view. And as you know, the main application season is approaching And the Northern Hemisphere has stopped [indiscernible] southern parts of the Northern Hemisphere. But it's -- in any given year, it's also a bit weather dependent and sometimes it really ticks off in February. Other times it might be into March or even April that you see the big volume shifting. So -- but with that can also [indiscernible]. In terms of free cash flow, lots to comment on given our [indiscernible] policy. That's on a similar vein. Obviously, what we've observed -- what we've seen in the quarter is that we had a kind of improvement, both in terms of our earnings and also with a release of operating capital, which is driven partly by lower prices and partly by lower deliveries. So obviously, the normal custom is that we -- you have an increase in deliveries at some point in the spring with the application season after they get their -- there's been some wait-and-see behavior in the market. So I think it's reasonable to expect that -- and as we comment on as well, there's certainly potential for catch up in all key regions based on the farming profitability outlook. But it's quite a step from there to sort of have a forecast on how the cash will develop. But then [indiscernible] lower prices tend to reduce operating capital beyond cash [indiscernible] the other way when deliveries increase by [indiscernible] can supply some more volume.

Your next question comes from the line of Mubasher Chaudhry from Citi.

Just kind of following up on this -- the demand picture. I mean [ Thor ] you made the comment there was a catch-up demand potential in all regions, et cetera. So I just wanted to get a feel for, first of all, kind of what the inventory levels are. I assume there's a hidden comment in there about inventory levels? And then secondly, just coming back on the demand. I mean you presented quite a compelling picture saying that the fertilizer prices have come off, farmer profitability is good. And as the prices keep coming off. So I'm just trying to understand kind of how late can the farmer go before they really need to [indiscernible] and you talk about application season. It's really kind of imminent. So is there something to do with regards to my first point around inventories that the farmer may not actually need to come back to yourselves for incremental volumes. That's the first question. And then just on supply side of things. I know you always kind of talked about their own plants running at higher rates because of the lower gas scenario now. Can you talk a little bit more on supply picture of nitrogen globally as well as we head into 2023 in terms of are you seeing any incremental capacity addition come through? Or there's a few plants which are expected to start up in India. How are those going? What the ramp-up looks like for there and therefore, the demand from the independents could be a little bit lower. So just a little bit on the supply and demand a global basis would be helpful also.

Again, I can -- I'll make a start on this one, perhaps, but [indiscernible] will add. So first of all, in terms of catch-up demand and inventory levels, I mean, this as you probably know, is an area where we have -- we are quite some way from having a perfect overview data-wise of what's going on, particularly in the whole market globally. In Europe, I think I've right in saying that the data we see is that the inventory levels at the end of the year for nitrogen are lower than average, but have increased somewhat towards the end of the year, which is consistent with the lower activity level in the market. But since Europe overall is behind the normal level of deliveries for the season. And then I think the -- as we look around the rest of the world, and [indiscernible] to comment on some of the U.S. data, but we don't see with the -- we don't see supply overhang at the start of the year other than in Brazil is the short version, I think. And then there are some -- there are probably some data points on this more specifically for -- in America, certainly. And then just before I hand over to [indiscernible] also the supply side. In terms of when you asked about sort of how can farmers leave it, well, it's really the is the most factor analysis and we long for a start, if you are in Southern Europe, you're already applying fertilizer now, whereas if you're in Norway, you still have a few months. So it depends on where you are. But I would say, overall, I mean, there are 2 factors that make up sort of portion about we think much longer. One is, of course, the European industry has had significant curtailment and does have seen significant curtailments in place. So right now, we're not sort of producing in a way anywhere near the normal levels for the industry as a whole. And the other is that there are logistical automatic is certainly not -- when you get an order today, it will be a number of weeks before you can [indiscernible].

So -- but with that on the demand, side North America, as you mentioned, U.S. customs released December trade day yesterday, I did not show any pick up getting supply whatsoever, there's a net import of 100,000 tonnes of nitrogen, very, very small. So depending on where the production numbers, we don't know what was actually produced in the fourth quarter yet due to the lag in the TFI reporting, but I would say anything between 15% to 20% less supply from a production and imports so far this season, July to December compared to last season. And then there's a question of how much you need to pull out due to inventory carryover from last season to know exactly how much it is, but it kind of leads us to the conclusion that it's more like being supply while on the farmer level today you can invest is quite a good and talk about very strong corn acreage, for instance, because of that -- the [indiscernible] ratios between fair class costs and corn prices. So that's also kind of I think one of the reasons why also [indiscernible] mentioned in the presentation today that you can be a little bit concerned whether sufficient supply will be fine in the right places at the peak question mark. So on the supply side, we are in a phase of peak supply additions globally on the real side as also the graph from CRU that varies in show. We have new plants around Nigeria, Kenai, Iran, India as you mentioned, Russia upgrade as much as they can that they cannot export. So we think there is -- maybe as I mentioned, a couple of Indian plants to remain, but also that we are moving towards the tail end of that phase of new capacity, but we think that's due to the ramp-up, there is probably some issues also in 2023 compared to 2022 from those plants that started off last year. So that's of course an element to be aware of, that there is outside Europe, there is a quite significant supply increase in 2023.

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

So a couple of things from me. I'm just looking at a Bloomberg headline quoting [ Sentara ] saying that Yara has been able to mature its clean ammonia portfolio. I just wonder if you could elaborate on what that means specifically A separate and second question is around CapEx guide for this year. So the 1.7 billion -- could you give us an idea of the growth projects, please, within that?

That's -- it's explain what we were referring to on clean ammonia, they've been working on preparing that for the next IPO and the capital markets have been favorable for [indiscernible] in the meantime they've been working at full speed and setting up this unit a separate structure doing the carve-out and preparing it for a potential IPO and also looking into the opportunities with looking at a clean ammonia products to be considered. And it also now is happening in the whole hygiene economy. And I'm particularly referring to the Inflation Reduction Act. Now we're very favorable commissions for Blue ammonia to be produced there and potential for new investments. And this represents an opportunity for Yara in at least 2 ways. One is the obvious one, been having leading infrastructure for [indiscernible] among across the world in modern our shipping fleet, our terminals, peanut across the world, this needs to be transported and then we have an infrastructure to support that. And then it also represents an opportunity to decarbonize also in Europe as we demonstrated now in recent months and quarters is our ability to run our plants with important among and increasing that flexibility certain essence opportunities in the U.S. are also helpful for our asset portfolio in Europe, where we can optimize across. So we're referring to the continued development of the clean ammonia and where we are continuing to mature the projects both in blue and also in green. And I'm talking about green, our pilot project demonstration crop in Norway, we will start producing at this year, and we have to our first commercial agreements with the Swedish [ farmer crop in London ] and also direct with the [indiscernible] and shows the potential and interest for this product and in particular, for [indiscernible] was very interesting opportunity because they have the entire value chain from farmer to the shelf in the super market, and they are really leading the way in decarbonizing crude [indiscernible] possible, so in place it corporation there. And this is something that we entireties should take note of what is possible to do, if you're thinking to value chain and how it's possible to do significant decarbonization on back of wind fertilizers, but also for doing as an intermediate [indiscernible] And on the second question -- sorry, Andrew, you have a follow-up?

Thor, yes, I did actually, sorry. Just because [ Sentara ], you mentioned the IRA. I just wondered if that gives you options for Canada as well. So Bell Plaine, obviously, does that give you sort of flexibility in the future for decarbonization projects or not? I wasn't sure whether that would capture that particular site.

Well, so Canada has come with the very first statements on how they are into a similar program, but governments across the world right now are looking at similar policies to guide the decarbonization as the Inflation Reduction Act as a base driving investment is driving decarbonization and this is much needed at cost of [indiscernible] . But for us, we're right now looking at the U.S. and see the opportunities there, and we've been clear also in Europe that if you look into similar initiatives to drive decarbonization, that is something that should be driven between non-sector and government in order to be able to reach the goals the Pari agreement.

And then on your second question, Andrew. I expect you've probably gone into this, but for the benefit of the wider audience, our improvement program slide in the presentation probably has the most fine print of today's communication. So just on the CapEx guidance that we've proven, we've shown guidance for this year of $900 million -- roughly $900 million maintenance and $800 million growth. And of that $500 million is carried over from this year. We've noted in the presentation that this growth category includes both improvement and growth projects and both committed and uncommitted projects. So I can say that the significant part of this is uncommitted. It includes everything from energy efficiency projects and other projects to improve that total plant and also smaller M&A projects that some of which are not -- the timing and success rate is not known yet. So this is not the total on growth and CapEx for the -- in the guidance is far from a fully committed number. But we'll, of course, revert with more specifics as we proceed through the year.

Your next question comes from the line of Alex Jones, Bank of America.

The first one is on nitrates pricing specifically relative to urea. I guess the spread has been high now for over a year, and you talked through last year about high production costs in Europe justifying that. Can you talk now that European production costs have fallen to at least some extent about the outlook for that spread and how sustainable you think the wide nitrate spread over urea is? And then the second question, sort of just on production levels and inventory levels. I guess you sound fairly constructive on the pricing and demand outlook into spring farm computing. So could you just give us some idea of in that backdrop, how you think about production curtailments and whether the sort of relatively high level of curtailments you now have suggests you have a slightly higher level of volume inventory on the balance sheet to meet the strong demand that will be coming up in the next few weeks?

Thanks, Alex. And I will make a [indiscernible] on both of these and [indiscernible]. But maybe starting with the last part we commented on the European industry, and I think you can deduce that Yara is following a similar trend. And that yes, inventories increased somewhat at the end of the year with the lower activity levels generally. But they are still at a lower level than normal for this time of the season compared to previous seasons. So -- and that was the fact that we and other players have been curtailing a bit simplistically, you could say this curtails production relative to demand as well. So the lower demand doesn't mean that inventories are structurally higher. So that's also back to why we're mentioning this as well that for the industry as a whole, we have some concern if the wait and see the later continues much further into this year as that could certainly affect the availability when the application seasonalize. On the nitrate pricing asset premiums, first of all, I mean, you'll know we have discussed this, I'm sure, in the past slides, our main reference there is if you like farmer profitability in case of Europe, wheat pricing, what does this look like relative to the farmers revenue rather than just the [indiscernible] premium versus urea is a trap. And as we comment on in the report, we provided examples using both urea and nitrates. And in those cases, they show improved fund profitability compared to a year ago. And the other point is that our normal seasonal pricing pattern is to incentivize early buying, they have to further price in premiums at the start of the buying season in the summer when we have the typical annual reset, summer early spring and then to increase prices and often premiums, although that depends on urea price development to reach a peak during the first quarter. So I think from both of those points of view, it's sort of that there isn't anything unusual in the nitrate pricing now. But this is, of course, in a volatile backdrop and that both those parameters, if you like, are within the normal range.

Your next question comes from the line of Angelina Glazova from JPMorgan.

Congratulations on good results. I have a follow-up question on the green ammonia space. So over the past few months, we have seen quite a significant number of new project announcements, both on the green and blue ammonia side. So far, it seems that this project announcement supply implied by them significantly exceeds the potential demand which could emerge by the end of the decade from new applications of green ammonia. So just wondering what's your views there in terms of supply and how likely are the project -- this announced project to go ahead? And also maybe on the same note, so you have highlighted Yara's advantage in terms of having a significant amount of terminals. How are you seeing entry barriers for other players maybe to set up other ammonia terminals over the next few years in Europe?

Yes. So it -- I can't comment on single targets and the announcement, especially if you look at to portfolio also in the gray ammonia space more announced international sites that are not being commissioned. If you look at broad of this, one thing is more going into [indiscernible] the main application right now. But [indiscernible] is looking to decarbonize new opportunities arise. One is for shipping where risk need for decarbonization in order to reach the IMO targets and that creates demand for [indiscernible] fuel as well, as well as decarbonizing the fuel and [indiscernible] and conserving both those capacities. And by creating scale, there will be further open or mentioned deposit on crane demand for ammonia. So that's one additional area on a factor. And then there are also work going down right now to reduce coal consumption in coal-fired pots in Japan in particular or we need to phase out coal and where ammonia can be used as an energy source to help decarbonize and also that area. And then when the cost does go down, demand would be high. So this is helpful for driving both scale and cost down. With regards to infrastructure, I believe we're unique in the size of our distribution network, also compensates is something that has developed over several decades. It's been the backbone of optimizing our operations, both within the [indiscernible] business, but also the industrial solutions built to serve our own needs, but now that we see the trial to be harnessed across the world, the need for green or blue hydrogen economy can serve an additional purpose, and that's something that we're excited about and where we see business opportunities. And that's a key reason for us to separate in a moment to allow to turn that purpose, but also to grow and support that market. But this is not something that is possible to do overnight. This is something that we have built through -- after our [indiscernible].

[Operator Instructions] And your next question comes from the line of Rikin Patel from BNPPE.