Yara International ASA (YAR) Earnings Call Transcript & Summary

Thank you and welcome to everyone to the telephone conference for Yara second quarter results. I am here together with representatives from Yara's management today. We have our CEO, Svein Tore Holsether; our Deputy CEO and EVP; Corporate Development, Lars Rosaeg [Technical Difficulty] and our Head of Market Intelligence, Dag Tore Mo as well as other key representatives. We hope you all have seen today's presentation and will therefore go straight into questions. Operator, if you could please open the first line question.

Absolutely. The first question comes from the line of Christian Faitz from Kepler Chevreux.

Yes. Two questions from my side, please. First of all, you had some 10% curtailments in Europe during Q2 as you elucidated at the 12'o clock webcast and mostly in urea. Where are we at present in the 10%? And on that -- in that relation on the Tertre site Belgium, which indeed looking at the map is a bit in the middle of Norway from a logistical point of view. Is there anyway you can build up logistics for ammonia supply from the coast? And my second question would be, with your large LatAm business, particularly on the trading side. Can you share with us some current demand patterns? And how does inventory look at the start of the application season in Latin America.

Christian, on the curtailments, we are somewhat lower today. I'm looking at Svein, but 7%, yes. On the -- I can maybe also comment on the Tertre curtailment. And Christian, you had -- I may not have caught the full gist of your question, but you noted that we have logistical issues that -- and that's what we comment on 2 main factors with the curtailment, one is that it's influenced by our long-term view of ammonia prices. And as we covered in our Capital Markets Day that we see attractive new projects in the U.S., and we are, as you know, looking closely at them, but a consequence of that, and we consider them. So competitive that they are likely to influence the price level longer term. And then the second factor is specific to the plant, which today does not -- is not set up well for ammonia imports. That's certainly something that could change in the future, but the curtailment that we've made is based on the -- and that's what the IFRS rules require as well that you test and value the plants based on their existing setup. We do have potential plans to increase flexibility there. But as of today, they are not finally approved projects. Yes. Sorry, I may have a said curtailment, but I was talking about impairment. Can -- on the final question?

LatAm America inventories?

Yes. No, it's going to be fascinating because -- our understanding is that probably due to -- I'm talking on Brazil in particular, but I guess the other markets may not be very different. Is that because of the very high prices and declining prices through last season, farmers have been extremely late in their buying of fertilizer. So that -- so there has been a lot of talk about inventories in the value chain because of these importers have taken in products, and there has been flows from -- on the nitrogen side from places like Russia, Venezuela, Iran that has difficulty finding other markets, for instance, but also from other places. But then just a matter of a few weeks, it turned totally around when the peak season is approaching. So you may have seen that also Christian that actually CFR Brazil prices, all nutrients have increased recently. And for urea, it's up to around $370 or so as mentioned, which is kind of even attractive from a spot sales perspective from the Arab Gulf. So those inventories very quickly disappeared and then you know we released kind of information from experts on the Brazilian market, there is much more optimistic tone now also on the total market, therefore, it is coming year or coming peak season than what maybe expected just a couple of months ago. So it seems to us like no longer an inventory issues in Brazil or probably then also the rest of Latin America.

Our next question comes from the line of Alexander Jones from Bank of America.

Two, if I may. The first following up on the impairment in Belgium. Can you talk about how that lower long-term ammonia price impact -- outlook impacts the attractiveness of your blue ammonia plants in the U.S. that you're considering building. And then the second question, just on CapEx guidance for the year. You mentioned in the webcast that there are $500 million of uncommitted funds within that. Can you give us any idea of the sort of projects that you're considering within that and therefore, how likely or not they are to go ahead within this year?

Yes. Alex, this is Thor. First of all, on the ammonia prices, I mean, these price assumptions are built into, of course, also our project assessments for the U.S. project. So this is -- it's within the logic, let's put it that way, when we say that these projects are attractive. So there's no change in that statement. It's more taking a balanced view of what this means globally. And as we mentioned in our Capital Markets Day, we see this as a -- of course, in isolation, it's negative for a European integrated nitrogen plant with no sourcing flexibility. We basically have one of them today in Tertre and as mentioned on the previous question, we do have opportunities to increase flexibility there, and we're looking at them, but we have no conclusions on that yet. But overall, we have a flexible production setup, and we see very strong business cases to invest in low-carbon ammonia in the U.S. and to use that to actually sustain and strengthen our finished product setup in Europe. So deep in the flow of the first question. What was the second one?

I can add, Svein Tore, in the meantime, I will address the second question. When it comes to the blue ammonia projects in the U.S., as we mentioned in our Capital Markets Day as well, is one of these where -- circumstances where an opportunity on -- in one country represents a solution to a challenge in another one. And what we've been facing with high energy prices in Europe is impacting all energy-intensive industries in Europe, but with the flexibility that we have demonstrated in our production and the ability that we have to bring ammonia into Europe, that gives us flexibility. And we have a unique setup with Yara Clean Ammonia being the biggest trader of ammonia in the world. We have 14 ships that transport ammonia, so we can bring that across from other parts of the world. And that helps us in the first instance now so that we could use this to handle energy price increases and fluctuations by bringing in ammonia from overseas. But the blue ammonia projects allows us to both take advantage of lower energy prices in the U.S. and maintain our finished goods positions in Europe. And at the same time, through the support of the Inflation Reduction Act, we can also decarbonize Europe as a result of this. So these are highly attractive projects, but it comes as a result of what we've seen in Europe. So it doesn't change anything. This is what we saw and the reason why we're making these adjustments and our business model is well fit for incorporating. Just that, now I hand over to...

Yes. Thank you, Svein Tore. On the -- so on your second question, Alex, the roughly $0.5 billion of uncommitted gross CapEx, it's a combination of smaller improvement projects in the production plants and potential smaller M&A. So these are all projects at an earlier stage of development and where we have flexibility. So it's -- there's a possibility that some of this may be phased into future years.

Our next question comes from the line of Joel Jackson from BMO Capital Markets.

I'll ask my question one by one. Looking at the inventory write-downs and some of the color you supplied on Slide 7. So it's largely NPK and ammonia impacts. Can you break that down, the write-down and the positioning losses also maybe by region, if you can give us some relative magnitude of that?

Joel, this is Thor. I mean the sort of region and product splits may be a bit is more detail than we have available externally. But I can say that the largest -- by region, the largest overall write-downs were in Europe, but we also had fairly significant share in the other 2 regions. And then the additional comment I would make is that the exposure changed during the quarter, mainly because we had strong order taking in Europe. So there is less price exposure in Europe at the end of the quarter than the start. While in the other 2 regions with lower order taking, we have longer positions at the end of the quarter compared to Europe.

Okay. And then the lag that we should expect kind of in Q3, how is that compared to normal lag in terms of price realizations versus some of the benchmarks you might see.

We don't have specific guidance on that, but I suppose I can link it a bit to the previous answer in that we have more orders in Europe than we have overseas. So it's -- and I would say that's a good to have a balance from our point of view, not least because we're seeing a shift in the market trends now where we're obviously looking at the first half, we had negative effects from being long. And then now with increasing prices, probably the risk is moving a bit more towards not being committed too far out.

Okay. And then just my final question. Just on the Indian dynamic, what is your latest views on sort of what Indian urea production is or import needs? And how that might change in 2024.

I'll hand that one to you, Dag Tore.

Yes. No, they are currently running at around 2.6 million tonnes a month according to the latest data we have which is around 300,000 tonnes or so -- 300,000, 400,000 tonnes more than what they were before this restarts or this starts of the new capacities. So also I would agree with those views that from an import level of around 10 million tonnes -- 9 million, 10 million tonnes might drop to around 6-or-so million tonnes or so based on the new capacities. I mean India is clearly where there has been the most new capacity over the last couple of years. Now, it's our understanding that these plants have started out in Poland. Maybe there is some supply overhang for some more months, but not very many months. So into 2024, the way it looks there, I don't think there is particular reasons to expect much more supply in India.

Our next question comes from the line of Priyanka Patel from UBS.

Just one question on my side. So for Europe, you reported negative $71 million of EBITDA, and that was impacted by the inventory effects. And because you haven't reported what exactly the inventory impact was. Could you comment on what margins were like for nitrate and NPK production, like were they negative or still profitable?

Yes. Priyanka, this is Thor. We have specified or indicated that the overall position loss in the quarter was roughly $230 million. And then I would -- in terms of the margin, of course, bear in mind, this is at EBITDA level. So we are -- if you -- I know, it's not sort of a number that is reported in our results, but if you look at the combination of revenue and cost of sales, you'll see that we had clearly stronger margins than EBITDA as you normally would. So -- yes. And then with regard to Europe, I mean you can get -- and this is something you can follow up with us offline as well, but you can get an idea of profitability by 2 alternative models on cash costs, one based on ammonia that is interesting and one based on gas production. So -- and of course, we've been reducing our curtailments, but we've been flexing a bit between those two. But overall, for the quarter, it's been more profitable to upgrade based on ammonia compared to gas. But sort of back to the start of your question, I mean, we have positive margins both overall and in Europe, but it's at the EBITDA level that we're -- but we are low this quarter. But if you should take out those position effects also that is a larger positive number.

Our next question comes from the line of Chetan Udeshi from JPM.

My first question was, I was just curious, you kept highlighting the strong order book in Europe. And I'm just curious, it's essentially the end of the season. So what do you exactly mean by strong order book in Europe? I mean, is this order book stretching into Q4 and Q1? So there is still that position risk to some extent because you're not shipping Nestlé in Q3. These may be very long lead time orders. So maybe if you can just talk about like what you exactly mean by order book, what is the timing in terms of shipments or delivery of that order book? Because I'm also curious to be raising the production run rates now in an off-season in Northern Hemisphere. Just curious from that perspective. And second question I had was when I look at your inventories, the absolute value at the end of Q2, it's come down quite a bit from Q1 levels, but still $3.3 billion. And historically, you've been running the business as more like $2 billion to $2.5 billion, so within that $3.3 billion, is there other -- like -- is there additional write-down risks? Or do you feel more comfortable that at the current prices or let's say, if the prices stay at where they are or maybe the most down 5%, you don't have to take another big write-downs. I'm just curious how that shape of inventory looks as we head into the year-end overall.

Yes. Thanks, Chetan. I'll have a start at both. I'll maybe start with the second one and let the others from the team chime in if there's anything to add here. But I would say -- I mean, to start with the write-down risk, what we've tried to show looking at the price curves that we sort of -- partly to explain the development in second quarter, but also to sort of see where we are now at the start of the third quarter. When we talk about a likely recovery of margins based on the price picture now it's specifically saying that well, nitrogen margins in particular, are much higher now than they were at the end of second quarter. So that's a positive. On potash, the pricing is basically flat into the third quarter, and it's down slightly on phosphate. But the net of this, as it stands now, it looks like, if anything, a positive rather than a negative. In terms of why the -- you're sort of underwhelmed by how much our inventory is down in absolute terms. Certainly, one factor would be there that, yes, we've released some inventory in Europe and of course, prices are down, and we have those effects. But outside Europe, it has been -- we have longer lags there from production to sales and delivery and with slower sales outside Europe, that will be a factor. In addition to that if you compare with the higher margin environment, our inventories will be valued at the lower of cost than net realizable value. Well, right now, there's less difference between those two numbers than when we're in a high-margin environment. So I'd highlight those factors. Yes, my team is not here. So it looks like I passed on that one. On the order book in Europe, I mean, you're touching on this sort of the -- classic sort of when does the season actually start? What are we delivering for the old season versus the new season? I think what we've put behind us a season, as we mentioned, that has a bit higher opening stocks last summer that has turned that positive in the end as we see it that the application rates are most likely up because we -- in terms of deliveries ended flat compared to a year earlier. But within that, this is always the case to some extent, but maybe some of what we've delivered in the second quarter will be for the new season and this is -- we think it's linked to the attractive prospects as well that the affordability ratios for farmers. I mean it seems like it's a really good idea for farmers to buy inputs now, given those ratios. So we -- when you add in them, for example, the -- clearly, there's a risk of higher gas prices and natural product prices head against the winter. So it's reassuring, I would say that both it looks like application rates are up for the season that we've just finished, and this position taking is quite lively for the new season. I don't know if you...