Yara International ASA (YAR) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Yara's First Quarter Results 2024. Please note, today's call is being recorded. I would like to hand over to Maria Gabrielsen, Head of Investor Relations.

Thank you, operator, and welcome to everyone to this telecom conference for Yara's first quarter results. I'm here together with some key representatives from Yara's management. We have CFO, Thor Giaever. We have our Head of Market Intelligence, Dag Tore Mo. And we have also EVP Corporate Development, Magnus Ankarstrand as well as others. Since we hope you all have seen today's presentation, so we will go straight into questions. And operator, you can please open the first line.

[Operator Instructions] And your first question comes from the line of Lisa De Neve with Morgan Stanley.

I have 2. The first one, during the presentation, you stated that there is still business to be done in Europe. Can you share, I mean, the level of activity you're currently seeing in Europe? And maybe also what you expect -- whether you expect activity to improve in Brazil and buying patterns to evolve? And then the second question I have is on blue ammonia. You have a number of greenfield blue ammonia projects that are currently up for FID in the second half of 2025. I mean, what would be your motivation for building a new plant, which is essentially adding ammonia capacity in the market versus perhaps also considering either buying grey plants and adding CCS to it or buying existing plants that are being built and are currently under construction or is this sort of part of the broader decision process? Any thoughts on that would be welcome.

Yes. Lisa, this is Thor. I can start on the Europe part. I think I actually heard 3 questions there for the price of 2, because the first one was both Europe and Brazil, but we'll try to answer all of them. I mean, current season is -- I mean, relating it a bit to our comments on the season as a whole, we've had a lot of price volatility, of course, we've had over the past few years. And understandably based on that, there has been more and more just-in-time buying, late buying throughout the season, waiting as long as we can in many cases. In addition, we've had some weather issues in the first quarter that has held back the physical application. And for those reasons combined, we are not surprised to see that there is still quite some activity ongoing into the second quarter. So this is -- this message is relevant. For example, I'm sure at some point in the quarter there will be -- new season price may be offset either on the question or answering side. Normally, sometime during the second quarter, we will have a price reset. But the way things look right now, that isn't necessary to do earlier than normal at least. Linked to those factors earlier on the season, we're still seeing a business that's being done for a muted application. Because in other cases, we've had a very, should we say, we've had an early spring and we've got primitive pre-buying by this stage, actually, the demand could be more about positions for next season. But what we're seeing now is that there's definitely business for current application. And the Brazil one, maybe I'll hand over to you, Dag Tore.

Nothing particular. I think we had a bit off season now in Brazil and -- but there's still demand and they are supporting by importing [indiscernible] you could say, at the moment. And of course, their [ barter ] ratios that are there are quite pre-occupied with the number of bags of fertilizer they have to pay for their grain. Still, it's improving quite a lot. So I would say that at least as far as I can see it, there is quite -- there is nothing particularly active, rather positive sentiment in delivering agriculture in Brazil.

Yes. And on Clean Ammonia, I'll hand over to Magnus.

Yes. I think several questions back there as well. But I think we do obviously look at all of the aspects that you mentioned. I think what we see very clearly is that blue ammonia fits very well into Yara's portfolio. We're of course also looking at supply-demand. And as one of the biggest ammonia producers in the world and the biggest ammonia distributor in the world, we of course have a quite good forecast internally of where we think that is going. So all those play into our decision there. We will only of course make investment decisions that we believe are value accretive for our shareholders. And I think, as I said, we are working on maturing several different options, but we will pick the ones that we believe are the most value accretive. I think another important aspect there is that probably -- I mean, there are -- we are one of the few or the only company in the world who can offtake sort of the amounts of ammonia that would combine other projects or projects like that as well, which of course, gives us a lot of flexibility in terms of how we want to play and how we want to develop that market going forward. But I think to summarize, we are looking at what options would benefit value creation for our shareholders the most.

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

A couple of more on decarbonization. I guess, to follow-up first on your remarks there, Magnus, you talked about sort of attractive returns for shareholders. Are you able to quantify that in any terms in terms of IRR or ROCE threshold that you have on these investments in order to go ahead with them? And then the second is that during the quarter, you signed an offtake contract for green ammonia from a project in Oman. I'm interested in that aspect, whether there's an opportunity here for you to sort of outsource more of your green ammonia production to others who might have lower IRR thresholds than you rather than producing it internally or whether there's a strategic value in having captive supply as well?

Yes. I think core attribute of our business model is exactly that, right? So we have a mix of own production and sourcing it. Roughly 30% of what we handle today, we source from external parties and the rest we produce ourselves. And then also of the ammonia we handle, we sell 50% to external parties and take 50% ourselves. So I mean, we have quite a lot of flexibility there. And I think we certainly would want to keep that model because that gives us a lot of optionality. At the same time, in this business, of course, it's very important to be asset-backed as well. So I think the combination is good. And I think there's obviously a significant difference here between blue projects and green projects from a technology and market perspective. The green projects are -- or blue projects are -- have much more certainty around a lot of different factors. And whereas some of the green ones can be different drivers, both sort of on the electricity side and uses side. And as you say, it seems sensible for us to take the position like what we've done in the [ Mali ] example, where we are the offtaker. We are also in the commissioning phase of our own pilot project, which is the small one, but it I think adds quite a broad portfolio here, and I would say, quite good insight into sort of the profitability and the drivers of these different types of ammonia projects. So I think we will review both avenues. But again, we are looking for significant returns in all our projects. But particularly as we go up, we have sort of numbers on what that means, but we will do that in due course, probably in those 2 key divisions.

Yes. And Alex, I can add, I mean generally speaking, I mean, we have rates of 10%, but before we start the risk adjustment, you may have seen our comments today that we are -- we need to have an attractive return on a risk-adjusted basis. As I'm sure you will agree, there is the -- any green ammonia investments these days, especially involving in cross-border exports and so on are not free of risks. I think you can deduce from that, that we're looking for a considerably higher returns under 10%.

I'd maybe just add one thing. It is of course -- I mean, there are quite a few [ hardwire ] drivers in the game as well, like, EPS [indiscernible] a fundamental driver for our decision making and also why we, for instance, announced last year our investment into capturing existing CO2 gas, which is obviously the case that has a very clear revenue side in the sense that we avoid significant expectation from doing that.

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

I've got 2. Firstly, I noticed in your EBITDA bridge that you booked about $47 million in the other line, I think $20 million of that is fixed cost inflation. So can you maybe explain what the remainder is and whether that will reoccur in the remainder of this year? And then secondly, I guess, there's been a lot of back and forth around whether the Chinese export restrictions will be lifted over the past few weeks. I was just wondering what your views are there and whether you have any further insights on the ground?

Yes. Rikin, on the first one, we had about $12 million lower other income. And this is related to -- yes, another income that we have in Italy last year. We also had it this year, but it is lower this year related to gas interruptibility and it's linked to lower gas prices. And the remainder is or most of the remainder is lower interest income from customer prepayments and also linked to the price level. Maybe I'll hand over to Dag Tore on the China question.

Yes. And I think that we don't have any hard facts that is not in the public space, but I can give some comments around the possible interpretation. I think it seems pretty clear that the Chinese government are typically high stream, high priority in securing a plentiful supply of nitrogen to their farmers at a stable or better price level for their farmers. And it seems to us that it has that kind of priority, has become even more important over the -- probably, let's say, last year or 2. So that's some of it. So what then happened is that they have not exported anything in first quarter and there was an expectation based on pretty strong domestic production that it will soon open up. And the Chinese government indicated that they can start export processes -- approval processes again. And as soon as that was known, the producers in China actually raised the prices in the domestic market based on the assumption that they could now turn to the export market. And that's not clearly have offset the government quite a lot before they fast track immediately and said that, okay, you can still accept applications, but you cannot expect to be allowed to export at least through May; some are talking about June, some are talking about July. So this of course makes it very unclear for the market how much to be -- how much can you confirm from China because I think many kind of confirmed quite a lot because their supply situations are being rather good. But this may also point to the fact that there could be that data consumption development in China is also quite positive that makes it kind of a little bit more a question mark also for the government. So that decline was one of the key risks for the remainder of 2024 is what level of export the Chinese will manage to supply.

Next question comes from the line of Aron Ceccarelli with Berenberg.

Ask if you can provide a little bit more color on marginal producer capacity coming back. I believe you guys switched your Italian plant in Ferrara recently. We saw some players in Poland and some in Romania coming back. Just wanted to have more color around what kind of speed you see -- at what speed you see players coming back? And what expectation do you have here for the next remainder of the year?

Yes. Looking back a couple of years in 2022 when the gas -- and there were some curtailments provided in the second half of '21, gas prices in Europe increased during the second half of '21 even before the invasion of Ukraine, but there is a big hit in '22 [indiscernible] and Central Europe or EUA if you may, lost roughly 2.5 million tons of urea supply of production and of course other products. So that is kind of the range. You're talking about the high end of the range of what possibly can come back, some of it -- a little bit came back already in the second half of last year. But you are right that it is probably more of an impact this year. And you may have seen also that [indiscernible].

They announced just now recently that they produced 30% more in March than they did March last year, for instance, and we are also ramping our plant also. So yes, we have 1.22 million tons in urea maybe from other products, it's kind of the I think potential of how much will be returning. Again, [indiscernible] to the gas prices also going forward.

Your next question comes from the line of Tristan Lamotte with Deutsche Bank.

2, please and kind of related. The first is, I was wondering if you could talk through what you're expecting to be the impact of C-band on your profitability and how you expect that to evolve in the short and long-term? And then second, you made a comment about the impact of Russian exports to Europe in urea. Could you elaborate on the relative cost position between the different global regions at current feedstock prices and how you expect that to evolve?

Yes, I can start maybe on the C-band part. I mean, a bit pessimistically, I mean, we have the EU ETS today with basically not the level playing field for European producers because we pay a carbon cost, while import just doesn't. And then gradually over the next 6 years, we will get [indiscernible] then while the EUA lines that are more phased lines. And we actually touched on this in the fourth quarter presentation, how this -- provided we continue to decarbonize, which we're doing and we mentioned the example this quarter that we have improved our energy intensity per ton to the tune of roughly $40 million annual EUA savings. So provided we decarbonize, and then if you see the main nitrogen imports, our urea, which is hard to decarbonize than nitrates, then we actually see this as an upside going forward because we will then or at least are likely to have a market price which is set by again the highest cost products, which is like -- well, decarbonized products will be the highest cost. So again, with business linking into our strategy for clean ammonia too, but a key route to decarbonize nitrate is to have decarbonized or low-carbon ammonia feedstock. And then as to note also that the advantage we have in nitrate is that the product doesn't actually contain carbon and nor does ammonia, but you decarbonize the -- you capture the carbon and the process of producing it. Whereas on urea, you can't actually do that because the product in the end still contains carbon. And that sits on the C-band, that's how it is measured. Yes, the second question was on the imports and Russia. Dag Tore?

Yes. I mean, it's not that it's not something new that Russia has a very low gas price level in Russia and it hasn't been any higher. Recently, the ascension of the gas because of a sharp reduction in the flows through the pipeline through to Europe. So it's also -- so it's clearly very different. And I would think that it's a bit high. I think I don't have the exact number, but I mean the Henry Hub price today in the U.S. is 1.6%, 1.7%, I think that it's probably not very different. And alongside some of our producers it's probably low end of the cost curve. So yes, of course, not important for a price that's setting in any way, but illustrating the fact that it's very profitable for -- that production is very profitable.

Our next question comes from the line of Chetan Udeshi with JPMorgan.

I have 3 questions. The first one, probably for Thor. Why is the maintenance CapEx of Yara so high? I mean, it's $900 million. It's 6% your annualized revenue when typically maintenance CapEx for other companies tend to be more like 3% to 4% of revenue. So what is different at Yara or is this just some one-off CapEx that you have this year which is not something we should think about as recurring? The second question was a bit more difficult one, I'm sorry, but I couldn't help asking it, which is last year, your volumes were falling and hence the earnings were depressed. This year volumes have recovered and even then the earnings are depressed. Is there something you can change in terms of strategy, because it seems this market is inherently just structurally more difficult? So is there something that you can adapt in terms of strategy? That means that at least you can have some sort of an earnings upside with volume growth. And the reason I'm asking this is, previously you had pretty good dividend. And based on what you guys are doing today in terms of earnings and the dividend policy for investors, there's not even a sustainable dividend at the moment. So just curious if there is a sort of internal discussion on whether you can be sort of base the strategy somehow?

Chetan, I think you said 3 questions, but that's 2. I'm glad you already pointed to me for the first presumably less difficult questions. I mean, the maintenance CapEx, you're comparing to other companies and industries, but that's the first part. And I think if you stay -- if we stay within the fertilizer business, as you know, we have a wider and more global and more integrated footprint than mostly other big players. So where most of the others are single nutrients, commodity-focused and not engaged in downstream activities, we have multi-nutrients, we have specialty as well as commodity and that's one part of that is more complex plants and NPK plants or an integrated NPK plant is more complex than an integrated ammonia urea plant. And we go further into the value change. We have terminals, blending units and so on. So there are a number of factors related to that. And of course, it's not just an added expense or investment. We also get higher premiums in the market. So sort of that's -- there are pluses and minuses to that equation. But having said that, of course, how we allocate that CapEx is hugely important and something that we are always working on and in particular now as we mentioned, evaluating the portfolio. And for example, within our production launch, we made a clear distinction between the higher returning -- consistently higher returning plants and the others in terms of how we allocate funds. The second question, we can -- we may have some comments around the table. But -- and of course, the varied [indiscernible]. Maybe the first place I'd start when you -- sort of you're comparing or looking in particular the last year or so, I think it's maybe an obvious statement, but we are in a cyclical business. And I think if you look at '22 and '23, I think it's -- there are good reasons to see those years together, the first of which where we were able to use our flexible business model, our global position, our ammonia position to really cope really well with a high energy cost situation, which probably many thought would be more some engine for us earnings-wise as well as operationally. But we're -- and then as you mentioned, '23 was challenging. We had falling prices for certainly the first half of the year and also the end of '22 and lots of position losses. But if you look at those 2 years together, again, with the sort of cyclicality comments in mind, if I remember right, you're looking at an average return of 14%, 15%. Of course, we are working on our strategy. And I think we have quite a number of initiatives there, both in terms of improving what we already have across the portfolio, but more importantly, how do we add up for the future, and the clean ammonia growth is a really important part of that. I think the -- just to briefly touch on dividends, yes, I mean, you will get some years where as we say, dividend capacity is low. But then we -- the previous 2 years, I would argue, it's been pretty high. So again, through the cycle, it's a good return. I don't know if you want to add?

Yes. I think -- I mean, of course, there are structural changes in different markets. But I think in a way -- I mean, those changes are in a way reciprocated in other markets. And I think this is where the strength of our global business model comes in, our flexibility on the low gas, for example, our ability to ship products in different parts of the world and optimize on a quarterly and annual basis. So I think in a way, we as a company are well positioned for structural changes in the market, which in this industry happens from time to time. And we are, as Thor mentioned, working on making adoptions like that and then some of them we can make quite equally and then some sometimes require more structural changes. And I think the move into green ammonia is of course in a couple of the others. But I think there's also a lot we do that are working to optimize the [indiscernible] also on a kind of a shorter timeframe. But of course, with the volatility that we've seen over the last 2 years, it takes time sometimes for that to settle as well. And as Thor mentioned, I mean, we have to also see this period a bit on the one line.

Your next question comes from the line of Joel Jackson with BMO.

A couple of questions, I'll go one by one. Just looking back to the China dynamic, so we've seen the last, I don't know, 3 quarters, Chinese urea production rates really pick-up, Chinese urea production really pick-up. That's been despite obviously a more restrictive urea export policy, and we're going to see what happens in the months to come. Can you give a sense of why -- what's going on in China that the production rates are going up? Do you see demand going up? I've seen some reports that maybe non-ag urea demand has been going up. But are there concerns that if the taps do turn back on for exports that there's going to be a flood in the middle of the year because production has been so high?

Yes, please, Dag Tore.

Yes. I think demand is going up. If you just look at 2023, if you just look at the parent consumption and ignore any inventory changes, I mean, cost must go up by somewhere between 5% and 10%. And I mean, it's hard to understand why these inventories would be very high at the end of that year anyway. So I think there is an underlying positive development on demand. And I think food production seems to be like -- increased food production, increased yields are quite important in China recently compared to, let's say, some years back when they were more focused on concerns around local pollution, environmental issue, no green use efficiency, et cetera. So they've been hit. To what extent that has anything to do with the general geopolitical situation, I don't know. But of course, China is very depending on food imports, both grains and oilseeds. So what will happen this year, I don't know, nobody does. As we mentioned, I mean, there is a range of expectations out there, but it is interesting that the domestic prices in China still today are in the range of $300 giving all producers hefty margins on their -- above their variable costs. So it's an interesting question, how much excess supply is there. As we say, we will probably find out as the year proceeds. But as I answered earlier question, I think it's one of the key risk factors on the supply side in 2024 and it's hard to know the answer.

Okay. My second question is, can you help me be a little more granular on the performance in the Americas in Q1 and the outlook in the Americas between North America and South America? So maybe you can breakdown how the quarter played out, specifically all the different factors in North America versus South America, please?

Yes. Not a great granularity, I'm afraid. I mean, we report at the Americas level externally and need to stay with that. But I think -- I mean, one perhaps somewhat obvious observation is that the Northern Hemisphere is in peak season in the first quarter, while the Southern Hemisphere is not. We've mentioned the main factors being of course even being a main season. North America is still exposed to lower prices compared to last year. And then also in Brazil, we mentioned kind of just-in-time buying patterns here. So both are impacted. I think you -- as you probably know, I mean, we are more integrated in terms of our own produced product than North America and the effects tend to be bigger, for example, on a plant like [ alpine ] in terms of nitrogen price exposures. In Brazil, the business model -- I mean, in addition to that not being high season there, but the business model is more based on imported and third-party products. So you can at least wait the North America part a bit more on the South America part.

Next question comes from the line of Charles Bentley with Jefferies.

So just the first one, I mean, just on this kind of, I guess, measured tone on CapEx projects and the returns focus. Can I ask what variables changed the most? Is it around build costs as you look towards FID? Is it basically the kind of core economics of U.S. ammonia into Europe kind of mid-term gas prices might not stack up in quite the same way? Is it kind of higher risk in terms of regulatory certainty? Just kind of any thoughts about kind of those 3 factors, both the economics versus risk. The second question related to that is, basically, there seems to be a mix of messages between some projects being in progress and others not. I guess, if I look at like CF and JERA going forward with the JDA in the last few weeks, I know you signed an MOU with JERA. So just any thoughts on that relationship where that's kind of next steps there? And then just kind of finally, just in terms of this point around currencies and demand in Europe, I would have thought we're basically in the very, very kind of later days. So is there anything you can say around when you think that would be kind of fully done? And if I can try my luck, where you'd expect deliveries to be versus that kind of average on Slide 15?

Yes, I can maybe start on the Europe part. I mean, it's -- if you look back at past seasons, I mean, the point in time at which new season prices are issued either by ourselves or other than the industry, will -- I think it's maybe the nearest you have to a point with which you're moving into the new season. I would say, a normal timing for that is around mid-May. We've had some years recently where we've gone out earlier and that's been linked to situations where as we've seen in our presentation where volumes have been lower. But this year, we're seeing that currency and demand now. So it's looking like a more normal year line-up. So Magnus can comment a lot on the ammonia side of things. I can maybe just introduce by I think in terms of the factors you mentioned, it's all of the above and then some. Of course, these are projects that are -- as we look at our alternatives, it's gas price differentials matter. Of course, construction cost is available, incentive structures, both in the U.S. and Europe. But maybe sort of the advantage that we have I think is that the internal synergies for Yara are probably stronger than all of the players because we -- this isn't -- in the case of building a plant in the U.S., it's not purely just the plant economics, it's also how we can utilize that into both our global ammonia trading and shipping and not least into our European system, as we touched on earlier in terms of decarbonizing nitrate and NPK production in Europe. And then on top of that, the growth opportunities into other applications. But I'll hand over to Magnus.

Yes. No, and I think it's -- I mean, your point about the important factors, right? I think obviously, we don't comment on other companies' projects. But I think -- I mean, it's worth noting that I think even -- or the companies who are incumbent in this industry like ourselves, I mean, you see it takes time to develop these projects, right? And I think that's specifically because we have the experience and we take our time to evaluate those risk factors, construction costs being one of them, very, very carefully and look for ways of doing this that creates the most value. We also have a very valuable experience from being in our project in Freeport together with [ VFS ] is the last project to complete of ammonia projects in the U.S. Gulf. So we have recent experience there as well. And I think we take all these factors into account and evaluate the different options very carefully and that simply takes time to develop, which we know from projects in the past as well. And I think it's no surprise, as we've seen in the past as well, latest in 2015 or '13, '14, '15, '16, is that the discrepancy between projects announced and projects realized is a very significant trend. And again, we will sort of choose the options and the routes that creates the most value for our shareholders. As we've also announced, we are developing, I think all of our opportunities and partnerships as well. And there as well, we have a very good success story from the same region in recent years. And again, we'll evaluate that very carefully. I think again -- I mean, steady [indiscernible] of course, but it is absolutely crucial to realize the project of the magnitude that we -- an ammonia project is that you have capability, right? And I think today, very few companies worldwide have the capability to offtake ammonia project of this magnitude as we are. And it fits perfectly well into our business model. And that also of course gives us a lot of flexibility in terms of how we approach getting hold of that ammonia. And again, gives us the flexibility to maximizes value creation. But as Thor said, it's all the above as in any project, but -- and you mentioned the important ones.

[Operator Instructions] Your next question comes from the line of Bengt Jonassen with ABG Sundal Collier.

Thor earlier stated that there are still some last minute buying, I just wanted to relate that to your working capital. Is there a structural change in the market that means that you need to carry more working capital than normal or should we see some working capital release during 2024?

Of course, the structural change, as we've mentioned, is structural, at least we've seen more just-in-time buying in the recent seasons. Not sure whether it's structural or in a way, the structural change probably. We saw the risk appetite in the distribution chain go down after the financial crisis. But with the extremes we saw on gas pricing, particularly in '22 and part of '23, there was a sort of, if you like, tightening the screw there as well. I think in another environment that's more stable. I suspect there's some discounted price returns. In our case, I mean, we tend to manage that more in terms of our production levels. It's not like we're sort of building up or can build up huge stock level. So this is part of the background also for how we've, over the years, have this set-up with new season prices, incentivizing, buying throughout the season not just-in-time because we have to, as a total industry, always spreads on that risk. And then going back to the effect this quarter, it is -- the operating capital part is partly linked to the -- okay, the -- you had a slightly later main season this time. So let's say, in a normal year, you'll get that operating capital. You might have actually started releasing some of that already by the end of the first quarter, if you had a good level of buying in February and March. But this year, it's slightly delayed pattern until the operating capital exposure is -- runs a bit later as well.

That concludes our Q&A session. I will now turn the conference back over to management for closing remarks.

I also want to thank you to everyone for [indiscernible] questions. Have a good day. Bye.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.