Yara International ASA (YAR) Earnings Call Transcript & Summary

Yes. I don't think we can comment on prices. I mean, the tender you mentioned is for, I think, about 400,000 tonnes. So I mean, we, for sure think that there will be demand for green ammonia. I mean that's also why we have entered into sourcing contracts ourselves. I think what we're saying is that we don't believe that, that will be the basis of decarbonization of the industry in Europe. I think that -- for that, it needs significant scale. And obviously, as well, that's the limit for how far the public subsidy can extend. So that's why we believe that blue ammonia will sort of create the foundation for our decarbonization and the industry's decarbonization as well. But for sure, we also see a demand for green ammonia and we're participating there as well throughout the contracts using our system.

Our next question comes from Aron Ceccarelli from Berenberg.

My first one is about supply and demand. What's your degree of confidence about the nitrogen market tightening from here in the second half, considering that Egypt should possibly resolve its gas crisis in the next months. Russia is still pushing some product into the market, while at the same time, marginal producers are still able to generate positive margins. And would you envision another opportunity for a new price increase in your nitrates business? My second question is about your cost cutting plan since you already kicked it off already in Q2. So I would like to understand a little bit more about the phasing of these cost savings in the second half of going into 2025. My third question is more mid- to long term. And I'd like to understand what kind of direction Yara is taking from a strategic point of view as you get rid of some of your [ tail ] return assets, and it looks like you are focusing more on distribution. So how is the model going to look like in a few years? Are you expecting to reduce some of your manufacturing position and increase your distribution capabilities. Is that correct?

Thanks for the questions. Maybe start with the supply-demand part there, Dag Tore.

Yes. I think our confidence in operations are not kind of exclusively targeting the second half of the year. I mean almost short term, it's a bit hard to say, it's very volatile. But the demand and supply side, what we see now with the China situation; with Egypt, gas supply and other things. So our operation is more that there is now for the next 3 to 4 years, very limited new capacity in the pipeline. So that should give a good basis for solid market fundamentals on the nitrogen market. So we are not trying to give any precise predictions on the third and the fourth quarter. That was not the intention.

And -- I mean I can comment also on the nitrate part. I mean we -- we always need to relate to what's going on in the rest of the market. But I would say all other things equal, we are normally looking to raise the premium, if not the price for nitrates, the closer we get to the application season. But this is always an evaluation of the market environment, including other nitrogen prices, crop prices, et cetera. In terms of the phasing of cost savings, as mentioned, we will be spending most of the second half in a way preparing for launch of action. So on the other hand, we mentioned that we already have some early effects in terms of the quick win type actions we've implemented. So without providing any sort of numerical guidance, I think it's fair to assume that most of the significant savings come during next year, but we intend to update on this minimum quarterly as we move forward. In terms -- on your last question, which is -- others can chip in here as well, what is the ROI going to look like in a few years. I mean, I can maybe start with referring to Svein Tore's comments in the presentation that we've defined a key principle here is to prioritize core business where we describe that as ammonia, straight and end-based premium product operations with competitive scale and feedstock. So I think that's part of the evaluation and when we look at our portfolio. And if you look at our list of plants, of course, there are some that are very large scale and some that have a better feedstock position than others. So that can already give you an idea of what we're looking at. And in addition, on the feedstock part, the blue ammonia part and the potential to have production in the U.S., which can increase -- improve the feedstock position effectively also in Europe, is a key element of that. Lastly, I'd maybe just comment, I don't think there's anything in this to sort of say that we're moving more towards distribution versus production, but we need to strengthen returns across [ CRO ], and that involves looking at the portfolio, both in terms of production and distribution.

It's Svein Tore, if I could just add into that. I think you've seen an excellent example of this during this week with the agreement with PepsiCo Europe to work together with them and their farmers to reduce their carbon footprint. And that's not only a fertilizer cooperation. It's the combination of fertilizer, it's digital tools and agronomic advice as well in one package. And keep in mind that for the potatoes that PepsiCo Europe sources, half of the carbon footprint of these potatoes, they are from either fertilizer production or in field use of fertilizer, and we can help them to address both of that working together with the farmer. And it's part of the work that PepsiCo is doing to reduce their emission, then to reach their target of 40% reduction in greenhouse gas emissions by 2030. So it's an example of a full value chain collaboration, but also one that highlights what we can do today with existing nitrates in Europe that have about half the carbon footprint of imported material. We can get started today, helping to reduce the emissions, both on the product but also in field, and you will see products in the supermarket shelves from PepsiCo utilizing this, already disclosed since we already got started on it. And then with that as a basis, we'll also phase in products from the CCS project and also with solutions with green hydrogen, green ammonia as well. And I do think that we have a very strong position here with our decades of knowledge, understanding of soil and the agronomic competence that we have out there and it's about putting this together, and we see that a number of players in the food sector are now working hard to deliver on their targets as well. And common to many of these projects is that a significant part of the reduction will happen to -- will happen in the field of the farmer, and that's straight to the core of Yara's strategy.

Our next question comes from Lisa De Neve from Morgan Stanley.

I have 4 questions of which 3 small follow-ups. My first question is, can you please share what you're seeing in your nitrates environment. I know that the volumes you're selling are much better year-on-year, but still well below 2021 and 2022 first half levels. So any color on the dynamics here in the market would be very helpful. And then in terms of follow-up, in terms of the cost optimization program, can I just double check whether one of these -- whether there's any one-off costs to deliver the $150 million of fixed cost savings. Then secondly, on the CapEx program, how should we think about your maintenance CapEx on a midterm basis and on a constant scope basis? Or should I actually understand that next year's maintenance CapEx reduction already assumes some potential closures in the guidance that you're providing? And then lastly, a small follow-up on Aron's strategic question. I mean how do you think about your regional asset presence over the midterm and the weighting between owning production assets in Europe and anywhere outside Europe.

Lisa, thanks for a nice bouquet of questions. We'll start, I think, now as well with Dag Tore, you want to comment on the nitrates?

Yes. Following the curtailments due to the higher gas price environment in '22 and into '23, or even slightly in '21. There has been a return of nitrates again in the market, which is a bit of a higher share. So that has happened. As to the total nitrogen market in Europe, if -- I guess that's also what you kind of alluded to in the question. The consumption has not returned back to where the pre-2022 levels. So there looks to have been another kind of structural decline in nitrogen consumption in Europe, it has increased nutrient use efficiency as a result as far as becoming even better at getting crop output based on their inputs with the overage seeds or all the other means. I think it's a little bit harder to judge how much that structural decline is because there's still also this year, been a lot of weather problems, other problems, liquidity issues, volatility, et cetera, et cetera, financing. So -- but I think that -- I think there has been a drop in the nitrogen use level in Europe following this, the level with -- compared to what we had in 2021.

I can carry on, on the next course of questions. In terms of the cost program, will there be one-offs, possibly, it's a bit too early to say. We need to go through the evaluations this autumn, how we will implement. But of course, it's not unlikely that there will be, in some areas necessary to have one-off costs to implement, but we'll come back on that topic. In terms of CapEx, we've communicated today that this $800 million to $900 million level is roughly where we need to be with the existing asset base. So there's nothing in there that assumes closures. But having said that, we are looking at the portfolio. So depending on what decisions we make and where our portfolio is longer term, we will update this guidance. Then the final question was in terms of our regional footprint. I mean, the others may want to comment on this as well. But I would say that excluding U.S. ammonia that we're evaluating now, overall, it's -- and even as part of that case, we see a high value in the existing assets, as mentioned, provided they have scale and competitive feedstock, whether that's gas or ammonia and relatively high cost of construction, if you like, if you want to build something, especially on finished fertilizer and complex fertilizers. So as we've communicated, a key part of our strategy now is what we call future-proofing existing assets, again, provided scale and feedstock by most likely partly by improving our ammonia availability and especially on low carbon ammonia.

We have no response from Lisa as of right now. We're going to move on. Our next question comes from Tristan Lamotte from Deutsche Bank.

Two questions, please. The first is on the environmental credentials of urea versus calcium ammonium nitrate. I was wondering if you could give a broad indication of the relative greenhouse gas emissions of the 2 across the whole cycle and does how that's calculated matter? And is CAN always the preferred product from an environmental perspective? And then the second question is on working capital. How much of the working capital inflow for Q2 is temporary and likely to reverse in the rest of the year based on normal seasonality? And is it fair to say there should be a working capital inflow anyway for full year 2024, given that prices are likely to be down overall year-on-year.

Tristan, thanks for the questions. I can maybe start on the first question, others may chip in. I mean it's complicated, I guess, is a start point. And there is quite some variation in terms of what crops, what climate, soil types and so on, how urea performs versus nitrates. One, it's clear that the -- should we say, the upstream ability to decarbonize is very strong on nitrates because you -- basically, you're flexible on feedstock. You don't need to have integrated ammonia production with nitrate production so that you can have gray, blue and ultimately, green ammonia into nitrate production, which basically decarbonizes also the nitrates. But then when you use this on the field, there are different scenarios and different emission profiles. So that -- it's quite clear to us that there are -- both these products have their uses in different areas.

Maybe just to add there, I mean, how you apply the products also matters quite significantly in terms of the in-field emissions. And that's also part of our value creation -- sorry, value proposition towards farmers is to also combine our product deliveries with recommendations traditionally for yield and quality, but now more and more also in terms of how using our products -- using a combination of our products will reduce infield carbon emissions as well. And then obviously, from a CBAM perspective where the main -- or CBAM and ETS, where the major financial impact of this now takes place -- I mean, will take place in Europe. Then, of course, the difference, as Tore points out, is significant. I mean on nitrates and nitrate production, you have the ability to import low carbon ammonia. And that way reduce or almost remove CBAM effect or in the case of [ ROIC CCS ] in point to the strong scale remove the CO2 tax, whereas urea will inherently or inherently chemically contain CO2. And consequently, a significant CO2 footprint as well. So kind of the value difference there between decarbonized nitrates versus urea into Europe will, of course, be significant.

Yes. And then the second question was on working capital, temporary, seasonal. As we commented in the presentation that, yes, it is a seasonally normal operating capital release, roughly $0.5 billion in the quarter. It was a couple of hundred higher than that last year, mainly because the -- that was an environment where prices were falling quite heavily from the peak levels at the end of 2022. And yes, I mean, it's -- this is always exposed a bit to demand patterns and weather and so on. But most of the time, the second half is where we have a seasonal buildup, the first half where we have a release. And then the phasing between quarters in particular, is sensitive to early late spring and harvesting demand patterns.

The next question comes from Charlie Bentley from Jefferies.

Just a few. There's one on the cost savings. So you've had about $15 million of incremental fixed cost inflation year-to-date. So that run rate by the end of 2025, you'd be something like $300 million of gross cost savings to get back to $2.4 million. Is that fair? Is that kind of [ 11 ] fixed cost inflation you've seen in the first half and a representative of what we should expect -- so just kind of the growth for us is that [ $150 ] million would be helpful. Secondly, just the return on capital and implications of the [indiscernible] project, that's going into the outlook statement to specifically say it needs to be near 10% greater return. And if I look at Slide 17 in the deck, I can just consider the kind of the return implications. When you're thinking about your returns, are you using CapEx for like partial ownership of an asset you [ consider ] structurally. I mean, I know that this is going to be partnership owned. But just thoughts around what's included and isn't -- is it going to be kind of over the fence like Freeport? Just trying to think about the structure there? And then finally, just one on kind of second half demand. So I mean, from a profitability, it's pretty terrible, like soft commodity prices have remained very, very weak. And sentiment doesn't look so great. So just thinking about applications demand as we go through into the second half to kind of [ balance ] this in Europe and the U.S. and your expectations for how that should evolve?

Charlie, thanks for the questions. We'll -- your line is not fully high quality, but we'll do our best to see if we heard your questions right. I think the first one was on the fixed cost target and inflation effects. So I'll -- assuming I'm on the right track, we've said that the -- yes, okay, good. And yes, indeed, it is a nominal target. And then so we have -- compared to the last 12 months, last 12 months, we have $2.55 billion and the target is then to be at a run rate of $2.4 billion at the end of 2025. And that's depending on the assumptions you use means that sort of if you want to do this in real terms, it would look something more between $200 million and $300 million. Then the second one, I think, was sort of about the returns on potential blue ammonia in the U.S. and how we define that maybe a bit similar to the earlier question on whether that's sort of included, integrated returns in Europe and so on. But you mentioned partnerships and over-the-fence model.

Yes, maybe I can -- maybe I didn't hear the question fully either. But I think as I mentioned earlier, when we talk return, we talked about return on the project in itself. So we don't include sort of upgrading into nitrates or anything like that, what happens outside the project. So it is truly sort of a project measured on the ammonia market, et cetera, right, we typically do for a project like this. It's a bit early to sort of share the exact structure of the project. I mean, I think you referenced Freeport and hydrogen over the fence. I think we are certainly looking at and have evaluated all options to make a project that is as good as it can possibly be, including partnerships and also really trying to leverage all the competitive edges that we have with our system, but also what potential partners can contribute with their capabilities as well to make something that we believe is truly competitive also relative to others. So that's -- I think that's as much as we can share at this stage around the structure, but we're certainly talking return on the project itself.

And today's update was sort of trying to fill in some of the blanks in terms of the concept and thinking around this. And of course, we'll get much more specific on the profitability and the other terms of the setup that we're looking at as we mature the project and well ahead of decision.

On the crop price development and impact. I guess it's -- we haven't seen any kind of massive movements, I would say. It seems like the demand is still strong in places like China and India has been tendering. It's solid in Asia. Latin America is approaching the peak season. So there is quite healthy demand out there. And as you were indicating on the Northern Hemisphere, there is, of course, a little bit different dynamic. In the U.S., you may see that, let's say, urea prices in the U.S. Gulf are well below import parity and nothing going on there. So there's no kind of spot [ comet ] that finds its way to the U.S. market now. It's clearly off season. And that -- but that's not -- that's quite normal that, that is the situation in the third quarter. But I can also mention that, let's say, in Northern Hemisphere regions where farmers are sitting on quite some inventories normally and not, let's say, retailers and so on, like in the U.S., including in Europe and Canada, there is a normal kind of early season demand from the farmer segments of those markets as also normal, probably partly due to some hedging and risk spreading among the farmers. So we have -- we do not have any problems selling our product, neither in Canada, nor Europe at this stage to put it that way. So I guess it's a little bit early to say, but of course, lower crop prices, it's potentially one negative factor compared to the situation where they would have been stronger.

That concludes our question-and-answer session for today. I'd now like to hand back over to Maria Gabrielsen, Head of Investor Relations for final remarks.

Thank you, [ Sharon ]. Thank you for dialing in and for your good questions. Goodbye.

Thank you for everyone for attending today's call. Have a wonderful day. You may now all disconnect.