Yara International ASA (YAR) Earnings Call Transcript & Summary

Hello, and welcome to Yara's second quarter results presentation. The presentation today will be held by our CEO, Svein Tore Holsether; and CFO, Magnus Krogh Ankarstrand. I would like to remind you that once the presentation is done, we will move straight into the Q&A session. I will come back with instructions on how to ask questions in the Q&A. But first, let's start the presentation. It's my pleasure to hand over to our CEO, Svein Tore Holsether.

Thank you, Maria, and good morning, good afternoon, and thank you for dialing into our second quarter earnings call. As always, I will start with our safety performance. And in first quarter, we reported an increase in accidents. And this is also reflected in our second quarter numbers. And this is something that I take very seriously. And -- we've been working diligently across the entire organization to continue emphasizing the importance of our safety culture. And we had our annual safety day on April 28, which engaged colleagues across the world to increase the awareness and the commitment to the Safe by Choice approach because we know how to improve safety. And I am pleased to see that we have seen improving numbers towards the end of the quarter. And hope that we're able to continue to turn the negative trend that we've seen in the recent year. This is our license to operate. Every accident is avoidable, and we will bring our TRI down to 0. Let's then look at the key elements for the quarter. We report an EBITDA excluding special items of $906 million. That is an increase of 39% from last year, driven by increased margins. In addition, we did sell parts of our surplus EUA quarters with a gain of $153 million, and that is a special item to our EBITDA. This is the highest quarterly EBITDA in the last decade, except for 2022. Return on invested capital is 14.3%, reflecting strong quarterly margins further supported by sale of EUA quarters. While margins have been strong, continued market uncertainty impacted demand in off-season markets, particularly in the Northern Hemisphere. And as a result, demand was deferred to third quarter, and we report crop nutrition deliveries 17% below same quarter last year. Since late last week, we have, however, seen an uptick in buying activity again with demand resurfacing and prices gradually moving upwards. Earlier this month, we announced the acquisition of the Gulf Coast Ammonia plant in Texas. And the acquisition strengthens Yara's position on the global cost curve and has this portfolio flexibility and represents an important step in delivering on our strategic priorities. Looking at the EBITDA variance for the quarter. The 39% increase compared to last year mainly reflects increased nitrogen margins. And this is Yara's highest quarterly EBITDA since 2022, driven then by increased market margins, but also solid underlying finances. Prices have increased, and this is more than offsetting higher gas costs. We do report a negative volume impact in the quarter of $240 million, and approximately half of this reflects lost volumes due to reliability issues in our Pilbara ammonia plant and in addition to lost volumes due to the planned maintenance at our Belle Plaine plant. On top of that, we report $120 million volume impact due to the demand deferral, reflecting the 17% lower fertilizer volumes reported in the quarter. Fixed costs continue to reflect the cost reduction measures that we delivered on in 2025. And as presented at the Capital Markets Day and then quarter increase then of $8 million. That is a strong beat of inflation for the quarter. Return on invested capital has increased from 7% last year to 14.3%, also supported by the $153 million gain from selling EUAs, which contributes to approximately 1 percentage point of return on invested capital. The volatility in the quarter has had a profound and also an unusual impact on the market dynamics. The closure of the Strait of Hormuz led to a supply shock, driving prices sharply upwards and then peaking when India purchased 2.5 million tonnes of urea at over $900 per tonne in April. However, this occurred at a point in time when the European season was largely complete. And the combination of high prices and significant volumes going into India and among others, Australia, meant that demand was reduced dramatically elsewhere in the world. Simply put, customers and farmers did not need nitrogen for prompt application, delayed regular purchasing for the next season to avoid buying at peak prices. This market uncertainty led to a delay of the new season in Europe and also deferred demand elsewhere. And as the graph in our presentation here shows, there were large variations between regional price references, clearly illustrating the demand volatility across markets during the quarter. In recent days, demand for the new season has significantly resurfaced and prices have rebounded in many key markets, with the urea FOB Egypt prices increasing from around $410 million per tonne at the end of July, with the latest reported sale well above USD 500 per tonne. And this is reflecting increasing demand globally and Europe now being willing to pre-buy for the next season again. Market to supplier risk is also resurfacing now with an unresolved situation in the Middle East. As mentioned already, Yara announced the acquisition of the Gulf Coast Ammonia plant earlier this month. And this represents a significant milestone and largely fulfills our ammonia strategy. The acquisition will strengthen our ammonia cost position and enhance flexibility across our integrated production and distribution network. The plant is located in Texas, and we'll have a nameplate capacity of 1.3 million tonnes per year. Yara will own the ammonia plant and the Air Products will supply hydrogen, nitrogen and utilities under a long-term agreement. This purchase price of $1.3 billion will be paid upon closing and represents an attractive entry point into a highly competitive U.S. ammonia production. The asset is expected to generate strong cash flows and deliver solid returns, fully aligned with the Yara's discipline and returns-focused capital allocation framework. Bringing this plant into our portfolio really structurally improves our competitive position while also increasing our flexibility for ammonia optimization. The acquisition demonstrates how Yara can leverage our global platform, our market position and operational flexibility to capture attractive opportunities and strengthen long-term value creation. I will now then hand over to Magnus, who will take a closer look at the financials for the quarter. So with that, over to you, Magnus.

Thank you. As mentioned by Svein Tore, EBITDA is up 39% on a strong second quarter 2025, predominantly driven by increased nitrogen operating margins. This has translated into an 84% increase in earnings per share, and we clearly see the effects of increased earnings on a stable capital base. And better utilization of our installed capital is core to our improvement potential. This also translates into a significant increase in return on invested capital, 14.3% for the last 12 months versus 7% at the same time last year. Please also note that this number includes the sale of EUAs, which had a cash effect of USD 153 million, which is classified as a special item. Looking towards the cash side, the delayed start to the season as well as the increased price environment has led to a small buildup in operating capital compared to what is usually a release in the second quarter. And this will subsequently be released when prices stabilize and volumes catch up. This impacts cash from operations, which is lower than second quarter 2025, which benefited from a normal operating capital release. Finally, our net investments are down to USD 100 million as the USD 152 million divestment of parts of our surplus EUAs is booked here. And that leaves us with a free cash flow of the quarter of $583 million. As mentioned, the price surge in the second quarter came at a point where sales for the ongoing seasons in the Northern Hemisphere was at the very end. Deliveries for the ongoing season went on as normal, but there has been a significant delay of the new season where deliveries usually pick up end of May. And as Svein Tore mentioned, this is linked to low willingness to participate at elevated price levels for customers not in an immediate need of product, particularly when India purchased 2.5 million tonnes at more than $900 per tonne of urea, significantly over market prices everywhere else. And consequently, our deliveries are down, especially in Europe. The majority of other reduction of own-produced products is linked to the scheduled turnaround in Belle Plaine and Babrala. And beyond that, we have a reduction in third-party traded volumes in the Americas and Africa, Asia but these are volumes with more limited EBITDA impact. And looking closely at Europe and the season as a whole, we see that a much more stable picture than the tail end of the season. Yara's deliveries in Europe for the season as whole are stable on a season-to-date basis. Imports of urea to the European market, however, are also significantly down for the season, and this is a trend that has continued into the second quarter, and that increases Yara's relatively relative market share considerably. As mentioned, Yara's Q2 deliveries in isolation reflects a slow start to the new season. However, there is a significant pickup in market activity in the European market in July. And as you will have noted, global nitrogen prices are on the rise as well. And renewed tensions in the Middle East cash further uncertainty about nitrogen and phosphate availability for the third quarter and the upcoming season in the Northern Hemisphere. And while demand is deferred, Yara remains focused on maximizing and increasing the utilization of our assets. Looking at actual production tonnes and including the effect of turnarounds, Yara's had a solid organic production growth over the last years. And also during the current volatility, Yara has been able to profitably uphold production, which is critical. The quarter in isolation saw some reduction in produced volumes due to the scheduled turnarounds in Belle Plaine and Babrala as well as the previously reported outage in Pilbara ammonia production. Both Babrala and Belle Plaine are now back producing, while Pilbara has been taken offline in July for the scheduled maintenance. As the Strait of Hormuz was blocked in March, significant demand rationing was required to meet more than a 20% reduction in available nitrogen trade. And this was exacerbated by India's purchase of 2.5 million tonnes above $900 in April. And this also is illustrated at the top of the slide, showing major reductions in imports to key consumption regions with Europe and Brazil lagging the most. Europe, of course, affected by the very strong imports in Q4 ahead of CBAM. And consequently, a lot of buying remains to happen despite demand reduction in nitrogen application, application as a whole for the season cannot be skipped. And the renewed tensions in the Middle East also adds uncertainty to the supply picture. Chinese supply, currently quota being 3 million tonnes, will be a key factor to balance the market, and India consumption will also be another important factor to monitor. Looking to the medium term, the urea balance remains tight with a limited number of projects coming over the next years compared to historical demand growth. It remains unclear to what extent projects have been further delayed by the ongoing or in the Middle East. As mentioned, the significant increase in EBITDA in the quarter is driven by increased margins. Looking at nitrates operating margins from both our TTF and Henry Hub-linked gas cost exposure, margins have expanded significantly as nitrogen prices increased more than TTF and Henry Hub stayed below $3 per million Btu. A similar expansion in margin is seen in our NPKs, also helped by the phosphate upgrading margin. This is particularly relevant for Yara's 2/3 of our NPK production does not require sulfur in the production process of upgrading phosphate, and sulfur shortage has been a major driver of phosphate price increases in the last 2 quarters. This also erode significant production margins for producers using the phosphoric acid route. But as mentioned, Yara does not require sulfur for 2/3 of this production. At the very high price levels during the quarter, premium calculations become less of a driver for our earnings, particularly given the high increase in overall margins. And I recognize that this makes it challenging for analysts to forecast margins, particularly given that our sensitivities are based on global urea references. For the current quarter, both the large gap between global and local references as well as premium being consumed by the production margin contributes to deviation between our outside-in model and reported results. Summarizing the quarter and the impact on the balance sheet, we see that net debt stays relatively stable despite the dividend payout in the quarter. And this is sustained by strong cash earnings as well as the USD 153 million gain from the sale of EUAs. This puts our balance sheet in a robust position in anticipation of the regulatory closing and subsequent payments of the Gulf Coast Ammonia acquisition. And looking to this acquisition, it is not only a major strategic milestone, but should provide clarity on the -- to the capital markets on Yara's approach towards ammonia, which has been in development for some time. And with this acquisition, Yara achieves major strategic objectives in terms of lowering ammonia production costs with Henry Hub-linked gas and a larger production asset as a result. The acquisition represents a very attractive entry point with a CapEx significantly below other acquisitions in the U.S. Gulf when adjusting for size and operating costs. And as previously mentioned, the plant consists only of the back end of the ammonia plant and is supplied with hydrogen and nitrogen and certain other utilities from Air Products. Energy consumption is charged through directly, and this will be among the most energy-efficient plants in Yara's portfolio. For the hydrogen and nitrogen, there is also a base fee paid to our products, as is normal in the industrial gas industry, also similar to the arrangement we have in our Freeport ammonia plant. This replaces what would otherwise have been a construction CapEx of the front end of the ammonia plant as well as the sustaining CapEx and the fixed cost of operating a front end of an ammonia plant. And as such, this ammonia plant is among the most competitive in the U.S. seen from a total cash flow perspective. And also when looking at total cash costs per year, including the full operating cost, the plant is in the area of the first and second quartile on the cost curve. Post closing, this acquisition will have a significant impact on Yara's energy exposure. Coming from a time before Freeport, when less than 15% of our gas purchases were in North America, our portfolio will now be close to 40% exposed to Henry Hub or [ ACO ]. Of the remaining European TTF exposure, half of the exposure is linked to nitrate production, where locally produced ammonia can be replaced by imports if the gas to ammonia spread is negative. The acquisition also adds considerable length to our internal balance of ammonia between equity-owned production and own consumption, which allows even greater flexibility on further portfolio adjustments. And this opens for adjusting the relative energy exposure further in favor of low-cost production. On the topic of decarbonization, Yara remains strongly positioned in the carbon tax European market, also with this change of our portfolio. Firstly, because what the introduction of CBAM does is to expose imports to the same carbon cost as European produced products. This increases the price they have to take for their products of imports and levels of playing field. Yara's basis for carbon costs are average emissions intensity, and this is lower than import -- lower than the average of imports, leading to a margin gain for Yara. And this is not by coincidence but due to structural investments in energy efficiency and emission reductions over time, which, irrespective of accumulated free quotas, have had a very short payback time. Yara can also increase this positive delta further by replacing gray ammonia productions with low carbon ammonia imports and by reducing emissions further, like, for example, the CCS Sluiskil project. For Yara imports into Europe, we expect to utilize inward processing mechanisms for reexporting finished fertilizer, significantly reducing our import exposure to CBAM. The financial benefit of having carbon intensity below benchmarks is illustrated by Yara's accumulated surplus of EUA quotas equaling [ 5.2 million ] by year-end 2025. And during the second quarter, we have divested 1.7 million of these, leading to a cash impact and gain of USD 153 million reported as a special item in this quarter. This illustrates the added value of previous projects that have been done and also how we can monetize reduced emissions in projects like CCS Sluiskil as well as potential carbon reduction measures in our U.S. plants. Then moving to capital allocation. Yara maintains its policy after the Gulf Coast acquisition. Our overarching target is always to maximize returns to our shareholders through return on invested capital and where this quarter is a big testimony to that. Delivering on our improvement program is the first priority in achieving that. And as previously mentioned, the GCA acquisition will also expand our EBIT margins further by significantly lowering our cost position. And beyond that, Yara will maintain our strict capital discipline, focusing on reprioritizing sustaining CapEx towards the highest return assets and ensuring realization of benefits from executed growth investments. Post closing of the acquisition, it will be a priority to maintain a strong balance sheet, ensuring that we have the capability for high-quality investment opportunities at the right timing, while, of course, maintaining attractive shareholder distributions. And concluding with the improvement program, the successful and continued implementation of our cost program and adoption towards more flexibility puts Yara in a much stronger financial position than before 2024. The improvement program extends from our cost program, covering a broader range of initiatives with a significant portion focused around increased asset utilization and expanded production output. Additionally, ensuring cash flow delivered from completed growth investments, such as our Yara Vida plant in the U.K. and the [ BK ] expansion in Colombia are core focus areas. The program is in its early stages but currently delivering according to plan with USD 50 million, USD 60 million of the 2027 target realized so far, and continued follow-up remains our core priority. And with that, I give the word back to Svein Tore.

Well, thank you very much, Magnus. Looking beyond the quarter then. Yara remains focused on strengthening long-term competitiveness and creating shareholder value through disciplined execution. First, capital discipline remains the foundation of our approach. And we continue to prioritize returns focused capital allocation to execute on our EBITDA program and to maintain a robust balance sheet. Second, we remain committed to high-quality value accretive growth. And the Gulf Coast Ammonia acquisition is a testament to how we allocate capital to opportunities that strengthen our competitive position while meeting very strict return requirements. Finally, our approach to decarbonization remains unchanged. One of the strengths of our business model is that we have multiple pathways to profitable decarbonization, providing flexibility to optimize timing risk and returns as market conditions evolve. And this flexibility allows us to advance our climate ambitions while maintaining focus on competitiveness, capital discipline and long-term value creation. To conclude today's presentation. Yara remains committed to continue to deliver sustainable cash flow expansion. We continue to see positive traction from our cost reduction program that we concluded in 2025. And as Magnus already mentioned, we are on track with our EBITDA improvement program. Despite being below consensus in a very volatile quarter, the quarterly results represent a significant increase from last year, almost 40% up and is one of the strongest quarter outside the record year in 2022. Strict resource prioritization and active portfolio management are key levers in strengthening Yara's competitiveness further. And with a strong balance sheet, capital discipline maintained and a clear commitment to our credit rating, Yara is well positioned to deliver to deliver sustainable long-term value creation. And with that, I'll hand back to Maria.

Thank you, Svein Tore. That concludes today's presentation. We will now move to a Q&A session. [Operator Instructions] We will just take a few minutes to set up, and then we will revert shortly. Thank you for watching. [Break]

Okay. Welcome back to everyone. We're now ready for the Q&A session. This is Maria speaking, and I'm here joined by today's presenters, our CEO, Svein Tore Holsether; and our CFO, Magnus Krogh Ankarstrand, in addition to our Head of Market Intelligence, Dag Tore Mo. [Operator Instructions] So with that, we're ready for the first question. David Symonds, please unmute and ask your question.

Three questions, I think, from me, please. Magnus, you touched on it in your presentation, but I think the margin item in the bridge was 20% below the outside in calculation. I was hoping you could give some more color on where the shortfall was. Was that just a timing thing? Secondly, could you talk, in a similar vein, can you talk about the forward sales level for Q3 versus normal? Should we be shortening the pricing lags in our Q3 estimates given that volumes are seemingly picking up at a lower price level and the forward sales could be lower than usual? And then thirdly, could you talk about the motivation for the sale of EUA credits? Is that linked to Sluiskil's carbon capture, which I think is starting up soon? Or is there some other motivation for that?

Yes. Thank you. I had a little bit of problem hearing your second question, but I'll see if we can get back to that. I think on the margin side and sort of the mix compared to the outside in view, I think obviously, this quarter, there's more volatility on pricing, which, of course, makes deviations and [indiscernible] easier. But I think the main driver for this is also on the volume side, right, that when -- I mean, when volumes are sold at which point in the quarter or even before the quarter. And I think -- what sort of particularly makes it a bit difficult in this quarter when you had such a delay in particularly the buying for the new season is, of course, that the price references as they're published, are published every week regardless of 50,000 tonnes were sold that week in the market or 1 million tonne right? So when you sort of average our volumes out on the price references, you can get a very different number. And I think particularly when prices were at the highest, of course, also particularly when customers in the Northern Hemisphere didn't have an immediate need to buy. Of course, there was a hesitation and people wanted to wait to see how things were going. So I think that the volume weighting is probably the biggest single explanation for that deviation. I think the second question, if -- in terms of how to think about the third quarter and sort of whether not to sort of change the lag? I don't think there's any reason to change as such. I think -- I mean, obviously, price levels are more normalized now than what they were a few months ago, even though, of course, as we see now that activity is picking up and also the situation in the Middle East, the prices are quite up in the last week. But I think as a starting point, we wouldn't sort of recommend that, but I do think it's important to sort of have a view, particularly at the differences between various global references, if that sort of discrepancy gets very high, then obviously that will have -- can have an impact on how prices will be -- look like as well on the realized pricing. I don't know, Maria, if you have anything to add?

I can just add that quite often when we enter into the third quarter, we do often have a normal -- longer order book than normal, right, because we take a lot of orders at the end of second quarter, but that has not been the case this quarter. So there's no reason why you should obviously increase the lag due to a longer order book now as demand has been more soft. So it's more as demand is picking up and activity is picking up, those prices will be the key prices for third quarter earnings.

I think even, of course, if -- I mean, obviously, results are impacted by how your volumes kind of -- how your sales sort of hit the different price levels and so on. I think always good to consider that you have sort of -- if you have extreme peaks. And of course, customers will always be a bit more hesitant as we get closer to application. And of course, customer flexibility is lower as well. Yes. So I think we'll leave it at that. With regards to the EUA sales, I think I mean the decision to offload some of our long position, which is what we did this quarter is also, of course, a financial decision. I mean it's -- we don't sort of speculate in EUA trade as such and I think sort of sitting on a very long position, I would only make sense if you think that well, keeping them would sort of see a price increase, including our discount rate that would sort of merit keeping the EUAs for a longer time. So I think it's partly risk management, finance management to sort of -- to take down our long position there. But I do think what is important, then you link it to Sluiskil, and that's, of course, that when we reduce our CO2 emissions in Sluiskil by 700,000 tonnes each year. That in isolation, of course, means that our long position becomes longer, right? So I think we still are sort of -- we have a long position that with Sluiskil at CCS now takes us through 2029 just based on our current emissions. But then again, the decision to -- how we sort of deal with this surplus is more a financial decision and how we view the market.

Okay. Angelina, it's your turn. Please unmute and ask your question.

It's Angelina Glazova from JPMorgan. I have a couple of questions around the demand environment, and then a quick follow-up on emission certificate sales. So you have already given us quite a lot of color on how demand has developed through the second quarter. And deferral is a term that has often been used to describe what's happened. Now obviously, we haven't been in that period for a very long time, but over the past week, we have seen a pickup. I think the most notable was Europe. And on that point, I wanted to ask, to what extent do you think it is driven by some support or subsidies that have been provided to the European farmers? And then when you think about other regions into the third quarter, so for example, the LATAM and in general, the fact that it's the Southern Hemisphere that will be in the season in December...

Angelina, we lost your sound. But we can start answering the first question and then see if we can get you back online by the time we've answered that.

Yes. I think that as a general comment globally, when the disruptions in the [indiscernible] gulf happened and the supply was lost, there was simply a requirement to ration on demand somewhere in order to balance the market that drove the prices so high. And I think if you then count in that neither India nor China wanted to take part in that demand rationing by keeping domestic prices stable or low, there was quite a burden on most private markets in the world to rations on demand. So -- of course, there is some demand -- quite a bit of demand deferral. And I think your point on Latin America is a star example there where you see that Brazil, for instance, so far this year, through June, has imported, 23% less nitrogen than last year and are now coming into peak season, as you mentioned. So they will be logical to expect a pickup. But of course, in the Northern Hemisphere and also countries like Australia, I think even South Africa, some other places, there has also been lost demand for the season that we have now finalized. If you just look at Europe, for instance, the European Union has imported 25% less urea during the season that we have now ended than the previous one, clearly indicating that there has been lower application of nitrogen, which is you can say then is lost. So a combination.

And I think just to add, what's important here is sort of the distinction between demand destruction and deferral and season and out of season, right? So I think in the beginning of March, and to some extent in April when the Northern Hemisphere was in season and, of course, needed tonnes promptly as India and others as well. And then suddenly, a big portion of supply suddenly disappears. Then you have to have the demand destruction, right, because there's no extra supplies anywhere. So if 20% of supply is gone, then 20% of demand has to go away as well. And I think the way that played out was that if it simplify that India said we buy -- we want to buy 2.5 million tonnes, and we'll pay almost anything to get it, right, ended up paying $930 significantly above market price. And that price was enough to release 2.5 million tonnes from others who otherwise would have bought it, right? And that, of course, leads to demand destructions in the season that farmers apply less or shift from corn to something else and so on, right? But that kind of demand destruction and with the season, it's not like they're going to stop buying nitrogen forever, right? And I think what we see post the season is deferral is to say that, okay, at this price, I'm not going to buy something that I'm not going to need until January, February, right? And you can do that for a while, but you cannot do that forever. And I think to the extent that turns into destruction for the next season, well, then, of course, that would be rationed by price again, right? So I think that's kind of important to remember that this isn't sort of demand that goes away forever.

Angelina, I can see that you're back on the line, could you unmute and ask the rest of your question as we lost you a bit earlier.

Yes, apologies about that. My follow-up was on the EUA sale. So the comments that you've provided earlier, should we treat that as a sign that you open to further sales potentially later this year or further down the line?

No, I think -- I mean, for us, it's really a question of how much we're going to need going forward and what the price outlook on EUA sales or the EUA price is going to be. So we don't have any sort of firm message around how we think about that going forward. But I think for now, we thought it was a good idea to lower our long position on EUA sales somewhat.

Then we move to Tristan. The line is yours.