Yara International ASA
Q2 2021 Earnings Call Transcript

Published: 16 Jul 2021

[Operator:]

Good day and thank you for standing by. Welcome to the Yara's Second Quarter Results 2021 Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. And please be advised that today's conference is being recording. I'd now like to hand the conference over to your speaker today. Thank you, please go ahead.

[Silje Nygaard:]

Hi, everyone, and welcome to our second quarter conference call. I am Silje Nygaard with Investor Relations. Since we've just had the presentation, we are okay to go straight into the Q&A.

[Operator:]

And your first question comes from the line of Joel Jackson from BMO. Your line is open. Please ask your question.

[Bria Murphy:]

Hi. This is Bria Murphy on for Joel. Thanks for taking my question. Can you just talk a bit more about your outlook for the -- …

[Svein Tore Holsether:]

Sorry. Could you please repeat the question?

[Bria Murphy:]

Yes, sure. I'm just wondering if you could talk a bit more color about your outlook for the nitrogen market in the second-half.

[Svein Tore Holsether:]

Yes, sure. Hi, this is Tore. I think the first point is, I mean, it's obvious I suppose that the market has tightened a fair bit this spring. And it's already a bit unusual when you see prices through the second quarter, because that's often a period where prices can drop off a bit when you sort of -- when you're closing the main application season in the Northern Hemisphere. So, it certainly -- it points to the value chains globally, although there will be regional variations, but globally it looks like the stocks and the value chain are limited, and then the price pressure is sort of, at least in part coming from -- yes, there not being lots of volumes available and also some of the buyers probably looking to secure a product earlier ahead of the next season. And then also comment on, I mean, supply-wise though there has been very little in the way of new supply additions. You've seen in the presentation, we've put the CRU estimates in there, show that there is a lot of supply coming this year and next year. But I think common to that is, it seems fairly obvious that those numbers, particularly for this year are simply not going to happen. There could clearly be some new capacity coming in towards the end of the year, but it will be at lower rates. And most likely also for next year it's probably going to be lower than our forecast. And then, back on the demand side, or in a way why -- another reason why there is a tighter situation now is the farmer incentive side, the food prices being higher. So, those of you who follow this industry for a while, of course you will know that there can certainly be volatility from quarter-to-quarter and month-to-month, but the factors I've mentioned, I think explain the strong , and it probably indicates that we can expect tight markets in the season ahead of us as well.

[Bria Murphy:]

Okay, thanks. And then, just can you talk about what drove the higher prepayments in Brazil in the quarter?

[Svein Tore Holsether:]

Yes, I mean it's -- these prepayments, I suppose it's important to say initially this isn't so much, which we say, Yara-controllable. I mean, or at least, the prepayments will vary from season-to-season. This depends a bit on the appetite of buyers. But it's -- you can probably link it a bit to the situation, we just touched on that. Another way of saying it, I guess, is the Brazilian markets have been relatively alert to the situation unfolding and has been keen to book product. Some of it's probably ahead of the highest prices that we've seen so far. But yes, as we stated in the presentation, the prepayments on our books are roughly $0.5 billion -- normal level for this point of the season. They will most likely normalize over the next couple of quarters. As you probably know, the main delivery season in Brazil is in the third quarter, a bit into the fourth quarter as well. So, and most of this is related to the currencies. A couple of worth noting them when we talk about, for example, operating capital efficiency, we do not include prepayments in that because we're aware of the seasonal variations there. And I've mentioned it's not really a sort of Yara-initiated or Yara-controlled parameter. And also we mentioned in connection with the net debt-to-EBITDA ratio that if you adjust the 1.05 that we have reported for this quarter, if you just adjust that for normalizing the prepayment and also the additional dividend we've closed then the pro forma number is 1.5.

[Bria Murphy:]

Okay, thank you.

[Operator:]

And your next question comes from the line of Lisa De Neve from Morgan Stanley. Your line is open. Please ask your question.

[Lisa De Neve:]

Hi, good afternoon. So, I have two questions. The first one is around the European Commission, which has set out it's fit for 55 package. So, the is supposed to apply to fertilizers, missing nitrogen fertilizers, and may enter in force in 2026. Also, the EU has announced a number of changes for the Maritime sector, including the fuel E-maritime. I think have encouraged the use of alternative fuel in European shipping. So, how does Yara think about the implications of the seabed for your operations in Europe? And how do you think about the maritime policy, and how it will foster your path for ammonia to be adopted as a maritime fuel substitute? Thank you.

[Svein Tore Holsether:]

Hi, it's Tore. And first of all, I'd like to say that the communication around fit for 55, it's very much needed. And it's good to see European leadership when it comes to sustainable development, and on environmental targets. It's a rather comprehensive communication, and it takes some time for us to fully analyze and see all the implications for us. But it's important to see that there is some adjustment in place to also safeguard European industry rich in many sectors is the most energy efficient, least polluting in the world. Also important and as you highlighted to look into the business opportunities that come as a result of new regulations and that's across a number of sectors, definitely within our core of crop nutrition, the importance of growing more food on less land, and with a lower footprint, Yara asked on a lot already, if we look at our emission reductions since 2005, we're down by 45% through a number of actions taken in our plants and throughout our value chain. But we have very clear targets towards 2030 additional 10% and then towards climate neutrality in 2050. But in order to get there we need to have value chain approach to it.

[Lisa De Neve:]

Okay, that's great. And then second question is simple one, just can you provide us an update on your capital allocation, and particularly, were you always in Brazil in Salitre project, in terms of the timeline of completion, I know it is COVID related sort of some of the delays that we just be keen to get an update on that? Thank you.

[Thor Giæver:]

Yes, I can start, and then I'll hand over to Tore, but in our approach to the new businesses that we're establishing, like Yara Clean Ammonia, and also our goal relates to find ways to fund them and allow the growth, and still managing within our capital allocation policy. And the way we've done that in the Porsgrunn plant is that they've taken the ammonia plant that will be a contribution in kind at the value of $450 million, and that manages of the CapEx from our side as a contribution you can't see, you can expect that we will look into JVs and structures in order to make conversions that enable a green transition, but also within the policy and our way forward when it comes to capital discipline and capital allocation.

[Svein Tore Holsether:]

Yes, I did not -- so, not very much. I think, as you've already heard me, so this is, even as we expand into these -- expanding our core new businesses, we are aiming to do that within our existing capital guidance. You asked about the Salitre project. This is progressing, but as you know, it's being impacted by the COVID situation. We haven't been able to manage the project anywhere near 100% over the last year and a half. So we are still progressing, but also reevaluating the timeline on that project. We don't have a new completion date to communicate at this stage, but the work is progressing, and we'll need to come back to that.

[Lisa De Neve:]

Okay, thank you so much.

[Operator:]

Your next question comes from the line of Andrew Stott from UBS. Your line is open. Please ask your question.

[Andrew Stott:]

Yes, good afternoon, everyone. And thanks for the opportunity. So a couple things I wanted to explore, please. First of all, on China just appreciate your insights into how you read China at the moment. There's been plenty of speculation about export tariffs being put back in. I think that will be for the first time, since 2014. There's also quite a lot of subsidy packages being handed out to the Ag economy, so, just to put some takes on China, the risks and the opportunities for Yara on that. And the second question was a bit more mechanical. I'm trying to scale the scope for further special dividend/ buybacks. You said Tore that you're at 1.5 times x, the prepayment effect. So, your target ratio is 1.5 to 2. If we think about further cash returns, are we thinking about the middle of that range given that you're already at the bottom or at the top end of that range? Thank you.

[Svein Tore Holsether:]

Okay, I guess I'll have a stab at both of these Andrew. I mean on China. I mean that's another factor that I could have mentioned of course on the outlook the supply demand within this as you know, I mean China has been a significant, but still are a significant exporter, but at lower levels and some years ago. So and as you'll also know, so they have both from the Ag soft commodities and on the fertilizer inputs being becoming more restrictive on the one hand importing more grains, and on the other hand exporting less fertilizer. So it's contributed to the tight situation. And that means that crisis lately have been far above. Also Chinese costs, even though they are most of the time the highest cost producer. And they have been cutting back on production. So it doesn't look like something that is about to change, but at the same time, of course, very, very prudent of everyone in the market to keep an eye on this. But so far the trend has been, I mean, many of us have been watching to see if they expand again, production with the high prices, but we haven't really seen that so far. So I think it's what we say, hey, looks like a sort of stable trend at the moment.

[Andrew Stott:]

Okay, thanks. And can I just do another sorry. On the nitrate deliveries or just the European deliveries down 16%, your remarks is totally logical, I'm guessing that there is a risk here that it's not all about delayed consumption from here to next year. The other risk we've always get, I guess, need to think about is market share. So how are you comfortable that you haven't lost market share in Europe, and it is just too late purchases?

[Thor Giæver:]

Yes, I mean, yes, Tore, do you want to comment.

[Svein Tore Holsether:]

Yes, maybe I can take that. Yes, so as we said in the presentation, there has been 16% drop, but over the season 3% our market share is stable, which we consider positive. And really, the quarter has been very unusual in the sense that we have had repetitive price increases, while normally in the second quarter as everyone who follows us or the European market would know that typically, you kind of reset the price for the coming season. And that means that it has really been about supplying application on this season. And there has been a waiting and see regarding next season. Positive into this is that stock levels are low. In fact, they are five years so that we consider being a positive starting point for a situation where we have had a quite sharp price increase over a short period of time. And just to add briefly, Andrew, there's also been some, you may have seen this some production issues in amongst other companies in the industry during the quarter. So there's also an element of that the supply hasn't been great either. And then finally, also you mentioned consumption. I mean, I don't think we have any reason to believe that consumption is that, the deliveries are down as it says 3% for the season. As a whole which isn't a great deal and, you know, probably most or even all or even more than accounted for by the fact that we think -- very low.

[Andrew Stott:]

Thank you very much.

[Operator:]

Next question comes from the line of Mubasher Chaudhry from Citi. You line is open. Please ask your question.

[Mubasher Chaudhry:]

Hi, thank you for taking my questions. The first one is around premiums that you mentioned un-squeezed, because they tend to get stuck here. So, the increase in pricing as a kind of squeeze the premium, looking forward, do we think those premium compared to the normal average that we've seen at Yara, or do we expect our squeeze to remain into third quarter? Some comments around that would be helpful. And the second question is around that the pre-payments that you talked about the kind of implies that there has been pre-buying, does that kind of indicate your confident in the pricing dynamic at the moment to be able to kind of lock in the pricing in the volumes today, as opposed to kind of continue to supply on a spot market or as you normally would, and therefore taking in locking in volumes earlier to lock in the current prices. Some thoughts around that would be helpful.

[Svein Tore Holsether:]

Maybe I take the first-half of that on the premiums. We said in the similar call after Q1 that we expect premiums to normalize. We repeat that message. And I think second quarter has been if you like demonstration that we are moving in that direction. We are closing a gap. I think it's important to consider the difference between the different players in the industry, you have players that are pretty much what we internally call FOB producers mainly selling sort of X factor or export. We are very different. We are in 60 countries. We run a lot of our commercial operation all the way down to retail even in some markets direct to farm, and that means that we typically have a time lag, but we also are in a variety of segments and crop segments which do not necessarily work exactly the same all the time. So we are confident with how this is developing. And we see obviously the underlying is very positive that the prices are increasing and also that the crop prices are up to the level where we see them now. So we are moving in the right direction, and we think this will normalize.

[Thor Giæver:]

Yes, on the prepayments, as I mentioned them, and this is mostly Brazil, and it's mostly then you probably know in Brazil the large volume is blend NPK, this is a business where we at any given time do have forward sales. But we do have a fairly strict risk management on the price exposures there. So, you shouldn't expect any big price impacts from that.

[Mubasher Chaudhry:]

Thank you, very helpful.

[Operator:]

Thank you. And the next question comes from the line of Adrien Tamagno from Berenberg. Your line is open. Please ask your question.

[Adrien Tamagno:]

Hello, thank you for taking my questions. I have two. The first one is on the potash side. With the recent price increase, and the Belarus situation, how do you think about your project in Ethiopia? And the second question is with regards to Clean Ammonia. As you learn more about the sector and the developments and you have more discussions with the partners. Do you see more interest on the green or the side of ammonia? Thank you.

[Svein Tore Holsether:]

That's what I think -- hello? Yes. So, hi, this is Tore again. Yes, the Ethiopia project is clearly -- I mean the higher potash prices is positive for any potash project. On the other hand for Yara, there is also as we've touched on earlier in the call, we have a CapEx guidance that we are fully intent on staying within. So a bit irrespective of price developments, it's important for us to have a very good, what to say balance between capital deployment and exposure across our portfolio. And we've said in the past for that project, we continue to think this is a good viable project, but we are keen to find ways to progress that without putting in a lot of more capital from Yara side.

[Thor Giæver:]

Then all its fact would all address the ammonia question or in green versus blue. And I think the interest now in hydrogen and the amounts potentially needed of the product. There is room for developing both and it depends a bit on the sectors right. So going on, whether there is more interest for green or blue, and we have Yara Clean Ammonia because we will be in both blue and green. So, it's equally interesting in some sectors. There is very clear demand that it should be produced with renewable energy assets would be in green in some sectors. It's the mission part that is most important that's produced with net zero emissions and then carbon capture and storage comes into place. We will be in both, but the majority of the work that we're doing at the moment is within the green ammonia link to our project in imposture, which is the largest one, but we're also working with in Netherlands and with the energy in Australia as well on products for green hydrogen and green ammonia. Keep it there. Not sure if I fully answer your question, if not let me know.

[Adrien Tamagno:]

No. That was very helpful. Thank you very much.

[Thor Giæver:]

Thank you.

[Operator:]

Next question comes from the line of Rikin Patel from Exane BNP Paribas. Your line is open. Please ask your question.

[Rikin Patel:]

Hi, thanks for taking my questions. Just a couple from me, firstly on -- first of all, your affordability, you mentioned in the release that in Europe, some buyers had maybe slipped to cover the existing requirements for this season, because of the rise in fertilizer prices. Just curious going into H2, how you see affordability developing in Europe and in Brazil, given I guess soft commodities are a little bit softer than what they were maybe a couple of months ago and all three of nutrients are still to an extent continuing to rally. And then just secondly on CapEx, in the first-half I think we spent around $330 million. And the guidance in the full-year is $1.3 billion. Can you just remind us what the key components of spending are for H2? That'd be great. Thanks.

[Svein Tore Holsether:]

I mean, I can start on the first one on this issue like this. I think my reflection on the sort of it's not that fertilizers weren't affordable to European farmers in the second quarter. I think it's at least before this year, we've had quite a long periods, at least three, four years, where broadly speaking prices have softened. And so it's been quite a good strategy to wait with purchases. And I think we've all to some extent over fuller in this market has been surprised a bit by how strongly and fast prices rose in the second quarter. So I think this is more of a surprise factor in a way than an affordability factor. You're right that, of course input prices have risen strongly as well as food prices, but remember that those input prices are quite a small proportion of the farmer revenue. So, I wouldn't see enough of the affordability as a big concern.

[Thor Giæver:]

And I agree, still good economy for the farmers to invest in fertilizers, if we lifted the bit to sort of a global level, you take the grain balance for instance, it has now declined, the stock level has declined four years in a row with now down to 55 days if we exclude China, and looking at the price food index, it has had a very strong development June to June 34% up. And I think in a way, it's important to keep that in mind when evaluating and doing the calculations on the farm economy, there might be some segments, some crops, some geographies that are the exception, but overall, the fundamentals are strong. And then on the CapEx, I mean, this is mainly normal maintenance, but also some running projects. Well, mainly in Brazil, actually with Salitre and other smaller growth projects. There is another -- I mean, in any given year, we tend to have more maintenance activity in the second-half often in the third quarter. There is a bit more of this year compared to last year, because we said for the first part of the pandemic, we did postpone some maintenance activities out of caution thoughtfully and to avoid, because the risk of disruption is always higher when you take down a plant, you can run into issues when you start it up again. So we did some risk adjustments of that, but yes, I mean, it's understanding the question there is a seasonal pattern here, but we are guidance for the full-year assumptions.

[Tove Andersen:]

And maybe I can category of investments that we have in the 1.3 are investments that are not growth investments, that investments in efficiency, and increased output and also reduction of emissions, as well as that's the third category.

[Rikin Patel:]

Great, thanks.

[Operator:]

Next question comes from the line of Chetan Udeshi from JPMorgan. Your line is open. Please ask your question.

[Chetan Udeshi:]

Yes. Hi. I was just going back to the one of the previous questions on European deliveries. And I think we also see the same pattern in Brazil that the deliveries of Yara in Brazil are down in second quarter when we look at the statistics Brazilian imports of all of the Ag inputs are up very, very strongly. I mean, I think the broader question to me is, when I look at Yara's targets or production, and I think there is that slide, which shows that on the slide 11. I mean, the ammonia production hasn't grown from 2018 to last 12 months, it's flat. And so to achieve that 2023 target, you need like 30% growth now in the next two years. And if the production is not rising, you have the best demand be in Ag. I'm just trying to understand what will drive that growth for era in the next two years in terms of volumes, and why are the volumes not growing even on a global basis for Yara today is a key question I have, any insights that will be useful. Thanks.

[Svein Tore Holsether:]

Yes, I mean, this on demand and on production. First of all, the Brazil deliveries partly linked to the prepayments. I mean, there is a slightly different phasing this year last year for us at least the deliveries started earlier. This year, there has been a bit more prepayment that for delivery basically in the third quarter, so overall, for the season as a whole probably not a lot of variation there. On the production, of course, particularly when you look at ammonia, that is, we mostly upgrade that into other products, but we also buy ammonia to upgrade. So, the fact that production is flat doesn't mean that you can't, for example, increase on finished fertilizer production, even if you're flat on ammonia. But having said that, you're correct that we have more work to do on our improving program, we do have a positive trend over the last 12 months compared to 2020. But we've had some setbacks in '19 and '20. So this is focused areas for us to get back on track there. But we are still sticking to our longer-term targets and we'll continue to report on that as we go forward. I can just add on Brazil that we live the delivery is coming now into third quarter normally. So it has been strong imports of all new trends in anticipation of really a strong market, strong fundamentals in Brazil. So I'm -- I don't think second quarter in a way should be their quarter to judge the performance in Brazil.

[Chetan Udeshi:]

Thank you.

[Operator:]

Next question comes from the line a Bengt Jonassen from ABG Sundal Collier. Your line is open. Please ask your question.

[Bengt Jonassen:]

Yes, hello, thank you for taking my question. Can you add a little bit about price realization in Europe on the , I think list prices were as above what you realize? And yes, a little bit color on that, please.

[Svein Tore Holsether:]

Yes, I think you followed us obviously very closely. So, that we have a time lag. One can also add maybe an element here which is normally the published prices are referring to Germany. Why are we settling to a basket of countries both in Europe and outside of Europe, where in some markets, we have a quite tight timeline between publication and realization and in other markets, we are also deeper in the market and might have a longer time lag. I think we consider that we have been actively pushing price in Europe. We have as you have seen published frequently lately, late this today with 298. And yes, there is a time lag, but there is nothing systematically different here. So I think we are moving with the market. Sometimes not so easy to read the market, but right now we are continuing to drive price into Europe.

[Thor Giæver:]

And I think just I mean, over the last thing where Svein has comment there. And I think banks if I remember like, do you even hypothesize on this issue before that when there are frequent price increases the lag moment temporarily does tend to widen a bit. And it is logical. And this isn't like a 100% Golden Rule. But I think most of the time when you see us increasing prices frequently. It's because the orders are coming in quite well. And then your order book does tend to go a bit longer and that's going away. Why are increasing prices because you're trying to find the balance to where you can price.

[Bengt Jonassen:]

Thank you.

[Operator:]

And next question comes from the line of Alexander Jones from the . Your line is open. Please ask your question.

[Alexander Jones:]

Great. Thank you very much for taking my questions. Two, if I may, please. Just to follow-up on the EU proposals yesterday. I think under the current CBAM proposal, there's no export rebate. So you'd be paying full CO2 cost on European production in the EU export. Could you remind us how much production you do export out of Europe? And how you expect that to evolve going forward as you consider these proposals? And then the second question would just be on the decision to do special dividend rather than the buyback, where you could give any color on your thought process between those two tools for shareholder distributions? Thank you.

[Svein Tore Holsether:]

Yes, hi Alex, this is Tore. On the first one, I guess we don't have published numbers on our exports. And we can follow-up on this a bit with you offline as well and good because you can look at some of our plants. I mean, for example, the slide scale plant and the Porsgrunn plant do export a lot, but they do also sell in Europe. So it's not a simple exercise, but we can probably, we can probably catch up on that after the call. Now, the second question, yes, dividends, well, I think well, in fact I know, the key reason for going for a dividend now is that we do we are at 105 is 1.5 to 2 times net debt-to-EBITDA and actually, as I mentioned pro forma and adjusted for the prepayments, we reached 1.5 with the dividends, if you can't do buybacks, you cannot return that amount of cash in the form of buybacks over that. So that's a key consideration. Also, as you know in our return policy, dividends are to be the main distribution mechanism. So it's certainly buybacks are something we'll continue to use, but dividends will be the main route.

[Alexander Jones:]

Got it, thank you.

[Operator:]

No question at this time.

[Svein Tore Holsether:]

I think operator, if there are no further questions now, I suggest we can round off now. So just thank you to everyone who's attending the call and for continuing to follow Yara.

[Operator:]

This concludes today's conference call. Thank you for participating. You may now disconnect.