Good day and welcome to Yara International's fourth quarter 2022 results. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the star one again. For operator assistance throughout the call, please press star zero. Finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Anika Jovik, Head of Investor Relations to begin the conference. Anika, over to you.
Hello. Thank you to Yara's conference call for the fourth quarter results. In the room with us we have the investor relations team, key members of the finance and accounting team, and last but not least, we have key members of our management team, including Lars Røsæg, our Deputy CEO, amongst other things, and Thor Giæver, the CFO, and Svein Tore Holsether, the CEO. With that, we can start with questions.
Thank you. At this time, I would like to remind everyone in order to ask a question, press star then one on your telephone keypad, and we'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Christian Faitz from Kepler Cheuvreux. Your line is open.
Yes, thank you. Good morning. Good afternoon, actually. Thanks for taking my few questions. First of all, can you give us some feedback on what you're currently seeing in terms of demand conditions in the northern hemisphere in your fertilizer offering that is, i.e., the nitrogen value chain but also NPK? Can you also share with us your view on how you see cash flow evolving for this year? Thank you very much. Free cash flow, that is. Sorry.
On the first question. Hi, Christian. It's Thor. On the first question, I mean, I can note, as you've probably seen in our reports and presentation, we note that both for ourselves and generally in the markets, we've seen lower activity towards the end of the year. Not something unusual in itself. You know, December is not usually the most action-packed month in this industry. We've said basically the same for the start of the year. Again, it's not unusual, and I think in the context of the price declines we've seen over the months, over the past months, it's not surprising either. That's the kind of headline observation from my point of view.
As you know, you know, the main application season is approaching in the northern hemisphere, has started in the southern parts of the northern hemisphere. In any given year, it's also a bit weather dependent. Sometimes it really kicks off in February, other times it might be into March or even April that you see the big volume shifts. With that, I can also finish as well. I don't have anything to add.
Okay. No.
In terms of free cash flow, not a lot to comment on given our non-guidance policy. On a similar vein, obviously what we observed, what we've seen in the quarter is that we've had an improvement both in terms of our earnings but then also a release of operating capital which is driven partly by lower prices and partly by lower deliveries. Obviously the normal pattern is that we, you know, you have an increase in deliveries at some point in the spring with the application season after the year where, you know, there's been some wait-and-see behavior in the market.
I think it's reasonable to expect that, and as we comment on as well, there's certainly potential for catch-up in all key regions, based on the farm profitability aspect. It's quite a step from there to sort of have a forecast of how the cash will develop. As a touchstone, you know, lower prices tends to reduce operating capital, cash flow. The other way when key deliveries increase that tends to tie up some more volume.
Okay. Thanks very much. Thor.
Thank you. Your next question comes from the line of Mubasher Chaudhry from Citi. Your line is open.
Hi. Thank you for taking my question. Just kind of following up on this, the demand picture. I think, Thor, you made the comment that there was a catch-up demand potential in all regions et cetera. I just wanted to get a feel for, first of all, kind of what the inventory levels are. There's a hidden comment in there around inventory levels. Secondly, just coming back on the demand, I mean, you presented a quite compelling picture saying that the fertilizer prices have come off, farmer profitability is good, and fertilizer prices keep coming off. I'm just trying to understand kind of how late can the farmer go before they really need to start applying.
You told me about application season is really kind of imminent. Is there something to do with regards to my first point around inventories that the farmer may not actually need to come back to yourselves for incremental volumes? That's the first question. Just on supply side of things, I know Yara has kind of talked about their own plants running at high rates because of the global gas scenario now. Can you talk a little bit more on supply picture of nitrogen globally as well as we head into 2023, in terms of are you seeing any incremental capacity additions come through?
There's a few plants which are expected to start up in India, how are those going, what the ramp up looks like for there, and therefore the demand from the Indian tenders could be a little bit lower. Just a little bit on the supply and demand on a global basis, would be helpful as well. Thank you.
Again, I'll make a start, and on this one, perhaps Svein Tore will add. First up, first of all, in terms of catch up demand and inventory levels, I mean, this as you probably know is an area where we have where we are quite some way from having a perfect overview data-wise of what's going on, particularly in the whole market globally. In Europe, I think I'm right in saying that the data we see is that the inventory levels at the end of the year for nitrogen are lower than average, but have increased somewhat towards the end of the year, which is consistent with the lower activity level in the market. Europe overall is, you know, behind the normal level of inventories for the season.
As we look around the rest of the world, and thus we may be able to comment on some of the U.S. data, but we don't see with the, we don't see supply overhangs at the start of the year other than in Brazil is the short version I think. There are probably some data points on this more specifically for in Americas certainly. Just before I hand over to Svein Tore on this one and also the supply side, in terms of when you asked about sort of how long can farmers leave it? Well, it's really, It's the multi-factor analysis.
I mean, long story short, if you are in Southern Europe, you're already applying fertilizer now, whereas if you're in Norway you still got a few months. It depends on where you are. I would say overall, I mean, there are two factors that make us sort of caution about waiting much longer. One is, of course, the European industry has had significant curtailments and does have significant curtailments in place. Right now we're not sort of producing in a way anywhere near the normal levels for the industry as a whole. The other is that there are logistical bottlenecks that is certainly not, you know, when you get an order today, it'll be a number of weeks before you can receive product.
Um, so with that, uh, to- On the demand side for North America, as you mentioned, U.S. customs released December trade, trader data yesterday and did not show any pickup in supply whatsoever, just a net import of 100,000 tons nitrogen, very, very small. Depending on where you put the production numbers, we don't know what was actually produced in the fourth quarter yet, the usual lags in the TFI reporting. I would say anything between 15%-20% less supply from home production and net imports so far this season, July to December compared to last season. It is a question of how much you need to pull out due to inventory carryover from last season, if you don't know exactly how much is. But it kind of leads us to the conclusion that it's worth calling lagging supply.
While on the farmer level today, if you look in the U.S., it's quite an upbeat mood and talk about very strong corn acreage, for instance, because of the much improved ratios between fertilizer costs and corn prices. That's also kind of, I think, one of the reasons why also Svein Tore mentioned in the presentation today that, you can be a little bit concerned whether sufficient supply will be found in the right places at the peak, question mark. On the supply side, we are in a phase of kind of peak supply additions globally on the urea side, as also the graph from CRU that Gary showed.
You have new plants ramping up in Nigeria, Brunei, Iran, India, as you mentioned, Russia trying to operate as much as they can as they cannot export anywhere. We think there is maybe as you mentioned, a couple, one or two Indian plants to remain, but other than that we are moving towards the tail end of that phase of new capacity. We think that due to the ramp up there is probably the additions also in 2023 compared to 2022 from those plants that started up last year. That's of course an element to be aware of. There is outside Europe there is a quite significant supply increase in 2022 and 2023.
That's very helpful. Really appreciate the color. Thank you.
Your next question comes from the line of Andrew Stott from UBS. Your line is open.
Yeah, good afternoon, everybody. Thank you for the opportunity. A couple of things from me. I'm just looking at a Bloomberg headline, quoting Svein Tore saying that Yara's been able to mature its clean ammonia portfolio. I just wonder if you could elaborate on what that means specifically. Thank you. A separate and second question is around CapEx guide for this year, so the $1.7 billion. Could you give us an idea of the growth projects please within that? Thank you.
That's, actually let me explain what we were referring to on the Yara Clean Ammonia. We've been working on preparing that for an IPO, so next IPO. I built, the capital markets hasn't been favorable for an IPO recently. In the meantime, we've been working at full speed in setting up this unit as a separate structure, and doing the carve out, and preparing it for a potential IPO. Also looking into the opportunities with Yara's Clean Ammonia for products that to be presented.
Now what is happening in the whole hydrogen economy, I'm particularly referring to the Inflation Reduction Act. There are very favorable conditions for blue ammonia to be produced there and potentials for new investments. This represents an opportunity for Yara in at least two ways. One, the obvious one, in having believing infrastructure for managing ammonia across the world. We are in ammonia with our own shipping fleet, our terminals, our production units across the world, this needs to be transformed, and we have an infrastructure to support that.
it also represents an opportunity to decarbonize also in Europe as we've demonstrated now in recent months and quarters is our ability to run our plants with imported ammonia, increasing that flexibility. In that sense, opportunities in the U.S. are also helpful for our asset portfolio in Europe, where we can optimize across. We're referring to the continued development of Yara Clean Ammonia, and there we are continuing to mature the products both in blue and also in green. Talking about green, our pilot project demonstration plant in Norway will start producing this year.
We have entered our first commercial agreements, with the Swedish partner called, Lantmännen, and, also, direct with the partner here, with the partner in TATA, and shows the potential and the interest with the, for this, product. In particular for Swedish Lantmännen, it's a, it's very interesting, opportunity because they have a entire, value chain from farmer to the shelf in the, in the supermarket. They are really leading the way in decarbonizing food chain where it's, possible. We're pleased with the cooperation, there.
This is something that the entire food industry should take notice of, what is possible to do if you're thinking full value chains and how it's possible to do significant decarbonization on behalf of green subclasses, but also for blue as an intermediate step. On the second question. Oh, sorry, Andrew. Did you have a follow-up as well?
Thanks, Tore. I did actually. Sorry. Just because, Svein Tore, you mentioned the IRA. I just wondered if that gives you options for Canada as well, so Belle Plaine obviously. Does that give you some flexibility in the future for decarbonization projects or not? I wasn't sure whether that would capture that particular site.
Well, I'm sure the, if Canada has come with a very clear statement on how they are looking to a similar program that I gather that many governments and countries across the world right now are looking at similar policies to drive decarbonization. That's why the Inflation Reduction Act, that is driving investment, it's driving decarbonization. This is much needed at a cost of, in actually it's greater. At first we're right now looking at the U.S. and seeing opportunities there. We've been clear also in New York that they should look into similar initiatives to drive decarbonization. That is something that should be a framework b etween private sector and governments in order to be able to reach the goals in the Paris Agreement.
On your second question, Andrew, the... I suspect you've probably gone into this, but for the benefit of the wider audience, the our improvement program slide on the in the presentation probably has the most fine print of today's communication. Just on the CapEx guidance that we've presented, we've shown guidance for this year of roughly $900 million maintenance and $800 million growth. Of that, $500 million is carried over from this year.
We've noted in the presentation that this growth category includes both improvement and growth projects and both committed and uncommitted projects. I can say that a significant part of this is uncommitted. It includes everything from energy efficiency projects and other projects to improve output in plants, but and also smaller M&A projects that some of which are not the timing and success rate is not known yet. This is not a... the total on growth and on CapEx in the guidance is far from a fully committed number. We'll of course revert with more specifics as we proceed through the year.
Okay. It's very clear. Thank you very much.
Your next question comes from the line of Alex Jones, Bank of America. Your line is open.
Great. Good afternoon. Thanks very much for taking my questions. The first one on nitrates pricing, specifically relative to urea. I guess the spread has been high now for over a year, and you talked through last year about, you know, high production costs in Europe, justifying that. Can you talk now that European production costs have fallen to at least some extent about the outlook for that spread and how sustainable you think the wide nitrate spread over urea is? The second question, sort of just on production levels and inventory levels. I guess you sound fairly constructive on the pricing and demand outlook into spring farm competing.
Could you just give us some idea of, in that backdrop, how you think about production curtailment and whether the sort of relatively high level of curtailment you now have suggests you have a slightly higher level of volume inventory on the balance sheet to meet the strong demand that will be coming up in the next few weeks? Thank you.
Thanks, Alex. I'll maybe start on both of these and others can add as needed. Maybe starting with the last part. We commented on the European industry, and I think you can deduce that Yara is following a similar trend and that, yes, inventories increased somewhat at the end of the year with the lower activity levels generally. They are still at a lower level than normal for this time of the season compared to previous seasons. That's, of course, you know, the fact that we and other players have been curtailing a bit simplistically, you could say we've curtailed production relative to demand as well.
The lower demand doesn't mean that inventories are structurally higher. That's also, t hat's why we're, you know, mentioning this as well. For the industry as a whole, we have some concern if the wait -and -see behavior continues much further into this year, as that could certainly affect the availability when the application season arrives. On the nitrate pricing, nitrate premiums, first of all, I mean you'll know we're...
We've got this, I'm sure in the past slides, but our main reference there is if you like farmer profitability and in case of Europe, wheat pricing, you know, what does this look like, in relative to the farmer's revenue rather than versus the urea price, although a premium versus urea is easier to track. As we comment on in the report, we've provided examples using both urea and nitrate, and in both cases they show improved farm profitability compared to a year ago.
The other point is that our normal seasonal pricing pattern is to incentivize early buying, to have lower prices and premiums at the start of the buying season in the summer when we have the typical annual reset, summer or late spring, and then to increase prices and often premiums, although that depends on the urea price development, to reach a peak during the first quarter. I think from both those points of view, it's sort of that there isn't anything unusual in the nitrate pricing now. This is, of course, in a volatile backdrop and t hose, both those parameters, if you like, are within the normal range. I don't know if you want to add?
Your next question comes from the line of Angelina Glazova from JP Morgan. Your line is open.
Good afternoon. Thank you for taking my question, and congratulations on good results. I have a follow-up question on the green ammonia space. Over the past few months, we have seen quite significant number of new project announcements, both on the green and blue ammonia side. So far it seems that these project announcement supply implied by them significantly exceeds the potential demand which could emerge by the end of the decade from new applications of green ammonia. Just wondering what your views there in terms of supply and how likely are the project, this announced projects to go ahead. On the same note, you have highlighted Yara's advantage in terms of having a significant amount of terminals.
How are you seeing entry barriers for other players maybe to set up other ammonia terminals over the next few years in Europe? Thank you.
Yeah. I cannot comment on single targets and the announcements, but if you look at past history and portfolio, also in the gray ammonia space, there are more announcements than actual projects that are end up being commissioned. If you look at broadly on this, one thing is ammonia going into fertilizer, which is the main application right now. As the world is looking to decarbonize new opportunities arise, one is for shipping, where there is need for a significant decarbonization in order to reach the IMO, you know, targets. That creates demand for fossil free fuel as well as to decarbonize the fuel and ammonia blue are being kind of considered in both those capacities.
By creating scale, there will be further development of engine technology and so on, creating new demands for ammonia. That's one additional area on top of fertilizer. There are also work being done right now to reduce coal consumption in coal-fired plants in Japan in particular. Where you phase out coal and where ammonia can be used as an energy source to help decarbonize. Also in that area and when the cost curve gets down, the demand will be high. This is helpful for driving both scale and cost down.
With regards to infrastructure, I believe we're unique in Yara in the size of our distribution network as well as the competence to drive it. This is something that developed over, I mean, several decades. It's been the backbone of optimizing our operations both in the fertilizer business but also the industrial solutions all built to serve our own needs. Now that we see the drive to decarbonize across the world, the need for a green or clean hydrogen economy, it can serve an additional purpose. And that's something that we're excited about and where we see business opportunities.
That's a key reason for us to separate Yara Clean Ammonia to allow it to carry that purpose, but also to grow and support that market. This is not something that is possible to do over overnight. This is something that we have built through our history.
Thank you.
Before continuing on to the next question, I would like to remind everyone, in order to ask a question, press star then one on your telephone keypad. Your next question comes from the line of Rikin Patel from BNPPE. Your line is open.
Yeah. Hi. Thanks for taking my questions. Firstly on the NPK premium, I saw this expanded quite considerably during Q4, partly as some of the underlying nutrient prices declined. Could you maybe size the impact of that increase in the premium on Q4 EBITDA? Relating to that, how do you see the sustainability of that premium going into Q1 based on what you said around demand and supply? Thanks.
Yeah. I can. Hi, Rikin. Comment briefly on that. I mean, this is very a very typical development. NPK pricing tends to be more sticky than the commodity reference prices that we use to calculate the premium. What we're doing here is comparing revenue on a premium product that we are selling on a value basis rather than cost plus basis. We're comparing that with pure commodity equivalents. When you have large shifts in the commodity prices, you tend to see the premium change. A drop in commodity prices, you see our premiums that up, and vice versa when you see an increase in those prices, it contracts.
This is a short-term development and then but over time, there is a remember our prices move more slowly. In terms of the P&L effect, you know, those tend to be smaller than what you can reach from the premium because the premium essentially does not tell you about the P&L effect. It tells you how the revenues compare in the marketplace. Again, to, we don't publish this, but to know the profit development, you need to follow our raw material costs, which again tends to be more stable than the spot prices for commodity products. I think I can only go as far as say that this is not a major change in our year-over-year.
Okay. Thank you. Your next question comes from the line of Bengt Jonassen from ABG Sundal Collier. Your line is open.
Good day. I have two questions. Firstly, on the CapEx guidance, Thor, you alluded to that some of that guidance is not being, let's say, committed yet. How much of the CapEx is actually committed, and how much flexibility do you have? The second question is also on the nitrate side. Have you seen any permanent shutdown of capacity in Europe or Eastern Europe during the recent quarters?
The last one went to.
Yeah. I have not observed anything I think we call permanent. There is still, there have been closures, in, particularly in Eastern Europe, as you mentioned, including Lithuania. I have not seen a kind of formally announced permanent closure, no.
Thank you.
Yeah. Bengt on the CapEx guidance, less than half of that growth CapEx is committed as of today.
Okay. Thank you.
Maybe I forgot that there is, of course, one announced closure in the U.K. by CF Industries at the Ince Flats, and so.
Yeah, sure.
Is allowable.
Your next question comes from the line of Lisa De from MS. Your line is open.
Hi, thank you for taking my questions. I have two. First and foremost, could you please share what you're seeing on the industrial solution side, and I mean excluding DEF? I mean, it has been a bit of a tougher fourth quarter, given the market backdrop in Europe, but just wanted to understand if you've seen at least some sequential improvement early this year. That's my first question. The second one is, a more holistic one, again, on green ammonia. There's talked a lot about the IRA today and how this could potentially benefit you. I mean, EU released a green industrial plan, and clearly we're still awaiting more details on the policies and sort of level of potential support.
What would be actually required for you to undertake or give the green light to sort of more larger scale green or even blue ammonia projects in the European Union, especially given currently you're mostly committed to sort of some pilot projects in Norway and the Netherlands? Thank you.
Yeah. I can start on the industrial solution. W e don't have a trading update for this year, but as you've seen in the for the quarter, we had a 13% reduction in the deliveries there. This was partly in the base chemicals unit and partly in transport reagents. but sort of similar decline levels in both. It's definitely on Green or Blue ammonia. Well, first Green for both. Blue is also important in order to drive the demand from the use sectors, as well as through that demand in the greater marketplace.
It gets scale efficient in terms of very helpful both for the analysts for the, as Svein Tore pointed out, we had some green projects that we're working on, one in, hopefully other one in Netherlands and then in Norway and the one in Norway that the small one, the demonstration plant is being commissioned this year. With regards to large scale, what was needed in order to do large scale green ammonia in Europe in particular is renewable energy. For us is there's a build out of renewable energy production, but there's also need for greater capacity so that it's possible to get the power that's needed. Also in policies.
Where there's this cooperation between governments and the private sector with the cost of these products, they're big enough to drive scale for the whole industry. While we're not looking for a first movers advantage, if there is to be first mover neutrals that we're not carrying the whole cost of creating scale on our end. That is something I've heard, and we're in the U.S. now, there's been a very clear commitment towards that as a signal that generally that's going to be helpful.
It's, there are obviously just ongoing and then issues in Europe, as well, but, it still remains to be seen, what shape or form that will be in and, then we'll react to that when that is, in place. We are working actively to promote a message around the importance of having, similar, initiatives in Europe, as well, both for, decarbonization, but also to maintain, vital industries.
Thank you very much for that.
There are no further questions at this time. That concludes today's Q&A session. I would like to hand back over to Anika for closing remarks.
Operator, do we have one question that came in just now?
Yes, there is a final question from Morten Normann from Carnegie. Your line is open.
Yeah. Hi, guys. I have one question regarding your curtailments and the variance analysis. In Q4, it showed a -$170 million in volume mix versus last year. Now the run rate for your curtailment is about twice as high for finished fertilizers. Assuming staying at this curtailment level throughout Q1, could you elaborate a little bit more on the impact on your EBITDA? I mean, you're probably also cutting more of non-commodity product this time, maybe.
Yeah. Good question, Morten. I think we'll have to decline on that one. I mean, we've discussed a bit earlier that we don't have higher than normal inventories to the contrary. It's not that we don't have inventory. You probably heard us say on other occasions, it's very rare that our deliveries are primarily, you know, are in any given quarter are restricted by our production level. I think that's likely to be the case this time as well. As you know, or as we've commented on, activity has been low at the start of the year, that came up in the capital at the end of the quarter. Yeah, I…
It would be unusual for our deliveries to be limited by our stock and production in any given quarter.
Okay. Are you cutting more on the non-commodity products this time?
I mean, we have curtailments in both categories. You know, in some cases it's due to production costs, but it, in some cases it's due to demand levels.
Okay, thanks.
Thank you. There are no further questions at this time. I'd like to hand back over to Anika.
No. Thank you all for attending and again on the Capital Markets Day, June 26th, and in the meantime, feel free to reach out to the investor relations team for any further questions and we will respond promptly. Thanks again.
This concludes today's conference call. You may now disconnect.