Good day. Thank you for standing by. Welcome to the Yara 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. To ask a question during the session, you will need to press star and one on your telephone. If you require any further assistance, please press star and zero. Please be advised that today's conference is being recorded. I will now like to hand the conference over to your speaker today, Nygaard. Thank you. Please go ahead.
Hi, everyone, 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. Moderator, if you can please open up.
As a reminder, to ask a question, please press star and one on your telephone keypad. Your first question comes from the line of Joel Jackson from BMO. Your line's open. Please ask your question.
Hi, this is Bria Murphy for Joel. Thanks for taking my question. Can you just talk a bit more about your outlook for the
Sorry, could you please repeat the question?
Yeah, sure. I'm just wondering if you could talk a bit more, give a bit more color about your outlook for the nitrogen market in the second half?
Yeah, sure. Hi, this is Thor Giæver. I think the first point is, it's obvious, I suppose, that the market has tightened a fair bit this spring. It's already a bit unusual when you see prices firming through the second quarter because that's often a period where prices can drop off a bit when you're closing the main application season in the Northern Hemisphere. It points to the value chains globally, although there will be regional variations, but globally it looks like the stocks in the value chain are limited and then the price pressure is at least in part coming from there not being a lot of volumes available and also some of the buyers probably looking to secure a product early ahead of the next season. As we commented on, supply-wise, there has been very little in the way of new supply additions.
You've seen in the presentation, we put the CRU estimates in there that show that there is a lot of supply coming this year and next year. I think our comment 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 could be at a lower rate than most likely also for next year. It's probably going to be lower than what's thought of. Then back on the demand side or in a way, another reason why there is a tighter situation now is the farmer incentive side, the food prices being higher.
Those of you that have followed this industry for a while, of course, you'll 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 discipline. It probably indicates that we can expect tight markets in the season ahead of us as well.
Okay, thanks. Just can you talk about what drove the higher prepayments in Brazil in the quarter?
These prepayments, I suppose it's important to say initially this isn't so much a, let's just say Yara controllable, or at least the prepayments will vary from season to season. It depends a bit on the appetite of buyers. You can probably link it a bit to the situation we've just touched on that, perhaps another way of saying this, I guess, is the Brazilian market has 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. Yes, as we stated in the presentation there, the prepayments on our books are roughly NOK 0.5 Billion, a 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 first quarter, a bit into the fourth quarter as well, and most of this is related to the current season. A couple of worth noting then when we talk about, for example, operating capital efficiency, we do not include prepayment in that because we are aware of the seasonal variation there, and as mentioned, it's not really a sort of Yara-initiated or Yara-controlled parameter. 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 adjust that for normalizing the prepayment and also the additional dividend we proposed, then the pro forma number is 1.5.
Okay, thank you.
Your next question comes from the line of Lisa De Neve from Morgan Stanley. Your line is open please ask your questions.
Hi. Good afternoon. I have two questions. The first one is around the European Commission, which has set out its Fit for 55 package. The EU CBAM is proposed to apply to fertilizers, mostly nitrogen fertilizers, and may enter in force in 2026. Also, the EU has announced a number of changes for the maritime sector, including the FuelEU Maritime that is to encourage the use of alternative fuel in European shipping. How does Yara think about the implications of the CBAM 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.
I'll take it. Svein Tore. 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 that Europe takes the 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. It's important to see that there is an adjustment in place to also safeguard European industry, which, in many sectors, is the most energy efficient and 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 has done a lot already. If you look at our emission reduction since 2005, we're down by 45% through a number of actions taken in our plants and throughout our value chain. We have very clear targets towards 2030 with an additional 10% and then towards climate neutrality in 2050. In order to get there, we need to have a value chain approach to it so that it's recognized throughout from Yara to farmer and then all the way to the food companies, retailers, and consumers. This also opens up opportunities for that and new value pockets for Yara as well. Today, to a great extent, our premium is from what we can do in terms of additional yield, higher crops to the farmers.
When farmers also start to be paid based on the environmental footprint of farming on nutritional content and so on, there are some very interesting new value pools that we can tap into. I encourage you to also read the report from the Food and Land Use Coalition, where this is described very well, also the hidden cost of the food system. I think Yara is very well positioned to both support and drive this forward. On the shipping sector, as you mentioned, this also highlights the opportunities within green ammonia and green ammonia being an energy both carrier and for storage to enable green hydrogen use. With the ambitions of the maritime industry, if they are to reach their emission targets, they have to move to zero emission ships.
In that regard, ammonia is very interesting and a very good alternative to get there. We're setting up to support, amongst others, that industry through Yara Clean Ammonia, where we have first step set up a JV here in Norway to convert our port facility to green hydrogen together with Aker and Statkraft. We're working on that also with the authorities. Then we signed cooperation agreements, like with Trafigura as one example, and also with Yara in Japan in order to start to develop the markets as well. Really interesting, then we'll get back to more granular comments on the EU Fit for 55 as we have been able to study that in more detail. Thanks.
Okay. That's great. Second question is a simple one. Just could you provide us an update on your capital allocation and particularly where you are with the Brazilian Salitre project in terms of the timeline of completion? I know that's COVID related, some of the delays, would just be keen to get an update on that. Thank you.
Yes. I can start and then I'll hand over to Thor. In our approach to the new businesses that we're establishing, like with Yara Clean Ammonia, and also with Agoro to find ways to fund them and allow the growth, and still managing within our capital allocation policy. The way we've done that in the Porsgrunn plant is that we've taken the ammonia plant that will be a contribution in kind at a value of $450 million, and that manages off the CapEx from our side as a contribution in kind. 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. Thor, I don't know if you'd like to add further to that.
Not very much to add, I think as you've already heard, Lisa, even as we expand into expanding our core new businesses, we are aiming to do that within our existing capital guidance. You asked about the Salitre project. It is progressing, but as you know, it's been impacted by the COVID situation. We haven't been able to man the project anywhere near 100% over the last year and a half. 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.
Okay. Thank you so much.
Next question comes from the line of Andrew Stott from UBS. Your line is open. Please ask your question.
Good afternoon everyone, and thanks for the opportunity. 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 has been plenty of speculation about export tariffs being put back in. I think that would be for the first time since 2014. There's also quite a lot of subsidy packages being handed out to the ag economy. Just to put some takes on China, the risks and the opportunities for Yara on that. The second question was a bit more mechanical. I'm trying to scale the scope for further special dividends/buybacks. You said, Thor, that you are at 1.5 times X the prepayment effect. Your target ratio is 1.5- 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.
Okay. I guess I'll have a stab at both of these, Andrew. On China, that's another factor that I could have mentioned, of course, on the outlook for supply demand within this. As you know, China has been a significant, still are a significant exporter, but at a lower level than some years ago. As you'll also know, they have both from the ag soft commodities and on the fertilizer inputs becoming more restrictive. On the one hand, importing more grains, and on the other hand, exporting less fertilizer. It's contributed to the tight situation. That means that prices lately have been far above also Chinese costs, even though they are most of the time the highest cost producer. They have been cutting back on production. It doesn't look like something that is about to change.
At the same time, of course, very prudent of everyone in the market to keep an eye on this. So far the trend has been that many of us have been watching to see if they expand again production with the higher prices, but we haven't really seen that so far. I think it looks like a sort of stable trend at the moment. In terms of the dividends, you're right, our capital allocation policy says that we should be aiming for, over time, 1.5- 2 times net debt to EBITDA. We have indicated in the past sort of where you are. Well, first of all, this isn't a sort of spot evaluation from quarter-to-quarter. It's a corridor that we're aiming for over time.
We've mentioned in the past that when you're in a higher price environment, you would tend to be towards the lower end of that range and vice versa, because you also want to avoid volatility with this metric. Of course, when in the situations where your EBIT changes, your EBIT level changes, the metric changes too. We are not going to beyond that sort of guide anymore specifically. I think it's fair to say that we are in a relatively positive price environment, so it's not the time where we would move to the top of that range, certainly.
Okay, thanks. Can I just do another, sorry. On the nitrate deliveries or just the European deliveries down 16%, your remark is totally logical. I am guessing that there is a risk here that it is not all about delayed consumption from here to next year. The other risk we always, I guess, need to think about is market share. How are you comfortable that you haven't lost market share in Europe, and it is just delayed purchases?
Yeah. Well, Terje, do you want to comment?
Yeah, maybe I can take that. It's Terje Nielsen. Yeah, as Thor said in the presentation, there has been a 16% drop. Over the season, at 3%, our market share is stable, which we consider positive. 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. That means that it has really been about supplying application for this season. There has been a wait and see regarding next season. Positive into this is that stock levels are low. In fact, they are low as five years. 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.
Just to add briefly, Andrew, you may have seen that some production issues amongst other companies in the industry during the quarter. There's also an element of the supply hasn't been great either. Finally, also, you mentioned consumption. I mean, I don't think we have any reason to believe that consumption is down, but the deliveries are down, as Terje said, 3% for the season as a whole, which isn't a great deal. Probably most or even all, or even more of them accounted for by the fact that we think is very low.
Thank you very much.
Next question comes from the line of Mubasher Chaudhry from Citi. Your line is open to ask your question.
Hi. Thank you for taking my questions. The first one is just around the premiums that you mentioned that have squeezed because they tend to get a bit sticky, so the increase in pricing has that kind of squeezed the premium. Looking forward, do we think those premiums come back to the normal average that we see at Yara, or do we expect that squeeze to remain into third quarter? Just some comments around that would be helpful. The second question is around the prepayments that you talked about, or that kind of implies that there's been pre-buying.
Does that kind of indicate your confidence in the pricing dynamic at the moment, to be able to lock in the pricing and the volumes today, as opposed to continue to supply on a spot market or as you normally would, and therefore taking in or locking in volumes earlier to lock in the current prices? Just some thoughts around that would be helpful.
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. I think second quarter has been, if you like, a 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 Ex-factory 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. 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. We are confident with how this is developing. We see it, 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. We are moving in the right direction, and we think this will normalize.
Yeah. On the prepayments, as mentioned, this is mostly Brazil, and it's mostly then, as 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. You shouldn't expect any big price impacts from that.
Thank you. Very helpful.
Thank you. The next question comes from the line of Adrien Tamagno from Berenberg. Your line's open. Please ask your question.
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 broader situation, how do you think about your project in Ethiopia? The second question is with regards to clean ammonia. As you learn more about the sector and it develops, and you have more discussions with the partners, do you see more interest on the green or the blue side of ammonia? Thank you.
Should I take the role? Yeah. Hi, this is Thor again. Yeah, the Ethiopia project is clearly, the higher potash prices is positive for any potash project. On the other hand, for Yara, there's also, as we've touched on earlier in the call, we have a CapEx guidance that we are fully intent on staying within. A bit irrespective of price developments, it's important for us to have a very good, what should we say, balance between capital deployment and exposure across our portfolio. 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's side.
I'll address the ammonia question on green versus blue. I think with the interest now in hydrogen and the amounts potentially needed of the product, that there's room for developing both. It depends a bit on the sectors where it's going on, whether there's more interest for green or blue. We have Yara Clean Ammonia for because we will be in both blue and green. It's equally interesting. In some sectors, there's very clear demand that it should be produced with renewable energy assets within, in green. In some sectors, it's emission part that is most important, that it's produced with net zero emissions. Carbon capture and storage comes into place. We will be involved, but the majority of the work that we're doing at the moment is within green ammonia, linked to our project in Portugal, which is the largest one.
We're also working with Ørsted in Sluiskil in Netherlands, and with ENGIE in Australia as well on products for green hydrogen and green ammonia. I think I'll keep it there. Not sure if I fully answered your question? If not, let me know.
No, that was very helpful. Thank you very much.
Okay.
Next question comes to the line of Rikin Patel from Exane BNP Paribas. Your line's open to ask your question.
Hi, all. Thanks for taking my questions. Just a couple from me. Firstly, on fertilizer affordability. You mentioned in your release that in Europe some buyers had maybe just looked to cover the existing requirement 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, commodities are a little bit softer than what they were maybe a couple of months ago. All three of the nutrients are still, to an extent, continuing to rally. Just secondly on CapEx. In the first half, I think we spent around $330 million, and the guide for the full year is at $1.3 billion. Can you just remind us what the key components of spending are for H2? That'd be great. Thanks.
I can start on the first one and, Terje, add if you like. 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 partly a reflection that before this year, we've had quite a long period, at least three, four years, where broadly speaking, prices have softened, and so it's been quite a good strategy to wait with purchases. I think we've all, to some extent, all of us following this market, have been surprised a bit by how strongly and fast prices rose in the second quarter. 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. Remember that those input prices are quite a small proportion of the farmer revenue. I wouldn't see that as affordability as a big concern in the second half.
No, I agree. Still good economy for the farmers to invest in fertilizers. If we lift it a bit to sort of a global level, you take the grain balance, for instance, the stock level has declined four years in a row. It's 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. 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, of course, be some segments, some crops, some geographies that are the exception, but overall, the fundamentals are strong.
On the CapEx. This is mainly normal maintenance, but also some running projects, well, mainly in Brazil actually, with Felice and certain other smaller growth projects. In any given year, we tend to have more maintenance activity in the second half, often in the third quarter. There's a bit more this year compared to last year because we did for the first part of the pandemic, we did postpone some maintenance activities out of caution, partly, 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 up again. We did some risk adjustments of that. Yes, I understand the question. There is a seasonal pattern here, but our guidance for the full year is unchanged.
Maybe I can add to it. A third category of investments that we have in these $ 1.3 billion are investments that are not growth investments, but investments in efficiency and increased output and also reduction of emissions as well. That's the third category.
Great. Thanks.
Next question comes from the line of Chetan Udeshi from JP Morgan. Your line is open. Please ask your question.
Yeah. Hi. I was just going back to 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 strongly. I think the broader question to me is, when I look at Yara's targets for production, and I think there is that slide which shows that on the slide back, I think it's 11. The ammonia production hasn't grown from 2018 to last 12 months. It's flat. To achieve that 2023 target, you need 13% growth now in the next two years.
If the production is not rising in one of the best demand periods in ag, I'm just trying to understand what will drive that growth for Yara in the next two years in terms of volumes. Why are the volumes not growing even on a global basis for Yara today is a key question I have. Any insights there would be useful. Thanks.
A bit on demand and on production. First of all, the Brazil deliveries partly linked to the prepayments. There is a slightly different phasing this year. Last year, for us at least, the deliveries started earlier. This year, there's been a bit more prepayment, but for delivery basically in the third quarter. 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 and acids, we mostly upgrade that into other products, but we also buy ammonia to upgrade. 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. Having said that, you're correct that we have more work to do on our improvement program.
We do have a positive trend over the last 12 months compared to 2020, but we've had some setbacks in 2019 and 2020. This is a focus area for us to get back on track there. 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 really the delivery is coming now into third quarter normally. It has been strong imports of all nutrients in anticipation of really a strong market, strong fundamentals in Brazil. I don't think second quarter in a way should be the quarter to judge the performance in Brazil.
Thank you.
Next question comes from the line of Bengt Jonassen from ABG Sundal Collier. You line is open please ask your question.
Yes, hello. Thank you for taking my question. Can you allude a little bit about price realization in Europe on the CAN side, on the nitric side? I think list prices were a tad above what you realized, yeah, a little bit cover on that, please.
I think you follow us obviously very closely, so you know that we have a time lag. One can also add maybe an element here, which is normally the published prices are referring to Germany, while we sell into 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 pursuing price in Europe. We have, as you have seen, published frequently lately, latest today with EUR 298. Yes, there is a time lag, but there is nothing systematically different here. I think we are moving with the market, and sometimes not so easy to read the market. Right now, we are continuing to drive price into Europe.
I think just overlapping with Terje's comments here, and I think, Bengt, if I remember right, you've even hypothesized on this issue before, that when there are frequent price increases, the lag momentarily does tend to widen a bit. It is logical. 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. That's in a way why you're increasing prices, because you're trying to find the balance where you can price.
Thank you.
Once again, if you wish to ask a question, please press star and one. Next question comes from the line of Alexander Jones from BofA. Your line's open. Please ask your question.
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 costs on European production that you export. Could you remind us how much production you do export out of Europe, and how you expect that to evolve going forward as the EU considers these proposals? Then the second question would just be on the decision to do a special dividend rather than a buyback, whether you could give any color on your thought process between those two tools for shareholder distributions. Thank you.
Hi, Alex. On the first one, I guess we don't have published numbers on our exports. We can follow up on this a bit with you offline as well. You can look at some of our plants. For example, the Sluiskil plant and the Porsgrunn plant do export a lot, but they do also sell in Europe, so it's not a simple exercise. We can probably catch up on that after the call. The second question. Yes, dividends. In fact I know a key reason for going for a dividend now is that we are at 105, 1.5- 2 times net debt to EBITDA. Actually, as I mentioned pro forma and adjusted for the prepayments, we reach 1.5 with the dividend. You can't do buybacks. You cannot return that amount of cash in the form of buybacks over that.
That's a key consideration. Also, as you know, in our return policy, dividends are to be the main distribution mechanism. Certainly buybacks are something we'll continue to use, but dividends will be the main route.
Great. Thank you.
No question at this time, but once again, if you wish to ask a question, please press star and one.
I think, operator, if there are no further questions now, I suggest we can round off now. Just thank you to everyone who's attended the call and for continuing to follow Yara.
This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.