Good day, and thank you for standing by. Welcome to the Yara Second Quarter Results twenty twenty one 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 recorded.
I would now like to hand the conference over to your speaker today, Yora. Thank you. Please go ahead.
Hi, everyone, and welcome to our second quarter conference call. I am Silja Nygard with Investor Relations. Since we've just had the presentation, we are okay to just go straight into the Q and A. So moderator, if you can please open up.
And your first question comes from the line of Joel Jackson from BMO. Your line is open. Please ask your question. Hi. This is Bria Murphy on for Joel.
Thanks for taking my questions. 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, this is Thulie Eves.
I think, the the first point is
I mean, it's, obvious, but it proves that the, that the market has tightened a fair bit this, this spring. And it's already a bit unusual when you see prices firming through the second quarter because that's often a period where where, prices can drop off a bit when you when you, sort of when you're closing the the main application season in the Northern Hemisphere. So it it certainly it it points to to the value chains globally or whether there will be regional variations. But globally, it looks like the the stocks in the value chain are limited, and and then the price pressure is sort of at least in part coming from, from, yeah, there not being a lot of volumes available and and also some of the buyers probably, looking to secure a product early ahead of the next season. And then also as we come from I mean, supply wise, you know, there there has been very little in the way of new supply additions.
You you've you've seen in the presentation, we we've put the CRU estimates in there. This shows that there is a lot of supply coming this year and next year, but I think our comment to that is that is it it seems fairly obvious that those numbers, particularly for this year, are are simply not going to happen. There there could clearly be some new capacity coming in, towards the end of the year, but so this could be at a lower rate. And, you know, most likely also for next year, it's probably going to be lower than what's what's forecast. Uh-huh.
And and then back on the demand side or in a way why another reason why the you know, there is a tighter situation now is is the the farmer incentive side, the food prices being higher. So, those of you who follow this industry for a while, of course, will know that there there can certainly be volatility from from quarter to quarter and month to month, but but, the the factors I've mentioned, I think, you know, explain the strong difference. And and, you know, it's it's probably indicates that we can expect tight markets, in in the season ahead of us as well.
Okay. Thanks. And then just, can you talk about what drove the higher prepayments in Brazil in the quarter?
Yeah. I mean, it's These prepayments, it's pretty important to say initially this isn't this isn't so much a, what should we say, Yara controllable. I mean, or at least the prepayments will vary from season to season. It depends a bit on the asset type of buyers. But this you you can probably link it a bit to the situation I've just just touched on, I have another way of saying it, I guess, is the the Brazilian markets have been relatively alert to to the situation unfolding and has been keen to to to book products.
Some of it's probably, you know, ahead of the highest prices that we've seen so far. But, yes, as as we said in the presentation, the the the prepayments on on our books are roughly half a billion There's a a normal level 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 is in the third quarter, a bit into the fourth quarter as well. So so, it and and most of this is related to the current season.
So, a couple of, you know, worth noting then when we talk about, for example, operating capital efficiency, we do we do not include prepayment for that because we, we we are aware of the seasonal variations there. And and and as mentioned, it's not really a sort of Yara Yara initiated or or Yara controlled parameter. And, also, we mentioned in connection with the with the net debt to EBITDA ratio that if you adjust our the one point o five that we have reported for for this quarter, if you just adjust that for normalizing the prepayments and also the additional dividend we've approved, then the pro form a number is 1.5.
Okay. Thank you.
And your next question comes from the line of Lisa Denied from Morgan Stanley. Your line is open. Please ask your question.
Hi. Good afternoon. So I have two questions. The first one is around the European Commission, which has set out its fit for 55 package. So the EUC ban is supposed to apply to fertilizers, missing nitrogen fertilizers, and and may enter in force in 2026.
Also, the EU has announced a number of changes for the maritime sector, including the fuel EU maritime that it's in cure encourage use of alternate fuel in in European shipping. So how does Yara think about the implications of the C band for for your operations in Europe? And how do you think about the maritime policy and and how it will foster your path for ammonia to be adopted as as a maritime fuel substitute. Thank you.
So it's Matthew here. And first of all, I'd like to say that the communication around 5455, it's very much needed, and it's good to see that your PIXAL leadership when it comes to sustainable development and on environmental targets. It's a rather comprehensive company communication, and it takes some time for us to fully analyze and and see all the implications for for for us. But but it's important to to see that there there is an adjustment in place to to also, safeguard European industry, which, in in in many sectors, is the most energy efficient and need for it in in in the world. Also important, and as you highlighted, that to to 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 the importance of growing more food on less land and with a with a lower footprint.
ERA has done a lot already. If if if you look at our emission reductions since 02/2005, we're 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 the 2030 with an additional 10% and then towards climate neutrality in 02/1950. But 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 to all the way to the food companies, retailers and consumers. And 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 crop crops with the farmers. But when farmers also start to be paid based on the environmental footprint of farming on nutritional content and and so on, there are some 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. And and, I think Yaris is very well positioned to to both support and and drive this forward. Then on on the shipping sector, as you mentioned, this also highlights the the opportunities within ammonia and green ammonia and green ammonia being an energy both carrier and for storage to enable green hydrogen use.
And with the ambitions of the maritime industry, if they have to reach their emission targets, they they they they have to move to zero emission ships. And in that regard, ammonia is very interesting and and and a very good alternative to to get there. And we're setting up to support amongst others that that industry through YaraClean ammonia, where we've, first step, set up a JV here in in in Norway to to convert our costume facility to to green hydrogen together with Aker and Skopkaft, and we're working on on on that also with the with the authorities. And then we signed cooperation agreements, like, with Trafigura as as one example, and also with Jira in Japan in order to to to start to develop the markets as well. So so really interesting, and and then we'll we'll get back to more granular comments on on on the EU fit four fifty five as we have been able to to study that in more detail.
Thanks.
Okay. That's great. And then second question is a simple one. Just can you provide us an update on your capital allocation and and particularly where you are with the Brazilian city trade project in terms of the time line of completion? I know that's COVID related sort of some of the delays, but we'd just be keen to get an update on that.
Yes.
I can start, and then I'll hand over to Thore. But in our approach to the the new businesses that we're establishing like Yara and Clean Ammonia and also the agorists to to to find ways to to fund them and allow the growth and still managing within our capital allocation policy. And the way we've done that in in in the positive plant is that they've taken the ammonia plant that will be a contribution in kind at the value of $450,000,000, and that manages of the of the CapEx from from our side as a contribution in currency. You can expect that we will look into JVs and and and structures in order to to make conversions that enable a green transition, but but also within the policy and and our way forward when it comes to capital discipline and and capital allocation. And so with that, I don't if you'd like to add further to to that.
Yeah. I not not very much strength with that. I think, as you've already heard, Lisa, that this so this is, even as we, expand into, you know, these, expanding our core new businesses. We we we are aiming to do that within our existing capital capital guidance. You asked about the Sovicha project.
It is progressing, but as you as you as you know, it's being impacted by the COVID situation. We haven't been able to, man the project anywhere near a 100% over the last year and a half. So we are still we are still progressing, but also reevaluating the the timeline on on that project. We don't have a, a new completion date to to communicate at this stage, but but the, the work is progressing, and and and we'll we'll need to come back to that.
Okay. Thank you so much.
And next question comes from the line of Andrew Stott from UBS. Your line is open. Please ask your question.
Yeah. 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 would be for the first time since 02/2014. 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 dividendsbuybacks.
You said, Tore, that you're at one and a half times x, the prepayment effect. So your target ratio is one and a half to two. 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'll, I guess I'll have a stab at both of these, Andrew. I mean, on on China, I mean, that that's another factor that I could have mentioned, of course, on the on the outlook for supply demand. Within this, as you know, I mean, China has been a significant still are a significant exporter, but at a at a lower level than some years ago. So and and as you as you'll also know, they so they have both on the ag 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 and that means that, you know, prices lately have been far above, also Chinese costs even even though they are, most of time the highest cost producer. And they have been cutting back on production. So it you know, it's it's 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 to keep an eye on this. But so far, trend has been that I mean, 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.
So I think it's it's, what should we say? A a looks like a sort of stable trend at the moment. In terms of the, dividends, I mean, we we, are you're right. Our our capital allocation policy says that we should be aiming for over time one and a half to two times net debt to EBITDA. We have we have indicated in the past sort of where you are.
Well, first of all, this isn't the sort of spot evaluation from quarter to quarter. It's a corridor that we're aiming for over time. But you you can also we and we've mentioned in the past that, you know, when you're at in a higher price environment, you would tend to be towards the lower end of that range and vice versa, because you you also want to avoid, volatility in in your you know, with this metric, of course, when in the situation where your EBIT partings changes, your EBITDA level changes, the the metric changes too. So we're we're not going to, beyond that sort of guide anymore specifically, but I I think it's fair to say that we are we are in a relatively positive, price environment. So it's it's not the time, where we would move to the top of that range certainly.
Okay. Thanks. And can I just do another story? On the nitrate deliveries or just the European deliveries down 16%, Your remark is is totally logical. I'm I'm guessing that there is a risk here that it's not all about, delayed consumption from from here to next year.
The other risk we've always get, I guess, need to think about is market share. So how how are you comfortable you haven't lost market share in Europe and it is it is just delayed purchases?
Yeah. I mean, yeah. Well, Thaddeer, do you want to comment?
Yeah. Maybe I can take that. It's Thaddeer Knutsen. Yeah. So as Thou said in the presentation, there has been a 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 for 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 as 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 that some production issues in in amongst other companies in the industry during the quarter. So there's also an element of the the, you know, the 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 down, that the deliveries are down, as as as it says, 3% for the for the season as a whole, which isn't a great deal. And and, you know, probably most or even all or even more of them accounted for by the fact that we think confidence is very low.
Thank you very much.
Next question comes from the line of Mubashir Chaudhry from Citi. Your line is open. Please ask your question.
Hi. Thank you for taking my questions. The first one is just around the premiums that you mentioned unsqueezed because they tend to be a bit stickier, so the the increase in pricing has not kind of squeezed the premium. Looking forward, do we do we think those premium come back to the normal average that we've seen at Yara? Or do we expect that squeeze to remain into third quarter?
Just some comments around that would be helpful. And the second question around the the the prepayments that you talked about. So that kind of implies that they've been prebuying. Does that kind of indicate your confidence in the in the pricing dynamic at the moment to be able to kind of lock in the pricing and the volumes today as opposed to kind of 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 prices current prices? Just some thoughts around that would be helpful.
Maybe I take the first half of that on on the premiums. We 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, 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 sort of extractor 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 it obviously the underlying is very positive that 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, and we think this will normalize.
Yeah. And on the prepayments, as as mentioned, I mean, this is mostly Brazil, and it's mostly then you as you probably know, in Brazil, the large volume is is Blend NPK. This is a business where we, at any given time, do have forward sales, but we we do have a a fairly strict risk management on the price exposures there. So I I you shouldn't you shouldn't expect any any big price impacts from from that.
Thank you very, office. Very helpful.
Thank you. And the next question comes from the line of Adrian Tamagno from Berenberg. Your line is 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 battery 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 develop developed 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. So, hi, this is Thur again. Yeah. The the Ethiopia project, is clearly, I mean, 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 have a very good, what should we say, balance between capital deployment and exposure across our our portfolio. So and we've said in the past for that project, we we we continue to think this is a a good viable project, but we are keen to find ways to to progress that without without putting in a lot of more capital from from your side.
Then I'll, it's so, Santo, I'll address the, ammonia question on green versus, blue. And
I think
with the interest now in in hydrogen and the amounts potentially needed of the product, there there is we look forward developing both, and it depends a bit on on the sectors where it's going on whether there's more interest for green or blue. And we have a there's we have the other clean ammonia for for because we will be in in both blue and and green. So so it's equally interesting. In in some sectors, there there's very clear demand that it it should be produced with renewable energy as it would be in green. In in in some sectors, it's it's emission part that is most important that is produced with net zero emissions and then carbon capture and storage comes into
We will be involved, but the majority of the work that we're doing at the at the moment is within green ammonia linked to our project in Poshkun, which is the the largest one, but we're also working with the with the in in in Netherlands and with the NG in Australia as well on on products for green hydrogen and then green ammonia. So I'll keep keep it there, but not not sure if I fully answered your question. If not, let me let me know.
No. That was very helpful. Thank you very much.
Next question comes from the line of Rikin Patel from Exane BNP Paribas. Your line is open. Please ask your question.
Hi, all. Thanks for taking my questions. Just a couple for me. Firstly, on first line, your affordability, you mentioned in the 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, soft commodities are a little bit softer than what they were maybe a couple of months ago, and all three of the nutrients, are still, to an extent, continuing, to rally.
And then just secondly, on CapEx. In the first half, I think we spent around $330,000,000 and the guide for the full year is at 1,300,000,000 Can you just remind us what the key components of spending are for H2? That'd be great. Thanks.
I can, I mean, I can start on the first one and tell you add add this if you like? The I think the my reflection on the sort of it it's not that fertilizers weren't affordable to European farmers in the second quarter. I think it's more 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 and so it's been quite a good strategy to wait with purchases. And 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. So I I think this is more of a, yeah, surprise factor in a way than a than an affordability factor. You're right that, of course, input prices have have risen strongly as well as as food prices, but but remember that those input prices are, you know, quite a small proportion of the pharma revenue.
So so I wouldn't see that as a affordability as a big concern in the second half.
I agree. Still good economy for the farmers to invest in, in fertilizers. If we lift it a bit to sort of a global level, you take the the grain balance, for instance, it has now declined. The stock level has declined four years in a row. It's now down to fifty five days if we exclude China.
And looking at the price food index, it has had a very strong development. June to June 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, of course, be some segments, some crops, some geographies that are the exception, but overall, the fundamentals are strong. And then on the, on
the CapEx, I mean, this is this is mainly, mainly normal maintenance, but but also some some running projects. Well, mainly in Brazil, actually, with Aliche and and certain other smaller growth projects. There is a I mean, in any given year, we tend to have more maintenance activity in the second half, often in the third quarter.
Also,
There's a bit more this year compared to last year because we did for the first part of the pandemic, we we we did postpone some maintenance activities. I took caution partly and and to to to avoid you know, because the risk of the risk of disruption is always higher when you when you take down a plant. You you can run into issues and you start out again. So we we we did some risk adjustments of that. But, yes, I mean, it it's, understand the question.
The that there is, there is a seasonal pattern here, but, we we our guidance for the full year is unchanged.
And maybe I can add to the third category of investments that we have in in these 1.3 are investments that are not growth investments, but investments in efficiency increased output and also reduction of of emissions as well. So that's the that's the third category.
Great. Thanks.
Next question comes from the line of Chetan Udeshi from JPMorgan. 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 also had no.
I think we also see the same pattern in Brazil that the deliveries of Yara in Brazil are down in second quarter when when when we, you know, look at the statistics, you know, Europe sorry, Brazilian imports of all of the ag imports are are are up very, very strongly. So, I mean, I I think the the broader question to me is, you know, when I look at Yara's, you know, targets for production, and I think there is that slide which shows that on the slide back, I think it's 11. I mean, the ammonia production hasn't grown from twenty eighteen to last twelve months. It's flat. And so to achieve that 2023 target, you know, you need, like, 13% growth now in the next two years.
And if the production is not rising, one of the best demand be in ag, I'm just trying to understand what will drive that growth for Yara 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 there would be useful. Thanks.
Yeah. I mean, this so a bit on on on demand and on production. First of all, the 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 delivery started earlier.
This year, there's been a bit more prepayment, but you know, for delivery basically in 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 we mostly upgrade that, into other products, but we also, buy ammonia to upgrade. So 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 but, having said that, you're you're you're correct that we have we have more work to do on our on our improvement program.
We do have a positive trend over the last twelve months compared to 2020, but we we've had some some setbacks in in '19 and '20. So so this is, you know, a a focus area for us to to get back on track there. But we're we are still, we are still, sticking to our our longer term targets, and 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. So it has been strong imports of all nutrients in anticipation of really strong market, strong fundamentals in Brazil. So I I'm I don't think second quarter in a way should be that quarter to judge the performance in Brazil.
Thank you.
Next question comes from the line of Ben Jonathan from ABG Sandal Collier. Your line is open. Please ask your question.
Yes. Hello. Thank you for taking my question. Can you elaborate a little bit about price realization in Europe on the CIM side, on the nitrate side? Think list prices were at tad above what you realized.
And yes, a little bit color on that, please. Yes. I think you follow us obviously very close. So you know that we have a time lag. One can also add, maybe an element here, which is, normally the 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 pushing price in Europe. We have as you have seen published frequently lately, latest today with February. And, yes, there is a timeline, but there is nothing systematic clear, different here. So I think we are moving with the market and sometimes not so easy to read the market. But right now, we are continuing to drive price into Europe.
And I think just,
I mean, overlapping with with Tadeus' comments here. And I think, Benk, if I if I remember right, you've even hypothesized on this issue before that when there are frequent price increases, the lag, you know, momentarily does tend to widen a bit. And it is logical. I mean, 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 and, you know, then, you know, your order book don't think tend to go a bit longer. And and that's in a way why you're increasing prices because, you know, you're trying to find the the balance to to where where you can price.
Thank you.
And next question comes from the line of Alexander Jones from BOFA. Your line is 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 C band proposal, there's no export rebate.
So you'd be paying full CO2 cost 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? And then the second question would just be on the decision to do a special dividend rather than the buyback. Whether you could give any color on your thought process between those two tools for shareholder distributions? Thank you.
Yeah. Hi, Alex. This is Touwit. On the first one, I guess we don't have, published numbers on on on our exports. But and we can follow-up on this, a bit with you offline as well.
But and because you can look at some of our plants. I mean, for example, the, the sloyscale plant and the and the Poshtivin plant do export a lot, but they they do also sell in Europe. So it's not it's not a simple exercise. But we can we can probably, we can probably catch up on that, after the call. Now the second question.
Yeah. Dividends. Well, I I I think the well, in fact, I know the, a key reason for going for a dividend now is that we do we are at one, you know, one zero five, one and a half to two times net debt to EBITDA. And actually, as I mentioned, you know, pro form a and adjusted for the prepayments, we reached 1.5 with the dividend. It you can't do buybacks.
You know, you you cannot return that amount of of of cash in the form of buybacks over that. So so that's a key consideration. Also, as you as you know, our in our, return policy, dividends are to be the main, the main distribution mechanism. So it's, certainly buybacks are are something we'll continue to use, but but dividends will be the main 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 we can round off now. So just thank you to 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 standby.