Thank you. Welcome to everyone to the telephone conference for Yara's second quarter results. I'm here together with representatives from Yara's management today. We have our CEO, Svein Tore Holsether, our Deputy CEO and EVP Corporate Development, Lars Røsæg, CFO, Thor Giæver, and our Market Intelligence, Hans Olav Mørk, as well as other key representatives. We hope you all have seen today's presentation, and will therefore go straight into questions. Operator, if you could please open the first line of question?
Absolutely. The first question comes on the line of Christian Færgestad from Kepler Cheuvreux. Please go ahead with your question.
Yes, good afternoon. Good morning, everyone. two questions from my side, please. First of all, you had some 10% curtailments in Europe during Q2, as you elucidated at the 12:00 webcast, and mostly in Urea. Where are we at present with this 10%? On that relation, on the Tertre site in Belgium, which indeed, looking at the map, is a bit in the middle of nowhere from a logistical point of view. Is there any way you can build up logistics for Ammonia supply from the coast? My second question would be, with your large LatAm business, particularly on the trading side, can you share with us some current demand patterns, and how does inventory look at the start of the application season in Latin America? Thank you.
Yeah, thanks, Christian. On the, on the curtailment, we are, we are somewhat lower today. I'm looking at Yara now.
7%.
7%, yeah. I can maybe also comment on the type of curtailment, and Christian, you had, I may not have caught the full gist of your question, but you noted that we have logistical issues, that's, and that's what we comment on two main factors with the curtailment. One is that it's influenced by our long-term view on ammonia prices, and as we covered in our capital markets day, that we see attractive new projects in the U.S., and we are, as you know, looking closely at them. A consequence of that, and we consider them so competitive that, you know, they are likely to influence the price level longer term.
The, the second factor is specific to the plant, which today does not, is not set up well for ammonia imports. That's certainly something that could change in the future, but the curtailment that we've made is based on the. That's what the IFRS rules require as well, that you test and value the plants based on their existing setup. We do have potential plans to increase flexibility there, but as of today, they are not finally approved projects. Yeah, sorry, I may have said curtailment, but I was talking about impairment. The final question?
Brazil or Latin America inventories.
Should
Yeah, no, I, it's a little bit fascinating because, well, our understanding is that probably due to, I know I'm talking on Brazil in particular, but I guess the other markets may not be very different, is that because of the very high prices and declining prices, through last season, farmers have been extremely late in their buying of fertilizer. There has been a lot of talk about inventories than in the value chain because of this, as importers have taken in product, and there's been flows from on the nitrogen side, from places like Russia, Venezuela, Iran, that has difficulty finding other markets, for instance, but also from other places.
Just a matter of a few weeks, it turned totally around when now that the peak season is approaching. You may have seen that also, Christian, that actually CFR Brazil prices for all nutrients have increased recently. For Urea is up to around $370 or so. It's mentioned, which is kind of even as attractive from a spot sale perspective from the Arab Gulf. Those inventories very quickly disappeared, and when, you know, we get kind of information from experts on the Brazilian markets, there is much more optimistic tone now also on the total market there for this coming year or coming peak season, than what many expected just a couple of months ago.
It seems to us like there are no longer any inventory issues in Brazil or probably then also the rest of Latin America.
Thank you. Our next question comes on the line of Alexander Jones from Bank of America. Please go ahead with your question.
Great. Thanks so much for taking my questions, too, if I may. The first, following up on the impairment, in Belgium, can you talk about how that lower long-term ammonia price outlook impacts the attractiveness of your blue ammonia plants in the U.S. that you're considering building? The second question, just on CapEx guidance for the year. You mentioned in the webcast that there are $500 million of uncommitted funds within that. Can you give us any idea of the sort of projects that you're considering within that, and therefore, how likely or not, they are to go ahead within this year? Thank you.
Yeah. Hi, Alex, this is Tord. First of all, on the ammonia prices, I mean, these price assumptions are built into, of course, also our project assessments for the U.S. project. This is, it's within the logic, let's put it that way, when we say that these projects are attractive. So there's no change in that statement. It's more taking a balanced view of what this means globally. As we mentioned in our capital markets day, we see this as a- Of course, in isolation, it's negative for a European integrated nitrogen plant with no sourcing flexibility.
We basically have one of them today in Tertre, as mentioned on the previous question, we do have opportunities to increase flexibility there, and we're looking at them, but we have no concluded, no conclusions on that yet. Overall, we have a flexible production set up, and we see very strong business cases to invest in low-carbon ammonia in the U.S. and to use that to actually sustain and strengthen our finished products set up in Europe. I was so deep in the flow of the first question. What was the second one?
Yeah, I could add in it, Svein Tore Holsether, in the meantime, while we address the second question. When it comes to the blue ammonia projects in the U.S., as we mentioned in our capital markets day as well, it's one of these rare circumstances where an opportunity in one country represents a solution to a challenge in another one. What we've been faced with is high energy prices in Europe. It's impacting all energy-intensive industries in Europe. With the flexibility that we have demonstrated in our production and the ability that we have to bring ammonia into Europe, that is that gives us flexibility.
We have a unique setup with Yara Clean Ammonia being the biggest trader of ammonia in the world. We have 14 ships that transport ammonia, so we can bring that across from other parts of the world. That helps us in the first instance now so that we could use this to handle energy price increases and fluctuations by bringing in ammonia from overseas. The blue ammonia projects allows us to both take advantage of lower energy prices in the U.S. and maintain our finished goods positions in Europe. At the same time, through the support of the Inflation Reduction Act, we can also decarbonize Europe as a result of this.
These are highly attractive projects, but it comes as a result of what we've seen in Europe. It doesn't change anything. This is what we saw and the reason why we're making these adjustments, and our business model is well fit for incorporating just that. I hand over to.
Yeah, thank you, Svein Tore Holsether. On your second question, Alex, the roughly half a billion of uncommitted, gross CapEx, it's a combination of smaller improvement projects in the production plants and potential smaller M&A. These are all projects at an earlier stage of development and where we have flexibility. It's there's a possibility that some of this may be phased into future years.
Thank you.
Yep.
Thank you. Our next question comes from the line of Joel Jackson from BMO Capital Markets. Please go ahead with your question.
Hi, good afternoon. I'll ask my questions one by one. Looking at the inventory writedowns and some of the color you supplied on slide seven, it's largely NPK and ammonia impacts. Can you break that down, the writedowns and the positioning losses, also maybe by region, if you can give us some relative magnitudes of that?
Yeah. Hi, Joel, this is Tord. I mean, the sort of, region and product splits may be a bit, is more detailed than we, than we have available externally. I can say that, the largest, by region, the largest overall writedowns were in Europe, but we also had, fairly significant, share in the other two regions. Then the additional comments I would make is that the exposure changed during the quarter, mainly because we had strong order taking in Europe, so there is less price exposure in Europe at the end of the quarter than the start. In the other two regions, with slower order taking, we have longer positions at the end of the quarter, compared to Europe.
Okay, thank you for that. The lag that we should expect kind of in Q3, how is that compared to normal? Lag in terms of, you know, price realizations versus some of the benchmarks you might see.
We, we don't have specific guidance on that, but I suppose I can link it a bit to the previous answer, in that we have more orders in Europe than we have overseas. It's. I would say that's a good to have a balance from our point of view, not least because we're seeing a shift in the market trends now, where, you know, obviously looking at the first half, we had negative effects from being long. Now with increasing prices, probably the risk is moving a bit more towards not being committed too far out.
Just my final question, just on the Indian dynamic, what is your latest views on sort of, you know, what Indian urea production is, their import needs, and how that might change in 2024?
I'll hand that one to you, though, Tore.
Yeah. No, they are currently running at around 2.6 million tons a month, according to the latest data we have, which is around 300,000 tons or so, 300,000-400,000 tons more than what they were before this restarts or the starts of the new capacities. It's also, I would agree with those views, that from an import level of around 10 million tons, 9-10 million tons, it might drop to around 6 or so, based on the new capacities. India is clearly where there has been the most new capacity over the last couple of years.
Now it's our understanding that these plants have started up all, and maybe there is some supply overhang for some more months, but not very many months. Into 2024, the way it looks, I don't think there is particular reasons to expect much more supply in India.
Thank you.
Thank you. Our next question comes from Lana Priyanka Patel from UBS. Please go ahead with your question.
Hi, just one question on my side. For Europe, you reported negative $71 million of EBITDA, and that was impacted by the inventory effects. Because you haven't reported what exactly the inventory impact was, could you comment on what margins were like for nitrate and NPK production? Like were they negative or was it still profitable?
Hi, Priyanka, this is Tord. We have specified or indicated that the overall position loss in the quarter was roughly $230 million. I would, in terms of the margin, of course, bear in mind, this is at EBITDA level. We are, if you, I know it's not a sort of, a number that is reported in our results, but if you look at the combination of revenue and cost of sales, you'll see that we had clearly stronger margins than EBITDA, as you normally would.
Yeah, and then with regard to Europe, I mean, you can get, and this is something you can follow up with us offline as well, but you can get an idea of profitability by two alternative models on cash costs, one based on ammonia purchasing, and one based on gas production. And of course, we've been reducing our curtailments, but we've been flexing a bit between those two, but overall for the quarter, it's been more profitable to upgrade based on ammonia compared to gas.
Sort of back to the start of your question, I mean, we have positive margins both overall and in Europe, but it's at the EBITDA level that we are low, this quarter. If you take out those position effects, also that is a larger positive number.
Okay, thank you.
Thank you. Our next question comes on the line of Chetan Udeshi from J.P. Morgan Please go ahead with your question.
Yeah. Hi, thanks. My first question was, I was just curious, you know, you kept highlighting the strong order book in Europe, and I'm just curious, you know, it's essentially the end of the season, so what do you exactly mean by strong order book in Europe? I mean, is this order book stretching into, you know, Q4 and Q1? You know, there is still that position risk to some extent, because you are not shipping necessarily in Q3, you know, these may be very long lead time orders. Maybe if you can just talk about, like, what you exactly mean by order book. What is the timing in terms of shipments or delivery of that order book? Because I'm also curious to be raising the production run rates now, you know, in an off-season in Northern Hemisphere.
Just curious from that perspective. Second question I had was, when I look at your inventories, at the end of Q2, it's come down quite a bit from Q1 levels, but it's still $3.3 billion, and historically, you've been running the business as more like, you know, $2 billion-$2.5 billion. Within that $3.3 billion, like, is there a additional write-down risks? You feel more comfortable that, you know, at the current prices, or let's say if the prices stay at where they are or maybe the most down 5%, you don't have to take another big write-down. I'm just curious how that shape of inventory looks as we head into the year end overall. Thank you.
Yeah, thanks, Chetan. I'll have a stab at both. I'll maybe start with the second one, and let the others from the team chime in if there's anything to add here. I would say, I mean, to start with the write-down risk, what we've tried to show, looking at the price curves, that we sort of, that partly to explain the development in second quarter, but also to sort of see where we are at now at the start of the third quarter. When we talk about a likely recovery in margins based on the price picture, now it's specifically saying that, well, nitrogen margins in particular are much higher now than they were at the end of second quarter, so that's a positive.
On the potash, it's the pricing is basically flat into the Q3 , and it's down slightly on phosphate. The net of this as it stands now, looks like if anything, a positive rather than a negative. In terms of why the, or if you're sort of underwhelmed by how much our inventory is down, in absolute terms, certainly one factor would be there that, yes, we've released some inventory in Europe, and of course, prices are down. We have those effects, but outside Europe, we have longer lags there from production to sales and delivery, and with slower sales outside Europe, that will be a factor.
In addition to that, if you compare with a higher margin environment, you know, our inventories will be valued at the lower of cost and net realizable value. Well, right now, there's less difference between those two numbers than when we're in a high-margin environment. I'd highlight those factors. Yeah, my team is nodding, it looks like I've passed on that one. On the order book in Europe, I mean, you're touching on this sort of the classic sort of when does the season actually start? What are we delivering for the old season versus the new season? I think what we've put behind us a season, as we mentioned, that had a bit higher opening stocks last summer.
That has turned out positive in the end, as we see it, that the application rates are most likely up, because we've, in terms of deliveries, ended flat compared to a year earlier. Within that, and this is always the case to some extent, but maybe, you know, some of what we've delivered in the second quarter will be for the new season. And this is we think it's, you know, linked to the attractive prospects as well, that the affordability ratios for farmers. I mean, it seems like it's a really good idea for farmers to buy inputs now, given those ratios. We, when you add in then, for example, the-
Clearly, there's a risk of higher gas prices and therefore product prices heading into the winter. It's reassuring, I would say, that both it looks like application rates are up for the season that we've just finished, and that position taking is quite lively for the new season. I don't know if Tore, what you think?
I guess you can say that the order book is primarily or overwhelmingly third quarter deliveries, right?
Right. Yeah, yeah.
You saw the announcement, the more latest announcement, maybe on the nitrate price for a kind of a modest volume for September delivery, right? That's we are not selling for Q4 or Q1 given this gas price risk, but that we are.
Yes, exactly.
Yeah.
This is a good point, and that was part of your question, Chetan. Yes, to be clear, this is about delivery for third quarter, not beyond.
That's clear. Thank you.
Our next question comes from the line of Rikin Patel from BNP Paribas Exane. Please go ahead with your question.
Hi there. Thanks for taking my questions. Just one on volumes. So in the Americas, NPK blends declined by about 25% during Q2. As you done in the last year, you flagged the impact of sanctions and the impact on commodity deliveries, I guess, into Brazil. Just curious what the situation is at the moment on sourcing potash. Have you been able to sort of renavigate your supply chains, having moved away from Russia and Belarus last year? I suppose now that demand is coming back and farmers are starting to restock in the region, do you expect to see an improvement in NPK blends as that demand picks up in keeping with those sort sourcing issues? Thank you.
Yeah. Hi, Rick, I think maybe two points. I mean, first of all, as we mentioned, and you're completely right, this, the lower lend NPK sales are linked to the raw material and sanction situation. To answer your question, yes, I mean, we've had a significant restructuring of our sourcing on, well, on phosphate, on potash, and also on ammonia. As part of that, we have deliberately taken down our activity on the NPK blends in Brazil. It is a lower margin segment, that's just had a proportionally lower impact on our earnings. In terms of-
Yeah, I mean, markets are improving now, and certainly the overall market there, and including Brazil, is likely to be positively impacted by that. We'll need to, and should prioritize our efforts towards the higher margin compound NPKs that supply into our NPK plants in Europe. Yeah, of course, we need to as we've as has been the reason for this restructuring, we have to pay attention to applicable sanctions and operating operate our business in terms of what's possible related to that.
Okay, thanks. Just another one. We're seeing increasing reports of droughts across the world, whether it's in the U.S. or whether that's or over here. Are you seeing any sort of impacts on volume in the near term? Any other thoughts on that situation would be welcome? Thanks.
Yeah, my impression is that, as you said, with the heatwave in Europe, the problems in the northern U.S. and also Canada and other places, that a lot of that happened mostly after the application season. I believe, at least I haven't kind of really seen any concrete evidence that there has been a lot of cutbacks. Maybe there could be a third application or something that could be affected, possibly, nothing major that I've seen highlighted anywhere.
Okay. Thanks a lot.
Our next question comes on line from Aron Ceccarelli from Berenberg. Please go ahead with your question.
Hello. Hi, good morning. I have one on your slide 26. Considering the current cost of gas and considering also the velocity and the speed at which you and your competitors are able to bring back capacity from curtailments, what makes you really confident that we're not going to see a different picture from what you show in the presentation in terms of capacity condition for the remainder of this year and next year? Thank you.
Aaron, your line is a bit unclear, but I'll try. I think you are asking, referring to the capacity addition, slide. Is that correct?
Yes, exactly. Sorry, I'll try to rephrase that.
Yeah.
I was asking, considering the current gas cost and also the speed at which you and your competitors are able to bring back capacity from curtailment, what makes you confident today that we are not going to see a different picture to what you're showing in the slides at, for this remainder part of the year and especially for 2024?
Yeah. Right. In other words, the, yeah, the risk of currently or previously curtailed capacity changing this picture.
This slide only shows new plants that are under construction and when they are expected to come on stream. That slide is not addressing deviations, the utilization rates of the existing industry. That you have to take into consideration in addition. Yeah.
Yeah. Okay.
Just to add that maybe.
Coming back.
I mean, at risk of stating the obvious, I mean, it should, well, you should link it also to your gas price and view going forward. Currently, of course, the margin situation for European producers is improved, and so although we don't have numbers on this, I think it's reasonable to assume that other European nitrogen producers have increased their utilization rates. At the same time, the risk of higher gas prices and curtailments this coming winter is significant.
As you look at this, back at this slide, if you have a gradual increase in European utilization rate going forward, that could be an offsetting factor, but beyond this year, capacity additions are significantly lower.
Thank you very much.
Thank you. Our final question comes to line on Ben Isaacson from ABG Sundal Collier. Please go ahead with your question.
Thank you for taking my questions. I think I have four questions, if I may.
Given your, let's say, positive outlook on demand on your recent price hike for CIN, why are not your finished fertilizer plants operating at full blast, at 100% utilization? You have still curtailed capacity. That's one question. The second question would be, in addition to the Tertre plant, there is also a write-down of $35 million for an asset under construction. Which asset is that? Then, on the position losses year to date, around $500 million are including write-downs. To get a better picture about 2022, is it possible to quantify any position gains? The final question would be on the market side.
The first phase of CBAM being implemented from the first of October, I think, what kind of effects do you think could potentially come into play from first of October? Thank you.
I take that one first?
Yeah, we can.
No, I mean, I my understanding is there is the reporting starts October first. The actual implementation of the CBAM only starts in 2026, and then only with 5% the first year, and a very slow phasing. You're not up to 50% until 2030, and full effect in 2034. We are, of course, following this closely, and we and the implications is, of course, that the urea that is imported will get a penalty, a full carbon cost added to it, with an implication that has for the rest of the nitrogen market in Europe, and the same with the gray ammonia. It will not have a market effect October first. It will start gradually in 2026.
Just to add, it's with the focus on carbon cost, if you look at our strategy, the products that we have, and the competence that we have, not only to, I mean, reduce our own emissions, and if you look at the carbon footprint of Yara's fertilizer compared to the world average, we already have an advantage. On top of it, with our agronomic competence and how we work with the farmer focus, we can also help in reducing the in-field emissions. As we see now, also the awareness on this, at country level, but also within the whole value chain, is increasing.
While there will be immediate impacts focusing just on the production side, there's a large opportunity from a business perspective here, where Yara is uniquely positioned to help drive this shift towards lower emission agriculture. We talked about that in the capital markets day as well, and happy to follow up more on that topic at a later stage.
Yeah, maybe staying with the reverse order of your questions, Ben Isaacson, on position gains in 2022, we don't have a number that we're publishing here, but I think you can take a look at the slide in the presentation six, where we show the price developments for the main nutrients, also including last year. I think certainly if you look at Q2 last year, I would tend to conclude that, if anything, the effects there were negative, probably not as high as this year. The difference being that our underlying margins were much stronger, but we had a negative development there. For the year as a whole, it's kind of mixed.
On ammonia, for example, you overall have a negative trend, but you can find some periods that were positive. The question on the asset under construction and the write-downs, that is actually part of, we actually had some asset under construction in Tertre, perhaps linked to turnaround. That's in a way, that's included in that one. On the why we are not 100%, I mean, the operating rates in Europe, the remaining curtailments are within Urea. Of course, that's, as you've seen, is a rapidly changing picture, but, you know, these are, it's not a sort of day-to-day, we can't immediately react, or we shouldn't immediately react to spot prices.
They take some time to feed into the market, so, but clearly the, based on what we see in the market today, those curtailments should reduce further and be eliminated.
Thank you.
Yeah.
The last question is, if you guide anything on the position losses you had last year?
Yeah, I took that.
Also keep in mind that it's a bit challenging to compare 2022 and 2023, also because of the massive shift in the raw material sourcing as a result of the war sanctions and the impact that has to the whole industry and also to our sourcing. A 2022 to 2023 comparison here is very challenging.
Thank you. There are no further questions at this time. Ms. Maria Gabrielsen, I turn the call back over to you.
Well, thank you to everyone for joining the call. Thank you. Bye.
Thank you. You may now disconnect.