Yara International ASA

Hello, and welcome to everyone for this conference call for our second quarter results. We hoped you all watch today's presentation.

So, I'm going to go straight into Q&A, but I'm here in the room together with our CEO, Svein Tore Holsether; our CFO, Mr. Magnus Ankarstrand; Head of Market Intelligence, Dag Tore Mo and other representatives from Yara.

So with that, please operator, could you open the first slide, I will give...

Yes. I hope you can hear me.

Thanks for taking my two questions, please. First of all, can you please share some thoughts on the Yara blue ammonia project planning in the U.S., particularly in the context of the “Big Beautiful Bill.

And my second question would be, would you attribute any demand destruction in Europe in Q2 to adverse weather conditions, i.e., the extended drought or is it simply the prebuying effect on the back of an early spring last year?

Yes, could you just repeat the second part of your first question here, [indiscernible].

So yes, I mean, your blue ammonia project where you still have to do an FID at some point? My understanding is either late this year or early next year.

But with the IRA kind of being phased out with a Big Beautiful Bill by Mr. Trump.

How is your thinking around that blue ammonia project or these blue ammonia projects going forward?

Yes. Okay.

I understood. I think first of all, the project when we make project decisions, of course, we look at the fundamentals for ammonia production and whether those are in place and give a profitable project, that's one.

Number two, of course, which is that we point to are the tax credit. And specifically for the projects that we are looking at is Section 45Q of the general revenue cost.

That you say tax credit that was present long before the Inflation Reduction Act, it was increased by the IRA. And it was continued with the new budget or the new bill that was passed in Congress signed by the President now a few weeks ago.

45Q is maintained and actually expanded a little bit as well. So our thinking around that has not changed per se.

It has -- if anything, it's been confirmed or improved. But of course, we watch that and all other geopolitical assumptions very closely.

And for the second question, I hand over to Dag Tore.

As we mentioned, we think that the season deliveries in Europe is up a little bit compared to last season, 1% to 2% per ounce or something as still estimates, so fairly normal development and so most of them are facing as we indicated between the second and the first quarter also the fourth quarter was relatively strong last year. So on the weather issues, the initial problems improved quite a bit.

Yes, across, let's say, Germany, Sweden and Poland, et cetera. So that looks quite good.

So the latest estimate I've seen from the European Union, for instance, is a rather positive yield outlook in Europe and definitely much better than last year, but even above average. This current heat wave, I have not seen or picked up anything specific as to serious problems at least nothing that I have observed on that.

I have two. The first question is the EU has all put in place, import duties on nitrogen-based fertilizers from Russia.

I mean how do you see the shaping the European market from here, especially as it relates to nitrates and NPKs. And what do you think it means for your European farmers?

That's my first question. And then secondly, can you share what you're seeing on current demand dynamics, especially in Brazil, given the expectation for a strong U.S.

corn crop?

Yes, as we indicated, there is over EUR 40 average import duty on Russian nitrogen products from July 1. And EUR 45 on phosphate products.

We haven't seen much kind of shift yet. Russians are still active in the European market, of course, then taking a bit of a hit on the netbacks compared to earlier.

But of course, large markets they have. But more a question for the Russian of optimizing their exports by market anyway.

So that -- so far no huge effect on this. One interesting element that we have yet to see is this threshold of figuring out a much lighter duty, if that is 1.8 million tonnes across all products as many, seem to believe, then there will be a reduction eventually in the Russian exports into Europe.

We will probably see that later in the season in that case. As to nitrogen in particular, there are, of course, a lot of other sources of imports into Europe that is not far away.

Egypt and Algeria are duty-free and are already seeing Europe as almost like their home market and Nigeria as well. So there's no lack of sources of securing nitrogen into Europe.

But maybe a little bit higher prices would be logical to assume in order to shift those trade flows accordingly.

And just to add on the Russian exports to Europe, what we seen and I'm pleased to see that European Commission has addressed that is that not only the exports of Russian urea into Europe continue, but it's increased compared to prewar levels. And return this one is level of playing field when it comes to competition and the other markets who are independent.

And that's a lesson that Europe has learned the hard way when it comes to energy, and natural gas, and it could be avoided in the future on other sectors as well. And that's what is now recognized and then with the tariffs in place from July 1, that's one step.

And then as we mentioned there are some voluntaries, but there are also some calendar triggers here as well. So it starts now at one level, and then it will gradually increase in the years to come, of course, there are other import sources as well.

And so the price impact is limited. But at the same time, this is also European -- Europe protecting us against dependencies from Russia as well.

And it remains to be seen how it's interpreted in terms of the volume triggers, but there is a volume trigger as well, as said, if the import continues or increase.

On the Brazilian side, as you mentioned, I mean, U.S. corn, large -- U.S.

corn acreage is more element top seed and as Magnus mentioned in the presentation also that we are seeing quite supportive conditions for crop protection in general in the world. Now there are fewer issues around than what we normally see in a year.

It's my impression from the latest outlooks from USDA and others. So yes, that is kind of putting a little bit of a limit on grain prices, which are kind of most other price commodities or food commodities.

Then what we observe in Brazil is relatively flat, I would say. They have been importing roughly the same amount of nitrogen so far as they did last year.

A shift away from urea towards ammonium sulfate from China, but the total nitrogen around the same and on phosphate similarly. So it seems like it's running fairly smoothly and quite normal, and they are actually quite active buyers.

Today, you may have observed that the CFR prices to Brazil on urea pick up a little bit recently. So nothing dramatic, I would say, fairly normal.

This is like the most focus this week. It's on this coffee -- coffee-ish.

Trying to get as much Brazilian coffee in the U.S. market before there is potential delivery.

Two questions. First one is on your volume mix.

What is the main reason for the lack of positive contribution on your EBITDA from volume and mix in Q2? And when you look at your Q3 order book, how should we be thinking about volume and mix going into the next quarter?

The second question is around your blue ammonia projects in the U.S. In your call earlier today, if I understood correctly, you mentioned that you are not evaluating any equity issuance.

Perhaps can you elaborate a little bit around that, please?

Yes. Thank you.

On the volume side, the main drivers behind that being flat on the EBITDA level is that we had a strong Q1, particularly in Europe on the volume side, less now in Q2, but overall for the season up. And last year was a little bit the other way around.

So that's basically the main difference there.

So the increase in volumes in Brazil little bit lower margin volume, it's on the higher margin making [indiscernible]

Right. With regards for the third quarter, I mean, John said in the presentation, we don't guide specifically on the mix as such.

On the blue ammonia project, as I said in the presentation, when we evaluate those in addition, of course, that we need to expect double-digit return. We're also not planning to invest a level -- in the CapEx at the level where we would plan for doing an equity raise.

That is correct.

What would you say is the best setup or structure for these type of deals?

I think as we also pointed to in the presentation, all of our ammonia projects historically have been partnerships. So we believe that, that is the best structure.

I mean, obviously, I mean sharing equity with others. It means complementary skills with others as an example in all of our ammonia joint venture, Yara's off-taker and our capabilities and strong synergies or strong infrastructure in that area brings a lot of synergies to a project that increases Iran value of the project.

So really partnerships and complementary skills that is able to increase the underlying value and return of the project and also then share -- equity and share risk and those are sort of the main businesses that we follow and we -- as we have done in the past, most recently with our Freeport ammonia plant that we completed in 2018.

The first one is just on the market. So kind of -- how are you viewing volumes and deliveries kind of going forward?

There's obviously been some supply-side shocks that have driven urea prices up. So I'm just kind of wondering what you're seeing in terms of the volume side of things?

And then secondly, a question just on CapEx. So yes, I know the decrease in growth CapEx projection for this year, just any color as to what sort of project that was?

And if we should expect that project to maybe return to next year, for example? And then kind of a more general question in terms of CapEx of blue ammonia facilities.

I'm just wondering how much CapEx inflation you've seen from other kind of blue ammonia plants in the last couple of years? Any kind of color on that would be very helpful.

On the supply outlook, it's, of course, not possible for us to get on the utilization rate in general. As you mentioned, there are a lot of events that happened that are foreseen like how much we reproduced in Egypt, one thing was the gas curtailment from Israel during the conflict then they're there.

You also have their power needs, which they are prioritizing their gas quorum. And we'd also had Iran and you have even had some drown effects on Russia that stopped a couple of Russian plants for some while.

So of course, all of these events scheduling, no maintenance of things that are not possible to forecast. What you can see is that with a limited number of plants in the pipeline, the new capacities of course, the utilization rate and the Chinese export levels are from, in a way, the two most important supply side factors.

What we see now for 2025 is that it will be surprising if the world ex China managed to produce anything more than 2024 based on what has happened so far in the year, which means that if China exports around 3 million, 4 million tonnes, that is pretty much where the supply growth will come from. Offsetting that is worth a stronger need for Indian imports.

So you don't really need that much demand growth in order to balance the market. And I think that is what we are seeing that the prices are at $450 to $500 because the market is tight and you actually need some demand rushing in order to balance.

So that seems to be how 2025 looks. 2026, there are still not many plants in the pipeline, new capacity.

So it is still also, I think, depends on your assumptions for what the global utilization rate is able to do and how much will export.

On the question on CapEx, if you go a year back, I mean, what we were looking at for the year was a CapEx of $1.35 billion, which we now committed to taking down through the growth projects. Now we think that people have pilot taking down further.

There's a mix of things here. As you have seen, we've done changes to our asset portfolio as a fixed cost effect.

But of course, it also has an impact on maintenance cost. We have also looked at our growth project portfolio.

There was some uncommitted CapEx there that we do not plan to spend this year. And then there are also some project that we canceled given profitability not being strong enough or expected profitability not being strong enough.

But there are also a few minor things that have started to a very high return and a very short or return in the short time frame as well, such as some key expansions for ammonia -- receiving ammonia vessels, as an example, that are very small investments with a very, very high return. I think -- all in all, it reflects a strict capital discipline where we plan to prioritize the CapEx that we reinvest for the paying projects and progress very strictly according to that.

With regards to the blue ammonia project, yes, we've seen CapEx inflation. I think that's also have been quite clear in the market based on other projects out there and other announcements as well.

I think -- but it's very important for us in that context -- I mean, in addition, of course, to have a CapEx level that the -- to our capital structure balance sheet is, of course, also to look at the CapEx per tonne, which is, of course, crucial for the profitability of the project and trying to find solutions and opportunities where we are at the competitive level there in addition to other synergies as well that will enhance project value.

I have three, if I may. Two questions on the operations.

Quite weak volumes within the Industrial segment, any high-level comments on that? The second question would be on Clean Ammonia division, which seems to have a weak quarter, any comments there?

And the third question would be, if I remember correctly, you got quite significant boost from improved margins on third-party distribution, particularly in Brazil last year. Could you give some high-level comments on current profitability compared to that quarter?

Yes. Thank you for your question.

On the volumes in industrial that mostly pertains to volumes in our assets in Brazil that we closed. And those -- the impact, the EBITDA impact of that is very minor.

Otherwise, industrial has performed quite well. There's been a size reduction as well due to an outage in Brazil, but the main impact comes from the closure of the Brazilian assets.

With regards to Clean Ammonia, those are particular, of the $1.5 cost events on the project side this quarter, which explains that -- I mean that's a one-off as we see it. When it comes to the DTC margins in Brazil, those being roughly at the same level as last year and slightly higher than our average.

I have two, please. The first one is regarding the market share in Europe, it was good to see that you were reporting market share gains both in the first and the second quarter this year.

And I'm just wondering how you've seen a set up there for the rest of the year with regards to maintaining those market share gains? Or maybe you see scope for additional gains and what measures you would need to take to achieve that?

And in case you see such a scenario? And then the second question is a follow-up on the CapEx guidance comment for this year.

So you have mentioned that the reduction in guidance effectively came from removing a project -- a growth project where CapEx was not committed. So could you confirm if out of the remaining growth portion in the CapEx guidance if all of that is committed for this year?

Or there is still some uncommitted portion in that?

I think I'll start with the last question first. So our guidance on CapEx for this year is our guidance.

So I mean that's -- as we stand now, that's what we expect to spend. When it comes to the changes, now the growth capital side now from past guidance that one particular project, it's a great project that's before different reasons and then mostly sort of not testing enough or not making the profitability pressure that we have that we're not going to proceed with in this quarter.

So it's not something that we expect to move into the next year as such. When it comes to the market share question, you're correct that the leasing out, even though we were slightly down in the second quarter.

I think it's difficult to sort of predict the expectations for the next season. I mean, obviously, we look at European market but also opportunities overseas and of course, optimize as much as we can.

But of course, Europe is a core market for us, and this market is pretty important for us to be strong and have a role, and we're very focused on that as well. The last part of your question is that there is around $50 million uncommitted as of now on the growth side.

I have a question on the NPK margins. Correct me if I'm wrong, but it seems like they are now for a year or 2 have been about twice as high as they have been historically.

Can you explain a bit what's going on there? And whether you think this is a new normal that we can expect also going forward?

Yes. I think you're correct on your observation.

I think that's partly driven by strong commercial work also prioritizing the highest paying market, the premiums that are open of the margins and certainly that important, the things you need to keep in mind. There is, of course, also some fluctuation depending on how commodity values go, but we have seen a very strong commercial effort in particularly Asia last 3 quarters, but also in Nordics as an example.

So from that perspective, the commercial job that's done the underlying performance there is strong. And then of course, premiums do are, to some extent, impacted by the loss of the [ size ].

Two, please. The first is, could you please talk about the kind of levers that you can still do to improve costs and where you are in that cost-cutting journey.

And to what extent that's likely to support 2026 to at this point? And then secondly, you mentioned strong premium products for the quarter.

What do you think is driving this? And could you comment on how long that's likely to last?

I think on your first question on cost, as we pointed out in the presentation, we believe that we will be ahead of our result target by around $30 million as communicated. Of course, and we also give a number of where we believe sort of the actual cost for 2025 will be.

And then we have measures that have been implemented in 2025, and we still have measures that are under implementation. And of course, the full year effect of those you typically don't see before we have 12-months after.

So that's why we say that the run rate is lower than the cost for 2025 will be an additional effect in that 2026 as well.

And if I may add there, and we're very pleased with the engagement across the whole organization, and we spent a lot of time on detailing out and anchoring cost improvement program. And the organization has set up and moved faster than we expected.

So we're setting new and higher target, but it does mean that we're going to end focusing on cost, but that is more continuous improvement that goes on the cost side, but also what we're seeing in terms of productivity as well. But when we set the program, that was like what we needed to achieve in the next 18 months in terms of the step change in the cost base, and we're pleased to see that progressing and how the organization has progressed.

And your second question is that to be always behind the growth in premium product volumes, there are generally two drivers to that. I think the first one, important one is high asset utilization.

And there are two drivers for that. I think, number one, is what we pointed to in the presentation today that we have through our improvement program in production increased production -- I mean our production of premium products or finished fertilizer, in our assets, very close to our 2025 target now.

And that is kind of how we measure that is sort of operational performance. So that doesn't include sort of market curtailments things like that.

But in addition to that, we have during the last 12 months had a very strong focus and also maximizing utilization of our assets in addition to sort of the operational uptime they provide, particularly going into this season we get that it's running in Q4, which gave us more product to sell in particularly Q1 but also Q2. And that's, of course, key focus area for us in addition to the operational performance, also on the commercial performance side, so that we can maximize utilization of our assets.

And that's, of course, the cheapest way of increasing our ROIC and making sure that the capital create volume.

I've got a couple, please. I just wanted to get your feedback on ammonium nitrate.

I understand there's -- I understand there's sort of some pull from the defense side, and that's affecting market supplies. So I just wondered if you are having to sort of adjust for that.

And yes, I don't suppose -- I think the answer is probably going to be no, but is there a way for you to get on the bandwagon by producing military-grade products. I understand there's quite a lot of interest in making that conversion.

Yes, any feedback on that? And then just an update on the asset footprint optimization plans that you have and in some of the areas where there seems to be quite a lot of appetite among your peers to asset swap and so on.

So if there's any sort of what the outlook for that is?

Yes. On the first one, I think we don't see sort of a particular growth for technical ammonium nitrate for the defense industry as such.

I'm not sure it's the right product per se, but that's more due to the traditional areas of mining operations -- and for those purposes. But in general, of course, defense industry, the demand, a lot of different industrial projects where our base chemicals is a component to intermediary chemicals that is also requested by the defense industry.

So I think if I could say that the growth we see on the defense industry side helps the industrial demand in general, even though specifically, you'll directly consuming our products.

It's growing, but not to a level that will have a meaningful or a big impact to the industry.

On the asset footprint, we have, as we talked about earlier this quarter, done quite a lot of measures, some larger closures that have been performed, the hibernation of our assets in Brazil. We're also in the process of restructuring [indiscernible] and our most advanced in France.

On top of that, we also are doing quite a lot of smaller changes that when you have it added up, it becomes meaningful contribution as well. And we will continue to do that and optimize as we go forward.

We didn't bring in this call, but last quarter we did show an overview of our European asset base and quite a significant portion of that asset base is actually quite well positioned going forward with high -- sorry, with the ability to import ammonia, and our ammonia exposure in Europe is predominantly in our larger plant, which is high scale, and from that perspective, on the European cost curve, quite competitive. But I think as we alluded to in the previous quarter, we have those assets that equates to around $70 million of annual CapEx avoidance from 2026.

Thank you to everyone for listening in, and have a good weekend.