Yara International ASA (OTCPK:YARIY) Q2 2024 Earnings Conference Call July 19, 2024 6:00 AM ET
Company Participants
Maria Gabrielsen - Head of Investor Relations
Svein Tore Holsether - President and Chief Executive Officer
Thor Giaever - Executive Vice President and Chief Financial Officer
Maria Gabrielsen
Welcome to Yara's Second Quarter Results Presentation. The presentation today will be held by our CEO, Svein Tore Holsether; and our CFO, Thor Giaever. There'll be a conference call at 1:00 P.M. Oslo Time, where you can dial in and ask questions. You can find dial-in details on our webpage under Investors.
And with that, it's my pleasure to hand over to our CEO, Svein Tore Holsether.
Svein Tore Holsether
Thank you very much, Maria, and good morning, good afternoon and good evening. And thank you for joining our second quarter results presentation.
As always, we start by looking at our safety performance, and I'm pleased to see our TRI rate at 1.0 at the end of this quarter. In the second quarter, we've had nine accidents and fortunately, these have all been with low or moderate severity. I would like to take some time to mention the flooding in Brazil.
Yara has more than 2,000 employees living in the state of Rio Grande do Sul, working at our facilities. The flooding has impacted large areas of the state, including Porto Alegre, where our office is located, and Rio Grande, where Yara Brazil has its biggest production operation.
Yara has been working to ensure the safety of our colleagues, some of whom have been made homeless by the floods. We're providing support to employees affected, including financial and psychological help. And our thoughts go to all those impacted by this.
Turning then to the main elements of the first quarter. EBITDA excluding special items is $513 million for the quarter, and this mainly reflects improved margins in a more stable price environment compared to last year. Cash flow for the quarter is strong with $500 million release of operating capital. While EBITDA has increased compared to last year, returns are not at satisfactory levels.
Return on invested capital for the quarter is 6.1%, which is below our mid-cycle target of 10%. We, therefore, need to improve our returns and are initiating a cost and CapEx reduction program and we aim to reduce fixed cost by $150 million and CapEx by $150 million by the end of 2025.
With these cost reductions and tightening nitrogen markets, Yara's financial position is set to improve. Yara is now taking action to focus its strategy execution to be better positioned to deliver value-accretive growth and increased shareholder returns.
Turning then to the EBITDA analysis, last year's EBITDA included write-downs of $140 million and additional position losses as prices were on a steep downward trend entering into the quarter. This explained the relatively low comparison base of $252 million in the second quarter of last year.
Deliveries increased by 3%, reflecting higher demand in Europe and a lower level of curtailments than one year ago. Margins improved as lower gas prices, both in Europe and the US, more than offset lower nitrogen prices. EBITDA is also impacted by the flooding in Brazil this quarter.
Although the inventory write-down of damaged products of approximately $17 million is classified as a special item, we also have some impacts related to lost volumes and other costs, and this amounts to approximately $8 million in the quarter.
Fixed cost is stable compared to second quarter in 2023 and this includes a positive impact of portfolio optimization, mainly the divestment of Yara Marine. And the remaining increase is significantly below inflation, reflecting early progress of initiated quick wins to reduce our cost base.
With this, EBITDA for the quarter ends at $513 million and with a second quarter return on invested capital of 6.1%. Even at the lower end of the cycle, a return on invested capital at this level is not satisfactory, which is why we are now taking action on cost and CapEx.
As already mentioned, Yara is initiating a cost and CapEx reduction program. This will be achieved in two ways. First, by sharpening our focus on core business and key strategic priorities. By core business, we mean our ammonia straight N and N-based premium product operations with competitive scale and feedstock.
Secondly, by scaling down other activities, especially those areas where we have grown during the last years and where returns are taking longer time to materialize than anticipated. And by doing this, we will increase free cash flow, drive sustainable profitability and improve funding for profitable growth and shareholder returns.
As communicated previously, we're also performing an asset portfolio review to identify our fit-for-future asset base. This includes focusing investments to high return core assets and considering restructuring options for assets at the lower end of the return scale. This can be achieved through both change of scope, closures or divestments, dependent on whether there is an accretive value for other owners.
Our target of reducing fixed costs with $150 million and CapEx with $150 million is ambitious, however, both realistic and necessary, and demonstrates Yara's commitment to improve funding capacity for value-accretive growth and increasing shareholder returns.
I will now hand over to our CFO, Thor Giaever. Over to you, Thor.
Thor Giaever
Thank you, Svein Tore. So, as you have already seen, EBITDA more than doubled compared with second quarter 2023, mainly reflecting improved margins. Earnings per share also increased but were impacted negatively by a $126 million currency loss and an effective tax rate for the quarter of 92%.
The foreign currency loss stems mainly from -- the main reason for the high effective tax rate is tax losses in Brazil that have not been recognized as deferred tax assets. Excluding this tax effects in Brazil, the effective tax rate for the quarter is 20%.
We had a seasonal operating capital release of approximately $0.5 billion, lower than the previous year, mainly as last year also saw positive cash effects from the steep price declines in the market from the record levels in 2022. However, thanks to increased operating earnings, cash from operations increased $150 million compared with a year earlier.
Investments were slightly lower than a year ago and ROIC was at 5.6% on a 12-month rolling basis and 6.1% for the quarter in isolation. Although this marks an improvement from first quarter 2024, it's still below our mid-cycle target of 10%. And as you've already seen, we are taking action to reduce costs and focus our portfolio.
Turning to deliveries, these were stable or up in all our operating segments. In Europe, we delivered an increase of 7%, reflecting both a late spring and successful launch of new season nitrate prices. European industry deliveries for the quarter were in line with the five-year average, while Yara deliveries compared to five year average were up 3%.
Africa & Asia and Clean Ammonia saw or delivered the largest volume increases within Yara with the former up 9%, mainly driven by higher urea deliveries and strong production levels in Babrala in India and Pilbara in Australia, producing respectively 9% and 11% more than a year earlier. In Clean Ammonia, total deliveries were 11% higher, driven mainly by improved product availability from our ammonia plants in the US and Australia.
The Americas segment was impacted by flooding in Rio Grande, Brazil, and this had a negative volume impact of approximately 140,000 tons. Adjusting for the flooding impact in Brazil, deliveries are up across all geographic regions in Yara, reflecting both improved production and a positive demand environment globally following several seasons with destocking and just-in-time buying patterns.
Moving to net debt, this decreased by $366 million to just below $3.6 billion at the end of the quarter, driven mainly by improved earnings and a substantial operating capital release, which more than funded investments and our annual dividend payment. The change in Other is primarily related to new leases and currency effects on cash and debt. All of this brings our net debt to equity ratio and net debt to EBITDA ratio to respectively 49% and 1.87, both within our financial policy range.
Coming back now to the cost and CapEx reduction program we are initiating, where the target is to reduce fixed cost by $150 million by the end of 2025 compared with the last 12 months as of second quarter 2024.
These are nominal targets, meaning that by the end of 2025, we should be running at approximately $2.4 billion fixed cost, compared with the $2.55 billion we have in our P&L for the last 12 months. This reduction will be primarily achieved through targeted work to downscale or stop activities where returns are not materializing as planned.
The main cost focus will be on overhead cost and new business offerings, but we will be taking action all across Yara. We have already implemented immediate company-wide actions, primarily on external spend, and effects of these are visible already in the second quarter results. And we'll report on fixed cost development quarterly going forward with the main P&L impacts to be expected during 2025.
We are also reducing our CapEx guidance for 2024 and 2025. For 2024, a significant share of CapEx is already committed, but our guidance is reduced by $100 million. Well, for 2025, we reduce our guidance by $150 million. And this effectively means maintaining a nominal $1.2 billion total since 2022.
In terms of growth investments, the ongoing projects have solid returns, with the largest one this year being the new YaraVita plant in the UK with an internal rate of return above 30%, and also the CCS project in Sluiskil which has roughly $150 million CapEx in 2025.
The maintenance CapEx level of $800 million in 2025 will compensate for inflation since 2021 and take the underlying spend down to the lower part of the maintenance cycle last seen in 2019 and 2020. And a maintenance level of $800 million to $900 million, adjusted for inflation, can be assumed for our current asset base.
However, this may be adjusted as we proceed with portfolio reviews, which may lead to restructuring or divestments of tail return assets as we prioritize fit-for-future assets and high return growth projects.
Turning to our integrated scorecard, I've already covered our key profit metrics. Within our people and planet KPIs, we continue to see an overall positive trend and our GHG emission intensity remained at a good level of 2.9 CO2 equivalents per ton of nitrogen produced, on track to reach 2.7 by next year.
Our MSCI rating has shifted from AA back down to our 2025 target of A, and MSCI reports metrics standardized on revenues while the intensity metrics in our scorecard is standardized on tons produced. We believe measuring intensity based on production is more accurate as revenues can be influenced, for example, by commodity price levels which are unrelated to the processes where emissions occur.
Ammonia production increased 26% in the first half of 2023 or compared with the first half of 2023 when we had significant curtailments across plants including Tertre, Ferrara and Sluiskil.
And while finished fertilizer production is marginally down over the last 12 months, again for the first half of '24, production is up 11%, also attributable to market-related curtailments at the same time last year. Finally, as we now take action to focus our portfolio and reduce costs, this could lead to a revision of some of the targets in the KPI scorecard.
So while our returns have not been at satisfactory levels recently, our financial performance is set to improve going forward. With our cost and CapEx reductions, we are targeting a two percentage point improvement in ROIC by the end of 2025 on a like-for-like basis.
In addition, the markets outlook is positive with a significant tightening of urea supply in the coming years, combined with supportive demand fundamentals. This indicates a tightening nitrogen margin -- market, which will support Yara's margins.
With a leaner cost base and tightening nitrogen markets, Yara's financial performance is therefore set to improve. This will enable us to deliver on our strategy, enabling both value-accretive growth and increased shareholder returns.
I will now hand back to Svein Tore for his closing remarks.
Svein Tore Holsether
Thank you, Thor. I would like to take a strategic view and reflect on Yara's core competitive edge and the potential for profitable growth. We have a strong equity story here in the years to come.
First, Yara has an ammonia system unlike any other players. It's the largest ammonia system in the world and the system itself is highly scalable. And what does that mean? Well, it means we can increase the volumes we import and export significantly at a low investment level.
And the combination of own-produced tons and third-party sourcing is our strength. It provides significant flexibility and resilience and market insight. This was proven both during COVID in 2020 when hardly any market outlets for ammonia could be found, and again in 2022 when a third of the market supply disappeared overnight. In both cases, our system prevailed and created significant value.
This creates a unique possibility for value creation, particularly during the shifts in the global energy systems that have already started. With a significant internal demand, as well as the combination of own-produced and third-party sources, Yara is the natural offtake partner for any new ammonia project.
This also makes us a credible supplier for new market segments through our subsidiary, Yara Clean Ammonia. One of the main challenges now is the myriad of changing regulation in this field, but with our flexibility and in-house production, we are well positioned to handle that.
Our ammonia position is a strong strategic fit with our nitrate production capacity globally, but in particular, in Europe. Importing Clean Ammonia, combined with our CCS product in Sluiskil, alleviates the burden of ETS and CBAM. All of our nitrate and NPK production in Europe can run on imported ammonia.
And this means that we can effectively decouple ourselves from European gas pricing when operating margins are under pressure. And this illustrates the significant option value in our production sites in Europe and presents a solution to the surmounting energy challenge that is facing Europe. And in addition, it will take us towards our decarbonization goals.
Decarbonized nitrates and NPKs will have a significant advantage in Europe compared to imported urea. And this is not a bet on future market development. ETS is well established and CBAM is implemented from this year. And we already see the emerging demand for decarbonized crop nutrition offerings.
And Yara has already signed several agreements for low-carbon fertilizers, the most recent one being with PepsiCo Europe, to contribute to decarbonize the food value chain. And this shows that food companies globally are also realizing the contribution Yara's low-carbon fertilizer can provide towards their decarbonization commitments. Take our partnership with PepsiCo that I mentioned as an example.
Through local distributors, Yara will provide PepsiCo farmers with low-carbon crop nutrition products. Combined with the agronomic advice and precision farming tools, this will help farmers to increase nutrient use efficiency, yields, and reduce the carbon footprint of their crops. And this is happening already now.
The collaboration has already kicked off in Continental Europe with a selective group of potato farmers for the 2024 seasons. Products grown using Yara's current low-carbon nitrates, which have a 50% lower CO2 footprint than most non-EU fertilizer, will be in the supermarket already this fall. And this is a clear demonstration of the importance of Yara's nitrate-based fertilizers in a low-carbon future and provides further evidence of growing demand and willingness to pay for a low-carbon crop solution.
As I said earlier, the combination of own-produced ammonia and third-party sourcing is a core lever for value creation in ammonia. Upgrading gas to ammonia and nitrogen fertilizer is the core of our production system. We believe that also having an upstream equity position in blue ammonia in the US can create significant shareholder value and the work to develop these opportunities continues.
As we talked about, Yara has a pole position in the ammonia space. This also provides unique opportunities to extract value from an upstream project. We have multiple outlets and we can leverage our own consumption fully if needed. Demand is not a problem. We can enable a higher scale in projects, reducing CapEx per ton.
And combined with our European platform, we can leverage lower US gas cost, 45Q tax credits, and as I just told you, capture additional value on top through our nitrate-based products.
This also makes Yara a good partner, meaning that we can combine our offtake capacity and ammonia experience with our partners' capabilities, enabling strong synergies and value creation. This also opens opportunities to have a higher offtake than the equity stake, and at the same time, sharing risk.
We have already demonstrated a strong track record for price in the US with our Freeport ammonia plant completed in 2018. This is an excellent example of a successful project, a joint venture with BASF, where the plant was completed on budget and on time and is currently operating up to 128% of the nameplate capacity.
However, let me be clear. Even though we believe we can achieve significant shareholder value, we will only sanction products with the prospects of a strong double-digit return. These are not sustainability investments, but investments into Yara's core where we have a strong competitive edge and create shareholder value and where we, with concrete regulations, such as CBAM and 45Q, help to put a value on the decarbonization.
So, to summarize, our future value creation is driven by optimizing our core operations, on the one side, and value accretive growth, on the other side. We are delivering higher volumes and margins.
And as we scale down our non-core activities and optimize our portfolio, we will be better positioned to drive profitable growth, both within ammonia and premium products. And combined with a tightening nitrogen supply, supported by margin opportunities derived from European CO2 tax, Yara is set to increase value creation and shareholder returns going forward.
I will now hand you back to Maria. Over to you, Maria.
Maria Gabrielsen
Thank you, Svein Tore. I would just like to give a final reminder about the conference call starting at 1:00 P.M. Oslo Time where you can dial in and ask questions. That concludes today's presentation. Thank you for watching.
Question-and-Answer Session
End of Q&A