Yara International Asa

Welcome to Java's second quarter results presentation. The presentation today will be held by our CEO, Svein Tore Holsetter, and our CFO, Tore Gjever. There'll be a conference call at 1 p.m. Oslo time where you can dial in and ask questions. You can find dial-in details on our webpage on our investors. And with that, it's my pleasure to hand over to our CEO, Svein Tore Holsetter.

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. IATA 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 costs 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 a 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 Jara 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, depending 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'll now hand over to our CFO, Thor Gjever. Over to you, Thor.

Thank you, Svein Tore. So as you've 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 rates is tax losses in Brazil that have not been recognized as deferred tax assets. Excluding this tax effect in Brazil, the effective tax rate for the quarter is 20%. We had a seasonal operating capital release of approximately half a billion dollars, 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 and 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 costs 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 dollars fixed cost compared with the 2.55 billion dollars 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 impact to be expected during 2025. We're 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 Yara Vita plant in the UK, with an internal rate of return above 30%. And also the CCS project in Sloyskill, 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 divestment of tail return assets as we prioritize fit for future assets and high return growth projects. Turning to our integrated scorecard, I have 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 Tatra, Ferrara, and Loiskill. 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 market outlook is positive with a significant tightening of urea supply in the coming years, combined with supportive demand fundamentals. This indicates a tightening nitrogen 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.