Yara International ASA
OSE:YAR
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Yara International ASA
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continues be low, and industry-leading level remaining quite stable under an exceptionally challenging operating environment in the last 12 months.
However, we had a serious accident in Cubatao in Brazil on June 12, where a Yara operator, while performing maintenance on a conveyor belt was pulled into the belt. And as a result of that he lost his arm. It's a very tragic reminder which underlines how crucial it is that we continue to prioritize safety and how important it is that we continue to work with safety, leadership, supervision and adherence to Yara technical standards in every single location and place where we operate.
Every accident can be avoided, and we continue to strive towards our ambition of zero injuries. It is absolutely possible. All 17,000 colleagues in Yara have the responsibility and mandate that follows with safe by choice and it's the same for all the contractors working together with us.
Turning then to the highlights of the quarter. The second quarter has been impacted by continued falling prices, which led to weaker earnings compared with second quarter 2022. Although the price dynamics through the first half of 2023 have created a low margin environment. We've had strong cash conversion, thanks to a substantial release of operating capital.
As in the first quarter, the falling prices have led to position losses. This is estimated to have had a $230 million EBITDA impact negative in the second quarter. However, based on recent weeks, urea price increases, a recovery is likely during the third quarter. As expected, nitrate demand picked up during the quarter with a 32% increase in European delivers, offset by lower commodity prior deliveries outside Europe. Increased application rates for the current season and the healthy farmer incentives indicate stronger demand and a tighter nitrogen market going forward.
Fertilizer prices have dropped 50% to 70% this quarter, compared with peak levels a year ago, reducing margins and earnings with EBITDA, excluding special items, 83% lower compared to second quarter last year.
Despite the strong decline in results, a significant release of operating capital contributes to strong cash from operations, ending at $677 million for the quarter, which is only 30% down from last year. For the first half of the year, the relative performance is even better with cash from operations down only 8% despite EBITDA being 74% lower.
This is not a coincidence, but rather a structural feature of our business model that operating capital tends to move in the opposite direction of earnings. It means that Yara's underlying earnings and cash generation are resilient, also at the lower end of the cycle.
This quarter's declining price trend can be seen across all primary fertilizer nutrients, with nitrogen, phosphate and potash prices falling all below levels last seen in 2021. Ammonia has seen the biggest drop both within the quarter and year-over-year as lower gas prices in Europe and weak demand have pulled prices lower.
DAP prices are still relatively high, but also, they have weakened, reflecting demand destruction on the back of last year's high prices. The significant price decreases have impacted the whole industry, both in terms of margin and price exposures in inventories, including raw material purchasing.
Second quarter saw a strong pickup in demand in Europe, following the announcement of the new season nitrate prices. However, continued steep price declines led to lower demand in overseas markets. The slow overseas markets increased our net exposure between production and order taking to an average of approximately two to three months contributing to an estimated total position loss of approximately $230 million, including new inventory write-downs during the quarter of $140 million.
Approximately 60% of this relates to NPK and nitrates, mainly in the Americas and in Asia, as we generally have a longer lead time from production to customer delivery in markets that are further away from Europe. In addition, we had some position losses from long positions in purchased raw materials.
Position losses for ammonia are up due to a large drop in ammonia prices, impacting ammonia inventories in plants that were purchased at higher prices and longer transport lag to bring ammonia into Europe due to the ammonia curtailments.
As you saw on the previous slide, commodity fertilizer prices have been dropping for the last six months. However, based on the rebound in urea prices in recent weeks, position effect recovery is likely in the third quarter.
As demand picked up and the nitrate market tightened in Europe, Yara discontinued the majority of its curtailments of finished products during the quarter. The second quarter curtailments of approximately 10% of European capacity are mostly related to urea production. Ammonia curtailments were also reduced compared with the first quarter. However, we continue to monitor and to adapt to the market situation and to utilize our ammonia sourcing network when that makes sense.
Profitability for ammonia production in Europe is still volatile. Our evaluation of curtailments is based on a holistic view of the production portfolio, including the upgrading margins to nitrate and to NPKs.
Industry nitrogen deliveries in Europe ended in line with the previous season, thanks to demand recovery in the second quarter. So given supply overhangs from last season, flat season deliveries indicated underlying increase in application rates, which is positive for the demand outlook going forward.
As already mentioned, the past weeks, we showed an upswing in the urea price with an increase of 22% as of July as you 13, as you see on this slide. And since these prices have increased further this week reaching $400 per ton. The cereal-to-urea index shows unusually affordable urea. It's higher than both in 2022 and 2021, providing healthy farmer incentives in the current environment.
Also, we are in 2023 at the peak of capacity additions with limited new capacity coming on stream in 2024 and onwards. So together with the recent urea price developments and strong farmer incentives, this indicates a tighter nitrogen market outlook going forward.
And with that, I'll hand over to Thor to take you through the financials in more detail. Over to you, Thor.
Thank you, Svein Tore. So as you've seen, our results are weaker this quarter with a similar decline for EBITDA and for earnings per share. But with the latter into negative territory, as an EBITDA of approximately $250 million, more or less covers depreciation and amortization. But in addition, we had impairment losses of $185 million and a net tax expense of $7 million.
The impairment loss is mainly in our Tertre plant in Belgium, reflecting a more conservative outlook on long-term ammonia prices, due to the expected effects of the Inflation Reduction Act in the U.S. and that this particular plant currently has limited flexibility to import ammonia.
Despite having a loss before tax, we recognized a net tax expense of $7 million. And this is mainly due to the Tertre impairment being realized without a tax effect. And in addition, we had losses in certain countries that are not recognized as deferred tax assets.
Our return on invested capital for the last 12 months is down from 17.7% to 10.5% primarily due to the lower margin environment so far in 2023 compared with the stronger levels in 2022.
EBITDA for the quarter is down 83% as lower prices more than offset savings from lower gas costs and the positive effect from increased premium product deliveries. Within the price margin variance, we estimate the negative position effects at approximately $230 million, of which $140 million were taken as write-downs as described by Svein Tore.
Our energy costs were approximately $690 million lower, in line with our updated guidance. Fixed costs are up in the quarter, but this is in line with our guidance, including inflation and ramp-up of new business areas.
Looking at our segment results. The impact of declining prices and lower demand is seen in the lower EBITDA across all segments. In Europe, we had a positive effect from improved deliveries. However, this was more than offset by lower margins, including position losses. For the other segments, the lower results reflect a combination of lower margins and lower deliveries, but with stronger production margins in North America relative to the other segments.
We had position losses across all regions, but Europe ended the quarter with a reduced net exposure due to strong orders taken during the quarter, while Asia and Americas have longer positions, due to longer lead times and lower order book coverage compared to Europe.
Taking a closer look at deliveries, total crop nutrition deliveries were in line with the year earlier with an increased share of premium fertilizer in all regions. In Americas, the overall reduction mainly stems from lower deliveries of low margin trade volumes in Brazil. Africa and Asia deliveries were impacted by a planned maintenance stop in our plant in India. In addition, the region had lower trade volumes for urea in Africa, partly offset by increased NPK deliveries in -- mainly in Thailand and in Kenya.
The Industrial segment saw lower deliveries, mainly reflecting lower industrial activity in Europe. And for clean ammonia, deliveries were roughly in line with a year earlier.
Turning now to net debt development, which increased $830 million in the quarter, as we paid out a record dividend of NOK55 per share, totaling roughly $1.2 billion. Excluding this dividend payment, we reduced net debt by approximately $400 million, as a strong cash flow from the release of operating capital more than offset investments. The operating capital release was mainly driven by a release of inventory, reflecting a combination of lower prices and lower volumes in inventory. In addition, we had positive effects from lower receivables due to lower prices and strong collection of subsidies in India.
Looking at our operational performance, both ammonia and finished product production were impacted by curtailments, approximately 200,000 tons of ammonia and 400,000 tons of finished products were curtailed in the quarter. And for the avoidance of doubt, these curtailment numbers are not annualized, but actual volumes curtailed during the first quarter. Excluding these, we saw a negative development in reliability performance in connection with start-up of ammonia plants after planned maintenance. While on finished fertilizers, performance improved year-over-year but was also affected by ammonia outages.
Within greenhouse gas emissions, our ongoing investment projects and our shift away from Russian ammonia sources have improved our GHG intensity indicator by approximately 270 kilos of CO2 equivalent per ton of nitrogen. However, extensive recent production curtailments and reliability issues have negatively impacted our total performance overall.
We continue to maintain strong cost and capital discipline, with a target to beat inflation in core business and maintaining maximum $1.2 billion annual average CapEx in real terms. Fixed cost in core business increased on a 12-month rolling basis, as mentioned, mainly due to inflation, but our overall resource use developed in line with target.
As already mentioned, CapEx is increasing, but is well within our guidance and reflects planned maintenance during second and third quarter in several plants, including Pilbara, Freeport and Tertre. Of the $1.7 billion CapEx frame for the full year, about $0.5 billion remains uncommitted.
Operating capital days have increased to above target level, as inventory days increased due to lower deliveries in overseas markets, but we remain committed to the target and consider this achievable.
Rounding up this section of the presentation, we've already covered many of the key elements in our corporate scorecard. The female senior manager's indicator is up to 30%, as we continue targeted efforts within talent and organizational development and succession planning. I already commented on the GHG emissions intensity. But for our absolute GHG emissions Scope 1 and 2 indicator, we are positively impacted by both the effects of greenhouse gas reduction projects and lower production levels.
Excluding the impact of lower production, we are currently 8% below the 2019 baseline, thanks to a combination of investment projects and Scope 2 reductions mainly within electricity sourcing. Finally, I'd like to highlight that despite the weak margin environment, we continue to generate strong premiums above commodity product values, significantly above historical levels.
And I'll now hand you back to Svein Tore for his closing remarks.
Thank you, Thor. And to conclude, we continue to focus on our strategic priorities while remaining firm on our capital discipline and capital allocation policy. Yara's fundamentals remain strong. And with our focused strategy, we are delivering strong shareholder returns, demonstrated through our record dividend distribution last month.
And then also a final reminder, that we will have an audio conference call starting in about 35 minutes at 1:00 p.m. Oslo time. For log-on details to that, please go to yara.com under Investors.
So with that, that concludes today's presentation. Thank you for watching.