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Will Yara's Impressive Margins be Replicated in North America with CF, MOS and NTR ?

Yara International ASA (YARIY) reported improved y/y financial figures as it disclosed its Q2/2022 financial results on July 19th. Adjusted EBITDA amounted to $1.475B (consensus $1.420B, $775M in Q2/2021) while owing to higher interest expense, adjusted EPS amounted to $3.32 (consensus $3.50, $1.42 in Q2/2021). Most impressive was the fact that Q2/2022 adjusted EBITDA margins per tonne of ammonia amounted to nearly $875 per tonne (1.688M tonnes of ammonia produced), compared to the $770 per tonne from Q1/2022 or the $410 per tonne achieved in Q2/2021 when 1.891M tonnes of ammonia was produced. Moreover, adjusted EBITDA contributions increased from all geographic areas highlighted by $325M from Europe (+86% y/y), $657M from the Americas (+163% y/y) and $148M from Asia/Africa (+59% y/y). Putting things into context, what is most impressive about the margin increases is that y/y, the EU spot gas price increased from $7.50 per Mbtu in Q2/2021 to $33.10 per Mbtu in Q2/2022 (+340%). Despite lower deliveries (farmers predominantly in Europe deferring purchases), pricing power has more than offset the increase in costs. As such, $796M in dividends was paid out this past quarter with the BOD considering further cash distributions for Q3/2022.

Yara has indicated that industry fundamentals remain strong despite the recent European gas surge prompting significant curtailments (currently amounting to an annual capacity of 1.3M tonnes of ammonia and 1.7M tonnes of finished fertilizer). The company has reiterated that global nitrogen prices have strengthened significantly in the past year, mostly driven by limitations to Chinese exports, and supply disruptions linked to the war in Ukraine and the corresponding sanctions. As nitrate inventories in Europe remain at historically low levels, Yara expects to achieve record nitrate premiums (as defined by the average sales price for straight nitrates versus the comparable value of urea) in the quarters ahead. With regards to the consideration of further Q3/2022 cash distributions or buybacks, though possible (leverage rates continue trending below Yara’s target range – net debt/EBITDA currently 0.8x compared to a target range of 1.5x-2.0x) we think the likelihood is remote seeing as the corporate gas cost is expected to increase to $1.10B in Q3/2022 and $920M for Q4/2022. Owing to Yara’s European exposure, YTD the company has underperformed (-13.8%) its North American peers such as Nutrien (NTR) +7.3%, The Mosaic Company (MOS) +22.9% and CF Industries (CF) +23.8%. Note that YTD, the S&P500 is down -17.4%.

Given the pricing power and margin story as exhibited by Yara’s Q2/2022 results, keep in mind that the global weighted average gas cost is currently at an approximately 25% discount to the European average weighted cost. We will see in early August if the margin story is applicable to North America as well.

CF Industries (CF) reports results on August 1 – Consensus calls for revenues of $3.53B, EPS of $6.00

The Mosaic Company (MOS) reports on August 1 - Consensus calls for revenues of $5.72B, EPS of $3.97

Nutrien (NTR) reports on August 3 - Consensus calls for revenues of $14.72B, EPS of $5.82

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