Nutrien Ltd. (NTR) Earnings Call Transcript & Summary

Welcome to the next session. It's a pleasure for me to host Nutrien. And in particular, we have CEO, Chuck Magro. So Chuck started out in Nova Chemicals. He joined Agrium back in 2009. He led manufacturing there. He's a chem e by training. He had -- he was Chief Operating Officer and became CEO. And then Chuck led the integration and merger with PotashCorp. So they created what is really a powerhouse ag entity in nitrogen, potash and retail, all 3. So it's a powerhouse ag name. And it's great to have you, Chuck, and I look forward to your remarks.

Yes. Thanks, Steve. Hi, everyone. Good morning. So it's always great to be at this conference. We were at the BMO conference, and there was a lot of, of course, mining conversations. So now we'll talk about materials here. I think it will be good. Look, it's also a pretty timely part in the schedule because, of course, the spring season is upon us. So it's interesting to talk about what we're seeing, which we will today. But also, just if you look back at 2019 in agriculture, I think that it's been such an unusual year. I think it's going to be important to talk about what we see in front of us in 2020 and potentially beyond that. And so before I get into the slides, I just want to give you a few things right up front. First, we do see the spring season this year in North America, we expect it to be very strong. We also think that 2020 will be a year of recovery after 2019. So we do think that 2020 will return to the cyclical recovery that we started to see in 2018 and then, of course, continued further improvements in 2021 and beyond. We just don't know exactly when that recovery will take hold because we've seen, of course, low fertilizer prices and inventories have been built up in the system that we need to work through. And finally, when you look at Nutrien as a company, we believe we're pretty well positioned. Certainly, in 2019, we saw stable earnings and cash flows. Our dividend is very strong right now. We consider the dividend to be a key part of our allocation of capital strategy. We have significant upside leverage. And we are investing for future growth in the business, which I'll talk a little bit about in just a minute or so. So this is the forward-looking statement. I'll start just talking about the company. Then I'll switch to the market and the outlook and then wrap up with some of the investments we're making. And I'm going to spend a couple of minutes on our digital investments as well as how we're thinking about sustainable agriculture and ESG, which is a growing theme for many of you I know and certainly a core focus for the company and the Board. So when you look at how Nutrien is positioned, it starts with our broad exposure in the ag value chain. But really, what it comes down to is Nutrien has a very unique relationship with farmers around the world. We're on their farms working shoulder to shoulder every day. We have a relationship with about 0.5 million farmers in 7 countries. And I -- we think that, that gives us some special insight into where things are headed. Second of all, though, of course, is the business model. Being vertically integrated, it allows us to generate both growth and stability, and it really comes from having operating synergies but also financial synergies, things like higher operating rates, lower costs, strong cash flows and a strong balance sheet. And what that allows us to do is it allows us to invest at the bottom of the cycle, which I'll chat about in just a minute. So this is the asset footprint for Nutrien. I think it's a pretty unique footprint. You can see the integrated asset base. We are the world's largest fertilizer producer. We have about 30 million tonnes of global capacity. About 3 million of those tonnes go through our retail platform, and we are the world's largest ag retailer with a full suite of products, services and solutions. We also have what we believe now to be the leading digital platform and a whole suite of climate-smart products and services that we're adding to. In potash, we're the market leader, the largest producer in the world, one of the best supply chains both domestically in North America but also through Canpotex internationally. And Canpotex and Nutrien have relationships in potash that go back 50 years. So this is a commodity business, but relationships in fertilizer around the world matter. Our mines are some of the safest and lowest cost in the world, and we have significant unused capacity. In fact, we have about 6 million tonnes of potash capacity right now that we're not using, which we plan to put into the market as the market needs it over the next decade or so. When it comes to our nitrogen business, we have a great competitive position. 70% of our production is in North America, of course, based on cheap, reliable gas. You can see on the chart there. And since the close of the merger, we've invested or are in the process of investing about $300 million of capital to expand our footprint. And by 2022, we expect to have about another 1 million tonnes of nitrogen brownfield capacity available. And half of that you'll see in 2020, primarily from our expansion of our ammonium sulfate business in Redwater. But also, we had a small urea debottleneck in Augusta, Georgia, that will be available this year. This is the retail business. You can see very stable margins, and it has a history of growing pretty consistently in good markets and in bad. We use a highly accretive M&A strategy as the major growth platform for retail. But also, we have several organic growth platforms such as our proprietary products, our network optimization work and now our digital investments. And you can see the margins in retail in 2019 dipped slightly. That was because we just saw so many unplanted acres in 2019, which impacted the overall business. So Nutrien as a whole. We added about $1 billion of EBITDA since 2017, which we would have considered the bottom of the cycle. And this is pretty good performance compared to our peers. In fact, the EBITDA growth is about double what we saw our peer average. And you can see the free cash flow is extremely robust. The cash generation at this point in our cycle is really a key differentiator for the company, and that allows us to act when others can't. And in commodities, all the value is created at the bottom of the cycle. That's why we did the merger in 2017. There was no coincidence there. And since 2017, while we've continued to act and use our balance sheet and our cash flow, we've purchased a lot of stock. We've raised the dividend every year since the merger, and we continue to invest in growth, primarily in retail. As I mentioned, this chart clearly shows that we lead the space in returning capital to shareholders. In fact, we've bought back $3.7 billion of stock since January 2018, over 11% of our shares outstanding. And we raised the dividends 13% since that time. So in total, we've returned 22% of our market cap to shareholders since January 2018. Talk a little bit about the market now. After a really tough 2019, you look at that year, it virtually eliminated all global growth for crop inputs. We are now, when we're sitting here in early 2020, cautiously optimistic about the year. Why? Well, first, normal weather, we are anticipating that the U.S. alone will add another 14 million acres, and most of that will go to corn and soybeans this year. Second, the fundamentals are good. The fundamentals in our industry are not capturing headlines, but they have improved over the last year. We're seeing higher margins for growers. We're seeing a positive sentiment in the grain markets due to the recent settlement between the U.S. and China on the trade situation. And we're seeing higher prices for palm oil in Southeast Asia, which should support potash demand. So if you look at the acres, you can see on the chart on the left, we lost a significant amount of acres due to the wet spring last year. And now if you look at what the USDA is saying or what we're seeing in our business, we expect those acres to return into corn and soybeans, and that should be up significantly. Then if you look at the chart on the right, you can see that stocks are projected to tighten in 2020 due to the production issues we saw last year. In addition to higher acreage, we are also anticipating an improvement in grower margins for most of the key crops, especially corn, soybeans and cotton. And those are very important to the Nutrien footprint. We may see a little bit of pullback in -- from the Brazil farmers. But if you look at these levels, they're still well above historical levels, and that should keep a strong incentive for them to maximize their productivity. So this should support some increase in fertilizer prices as we work our way through the year. Now this is a new chart for Nutrien, and I think it's important to spend a little bit of time on this. This chart shows just how unusual 2019 was. In fact, if you look at the 10-year chart there, the green, even if you take this data back 20 years or more, it'll show basically the same thing. Grain and oilseed consumption has grown really consistently at about 2% per year for a very long time, and global fertilizer demand has tracked that quite nicely over the many years. Then 2019 hit and 2 things changed: Grain and oilseed consumption actually grew at less than half that rate, and fertilizer demand was actually negative. And this is the first time in decades that we saw this happen. And we know why that is, right? Trade war, African swine fever, weather in the U.S., all those things influenced the traditional trends that we've seen for many, many years. But one thing is still the same: The world does need the food, and demand for food is still growing. So our view is that this is unsustainable and that we need to see a rebound both in the growth and consumption of grains and oilseeds but also in fertilizer demand. And that's why we're so bullish on the spring this year and as we work our way through the inventory that's been built 2020 and beyond. Switching gears finally to our growth platforms. Obviously, one of the biggest growth platforms we have is in our potash business with the 6 million tonnes of available excess capacity that already exists. There's a pathway to create tremendous value. We also have plans to debottleneck our 6 existing mines by another 5 million tonnes for a fraction of the cost of greenfield economics. We plan to continue to grow our sales volumes over the next 10 years as the potash markets grow. And we are investing significantly to lower our cost of production, which is already some of the lowest costs on the planet. But now we're investing quite heavily in automation of our mines in our operations that we believe will literally transform how we mine potash in the future. So there's exciting things to come, and we look forward to sharing more of this with you at our Investor Day later in the year. But for 2020, we do plan to sell another 1 million tonnes based on last year's numbers because we do expect global potash demand to grow by about 2.5 million tonnes in 2020. In nitrogen, we already have the highest margins in the industry. And the investments we are making right now will only improve on that position. Our plan to invest $300 million to add the 1 million tonnes of new nitrogen and ammonium sulfate by 2022 is well underway. And about 500,000 of those tonnes will be available this year with the ammonium sulfate investments that I've already mentioned. And then if we look at retail in terms of the digital platform, we've made just amazing progress in such a short period of time and built what we believe is going to be the leading digital ag platform in the ag retail space. We now have 62% of our customer base with active accounts, which represents about $6 billion of revenue signed up on the platform. And in 2019, we had $260 million worth of revenue come in through the platform. And that number we expect to double this year to about $500 million of revenue. And there's no other ag company in the world that has this level of digital business, and we're just getting started. We are also strategically adding new functionality to the digital platform and integrating new features. So this spring, we will roll out a set of new agronomy tools that will help farmers become more sustainable and actually model their farms digitally as well as we're adding advanced financing capability on the digital platform. We will also significantly expand the number of products and services that are on the platform for e-commerce purchasing. In 2019, we had approximately 36% of our products were available. And in 2020, we plan to add feed and fertilizer blends online for purchases. So we see this as a tremendous growth platform and also a way for us to reduce and optimize our cost structure over time. We're also taking steps forward to grow our financing business. Basically, we're focused on 2 things. We plan to grow the percentage of our business that we actually lend to. So today, we lend to about 20% of our customers, and we would like to get that number closer to 50% in the future. But we're also focusing on how to lend, and we're offering more convenience and value for our growers and lowering the risks and cost to serve as we professionalize this important business. And finally, on our Brazil growth strategy, we're now in execution mode. In fact, we see a pathway to generate $30 million of EBITDA from our Brazil business this year. And we're well on -- in sight on our targets to deliver $100 million of EBITDA by 2023. And today, we now have 20 retail facilities in Brazil, and 5 greenfields will be commissioned this year as well. And finally, I'll wrap up just quickly with sustainability and the notion of sustainable agriculture. We believe that this is a tremendous opportunity for Nutrien. We plan to roll out a comprehensive strategy by the end of the year, which will be good for our customers and, of course, good for the planet. We've made some significant investments already to improve this area of our portfolio with the recent acquisitions of Actagro, Agrichem, Waypoint and Agrible. All of these were strategic pieces to building our climate-smart portfolio of services and offerings for our farmer customers. So I'll leave it there. And we can talk about your questions, Steve. Thank you.

Very good, Chuck. With respect to the retail business that you have that is so strong in the U.S., does it still have the same potential growth that it has had over the last 5 years? And where do you see it kind of maxing out or starting to slow?

Yes. So if you look at -- we have a massive business in the U.S., as you mentioned, about 1,500 locations, $600 million to $700 million of EBITDA. But we're only 20% to 22% of the market. And in other markets that we operate in, so Australia and Western Canada, Argentina, we have a higher market share than that. So there's still a long runway to grow our retail business in the U.S. It would be our primary mechanism for growth because we'll have the most synergies in the U.S. So we can easily get our market share well into the 30s and hopefully beyond that. So that's our focus. If you look at our growth focus for retail, it would be U.S. consolidation and roll-up. It would be backward integration for our proprietary products portfolio. Brazil would then be another path to grow our retail business, and there's a significant open space there for us. And then now the new digital platform, which we tend to take around the world but we'll start in North America, I think we don't even know the full potential of the digital agriculture platform that we've built.

If I recall correctly, your historical experience with these bolt-ons or tuck-ins, retail, you get several turns of EBITDA improvement over the subsequent couple of years. Do you think that, that has changed? Is that -- is there potentially more benefit because you're getting bigger in proprietary? You got the digital platform. Can you take a mom-and-pop retail organization and drive more EBITDA growth now than you used to?

Yes. We can. So historically, what we've seen is we buy the independent owner-operators for somewhere between 7 and 7.5x. And of course, there's instant accretion there because our retail business trades at a higher multiple than that inside the corporate structure. And that's pre-synergy. Post-synergy, there's 1 turn to 1.5 turn because, of course, we have significant buying power when it comes to all of our materials. So that helps. As well as when we introduced our proprietary products line through the channel, we get margin enhancement there. And of course, there's a little bit of cost savings from a corporate structure perspective. Now when you layer on, okay, building the digital platform and allowing the new acquisition targets to use the digital platform, we think that, that's going to be another way to see margin enhancement for our roll-up or our tuck-in strategy. So it's pretty exciting. And we don't really see that changing. And in fact, we see more and more opportunity. We've also built quite a big business in our proprietary products business, now that's available. So we have 400, 500 proprietary products that's exclusive through Nutrien retail, which I think is another reason why farmers come and talk to us because we have some very unique technology now.

And these family-owned retail businesses that you're now targeting, would you say that they are increasingly interested in discussions with you because they're struggling more than they have in the past?

I don't know if they're struggling more in the past -- than they have in the past. I think, look, the industry is just evolving and changing. And I think that, that's probably prompting some to think about when is the time to exit the business. Because you look at what's happening in ag retail is you do need something to differentiate yourself. So unless you have the capability, for example, to invest in production of your own proprietary products portfolio or if you have the capital to invest in a digital platform, all these things, I think, are going to become table stakes in the future. I think that the trend is shifting where you need to have the financial resources and breadth to be able to be successful longer term. And so a lot of the retailers that want to sell to us, we purchase their organization, and they continue to work with us because they love the industry. It's a fantastic industry. But they probably don't want or don't have the capital to invest in some of these areas like, I say, a Nutrien does. And I think that's a natural evolution for an industry. And so the roll-up and the consolidation of this space, I think, is important and it's healthy. And we expect it to continue.

And in the digital platform that you're expanding, would you say that the benefit to you over the intermediate term is more you can cut costs because maybe you don't need as many sales/agronomists? Or do you think that it could drive more loyalty, make those customers stickier? Or one other I wanted to get your thoughts on, could you potentially drive maybe a mix shift towards more proprietary products or higher-value products, just drive revenue in that respect?

Right. So look, our plan isn't to replace our agronomists with the digital platform. In fact, that strategy, I think, has been tried before in the industry and it's doomed to fail. A big part of the key of our success as a company are those 4,000 agronomists working on the farm every day, plus the supply chain fidelity that we have with the amount of retail facilities, the size of the equipment that we have in the fleet, being able to get people and product to the farm is a key determiner of success. I think what the digital platform will allow us to do is allow us to service more customers. Probably from an agronomist's perspective, they'll be able to help and support more customers. So that's one thing. What we're finding is that farmers that we either lend money to or are using the platform actively, there's less turnover and we get a higher share of their wallet. And I think -- so those things will eventually drop to the bottom line in terms of margin enhancement. But that truly -- the reason we're investing so heavily is we think that this is a key factor in conjunction with having our agronomists support the farmer, having a strong balance sheet and capability to lend money to the grower, and having a digital platform where we have a lot of eyeballs and active use on the platform. You put those 3 things together, and that's going to drive, I think, tremendous differentiation for Nutrien in the future. And there's no company that I can think of that can bring those 3 to bear like we can.

When you think about that retail business of yours, what fraction of those customers that you have do you sell fertilizer to, seed and crop chemical? Those 3 percentages, I assume, are different. And what do you think you could do to drive those up?

Well, that's right. So we -- certainly, when you look at our sales, it's clear that we have a higher share of the wallet when it comes to fertilizer and crop chemistry than seed. So if there's one area where the company is absolutely focused on, it's getting more of the seed acres sold because that will bring, we believe, more chemistry and certainly more fertilizer sales. And we have a separate strategy, a separate organization that is focused on seed sales. And that is the one area where we're probably underrepresented compared to the rest of our shelves, and it's an area of opportunity. But it's also an area where we've made very good progress over the last 4 or 5 years. That's also one of the reasons why we're excited about the digital platform because the new capability that's rolling out just the spring is growers will be able to do a side-by-side comparison of the different technologies when it comes to seed and be able to see how they perform. And then, of course, they can get a recommendation or they can talk to our agronomists as well. But they'll be able to do a lot of that sort of home shopping and analysis online on the digital platform, which will be the first time, I think, that we can say that growers can actually map that out in one single platform and understand the different offerings that are available to them. And we're rolling that suite of technology and tools out actually right now, just before the spring season. So after the spring, we'll have a lot more data that we'll be able to share. But I think it's going to be an exciting offering for farmers.

And will the seed genetics that they can compare in that digital platform only include seeds that you sell them? Or would it also include seeds that they buy direct from other seed companies?

Yes. We're going to have a robust offering that it will be certainly products that we sell. But we're going to try to include all the other products that are available. We think it's important because if you think about how we go to market, Steve, we are -- we view ourselves as being an independent crop adviser. Yes, they work for Nutrien, and that's -- everybody knows that. But they make decisions on behalf of the farmer for what's best for the farmer. And the only way we can live to that promise is that we build a platform that growers can actually see. Yes, here's all the things that we can sell them. But here's what's left in the market space. Now that may take us a little bit of time to get to, but that's absolutely the vision because we want to live true to our promise to our grower customers that we are an independent crop advisory company.

And when you think about your proprietary products, you got the Loveland brand of chemistry and the Dyna-Gro brand of feeds. Which of those 2 is a bigger share of your proprietary business? And which one do you think you can grow more?

Yes. So Loveland products, by far, are the biggest -- the bigger of the 2. Today, it's approaching $1.5 billion of revenue. So it's a sizable business in itself. We have 8 manufacturing sites now around the world, and we're adding to that portfolio every year. So Agrichem, Actagro, so Agrichem in Brazil, Actagro out of California, these are all specialty liquid foliar applications, nature-based sustainable products, really high margins, good for farmers driving their yield enhancement. And there's a lot more that we'd like to add to that portfolio. But the Dyna-Gro brand feeds, it's great because what it allows us to do is how we use that business is we have all the knowledge and information regionally by farm. And so our agronomists actually pick proprietary genetics from the majors, so we license the tech, but we -- but they're custom-selected for certain regions and certain crops. And because we have so much knowledge about the growing in those local conditions, the Dyna-Gro brands actually perform extremely well. And we price it accordingly. We also have our own genetics. So as part of the Dyna-Gro brand, some of them are affiliated with Dyna-Gro. Some of them, we've left as separate brands. But we have our own genetics for canola up in Canada and for rice and cotton. And that's because those portfolios became available and we had a strong market share in the United States. So we backward-integrated into these smaller seed genetic investments. We would never do that on the broad acre crops, the big ones. We're not that kind of company. We don't have the margins to be a technology company from a seed genetics perspective. But in the smaller crops, we've made it work and they've been a good differentiator for us.

And does your digital program help the farmer calculate, say, returns on purchasing various genetics? Like you just mentioned the Dyna-Gro brand, you price it accordingly. Maybe the yields aren't quite the same as an elite brand, but you sell it cheaper, too.

Right. So the part of this -- the tool system that we're just rolling out this spring, growers will be able to pick a seed variety once they do their comparison, load up a fertility package and then a scouting package to ensure that the crop has support throughout the growing season. And they'll be able to actually calculate not only a yield but also certainly a bottom line profit and a return on that investment. Once they have that loaded, they can then just load it into the cart and purchase it or they can push a button and say, "I'm going to talk to my agronomist before I pull the trigger on that large investment decision that they need to make." So that capability, right, is going to be launched, is launching as we speak. And that, we believe, is going to be first of its kind in the industry. And it's not just about an e-commerce platform, but it goes much deeper than that to help the farmer with the agronomy decisions that they need to make.