Nutrien Ltd. (NTR) Earnings Call Transcript & Summary

Next up, we have one of the largest agricultural platforms in the world, Nutrien. For those that know them, Nutrien retains one of the largest retail networks in North America, actually the largest, has a very attractive cost position in both potash and nitrogen. It's also in absolute forefront of digital ag, precision farming and other sustainability initiatives in the wonderful world of agriculture, something I'm sure we're all enthusiastic on. Today, I'm very pleased to have with me the EVP and CEO of Nutrien Retail, Mr. Mike Frank. Mike has -- will go through a few comments, mainly fireside chat. And I would encourage anybody from the audience if you do have questions, please feel free to e-mail me at christopher.parkinson@csg.com, or I'm also on Bloomberg as well. And Mike, I -- forgive me if I -- you see me at the side. That means somebody's is IM-ing me. So first of all, Mike, thank you so much for taking the time to attend, and I wish we could be in person, but maybe sometime in 2023.

Yes. Hopefully it's before then, but Chris, good to be with you today. Thanks.

Perfect. One of the things I just want to start off with that I think is obviously a theme through -- across all the agricultural companies we have at the conferences, there's obviously -- I hate using this term at this point, but unprecedented time line of events in March and April, which led to a lot of uncertainty in ethanol and feed in a lot of the markets. Originally, the USDA had this 97 million acre core number out there, which really led to a lot of fear and volatility. And it's been very clear that over the last few months, we're certainly avoiding the worst-case scenario. You've also had a few farm safety nets. So things that -- things are certainly moving in the right direction. But can you just offer us the latest and greatest from Nutrien's perspective, what you're hearing from growers, your regional managers just at this point in time?

Yes. You bet, Chris. So look, I mean, really, the last 2 years have been really tough years for U.S. agriculture. Last year, as you remember, there was 14 million, 15 million acres that went unplanted because of the flooding in the spring. And even this year, there's -- USDA came out last week and said there's over 10 million acres of proven plant acres. And so I think a lot of people missed that, that there was a lot of acres that didn't get planted again this year. But then, of course, as you said, with COVID and the impact on ethanol, the challenges continue. Now that being said, we ended up getting 91-or-so million acres of corn planted. More acres of beans -- 87-or-so million acres of beans, 85 million, 86 million, 87 million, somewhere in there. And so, look, generally, I would say especially in the last month, as commodity prices have strengthened, grower sentiment is good coming into the fall. Now if you were hit directly with the derecho storm, then you're going to have a tough time with harvest. But outside of that, the last probably 6, 8 weeks have been pretty hot and dry, so that's probably taken off a little bit of the top-end yield. But the -- obviously, the USDA yield expectations of around 178 bushels, that helped with commodity prices as well. So I think all in, as a grower is thinking about kind of getting this crop in the bin -- and we're probably still a week away from harvest really starting in the Midwest. As they're thinking about next year, we're already having conversations with them about what are the high-yielding hybrids or what are the new soybean varieties. And so they're starting to think about, like, how do I maximize yield going into the next season because they're planning for commodity prices being better than I think what they were thinking maybe 2, 3 months ago?

And just -- I apologize for the short-term question from a sell-sider, but when we take those comments in the context of the macro, how should investors be thinking about the qualification season? We're obviously having an early harvest in many areas. Prices are up. The yield levels will inevitably lead to the need for a lot of nutrient replenishment. So once again, what are you hearing? How should we be thinking about that?

Yes, that's exactly right. So firstly, from a Nutrien replenishment standpoint, we're thinking it's going to be a good setup. Crops looked really good right through the summer and then again, it got hot, and so it took out some of the yield, but the plants were strong and healthy and the roots were deep this year. And so they did take out a lot of nutrients, and so that's going to bode well for getting those nutrients replenished this fall or next spring. Now right now, harvest is probably 2 weeks ahead of last year, 1 week ahead of normal, and that makes a huge difference. If farmers can get 3 to 4 weeks of post-harvest work in, they can get some fertilizer down, some pre-emergent residuals down, and that takes off some of the workload in the spring, and it helps us finish off a good year. And so we're set up right now for what's going to potentially going to be a good fourth quarter. Like I don't want to predict the weather because the weather can shut it down, but if we get the crop off a week or 10 days early, that normally sets us up for a good Q4.

I don't want to predict the weather either if you actually point at me, but I'm asking you quite frequently. On that front, I mean, it's one of these things where this next question has to be taken in the context of what I'm asking it. But in the context of entering the fall application season, where do you see North America inventories, NP&K? Obviously, you have one of the best, if not most advantaged, retail assets across North America. So presumably, you're positioned very well. But where do you think the industry is? Or are there any factors that the investment community should be looking for as the application season further materializes? And I agree with you, it's clearly looking positive.

Yes. So look, I think the inventories at the retail level are probably very normal, which is, at this point in time, sheds are pretty full, anticipating a fall application window. And I think across NP&K, there's going to be good supply. Now obviously, phosphate prices have strengthened here recently. I think they're starting to flatten out at the current level. We think that there's still probably upward pricing opportunities in nitrogen and potash as we turn the first ground of inventory. And if we get a chance to refill our sheds and put some more on ground, we're probably pricing into an increasing pricing climate. So that's kind of what we're expecting as -- on the retail side as well as on the wholesale side of our business.

And just while we're on the topic, just distinctly on the U.S. retail and just the time of year, correct me if I'm wrong, but typically, retail acquisitions occur or come to light potentially in the second half of the year after the season is fully -- more or less fully complete. Just given COVID and given everything that's been going on, can you just give your current assessments of that? I mean the U.S. M&A landscape, how should we be thinking about that? And any just preliminary thoughts into '21 as well?

Yes. So you're right. I mean either we close acquisitions kind of early in the new year or in the second half of the year once we get through the busy spring season. And so we've been busy the last 2 months. We thought there could be a slowdown because of COVID, but there's actually a lot of tuck-ins that have come our way. And so we've closed a number of them. There's still a few more that we're working on to kind of finish out the year. We'll close in early '21. So I would say, if you look back over the last 3 years, 2020 will likely be pretty normal in that we didn't have any big acquisitions, but we've had a lot of nice small tuck-ins. Again, typically, if you go back over the last 3 years, we're buying retail sites that have about a 6% to 6.5% EBITDA margin. We're paying somewhere between a 6 and a 7x multiple. Within a year, we've upgraded that business to be around 10% EBITDA, and we grow it even beyond that over years 2 and 3. And so yes, these are very accretive acquisitions. And so we have found a way to put protocols in place. We've got some people going out now and doing inventories and doing some diligence on-site. And so we figured out a way to kind of make this work in spite of the COVID challenges.

And just another thing this time of year, as is the 15th, and in the next couple of weeks, there's going to be a disproportionate focus of investors, guilty as charged, on U.S. seed price cards. You mentioned in your preliminary remarks that there's obviously already been a focus on which hybrids, varieties and so on and so forth are looking better than others and who wants to lock in what at one point in time. What's your -- what's Nutrien's own assessment of U.S. price cards? How should we be thinking about it from apples-to-apples pricing, new product growth mix? What are the key factors we should be monitoring?

Yes. So the price cards really just started coming out last week. And in fact, we got another one today. And so they're pretty fresh. And like our quick look at the cards would say that for the most part, varieties or hybrids that performed well last year are priced pretty flat going into '21. And new hybrids or new varieties that these seed companies think there's going to be yield opportunity, they're priced up 2%, 3%. So I would say we're -- so far, we're in a very traditional pricing scenario from what we've seen in previous years. Now the question will be once we get into the season. I think at this commodity price level, there shouldn't be a lot of extra discounting. There should be some discipline, and that's kind of what we would expect to play out here over the next several months. So that's how it's starting out. Again, the selling season really starts. Once the growers get in the field, they start combining. They see the yield of the hybrids or varieties they planted this year, and that's when they start making decisions on what they want to do next year. And so again, this really starts playing out over the next several weeks.

Got it. And then just also, one of the questions that I think is important for the industry, but your perspectives are also greatly appreciated, is the dicamba registration issues. And obviously, there's still a time line and hope and will -- Bayer presenting in a couple of days actually. But just what are your own perspectives on that from an industry and a regulatory sense as well as your own and how you're uniquely positioned to kind of help in any regard going forward?

Yes. So look, so I think first and most importantly for us is no matter how this plays out on the retail side, we're going to serve our growers. We'll have access to soybean and cotton varieties across multiple trade platforms. And so we'll serve the market. And so I don't think -- no matter how it plays out, there's a material benefit or negative impact on us. Now look, I think obviously, Bayer and BASF are trying to get Xtend reregistered. And I would say that as growers start making decisions for next year, there's probably maybe 60 days that we have here just to see if it's going to be reregistered or not. And even if it is, I think growers are going to have the question whether or not there's going to be kind of an injunction like there was in the middle of last year, where suddenly they -- there's confusion on whether they can spray dicamba over the top. So the more certainty that Bayer and BASF can bring on the Xtend platform, that will help farmers make decisions. But the other reality is there's only going to be so much germplasm available in Xtend and in Enlist and in the other smaller platforms. The leading germplasm, for the most part, is still in the Xtend trait because that's where Bayer has their germplasm and even Corteva has, I think, the majority of their germ plasm still. So whether or not growers can spray dicamba over the top, we're going to sell a lot of Xtend beans next year. And now as we said at the end of Q2, and that's probably still our view today, it is like last -- this current year, we sold about 20% of our mix in Enlist, and that probably will go up to 30% or in that range going into 2021. But it probably doesn't move a whole lot more than that regardless of, I think, how this reregistration plays out.

That's very helpful. Then just switching over to one of the biggest topics over the last 12 to 18 months. And quite frankly, it's been there all along, has just been the development and the growth of your international retail platform, especially -- particularly in Australia, where you've obviously started with the initial large acquisition about a decade ago, the more recent one last year. Just given the rebuilding process Australia has been experiencing, can you just give us an update, not only just starting with the Australian macro, the crop movements there? But then also hit on a lot of the things that -- actually, Chuck, correct if I'm wrong, was in charge of way back when of really getting that acquisition going. You still have a lot of room to materially improve those margins in the Ruralco asset. So if you could comment on what's also in addition to macro in your control to improve that asset, it would be greatly appreciated.

Yes. That's a good question. So firstly, yes, so look, we got our Landmark -- our legacy Landmark business, which was the brand in Australia, up to, I think, really high performance. And so coming out of last year, the Landmark business was in double-digit EBITDA margins. It experienced several years of organic and inorganic growth and we have a really good leadership team there now. And so it's being very well run. Obviously, the acquisition of Ruralco almost doubled our footprint, doubled the top line. Now we also acquired a business that was -- that had about 4% EBITDA margins. And so there was a lot of opportunity to bring these 2 businesses together and try and upgrade it all to kind of where we got the Landmark business prior to the acquisition. And we're seeing that play out now. So firstly, out of our control, we got the benefit of good rains this year. And so when it started raining in January, that obviously helped the Australian farmer, and that helped us really draw down inventories, especially the Ruralco inventory. So if you think about the Ruralco business, they weren't back-integrated. They didn't have their own proprietary products, which was one of the reasons that their margins were a lot lower than ours. And they didn't have the global relationship or leverage with suppliers. And so even on third-party products, they didn't have the buying position that we have in our business. And so the nice thing about this acquisition is there was a ton of cost synergies. We really added very few positions in the management areas. And so we were almost able to get rid of one management team. Theoretically, we've shut down about 50 locations where we've been able to consolidate 2 branches into one. So there's a lot of cost leverage there. And now we're getting the benefit of higher gross margins on product portfolio that we're selling through our new network now, both proprietary products and replacement products, that are -- that we're buying with our buying leverage as Nutrien. So 2020 has been a really good year. We're actually running way ahead of where we expected to be in Australia with the combination of these 2 companies even though the Australian dollar really got weak after COVID. It's kind of bounced back since then. But we're seeing very strong results out of Australia. And if we think about 2021, we're going to get a full year impact of a lot of the changes that we made in 2020. And we saw some of the benefit in '20, but we're going to see a full year impact in '21. So it's pretty exciting what's happening down there.

So you mentioned something in your remark right there, which I think is important, and correct me if I'm wrong, I believe this is a big aspect of improving the initial Landmark acquisition margins, it's the integration of third-party products. And I think it took a little bit longer than you said initially at Landmark, but you kind of are already positioned on where you need to be. So when I think about margins not only due to, let's say, a healthy season based on the Australian ag at macro, what else could you do over the next year or 2 to further improve those margins presumably rolling in the preliminary innings on this proprietary integrations versus third party? Where can Australian margins go just relative to the U.S. business? And how should investors be thinking about that?

Yes. Yes. So look, I think we should be able to get this business north of 10% EBITDA margins. And so we -- in our Landmark business, we started back integrating with our own proprietary products. We've recently made, and I when I say recently, we closed it in the early days of 2020, some production assets for our new business there. So now we've got the scale to be able to import active ingredient out of China, bring it into Australia, formulate it and package it and sell it through our network. And that's where we really drive a lot of margin opportunity. And so we've got the building blocks in place, Chris, to be able to now serve our new larger footprint with proprietary products, and that's where we see the margin opportunity. And that falls down to the EBITDA line as well.

Very helpful color. Another area, geographically, you've been growing has been Latin America. There are a few larger assets down there, but nothing's really happened on the M&A front. You got the same timing issues you have, but still made a few deals. Just how do you feel about your footprint down there at present? Where do you think it could go? And as of right now, do you have any kind of key focus in Southern Brazil versus Central Brazil? Are there any other considerations we should think about as you develop and evolve your business on the, let's say, Brazilian frontier, so to speak?

Yes. Perfect. So firstly, we built out our leadership team there. So it could be a chicken and egg. Like make an acquisition and then add leadership. I like that from a cost perspective, but we decided to invest in a high-quality leadership team, and we've built that out now. And so we've got people in place that can run the business that we aspire to build in Brazil. We made 2 nice acquisitions this year, Tec Agro and Agrosema. Two, I would say, mid-sized companies. They've added over $250 million of top line in our business. And look, we think that the business in -- sorry, in Brazil that we have now is a business that, on a full year basis, will deliver just over $50 million of EBITDA. Our aspiration in the next couple of years is to get that to over $100 million. And as you said, there's some large acquisition targets that we could consider, but there's also a lot of kind of mid-sized targets like we did this year. And so I think you'll see us continue to unfold this strategy over the next year, where I think in 18 months, 2 years from now, we will have a business that will be over $100 million of EBITDA down there. And then we'll be able to participate in the growth opportunity that Brazil offers, where in the past, we've had a very small footprint. And so we've been underrepresented there.