Nutrien Ltd. (NTR) Earnings Call Transcript & Summary

Welcome back, everyone. My name is Steve Byrne. And it's a pleasure for me to host a fireside chat with Nutrien. We have 2 from the management team with me today. Pedro Farah is CFO, and he is with us. He's to my right up on the screen. He's been a CFO for 2 years. He previously has been with some very large companies, Treasurer at Walmart, he was at Walgreens, Dell, General Motors. So glad to have you, Pedro.

Glad for me.

And we also have Jeff Tarsi. Jeff is down in Memphis, and he is Senior VP of Nutrien Ag Solutions, North American operations. They have 800 retail facilities in the U.S. and 300 in Canada. And we will have plenty to talk about with the retail business of Nutrien. I toured a cotton farm with Jeff about 15 years ago, I want to say. It was the only cotton farm I've been to, but Jeff knows it very well, and I learned a ton from him. That was back in his UAP days. So it's a pleasure to have you both with me today, and welcome.

Thank you.

Thank you, Steve. We look forward to it.

Good. So let me start us off with a retail question being last Friday, we published an Ag retailer survey that we run through Purdue University. And we've been doing it for many years. We collaborate on the questions, and then they've blasted out to the retail channel, and I get the data and we analyze it. And we published it last Friday. And it's probably been the fifth year that we've run this survey through Purdue, and this one was by far the most constructive and differentiated from all of our previous surveys. The -- it wasn't just a leaning towards optimism. It was by far, the overwhelming majority of respondents responded to questions about their expectations for increased fertilizer applications, increased crop chemical applications, increased pricing, more or less a mix shift up in seed pricing, crop chemical mix shift up. So pretty positive across the board for what your retail channel -- your retail business sells. So I just wanted to bounce that off of you. Does that seem reasonable? Is that consistent with what your own expectations are for the retail business for 2021?

Yes, Steve. And so if I think about -- I looked at the survey as well and really it didn't have to have a survey because we're out working with growers on a daily basis. We have a very relationship-driven business, as you know, when you've been out visiting with us before. But if you just take -- and you say, what a difference a year makes? And if you look at commodity pricing and where we were sitting a year ago versus where we're sitting today, and it's basically across all broad acre crops, whether you're talking about corn, soybeans, rice, wheat, cotton, sorghum. We get into Canada, and we look at barley and canola. We're seeing drastic price changes from a year ago. And if you think about it, we've been in, what I would call, a commodity pricing slot really since some time in late 2013. So we've been about 7 years or longer -- in what we would call, under a lot of pressure from a commodity pricing standpoint. So to see these commodity prices respond back like they have, to see the ending stocks of where we are on corn and soybeans and even cotton inventory being depleted some is cause for great optimism with our customers. And I'd like to refer it to going into a year like this is where we go into -- a grower goes into a mindset of swinging for the fences, and they won't hit a home run. And this is an opportunity as we say to make hay with higher prices, they're going to try to produce every bushel of yield they can on a given acre of land. And so we're -- whether they're confident or not, we do a lot to help them with a lot of their planning from a crop planning perspective, Steve. And so I think we saw last fall that started with -- that they were eager to get P&K out in a large part in a lot of areas, get a lot of nitrogen out from NH3. And we'll see them go into this season with our seed bookings. If I look at our book today, it looks very healthy. These guys want to play out the best germplasm, the best trade packages and they're going to give these plants all the nutrients they need to produce. They're going to take care from a wheat control standpoint and a nutritional standpoint that can protect it against disease. And those are the things that we expect them to do in times like this. And so -- yes, we do feel good from that standpoint. And look, it's all about return on investment. And we want to try to lead them to the best path forward to take advantage. We don't know how long these prices stay this way. There's a lot of opinions out there today, but it looks like a good period for agriculture, Steve.

Yes. The only other thing that I would add, Steve, if you don't mind to -- certainly probably modestly from his side is that retail is also able to reduce their cost structure through this year and continues to do so. So I think that is independent of prices in the future that kind of lowers the breakeven or lowers the cost structure for the business. And there has been margin expansion as we have greater penetration of private brands as well. So while prices may fluctuate, I think, those are sort of heavier variables that are probably going to help us in whatever price environment would have in the future.

And so I'd like to hear the views from both of you on further acquisitions or bolt-ons in retail. And maybe have different views, but how much bigger could your market share get in retail where we kind of have you penciled in at roughly a 20% market share of U.S. retail? Maybe it's a little bit north of that, particularly in Canada. But where do you think it could go? And I guess, one of you is -- it could address that from the perspective of the commercial benefits of having a larger footprint or more facilities. And maybe from your perspective, Pedro, are these bolt-on acquisitions generating high returns?

Yes. Maybe I can kick this off, and I'll pass it on to Jeff. But obviously, we see no impediment for growth into much larger percentages. Of course, we have been gaining market share of about 1% a year over the past 5 years. And the part of that has been tuck-ins. But above that, it's been organic growth, I would say, on a kind of a 50-50 basis as we go forward. So a much higher penetration in the U.S. is still possible. Of course, to get to a number like 30% will probably need to do a larger acquisition. But the gradual increase at a rate of 1% is possible. And just to -- before I pass it on to Jeff, in terms of the profitability of that, of course, all the purchases that we have made for tuck-ins are not homogeneous. So we look at those from time to time and we look at them. And -- but all in all, we are kind of very happy with the returns that we have had. It's been accretive. We have been buying at much lower multiples than our retail business would command. So we are happy with the acquisitions that we have. But in the future, we have other means to grow it as well. So I think we can do less tuck-ins and do -- and grow more through digital, more through other products, more through greater penetration of accounts and more with services, including financial services as well. So that is more related to the U.S., but we also have acquisitions outside of U.S., but maybe I'll park it here and let Jeff comment on the U.S.

Yes. Steve, we've been very active in the acquisition side of things in retails dating back to 2008 when Agrium and UAP came together. And so we've always been a big player in that market. I think we'll continue to see those tuck-in opportunities. The pipeline is still pretty decent right now. I get a lot of questions with the markets moving up like they are. Does that diminish the opportunity? And in some cases, it can. On the other side of it, it's offset a little bit from the standpoint that we've got a new administration that went in, in January. And so a lot of these independent business owners are asking themselves, what's going to happen with the tax structure there? So I think those 2 things kind of counterbalance each other out. In my opinion, with it, obviously, as Pedro just said, we get a lot of benefits, especially on tuck-in acquisition opportunities. Most of the time or nearly all the time, these independent businesses don't have their own proprietary arm of business. So we're able to integrate our proprietary offerings like data grow and level of products into those businesses immediately. We have some supply chain efficiencies that we're able to bring to the table as well. And they help us as well from an OpEx standpoint and a branch rationalization standpoint as well. So as these things come up, we continue to look at them. And if they make sense, we continue to be aggressive and act on them and such. And they've been a nice part of our growth. As Pedro says, we've made a lot of other growth opportunities outside of that, especially as it relates to organic growth, and I'm sure we'll get into some of that this afternoon as well.

And Steve, if I just could comment on acquisitions outside of North America. Because we have made a significant acquisition in Australia, and we have made a number of smaller acquisitions in Brazil, and I think we are particularly happy with those. I mean they have performed extremely well. We're very happy with the integration process that we have had in Australia, which exceeded our original expectations. If you look on a year basis, even in a tough year like 2020 with COVID and all that, more than 60% of our growth in EBITDA actually came from outside of the U.S. So those acquisitions, even though they are smaller businesses, the growth margin and -- the margin and the growth potential have been fairly robust, and we intend to continue to grow those as well, especially Brazil where our share is miniscule at this point.

Jeff, you've made a -- you commented about a few things that are attractive about these tuck-ins. You mentioned the proprietary products, so you get a higher margin out of that than the original owner of that retail even had access to. So that's really more of a margin expansion driver. But then you also have the benefit of being able to carve out some of the back-office costs and so forth of a facility. And then you also have the -- I assume the benefit of increased density so that if you have a competing retailer surrounded by Nutrien retailers, that acquisition has some obvious benefits to you. How would you rank those in terms of value creation?

Yes. And they all play a part in that value creation. I think when -- look, I worked at the M&A side of our business for 12, 13 years. And I always thought that these are opportunities, probably if I had to rank them, I'd say that the proprietary products opportunity to inlay those products into that business would be number one. I think the supply chain efficiencies would probably be number two, and relationships that we have with the basic manufacturers and such and being able to create some additional opportunities within that customer base. And then you mentioned the OpEx side of it, yes. So a lot of these businesses might have someone working in accounting. They might have someone working in inventory management, and we do that on a centralized basis. So that brings efficiency as well. So it all adds up to me into a really nice advantage for us. And -- but if I had to rank them, I'd rank them along with that proprietary products play in that supply chain side of the play as well. And then, Steve, another thing that we don't factor is, in a lot of instances, that business might have an asset that we need or an asset that we would have to go build. And I'm always in favor of not having to add infrastructure to the business if we can find an opportunity like an acquisition, and we don't have to put another asset into that network and such. So all that is pleased and very favorable for us. And like I said, we've been aggressive for a long time. And we think over the years, we've done a really good job of integrating these opportunities as well into our business.

So let's drill into the proprietary products a bit. And Pedro, you're in Loveland, Colorado right now that is certainly one of the proprietary product lines, the crop chemicals. And Jeff, you mentioned Dyna-Gro, the proprietary seed business that Nutrien has. You, on your last call -- last earnings call, made a target of how much of the, I forget if it was EBITDA or gross profit that would be from the proprietary products as a contribution to the retail segment. It's currently 23%, and been flat at that level the last couple of years. And you want to go to 29% in 2 years. My question for you is, how are you going to get there, right? The value position seems pretty obvious, but how are you going to get there?

Yes. I think there are 2 questions, and I'll let Jeff speak specifically about the U.S. portion of it because, obviously, in the U.S., we continue to -- our North American general, Jeff, we continue to expand and increase that percentage. But also -- and I think, as Jeff alluded to, both in Australia and Brazil, we have not only acquired more businesses and more licenses, but also all the licenses and proprietary products we are available. As soon as we make an acquisition as big as Ruralco, all that -- all those products flow into the new network that we have acquired. So that is like an immediate lift that we gain as we increase and make other acquisitions of size outside of North America. But we have been fairly successful in also increasing the percentage in the U.S. Maybe Jeff, I'll pass it over to you to speak to that.

Yes. I think the unique thing, and I talked a little bit earlier about, we've been successful in integrating. And if you go over to Australia and you look at the landmark business that we started with there, so we've got a really good track record. That's what excites me about that Ruralco opportunity is, we know we've integrated our level of products and proprietary business into that landmark-based business. And we've got the Ruralco business and they'll make that same integration into that business. The U.S. business is a more mature business, Steve, as you know, but we still have a lot of opportunity as it relates to proprietary. I'll start off with the seed side of the business. And whether we're in Canada or whether we're in the U.S. And if I look at our Dyna-Gro business or our seed business in the U.S. today, we're very balanced along our fertilizer shelf and our crop protection shelf. Where we're unbalanced is that seed field of our business. And we think there's a lot of growth opportunity. We don't think, we know there's a lot of growth opportunities there. And as we continue to reach out and expand share across that seed platform, we'll be bringing Dyna-Gro at that same pace of that business. So that's going to help us from the seed side of the thing. We back-integrated ourselves really nicely as it relates to the nutritional markets. If we look at what we've done with Actagro and that acquisition and the investments we've made in CH Bio and Agrichem, we think that nutritional market is steadily a growing market for us. And so we're going to be able to expand ourselves around plant nutrition and around soil help and soil science. We bought a Waypoint Analytical, which is a soil and plant tissue layout that is headquartered out of Memphis, one of the largest in North America, and we've seen our soil sampling and video analysis really increased over the last year. And that's going to -- the more testing we do, the more analysis we do and the more expansion on those products we just talked about that we see coming along. And the other natural lift we're going to get this year is the last 2 years, Steve, and I know you followed production really close. But in '18 and '19, we had really tough years as far as getting our crops in and how we got started on those markets. And so when things get delayed, we see a lot of products get -- either get delayed or get left off, especially as it relates to some of the pre-products and such. And a lot of those are products that we have that are proprietary to us and are leveling offering. And so it's probably the thing I'm most excited about in 2021 is with that fall we had last year, we are prepared to plant today, no matter where you are in North America. And I think we're going to see just some natural expansion on that proprietary side of our business, just from picking up some markets that got -- that either got minimized or just didn't get used at all. I think we'll have an excellent burn down market and -- with burn down, comes a lot of our proprietary adjuvants and surfactants and drift control agents and stuff like that. So this is not a -- that number that you talked about, that's not a number pooled out there. We very carefully looked at it, and we've got a plan for how we want to get there.

And would you say that the growth in proprietary crop chemicals is getting a supply -- getting more supply agreements from your big suppliers, i.e., you carry a branded fungicide, but you get a supply agreement that you can then incorporate into a Loveland brand? Is that the type of proprietary crop chemical opportunity? Or is it the Nutrien establishes your own registration for products? And you have produced your economics because you can pull the product in from India over China and you formulate it yourself? Which of those is the growth engine for you?

That is a combination of all of them, Steve. It's -- we obviously work very closely with our -- what I call our original registrant or our big suppliers. And in the life cycle of any products, products go off patent, they could come post patent. Those companies bring on new products. They start putting their emphasis on the new chemistry that's coming into the place. And as that life cycle exchange takes place, we'll bring those -- some of those products into our Loveland brand. And a lot of times, Steve, we like -- we're not an R&D company. But what we do a really good job with is, is reformulating products and looking for ways to take older products and make them better, make them perform better, make them give better ROI for our customers and such. So we have taken products like that. We've got a number of products in our arsenal where we've done that. And look, where we can on a post-patent product where we can work with the original registrant on sourcing that active ingredient, we do. And where we can't, then we can also go offshore and pulling in active ingredients and urge. We've got our own formulating facilities, where we can go in and formulate those products as well. But we've got -- we -- our platform is really wide as it relates to proprietary starting with the seed treatment, whether it's burned down products or pre-emergence or post-emergent herbicides. You mentioned the plant health fungicides and then I certainly don't want to deemphasize that nutritional product portfolio that we have and what that brings to the table. So it's really from start to finish and across a multitude of products as well.

The -- Pedro, you mentioned Brazil, and we had the pleasure of André Dias on an event that we had last fall. And just curious as to your view about whether you can grow that retail business in Brazil as fast as it has been growing over the last year. Is that your expectations?

Yes. I think there are a few things about Brazil. Number one, our relative size is very small. So we have less than 1% share. Then number two is, of course, the market continues to grow incredibly fast. And not only it's growing, but it's a profitable market. So the margin structure of the market is good. What also affords us to do is to not have a shotgun approach for more of a rifle approach, Steve, in a sense that we can focus on an addressable market within that market that plays to our advantages. So our approach is an approach that has a selection of certain kinds of growers, certain regions and certain crops. So that is where we can add the past value to our customers there. And even with all of that, we see a lot of growth, and that has already -- all the acquisitions that we have done as of recent have performed extremely well, which gives us more confidence to put more there because we have announced fairly heavy investment on our Board. And our investors would like to know that the investments we have made have been returning and they have. So in addition to that, we have a very robust pipeline of acquisitions in Brazil. We, of course, are very careful of not overpaying. So we're -- in Brazil is, of course, a market that has a lot of risk and volatility. So we're very careful in our due diligence process in Brazil. But we have a number of different companies. We have been very successful. Our corporate development team there, it's very good. And I think it's -- we're also getting much better integration in Brazil as well. So it's prospecting, deal making, integrating and operating, all things that we have done very well elsewhere. And I think in Brazil, we have demonstrated that as well. So we are very positive about it. I think there are also many avenues for growth. So we have a plan A, a plan B and a plan C. So if certain things don't pan out there, different alternatives to get to what we want to get to, no matter what individual deals get done. So I think that gives us a lot of confidence. The infrastructure in Brazil is great. You met André and I think he's putting together a phenomenal team in Brazil as well. So in Brazil, you need to have a very competent team because it's a tough market to navigate through.

I received a question on the portal, asking you to comment about your -- this carbon capture opportunity or regenerative soil or carbon sequestration opportunities. Can you give us an update on where that whole initiative stands? And how do you think you might be able to benefit from this initiative?

Yes. Jeff, do you want to speak about that or you want me to speak about it?

Yes. No. Listen, I see it as a -- Steve, it's probably one of the most talked about things in agriculture to date. On it, the last 12 to 18 months, digital kind of in at the forefront and now sustainability and carbon really take up a lot of airtime. And I see it in our retail network, I see it as a real opportunity. And I see it as an opportunity because we provide inputs to our customers. But really, at the end of the day, what we do is we provide solutions for our customers. And as much as the sustainability piece has talked about in as much as carbon as the forefront, whatever is going to happen in that market is going to actually have to happen down at the ground level at the field with the producer. And so that's going to involve a lot of education at that level. And it gives us an opportunity to sit with that producer and strategize about what's the best approach to fulfill kind of what society want, side of this piece of it and what part the agriculture plays in this side of it. And so we'll use a lot of our digital tools to sit down and do a field plan. And as it relates to carbon and sequestration, what color crops do we want to plant? What crops are we going to follow that up with? What's the fertility program that will go around that? We have a lot -- we've been talking about our proprietary products. We have a lot of products in our arsenal speed that play right into that carbon strategy as it relates to that. And look, our grower season opportunity as well that most of these programs, grower has got to be able to see a way that it fits him to some degree. And can he monetize? There's some extra efforts that have to be made here. And I think the way these programs and the pilots that we're running, you could see that there are some dollars attached to that. And I like, Pedro, from a big Nutrien standpoint, we're kind of playing the middleman in this piece of it and connecting the grower with that business that's out trying to purchase those carbon credits. And so again, at the end of the day, for me, it just makes us even more sticky with our customer. And look, our customers and our growers, I can't thank the people that value more of trying to take care of our planet in ways that they can do things and they can feel good about what they're leaving for the future generations in this business. And I think we're very -- I don't think -- we're very proud of the part that we play as well. But when I look at it purely from a retail perspective, I see it as an opportunity for us. I do.

Yes. And well said, Jeff. And I think the only thing that I would say is that there are a number of different stakeholders there in terms of e-commerce, farmers, suppliers and all that. And we are in a very good space to actually connect all those dots. And we have line of sight, 400,000 acres in our pilot program this year and we're intending to expand this in following years. And pretty much, like Jeff said, is working with all of them establishing the baseline, providing all the solutions that will reduce their carbon footprint. And then capture some of the credits and see how we can facilitate the trading of those carbons at the later point in time, too. So almost like the 3 stages of that, and we think we can help in all of those.

And if one of the mechanisms to drive more carbon sequestration in the soil is, no till as opposed to cultivating, does that generally mean more burn down? And is that generally favorable for you?

Yes. And look, we've -- if I go back, Steve, to the days when I was on the farm, tillage, in general, it's probably been reduced 70% since I left farm in the mid-80s. I mean it's remarkable, just how much less tillage we do today. And sometimes when we're doing tillage, we're doing strip tillage on that side of it. But I don't see it affecting what we do from an input side of things. It might change up the approach that we take a little bit from that side of it. And a surface applied preemergence or burn down versus an incorporated chemistry or whatever with it, but we've got those tools out there today. They exist. I don't think they have to -- they won't take away from yield, in my opinion, on it. And we're getting with our digital tools that we have today. And that's where that data piece of digital is so vital to our business, because we came over with a layer after layer after layer of data and have been able to provide good direction to our customers on what's the way that's most beneficial for the environment and, at the same time, creates a good ROI for the customer and a good yield. We're trying to do 2 different things here. We're trying to build some stocks back up from the grain side of things, and we're trying to treat our planet much more carefully as well with them. And I think we can do both.

And I'd like to ask a question about the Dyna-Gro seed business that you have, the proprietary seed business. Is your share of the seed that you sell-through your channel that's proprietary, if I understood you correctly, Jeff, did you mean that your share of that proprietary seed is a little relative to your share of proprietary crop chemicals?

No, no. I've said, that wouldn't be accurate. What I meant, Steve, is that share of seed, in general, is much lower than our share of crop chemistry and nutrients across our retail business. And look, there's a lot of reasons for that go-to-market strategy in the Midwest. If you look at the Pioneer model, it's been quite different than go-to-market strategy with crop chemicals and fertilizer in such with it. But we do a good job on a percentage basis of putting our proprietary seed now. I'll tell you this, to get the growth that we want to get in that seed platform going forward, it won't come -- just what we've done. We need to do a better job. There's a lot of things that have changed in that seed arena. Obviously, there's been a lot of consolidation in mergers in that side of the business, but it's also creating some additional opportunities for us as well with that piece of it. And look, we've done an exceptional job, I think, with Dyna-Gro again. We don't take second seed to anybody on a germplasm standpoint or a trade package standpoint. We'll be introducing this year. It's not a big acre crop, but it's a big deal for us. We'll be introducing this year commercially our first Dyna-Gro rice product. And it's going to be a great product for us because we've got an extensive network of retail facilities. I think when you travel down, we were in a bootheel in Arkansas. And we've got a very extensive network of retail branches in that area where about 90% of the rice is grown in the U.S. So we continue to bring really good product offerings to the market in that proprietary brand, and our people take a lot of pride in selling those as we have them.

So Pedro, how do you look at capital deployment from here? You have fertilizer pricing has just ripped and your phosphate business got written down in the past, but it was pretty darn close to the trough. And phosphate has really rallied since then. Do you look at those wholesale fertilizer businesses as areas where you might put some more capital in than you have in the past to debottleneck or increase some capacity in some way versus where I think a lot of the capital has been directed and that is into retail? How would you look at it now?

Right, Steve, I think our priority allocation is still on retail and digital growth because we think that it has tremendous potential for the future, not only in the U.S. but outside. But to address your point about the other nutrients, all of you of phosphate, even though we had a tremendous jump this year, we think that structurally, the market is still -- despite of the CVD investigation, it is still structurally for the long term. Of course, when we do impairments and all that, we don't look at the near time. We look at a short -- the more structural prices. We think that it hasn't changed. So we think that even this price jump that we have seen as of recent is going to invite some significant volumes from other producers in Russia and Saudi, and so we think this market will continue to be challenged. So our location would not be on phosphate. And as you recall, phosphate is only about 5% of our EBITDA in total. Now when we are talking about nitrogen and potash, in nitrogen, we do -- we have been making some high return investments in, I would call, debottlenecking or brownfields in nitrogen. And you have seen some of that capacity already being kind of on the market right now. And I think -- we think we're going to continue to do those. We operate a very high operating rates right now at 94% to 96%, which I think is what we kind of have communicated in our Investment Day. And so we'd like to continue to debottleneck. And those are very good return projects for relatively little capital, and they have less risk as well, given that we are doing this from a brownfield basis. And for potash, we have 6 mines where we have essentially 5 million tonnes from this year of paid for capacity. So there is no real need for great investment there. We have idle capacity that we can bring at virtually no investment for the next 5 million tonnes. And then after that, we have another 5 million tonnes there will be a very low investment as well in terms of brownfield. So we have a long way to continue to utilize the kind of good mines that we have as the first quartile cost for quite a number of years to come. So we'll bring -- we'll obviously bring those as the market needs. We don't want to basically flaw the market. We'll bring them responsibly over time. Our interest is that the markets continue to be affordable for the grower and more stable as opposed to shoot up and shoot down. We don't think that, that's very good for us. So we'll continue to be here. And as you've seen before in terms of -- in potash, whatever there was a surge, and there has been a smaller one in Q4 that we increased our production. But in the past, when there were floods, we're able to quickly surge our capacity by 1 million tonnes or more to provide the market that capacitated as they needed. So I think that's still the plan we have. We have plenty of capacity available at very, very little incremental cost.

Well, fellows, we've run out of time, and we just want to say thank you to both of you. I've thoroughly enjoyed the discussion. Best of luck to you this year. We'll be following your progress very closely. Look forward to catching up with you soon. Until then, my best to you.

Thank you very much for the invitation, Steve.