Nutrien Ltd. (NTR) Earnings Call Transcript & Summary

All right. Thank you, and good morning, everyone. My name is Adam Samuelson. I'm the Agribusiness and Packaging Analyst here at Goldman Sachs. Very pleased to continue our Industrials and Materials Conference this morning with Nutrien. We have their Chief Financial Officer, Pedro Farah, on with us today. We also have Richard Downey, who heads up their Investor Relations effort on as well to take questions. Before I pass it over to Pedro, I think you have some very brief opening remarks. I want to remind everybody, there should be a box in your webcast window. Please do send your questions in. We love getting questions in from the audience. We'll get to those as we go through the Q&A session in a little bit. But with that, let me pass it over to Pedro. Thank you for being here with us. You have some quick comments at the beginning and then we'll go into Q&A.

Thank you, Adam, and a pleasure to be with all of you. I thought it would be appropriate just to have a very few introductory comments given all the changes. Of course, it is a very exciting time for us. The market is substantially better this year versus last year. Of course, that is generalized. But I think in our case, we are seeing this everywhere in the crop market and in the fertilizer market as well. So it's impacting virtually every side of our business. So what we have told everybody during the Investor Day last year, it's pretty much like what's happening. Our leverage in terms of EPS being 2.5x the growth of our EBITDA growth, it's also happening. So we think there is, you're starting to see some of the kind of the leverage up as well here. But I will be remiss not to kind of tackle the virtual elephant in the room here, which is the leadership change that we have with Chuck Magro leaving us and Mayo Schmidt being our new CEO. And what I can tell you is that there's basically no change in strategy. There is no change in our capital allocation methodology. So we're pretty much going to follow the same road that we are going until now. There was no dispute in that regard that generated the settlement of Chuck. So I would say that pretty much, Mayo has been very involved as the Chairman of the company until now and all different aspects of it and so were the other members of the Board, including Russ Girling, who is our new Chairman. So the strategy continues to be the same. Capital allocation continues to be the same. And that's probably all I will say about that. So with that, maybe, Adam, I'll just pass it on back to you.

Great. Thank you, Pedro. And I want to come back a little bit to capital allocation holistically and strategy change or not, just to understand kind of the key focus areas. But first, I wanted to talk about market environment, very different ag macro backdrop than we've had in many years. And so maybe we'll start in retail as you're in the heart of the key season for that business and how planting progress in the U.S. seems to be proceeding quite nicely. But maybe give us the latest kind of thinking on how the spring is progressing and what the implications of that are for acreage and what you're seeing in the business as a pull on tonnage, but also some of your more higher-margin proprietary products and the opportunities there?

So I think in summary, I think we could say that it's going very well. You just have to look at our Q1. Of course, there was a good surprise in Q1, and especially that was coming from retail, and retail, fertilizer in retail. And we're still expecting acreage to grow this year. We are already seeing that the planting has caught up. I mean, I think in the beginning of the year, the planting was slightly behind and planting now has caught up maybe in all crops except for cotton, but we think it's going to be caught up as well according to previous averages. So there was, prices are holding up. Margins are holding up. And our proprietary products continue to kind of have increased penetration. Of course, because we have more fertilizer sales as a consequence of prices, the mix impact may be slightly depressed because of that, but it's more volume than what we would have had normally, it's just the mix impact being somewhat behind. So I think we are still on the road to where we were saying, maybe a bit ahead of the game for our 2023 targets. We kind of talked about having a 60% organic growth and 40% M&A growth. And I think 2021, we will probably have 80% of organic growth, which obviously bodes very well for profitability for us. So I think that's kind of in the U.S., and I would say just to complement that both Australia and Brazil are also doing very well. I think we tend to spend quite a bit of time in the U.S. for obvious reasons because we are more familiar with it. But outside of the U.S., it's already 30% of retail profitability. So it's becoming increasingly more relevant. And I think the progress we're making in Brazil with our pipeline and acquisitions and in Australia with the integration of Ruralco, I think those places have surprised to the positive with integration being ahead of the game. So we are pleased with not only the U.S. progress, but outside of U.S. as well.

That's really helpful. And maybe just to round that out because of the time of the year it becomes even more critical. Western Canada as kind of the later planting market, how is that going or any sense there? It's been drier in Western Canada. So is that positive, negative or...

Yes. I think there are kind of spotty areas in which you're going to see some delays. Well, we don't think that, that's going to have any major impact. We have seen in the beginning of April overall North America doing fairly well. So not only in terms of volumes, but in terms of margins have kept up. So we're a lot more positive about the strength at this point in time that we have little experience. Of course, as you know, Q2 is a very big quarter for us. So it's still to play out. But I think all the signals that we have seen so far confirm that we're probably in a good road here, absent any climatic disruption.

Okay. And then along those lines, with the grain, oilseed price environment that we're in and the farmer income environment that we're in, is it too early to sense kind of how that is changing farmer input budgets? Is it just a volume opportunity that retail benefits from or is there mix as they either trade into more branded items or there's opportunity for your Loveland proprietary products? Just help us think about how that will play out over the course of the spring and summer and I guess, probably more Q3, but what you're seeing with your customers at this point?

Yes. Adam, when I talk to our kind of people in retail and a few people, I mean, there's obviously a greater discretionary expenditure available now to the farmers with crop at almost record prices that we have seen, $7 corn, $14 soybeans, all-time highs on some other crops. So there is more discretionary spending available, but there's only so much they can buy or will buy anyway. So they will try to maximize their crops. I think they're going to, especially now given the price, maximize their yield, not only in terms of chemicals but also fertilizers. We are expecting them to not be at all constrained. But in terms of kind of a trading up, they will trade up so much. And then after that, they will have had all they kind of need to. So there is some trading up, but not extreme because they will have had all they need.

Got it. And then maybe just the final one on retail. I mean, we can come back to it more later. But how does a better farm income environment, better farm input spend environment impact that M&A pipeline? And what are you seeing from a tuck-in perspective or have valuation expectations changed meaningfully or are people now actually more receptive to potentially divesting at a better point in the cycle?

Yes. So we look at that every year. We have a great team there, and we're very disciplined. I think some of our pipeline, to your point, I think people may want to benefit from the high. So they may be less inclined to get out of the business at this point in time. But we have made 6 acquisitions year-to-date in the U.S. And in Brazil, we have the acquisition of Tec Agro, which was a sizable step. We also are looking at a very good pipeline in Brazil for our business there. So I think we are not sort of totally focused on one market. We're going to be opportunistic in between markets depending on valuations and the opportunities we have. So playing, still we're going to be playing in the U.S., but we're also looking at Brazil very intensively.

Okay. All right. And maybe just on Brazil, I mean, just remind us the aspirations for the business there and how big you think it can be? And is it just organic growth and bolt-ons or is there something bigger that you'd have to do to really hit that medium term target?

We are open to something bigger, Adam. But we also need to, it all depends on the value and the price. So we obviously have our hurdle rates, and we'll do what's right for the shareholder. There's also some differences in multiples when we look at bigger versus smaller and some of the terms and conditions of the deal, especially in Brazil, are important. So you have caps and warranties and some other conditions. So it is not the only thing we see is like big or small. We are looking at all these other conditions as well. But what I can tell you is, A, we are open for bigger, but we also have many different avenues to get to our ambition. So we are approaching $500 million of revenue. And I think we'd like to be in 2023 at about another $100 million of EBITDA. Maybe it was 2025, and that's kind of a long-term goal. And for that, we'll probably need, I think, as we spoke before, we need to probably invest another $1 billion in Brazil. And we're prepared to do that. And we have many avenues to get the expenditure in the next couple of years. So we have a strategy that is very focused in Brazil. And there is a plan A and a plan B and a plan C. So one way or another, we're going to try to occupy the geographies that we have with the type of growers that we would like and the types of crops that we want. So that's the sort of overlay of the different strategies that we have for Brazil. So more importantly, in Brazil, the assets we have acquired recently have been performing very well. So that gives us further confidence that despite of all Brazil's volatility, agriculture seems to be fairly insulated, and we continue to do very well in Brazil, giving us more confidence for future investments.

Okay. That's great. Maybe shifting over to the potash side then. Let's maybe talk, set the stage in terms of the industry kind of supply/demand outlook as we sit here today for the balance of the year. And specifically, North America, seems that it's been particularly strong. You and Mosaic both introduced summer fill prices last week. Mosaic was at our conference yesterday, and they alluded to that summer fill program selling out within 48 hours. Talk about kind of what you're seeing on the demand side and how that plays into the second half?

Yes. To your point, I think, similarly to what you heard, our summer fill program was also done in 2 days. The reference price was an increase from where we were trading by $10. And we see that momentum continuing another $30 per short ton for the future in Q3 and potentially Q4. So a number, we are fully subscribed in the summer fill program until September 30. So Q3, it looks very positive for Q3. And even as we look forward into Q4, we may be looking at additional volume as well so that we can fulfill the market demand. So I think that, all in all, this is all a very positive environment for potash. Potash is still, I would say, at mid-cycle prices. There's still some upside to go. And we've seen stocks to be fairly low and the market to be very receptive. So I think we see not only a good environment now, but probably a momentum continuing into '22 as well.

Okay. And as we look at some of the other key demand regions of the world, Brazil, Southeast Asia, India, China being kind of the 4 other big ones, what are you seeing kind of similarly or differently as you go outside North America?

Yes. I think it's a global market for potash at this point in time. So we are seeing strong demand. Brazil continues to have very strong demand and prices as well. We have been reducing some of our shipments to China or our projections for shipments to China because we still don't have a contract. And as you would see that we are pretty much sold out throughout the various quarters. So we have a much lesser risk than in prior years because of that. But we like to work with China. They're good customers. We have been working with them for decades. And the intent is that we will be able to continue our good relationship, but of course, needs to be on market conditions. So that will be the only thing that will do that. All the different demand in Southeast Asia seems fairly solid. Of course, palm oil hitting an all-time high. And the demand that, that sort of unleashes is quite positive for the market as well. So what we see is, we'll continue to use our 6-mine network. We obviously try to optimize the network in the mix of production. And as we increase in production, we'll probably have a mix that will be less favorable because we will be engaging mines that are more expensive than the other ones in terms of cost per tonne, cost per material. But I think the scale is also going to be more than offsetting that. So our targets for costs will continue to improve over time in terms of as we kind of scale our mines, offsetting the mix effect.

Okay. That's really helpful. And so maybe to that point on leveraging the network, the company has significant kind of idled or spare capacity. Help us think about how you would bring any of that back in what does seem like a pretty strong demand environment. And what are the key kind of barriers, labor, capital, time that it would take to bring some of that back online?

Yes. There has been, number one, we have what we will call between the '13 and '18, fairly paid for capacity. So that is a very limited investment in mostly people. And that's what we've been kind of doing first, activating first in terms of our mines. And I think those are, because you don't have a lot of machinery and all that, it's more hiring, they can be done at a much shorter period of time. So the lead time to activate that is much shorter. And that's what we'll be availing ourselves first. And then, of course, from '18 to '23, you require investment. We know we have done a lot of engineering studies to know that our next step happens at a much lower cost, even a low brownfield cost, I would say, for those in the future. So that is very kind of positive in terms of scaling up to whatever the market demand happens to be. And we continue to think the market will increase 2, 2.5. Our potash kind of estimates for this year is 60 million to 70 million tonnes. Depending on how the market continues to grow, it might be slightly higher. But that's kind of what we see at this time looking at all the different market, global competitors as well.

Okay. And you just alluded too that you have potential inexpensive brownfield opportunities within your network. And it ties into a question that we have gotten from the audience around BHP and Jansen, which they do seem like they're going to their Board for final investment decision this year. Does the market need that capacity? You've got a lot of spare capacity. Seems like you've got room to add capacity a lot cheaper. And just how do you think about your scope for partnerships or ways to help bridge that where it seems like there's expensive capacity being built when there's more efficient ways for capital to be deployed within your company.

Yes. Adam, look, I mean, the whole discussion on Jansen has been going on for quite a while. We could set about this one. And I think what we're doing, at this point in time, is focusing on our own capacity and our own customers and trying to meet demand where it is. Like we said, we have good capacity. We have cheap capacity and we have means to utilize the 6 mines in the best way possible to meet that demand. Our competitors will do whatever they will do. I think that, at this point in time, we'll try to kind of focus on our customers.

Okay. And maybe just to wrap up that with Canpotex for international marketing. I mean, it's a very different structure today than it used to be 20, 30 years ago when there was a much larger number of Canadian potash producers. How do you think about the value of Canpotex going forward as a marketing arm and the competitive advantage it brings to Nutrien?

Yes. I think Canpotex is a great marketing and sales company, and it has been for a number of years. It's a great arm for us. It's very well connected. I think it's proven to be very effective in creating share value for us. So I think we continue to see them being very effective. I think as an illustration of that, like our ability to set up a short-term contract with China last year gave us the possibility of using some of those tonnes for like a more competitive, a higher price right now. So they've been able to be very effective in the distribution as well. And I think that's through the cycle there. So they've been positive right now, but then being positive through the cycle as well, which is important. I mean, we all know that the industry is cyclical and our customers value the service they get, the reliability, the credibility they get from Canpotex.

Okay. Maybe switching over to the nitrogen business and get your perspective on the industry supply and demand outlook over the balance of the year. And in particular, the guidance that you kind of updated last week, it does still imply a pretty meaningful or seem to imply a pretty meaningful step down in pricing in the second half of the year. And I'd just like to understand what's driving that conservatism.

Yes. Our forecast is the best estimate of what we did at the time. And of course, we'll keep looking at the market. And we did anticipate and we do anticipate some correction in fertilizer prices in the summer period, at least for nitrogen and phos. And it's common to expect some additional capacity that will come on stream as well. So all of those were taken into consideration in making our forecast. However, given the momentum, we might not be seeing the full summer reset we kind of originally anticipated. So at least as it relates to nitrogen, we'll kind of adjust as we go forward. This is a dynamic market. But maybe we're not seeing the lowest lows that we have foreseen. We'll have to see how it evolves.

And if that is the case and the market is proving stronger into the summer, what do you think is the key reason? Is it cost curve or is it the demand pull in different regions? Where do you see the bigger tension?

I think there's not a big difference in the cost curve at this point, but the demand has certainly, have been a lot stronger. The crop prices have made it stronger. And also in our case in nitrogen, we also see the resurgence of the industrial demand. So the industrial demand is going to help sustain our prices too. And of course, oil, energy recovery and oil prices increasing, it will probably kind of help support prices as well. So I think those are some of the factors that we see supporting prices.

Okay. And as we look at your portfolio and your asset base, Trinidad is one where the competitiveness seems to be in a different place today than it might have been 10 or 10-plus years ago. How do we think about the long term kind of value and fit of the Trinidad assets in the Nutrien portfolio?

So Trinidad is a world-class facility with about 2.2 million tonnes of ammonia capacity. And it has the advantages of tide water to serve the global export market, which is unique for us. And it provides a lot of advantage as we think about growth from hydrogen and fuel markets as well. And our gas cost indexed to global ammonia prices, so it also provides a good margin benefit. And I would say that Trinidad has a fair amount of industrial demand as well. So as industrial demand is increasing now, they will tend to be more, a lot more utilized. So at this point in time, we are running all plants in Trinidad, including #3, #4, which is one of the plants we've put in care and maintenance for a short amount of time. But we do have some, kind of a scheduled maintenance for 2021.

Okay. And you just alluded to Trinidad potentially having some other advantages on hydrogen, which is a topic that you're seeing a lot of peers in the nitrogen industry explore, whether it's like ammonia as a hydrogen fuel source or just green or blue ammonia. How do you see that opportunity across your portfolio? And a place that's going to get some investment dollars going forward, what will it take to actually move forward with some of those investments?

Yes. I think in terms of blue ammonia, you could say we already do have blue ammonia. And I think some of our future debottlenecking or turnarounds will contain some additional brownfield-type investments that will continue to improve our capabilities there. Green ammonia, for some of that, we'll have to kind of watch the carbon market and see when that becomes more viable and then see how the technologies evolve as well. But of course, we have an ESG Day coming, in which we're going to be talking more about that and about our plans for the future.

Okay. All right. That's helpful. So maybe kind of bringing it up to the corporate level and thinking about kind of the strategy, capital allocation. And it's a question that's coming from the audience. You touched on some of this in your opening preamble. But can you talk about Agrium and PotashCorp as Nutrien have been together now for a few years. I mean, preceding that, Agrium had the retail and wholesale integration as well. How do you think about the strategic fit of having those 2 businesses together, very different capital, cash flow profiles, capital intensity differences. How do we think about that strategic fit?

Look, when we did the merger originally, there was like $900 million created in different merger synergies. And there was $650 million of merger synergies and then some additional benefits later on. And I think COVID was a good example of that, about the earnings stability that we can provide and the ability to sustain our dividends and which a number of our competitors needed to suspend guidance, suspend dividends. And we were able to maintain our dividends and even increase our dividends as recently as last quarter. So we see the value there. Mayo has, our new CEO, has been discussing about some additional initiatives or interest of him to focus on other operational efficiencies and supply chain efficiencies that we may have further in the integrated model that we have right now. So we see stability. We see good integrating synergies that have been accomplished, but more that could potentially be accomplished.

Okay. Okay. No, that's helpful. And so in that vein, I mean, the company, especially as nutrient prices continue to rise, the cash generation does increase pretty meaningfully. And help us think about the priority use in terms of M&A, incremental organic investment. Dividend seems like that's a pretty strong commitment, but it's a pretty fixed cash outlay. And repurchase, how do we prioritize those? I thought it was interesting. You guys had increased your normal course issuer bid in the fall, but the pace of repurchase in the first quarter was pretty light. Just help us think about those moving dynamics.

Yes. So I'm just going to restate what we have been saying just to ensure that we are kind of reaffirming our capital allocation methodology. But the #1 thing that we need to do is to sustain our assets. Of course, we have been guiding about $1.1 billion to $1.2 billion. And likely this year, it's a bit on the higher side because in the prior 2 years because of COVID there were some delays in some of our sustaining capital deployment. And as we go after sustaining, of course, we would like to keep our balance sheet strong. And by that, I mean, we would like to keep our BBB flat balance sheet. It's fairly important to secure our seasonal capital requirements, especially for retail, where we have a lot of swings throughout the year. And that means to us living between a 2 and a 3 net debt to EBITDA kind of a framework, which we have been able to do. And I think this year, with the increase in EBITDA, you see some amount of delevering, natural delevering there. And then after that, we're very committed to our dividends. As we spoke, we think we can provide stable and growing dividends, and that has been what's behind the kind of the recent increase now. As we look into the future, we see no reason why not to be able to continue to do that. I think our greatest test was COVID and all the liquidity issues there. And I think we passed with flying colors there. And the rest is compete for capital. So we look at, and even in Q1, we did approve the NCIB and we obviously approved because we intend to use it to some extent. But all of those things, organic and inorganic investments, are going to compete for capital base as well. You would also kind of expect Q2 to be a fairly big quarter. So we are kind of thinking a bit of the working capital requirements for Q2 as well. But we'll be looking at all of those. And our NCIB will compete with some of our M&A and other organic investments. So we will be making that with the best potential return for the investments we could find.

Okay. And on those organic versus M&A kind of investments, remind us of your kind of return hurdles and criteria?

Yes. We do have. I'm not quite sure if we kind of published a hurdle rate, but I can tell you that our hurdle rate is somewhat high. It's like higher than our cost of capital just to have some risk premia on that, and we adjust those hurdle rates by country. So for example, in places like Brazil, would expect a much higher hurdle rate because of sovereign risks and all the other risks associated with that. But all of the capital initiatives that we spoke to during Investor Day are still very much there. So we have spoken about retail, investing capital in some of the tuck-ins and greenfields, especially Brazil M&A. So in addition to what we call Project Foundation, which is the deployment of SAP and our digital initiative as well, and those are different things. In potash, we have new generation investments, which is power generation for potash and our automation. So those 2 pretty much tackle the 2 main costs of potash production, which is labor and energy. And then in nitrogen, we have a number of different initiatives. We already deployed many of them, increasing our capacity. And we'll continue to do this debottlenecking projects, which are low risk, high return, to continue to increase our capacity in a very efficient way. And as we do that, we'll also be addressing greenhouse gas emissions as we do those as well. Because those turnarounds and debottlenecking give us a greater opportunity to make low-cost investments that address green initiatives.

All right. Great. Well, I think we're going to leave it there. We're bumping up against our scheduled time. So Pedro, I want to thank you for taking the time today to speak with us. Thank you all for joining on the webcast. And I hope everybody has a great day.

Thank you. Goodbye.