Nutrien Ltd. (NTR) Earnings Call Transcript & Summary

Okay. Great. Looks like we're live now. Thank you all for joining us on the webcast today. We're very pleased to be hosting Nutrien, and we are joined by the CFO, Pedro Farah; along with Jeff Holzman and Tim Mizuno from their IR team. It's definitely been an eventful year in ag and fertilizers and also for Nutrien, so we have a lot to talk about. Pedro will have some opening remarks first, and then we'll be doing Q&A. [Operator Instructions] So with that, I'll hand it over to Pedro.

Thank you, Andrew, and good morning, everybody. And Andrew, definitely a very eventful year, actually a couple of years since COVID here, but even longer than that. So just to canvas a little bit this conversation today, I just wanted to kind of hit on a few points. Number one is that our integrated business model and strategy is delivering exceptional results in this year's record earnings in the first part of the year, and an expected EBITDA to exceed $6 billion are kind of evidence of that. We're obviously benefiting from the strength in the current ag cycle. But more importantly, there are a lot of actions that we have taken that basically capture that opportunity. So just for a few examples. And most relevantly, we increased potash production by about 1 million tonnes in a very short order. We expect to be running potash at a run rate at 17 million tonnes in Q4. This ability to uniquely ramp potash in the industry and ensuring that all the customers have their products is really what's creating a lot of value to us and our shareholders as well. And then retail delivered a very strong and record results so far driven by strong organic growth and the benefits of our acquisition and tuck-in strategies. So we are now ahead of schedule on meeting several of our 2023 retail finance targets. So the outlook, shifting to outlook, remains very strong. So we have a very positive outlook for market fundamentals for the remainder of 2021 and into 2022. Ag commodity prices are very strong, which is supporting the demand for all crop inputs. And we have seen fertilizer prices continue to increase in the second half of this year. So we have not only exceptional results, a great outlook, and we have numerous avenues for further growth in the business to deliver further value. So we think we are competitively advantaged in high-quality assets and very strong cash generation and extremely solid balance sheet and a very good track record for disciplined capital allocation to deliver on our targets here. So Andrew, I'm kind of ready to take any of your questions going forward now.

Okay. That sounds good. So I think some of the questions that we get the most right now are really around capital allocation. Nutrien obviously looks to be generating quite a lot of cash over the next couple of years just given where we are in the cycle and obviously with some of the company-led initiatives over the past few years since the merger. Can you just talk about any plans that -- any specific plans for the cash windfall? Could we see Nutrien maybe hold on to a little bit of cash for some dry powder in case something interesting comes up? Anything around those will be, I think, really interesting for investors to hear about.

Well, certainly, a great high order problem to have. We have been very consistent in our disciplined approach of capital allocation and is a -- capital allocation discipline is a core pillar of our strategy. So we typically talk in terms of sustaining world-class assets, preserving the balance sheet strength and providing stable and growing dividends. And then we're deploying the balance of that cash into opportunities including, to your point, Andrew, delevering and share buybacks. So today, as we look at those tenets, we are catching up on some sustaining capital projects. And specifically, we had some delays due to COVID restrictions. We couldn't do some of our maintenance or sustaining capital investments because of -- we couldn't jam too many consultants or people in smaller sites. So we are catching up a little bit on that. We are actively managing the balance sheet, maintaining investment grade, which is part of our objective to be BBB flat. And we're looking to potentially delever as prudently, kind of taking advantage of the early part of the upswing cycle right now. We also -- we increased the dividend in the beginning of this year and demonstrating the confidence in -- just specifically, we have demonstrated the confidence throughout the COVID times. So even in the worst times, one visibility was not there. I think we're quite committed, and we have the ability to keep our dividend going, which underpins the stability of our business. And we are -- announced a share buyback program that we've been executing on it, having repurchased about 500,000 shares, most of which in the past month. So there are also some growth opportunities we are looking to do. We continue to grow in Brazil, where the aggregate economic value and proceeds deployed is now close to $300 million. And we made 6 -- 18 acquisitions -- sorry, 6 acquisitions in the U.S. in the past 1.5 years. So we also are doing the tuck-in acquisitions in the U.S., where we completed 11 acquisitions in 2021. However, we are -- as we go forward, we're looking to be selective in this stage of the cycle here. So we are completing the first tranche of nitrogen brownfield expansions this year. Our Board had approved $260 million of additional nitrogen brownfields expansions. And these are excellent projects with over 25% IRR and adding about 500 million tonnes of additional nitrogen production. And finally, we are -- kind of also approved our first tranche of ESG decarbonization projects. We are allocating about $50 million in 10 projects that will basically empower us to make significant progress against our 2023 targets of reducing CO2e by 1 million tonnes. So all of that is underpinned by our operational excellence in the business. We have made also investments on that. And as you see our handout in kind of Page 6, we're generating significantly higher retail EBITDA where we have made a lot of those investments. And the uptake on our winning -- award-winning digital platform is just absolutely phenomenal. And we've been able to control the production costs especially in potash despite the inflation and FX headwinds. So it's been -- we have a lot of options, but we are very committed to our disciplined capital allocation.

So maybe just touching -- I'll touch on a couple of things there. So maybe first, the dividend, I mean, historically, Nutrien has set to tie the dividend growth to kind of growth in retail and just growth in sustainable cash flows. So given the growth that we have seen and given the retailers kind of marching -- continues to march forward, can we expect some sort of a continued dividend increase and seeing something within the next 6 to 12 months?

So we are committed to stable and growing dividends from the integrated business, and we think that retail underpins the ability to continue to provide that sort of a stable and growing dividends through the cycle. And even with the uncertainty of COVID, that's exactly what we did, and that was allowed in great part by our confidence in retail providing that sort of a linearity to our dividend. So we have increased our dividends not too long ago, and we think that the Board is going to continue to look at that. And we see a possibility of increasing within the next year, but this will be obviously a Board decision.

Right. No, for sure. And then just given -- you talked a little bit about where you are in the cycle. And obviously at the higher parts of the cycle, maybe you're going to generate more cash but look to keep a little bit more on the balance sheet in case things turn at some future point in time. Is that the strategy that Nutrien is looking to employ right now to maybe keep a little bit on the balance sheet just in case, at some point, things turn, and then you can maybe deploy some of that capital that you've done in the past several years?

Yes, Andrew, the way we think of that is we obviously think of that through the cycle. So we had a trough, I would say, what we believe is the lowest EBITDA to date in our kind of existence last year. And this year, it's kind of looking like, per our guidance, to be one of the highest ever. So we cannot just base our strategy on the lowest and the highest, so we need to look through the cycle. But what we are thinking to do is taking the advantage of the early part of the cycle to delever. So we are kind of at a stable and get all the options not only from the balance sheet strength but financial flexibility through this cycle. But there is a lot of opportunity. We're going to be balancing that with our shareholder distributions as well. So it's not going to be a one size fits all. We're going to be taking a look at all opportunities and seeing how do we balance those. And I think the cash generation that we have right now is going to allow us to do a lot of those things at the same time.

Okay. Yes. That makes sense. Maybe can you just talk about -- let's talk about some of the growth opportunities that you're seeing for Nutrien longer term or over the next 5 years. Obviously, there's been a lot of focus on -- from the company on the retail side. The company has had a very successful kind of roll-up strategy in North America and now in Brazil. Are there other areas that maybe the company might be looking at within the ag value chain? And obviously, whatever you're doing currently, which parts of those would you want to continue focusing on the most?

Yes. We always look at strategic opportunities in adjacent spaces as well. And I would say that the critical thing here is that we are very disciplined in our approach to capital allocation. So where we look at all those things that there is a very rigorous analysis, ample consultation with the Board and a lot of comparison to the various opportunities on a risk-adjusted basis. So we're obviously not going to tip our hat to one thing or the other, but everything is -- it's on the table as long as it makes strategic sense here. So there are many ways to grow the business. And we're looking at our track record in retail through acquisitions has been great, but there's also a lot of growth through organic growth in retail. But also the growth of proprietary products, network optimization, digital and Nutrien Financial is becoming larger. And finally, kind of sustainability is also a great opportunity there. So obviously, potash is another kind of a source of growth in the future, that it's not adjacent but very core to what we do. And as we mentioned, we have another 4 million tonnes of available potash operating capacity right now. And I know that there was some skepticism about our ability to utilize the option, our kind of a capacity option now. And in Q4, we are about to be running at 17 million tonnes of the 18 million tonnes that we kind of had in operational capacity. And I think that will demonstrate that we can do this. And not only we can do it, but we can do it in a fairly short order and take advantage of burst demand with our burst capacity here. So there is a lot of growth opportunities. Some of those are not linear. They also come with the volatility of the market, and we're being able to use the assets and flexibility to exploit those.

Right. No, for sure. Why don't we -- let's talk about the grain markets a little bit. Obviously, corn prices and soybean prices have been really strong this year. We've seen a little bit of a dip more recently but still relatively very high when you compare to historical levels. Farm profitability looks really strong. Can you just talk about Nutrien's outlook over the next 12 months and how that might impact some of the fertilizer demand and crop input decisions that farmers might be making over the next 12 months just on a broad overall basis?

Yes. We -- 2 things. Number one, from our view of crop prices is that continuous strength will be there for a while. There is also a lot of strength on the basis of just monetary expansion that kind of makes its way into that as well. But as it translates to us too, we are keeping our ears to the ground here about inventory levels. And what we are seeing is everything in the business -- fertilizer business is actually going to the ground and inventories are tight. We have sold through November in many of our kind of business and kind of assume by the time we announce our Q2 results -- or Q3 results, we're going to know where we're going to be for next year to -- through Q1. I think everything is pointing in the same direction. There's no -- so absent any kind of a major disruption from a worldwide standpoint, I think we are looking to be fairly good. We also see affordability of our fertilizers still to be fairly good given the crop prices. So we don't see yet any demand destruction of any kind in any of those fertilizers. So I think the affordability is good. Demand is good, I mean, evidenced by how much we're being able to sell forward. And you just see prices in Brazil in potash, for example, going up [ above $700 ]. So I think there is quite a lot of strength in the market at this point.

Okay. And in terms of like the crop mix, corn, soybean and the different products, if you're looking in the U.S. more specifically, for the retail business, obviously, it's important, we see a little bit of drought coming up in the Western parts of the country, actually not a little bit but pretty severe, right? How does that impact Nutrien's business? Help us walk through that -- those thoughts going into next year.

Look, I mean we always have -- I mean it's never perfect. And there are years, they are less perfect than others. I mean like '19 certainly was a -- is a very bad year in that regard. This year, we have not seen a net disruption that will concern us. I think our outlook for the business and what we've seen both in volume and in margins have been fairly positive. So our outlook for the business and the results to date are fairly strong. So we don't see any inflection point. Now we will have to see what happens in terms of an open fall application. Of course, there's a bit weather dependence there. But right now, there's -- we don't see any sort of major clouds in the sky that would make us too concerned about the retail side. So far so good, and the results to date are like a very -- are very good.

Okay. Okay. That's -- is there -- on the potash side, you talked a little bit about affordability. Prices in Brazil are reaching $700. And in the U.S., we're seeing 6 handles. How do you think about farmers looking at that number relative to where crop prices are and some of the feedback you're getting? Obviously, demand is really strong right now, but we do have some supply coming online as well. Like how do you think through those things and the price path for potash over the next little bit?

Yes, I think there is still a lot of demand for potash. Of course, as prices go up, I mean nobody wants to be caught outside of our position here in potash. But there is still kind of a long way in terms of what we see in the market right now. I think, like I said, inventory has been low, being sold through most of Q4, the outlook for the future being good. The international market is being very strong. We haven't even delivered much to China. China is still a market that will need to come back to the market and make some purchases. We believe that their inventories are kind of decreasing. We'll have to get to the table. So those are potential additional kind of price pressures or volume pressures in the market. So we don't see the situation kind of flipping in the short term. Crop prices being high, the affordability is still being high, and I think there is still a lot of incentive to plant whatever people can. So the growers are still strong in the demand here and at affordable prices. So no -- again, just weather is the only uncertainty for Q4 and for the fall application. Other than that, I think, all the signals are very positive.

Okay. I think in the Q&A, it looks like we have a question around potential softening pork markets in China, which is obviously a strong factor in corn and soybean demand. Is there anything that you're seeing in terms of the impact on fertilizer prices from that? Or is that maybe still too early? Or is the impact not really being felt?

Yes. Well, because we basically have had no sales to China right now, so all the strength that you have seen right now has been independent of China. And China is a factor that -- of course, they're communicating this in the global market, so I'm not saying that, of course, that's not a factor. But I think there is still a lot of pork population that needs to be rebuilt there, and there's a lot of attractiveness. And even though prices are not there, they are still in a recovery mode. We think that China is still going to be a net kind of a demand increase in the period as opposed to a decrease despite of some volatility we may be seeing from pork in the meantime. I mean just inventories are the main signal we are looking at, and inventories are low, so -- and getting lower. So that is the sort of a North Star of what we're looking at.

Okay. And I mean since we touched on China, obviously, since the contracts were last signed for Canpotex earlier this year, the price has gone up a lot globally. You're seeing even strong prices in Asia, with Southeast Asian prices seeing a pretty big surge recently. Can you talk about maybe just the strategy around how to approach this? Because obviously, the buyers on the Chinese side don't want to pay this big surge, but they're going to see this globally. And does Canpotex wait this out? It looks like Canpotex is filled already through, I think it was November, right?

Yes.

So can you just walk us through how that -- how the contract negotiations might go this year with China and also with India? Maybe India is going to sell out a little bit earlier this year given where their inventories are. Any thoughts there?

Yes. I think there has been some spot buys done by China specifically but the spot kind of buys being at much higher prices. And the strategy to wait to secure lower price is likely not going to be a successful strategy this year because the prices are just very stable and strong. So we think at some point in time, there is enough pressure there that they will have to come to the table. But if they don't, I mean, we do have other alternative demands. So obviously, we're not interesting in selling below the market at this point in time. So I think at some point in time, there will be a kind of an intersection between those factors that will kind of get us all on the table and sign a contract. Canpotex is the best in the world in this, so we are expecting this to be done at very rational prices that make sense given the current market conditions. So I am -- I don't think we are feeling pressured to settle anything below market.

Okay. And then maybe just more specific to Nutrien in terms of the potash segment, the strategy going forward. Obviously, you're bringing on a lot of capacity over the next 6 to 12 months, and nameplate capacity looks to be, I think, it's around 17 million tonnes, right, on a run rate basis at least. Can you just talk about that strategy, volume versus pricing? And there's obviously a lot of flex in the Nutrien system. So can we assume that maybe that run rate that we see at any given point, maybe there's a little bit more variability in that number going forward? How should we think about that?

Well, there's always variability in the market. What we are seeing now is, of course, a recovery after a couple of years of kind of a more tenuous market, maybe all the environmental factors and COVID kind of combined. So I think we're seeing some of the recovery, and we are seeing that the recovery may be stronger and more long lasting than what we originally thought at the very beginning. In terms of our capacity, we do have 18 million tonnes of available operating capacity in the short term. So it's -- we call it paid-for capacity. Of course, there's small investments, so we need to make and will need to bring people and some investments in the -- in conveyor belts and things but not a major investment. And we can get to 18 million tonnes. And in Q4, we're going to be operating at 17 million tonnes already. So we are pretty close to utilizing a lot of that capacity. And I think more specifically kind of it talks about our ability to ramp that up in a very short period of time. But we have the 6-mine network that allow us to do that. All of them are operating, and it's much easier to turn the volume to dial up when you have all the mines operating than when you have to restart a mine or obviously start. And also, it kind of speaks to having a combination of a network of mines versus having one mine. Of course, there's a risk adjustment here. We did have a fire earlier in Vanscoy. We kind of -- nobody would notice anything because we totally compensated with our 5 mines. So those things will happen with different producers from time to time. And we both have very good quality assets and good geology, but we are able to kind of compensate and balance that risk and kind of ramp it up very quickly. So we are -- we think the market is going to continue to be strong. We are seeing this year record shipments between 69 million and 71 million tonnes. And we see a continued increase in the market for the next 10 years, about 2.5% on average. Of course, that will be -- that will not be linear, but we see a 2.5%. So by the time that even additional capacity comes online from some competitors that this market is going to be at 90 million tonnes, and there will be -- that will have additional capacity at brownfield costs, which is a fraction of greenfield that we can bring to line. So this is going from 18 million tonnes to 23 million tonnes. So we can bring that to align with a very fractional investment and still reduce a lot of flexibility through the period as well. So that -- I think it's all boding very well for us, not to say that volatility is distinguished, but I think we are looking very good and sort of feeling even more comfortable than before.

Okay. Maybe just touching quickly on the nitrogen market before -- in the last few minutes we have here. What's the cost curve looking like right now? And maybe what's your expectation over the next little bit, maybe over the next year, given really high energy prices, European nat gas prices at record levels and coal prices in China are pretty high. What does that marginal cost of production look like? And how does that change over the next little bit?

Yes, we think we're in a sort of a more rational market today. There's still -- the balance between supply and demand is tighter. There was production outages and very high global energy cost that is supporting the prices. So we expect the demand to continue to increase at that 1.5%. And there is new kind of markets for nitrogen that are also emerging with ammonia becoming a fuel or kind of a power source, which will provide even further upside in the longer term for that market. So much of the capacity in the next 3 years is being added in Russia, Nigeria and India. And -- but the base of those additions for the next few years particularly after 2021 will likely fall short of the projected demand growth. So we expect the increase in nitrogen sales volume to be between 11.5 million to 12 million by 2023 in a combination of high return of expansion projects for us. And we're talking about our numbers and increased operating rates that we have, mostly driven by reliability. So we're getting more of existing assets here. And on top of that, with the Board approving another $260 million of projects for nitrogen, we'll be bringing online excellent projects, I mentioned this in my opening remarks, that have extremely good ROIs in excess of 20%. And so we expect that those would generate, once completed, at run rate, $90 million of additional EBITDA. So that is fairly supportive for the future.

Okay. That's great. I think that's all the time we have, unfortunately. There's always a lot to cover with Nutrien, but I appreciate your thoughts, and thank you for joining us today.

Thank you.