Nutrien Ltd. (NTR) Earnings Call Transcript & Summary

Okay, welcome back. My name is Steve Byrne, and it's a pleasure to host this next session with Nutrien. If you were in the last session -- was the fertilizer outlook call. It was a layup for a discussion here with Ken Seitz, Interim CEO of Nutrien. Lots and lots of questions here for you, Ken. But would like to kick it over to you, make any opening remarks, and we'll jump into some questions.

Yes. No. Hello, everyone, Good morning. And Steve thanks for the opportunity to come chat. Yes, so maybe just a few thoughts and some messages that we're talking about off late and the focus that we have at Nutrien, it's really 3 things. One is, you would have seen coming out of '21 and then into 2022 the benefits of our integrated model on full display. And so as we executed through 2021 and the year that we had in retail we saw really strong performance on our supply chain amid challenged supply chains all over the world. But with our strategic procurement and the way that we have developed that supply chain over decades, now we were able to get the products to our grower customers where they needed and when they needed it. And again, we saw the benefits of that last year, and we're going to be building off that into 2022. On the nitrogen side, well of course, the market is doing what the market is doing. On the execution side of our business, of course, we have our network of strategic located plants throughout North America and access to below-cost feedstock. And that is in comparison to some other parts of the world that for some of the wrong reasons, of course, are experiencing some real challenges as it relates to high-priced feedstock. So in 2021, you would have seen us safely maximizing productivity and availability operating rates out of our nitrogen facilities and you will have seen those results. And then finally, in potash, our network of 6 mines and obviously, with the backdrop of very strong fundamentals for crop nutrients and the backdrop for our entire business among those fundamentals, certainly that's true in potash as well as we saw demand reach record levels. But also with some supply side issues you saw a step up in producing an additional 1 million tonnes. And of course, in this environment heading into 2022, planning for even more tonnes out of our network of 6 flexible mines. So our integrated model reaching right through that value chain, again on full display in 2021 and heading into 2022. Second message that we talk a lot about is just our capital discipline and sustaining our assets, and obviously have our balance sheet fortified even if we come out of the cycle into more of a mid-cycle pricing environment. Our dividend is -- in terms of yield is one of the best in the industry. We have some really exciting organic growth opportunities that we have in sight that we can talk about that obviously meet our hurdle rates, and certainly in this environment are well into the money. We've announced our NCIB in the renewal, but at a 10% level, then we're going to be doing a couple of billion dollars' worth of buybacks this year with room to do more. We believe if the market unfolds the way we believe that it will. And then finally, we continue to focus on the inorganic pieces as well, and that has been mainly expansion in Brazil and again our opportunity pipeline there is substantive. So from a capital allocation point of view the discipline that we've always shown, we continue to show. And then the third message is just on our sustainability work. And we're really quite excited about as we seek to feed the world and do that sustainably the way where Nutrien is positioned in that story. And that's our carbon program and the work that we've been doing there and success with the grower looking to expand that materially this year, but then also in our nitrogen business unit where we're talking about low-carbon ammonia, we're the largest producer today, but also having number of other decarbonization projects underway. So it's really, Steve, those 3 messages. It's integrated model on full display, it's disciplined capital allocation and our ongoing focus on sustainability.

All right, thank you Ken. And any priorities that you would like to comment on -- for yourself as interim CEO and where you want to take the company right now?

Yes, no. So, yes, absolutely. The priorities that we have at the moment are consistent with the priorities that we've had at the company for some time. And so the first one is our people. Keep our people safe and absolute focus on safety. We're a large industrial company and we have a lot of activity at any given time and operating through a pandemic, safety is our top priority. The second one is just execution -- safe execution of our plans. Coming out of 2021 and into 2022 we have the same team in place that execute and delivered in 2021. We want to take that team and achieve our bold and audacious plan for 2022. And then the third one is just the ongoing focus on our strategic priorities. And if you look at the challenge that we have as a globe and as a company, and that is feeding 10 billion people by 2050, but doing that sustainably. And we don't think that those need to be at odds with each other. In fact, we think there's opportunity there. And so with our integrated model, I believe, there's no company better positioned to address that challenge and take that challenge and turn it into opportunity than Nutrien sustainably producing food for that number of people, but doing it with our integrated model.

So you ran Canpotex for a number of years, and I really want to jump into your views on where does potash go from here if the world is cut off from 20% out of Russia, potentially, as much as another 20% of Belarusian product that can't get out or it's only way out is through Ukraine and does that get blocked? What's the outlook for potash in that kind of a scenario?

Yes. I mean it certainly will be a challenged environment for the potash market. And so we do have the backdrop of the ag fundamentals at the moment. And then as we headed into 2022, in the U.S., looking at grower margins at 70% above the 10-year average. In other words, even at these higher crop input prices, grower economics are intact, and in fact, there's some runway there to keep grower economics intact. But Steve, as you say, some of these big, potential supply shocks to the equation do present a challenge. And so if you look at the evolution of Belarusian sanctions and where we are today with challenges for BPC product to get to tidewater, alternatives ports and rail to China also look challenged. So that we had been anticipating some shut-in or difficulty with BPC exports. And we also have seen some of that impact in places import markets like Brazil and the U.S. for BPC product. And so hence, us stepping up 13.7 million to 14.3 million tonnes guiding for production this year, but also preserving additional capacity of about 0.5 million tonnes after that to play our part in helping balance that supply/demand equation and meeting the needs of our customers. But as you say, Steve, very recently, obviously, with this terrible situation in Ukraine, Eastern Europe, none of us want to find ourselves in this situation. But it kind of has become what it's become. And now posing questions, as you say Steve about, while we don't see sanctions necessarily on agricultural products or crop inputs in that part of the world, do logistics become more challenged? The things that facilitate exports like banking, like shipping, those become more challenged? And I've been saying this morning just about every time I read the news, some nation is refusing to accept a Russian vessel at their ports. And so a lot of uncertainty at the moment I think it's fair to say, and that uncertainty is putting a floor on potash prices and could they firm? Absolutely. Where this goes from here? Could we see some demand rationing in certain parts of the world? I think that's possible. Could we be seeing some ongoing firming in the price? I think that that's possible as well. But again, there's some runway there with the grower. For our part, again, we're looking at our production capability and we'll be maximizing production this year. And as we look at the legs that some of these challenges may have and how long this may last, we'll peer into 2023 and looked at additional flexibility as well.

You got pushed on the last call about bringing on more capacity and you were clear about not doing it unless some kind of a cut was permanent out of Russia or Belarus. What would you consider meeting that definition?

Yes. That's absolutely the case, Steve. And I'd call it cut permanent or prolonged, something that gives us the confidence that as we as soft rock miners open up ground -- and I've been working in the mining industry for a long time -- open up ground, and the moment that you do that, ground starts moving and we need to install infrastructure, and we need to have rock bolts and we need to install utilities and maintain all of that as we're mining. And so the challenge that we have is that we do not want to incur all those costs, open up all that ground, maintain all of the underground infrastructure only to see potash come flowing back into the market us being left holding all these costs. So we do a lot of math and we know where every next tonne will come from for us and we know the cost associated with that tonne. And when we backcast over the last 10 years, we do all kinds of math to say, given our experience with mine floods and other shocks to the system, when we want to preserve flexibility, how much should we do that when opportunities present themselves in the market that's economic flexibility. And so we haven't planned for words and we haven't planned for those sorts of things. But to your point, Steve, now with the way the world is changing, could we see some prolonged challenges for the market that could be -- and that's causing us now to go back and reevaluate exactly that equation of what is an economic tonne, what do we credibly believe our customers are going to be calling for that we put into the market that is an economic tonne. Without as I keep saying, building churches for Easter Sunday, we're over expanding and ultimately have left holding those costs.

And any expansions would be obvious to you that are either underutilized or you've put more machines below ground?

Yes. No. That's absolutely the point, Steve. We have the past charted and from 14-ish million pounds to 18 million tonnes, basically a material capital. And it does bounce around from mine to mine those increments. As we look at the infrastructure that we have, the shafts that we have in place, and of course, opening up ground from 18 million to 23 million tonnes, which is further out in time for us. We've also charted -- we've done some engineering on what that path looks like. That's where we get into the brownfield expansion discussion. But even that for us, it's about less than $500 a tonne and so -- capital. And so even those tonnes 18 million to 23 million tonnes would be the most economic tonne that you could put into the market. And again, yes, we have a path identified for those tonnes as well.

And how long would those take?

The 18 million to 23 million tonnes? Out in time, I would say the eloquent part of that discussion is our mills are built, our shafts are sunk. There's not big chunky $500 million or $1 billion capital there. The increments are reasonably small, so that 6 months to a year worth of anticipating the market, we can continue to grow those volumes sort of 100,000 tonnes at a time.

Okay. All right. Jumping over to nitrogen. You already have brownfield projects underway in multiple locations. Maybe just comment on what products are you prioritizing and is it really just demand growth that is driving that?

It is demand growth that's driving that. And also, we don't see a lot of new capacity coming online as well. And so, yes, it's absolutely the case Steve, that we're expanding with our brownfield expansions or so-called Phase 2 expansions. We're deploying $260 million which will add another 0.5 million tonnes of production by 2023. And with some expansion in ammonia but actually a little more focus on the higher-margin products like UAN, like urea and ESN. And again, as we look at how the market is growing and the backdrop in the fundamentals for crop nutrients we want to be there with our tonnes and we want to be there with those higher-margin tonnes. So that's were our focus is.

Is there a scenario where the tightness in nitrogen globally meets your definition of prolonged where you would do something even more aggressive?

Yes. I mean we have additional brownfield opportunities beyond our so-called Phase 2. There's a Phase 3 out there, and we're definitely evaluating those. But we're also having this discussion about decarbonization in nitrogen and how is it that we think about Phase 3 debottlenecking the extra tonnes that, that might add, versus the opportunity that may be before us as it relates to low-carbon ammonia. Of course, we're the largest producer of low carbon ammonia today, and we actually believe that there's an opportunity there. So on the low carbon side, we're having the discussion about what the commercial opportunities are outside of agriculture -- fuel and energy and ammonia as a hydrogen carrier. In that -- then on the engineering side, what does that look like. So in addition to the brownfield expansion conversation and really weighing out those economics, looking at the future of low-carbon ammonia, we're having Investor Day -- an Investor Day on June 9 and we expect to be able to talk more about our plans for low carbon ammonia at that time.

Any particular end markets that you're seeing the most demand for your low carbon ammonia?

Yes, we're just evolving those discussions at the moment. But on the energy side -- so Japan is obviously and landlocked nation with some energy challenges. So having those discussions in that part of the world, you will have seen that we announced a partnership with EXMAR on marine fuel, where we seek to prove out the feasibility of that and actually have something in place by 2025. So those discussions are bit in their infancy, but at the same time we're seeing a lot of interest on the commercial side of the business and we'll be seeking to evolve those types of discussions.

And those are potentially converting what you already have over to blue.

This is a new plant. So this is new facilities that, again, if we look at the capital that we would deploy, that's the engineering work that we're doing at the moment. And again, we expect to be able to talk about that and -- but that would be an existing facility. So this is not a greenfield development. This would be at a place like our Geismar facility where all that infrastructure exists. But, yes, we'd to be seeking to bolt-on, some low carbon facilities. And again, be in a position to talk about that more with you in a few months.

But could that be tonnes that are currently going into ag markets are diverted into an energy or fuel market -- would then tighten up more?

No, no, we think this is the incremental volume.

Volume.

Yes. And then also we don't plan to rob from our ag production. But of course, with blue carbon ammonia or low-carbon ammonia or blue ammonia, that has the carbon benefit for our ag side of our business as well. And so we don't just talk about fuel and we don't -- greenfield. We don't just talk about energy, we talk about the on acre solutions for low carbon ammonia among our ag nitrogen business as well. And we can talk more about everything that we're doing on the sustainability side for nitrogen with the grower as well. But in terms of production, there's a benefit for us as well.

Okay. I do want to jump into -- on the retail side of the business that you have, and maybe just start off with capital deployment. Do you -- is that the segment that is likely the focus of inorganic growth?

Yes, certainly. As we look at our footprint and where we're operating today, we obviously have extensive retail footprint in North America and that has been borne out of a real focus on tuck-in acquisitions over the years and we've had a lot of success with that. We have additional opportunity in North America, certainly across the corn belt. We're watching valuations in North America very closely, just given where we're at in the cycle. But beyond North America, obviously, we're the largest retailer in Australia as well, but seeking to grow in Brazil. And that's, Steve, where the -- I would say the discussion is centered today is. We've done 5 deals since 2020, about $300 million worth of acquisitions, expanding our footprint in Brazil. And of course, that's just the most remarkably exciting ag market in the world at the moment just in terms of future growth and future prospects. So we want to continue to grow there. And our opportunity pipeline is full. We are looking at several opportunities at the moment. Same question about valuation in Brazil. And so it's more about quality than quantity. But at the same time, we're small enough in Brazil and we are able to identify even in this market, projects that meet our hurdle rates or opportunities that meet our hurdle rates. And so yes, that will continue to be a focus for us.

We had a good call with your colleague, Andre Dias [ light fall ], and it's very clear that he sees an enormous opportunity in Brazil.

Yes. No, and I totally agree with Andre. And Andre, certainly is just excellent and he's assembled a really high-quality team there. So that as we acquire and as we grow our footprint, integrating into our business, taking our learnings from our North American model in terms of our supply chain, in terms of proprietary products and taking some branded products off the shelf of that acquisition, putting a proprietary product on where our margins are 2x a branded product. And the solutions that we can bring as it relates to digital and Nutrien Financial and the sustainability discussion. That's a model we can take to Brazil as we grow that out. And like I say, Andre and his team have just done an extraordinary job. And I believe we'll continue to do so.

I wanted to ask a little bit about the Loveland brand of crop chemicals. Is any of Loveland where Nutrien owns the registration of the chemical and you source the actives from India or China? Or is it exclusively a relationship with the major producers where it's their molecule and you really selling under their registration, is it both?

It is both, yes, Steve. So the majority would be in the bucket that you just mentioned. So that's what the major producers, and frankly our preference. But it is the case where we have our own registrations and that affords us a few benefits, obviously, some leverage in that discussion. But also we have among those Loveland proprietary products, some great solutions for the grower and among those solutions would be some of our own registrations. Yes.

That could have nice margins if you're sourcing from --

And absolutely, and hence the focus on our proprietary products and continuing to grow that business. We've seen great success through 2021 capturing additional market share. And again as we look to expand that footprint, those proprietary products will play a major role.

And on the Dyna-Gro brand of seed is that entirely genetics from one of the major seed companies or is there any part of it that is really proprietary to Nutrien where you can cross a parent line from one seed company with another and create something that's truly novel and unique?

Yes. I don't know the answer to that one, Steve, but we've got Mr. Tarsi there and --

[ Kelan's ] mic there for you.

Yes, Steve, I'm happy to take that and it depends on the crop. If we look at crops like canola, cotton and rice, much of what we sell in the Dyna-Gro brand in our -- is our own germplasm and we breed for it. Obviously, if you're with corn and soybeans, we're sourcing most of that germplasm and a lot of those trait packages and we do that across multiple suppliers as it relates to that on it. But a very strong brand for us. It's a growing brand, and it's a big part of our seed shelf. And I think as Ken might tell you, seed is a major focus for us from an organic growth standpoint going forward as well.

Can you talk us through where you see the carbon sequestration opportunity going, is that a revenue source for Nutrien or is this really to drive loyalty with your farmer customers?

Yes. No, it's certainly another significant component of the Nutrien offering in terms of our relationship with the grower. We have 3,900 agronomist and crop advisers who are meeting with our grower customers every day. And in terms of that range of solutions, whether it's seed or chemistry or crop nutrients, soil testing and we have one of the largest labs in North America, precision agriculture, our digital solutions, our financial solutions, the supply chain that we have. But then, Steve, as you say, the sustainability solutions. And so as we run our carbon program and we seek to learn from that pilot in those discussions with the growers. Okay, how is it that we can generate through best practice, a high carbon -- a high-quality carbon credit that the producer can enjoy, because we know that there's going to be value there. How is it that we can bring other sustainability benefits like biodiversity, like water conservation to the discussion. How is it that we can seek to sequester and tie up carbon in soil? And as we've gone through those learnings now with our carbon program at about 225,000 acres signed up. And by the way, we're working with our big suppliers on this as well and our partners who are part of this sustainability story -- a significant part of it. As we've deployed those capabilities into that whole acre solution and seeking to expand that to over 1 million acres this year, what we would say is that this is just deepening our relationship with the grower in terms of providing that entire solution for the grower, and ultimately seeking to grow our share of wallet and looking at market shares as well. So that's the partnership among our agronomist, among our solutions and of course the grower that we're seeing to continue to grow.

And what's more challenging for you on this, the documenting the sequestration and tracking all of that or being that intermediary with a downstream consumer of that grain that's willing to pay a premium for the environmental benefits.

Yes, I'd say it's all of the above, Steve. And I would say that this is an evolving discussion. And so right now, our experience has been that there's confusion among the growers about, okay, what is it that we're talking about. How is it that we're going to generate value. And our role as the trusted adviser is to try and make sense of that for them, and be that hub where we're collecting data information on -- from our partnerships and from the experiences on the acre, but also as you say, the downstream discussions as well. This is exactly the point of the pilot as we're learning. We're having those discussions and as we come out of what we'd call the pilot session, we seek to expand this further, gaining confidence with the grower as a trusted adviser as to what the true value is here and how we grow on that.

Anybody want to jump in here with a question? [ Kelan ] up here.

[indiscernible] I covered you guys from the fixed income side. I'm just wondering, given what's going on in the market, how your equity has performed, and what is going on with the rates market. Has it become more attractive for you to begin buying back debt as opposed to share repurchases given the elevated share price and the fact that dollar prices on a number of your bonds have come down close to par and some even below par?

Yes. So if you look at the work that we did in 2021, so we -- what -- have paid down about $2.1 billion in debt and so we're heading into 2022 here with about $10 billion in debt and the balance sheet that we would call really quite fortified. I mean you look at our leverage ratio today, it's a very, very healthy leverage ratio and something that even coming out of this pricing environment it's just sort of a more mid-cycle pricing environment. We would say our balance sheet is absolutely fortified. It's a very fair question about where our stock is today. We would say that we put in place a 10% NCIB and an automatic purchase plan for $2 billion worth of our shares sort of equally divided over the course of this year. That's up and running. But at the same time, we said that we would evaluate the opportunity to do additional buybacks come midyear and that's part of that evaluation process, absolutely. And we thought a couple of billion dollars. Could that still be the case? It could, but that's the math of that we'll be doing. Yes.

And we talked a little bit about the opportunity about retail in Brazil, but do you still see significant opportunity to expand through bolt-ons in the North American platform?

Yes, I think we would say less so on the bolts-on, more on the tuck-in or the smaller tuck-in acquisitions, and yes, we do see opportunity. We would say that we have a pipeline that we would be focusing on there as well. But I would say 2 things, Steve. One is we really believe in the organic growth opportunities with our existing footprint and we just talked about everything that we bring to the grower and proprietary products, and we've lived that through 2021 in terms of gaining market share across really all 3 shelves and the focus on what we can do organically. And I think it's just been a great story throughout the last several years, and that's the plan heading into 2022 and beyond. But then, yes, we see an opportunity as well. When valuations are appropriate, we're going to be very, very disciplined about that. We have a track record there. We know how this works. We know how to integrate those tuck-ins. It has to be the right opportunity. But yes, so when we find that right opportunity that we will continue to grow.

Okay. We are out of time. Thank you, Ken. Please join me in thanking Ken for his remarks.

Thank you, Steve.