Nutrien Ltd. (NTR) Earnings Call Transcript & Summary

All right. Well. Good afternoon, everyone. My name is Adam Samuelson. I'm the agribusiness and packaging analyst here at Goldman Sachs. We're thrilled to continue our Industrials and Materials Conference today with Nutrien. We're thrilled to have Mark Thompson, who's their Chief Strategy and Sustainability Officer here with us. Before we jump into the Q&A, I want to remind the audience, there is a box in the webcast windows. Feel free to submit any questions, we love getting questions from the audience and making this as interactive as we can. So have those coming, and then I'll get to those a little bit later in our discussion. But for Mark, thank you so much for taking the time today. Maybe I'll give you the floor a little bit talk about where we are in the ag and the fertilizer markets. It's very quiet, nothing is happening. I think we should be very ho-hum, but I'll leave it to you to maybe set the stage.

Yes. Thanks, Adam, first of all, for having me. Happy to be here on behalf of Nutrien. And as you said, I think this is a time that is very dynamic, and I'll make a few comments, maybe just to set the stage for our discussion. And I know we'll have a chance to dive deeper into a number of areas here today. But I think first and foremost, as I said, it's a very dynamic time for agriculture, especially given the geopolitical backdrop that took play given the ongoing invasion of Ukraine by Russia. And for many reasons, I think it's a critically important time for the agricultural industry in the world at large, giving a very meaningful role that both Ukraine and Russia play from both a production and an export standpoint in terms of global crop commodities, but also the fertilizer complex. And I think right now, the whole world is assessing the trade flow impacts from the conflict, the potential duration of the conflict. And obviously, those are things that we're watching very closely. And against this backdrop, we find Nutrien in a what we consider to be a very important and strategically advantaged position to play an important role here. When we look at the integrated strategy that we have, the unique asset base and competitive advantages that we've amassed in building the company, we see ourselves, I think, particularly advantaged in a couple of ways. I think first, if you look back at our track record and what we're continuing to do, increasing production of fertilizers in a very low cost efficient, quick-to-market manner to help serve the global need that's clearly there for fertilizers in this market. And then I think, secondly, when you look at our global retail business, serving growers around the world, that business is serving growers in North America, South America and Australia, all of which are going to be critically important from an agricultural production standpoint to help maximize productivity and increase supply to what's been lost from Ukraine and what could be lost from Ukraine from an agricultural production standpoint. So given the firming and agricultural fundamentals, when we take a step towards the financial outlook for our business, obviously, we see significant free cash flow generation for the business and strong financial performance, which we recently updated in our updated annual guidance for the company in 2022. And we do see ourselves being able to pull on a couple of levers, one of which I talked about continuing to grow production and increase our footprint in the market and invest in value, enhancing growth. Part of our well-established capital allocation priorities have been continuing to return cash flow to shareholders through returns of capital. And we do expect to be in a position to grow the business attractively over the long term. And I know we're going to have a lot to talk about that's focused on the very near term today. But I think what also is pertinent to say is that we're a company that's focused not only on growing and creating value in the near term in the type of environment that we're in today, but I think looking to the long-term viability and sustainability of the organization as well. And there's no more important time to recognize that nutrients are very important [indiscernible] to address global food and security, but also do that in a way that is a catalyst for positive action on climate and also environmental stewardship. And we've got a feeding the future plan with 2030 commitments embedded that really encompass all of our actions in this area. And I think it's not only about risk mitigation over the long term. There's some very exciting opportunities to continue to grow our company in very positive ways, and that's something that we're focused on in addition to playing a positive role in the near term to help make up some of the production shortfall. So with that, Adam, I think that sets the stage in terms of a number of things we'll talk about and maybe I'll let you drive.

No, that's great. So maybe we -- I think top of mind for everyone right now is what's going on in the potash market and the disrupted supply that's coming out of Belarus and Russia. And I guess, Mark, how are you in the company looking at kind of the supply-demand balance in potash today, what do you think -- so apologies for all the technical difficulties, everyone. I think we got cut off. Mark, I was just asking you maybe we can dig into the potash market a little bit. And I'd love to just maybe assess the disruptions and sanctions on Russia and Belarus. Can you help frame for us the magnitude of the supply dislocation here? What's the export production loss the year currently seeing out of Russia and Belarus and that helps us maybe set the stage for a discussion about where the potash market goes from here?

Sure. Yes. Thanks, Adam. So I think it's important to put in context, where we've come from, from a 2021 perspective before we talk about the current situation. And obviously, the market was beginning to tighten even in 2021. We lost some non-Nutrien production out of Canada in '21, which served to tighten the market. And then obviously, in an unrelated situation to the current crisis in Ukraine with the invasion from Russia, we saw a different set of sanctions imposed on Belarus, which began to limit Belarusian production as well. which has obviously been quite meaningful as more recently, they've lost access to their Lithuanian port facility, which is where 70% to 80% of the exports from Belarus were flowing. And so I think when you fast forward to an already tight market and look at what's taken place since the crisis in Ukraine. When you look at what Belarus and Russia together account for with respect to global trade and potash, the numbers are very significant. We're talking about 40% of global trade in that product. And so when we look at 2022, we're looking at a variety of scenarios, but all are impactful from a supply perspective from that region in the world. So I think looking at 2021 production as a proxy is instructive. So Russia as a country produced about 14 million tonnes last year. And we're looking at scenarios where that production is reduced in 2022, somewhere in the range of 2 million to 6 million tonnes, and that's as a result of sanctions more challenges around transacting and currency and generally, logistics and distribution as well. As I already talked about, Belarus is facing a unique set of challenges in terms of loss to its primary port facility and whereas Belarus produced about 12.5 million tonnes in 2021, we're looking at scenarios where that could be reduced anywhere between 2 million and 8 million tonnes. So we are in a situation where in 2022, we're looking at a fairly acute loss of potential supply in the market, which is why you see the fundamental strength that we're seeing today. And that's reflected as well in our global shipment guidance for the year, whereas previously, we had expected global shipments in the range of 68 million to 71 million tonnes. Now we're expecting shipments between 60 million and 65 million tonnes. And to be clear, that's completely unrelated to demand or demand destruction. And that's really a result of rationing because of the loss of production from that market. So I think from a 2022 standpoint, the effects are quite acute. And depending on the duration of the war in Ukraine and how long that persists, we could see those types of disruptions continue. But I think if you look to a multiyear horizon from a supply-demand balance, one of the more important things to note that isn't being talked about quite as much is the fact that in our own expectations in modeling, we had expected that 60% to 70% of the potential brownfield capacity over the next few years did sit in that region of the world. And at a minimum, we would expect that given the disruptions to current production profiles, that additional brownfield capacity is going to be delayed at least to some degree. So I think one of the important things to talk about here in the context of global supply demand is the role that Nutrien plays, obviously. And if you look at what we've done over the past couple of years, we've gone from producing just under 13 million tonnes a few years ago to up to 14 million tonnes last year, and now we're targeting production of about 15 million tonnes in 2022. And so we've been able to bring on very efficient, low-cost operational capability and increments and help to serve the supply deficit that's formed in the market. And as we look at this current environment, we're assessing our own capability and looking at the future in terms of our ability to continue to do what we have been doing and bring on very efficient low-cost supply. Our operating capability is 18 million tonnes. It sits across multiple sites. It's very efficient and low cost. And so we're looking and assessing right now about what a ramp would look like over the next couple of years to begin to bring more production into the market.

Okay. So that's really helpful. So I guess then, if I'm thinking about that 3 million incremental tonnes that's sitting there that you're looking at, can you help us evaluate kind of where -- what the bottlenecks would be in terms of time, in terms of capital, in terms of long-lead equipment that would dictate kind of how much you could bring on and when? Logistics as well probably comes a consideration, but we can maybe handle that full separately.

Sure. Well, look, first, we'll talk about, I think, the beginning of your question, which is what does the capital program look like in terms of the items specifically to get there. I think the good news from a Nutrien standpoint is the fact that the legacy companies that create a Nutrien embarked on a fairly significant capital expansion program historically. So really, the primary asset infrastructure is in place when you talk about hoists and shafts and the milling infrastructure that's really sitting there today. So more of what we're looking at in terms of the primary long lead time items or the capital components here are around mining machines, some underground development and infrastructure. And then I would say, optimization around on-site storage and load out capability. So those are really all items that can be addressed in a much shorter time frame. I think as you know, Adam, in this industry, if you haven't undertaken the initial investment, it takes a very significant amount of time and substantial cost to bring on a large brownfield or greenfield development, and that's not the case here. So I think the way we're thinking about this is on 2 fronts. One, from a production standpoint and securing long lead time items, if we were to make the decision to continue to go ahead and ramp production, this would be something that could happen in increments across multiple sites over, say, a 1- to 3-year period. And we could do that, I think, in a relatively efficient way at very low cost. And then when you look beyond that to the supply chain internationally, especially, obviously, Canpotex is our a service provider that moves tonnes internationally for Nutrien and Mosaic, and Canpotex has support infrastructure and contracts secured for many of those, sort of, let's call it, [ outside the fence ] logistics items. And of course, domestically with the integration with the retail business and the legacy assets of the potash business. We've got very strong, highly competitive infrastructure domestically to move tonnes to the extent that it's needed. So we are in a very good position to do this. And I think the second component of this is, again, watching the crisis in Ukraine and how this unfolds. And obviously, the longer the duration of the crisis, the higher the potential for the market to need the additional volumes. So we're also watching the market continue to evolve. And I think the incremental nature of the potential production increases allow us to bring this on in increments and be thoughtful about watching the market environment evolve as well.

Okay. And so maybe on that kind of the Canpotex capability point, do you see -- where were -- your Nutrien for this year, you're going to go up to 15 million tonnes by the end of the year. Mosaic is increasing their production as well and both this year and next, they've already talked to increase capacity. But just looking at the second half of 2022 versus where you've been, the 2 companies would look like there's going to be -- you're going to be producing about 2 million tonnes more in the second half combined than you were in the first half. And especially in the context of hopefully a normal Canadian grain crop in the second half, and we can get to that. Could you -- are there issues around railcar availability? Can you think that the logistics system can get that to export, especially? And then beyond the second half of this year, if there's incremental steps further, do you see bottlenecks on that side that begin to emerge?

Sure. Well, I think the short answer is we feel pretty comfortable when you think about the steps that are necessary to move the volumes into international markets. So of course, as we ramp up, there'll need to be incremental railcar leases in place and whatnot. And then, of course, you talk about port infrastructure. I think that's one of the places where Canpotex is quite advantaged. We have a number of long-term contracts in place, and that port infrastructure is secured. So we don't see a significant hurdle associated with increasing production as we've forecast that we are going to attempt to do this year in order to meet the market need. And I think beyond that, Canpotex also has the capability to plan for a more gradual ramp-up in volumes should the market need them over time.

Okay. So maybe on the demand side of this is, I mean, I think I'd love to get a sense from you what you're hearing from customers, both domestically and internationally. And I think one of the -- I think back to what happened in the market in 2008 as prices started to rise, a lot of customers started to get worried about holding high-priced inventory. And so you see people be a bit more hand to mouth and retrenched. And are you seeing your international buyers willing to take -- and domestic buyers for that matter as you think -- start thinking about summer fill being willing to take on inventory which would signal comfort around kind of market stability as you go into the back half of the year?

Sure. Well, look, I think there's a couple of items there, Adam. I think first, just to be really clear, we're not seeing significant acute signs or significant signs of demand destruction at this point. And I think while demand in North America has been somewhat slow because we've seen some seasonal weather issues that have delayed planting and some of the onset of the spring season. I think from a broad NPK perspective, we would expect that as the weather improves, as it is in some regions, just even this week across North America, you'll start to see an uptick in pull in the field. And that's true for nitrogen as well. I think second, from an economic perspective, when you contemplate the situation that growers are in at this moment in time, because of the issues we've talked about in terms of the fundamental tightness in crop commodities heading into this crisis and then what the crisis has done based on the fact that Ukraine and Russia together account for 20% or more of a number of globally important ag commodities, we've seen double-digit percentage price increases across all the major ag commodities. And if we look at cash margins for crops like U.S. corn and U.S. soybeans as an example, we're up 60% to 125% from a cash margin standpoint over historical average. So all that to be said, the economics incentives are very strong at this moment in time, and growers should have every economic incentive to maximize production. I think with respect to potash specifically, another way to think about Nutrien affordability is the fact that when we look at sort of rough averages and corn as a proxy, really the cost of potash to apply on an acre is about 6 bushels an acre. And the typical yield benefit that we would see from applying potash at normal rates is more like 12 bushels an acre. So from an ROI standpoint, again, the economic incentive is absolutely there. I think what we're more looking at this point in time, Adam, is back to what I started with when we talked about potash initially, which is not a situation where there's acute demand destruction, but rather supply rationing because of the acute shortage of supply coming out of Russia and Belarus. And so we do expect that across numerous markets globally, there may be some limitation on availability of shipments into these markets. And of course, depending on the geography we're talking about, you have soils in North America that are more potassium rich, which could potentially see less of an impact in the short term from a yield standpoint. But soils in places like Brazil that are depleted more easily in other portions of the world that really need that without seeing a yield impact. So again, I think it's more an issue of supply than it is of demand at this point in time. And over the long term, notwithstanding the ups and downs in the market, this is a Nutrien where demand has grown at a stable 2% to 2.5% over time when you sort of look at the trend. And so we don't see anything happening in the current environment that would change that trend.

Okay. All right. That's really helpful. So maybe I'll touch on something that you brought up and I think it's on people's minds, just given the exact time of the year that we're sitting at just -- and the unique perspective that Nutrien would have just -- how are you thinking about planting progress in North America? It's been slow to certainly through April. It seems like maybe at least in Midwest, the weather was there this week. Calgary, where you are, I heard there was snow this week, so maybe not, but -- just give us an update on planting progress in North America as today?

Sure. Well, the good news is in Calgary, we typically get going a little bit later than some of the regions of the U.S. you talked about. So it's not that unusual here. I think in the U.S., obviously, we have seen planting progress be behind typical levels and towards sort of the lower end of what we've seen over the last 10 years or so. I think we are, as you said, seeing some positive indications on weather and field activity picking up even this week when I've talked to some folks in our retail business. I think what's amazing about this industry and even the amount of scale and mechanization and technology that exists is once you get a window for a week or 2 in this industry, you can make a lot of planting progress very quickly. And so even at this point, if the weather cooperates over the next couple of weeks, we can make up a lot of ground from where we sat just last week, even. I think from a grower sentiment standpoint, grower sentiment is quite good when we sort of think about the overall backdrop our prepaid coming into the spring was very strong. When we look at sort of the grower credit position, past dues beyond 90 days, we're in a very low position. And so from an overall financial health standpoint, I think things are quite positive. Now -- of course, we've got to continue to watch the supply chain going forward. And if we were to see adverse weather continue that could potentially constrain planting activity in some of the product getting to ground. But I don't think we're there yet, and we're encouraged that we're seeing better weather this week. I think with respect to where you started, Adam, around, I think what differentiates Nutrien, which is worth calling out is the fact that this organization and especially the retail business was really built for this. The infrastructure we've amassed in terms of our distribution and logistics capability, the fleet that we have, the application services, this is a business that's built to do things on a very short time frame. And so I think one of our advantages is when we have tight windows like this, being able to get in the field very quickly once weather permits and serve grow our customers. So the whole field is ready to do that as the window presents itself here. And I think that's an advantage relative to other retailers with less scale that we bring that's quite unique.

Okay. All right. No, that's really helpful. Maybe switching gears a little bit. I'd love to ask a couple of questions on the nitrogen business. And that has faced its own disruptions by the events in Russia and Ukraine, seemingly more on the cost curve side than direct supply. But how are you -- maybe how are you thinking about the nature of that cost curve moving forward and the margin advantage that, that presents to Nutrien with its footprint in Canada and the U.S. in terms of that?

Well, you teed up a couple of important topics there, Adam. So I think just to kind of touch on each of them individually. I think nitrogen is probably the nutrient that we've been the most constructive on from a supply-demand perspective over the last 3 years. So even back in 2019 and 2020, we had expected and foreseen some pretty significant tightening in the market. And I think when you look at nitrogen overall as a complex, this is a Nutrien that grows consistently without much volatility at between 1.5% and 2% from a demand standpoint every year. So you can count on the market sort of needing those volumes on a year in, year out basis. And what we've seen over the past couple of years was just the supply not being added globally in the supply-demand imbalance starting to form. And so we were tight again even before we headed into the conflict in Ukraine. And again, when you look at Russia's role as an exporter of nitrogen products, depending on what product you're looking at, it's anywhere between 15% to 25% in nitrogen and they're the single largest exporter and participant in trade for the nitrogen complex. So that's very significant. Obviously, what's also significant about Russia's role in Europe is their role as a supplier of energy to the rest of Europe. And so we have seen it as a result of the crisis and even before, European gas prices start to increase significantly. And so today, obviously, we're sitting at or above that $30 level in Europe. And effectively, that's setting the high end of the cost curve and really is the marginal cost floor. If you convert that to sort of an ammonia basis, you need ammonia prices at $1,200 or higher at those type of gas prices. And what we've been seeing in recent months is as we get to those levels of gas costs, we've seen production in Europe effectively shut in on an economic basis because of that relationship that I just talked about. And of course, if ammonia has a floor being set at those levels and given the ability of producers and customers to switch between products, we would also expect that you're going to see a similar strength in upgrade products like urea and UAN as well. I think one of the dynamics that's at play very recently, particularly in North America, is the delayed planting that I talked about. And so as we see more field activity start to emerge. I think we're going to see the nitrogen complex firm up in North America with the demand pull. So I think when you step back from all of that, we don't see a situation at least in 2022 or a high probability situation where you see gas costs much below $30 for the remainder of the year. And as you touched on your comments, Adam, when you look at North American gas costs, even elevated from where they were a few months ago, the margin advantage is very, very significant. And even in Trinidad, where we do have some of our production footprint, the gas costs are really linked ultimately to ammonia pricing. And so while it's less competitive in North America, it's still very competitive versus Europe and making healthy margins in this type of environment. So I think in ways, the drivers are quite different for nitrogen, as we've just talked about. But the story for Nutrien is quite similar in that. If you look at what we've done since the merger, we brought on 1 million tonnes of incremental nitrogen production in a first wave of debottleneck in brownfields because we saw some of this tightness forming. And then we just announced last year a second wave of brownfields to bring on an incremental 500,000 tonnes for about $260 million, which we're in the middle of executing right now. And those projects are obviously very high quality. We benefit from our gas cost position and the returns are attractive at mid-cycle prices. And in the current environment, they're excellent returns. So we're going to continue to look for opportunities to place those tonnes into the market because clearly, there's a need today.

Okay. Well, that's -- I mean there's a great segue in there, and I'm sensitive that we're going to run couple of minutes over allotted time because of the technical difficulties, but I can't have a discussion without getting into some capital allocation question. And clearly, the operating environment, the earnings backdrop is incredibly constructive right now. And I just want to think about how the company is approaching reinvestment in the business and potential growth investment relative to the cash return and where there is growth investment to make that is -- that are more significant uses of capital, where -- how should we think about the priorities and the return hurdles on those kinds of actions?

Sure. Well, look, I think first and foremost, we have a pretty well-established capital allocation priority framework that we've communicated many times to investors and shareholders and continue to do that. And really, when you think about our first priorities, it's sustaining the asset base and ultimately protecting the balance sheet. And so this year, we gave some guidance around capital allocation to start the year and sustaining capital was moderately up this year because we missed some opportunities during COVID due to supply chains and interruptions to take care of some necessary sustaining capital work to ensure that our assets are producing at very high operating rates, especially in the current environment. So we're taking care of that, and we've communicated that previously. I think second on protecting the balance sheet. Obviously, we had previously announced some liability management actions and had taken out about $2 billion of long-term debt. At this point, our long-term debt sits at about $8 billion. We like how that positions us from a capital structure standpoint. I think regardless of where we are in any market cycle. So the balance sheet is very healthy and in good shape, and we wouldn't see a significant amount of action from a long-term debt standpoint that's necessary beyond the actions that; we've taken already. So I think when you move into thinking about the allocation of sort of compete for capital between growth and returns of capital, we'd announced previously, we were going to allocate $1 billion to growth in 2022. And those are all areas that are consistent with the long-term strategic priorities of the company and those that we've communicated in the past to shareholders. So in the potash business, really dedicating that capital towards underground development to enable some of this production that we've talked about as well as our automation program, which is really important in terms of our cost structure, our reliability from a production standpoint and safety. On the nitrogen side of things, I already talked about, Adam, the second wave of brownfield and some of the capital this year, we'll be supporting the completion of those projects as well as some of our announced greenhouse gas emissions reductions initiative to make the business more efficient and enhance our low carbon position. And then I think in retail, again, consistent with our priorities, retail M&A, looking at continued growth of our footprint in Brazil, as well as tuck-ins in the United States and growth of organic growth platforms for the future of the business, including proprietary products and digital. From a return of capital standpoint, Adam, obviously, we increased the dividend earlier this year by 4%. So we'll allocate about $1 billion of dividends and regular dividends to shareholders in 2022. And we had previously announced an NCIB where we had announced an intention to complete $2 billion of share buybacks through that NCIB under the program. Now of course, that was prior to the increased guidance that we gave a few weeks ago in early May. And now when we look at the midpoint of our guidance range, it converts to roughly $10.5 billion to $11 billion of operating cash flow. So there is going to be excess cash flow beyond what was communicated previously. So we've got an Investor Day coming up on June 9 through we intend to talk in a lot more detail about this. But I think just to provide a rough framework in terms of how we're thinking about that I mean, ultimately, that excess cash flow is going to fall into our compete for capital framework. And from a growth standpoint, I think the company's focus at this point in time is really in a couple of areas that we're evaluating, and we've talked about 2 of them already today, which is extremely low cost, high-return attractive projects that allow us to bring more tonnes in potash and nitrogen potentially into the market at a time when the market really needs those tonnes and there's a supply deficit. So very short paybacks at existing sites that are exceptionally capital efficient with very strong returns. The other area that we're evaluating and continue to evaluate is our leadership position that already exists in low-carbon ammonia and the optionality that exists at our current nitrogen sites for us to expand that position further because we do see value and growth there in the future. But I think lastly, and inevitably, we are contemplating and evaluating opposite those growth priorities, additional returns of capital to shareholders. And to the extent that we end up in an excess cash position like we expect to be, we think we'll be able to satisfy multiple of those objectives and plan to say more next month.

All right. Well, great. Well, I think that is a great way to end it and leave everybody waiting with anticipation for the Investor Day in June. So we'll end there, Mark, thank you so much for taking the time to everyone. Thanks for joining. Apologies for the technical difficulties, but we got able to get this in. Thanks, everybody, for the time today.

Thanks, Adam. Appreciate it. Take care.

Thank you.