Nutrien Ltd. (NTR) Earnings Call Transcript & Summary

Pleasure to have Ken Seitz up here with me, CEO of Nutrien. He a long career as CEO of Canpotex. So he knows a bit about Potash. But prior to that, he had a long career in the mining industry. So it's great to have him up here I saw Jeff Tarsi here, Head of Retail. So we got him as well. Jeff Holzman, I saw him somewhere as well. So we got the Nutrien gang. We toured your Geismar plant yesterday, a big nitrogen plant in Louisiana A lot of activity going on in that area. We also toured a fertilizer terminal of Yara. And the plant operator at the Yara terminal said their customers were really low on product. And here we are arguably at the beginning of the application season, at least in the deep south. Maybe not where you're coming from, where it's minus 10 centigrade, but certainly in the Deep South, application season is starting. And the fact that they retail channel was low on inventory, at least that's what Yara said. I'd like to hear your view on just high level, what has happened in the last year with respect to fertilizer supply? And then next step is why is the distribution channel low on inventory today right?

So good morning, and great to see you, Steve. Yes. I mean, I think we would start by saying that if we look across ag commodities and maybe this is obvious, but look across ag commodities really in every corner of the planet, we believe that grower economics continue to be really quite strong and arguably stronger given what we've seen happen with crop nutrient pricing over the last several months. And so heading into the spring planting season, certainly in the Northern Hemisphere, we would say that growers are compelled to lay down the appropriate crop nutrients. And this is an environment where we have absolutely -- and now we can talk about that sort of violent swings in inventories and sort of extreme volatility in the face of unprecedented supply events. But what we would say is heading into the spring planting season, those supply events that the supply side of the equation continues to be undeniably challenged. And again, this is owing to, in large part, obviously, to what we see happening in Eastern Europe. And then we can talk market to market. But again, in the Northern Hemisphere, we look at the channel and we say that on average, inventory levels would be sort of at or below historical averages. And so to your point, Steve, here in the North American channel, we can certainly talk about our work with the growers through [ Mr. Darcy ] organization, our retail business. And what we're seeing on the ground with our own inventory levels, of course, and in what we're seeing through the channel. And to the point that you're making, we would see those inventory levels perhaps a little bit below average. And what we're also seeing, I would say, is that with crop nutrient prices softening, and certainly, nitrogen is a good example of that. We see growers exercising a bit of leverage here at the moment, while buying continues to be really quite cautious. So staying out of the market until they absolutely have to and then reengaging obviously, when they get out on the ground, which is happening in the southern U.S. get on the line and start planting crops and obviously laying down nutrients. And so again, we're expecting if we have a wide open spring application season, we're expecting a strong spring application season here in North America and across the Northern Hemisphere. And so that what we'll need to see is likely a very significant volume is moving through the channel. And that's what we anticipate for this planting season here and in the Northern Hemisphere. Again, you go to the supply side of the equation, whether it's nitrogen and the fact that 30% of those clients in Europe continue to be shut down. Still facing some challenge to natural gas pricing feedstock pricing or whether it's Chinese Urea export restrictions in Russia and ammonia export restrictions or certainly over into potash, the persistence of challenges with exports out of Russia and Belarus. And again, we can talk more about that. The nutrient to Nutrien you can say, again, in an environment where we expect a rebound in crop nutrient demand that the supply side of the equation continues to be challenged.

And you highlighted the U.S. kind of retail channel inventories likely to be below normal? How would you characterize them in other parts of the world? Was this phenomenon of delaying and deferring purchases global? Or was that in U.S.

It was. I mean, again, what we've seen is as crop nutrient pricing has softened, over the past several months that unless growers and distributors need to step into the market and engage that they won't try and catch that falling knife, and create the inflection point rather stay out of the market. I think Brazil is a great example where in the face of real supply constraints for potash in the first half of 2022, the Brazilians imported 40% more potash than the prior year. And again, just wanting to get ready for their big planting season in our fall. But that by the end of the year, we saw those imports fall off so that for the total year, imports were down 8% in Brazil. But what we saw was this run-up in inventories and therefore, potash prices that peaked at about $1,200 a ton. But with those inventories built, the growers stepping out of the market and obviously getting into their planting season and just drawing down inventories and not reengaging until they absolutely have to. And so getting through their big planting season entering into 2023 in their second corn crop planting, which they're about 3 weeks into as we speak. We expected that the Brazilians would reengage in this first quarter. And indeed, that's exactly what's happened is that having to step into the market. Now we've had good engagement in Brazil. And as a result, you've seen potash prices stabilized at just over $500 a tonne. So that's Brazil. We can go to India. We can go to China and say that inventories are down in those parts of the world. Southeast Asia being drawn down. We expect them to engage strongly in Q2, Q3. So yes, market to market, we would say that as prices soften inventory is coming down. And eventually, of course, we know every spring in the northern hemisphere farmers get out on the line plied to crop. Indeed, we believe that's going to happen again in 2023, but we're doing it in an environment where, again, we've seen inventories drawn down. The other thing I'll say is just in terms of crop nutrients in the soil coming off a few years of strong yield, which, by definition, uses nutrients in the sale we're the largest -- one of the largest soil sampling networks and labs in North America, where if we were to characterize nutrients in the salt today, certainly for potash, we would say that potash needs to be replenished.

So for your farmer customers through retail and so you got, say, 20% or more of the U.S. farmers as your customer, do you think their application rates this spring will be normal, could any of it be above normal?

It could be. Yes. Jeff keeps pointing to the fact that we're moving a lot of our own proprietary germplasm into the market, and that's pretty special technology, but it's a big investment, and you're not going to make that investment in seed without surrounding that seed with appropriate fertilizer, especially when affordability is where it's at today. The grower balance sheet is as healthy as it's ever been and grower economics are as good as they've ever been. And so we are absolutely expecting a strong season in terms of application rates because everything is lining up for exactly that.

And what about the rest of the year? Do you see this as being a little more of a normal year as opposed to 2022 was extraordinarily [indiscernible].

I don't know that I can use the word normal to try and forecast 2022. And again, we just continue to experience these unprecedented supply side events, which led to all of the inventory buildup and volatility, all the pricing volatility in 2022 and heading into 2023, I mean, we just had a chat earlier in one of our meetings to say, I mean, as Nutrien, we'd love to have sort of more normalized, more normal outcomes for the balance of the year, both in terms of grower economics and certainly in terms of our own pricing and margins. But the reality is that there's still a lot of uncertainty on the supply side of the equation, whether it's, again, everything we've talked about in nitrogen or potash. -- that, again, big season with good weather in the northern hemisphere, lots of propnutrient demand we've been talking about the supply chain certainly in North America, where if there is a rush on those volumes, bugging up the supply chain and whether we can actually flow those kind of volumes through the channel, again, in the face of unprecedented supply disruption. So I'd love to sit here, Steve, and tell you that it should normalize, it should -- I think should flatten out look like previous years. I can't say that just given some of these unprecedented supply challenges.

Do I hear you saying there might be some challenges in actually meeting demand in the spring?

Yes. I mean that is -- I think that's something that more and more we're thinking about here. We know, again, that a lot of volume needs to move through the channel.

Geographically, where do you think that's

Well, I think here in North America, here in the U.S., I think that that's true. Again, given what we're seeing in our retail business, given the conversations we're having with growers and given the fact that buying has been cautious and that when this all starts to move and people engage with the market, farmers engage, there's a lot of volume that needs to flow through. So I think that is something we're mindful of. I would say that for us, for Nutrien and Nutrien Ag solutions, obviously, we've made an enormous investment in our own supply chain. Warehousing right through the channel. I don't think we've ever disappointed to customers. So we see that as one of our big strengths in this environment is the ability to move massive volumes through the channels and get it to our customers.

Would you say the fertilizer inventory levels within your retail 1,000 stores is higher than your competitor retailers?

If we look at -- and we do a lot of work on this sort of studying obviously, our own and understanding where we're at ourselves and how we've layered in volumes and prepared for the spring versus understanding from third-party consultants and whatever else we're seeing in the channel that we would say inventory levels, I'd put it, on average would be at or below -- a little below historical average levels heading into this flattening season.

But you can move your wholesale material into your retail channel? Are you better positioned than others?

Yes. I mean I think you can make the argument that having the largest crop nutrient production network in the world that I keep saying the Nutrien customer, which is obviously Nutrien Ag solutions, but we're supplying to multiple customers on this continent that the Nutrient customers should be the happiest customer.

All right. Let's drill into potash here, the level of supply disruption even by your own estimates for 2023, a 70 million ton market could be short 10 million tons right something in that range. How is that I guess, one, not reversing back to normal faster? And two, what do you think the impact of that is on global crop production?

Yes. So just looking at 2022 as a starting point. As you say, Steve, in an unconstrained market where we didn't have these supply constraints, we would expect global shipments to be exactly, as you say, 70 million tons, which we've seen, of course, and we also know that potash demand is growing year-over-year, 2.5% average annual growth rates. And that's just growing to all the things we talk about growing population, decreasing rate of variable land expansion, therefore, need to improve yields an event demand for high-quality food and on. So we have seen consistently over the last 20 years, potash demand growth at those levels. And we -- like I said, we expect that to continue. So 70 million-ton unconstrained, yet shipments in 2022 were around 61 million tons. So shorted by about, like I say, 9 million tons or thereabouts in an unconstrained environment, 2023, you would make the same argument, of course, the unconstrained shipments would be in that 70 million to 71 million-ton range, yet we're saying that we believe shipments will be 63 million to 67 million tons. So in other words, a supply-constrained market. And so why is that why is it a supply constrained market? Well, it's really Russia and Belarus. And what we saw in 2022 was Russian volumes down 28%. When we look at all the import/export data when the desk cleared at the end of 2022 and down 28%. And similarly, Belarus down 52%. And heading into 2023 now, we see really no reason for that to change in that we believe the Russians and the Belarusians have exhausted and had all of the economic incentives to exhaust every outlet that existed. So for 2023 with this terrible conflict in Eastern Europe continuing, we think Belarusians volume is down 40% to 60%. And Russian volumes 15% to 30%, which helps to define those goalposts that we set on global shipments of 63 million to 67 million tons. So yes, supply-constrained market and a market that should be shipping and consuming 70 million tons. What does that mean for yields? I think it's fair to say that if you deplete soil of potassium on a multiyear basis. And again, we're looking at our own soil sampling data. I think Jeff will tell you that we've got about 8 million data points at the moment that we're looking at in terms of soil samples in North America, and we are seeing potassium being depleted. And we know, of course, like I say that if you do that on a multiyear basis, it's going to affect yield.

Any more data on that 8 million samples, like what fraction you would characterize as insufficient or below optimal, I guess, better.

I would just put it as across on average across those 8 million soil samples. On average, we are seeing depletion of potassium and soil the below average levels.

How would you compare the 3 primary nutrients in your outlook for 2023, would you rank any one of them likely to tighten faster than the others?

Yes, I just -- I think it's -- that's a tough one to answer again, Steve. Just given you look at what's happening with urea at the moment, and again, cautious buying and the price softening actually quite dramatically, but on very thinly traded volumes and so small volumes, thinly traded, not much liquidity and big drops in price. Yet with the cautious buying, again, heading into the planning season, we expect a lot of nitrogen to move through the system, and we do expect further and now a rebound and strengthening in nitrogen pricing. But again, all these supply side challenges and uncertainties, what does that mean for volatility? What does that mean for tightness recovery in the nitrogen market? I think that needs to play out over 2023. We can talk about potash, similar we can talk about phosphate similarly. So I find it -- I would find it difficult to sort of talk about one crop nutrient as being more challenged than the other. There's just so many moving parts here among each of them that it remains to be seen. And therefore, as Nutrien what we're doing is we're planning our production footprint and 2023 targets to be flexible. And set out some base production targets that we believe the market is going to need by giving ourselves optionality to produce further and supply further into the market, if the market evolves that way in the face of all this uncertainty. Potash is a great example where we've guided 13.8 million to 14.6 million tons. A lot of that dictated by the ends of those ranges dictated by the timing of the China India settlement. But that also we're preserving the ability to sell 15 million tons into the market this year. And again, we've shown time and time again is nutrient that preserving that flexibility and surging tons into the market for our customers when it's needed is a serious value-creating opportunity. So we're planning our movements in 2023 in a similar way.

So the additional potash production is when, not if.

Yes, we believe that's absolutely the case. Again, you look at the backdrop, and you see through all of the noise in the market at the moment, you say one potash market is growing, and we believe that to be true. Two, Grower economics in the here and now in the moment. And frankly, given where grain stocks-to-use ratio is at 25-year low, that we think it's multiple cropping cycles to replenish those inventories. So we believe strong grower economics today, but that that's possible that, that sustains through multiple cropping cycles to replenish inventories. Growing demand, strong grower economics today and perhaps into the medium term with, again, an undeniably challenged supply side of the equation. And yes, I would say for Nutrien and for what we're planning to do here that we intend to and to increase volume. So we've made investments to debottleneck our nitrogen sites. We expect to add 0.5 million tons by 2025. We're obviously talking about, and I know Steve, you went to visitor our clean ammonia investment, which would further expand our footprint by 1.2 million tons. And then in potash, again, 15 million tons of capacity this year, but growing that first to 18 million tons. And we've said by now roughly 2026, but an ability to expand 18 million to 23 million tons of additional brownfield investments, which would be very competitive from a CapEx perspective.

So the Geismar plant we toured yesterday, there was a fair amount of earthmoving equipment in this area where the blue ammonia plant might be built. But clearly, there was a lot of activity going on over there. But this 0.5 million tons that you're talking about, that's debottlenecking is that downstream capacity expansion? Or is this also ammonia expansion?

Yes, it's both. And so yes, we're making those investments across multiple sites. And again, we would say that 0.5 million tons we used the word nitrogen is across different products. And yes, there are earthmovers at Geismar, as you saw. We're just working through the CapEx refinement process at the moment, getting confidence around what that capital number will be, and we were expecting around a $2 billion investment for that clean ammonia facility. We're running the economics and rerunning them at the moment. The way we're characterizing that investment is just looking at the returns associated with deploying that production into merchant ammonia markets, in other words, not relying on a premium from some of these new end markets like clean energy or hydrogen economy or marine fuel, but also there's the 45Q tax credit, which augments those economics. So that the remaining piece, Steve, is just gaining confidence around the capital side.

And until that greenfield plant comes on stream and then there's a couple of others that are also greenfield plants. These are multiyear projects. We have mainly [indiscernible] in here this morning and he's kind of concern that there's just not a whole lot of additional nitrogen capacity coming on in the next few years until you get these new plants that are multiyear projects. Do you have the ability to debottleneck more than this 0.5 million ton. I mean 200 million-ton global urea, 0.5 million tons doesn't move the needle much.

It doesn't. And I would say that there's limited opportunity with the existing footprint to make those additional investments. And so eventually, you start talking about new plant and albeit on our existing sites because we have the workforce, we have the capabilities and obviously, know-how, producing ammonia producing nitrogen running those plants. As it relates to the investment in Geismar and that clean ammonium facility, I mean that's a great example where we have access to Tidewater for these -- as these new end markets evolve. And we're talking about what the evolution of clean ammonia looks like for us and for the world. And it's going to take some time, maybe by the end of the decade, maybe 20 million tons of demand. But by the end of the next decade, maybe 160 million tons. So we do expect it to grow. And therefore, Geismar perfectly situated for export capabilities in some of these new end markets. But in the meantime, obviously, access to merge and ammonia markets access to the Denbury pipeline, which you would have talked about when you were at Geismar, so for carbon sequestration have the talent and the workforce there and in the capability to capture and sequester over 90% of the process emissions process carbon off that plant. So really, it's close to green ammonia as you can come with a clean ammonia plant.

And with respect to where that ammonia from that plant is likely to end up 4 or 5 years from now? Do you have a gut feel on whether this is going to be going into existing ag or industrial end markets? Or do you think this is -- it is likely to go into new clean fuel.

Yes,I think it will probably be a bit of both. But again, we're preserving our capability and running the economics on merchant ammonia markets. But we have written MOU with Mitsubishi for a potential for a 40% offtake off that plant. And of course, the interest there with Mitsubishi is take that ammonia back to Japan and co-fired within their coal plants. We have a project underway with a company called EXMAR looking at developing a ship engine that burns clean ammonia because the IMO International Marine organization has their own decarbonization target 70% by 2050, I believe it is. So they need to do something. And then there's the evolution of the hydrogen economy as well with clean ammonia as a hydrogen carrier safe hydrogen carrier. So yes, we think that those opportunities will exist for Nutrien as well and will help to inform maybe the next investment that we make in our ammonia expansion into the future.

So even if half of that incremental blue ammonia, the capacity that you have on [indiscernible] new products is when CF if even if half of that went into new markets, the incremental supply into ag markets might not flow the market. Well I bring this up because it is a concern about whether we got a slug of new ammonia coming in 4 or 5 years, is that a risk?

Yes. And I think we just have to watch the evolution of obviously, the ag markets. And that, too, is growing, 1.5% average annual growth rate. So we expect nitrogen demand on the planet to be 167 million tons by 2026. So even looking at ag markets, and as you said earlier, Steve, without meaningful investment in new plants on the ag side, we do see tightening in front of us, but there's also the evolution of these new end markets. And so economic supply and demand will take over and the economics will dictate whether it's justified to continue to expand clean ammonia capacity in the name of, yes, agricultural supply but also some of these new end markets.

So jumping to retail, do you see continued opportunity to bolt on new retail facilities in the U.S. I've had some channel contacts in that network that you've acquired, and it's annoyingly a loss of a contact for me. talk to us any time. Presumably, you have more of that coming.

Yes. I mean, what we would say is that over the last few years here in North America, we have seen we've seen some of the acquisition economics a bit challenged. Valuations have been high. And you've seen us do a few things. But for us, it's always about quality over quantity and so just finding those niche opportunities that meet our hurdle rates. And of course, I would say, without getting being too arrogant about it, we have lots of experience with tuck-ins in North America and integrating them into our business. We're really quite good at that. And so we're just really very selective on the opportunities Brazil is a little bit different. I mean that's a highly fragmented market. We're 2.5% of the market, and we'd like to get the fourth largest retailer in the country. And so we do have runway to grow there. Last year, total acquisitions, we did 21 acquisitions, spending $400 million but 3 of those were in Brazil. And one of them was meaningful in moving the Nutrien on market share. But we do have a strong opportunity pipeline in Brazil. We do see opportunities for further consolidation, further expansion, further gaining of market share in Brazil by acquisition. But we can't talk about Brazil without organic growth as well, where every time we do one of these acquisitions, we bring in our proprietary products. We look at the growers that are in accounts that are available for us to go after in the region. And so we're going in Brazil as well. We had a target of meeting $100 million worth of EBITDA in 2023 in Brazil. We set that out for ourselves, and we'll surpass that this year. So I think it's also -- it's also evidence of the very strong team that we built there in Brazil and certainly gives us confidence to do more into the future in a market where we all know can't be in Ag business, really kind of without being in Brazil, given the growth potential in that country.

Anybody question here?

Ken, I would say that the market doesn't believe the sustainability of the $9 billion to $10 billion of EBITDA that you're going to generate this year, just in terms of your overall multiple, what would you say your kind of mid-cycle or through cycle economics kind of baseline EBITDA would be off which you could build growth from volume expansion and spikes in pricing.

Yes. Yes. So we believe that post this conflict in Eastern Europe, we continue to have conviction around the fact that there's been this structural shift in energy markets and fertilizer markets and in agricultural markets. And so that as we've looked at on the pricing side, again, whether it's energy, ag or fertilizer that there has been this like I say, a structural shift. So that's one thing that's helping to obviously inform our view of what we would call a new mid-cycle earnings. But then in addition to that, on the wholesale side of our business, we just talked about the fact that into that market, we're expanding our volumes, and we expect to do that. So not only has there been a structural shift on the pricing side, we expect to be putting more volumes into that environment. And then finally, you look over Nutrien Ag Solutions where we have been experiencing really significant growth over the last several years. Actually, funded by our integrated model funded by the margin success we've been experiencing in our wholesale business. Albeit we're going to experience a bit of a reset in our retail business this year, about $350 million and that's just the margins that we've been enjoying in crop protection and certainly on the fertilizer nutrient side of the business resetting to sort of more normalized levels. So EBITDA of a couple of billion dollars this year and growing from that proprietary product supply chain, digital growing from that. So that when we put it all together, we say that the new mid-cycle for us is about $9 billion. And again, it's just putting together each of those pieces growing volumes, structure shift on the pricing side and what we see in front of us on our new genetic solutions. And then finally, I'll say, we do believe there's additional opportunity in our integrated model. We've just established a new commercial arm of the organization headed a new Chief Commercial Officer, where we look at through the value through the supply chain, go to market with our retail business and optimization through that supply chain of working capital, asset utilization inventories, there's additional opportunity for us. So again, it probably gets quite granular quite quickly, but you go across all of that, and that's where we say about $9 billion.

Yes, I have a couple of questions. The first one, following up on [indiscernible] what is the market thinking one thing that has come up is that you have that $63-plus million forecast for shipments for potash and it's supply constraint. At the same time, when we look at our model 9 months ago, the idea was that you could sell almost 16 million tons this year. So you're choosing to pull roughly 1.5 million to 2 million tons from the market. So isn't there some -- is that an evidence that demand is also an issue because you could have actually plugged in some of the supply constraint?

Yes. There's a number of moving parts here as usual. So if I point to 2022 again, I would point to the fact that the first 2 months of the year, there was no conflict on the planet. And so the world enjoyed sort of normal shipments of potash into markets like Brazil. And then I would point to, and again, if we're using Brazil as the example, the opportunity to bring as much into the country as possible prior to sort of sanctions being evolved and kicking in. And everything that happened there, and that was that 40% increase in shipments into Brazil, which with inventory buildup in Brazil, and we can talk about the late spring in 2022 and here in North America that led to higher carryover volumes over into the fall of 2022. I would characterize that more as inventory buildup and inventory drawdown. And as Nutrien, we plan our movements accordingly. It's not -- it's not just putting potash into the market beyond what our customers are asking for. So we meet the needs of our customers, and we're very mindful about that. Heading into 2023 now, again, when we talk about our own volumes, we're guiding 13.8 million to 14.6 million tons. And so I take the point, why not more in a supply-constrained environment. But the reality is, here we are, it's the end of February, and we're looking to settlement in India and China. And that -- the effect there is really kind of twofold. One, standard grade product starts flowing into those markets once those contracts are executed. And then we'll go fast and furious Panamax is heading over to China off the coast of Canada and pretty significantly. But then also in this environment, where there's this much volatility and perhaps buyers are looking a little bit cautious that the India and China contracts will likely help to establish what people view as a floor, a bit of a floor. Okay. Now I see the certainty there -- I see some price discovery I'm going to step into the market and buy it. And so but yet the longer those contracts delay, it shifts our ability to produce and ship into our customers to sort of out of the calendar year. It doesn't fit perfectly January 1 to December 31. And so when we talk about 13.8 million to 14.6 million tons is kind of dictated by the timing of those settlements, which then causes the rest of these volumes to move as a catalyst in a more meaningful way, shifted out of the calendar year. But again, preserving sales capacity of 15 million tons.

And we are out of time. Please join me in thanking Ken for this presentation.

Thank you.