Nutrien Ltd (NTR) 2018 Q2 法說會逐字稿

Greetings, and welcome to Nutrien Ltd.

Q2 2018 Earnings Call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Richard Downey, VP of Investor and Corporate Relations.

Please go ahead.

Thank you, operator.

Good morning, everyone, and welcome to Nutrien's conference call to discuss our second quarter results and outlook.

On the phone with us today is Mr. Chuck Magro, President and CEO of Nutrien; Mr. Wayne Brownlee, our CFO; and the heads of our business units.

As we conduct this conference call, various statements that we make about future expectations, plans and prospects contain forward-looking information.

Certain material assumptions were applied in making these conclusions and forecasts, therefore, actual results could differ materially from those contained in our forward-looking information.

Additional information about these factors and assumptions are contained in our current quarterly report to our shareholders as well as our most recent annual report, MD&A and annual information form filed with Canadian and U.S. security commissions to which we direct you.

I will now turn the call over to Mr. Chuck Magro.

Thanks, Richard.

Good morning, everyone, and welcome to Nutrien's second quarter earnings call.

Today, I'll recap our performance for the quarter and the first half of the year, which highlighted the value of our integrated business model.

I will also provide an update on the outlook for the remainder of the year and the significant progress we have made on our strategic priorities.

I am particularly pleased with how well the merger has progressed across many fronts.

I want to take a moment to thank all of Nutrien's employees for the commitment they have demonstrated in so many ways.

It's truly been impressive and rewarding to watch how the company has jelled in the past 7 months, how much we've accomplished in a very short period of time, and we see great promise for the rest of 2018 and beyond.

Now turning to our second quarter and first half performance.

Nutrien Ag Solutions, our retail business, delivered excellent results both on the second quarter and first half basis, with gross margins higher for all major retail categories this year.

Retail EBITDA was up 17% for the second quarter and 10% for the first half, with most of this improvement driven by organic growth.

This included strong performance from our proprietary products lines.

On a geographic basis, U.S. retail EBITDA in the first half of 2018 was up 6%.

Both crop protection and seed margins in the U.S. exceeded the previous year, and we saw excellent demand for all crop input despite some pressure from the delayed application season.

The Australian market has been impacted by severe drought conditions this year, but our business continues to perform extremely well.

In the first 6 months, Australian retail EBITDA reached a record $99 million, up 23% over the same period last year.

The importance of having a world-class logistics and distribution system was evident in a compressed season, clearly demonstrating Nutrien's competitive advantages.

To give you a sense of this capability, in the 2-week window starting April 29, we delivered $1.2 billion in products and services from our North American retail sites to the grower.

This equates to almost $90 million delivered every day through the peak of the spring season, with many of these products and services requested by our customers with just a few hours' notice.

Meeting this demand requires a significant infrastructure investment across the value chain and a substantial dedicated workforce.

Turning to our wholesale business.

We delivered another strong quarter in potash, with EBITDA increasing 32% year-over-year.

Our average realized potash price was up $27 per tonne compared to the second quarter of 2017, a reflection of improved prices in all major spot markets.

We achieved higher offshore sales as we benefited from strong demand, tight global supply and a greater Canpotex allocation.

Our potash cap cost to production declined to $60 per tonne in the first half, supported by network optimization and the realization of merger synergies.

Nitrogen EBITDA increased by 29% in the second quarter due to improved market fundamentals and lower production costs.

We had lower gas costs across our network of nitrogen facilities, and it is important to point out the significant advantage we had at our Alberta nitrogen plants, with AECO gas costs this past quarter under a $1 per MMBtu.

Also, our nitrogen plants operated very well, with utilization rates at 93% through the first 6 months, up 3% compared to last year.

Phosphate prices remained strong and more than offset higher sulfur input costs, supporting a 42% increase in EBITDA compared to the second quarter of 2017.

We benefited from strong demand and higher plant utilization rates, providing for a significant increase in our phosphate fertilizer sales.

With improved results across all business units, Nutrien's adjusted net earnings for the quarter was $1.48 per share and $1.66 per share for the first half, which is at the top end of our earnings guidance range we provided in May.

Adjusted EBITDA totaled $2.2 billion in the first half, up 15% from the comparable period in 2017.

These results demonstrate the strength of Nutrien's integrated business, the realization of merger synergies and our leverage to improving market conditions.

With the strong first half behind us, we now turn to the outlook for the remainder of the year.

Global agriculture fundamentals remain generally positive, but we are seeing pressure on most crop prices over the past quarter.

Favorable U.S. crop prospects is one reason for the weakness.

The second factor is related to the uncertainty over-escalating trade restrictions, particularly between China and the U.S. While it is difficult to predict the magnitude and duration of these potential trade restrictions, we believe it is unlikely there will be a long-term impact on North American agriculture.

So far, we have seen U.S. growers continue to invest in plant health and nutritional products to enhance their yields.

We also anticipate solid demand for fall application this year as we expect an early start to the harvest and strong removal of nutrients associated with what should be excellent yields.

However, farmers will be watching crop prices and trade developments closely, particularly post harvest, and they are likely to become more concerned if there is not a resolution on the trade front by that time.

In potash, we expect strong global demand in the second half and have increased our forecast for global shipments slightly to between 65 million and 67 million tonnes.

Canpotex is fully committed until October, and we expect strong domestic volumes in the third quarter with a large order book committed to our summer fill program.

As contract negotiations continue with China and India, our position is clear.

The new price must be reflective of increases seen around the world.

Given the continued improvement in market conditions, we have increased our potash sales outlook for 2018 to 12.3 million to 12.8 million tonnes and increased our potash EBITDA guidance to $1.4 billion to $1.6 billion.

Nitrogen prices have remained relatively firm in the third quarter supported by strong global demand and reduced supply from key export regions such as China.

Higher energy prices for marginal producers in Europe and China have also provided additional support to the market.

With higher nitrogen prices and lower gas costs compared to last year, we see an opportunity for strong nitrogen margins through the remainder of 2018 and beyond.

Phosphate prices have held up better than anticipated, supporting an improved earnings outlook for our phosphate business.

Based on these conditions, we have raised our adjusted annual earnings guidance to $2.40 to $2.70 per share and adjusted EBITDA guidance to $3.7 billion to $4 billion.

The earnings per share guidance includes approximately $100 million in additional annual depreciation related to the conversion of our Redwater phosphate facility to produce ammonium sulfate.

We expect our second half EBITDA to have a similar quarterly profile to our combined 2017, with third quarter accounting for up to 45% of the second half total.

The final item I would like to cover is the progress we've made on integration and our capital allocation priorities.

First on synergies.

We achieved a run rate of $246 million as of June 30, which means we've almost reached our initial year-end target of $250 million for 2018, well ahead of schedule.

Therefore, we have raised our 2018 run rate synergy target to $350 million.

The total target remains the same, which is $500 million in run rate synergies by the end of 2019.

The advanced realization of synergies has been achieved across all 4 of our major synergy buckets as outlined in our quarterly earnings release.

We achieved distribution and transportation optimization synergies through the first 6 months by selling incremental volumes through our retail network and eliminating 900 rail cars and 1,600 distribution points -- 16 distribution points.

We have also reduced fixed costs across our portfolio of wholesale assets and eliminated nearly $50 million in sustaining capital redundancies at our potash and phosphate sites.

In early July, we announced that our small Geismar phosphate facility will close by the end of 2018.

This, combined with the previously announced conversion of our Redwater phosphate plant, means that all of our phosphate rock contracts will be complete by year-end, with Nutrien no longer requiring any offshore phosphate rock imports.

This is consistent with our phosphate integration plan and will allow us to reduce cost by increasing operating rates at our integrated phosphate facilities in Aurora and White Springs.

We also made significant progress on the sale of our equity stakes, finalizing an agreement to sell our SQM Series A shares to Tianqi Lithium and completing the divestment of our SQM Series B shares through an auction process.

And in July, we signed an agreement to sell our Arab Potash stake to SDIC Mining Investment.

Along with the sale of our ICL stake earlier this year, we expect to realize net after-tax proceeds of approximately $5 billion and complete all divestitures by the end of 2018.

With market conditions improving, synergy capture progressing ahead of schedule and the expected proceeds from equity sales, our net debt-to-EBITDA ratio could fall below 2 by the end of 2018.

This -- in this position, Nutrien has a lot of flexibility to return capital to shareholders and invest in growing the business.

Maintaining a steady and growing dividend remains a top priority and is underpinned by the growth and stability of our retail business.

We've also moved aggressively on our share buyback program that was implemented in February.

So far, we have invested $1.5 billion to purchase 29 million shares, and we'll look to complete the remaining 9% in 2018.

Retail remains the top priority for allocating capital, and we have a number of avenues to grow our business.

First is the expansion of our existing footprint through tuck-in acquisitions and select greenfield builds.

These opportunities remain highly accretive, and we see a strong pipeline of acquisition opportunities in both North America and Australia.

The second element is to continue to grow our proprietary products line as we are able to generate higher margins from these products while bringing value to our grower customers.

Third, we are focused on expanding our footprint in Brazil due to the tremendous growth potential of this market and the opportunity to leverage our retail distribution proprietary products model and our leading digital ag platform to generate significant long-term value.

And the final point on our retail strategy is the significant progress we've made to advance our digital capabilities.

In July, we launched our integrated digital platform and made 2 strategic acquisitions that will greatly enhance and accelerate our digital capability and interaction with our customers.

One of the acquisitions is Waypoint, the largest agriculture laboratory group in the U.S., where we see opportunity to combine their sampling, testing and analytics capabilities with our new digital platform.

The second acquisition was Agrible, a company that has an impressive set of agronomic and sustainability tools, which can be immediately incorporated into our existing digital platform.

Nutrien has an unmatched opportunity to combine this digital capability with the independent knowledge from our local agronomist network, our extensive distribution system and proprietary portfolio to create superior value for our customers and our shareholders.

In summary, Nutrien delivered solid operational performance during the first half and made significant progress on its strategic priorities.

There is more work to come, but I believe we demonstrated the capability of our world-class fertilizer production and retail distribution network, not only meeting the crop input demands of our customers, but exceeding them in what was an extremely tight application window.

We think the investment thesis for Nutrien is clear.

The fundamentals of our business are improving, and no one in our industry has the leverage to the upside with every $25 per tonne increase in crop nutrient prices, contributing approximately $650 million in additional EBITDA.

Our leading retail business provides protection on the downside and the ability to provide shareholders a solid and growing dividend.

We expect to have $6 billion to $8 billion in cash to redeploy over the next 3 years that will provide tremendous opportunities to grow the company and return cash to shareholders.

Thank you for listening, and we'll now be happy to take your questions.

(Operator Instructions) Our first question comes from the line of Ben Isaacson with Scotiabank.

I was hoping to talk a little bit about the investment dollars or the amount of capital that you're allocating to the digital integrated platform.

Is this an investment where you can measure a return?

Or is it just a new cost of business?

Perhaps put another way, in a year from now when we look back at your progress versus your actual spend, how do we know and how do you know if you're doing a good job?

Ben, yes, great question on our digital capability.

I'll have Mike Frank, our President of Retail, give you some of the more specifics of the plan and how we measure the value that we're going to create for all stakeholders, our customers, but our shareholders.

But look, I think when I look at the strategy, the world is heading to a more digital platform in almost everything.

And we believe that having the digital capability, coupled with what we consider to be the world's best distribution network, the best agronomist services organization that we have, I think it's going to help us set ourselves apart.

And really, our goal is to become the best crop adviser and the easiest to deal with.

And we're going to combine the physical assets with the people assets that we have on the ground working with farmers every day with the digital capability, and there is a clear return on investment.

But I'll have Mike just talk about the strategy that we're invoking and how you're going to see the return on the investment.

Yes, thanks, Ben.

So when we look at the recent acquisitions, we really like what both Waypoint and Agrible bring to us.

We really believe now that we have the capacity and capability to build the leading digital agronomy platform in the industry.

And we launched our platform on July 1. A lot of the Agrible tool will be immediately put into our platform, which we think will improve the customer experience.

And to your question in terms of how do we measure success, obviously, there are a number of areas where we do charge for the service on the platform.

Variable rate fertilizer, variable rate seeding applications are 2 examples of that.

And so we do believe that there will be some discrete line items that we can measure and quantify from a value generation standpoint.

But look, I think we're in a unique position from a digital standpoint because we are in retail.

And we believe that by leveraging the data science capabilities that we have to bring true solutions to our growers, we will earn more of their business, and we'll earn some new business from new customers.

And so we're in the unique place in the value chain where we think we can grow our business through having the leading digital platform in the industry.

And so I think we'll see it on our base business, and we'll also see it specifically in some line items in our digital platform.

Yes.

And Ben, just a couple of other comments.

We don't feel we need to do any large, expensive acquisitions in this space.

The investments that we made on a relative basis are quite modest.

They were quite strategic to build some specific capabilities we were looking for.

That's not to say we might not have other bolt-ons, but we don't think we need to have some very large, expensive acquisitions in this space.

And I think how we're going to measure the return will be in multiple facets.

But share of wallet and reduced turnover of customers, I think, are 2 of the key KPIs that we're measuring certainly internally right now.

Our next question comes from Christopher Parkinson with Crédit Suisse.

So now that you executed on the SQM, ICL and APC transactions, can you just walk us through your updated thoughts on the M&A pipeline and retail across the Americas?

Maybe comment on whether or not you'd be interested in expanding your nitrogen portfolio either domestically or abroad.

Just any sense on how you're evaluating those opportunities versus a buyback would be very helpful.

Chris, so I think -- so the gist of your question is priorities for capital now that at least all of the equity stakes have -- the deals have been announced.

So obviously, we're working hard to get the remaining ones closed.

And as I mentioned in my prepared remarks, we think that, that'll happen by the end of the year.

So if you look at that, we are expecting net after-tax proceeds of approximately $5 billion, and then the base business and even in today's market fundamentals are generating significant free cash flow.

So if you look at the next 2 to 3 years, after we pay our sustaining capital and the dividend, we still will generate significant free cash flow.

And we think that, that will be somewhere between $6 billion and $8 billion in the next 3 years that we'll have to redeploy.

So the next logical question is, okay, what are those priorities for that capital?

And one of the fundamental growth priorities, of course, is retail.

And we have a lot of opportunity to grow retail.

We can grow the retail business through the traditional network in North America and Australia.

We've been quite vocal about our aspirations to replicate that model in Brazil, and we will most likely allocate somewhere between $1 billion and $2 billion of capital in Brazil, I'd say, over the next 5 years or so.

And as well as investment backward integrating into the Loveland products portfolio, which has been just wonderful investments for us and has driven a lot of our margin enhancement that you've seen in the retail business.

Now compare that to, say, a buyback, and what I would tell you there is we're not even complete with the first buyback yet.

We still have the remaining 10%.

We will complete that, as I mentioned, this year.

And then we're always looking at what's the best use of long-term capital to grow shareholder value, and we'll make those decisions in due course.

But I think just the sheer nature of having $6 billion to $8 billion over the next 3 years or so, I believe we'll be able to do a lot of different things with it, and we're going to balance growth with shareholder returns.

And I really can't say much more than that at this point, but I think we'll have enough capital to do both.

Our next question comes from Andrew Wong with RBC Capital Markets.

So yesterday, there was an announcement, small capacity reduction at Vanscoy.

Obviously, there's some new capacity that eventually will be coming online from the other competitors, so it makes sense to offset that.

But the demand is also pretty strong right now.

So just wondering, is the closure -- just Nutrien trying to get ahead of the curve a bit to make sure the markets remain balanced and healthy?

And what's the longer-term outlook for potash production?

Andrew, I'll give you kind of a strategic overlay on what we announced yesterday, and then I'll just have Susan Jones, our Head of the Potash Business, just to give you a little bit more of the specifics and the outlook.

So look, yesterday's announcement was really the result of several months of pretty intensive analysis and planning, and this is where we landed for what I would call our go-forward operating strategy based on what we can see today in the markets.

And we think that the announcement that we communicated earlier this week on the workforce reduction, it really does allow us to optimize our network, so the 6 mines in Saskatchewan, and of course reduce some cost.

It does improve our overall global competitiveness, which I think is important.

But more than that, it does allow us to maintain sufficient ramp-up capability if and when needed.

And the markets are improving.

And the potash markets, as you can see today, we even increased our overall global shipments up by about 0.5 million tonne.

So that's the strategic overlay, and the rationale is to optimize -- continue to optimize our network, drive our competitiveness but have sufficient ramp-up capability if needed.

And I'll just have Susan talk about the specifics of the Vanscoy announcement and then just talk about the outlook.

Yes, Andrew.

Great question.

I think the announcement yesterday was more about rebalancing the product between our facilities as opposed to taking volumes out of the market.

As you mentioned, we are seeing very good demand.

And what I should mention is that this whole shift of production volume from Vanscoy to other sites will contribute to our overall synergy plan.

And you're going to see by the end of 2019, we'll have annual run rate synergies in potash that will be delivering approximately $80 million to $100 million.

Some of that will be production allocation, and some of that will be sustaining capital.

So that's really what you're seeing with that announcement yesterday.

Our next question comes from P.J. Juvekar with Citigroup.

Chuck, your seed sales were up.

Can you just break that down between price and volume?

And the reason I ask is that there were some reports that seed prices were under pressure before some of these big mergers took place.

So given all these mergers, have you seen any behavioral changes from your suppliers in terms of seed pricing and market share -- the defending market share?

Good question, P.J. I'll have Mike Frank answer that question for you.

Yes.

P.J., as you saw our margins are up on seed overall, all driven really by volume.

And so our gross margin percent, they're already flat year-over-year, and we believe we gained share in the marketplace.

When we look at -- our market research would indicate that the entire U.S. seed market is probably flat to down a little bit, and we're up.

And so your question in terms of what are we seeing from suppliers, look, I think this market has been highly competitive for the last several years.

It continued to be competitive this year in soybeans.

We have now about half of our mix in dicamba, and so that continues to be a growth opportunity for us.

But the market continues to be competitive, and I would say we haven't seen any shifts in behavior due to the mergers that have taken place.

Our next question comes from Adam Samuelson with Goldman Sachs.

A question on the outlook for potash, and understanding shipments and pricing year-to-date have been strong.

Wondering if you can comment a little bit on how you think about the back half and later into the year given the crop price outlook.

I mean, are you seeing any concerns about affordability?

Palm prices in Southeast Asia have come off pretty considerably.

The Chinese contract, as you alluded to in the prepared remarks, has not been resolved yet.

Just trying to think about the run-up that you've seen in potash prices and, I guess, phosphate prices as well relative to the crop price environment that we're in and the currency environment that we're in that seems to be a little less beneficial?

Yes, good question, Adam.

Thanks.

I'll have Jason Newton, our Head of Market Research, give you kind of a view of what we're seeing globally.

And then I'll give you a couple of comments at the end.

Adam, yes, good question.

And I think really, if you look at the -- our global potash shipment forecast, I think the agriculture fundamentals really differ depending on what geography you're in.

So absolutely, I would say within North America, we're seeing crop prices come off versus where they were during the spring season.

And I mean, crop prices are the biggest contributor to grower margins.

And so obviously, grower margins at current prices are being squeezed, although current prices don't really mean a lot if there's no crop being sold.

That said, current potash prices within North America remain highly affordable and low by historical standards.

And from an North American perspective, we're seeing the crop is well ahead of normal progress in terms of maturity.

And typically, the biggest driver of the fall season is the length of that season and how weather cooperates, and so the outlook for the second half of the year looks pretty positive.

In Brazil, we did see some logistical bottlenecks in May and June driven by the trucker strike and that dispute.

But really, as we look towards the second half of the year, we think that those issues are resolving themselves.

And from a grower perspective, the soybean prices are very strong, and we expect an increase in acreage, which should support demand there.

And good points on Southeast Asia.

We have seen palm oil prices are lower, definitely year-over-year.

But the economics remain really positive even at the lower prices, and we continue to see strong demand in that market.

And from a potash shipment standpoint, we're maintaining a flat outlook for that outlook -- for that market in 2018 versus a record in 2017.

So that continues to be really positive.

And I think the uncertainty is with China and India in the back half of the year and driven by the contracts, and that I think is one of the bigger drivers of the range in our potash shipments forecast at this point.

Yes.

So Adam, so from my perspective, you've got a potentially an early harvest in the U.S., excellent yield.

So the application window will be open, and the product will be needed.

The summer fill program that Nutrien had was highly successful, so there is good demand for our products right now.

And Canpotex, as we mentioned, it is sold out until October.

So when we look at the global market, you're right to call out India and China, but we also know that they need the product.

And so I don't know exactly when we're going to have the settlement, but we do know that they need the product for their markets, and so it will come to a conclusion at some point.

And we do think that given everything we see around the world when it comes to supply/demand fundamentals that we are fairly bullish that we're going to have a fairly strong second half of the year for all those reasons that Jason and I just mentioned.

Our next question comes from John Roberts with UBS.

Chuck, at the start of your call, you highlighted your retail business ability to handle surge conditions like we had here in the spring.

Could you remind us on an annual basis what percent of your retail sales you actually apply for farmers?

And how big is your fleet of equipment now?

Okay.

Yes, Mike Frank can answer that question for you.

Yes.

John, so about half of our products are put down by our own custom application.

Of course, it depends on the area.

In some areas, we have our own equipment.

In some areas, we partner with other third parties as well.

So it's an important part of our business.

And again, every part of the market is a little bit different in terms of whether the farmers have their own equipment or whether they need those services from us.

And so we have the largest application fleet by far in the industry.

We're -- we have the seventh largest fleet of vehicles in the U.S., and so we have a lot of capacity to deliver products on farm.

Today, most of the products that we deliver are delivered right to the farm gate, and so we're uniquely positioned when it comes to a tight application window like we've seen this year to be able to use our supply chain to satisfy our customer needs.

Our next question comes from Stephen Byrne with Bank of America Merrill Lynch.

What fraction of your crop chemical sales through the retail business is represented by the Loveland brand?

And what would you view as a targeted percentage of that mix being Loveland?

And do you drive that by just pushing more of your suppliers into these types of agreements where you can use their product in your private label brand?

Or do you need to develop new formulations to do this?

Steve, Mike Frank can answer your questions.

Stephen, so specifically on crop protection products, about -- this year, about 27% of what we sold in the crop protection category would be Loveland products, and so that's -- last year, we were just a bit over 25%, and so we've seen some nice growth in that area.

But of course, it also means that we're selling 3/4 of the crop protection products from third parties.

And so I would say our relationship with our key suppliers is getting stronger and stronger as the industry is consolidated.

They need us more, and we need them to take their new technology to help our growers, and so we believe we can do both.

We can drive our Loveland products portfolio and partner strategically with the R&D companies that are bringing new technology.

On the seed side, it's about the same.

About 26% of what we sold this year will be proprietary Dyna-Gro or proven brands, and that's also growing year-over-year.

And so we've seen nice growth in proprietary, and again, we're partnering very closely with the R&D companies that are bringing new technology as well.

Our next question comes from Vincent Andrews with Morgan Stanley.

Just thinking about the tariffs a little bit.

Maybe you could just discuss specifically if they remained in place through the fall application season and what you think the farmer may do if there's a significant level of concern.

And sort of second to that, it would seem like Latin America is going to plant a lot more soy this year, obviously given where prices are.

But also, the tariff situation, I think, that's kind of the same thing.

But presumably, that leads to more corn acres in the U.S. versus soy going into it next year.

And can you just remind us how much more favorable greater corn mix is for you versus a soy mix and how should we think about that?

I'll answer your first question on trade, and then I'll have Mike Frank answer the specifics around soybeans versus corn.

So look, as we said this morning in the prepared remarks, we're not sure how this -- like anybody else, we're not sure how this is going to unfold.

Obviously, a trade war isn't good for anyone.

And I think the difference in agriculture, though, is when it comes to farmers is we are completely focused on the financial health of our North American farmers.

And farmers can't really afford to have sort of 1 bad year.

In fact, that would be quite impactful across this entire value chain and be seen, I think, in the broader economy.

So that's where our concerns lie.

It's the financial health of the farmer.

And nobody knows how this is going to play out.

But what we do think just looking at it is, if you step back and you look at the U.S. farmer, they are some of the lowest cost, most efficient producers of food in the world.

So the acres are going to get planted.

Now the mix could shift, to your second question.

But the world needs the food, and the U.S. farmer is one of the lowest cost, most efficient producers in the world.

So we think that the total acreage will not be impacted.

And so now to your second question, which is, okay, well, what could happen from a mix?

And what would the impact be on our business?

So Mike, maybe give your view on corn versus soybeans if that were to happen.

Yes, absolutely.

So Vincent, as you probably know, there's a strong crop that's coming across North America, and we continue to see farmers invest in that crop.

Even through July, we've seen higher rates of both fungicides and nutritionals get applied on the crop.

And so farmers continue to invest in this year's crop, which is a good indication.

And we also know that a lot of the commodity prices have been locked in earlier in the year at higher prices.

And so really, the question becomes, what are the commodity prices coming out of harvest for next year's crop?

I mean, that'll be a key indicator as to how farmers think about investing.

We know that there's going to be a high withdrawal of nutrients coming out of the soil because of the strong crop that's coming.

And to your point, Latin Americas, Brazil in particular, we expect to see probably 7% or 8% increase in soy acres based on the profitability of soy down in Brazil.

So that could point to more corn acres in the U.S. On average, we generate about twice the margin on a corn acre versus a soy acre, and so that's favorable.

But as Chuck mentioned, our complete focus is on helping the farmers succeed.

And our read of the situation right now is farmers still have good liquidity.

Their balance sheets are strong.

Obviously, the federal program, the $12 billion program that was announced in the U.S. has also been pretty well received.

Although farmers ultimately want markets to flow freely.

And so it'll be important, I think, coming out of this year's harvest to see exactly how this plays out.

We have a strong fall last year with fertilizer sales.

We're expecting another strong fall.

And with an earlier harvest, that will open up the window for that to happen.

Our next question comes from Mark Connelly with Stephens.

Chuck, just coming back to an earlier question.

It's hard to disagree with your long-term view.

But as you think about the near-term impact of farm income pressure, where in retail do you think you're going to see that?

Do you see this as a big positive for your private label?

Or are we going to see an acceleration of private label as a percent of your portfolio?

Yes, good question, Mark.

Mike can give you his perspective.

Our perspective is -- over the last 3 years as farmer income has come down.

We have seen an increase in our proprietary product, but I don't know if there's a strong correlation there.

I think what's happening is that the Loveland products are demonstrating the value and driving up yields.

So they're very affordable, but they also create a lot of value, and the brands are getting more known across the U.S. But also, we've grown our business internationally as well and in Australia and Canada those products are still what I'd say relatively new, and they're starting to demonstrate that they can compete with any of the other products out there.

So that would be my view.

I don't think it is being driven by farmer economics.

I think it is -- just the products are performing in the marketplace.

They're demonstrating value for the farmers, and that's what's driving up proprietary products percentage.

But Mike, maybe give your perspective as well.

Yes.

No, so that's -- Chuck, you mentioned that our proprietary products really aren't based on a price point.

They're unique formulations that create unique value for growers.

And in fact, a lot of our proprietary products are nutritional and other products that add value, and so we wouldn't expect to see a mix shift because of tougher economics to proprietary products.

Look, I think what we're seeing, and as we talked to our growers across our network, they're negotiating land rents real hard right now based on commodity prices.

And look, what we've seen as well over the last 2 or 3 years with commodity prices coming down, there's been an intense focus on seed costs, and so I think that category continues to be a focus of farmers as they think about what crop to plant.

And then as they think about seed, there's a lot of negotiation going on, on the seed category in particular.

Our next question comes from Don Carson with Susquehanna Financial.

Yes, Chuck, a question on what many years ago you called the Alberta advantage.

You talked about how you're able to source AECO gas for less than $1.

As you look out the next few years and where you see AECO gas trading versus NYMEX and as you look at transportation and capital costs, is there an opportunity to allocate some capital to significant debottlenecks of your Alberta nitrogen capacity?

Yes, Don, so look, generally speaking, we're bearish on natural gas.

The AECO differential is quite wide.

As you mentioned and as I mentioned in my prepared remarks, second quarter was $1 per MMBtu.

So the answer to your question on, can we bring more capacity into the AECO market, the answer to that question is yes.

We are studying some, I call them, moderate expansion opportunities in Canada to bring in a little bit more today.

Our total book, our nitrogen book based on AECO gas is about 30%.

We'd love to continue to increase that part of our nitrogen portfolio, and we are starting to do a little bit of work on what that could look like.

But I think we're a ways away, and it wouldn't be significant capital investment in the next year or maybe even the next couple of years.

We're still at the study and investment stage right now, early days on what we could do with our nitrogen portfolio in Canada.

Our next question comes from Jacob Bout with CIBC World Markets.

I had another question on potash markets.

Can you talk a bit about how you think about the balance between pricing and demand?

And given this compression farming comment, what price do you expect to see demand destruction?

Maybe as a quick secondary, just talk quickly about your -- how quickly you can ramp up production if you do get -- if we do get into a tough market.

Jacob, so I think Jason covered this pretty well.

Where prices are at today and the demand that we're seeing in the potash market, I'd say around the world, we're still quite a ways away from having any compression issues when it comes to the economic health of a farmer because of potash pricing.

So we're -- I don't have a specific number to give you.

But when we look at the numbers and we run them, we are quite a ways away from that happening.

So that's really the answer to your question.

The second question was...

Related to ramping up.

Oh, the ramp-up, yes, sorry.

So your second question on ramp-up -- Susan, why don't you take that question?

Jacob, excellent question.

We are -- and this is also linked to our outlook for rising demand as we're seeing tight supplies this year.

You're seeing exactly that in terms of our expected demand.

We're able to ramp up, and this is the time where Nutrien's potash network can really shine.

We have always ensured that we have adequate supply so that if markets are tight and we're seeing good demand, we can move products into the market on fairly short notice.

So great question, and I do think that you're seeing that as well this year on our outlook.

Our next question comes from Joel Jackson with BMO Capital Markets.

So you've been able to raise your guidance a fair bit on the [Nutrien] side, and -- but you didn't raise any guidance for retail, and you also pulled a synergy realization from 2019 to 2018.

And then one more observation is that retail margins for retail are -- fertilizer margins for retail are lower this year.

So maybe talk about that.

Why didn't you raise the outlook for retail?

And why are fertilizer margins lowering?

Joel, Mike can answer your question on retail margins.

But from a guidance perspective, what I'd say is you're right.

The guidance has been driven by 2 factors.

One is faster delivery of the synergies and improving market fundamentals when it comes to our wholesale businesses.

We're just seeing higher volumes and prices.

Retail guidance range, if you think about it and you step back year-over-year, it's up about 9% or 10%.

So going into the year -- and retail is a bit more ratable when it comes to its earnings profile.

That's what we like about the retail business is it's more stable, it's more resilient, and you won't see just because commodity prices are moving up that we're going to be able to raise guidance because of retail.

That's not how the retail business is built.

But I think you understand and know that.

So look, I think that the beginning of the year, we had a healthy increase in retail's earnings of a 9% or 10%.

It's not related to crop pricing and demand for nutrients.

So that's why.

And then on retail margins, what I would say is when I look at the overall shelves and the margins across the shelves, I think the business has held up brilliantly.

It's been extremely resilient if you just think about the pressure that we were under in the early second quarter because of the compressed spring season.

And for retail to hold its margin in a season like that, that just shows the strength and stability of that business model.

But Mike can give you a little bit more color.

Sure.

Joel, so we're pleased that we've seen growth in all regions where we have retail, North and South America and nice growth in Australia, as Chuck mentioned earlier.

We believe that the retail market overall is probably flat, and so we're growing on an EBITDA line at 10% year-to-date in probably a very flat market.

And in fact in Australia with the significant drought in New South Wales, it's a very tough market in that area as well.

On fertilizer, our margins are roughly flat.

Look, our average cost-of-good increase this year was about $15.

We cover all of that other than $0.23, and so we're roughly flat on margins, and we grew volumes significantly.

Going into the second half, we still expect to see growth.

We expect the market to be tough.

As you would recall, last year in Q4, we had a very strong Q4 because the windows stayed open, especially in the U.S. from a fertilizer standpoint.

So we're expecting not only to repeat the strength that we had last year in the second half but to grow on top of that.

And when we do that, that'll produce in the range that we're forecasting here.

Our next question comes from Steven Hansen with Raymond James.

Just a quick one for me.

Just -- you probably don't want to get too far out over your skis here on your synergy targets.

But given the pace that you've been trending at, have you started to think beyond the $500 million run rate target?

And if so, I'm sure you don't want to put a number on it just yet.

But if so, are the buckets where you think you could potentially exceed that opportunity set that you initially described?

Steve, I'll have Steve Douglas, who is looking after our synergies and integration, answer your question.

Yes, thanks.

Steve, look, what you've seen in us raising our guidance for the run rate for the current year is really a great work performed by the business units in terms of assessing what it is they could pull back out of 2019 into 2018.

There have been some puts and takes on what we're seeing, but the lion's share of that is really just pulling back future synergies back into the current year, which I think is laudable given the fact that a dollar today is worth more than a dollar tomorrow.

In terms of exceeding the $500 million, aspirationally, I think we've talked about always wanting to do that.

We have -- we're constantly weighing other opportunities, and we're very cognizant of the fact that these synergies have to be firm, tight, repeatable and [capitalized].

So we're not ready to expand past the $500 million, but I can tell you we're constantly exploring ways to continue to grow that.

Our next question comes from Michael Piken with Cleveland Research.

Yes.

Just wanted to delve a little bit deeper into where crop protection inventories are in the U.S. And specifically, if you could break it out between herbicides, fungicides and insecticides, that'd be helpful, as well as what you're seeing in terms of a farmer consumption this season.

Michael, Mike Frank will -- I think can give you a higher level view on where we think crop chem inventories are as well as maybe fertilizer.

Sure.

So our inventories right now on fertilizers is about flat to last year coming out of Q2.

Our crop protection inventories are up.

Our market research would indicate that in the U.S., the entire crop protection sales to farmers was probably up about 0.3%.

We were up over 5%.

And so again, it's a category where we feel strong and we perform well and gained share.

So the increase in inventories that we had coming out of Q2, we have actually already absorbed a lot of that with a strong July in the U.S. And so we feel good about our inventory position across all of our shelves at this point in time.

Our next question comes from Jonas Oxgaard with AllianceBernstein.

I was wondering if you could talk a little bit more about the Brazil retail strategy.

There's a couple of angles I was curious about.

One, the truckers strike that was in.

Does that do anything to your business case?

On the flip side, the tariff seems to make Brazil a better environment.

And then also, what's the competitive landscape down there?

Who are the main competitors?

And how does that impact what you're doing?

Jonas, yes, it's Chuck.

I'll give you the strategic overlay, and then Mike Frank can give you his perspective on the competitive situation in Brazil.

So look, the overall goal here is to replicate what we built in North America and I'd say in Australia, in Brazil.

And so we'd like to build a leading retail platform that is backward integrated with Loveland products.

It's a full-service high touch model that has all the precision agriculture, agronomic service application.

Same as North America.

And we think that, that is going to be very unique and value-creating for the Brazilian farmers, which it all has to start with creating value for the Brazilian farmers.

So that's what we're trying to replicate.

As I mentioned, we are going to allocate some capital into Brazil to grow that business.

And in time, we'd like the retail -- the business in Brazil to be the second largest business that we've got in our portfolio of retail businesses.

There are many ways to enter the Brazil market.

We could certainly look at acquiring a wholesale fertilizer blender and then adding the crop chem, the seed and the service afterwards.

There are traditional retailers.

There's not any national presence traditional retailers, but they do exist.

So think about a tuck-in roll up strategy similar to what we do to in the U.S. to build it out.

And then our acquisition in the first quarter, Agrichem.

The other way to enter Brazil is through a Loveland products play, which we've already done, and enter the market with that offering and then understand who you're selling to, to understand that market and build the retail model that way.

So we're looking at all of those options and weighing multiple opportunities as we speak.

But there is competition, but I think our offering will be very, very unique and quite competitive.

And Mike, maybe give your perspective.

Yes.

So Chuck, you covered it well.

The fundamentals in Brazil are very strong today.

Farmer profitability is high.

And as we mentioned earlier, we expect to see soy acres continue to expand going into this next season.

The retail market is very fragmented, and so we're scanning the market today and having a number of conversations to really develop our strategy around how can we consolidate that industry, which we think there's opportunities to.

We've got a handful of greenfields that we're investing in right now.

And as Chuck mentioned, we also want to have our own proprietary products company, just like we have in the U.S. and other markets.

And so the acquisition of Agrichem was a very good start to that strategy.

And so it's early days, but we think there's a lot of opportunity in Brazil.

Our next question comes from John Chu with Laurentian Bank Securities.

So Chuck, earlier, you mentioned in terms of your retail M&A focus with the U.S. and Australia.

So just on the Australian market.

I was under the impression that there's really 3 main players that have about a 30% market share.

And effectively, that market share was more or less capped.

So how do you intend to grow that market?

And -- or is there something bigger at play where you could take out one of the bigger players there?

Yes.

Good question, John.

So you're right.

There are -- I think the market in Australia, we do have close to 30% of the market share in Australia.

There are some other large, what I'd call, national players in country.

But there are still a lot of independent owner/operators, smaller companies that exist.

We've been actually rolling up the markets, similar to the U.S. and Canada, in Australia for the last couple of years.

Once Australia hit its legs and started to perform well, we started to allocate, I'd say, a very small amount of capital into Australia to continue to roll up that marketplace.

And I think the results have spoken for themselves, where certainly a very solid performance over the last 2 or 3 years with record performance year-after-year.

So that's what we're thinking, and that's what we're talking about.

It's more of a tuck-in roll-up strategy in Australia.

And then more penetration of our Loveland products, which are still relatively new in Australia, bringing in our nutritionals, our biological products, some of the higher technology products into that country to help Australian farmers maximize their yields.

And we could get a nice lift, we think, with more backward integration into Loveland products.

And that's all the time we have for today.

If there's any additional questions, the IR team is ready to answer them.

Otherwise, have a good summer, and we will see you soon.

Thanks.

This concludes today's conference.

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Thank you for your participation.