Nutrien Ltd (NTR) 2019 Q2 法說會逐字稿

Greetings and welcome to Nutrien's Second Quarter 2019 Earnings Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Richard Downey, Vice President of Investor and Corporate Relations.

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. Pedro Farah, our CFO and the heads of our 3 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 forecasts and conclusions, 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 U.S. and Canadian 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.

As always, I will walk through the results and speak to our outlook, but before doing that, I want to share a few broad comments with you.

First, the weather.

In North America, it has been like nothing we have ever seen before.

In fact, it has gone into the history books as the worst 9 months weather period in U.S. history, millions of acres went unplanted.

This resulted in a lot less spend on crop inputs and it is a big reason why we are seeing a pause in global fertilizer demand growth this year.

Second, our business continued to show resiliency and stability.

Nutrien delivered higher earnings in the first half, supported by the quality of our assets and the strength of our integrated model.

Even in retail, our results were solid despite excess moisture preventing over 10 million acres of prime U.S. farmland from being planted.

And that was just the headline number.

A shortened application window also reduced crop input spending on many acres that did get planted.

Third, demand for grains and oilseeds is still growing and supply is tightening.

With fewer acres and what will almost certainly be below trend yields, we expect U.S. corn ending inventories to drop by as much as half this year.

Markets have started to respond with corn prices up about 20% year-over-year, and this is expected to set up for a significant increase in U.S. corn acreage and a strong rebound in crop input demand next year.

The final point is that we remain focused on our controllables, managing our costs and leveraging our ability to invest countercyclically is where we are focused.

We outlined a plan at our Investor Day in May that provided a path to deliver long-term value and we are advancing it.

We have allocated approximately $1 billion so far this year to expand our retail footprint in the U.S. and Australia and to grow our proprietary products business.

We believe market environments like this will play to our strengths.

During the second quarter, we also used our strong balance sheet and confidence in future cash flows to return capital to shareholders.

We repurchased nearly 21 million shares during the second quarter alone, which brought our 5% authorized program to a close in less than 4 months.

We also announced a 5% increase to our expected quarterly dividend, raising it to $0.45 a share.

On these 2 fronts combined, we have returned $5.2 billion to shareholders since the close of the merger, that is more capital returned over this period than any of our peers.

Now with the high level points out of the way, I will turn to our results.

Nutrien's adjusted net earnings for the second quarter was $1.58 per share and adjusted EBITDA was $1.9 billion.

Our adjusted EBITDA in the first half increased by 18% to $2.6 billion, supported by higher earnings in our potash and nitrogen businesses.

We generated $1.7 billion in free cash flow during the first half, up 47% from last year.

Our cash production costs were in line with the previous year, and our G&A expenses were down 5%.

Retail EBITDA in the first half was $810 million, down 8% from the previous year.

The impact of lower acreage and a limited opportunity to apply other crop inputs were the key drivers.

When you consider that corn, soybean and canola acreage was off an estimated 7%, that shows up in our bottom line.

Gross margins held for all major retail product categories, except for crop protection products, which were hindered by a limited window for preplant herbicide applications and delayed pest pressure.

Nutrien's crop protection sales were down 3% in the first half, a relatively strong performance compared to U.S. industry sales that are estimated to be down more than 10%.

Fertilizer margins were strong in a condensed application season, highlighting benefits of our extensive distribution network.

Our potash business continued to deliver excellent results.

Potash EBITDA exceeded $1 billion in the first half, up 42% from last year.

Net selling prices rose by 26% with increases in both North America and offshore markets.

Our domestic sales were impacted by weather issues in the first half.

However, this was more than offset by record demand in offshore markets, particularly from Brazil and China.

Potash cash cost of product manufactured was $59 per tonne, maintaining our position as one of the lowest cost global producers.

Nitrogen EBITDA was up 17% in the first half due to higher realized prices, lower North American gas prices and increased earnings from our equity investments.

Our sales volumes and realized prices benefited from the strength of our North American distribution system and the diversity of our customer base.

Our realized prices this quarter were also supported by stronger urea benchmark prices and logistical constraints on the river system that resulted in elevated pricing differentials.

Phosphate EBITDA was down 17% compared to the first half of 2018.

We maintained our phosphate fertilizer volumes in the first half despite challenging market conditions.

Looking forward, we see a number of positive factors.

Corn futures have strengthened to multi-year highs and growers holding inventories are benefiting from increased cash prices.

Higher crop prices have increased grower incentives to maximize the yield of the current crop, and we are seeing good demand in Q3 for top dress nitrogen and crop protection applications.

Historically, our retail business is seasonally slower in July and August, but this year has been different.

The combination of the delayed season and higher crop prices have resulted in our July retail sales being up over 40% compared to last year.

With tighter supplies and improved prices, we see potential for around 95 million acres of corn planted next year.

Higher corn acreage, combined with lower crop input applications this spring, should support strong recovery in crop input demand this fall and certainly into 2020.

In potash, global prices have remained relatively stable.

Assuming an adequate application window, we expect a strong fall application season in the U.S. and a lot of inventory being pulled through the channel.

Demand in Brazil is expected to remain robust, supported by favorable crop prices and continued acreage expansion.

We expect customers in India to settle new potash contracts before China this fall, although we have moderated our view of full year shipments to these markets.

Given weather-related lower North American demand in the first half and some short-term softness in other markets, we now forecast global potash shipments between 65 million and 67 million tonnes in 2019.

We have, therefore, lowered our potash sales guidance to 12.6 million to 13 million tonnes.

As always, we were able to respond if market opportunities emerge.

Similar to potash, we expect a strong fall nitrogen application season in the U.S. Urea prices have outperformed other sources of nitrogen, in part due to continued strong demand from India.

Global ammonia prices weakened through the first half, but we expect that seasonal curtailments in production along with improved demand will provide underlying support to prices in the second half of the year.

We have lowered our annual adjusted earnings guidance to $2.70 to $3 per share, given the extreme weather impact from the first half of the year, and our adjusted EBITDA guidance to $4.35 billion to $4.7 billion.

The midpoint of our annual adjusted EBITDA guidance is up 15% from last year, which still represents strong year-over-year growth, demonstrating the synergy capture and the strength of our business.

Moving beyond 2019, we see the potential for an excellent year in 2020.

And we are making good progress against the long-term strategic agenda we laid out at our Investor Day.

In retail, we are transforming the business through scale, efficiency and digital leadership.

We will continue to expand our business in core markets in North America and Australia, while prudently building out our network in Brazil.

We expect to grow retail earnings by around [60%] over the 5-year period, driven by a combination of organic and inorganic growth initiatives and we have set clear performance targets in each of these areas.

As previously announced, we entered into an agreement to purchase Ruralco Holdings, the third largest ag retailer in Australia.

We continue to work through the regulatory approval process and expect to close this transaction late in the third quarter.

The retail acquisitions completed in 2019 will make a much greater contribution to our earnings next year.

In potash, we see opportunity to increase earnings in a relatively stable potash price environment through volume growth and further cost reductions.

We have 5 million tonnes of production capability that we can bring online as demand grows, which is an opportunity that does not exist for any other potash producer.

In nitrogen and phosphate, we continue to optimize our network and improve our cost positions.

We are completing a number of smaller nitrogen expansion projects that offer attractive returns for our shareholders.

Nutrien's integrated business model is designed to withstand events, such as what happened this spring.

It is also designed to capitalize on a long-term recovery in the ag markets, which we are starting to see positive signs in the second half of 2019.

We are a company focused on delivering, and we remain committed to building on a track record of performance for all of our stakeholders.

We would now be happy to answer your questions.

Thank you for listening.

(Operator Instructions) Our first question comes from Andrew Wong with RBC Capital Markets.

So obviously, 2019 has seen pretty difficult operating environments, a lot of market factors, trade disputes, weather disruptions, that kind of stuff, but you've done well to grow your earnings, executing on your controllables.

So if we think into next year, and I know it's a little early for that, but we're already into the next ag season, right?

So can you just talk about some of the earnings catalysts we should be thinking about both from a market side of things and company-specific side?

I know you touched on some of them in the prepared remarks, but it would be great to hear more about that.

Sure.

So -- yes, it is a little bit early, but I think the backdrop that we're seeing right now is that we do expect a pretty significant rebound in the market fundamentals in 2020.

And you can see it in crop pricing futures, but you can also see it in some of our business that we're seeing in retail with crop protection in the third quarter.

The fall season, we think, will be quite strong as well.

It's going to be, of course, the weather dependent and see if we have the application window.

But I think 2020 is setting up to be a very good agricultural year and that's going to be company independent.

From Nutrien's perspective, of course, we've been aggressive with our M&A activity in retail, and I think you're going to see the full value of those investments from a shareholder perspective in 2020 in a more, what I would say, normal or strengthening year.

So that is certainly going to be something that will be on full display when it comes to Nutrien's specific earnings growth for retail.

I think the work that we've done in our production businesses in nitrogen and phosphate, but also in potash to take our costs out and to optimize the network, so there's still a bit -- some of the full value that we're going to see from the synergy capture that we've delivered and the incremental work that we outlined at our Investor Day in May.

I think you're going to see continued improvement in our cost in the production business.

And of course, as the demand increases, particularly in potash, I think we'll be one of the few companies that can kind of rise to the demand needs that we think will happen in 2020.

So overall, things are early to really comment definitively, but what we see is that, I think we're going to be having the company fundamentals that we've been focused on and investing on for the last couple of years be on full display for 2020, but the backdrop of the agricultural fundamentals in 2020, I think, is going to be quite a rebound year based on what we're seeing so far.

Our next question comes from Steve Hansen with Raymond James.

Just wondering if you could quickly discuss the demand outlook for potash into China and India where you've notably pulled back your expectations a little bit on the back half of the year?

And just any nuances around the settlements that you've previously alluded to at the Investor Day and where you think you might settle?

Sure.

I'll give you a high level perspective and then I'll have Susan Jones, our potash CEO, talk about some of the specifics.

So you're right, Steve.

What we did with the guidance is we did reduce it by 2 million tonnes.

And that's simply because we believe that in North America, we've lost somewhere around 800,000 tonnes, maybe even a bit more because of weather and not being able to get the applications down.

We are seeing some, what I call, short-term softness in Southeast Asia due to palm prices, which we believe will improve next year as well.

And so that's all in the consideration of the reduction in guidance.

So now when it comes to China, what I'd say is that so far this year, we've seen good demand.

In fact, it's one of the reasons why, I think, we've had a good first half of the year.

And we do believe that China needs even more of the potash this year.

So what I think will happen though is that we will see probably a delayed time line for the contract in China simply because they know that demand in the U.S. has been off.

And for us, our position is quite clear.

When we set our guidance, you can see it in the downside and then in the upside of our guidance is we believe that certainly in the short term, no deal with China is better than a bad deal.

Because the overall fundamentals for potash are improving and the global markets are tightening.

And as we move into the fall and into 2020, we think that they're -- we're going to see strengthening in the potash markets.

And so we're going to be patient with the contract negotiations for China this year.

Susan, do you want to add a little bit more color, maybe comment on India?

Sure, Chuck.

Steve, as Chuck mentioned, the demand into China, the first half this year has been particularly robust and our expectation of imports into China year-over-year will be up 1 million tonnes.

They have indicated that they will not be allowing seaborne imports into the country after the end of August.

While we do know that port inventories are higher than this time last year, we also know that inland inventories are low.

And what's going to really determine when they settle their contract will be how soon the NPK producers will start taking products and draw them from the ports.

But what I can say is that the longer they delay the contract settlement, the higher the demand's going to be for 2020.

It's going to set us up really nicely for that year.

In terms of India, our intelligence is that they do expect to be actually settling their contract this fall, and we do expect they will come in and settle before China.

They have certainly had some delays in demand due to lower monsoons, but we are expecting that, that is short term and they will come in for about normal to maybe a little bit less than last year.

Our next question comes from Ben Isaacson with Scotiabank.

Nice job stick handling Q2.

Just a question on nitrogen and potash.

On nitrogen, I keep hearing how the fall is setting up to look really strong, and I was hoping you could frame that or add some goalposts, given farmer economics, where are dealer and even farmer inventories and how do we kind of break up ammonia, urea and nitrates and kind of maybe a trade war resolution, what does that mean?

On potash, you've talked a lot about demand and seeing some pockets of softness there.

What are you seeing on the supply side?

Any abnormalities or any surprises coming out of Russia, the Bethune project or anything else like that?

Ben, so what we'll do is we'll have Raef Sully talk about the nitrogen in the fall.

I think it may be helpful to also to have Mike Frank just -- Mike Frank talk about what he's seeing at the farm level and the retail level and then we'll move over to Susan for the potash demand/supply question.

So go ahead, Raef.

Thanks very much.

So I been -- we're very bullish on the outlook for nitrogen in the second half.

There's a few things here.

Obviously, in Chuck's comments, we noted that crop prices are supporting large corn acres in 2020, that's going to drive a very good fall application for us across all of the nutrients.

For nitrogen, now let me just start with ammonia.

If you look globally at the supply and demand, supply is tightening.

In 2018, there was a net addition of about 1.1 million tonnes of merchant ammonia.

In 2019, it will be about 0.6 million tonnes, against that global demand is increasing by 2 million to 2.5 million tonnes a year.

So if it wasn't for the fact we had such a bad spring application of ammonia, I think you'd start to see Tampa moving up already.

It rolled last time.

So it's flat at $215.

We think that's bottom of the market.

We think we'll start to see it tightening and going up.

Urea showed some strength through the season, that's been helped, offshore demand.

So we expect to see urea prices tick up as well and you'll have noted -- see us being out in the market in the last couple of days with the UAN fill price.

We feel pretty confident about it.

If there is a narrow application window, we think that's actually an advantage to us.

In narrow application windows we have the debt -- the distribution to be able to get the product out to the customers.

So we actually feel that's an advantage to us.

And then Mike, why don't you talk about nitrogen demand for the fall, what you're seeing at the retail and farm level?

Sure.

Thanks, Chuck.

So Ben, maybe I'll first start -- talk a little bit about our fertilizer sales in the first half of this year.

Even though, as you know, we've lost over 10 million acres, of planted acres, our retail business performed very well in fertilizer.

Our volumes were about flat in potash and up about 3% in nitrogen and our margins were up about $10.

And so our -- really demonstrated our supply chain in a challenging market we delivered at the farm gate.

As we talk to farmers right now about their plans for 2020, most of these acres that didn't get planted, we expect are going to go into corn.

There's going to be more corn-on-corn.

And so it's easy to see 95-plus million acres setting up for 2020, especially with where commodity prices are today.

And our customers are already talking to us about making sure that we're going to be ready to service their fields this fall as soon as the window opens up.

And so we need a window to get some fertilizer down this fall.

Last fall was a challenging window.

We didn't get down as much as we expected.

So the window does matter, but we do expect demand for NP&K to be extremely strong going into 2020.

Thanks.

Susan, why don't you talk about potash supply, please?

Just before I get into the supply side, I do want to address the second half domestically because I was discussing offshore in my last question.

So in terms of a fall application, assuming the weather enables a strong application season this fall, we do expect to see robust demand in the U.S., given the lack of application both this spring, but also last fall because they need to replenish the nutrients removed.

And just to give you a sense of that, we ran a very successful summer-fill program.

We were oversubscribed on this, and we had to close it early.

And as recently as last week at the Southwest Fertilizer Conference, there was a lot of optimism by retailers expressed by their growers on both second half shipments, the continued affordability of potash but also looking out into 2020.

In terms of supply, yes, I would say that perhaps we're not surprised, but we have seen continued slower ramp-ups from our competitors.

You asked K+

S. They did recently announce lower volumes due to longer turnarounds to address quality issues and it looks like they'll be coming in as they have stated at about 1.7 million tonnes this year on the lower end of guidance.

In addition to that, EuroChem did announce the delay of the VolgaKaliy operation until 2020 and Uralkali has indicated further issues with us too.

So as expressed at Investor Day, I think, this continued slowness of ramp-up is what we would expect to see as these ramp-ups continue, but is also helping to support the firmness in the supply-demand balance.

Next question comes from Joel Jackson with BMO Capital Markets.

Maybe a two-part question.

Just following up on the inventory situation.

Maybe Mike could talk about what we're seeing in the channel for inventories of the different crop protection chemicals and seeds?

And then maybe, Chuck, we can talk about, I think, you did as many share buybacks in the first half of the year as you did last year so you closed the authorization.

Could we see more buybacks in the second half with a new authorization?

Thanks, Joel.

Mike, go ahead and talk about inventory, please.

Yes.

So as you know, the entire retail industry brought a lot of inventory into the 2019 year on crop protection and everyone was set up for a strong both seed and fertilizer market.

And of course, the way the first half played out with weather and then acres ultimately not getting planted, it had a significant impact.

As Chuck mentioned in his opening remarks, the crop protection market based on point of sales data is down 11% in the first half of the year and yet our business is only down 3%.

So we performed extremely strong in the crop protection market.

Our inventories, I can't speak to the rest of the industry, but our crop protection inventories are now coming out of the end of the first half, were flat with last year, and as Chuck mentioned, we've had a really strong July.

In fact, we've continued to sell a lot of herbicides through the month of July.

So we're now pulling down inventory on a comparable basis.

And so we feel good going into the second half of the year as we prepare for 2020 and the year that's coming.

Our crop protection inventories are back in line with where we want them to be.

Seed inventories.

Of course, we have some of our own seed business where we're going to be carrying higher inventories into next year because of acres that didn't get planted and on third-party seed that we sell, that does get returned to our supplier.

And so we're restocking that seed right now, we're checking for quality, and we're setting up to get ready for next year's season.

So overall, both on crop protection and seed, we feel good about where we're at with inventories.

Finally, with fertilizer, again, the season didn't play out exactly as we expected, but we did a good job of deinventorying our fertilizer.

We're up in a couple areas like ammonia, for example, which this spring just didn't allow for the ammonia to go down as we expected, but we're restocking fertilizer right now in preparation for a window this fall.

And Joel, on your buyback question, so we look at what we've done so far since the merger, January 2018, we purchased 11% of the shares outstanding, spending about $3.7 billion at an average price of just over $51 a share.

And we've been very aggressive.

And we've communicated that very clearly, I think, to our stakeholders.

And the most recent buyback as we referenced in the prepared remarks, we did the 5% in about 4 months.

And so what I'd tell you right now to your question on what's next is our capital allocation priorities really haven't changed.

We've been very consistent that we want to have a combination of growth and significant returns to shareholders, and I think we've lived to that both of those objectives.

We're seeing some very good opportunities right now in the M&A pipeline.

We've got some other things we're looking at as well, but what I'd say right now from a buyback perspective is everything's on the table.

The markets have been quite volatile, and we have the balance sheet and the free cash flow to make smart, quick decisions to create shareholder value.

So that's how I would answer the question is I'd say right now everything's on the table.

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

A couple of questions.

If your prevent plant acres were -- in corn were close to 10 million acres, how did your overall sales in retail -- seed sales in retail go up?

Was there pricing?

Was the pricing that much better?

Or are you gaining share?

And then second question on chemicals.

You mentioned that crop chemical inventory for you is flat and maybe you're exhibiting really well and your inventories are flat.

What do you think -- where do you think inventory levels are in the channel from the producer to the farmer?

And are those high compared to, let's say, 5-year average?

P.J., we'll have Mike answer those questions for you.

P.J., our seed business performed extremely well this year.

And just like with crop protection, we know that we've gained pretty significant share in the marketplace.

On the revenue line, as you'll see in the first half, we're up about 2% on revenue.

When we look at pricing, pricing both in corn and soybeans was pretty flat year-over-year.

Replants were up.

And so we do know that about 4% of our sales were replants.

And so kind of if you net that off, our seed sales are probably down to -- 2% in terms of kind of apples-to-apples.

But again, in the market, that's extremely strong performance, and you're seeing that, I think, as other companies are announcing their earnings and showing significantly lower seed sales than that.

Look, we -- again, I can't comment because we don't know what inventories are for our competitors.

You asked about farm gate inventory on crop protection.

For the most part, at least what we do is if our customers change their plans and they don't need a product, then we restock it and we sell them the product that they need.

And so I would say our customers' inventory at the farm gate are nonexistent because they don't hold inventories and we serve them in a different way than maybe some other retailers do.

Our next question comes from Jacob Bout, CIBC.

I had a couple of questions on U.S. retail.

I guess, first off, market share.

What is it currently?

How aggressive do you expect to be in tuck-ins for the remainder of the year and what type of multiple are you looking at?

And then maybe just to wrap it up.

Just when you're thinking about U.S. retail, how are you looking at buying versus actually doing greenfield?

Mike, go ahead.

Yes.

Jacob, our market share in the U.S. has definitely ticked up this year.

We made some good acquisitions at the start of the year, a couple large retail, multi-branch retail companies in the Midwest, strengthened our position there, but our base business just from a market share standpoint, we think we probably grew in the range of 140 to 160 basis points of market share.

And so it's extremely strong and it really speaks to both the transformational efforts that we're focused on, our digital efforts and just our supply chain capability and our people in the marketplace.

So overall, we've talked about our market share being in the 20% range.

Look, there is still some way to go to close out 2019.

And so at the end of the year, we'll update that number, but we do believe that we're gaining market share.

On tuck-ins, we do expect there to be a busy season in the second half of the year.

It's typically when things do pick up and our phones are ringing.

We're going to continue to look for high-quality assets, and like we did at the beginning of the year, we really like buying multi-branch retail outlets that fit well with our business.

We're not seeing really a change in multiples.

And so depending on the quality of the assets, it's anywhere from 5 to 7 is a typical tuck-in multiple and we would expect that to probably continue to be the range that we're going to be investing in the future.

And then finally, how do we look at tuck-ins versus greenfields?

We're now operating about 16 new greenfields that we've set up in the last 18 months.

They're performing as expected, which is good.

We have 9 more that are in various states of build right now, and so we are continuing our greenfield investments.

That being said, I think whenever we can acquire an existing business that fits into our footprint, either where we have a gap or where we can consolidate branches, that would be our first preference.

When you make an acquisition, you get a customer list, you get salespeople and so you can hit the ground running.

And so we'll continue to focus primarily on acquisitions and tuck-ins and then just use our greenfield strategy either to consolidate multiple retail points or to look for open space where we don't have an opportunity for a tuck-in.

Our next question comes from Duffy Fischer with Barclays.

Couple of questions.

First, just your outlook for Latin America kind of however you want to define it, how much you think corn, soy acres will be up, down there and kind of inputs per acre?

Just I mean, how good could Latin America be this fall?

Second, the retail acquisitions you've done so far.

If you assume that Ruralco closes this year, how much incremental EBITDA is that next year?

And then the last one on the digital platform.

Will you be able to start to price for that next year do you think?

Or is it still kind of in the penetration phase where we're more than a year away from pricing for it?

Okay, Duffy.

So we'll have Jason Newton just talk a little bit about what we're seeing in Latin America and then we'll move over to the retail questions.

Just in terms of the Brazilian acres that we expect to be planted, I guess, in our fall and next spring.

I think if you look at where soybean prices are currently in Brazil, actually, they aren't -- they definitely are weaker year-over-year and in some sense following the global fundamentals in that market.

And so we don't see acreage increasing probably about the same as it did a year ago, so in the range of 1% to 2% year-over-year.

And as we look toward corn, I think a lot rides on the uncertainty with respect to the U.S. production.

And so there definitely is upside in Brazilian corn planting for the safrinha crop depending on what happens from a U.S. perspective.

And if the U.S. acreage and yield turnout has -- is sort of the base case that the scenarios project, I think there is more upside in soybean -- or in corn acreage and the safrinha crop in Brazil.

As a result, we expect strong nutrient demand as we move into later this year and into the safrinha planting period.

And then just on Ruralco.

So we're still working through the antitrust process and we do still expect the deal to close in the late third quarter.

And then I'll just turn it over to Mike just to talk about sort of what we could expect to see from an earnings perspective, let's say, for 2020, not really the second half of this year and then your last question, Duffy.

Go ahead, Mike.

Duffy, so in terms of -- obviously, we're -- as Chuck said, we're expecting to close Ruralco late third quarter this year.

And so we'll get a bit of a stub year with Ruralco this year as well with Actagro.

So if you look at 2020 with those 2 businesses and you compare it to, say, 2018 where we didn't have any part of their business, we would expect an EBITDA lift of about $100 million between those 2 businesses.

And so they're both expected to contribute significantly to our 2020 earnings.

On digital.

So with corn prices going up, we do expect the digital services that we provide our customers today that we do largely charge for like variable rate planting prescriptions and variable rate fertilizer prescriptions, that part of our business continues to grow.

So you'll see that in our services line.

And so we do expect that to grow.

Our large focus right now is also getting our customers and our employees engaging in our digital tools.

And we're off to a really solid start in 2019.

As you may know, we launched our customer portal about a year ago.

We've got close to 60% of our customers now signed up and engaging with us on the portal, and we turned on the ability at the beginning of this year for our employees and our customers to use the portal to order -- to put orders online directly to create efficiency and more price transparency.

And we're getting great feedback on the platform and every month and every week, in fact, we see the adoption of those tools go up.

And so we're really pleased with where we're at on our digital journey.

There's obviously a lot still ahead of us, but the tools we're putting in the marketplace are hitting the mark right now.

And operator, it's Richard Downey here.

Can I ask all the participants to limit yourself to one question.

Our next question comes from John Roberts with UBS.

How do you think about China hog fever as you do your planning for the next few quarters and next year?

Yes.

John, Jason Newton will give you sort of our latest thinking and then I'll give you a bit of color or commentary.

Go ahead, Jason.

John, as we look at the African swine fever, there really hasn't been a lot of update in terms of what's happening there compared to what we've talked about (inaudible) quarter and Investor Day.

I mean, it's a significant issue for African swine numbers and the numbers are anywhere from 20% to 40% and even above in terms of the loss of -- the numbers in the swine herd.

Now it seems, as you look at the actual impact in terms of global grain, that it, to date, it's been relatively muted.

And actually, if you look at the USDA's current forecast for 2019, both global feed demand and if you look at global meal demand are both projected to be at above trend levels even with flat to lower demand in China.

So they're expecting to see a rebound in feed demand in other markets globally.

And if you look at livestock prices, we did see a significant increase in livestock prices earlier in the year as the news of the problem and the fears about the problem increased and those have come back down also.

So there does seem to be a bit of a delayed impact in what's happening in China.

Part of that is that there really is a lot of uncertainty about how much loss of herd size there has been.

Some is that the existing herds both within China and throughout the world are growing to higher weights and those increased supply is coming out of frozen meat stocks and so on, that is limiting the supply tightness.

So on a short-term basis, we definitely haven't seen some of the impacts that would have been feared even a few months ago.

And I think as we look longer term, we don't expect that global meat consumption trends will change.

And so if you look on a global basis, we expect that meat consumption will continue to rise in the developing world and return to more normal levels in China, and ultimately, that's what drives global feed consumption and in turn crop input demand globally.

Yes, John, from my perspective, the market's behaving the way it should.

Protein prices are increasing and other markets are compensating.

So we're not factoring or forecasting a significant reduction in global grains and oilseeds and therefore crop input.

Our next question comes from Christopher Parkinson with Crédit Suisse.

Can you just talk a little bit more about your outlook for ammonia from both an ag perspective as well as industrial?

Just do you have any strong views on the U.S. and/or Caribbean market developments for the second half of 2020?

Just any comments on that operates would be appreciated.

Chris, Raef Sully can answer your question.

Hey, look, I'm not sure if I've got too much color to add to what I mentioned previously.

Again, just to start on a global perspective, merchant available ammonia, the supply of that is being gradually decreasing compared to where it was 3 to 4 years ago.

The global market is growing at 2 million to 2.5 million tonnes a year.

So I think -- and we're just seeing Tampa roll from $215 to $215 in August.

Obviously, we're waiting to see what happens next month.

But there should be a tightening globally in ammonia.

Urea continues to be tight -- tighter globally.

Again, when you look at the projects that were in the market for additional urea and ammonia 3 to 5 years ago, we just don't see that overhang today.

There's much less supply coming on, and so, again, the market is tightening.

Yes.

Chris, from my perspective, the midterm here -- the here and now, I think, Raef covered it very well, but long term, we're constructive on nitrogen.

Most of the major global supply now is in the market.

The demand continues to grow at historical demand growth rates, and we think that there's going to be a significant tightening over the next couple of years.

And so that's why when you look at what we're doing from an allocation of capital perspective, we have some very high return expansion debottleneck-type projects.

They're very small.

They're in multiple plants.

So the risk to do this for us is quite low, but we also think that that's the best way to add low-risk incremental tonnes into the market in the next 2 to 3 years.

Greenfield economics still don't make any sense with today's prices.

So we think that what will happen is that the market will continue to tighten over the next couple of years.

And we're the third largest nitrogen producer in the world, so that's beneficial for us and we have 1/3 of our gas on AECO gas and 1/3 of our gas on NYMEX gas in the U.S. So I think the outlook for us is pretty healthy.

Our next question comes from Adam Samuelson with Goldman Sachs.

Questions in retail.

Just trying to get a little bit more color around the gross margin kind of drivers in the quarter.

I guess, specifically in crop protection and seed, just trying to disaggregate a little bit.

Just market pressures from just acres down versus input costs versus mix on the proprietary product side?

And then just within retail also, just little -- any color on the growth in operating expenses relative to gross profit in the quarter or in the first half?

And I presume there is some M&A that creates noise in that calculation, but do you have color on how that performed?

Yes, Mike, go ahead.

Sure.

So as you can see our gross profit is down on a percent basis year-over-year, and it was an extremely competitive marketplace.

As we talked earlier, the retail channel broadly carried a lot of inventory into 2019.

And when the market didn't develop, Q1 was quiet because it was wet and Q2 continued to be quiet because it was so wet and then acres didn't get planted.

There was extreme competition in the marketplace.

And so when customers were buying, the prices got beat up and it was more competitive and so we saw that in our margins.

The second impact in -- from a margin standpoint from our business is that in the Midwest where we do a lot of custom applications, that was the market that was most impacted by the delay in the unplanted acres.

And when we do custom application, not only do we charge for custom application, but we also see higher margins.

And so just from a mix standpoint, a mix of custom application acres that also had a material impact on our margins in first half.

Now again, as we look to the second half of the year and July specifically, we're seeing margins rebound back to kind of historical norms.

And so we do believe it was a seasonal impact and that will get back to normalized margins going forward.

And really kind of similar in seed.

When there's -- the entire retail channel is prepared to sell 90 million or 91 million acres of corn seed and the same for soybeans, and you drop off 10 million or 11 million acres of market, the market gets more competitive as everyone's trying to get rid of their inventory.

And so that was the same thing that we saw in the seed business.

Again, we're -- overall, we're -- we think we did a good job of not only maintaining our business but growing share, but margins were challenging.

From an OpEx standpoint, look, when we look at year-over-year increase, obviously, wages and then specific investments in digital and supply chain transformation, our core costs were up about $7 million.

Other increases in cost, as you said, is really coming from things like the M&A.

And so there was about $50 million of increased cost coming into this year just from an M&A standpoint of tuck-ins and other businesses that we acquired in the last 12 months.

Our next question comes from Vincent Andrews with Morgan Stanley.

Just looking at your presentation slide, Slide 16 with the corn S&D.

I'm just -- your mid case is for 7% stocks-to-use.

So your high case is 10%, your low case is 3%, right?

And if I look back at the bar chart, last time, we had 7%, corn was almost $7.

And December 2020, right now, I think it's about $4.15.

So why do you think the commodity markets haven't -- the corn market hasn't responded faster to what's happening on the ground.

It's already the end of July.

What do you think the market's is waiting to see if we're really headed to 7% stocks-to-use.

Thanks, Vincent, for the question.

Jason Newton can answer it.

Vincent, it's a great question.

And in our opinion, the market today is trading at an S&D probably more like the high scenario that we showed in the slide deck and there is a lot of uncertainty with respect to both planted and harvested acreage as well as yield.

And so I think there is a wide range of scenarios.

If you look back to 2012, '13 when we had 7% stocks-to-use, that was with an extreme amount of demand rationing and so that's probably more like our low case scenario than the mid-case.

And we are in bit of a different world at this point than we were in 2012, '13 with a larger production base in Brazil.

At that time, you had large production responses from both Brazil and Ukraine and that's stuck around to some extent.

And so it's reduced the importance to some extent of the U.S. on its own.

But I think if you look in any of the scenarios, we'd expect to see a significant decrease in corn ending stocks and stocks-to-use ratio.

And we see that today with where corn prices are, which are in the range of $0.40 per bushel above where they were a year ago, and we saw significantly higher prices even -- even just a month ago.

And so I think from a corn supply and demand standpoint, we're tighter and prices are higher than they were at this point a year ago and is supportive of our acreage outlook for next year.

Our next question comes from Don Carson with Susquehanna Financial.

Chuck, a question for you on phosphate.

On your commentary, you expressed some reservations about the phosphate outlook just due to increased supply from the Middle East and North Africa, higher China exports.

So is this just a near-term weakness that you see, or what's your longer term view?

And phosphate's a relatively small business for you given this outlook.

Any thought just to perhaps exiting that business from a wholesale standpoint?

Don, so our view is that right now there is probably more pressure on the phosphate business than the other businesses, and it is short term.

In fact, the demand growth for phosphate globally looks pretty good.

When you get a little longer-term though, we are still concerned about some of the new supply that is still going to come into the market from the low-cost global players.

So that's a little bit of a different from a fundamental perspective than what we have in nitrogen and potash where nitrogen is behind us, potash is right -- most of it is behind us now, and phosphate, there's still more to come.

So the longer term S&D for phosphate, I think, is a little bit more concerning for us when we look at the outlook.

So to answer your second question in terms of the strategic direction for our phosphate business, we've made some very good moves as part of the merger.

We've went from 3 facilities down to 2. We've expanded some production in those 2 and they're very strong regional players with a good mix of ag phosphate and industrial phosphate.

So we are diversified and consolidated when it comes to the market, but also diversified from the product slate.

And now what we're focused on is just finalizing the synergy delivery.

Remember that at the end of the first quarter, we were at about $620 million of synergies and we still had a little bit to go because we needed to bring up the ammonium sulfate business in Canada.

So that's what the phosphate business team and what the organization is focused on.

Longer term, we'll have to see.

Right now, the business is making a modest return, and I think it fits well with our network and we are using some of the ag tonnes in our retail business.

But over time, we'll have to kind of assess the business, but right now we're very pleased with actually the synergies that we have delivered because the merger has made the business at least now positive from a contribution of a margin perspective.

Our next question comes from Mark Connelly with Stephens.

Chuck, I was hoping if you just bring us up-to-date on private label, where you see the growth from here?

Where you have meaningful gaps in your portfolio and how much of your private label is geared towards row crops?

Mark, Mike can answer that question for you.

Mark, so as you can see in our mix this year, we were focused on selling what we had in inventory, and so we changed the trend line a little bit where we really deinventoried our branded products and that did have an impact on our mix of proprietary.

We also expect that to straighten out going forward because we really do like our proprietary products business, it adds value to our customers and obviously it creates margins for ourselves.

And so we expect that business to continue to have a long runway of growth.

From an active ingredient standpoint, we don't have a lot of holes in our portfolio, and so we're not looking to add a number of new products from a crop protection standpoint, but we continue to look for other areas to grow that business.

Seed treatments, microbials, in that part of our business, we do see long-term growth in our proprietary products business.

And so that's kind of where we're focused, Mark.

We don't really look at it as a private label business.

This is a value-added business where we're bringing unique products to our customers.

Our next question comes from Jonas Oxgaard with Bernstein.

I've been trying to wrap my hands around your Brazil retail strategy and I'm at little bit of a loss.

My understanding of Brazil ag is that it's really a large inland market without any retail presence and then a coastal market with a lot of retail, but with 0 profitability.

And so neither of those 2 seems to fit with your U.S. retail strategy.

Can you expand a little bit on what you're trying to do in Brazil and how that fits with the rest of you?

I'll take the question and Mike can add any comments after.

Certainly, if you look at Brazilian agriculture and even in this first half of the year, we would have loved to have a bigger retail business in Brazil.

So it does help from a diversification of our business and the strategy.

But we've been in the Brazilian market now since 2012 and we've been operating what I would consider to be Nutrien's full service retail business in the South with great success.

And by that I mean, we've grown our sales year in and year out and our margins are almost equivalent to the United States.

So we believe that our offering would be unique as you mentioned, but value enhancing for both Brazilian farmers and for Nutrien shareholders, and so that is really the overall goal is to bring something different.

Our retail business would be different in Brazil, but we think there is a lot of value that can be added and our plan now is to prudently grow our retail footprint through a series of acquisitions and greenfield builds, which we have several under construction now to enter the market.

Because the market, we want to be cautious and we want to make sure we get this right, but certainly what we've seen with the pilot program as I will call it, since 2012, is that there is a lot of value creation potential with a full service offering of not just fertilizer, chemistry and seed, but agronomic knowledge and high technology.

Mike, anything to offer?

Yes, a couple of things.

So Jonas, to your point, we're not looking to copy what's already happening in Brazil.

If you think about it from a farmer's point of view, they've got somebody calling on them to sell them fertilizer, somebody else calling on them to sell them seed, somebody else calling on them to sell them crop protection products and even within crop protection there is a Bayer channel and there is a Syngenta channel and there is a BASF channel.

What we've done is we -- we're bringing whole acre solutions to the growers, and that's our model that we're bringing to Brazil.

We've been successful with that model in every one of the other markets that we operate in.

And as Chuck said in the pilot that we've been running in Brazil for the last 6 years -- 6, 7 years, we've been successful with it.

And so we're looking to bring full-service whole acre solutions where we can service customers both from a fertilizer, a seed and a crop protection standpoint and again -- and really serve them what they need on their farm to maximize yields and to minimize risks.

And so that's our model and that's what we're building right now in Brazil.

Our next question comes from Michael Piken with Cleveland Research.

Just wanted to talk a little bit more about kind of the global cost curve for nitrogen and what type of impact you might -- think that, that will have in terms of where prices can go.

And then secondarily, some of the nitrogen or urea plants down in China, you have a chart in your slide deck on Page 20 that shows some of the capacity closures.

Like how much of the capacity closures could come back online theoretically?

Mike, well, Jason Newton can answer your questions.

Michael, yes, obviously the evolution of the cost curve in nitrogen in 2019 has been negative for prices, especially in Europe that the Hub-based prices are down significantly from where they were a year ago, and that's pressured particularly ammonia UAN prices, but also urea.

But for urea, you mentioned that in the second part of your question, I mean, if you look Chinese costs year-over-year, they're down, but pretty marginally.

But if you look at prices both in China and the rest of the world, they are up.

And so the profitability levels have increased in China and production levels have stayed higher as a result, and that's part of the reason why they've had more supply to increase exports and why we increased our range of exports for Chinese urea in the second part of the year.

Second part of your question on whether they can bring these plants back on stream, we really haven't seen that yet.

And I think a lot of the plants were shut down in not great condition and require significant investments in environmental controls in order to start back up as well as additional investment because of the condition that there are shut down in.

And for the last period of time before they were shut down, they were really run without any maintenance and so these plants require investments.

And while the plants today are making money at current levels and operating rates have increased with the existing production base, we don't think there is enough there to justify investments in these plants at this time.

And really we've seeing that.

If you look at where production rates are over the past couple of years, they've really peaked out at similar levels in 2019 as they did in 2018 and just have held higher levels for longer periods of time.

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

Bayer indicated this morning that the dicamba beans out there, a little more than half of the soybean market in the U.S. Can you just give us an update on what you're seeing in terms of dicamba drift?

What kind of a liability is that for you?

And it doesn't appear that you experienced the same pricing pressure that they did.

Mike Frank, go ahead.

Yes, Steve.

Yes, the Xtend soybean technology would also represent about half of our mix, probably -- or maybe even a little bit more than half.

So it's a big part of our soybean sales.

Look, as I've said, it was a very competitive marketplace this year.

And so I haven't seen what they reported, but prices were under pressure.

But again, we believe we performed very strong in that challenging market.

In terms of the stewardship with dicamba to apply over Xtend soybeans, it's a very important issue.

Our custom applicators are very well trained.

We make sure that they know exactly what to do.

We record the wind.

We look for inversions and we make sure that when we're applying dicamba over the top of Xtend soybeans, that the product is hitting the intended target.

And so we haven't seen an issue with that.

From a weed control standpoint, dicamba is doing a very good job of controlling the weeds that they're -- that it's being targeted for.

And I would say our customers are very satisfied with the technology.

Our next question comes from Jeff Zekauskas with JPMorgan.

It's Silke Kueck for Jeff.

I have a two-part question, but they are both quick.

The first one is, given the stage of like where corn stocking is and where soybean pod setting is and everything being delayed, is there a scenario where the harvest could be late, and if that's the case, is that factored into the bottom end of your guidance?

And my follow-up question is, is I was wondering what your expectation for North American potash prices are sequentially in the second half based on success of the summer fill program.

I'll have Susan Jones talk about second half potash prices and then I'll address the harvest delay question.

Yes.

In terms of the second half potash fill program, we're about 50% committed for the second half.

So that answers the question in terms of how we've set it with summer fill.

It's about 50% of the volume.

And just as a reminder, we do have industrial potash and specialty that flows through as well.

Yes.

And then just to your question on corn and late harvest in our guidance assumptions.

So the short answer is the low end of our guidance still assumes that we have a fall application season.

It doesn't have to be a normal fall application season, but it can't be what we saw in 2018.

The other thing that I would say is that what we're seeing today from a retail perspective in Q3 is supportive of, say, the upper end of our guidance range.

So there is a scenario where we believe we can get to the upper end of our guidance range and then the lower end of our guidance range, what I'd say is that it's absolutely needed that we have a fall application season and -- but it doesn't have to be a normal season, it just can't be like last year.

Thanks, everyone.

Thanks for calling in.

And if you have any other questions, IR is ready to answer on the phone.

Thank you.

This concludes today's conference call.

You may now disconnect.