Nutrien Ltd (NTR) 2020 Q2 法說會逐字稿

Greetings, and welcome to Nutrien's 2020 Second Quarter Earnings call. (Operator Instructions) As a reminder, this conference is being recorded.

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

Thank you, operator. Good morning, everyone, and welcome to Nutrien's conference call to discuss our second quarter 2020 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 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. Securities Commissions to which we direct you.

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

Thanks, Richard, and good morning, everyone. Nutrien's second quarter results demonstrates the strength of our business even during these unprecedented times. The bottom line is at suited as essential, and there is no company better positioned to help farmers meet the growth in global demand. Our adjusted EBITDA was over $1.7 billion this quarter, and we demonstrated significant progress on our strategic and operating objectives. We were able to produce these results despite cyclical weakness in fertilizer prices and global economic uncertainty. In fact, Nutrien's second quarter EBITDA was higher than the combined total of the next 4 largest crop nutrient companies.

We also generated $1.6 billion in free cash flow this quarter, aided by strong working capital balance. I take 3 things away from our results today. First, the strength and performance of our Retail Ag Solutions business and the benefits of our growth strategy. We generated nearly $1 billion in EBITDA in the first half of the year, primarily due to strong organic growth and significantly higher margins. We also had tremendous uptake of our digital platform, which we continue to build out.

Second, we achieved excellent operational results in our potash and nitrogen business units, with strong onstream times and lower production costs, demonstrating that we generate strong cash flows even at the bottom of the cycle.

And third, the fundamentals of the commodity markets are improving, including the agricultural market. There are signs that fertilizer and most crop prices have stabilized and are beginning to recover, and the outlook into 2021 is now more positive.

Let's shift to our results for the quarter and the first half. In the first half of 2020, our Retail Ag Solutions business delivered impressive EBITDA growth of 20% compared to last year, despite lower-than-expected U.S. seeded acreage. 3/4 of the increase was from organic growth as we continue to offer growers new solutions and optimize our business. The other 25% of our growth came from highly accretive acquisitions, including from the Ruralco acquisition in Australia. Our Australian business continues to perform extremely well, contributing around $150 million in EBITDA in the first half of 2020, and we continue to be ahead of our Ruralco's synergy targets.

Total Ag Solutions EBITDA margin exceeded 10% in the first half of the year as growth profit was higher across all product lines and total gross margin percentages improved. We also lowered operating costs as a percentage of gross margin, achieved efficiencies in working capital requirements and surpassed $1 million of annual EBITDA per U.S. location, as well as making solid progress towards all operational targets set at our last Investor Day.

We continue to make great strides in the adoption of our Ag Solutions digital hub. On a year-to-date basis, sales through the platform surpassed $700 million, exceeding our annual goal of $500 million in just 6 months. In the second quarter, 45% of sales available on the platform were ordered online. We continue to build out this industry-leading platform with new functionality and by collaborating with key partners. We plan to launch our new digital seed recommendation tool in the coming months. This is a data analytics decision support tool that helps evaluate seed options, using the best and unbiased information and considers soil, weather and seed trial performance data.

We also continue to grow our footprint in Brazil, with the Tec Agro acquisition and within North America with the recently acquired AgBridge, which provides valuable data transfer and management capabilities for equipment to our essential data network. This start-up company is a small acquisition from a dollar perspective, but we believe that it will help improve our digital agronomy offering for growers and lead to improved utilization and optimization of our extensive fleet of custom application and equipment.

Shifting to potash, the breadth and flexibility of our operations and distribution system was highlighted this quarter. We achieved strong sales volumes for both the second quarter and the first half of 2020 as market demand was brisk. North American sales were the primary driver, but volumes were also supported by improved offshore demand. Our second quarter potash cash cost of product manufactured was $52 per tonne, down $8 from the first quarter and was the best quarterly performance on record. As a reminder, this is a weighted average of our product mix. Excluding white and specialty products, our red standard grade had a cost below $50 per tonne this quarter, ensuring we are at the low end of the potash cost curve.

Moving to nitrogen. North American sales to the agricultural markets were strong this quarter, which helped offset a downturn in industrial demand. Weaker industrial demand impacted global nitrogen prices, particularly for offshore ammonia. We proactively took downtime at our Trinidad facility to help balance regional trade and improve our cost position. We were able to lower our overall cost profile and achieved an impressive 97% operating rate on our North American assets in the second quarter. Much of our business remains among the lowest cash cost and highest margins across nitrogen producers globally. By the end of next year, we also expect to have added almost 1 million tonnes of North American production from brownfield projects and improved operating performance.

Now let's shift to what we are seeing for the outlook. We expect a stable second half of 2020, and we are constructive on 2021 and beyond. As a result, the guidance we provided in May is largely intact, and we only lowered the top end in nitrogen to reflect a modestly slower recovery for ammonia and UAN prices. We maintain guidance for our Ag Solutions and potash segments, and we have raised expectations for phosphate.

A few additional comments here on the ag markets and fertilizers. The downward revision to the USDA's corn and total acreage has reduced carryout levels and stocks to use estimates and improve the outlet for the 2020-2021 crop year and farmer sentiment. Lower crop production, combined with the recovering ethanol market and indications of potentially higher import demand from China has also provided a constructive backdrop for the fall season and into next year.

In Brazil, growers are seeing record crop margins and have forward contracted a historically high percentage of their anticipated 2021 harvest. Brazilian soybean acreage is expected to increase by approximately 5% in the upcoming planting season, and grower sentiment is extremely strong. Solid ag fundamentals and a long runway for growth is the key reason why building our Brazil Ag Solutions business is strategically important for us.

In Australia, moisture levels have improved significantly and grower sentiment is also very supportive. Australian planting acreage is expected to increase by over 10 million acres or 23% and should result in higher crop input demand in the coming growing season. We expect this environment will support good earnings for our Ag Solutions business and global fertilizer demand.

In potash, prices strengthened in most spot markets throughout the quarter and demand continues to be solid. Our order book is fully committed into October, and we remain confident in our full year volume estimates for the global market and our corresponding sales. We expect potash sales volumes in the second half to be strong, particularly in India, Brazil and Southeast Asia. We expect that global demand momentum that started in the second quarter will carry through to 2021, leading the potash supply-demand balance to tighten and markets to continue to recover. Our global potash demand forecast for this year still holds at 65 million to 67 million tonnes, and we expect to see growth from that in 2021.

As we prepare our production network for this demand and take scheduled maintenance downtimes, we do expect our crop cost will be slightly higher in the second half of the year.

In nitrogen, we reduced our full year earnings expectations as prices have been slower to recover than previously thought due to weaker industrial demand. Extremely low nitrogen prices have tested the cost curve, but there is limited new capacity under construction. As the economy recovers, so too will nitrogen demand and prices.

Though these are unpredictable times, one thing is clear. We continue to strengthen our position as an integrated Ag Solutions provider. We made significant progress across virtually all of our long-term operational objectives and continue to grow our Ag Solutions footprint and solutions offering. We are paying a solid dividend to ensure our investors are rewarded throughout the commodity cycle. Our dividend remains within our targeted range, accounting for less than 60% of our expected free cash flow during the cyclically low period and accounts for only about 80% of our free cash flow from our Ag Solutions business.

I want to finish up with some comments related to the environment, health and safety. Nutrien's top priority is ensuring the safety and health of our more than 25,000 employees globally and the communities where we live and work. The company successfully implemented controls and procedures to minimize the potential impact and transmission of COVID-19 at our operating facilities. We remain vigilant in this regard, and the company continues to be fully operational, and our people are doing an admirable job keeping each other safe, while ensuring we operate efficiently and effectively.

Second, Nutrien continues to be committed to improving ESG performance and reporting. We achieved another quarter of excellent results across our key metrics. We also issued Nutrien's first ESG report in April. And since that time, we have achieved significant company and sector rating improvements from a number of third-party ESG agents. We expect this trend to continue over the next year as we lay out our climate and ESG strategy and targets to lead the way for our industry.

In closing, Nutrien performed extremely well across all business units in a difficult and uncertain environment. We are well positioned with a stable and growing dividend, significant free cash flow, a solid balance sheet and end markets where demand continues to increase. Now more than ever, we are proud of the significant role we play in feeding a growing world.

With that, operator, I'll turn the call over for questions.

Operator, are you there?

(Operator Instructions) Your first question comes from the line of P.J. Juvekar from Citi.

This is [Kendall Martha] on for PJ. So just looking at retail, so during first quarter results, you noted that you wanted retail, inventory is pretty low. You expect that they would be low, so you could restock going into the fall. So just given very strong sales in retail in the first half, can you provide a little bit more detail on the inventory situation there, specifically within crop nutrients and crop protection? And would you say they're lower than normal or just about in line with what you were expecting?

Kendall. Yes, I'll have Mike Frank answer the question specific to retail.

Yes, Kendall. So our inventories across our network globally are lower in crop protection and in crop nutrients. In particular, in North America, we did come out of the season with strong sales, as you saw from the report today and overall lower inventory. So we did achieve the operational metrics that we were looking for. And in fact, if you look at our overall working capital metric, we're down to about 18% in our working capital ratio, which is really strong performance for us. And so we're -- if any, we're probably a little bit ahead of expectations.

And just more broadly speaking, Kendall, what I would say is across our ag value chain, so including the wholesale businesses, generally speaking, after 2019, we and the industry had a significant amount of fertilizer inventory because of the poor application seasons we saw last spring and last fall. We're feeling very good. It's part of the reason why we're more constructive for the second half and as we move into 2021, but most of that inventory now has normalized. And in fact, in some parts of the ag value chain, as Mike has alluded to, it's quite thin in terms of our inventory position. And as I mentioned, looking at our order book on a forward basis, our order book is quite full right through the third quarter now.

Your next question comes from the line of Ben Isaacson from Scotiabank.

Nice job on the quarter. Chuck, you guys have spent billions of dollars on physical retail infrastructure, obviously, including your tuck-in strategy. You've now realized, I think, 45% of North American retail sales available were made on the digital platform. As that continues to succeed, just working out backwards, if you're realizing $0.55 to $0.60 on the historical dollar from the physical infrastructure, is that the most efficient use of capital going forward? Is there shareholder value that can be unlocked by consolidating or thinning out the brick-and-mortar business model in retail?

Yes, Ben. So look, we've always said that the digital strategy is -- it's integrated. We call it an omnichannel with the physical distribution network. In fact, we couldn't deliver the great results on the digital platform without the several thousand ag agronomists that work inside at Nutrien and with farmers on a day-to-day basis and, of course, the physical facilities to move to the product. Agriculture is one of these very unique industries where when the season is open and farmers are ready to go to work, we need to get product, people and our assets on the farm in a short order, in a matter of hours.

So we think that the work that we've done on the digital platform is fantastic. We do believe that we're going to change how and what we can offer farmers and make farmers more profitable, help them manage their farms as well as help them kind of maneuver the sustainability world. And that's a big, big part of our investment. But we do think that it goes hand-in-glove with our physical network. In fact, we're very confident, we've seen other players in this industry just have a digital platform and not have the physical infrastructure, and they just cannot be successful, given the demands that are pressed when we're in the heat of the season and the requirements that our customers need.

Your next question comes from the line of Steve Byrne from Bank of America.

Yes. As you noted, the urea prices have really ripped in the last couple of weeks. And if we look into the U.S. Midwest pricing, the urea on a per unit nitrogen basis, relative to UAN and ammonia, is at a real premium. The UAN and ammonia pricing there is near multiyear lows. So curious to hear what your view is for where does that disconnect go from here? Do you think that, that disconnect narrows because the urea pricing is potentially unsustainable, or that you think the UAN and ammonia pricing could rally from here? Which of those scenarios is likely and reflected in your guidance?

Yes, Steve. I'll have Jason Newton to talk about the dynamics between urea, ammonia and UAN, what we're seeing, and then I can address the guidance question at the end. Go ahead, Jason.

Steve, yes, typically, what you see, especially at this time of year, is that the urea market is being driven by dynamics offshore and, in particular, the really robust demand that we're seeing from India. And to date, a little inability for Chinese suppliers to get in on those tenders. And so we've seen a tight global urea market and prices moving up in response. And typically, historically, you don't see the other product prices, ammonia, UAN, moving in tandem unless you're in season. So the spreads fluctuate because the urea price is volatile.

As we get closer to product actually being applied, you expect that those end market prices of ammonia and UAN will move to be more in line with historical levels relative to urea. And I think you've already seen some of the sentiment turning a bit more positive toward the other products because of the strength in the urea market.

Yes. And just to put that together now with our guidance and what we're thinking about it. So look, we think that the crop maturity is quite advanced right now for this time of the year. We are expecting an early harvest and a nice application window for a fall application. So from a demand perspective, and that's clearly what our order book is showing right now, is that we're expecting solid demand. I'd say this is a general comment, not only for nitrogen, but potash and phosphate, which is helpful.

And the reason we trimmed our guidance in nitrogen was purely just on the ammonia and UAN. We just don't think that there's going to be -- because of the economic slowdown and the hit to the industrial demand for nitrogen, we just don't think that there's going to be as much forward momentum when it comes to pricing. But we do think that urea certainly is strong, and there's reasons for that. The supply-demand is quite tight, as Jason has articulated. And what we -- when you look at the bottom end of our range, what we would need is a weather event, so a very shortened application season. And we're not calling for that today, but that would be the bottom of the range. And then the top end, of course, is a nice wide application season and a little bit of forward momentum when it comes to recovery and some nitrogen prices, but not a lot. We don't really need a lot to hit the top end.

Your next question comes from the line of Jacob Bout from CIBC.

My question is on retail margins. So solid improvement, when we look at a year-on-year basis. Can you talk a bit about what drove this? Was it mix, or what else is going on here? What role did digital play in this? And just lastly, what is your ability to improve margins further.

Mike Frank, will you take that question?

Sure. So Jacob, look, our first half was really about driving operational excellence and we focused on organic growth and EBITDA margins, and we executed against that strategy. Our stronger margins are partly a result of mix. And so for example, in Crop Protection, we saw a really strong market for kharifs, in both corn and soybeans, and there's solid margins on those products. Obviously, in crop nutrients, prices were off. But if you saw in North America, we pretty much were able to hold our per ton margins. And so our teams just did a really good job of selling the value of the products, and that drove margins.

I would say, lastly, on the seed side, our seed revenues are about flat. We actually walked away from some of our wholesale seed business, which impacted revenue in a market where there was more planted acres, but it strengthened our margins. And so we just executed across each one of our platforms, and we think that these margins are sustainable. Obviously, the digital platform is giving us more insights in helping us work with our customers to make better agronomic decisions. And it's also simplifying and making the entire purchase process more efficient. And that's also driving some margin efficiency for us. So it's a number of pieces that came together. But Jacob, we think these are sustainable. In fact, we think there's a runway of opportunity ahead to continue drive both growth and EBITDA margins.

Yes. And Jacob, just one further point. We also think there's some further upside in margins, simply because we're still integrating the Ruralco acquisition. That was a large acquisition for us. It was a public company, and we laid out the synergy targets that are going to take a couple of years to accomplish. So as the rest of the synergy -- synergies are delivered, we do think that'll have some upward potential for overall margins because it was such a large acquisition.

So we like what we see. I think Mike and the leadership team of the retail group have done a great job, and there is some upside as we further integrate the Ruralco acquisition into the overall company.

Your next question comes from the line of Joel Jackson from BMO Capital Markets.

I did want to follow-up on some of the commentary on seed margins. It was, I think, a more competitive dynamic in seed this year, especially in soybeans. I think you mentioned your margins were up. And there's also a bit of now uncertainty around what will happen with dicamba use, so I guess the value of Xtend if you don't get new registrations later this year for next year. So I want to -- maybe just a two-part question. How is the seed price dynamic evolving? Do you see more competitive market? And how might that pressure or not pressure margins? And then what is sort of your plans for some of the uncertainty around Xtend and as Enlist is ramping up?

Mike Frank, will you take those questions, please?

Yes, you bet. So Joel, good questions. Look, I think if we just kind of look across the seed industry, if you start with corn, what we saw on unit pricing in our retail business is that prices were up just a bit, about $3 a unit, so less than 1% price appreciation. So it's a competitive market. We didn't see a big shift in trait mix. And so the core market seems pretty stable. Margins are relatively stable as well. And as I just mentioned previously, we walked away from some wholesale business, both in some corn seed, but as well as in soybean seed.

Then more specific to the soy market, it's extremely dynamic, obviously, with the legal issues on dicamba that we were faced with at the end of the application window, those were challenges. But in the end, we were able to get dicamba on most of the acres that farmers wanted to get it down on. Our pricing on soybean seed was really flat. In fact, there was no appreciation or depreciation on selling price. Surely, In the season, there was some really aggressive pricing. We, for the most part, stayed out of that, and then the market came back. And overall, again, we saw a pretty flat pricing and on the retail side, similar to flat margins on soybean.

Now going into '21, obviously, there's a question on whether or not Xtend is going to be reregistered, and so we're working closely with our suppliers, Bayer, BASF, Corteva. We'll be prepared to sell whatever the farmer ends up wanting. We expect that we're going to sell both Xtend and Enlist seed next year. The root question is whether or not there's going to be a registration to allow us to apply dicamba over the top. I think we're going to continue to see strengthening of the Enlist platform. We think it will be -- this year, it was about 20% of our mix. Next year, we think it will be north of 30%. So there's definitely some momentum in Enlist right now. But again, we're kind of sitting back and waiting to see both from a legal standpoint and a regulatory standpoint, what tools that our customers can use and we'll have the available seed to solve them regardless of how these regulatory decisions get made.

Your next question comes from the line of Adam Samuelson from Goldman Sachs.

So the question is on the potash market. And I would love just get your views on China, as we think about the second half of the year and into next. Chuck, in your prepared remarks, I think areas of strength in the potash market, China was notably absent from that list, and just reflect on kind of how the contracts evolved the spring, port inventories and kind of how you think the utility of a China contract kind of works going forward given the experience both this year and the last couple?

Okay. Adam, so look, yes, the market fundamentals for potash, as we said, very good first half. Demand was strong. We're seeing brisk movements. We mentioned -- I mentioned already a couple of times, our order book. And the markets I did call out for strength were Brazil and Southeast Asia and India. And we are holding our overall market demand forecast to 65 million to 67 million tonnes in 2020. And certainly, we think that in 2021, the market will grow again.

Specific to your question on China, we do think that shipments to China in 2020 will be down, and that's built into our overall forecast and the numbers we provided. It's clear that they drew down their inventories. They tapped their strategic reserves to gain leverage in the last contract and they won't be able to do that again this year, unless those shipments are significantly higher than what we predict. So I'm not really overly concerned about the port inventories. I think there's some gamesmanship happening here. And we view overall inventories in China, so not just the port, but in-country to be actually reasonably tight because the fundamental demand for potash in China, we think, grew year-over-year. So we're feeling very good about the overall potash market, China included. If we can get to a point here where we continue to see solid demand in 2020, I think it sets up for another growth and good year in 2021.

Your next question comes from the line of Duffy Fischer from Barclays.

Two questions. First one is, there's been a couple of news article about COVID maybe hindering the overall ability to pull in the crop this year and to prep for next. So just with all your touch points in the field, do you think COVID will be an issue this fall on kind of a macro basis for North America?

And then the bigger question is, we're about a decade into the push into digital. It was about maybe 7 years ago or so, that Climate Corp. got sold, which is when I think it came to investors' minds how big this might be. Originally, people thought it was going to be revolutionary. You might have one winner. Obviously, none of that has really played out. If anything, it's been evolutionary to kind of nonexistent with what we see from the outside as analysts looking at the numbers for the company. So one, what's gone wrong with digital? What didn't happen over the last 5 to 7 years that was supposed to? Two, can we crack those nuts going forward? And do you see digital becoming kind of revolutionary? Can it really move the needle at some point? Or will it continue just to be evolutionary in your mind?

Duffy, what I'll do is I'll have Mike Frank give a perspective because he's closest to the farmer, on COVID and the harvest. Mike, please feel free to comment on your views on digital, and then I can come back to that as well.

Yes, you bet. So Duffy, look, I wouldn't anticipate any issues getting the harvest off. I mean if you think back to kind of middle of March when COVID, the pandemic, and the concerns were really ramping up, that obviously was right in the busy time of farmers in North America getting the crop planted. And firstly, our employees on the front line, they didn't lose a beat. Every day, they came to work, and they focused on making sure they were safe and the customers were safe and very importantly, making sure that our customers were making the right decisions. And so I think it's going to be the same thing as the crop comes out. Farmers will get into the field, they'll harvest. Grain elevators will operate, and I wouldn't anticipate any material issues from a COVID standpoint.

Now, good question on digital, revolutionary versus evolutionary. Look, our focus on digital has been very pragmatic. And it's really about what we can do as a retailer based on the breadths we have and the focus and the value that we add in the value chain. So we're using our tools, our digital tools to help our agronomists and our customers make better agronomy decisions. And we're doing that with seed. We're doing it with fertilizer, variable rate applications. And I would say that those tools are working extremely well and are adding value to our customers and to our business.

We're also now using our digital platform to help our customers plan ahead. And so doing complete crop plans across their entire farm, input by input, ultimately creating a business plan and then being able to execute that business plan as the season plays out, and all of this being done digitally ultimately streamlines the entire operation from our perspective in terms of how we work with our customers. Because once you plan ahead, then you can basically execute on that plan. And again, it's as simple as going into the -- into our digital hub and ordering the products, whether it's our customers doing that directly or our sales agronomists on their behalf.

The other thing I would say is, we're adding new features, really, month by month. And Chuck talked about this in his prepared remarks. This new seed selection tool that we've just rolled out will be the industry-leading seed selection tool. We'll have all of our seeds that we offer to our customers. And we've got an incredible database of both research and plot data and public trial data, crossed by weather and soil environment. And so we'll be able to help our customers make really good ROI decisions on seed selection. We'll be able to get access to the best financing programs through that same tool and then, ultimately, order the products. And so again, not only does it help from an agronomy decision standpoint, but it's incredibly efficient for our customers and for us.

And so we think that's how this continues to play out. And so I don't know if that's evolutionary or revolutionary, but it's making us help our customers make better decisions, it's making us a stickier supplier to them. Our organic growth is being driven in part because of our digital tools, and that's making a big difference in terms of our overall performance. And so we see digital as a very important tool in our retail business going forward.

Lastly, I'll just say with our AgBridge acquisition, we'll now be able to stream all of our data in -- geospatially that we're applying fertilizer or crop protection products across our entire fleet. And so that, again, is just going to give us a deeper database to be able to drive even better agronomic decisions going forward. So we're extremely excited about our digital tools today and where we're going. We believe that we're going to continue to invest north of $50 million a year in our digital strategy, and that makes sense for us based on the size of business that we can leverage that against.

Yes, Duffy, just a few other comments to augment what Mike has said is, look, we don't really think about it in those terms. What we do know, though, being so close to the customer as an independent adviser is that the relationship matters. And we don't expect ever that a digital platform or portal is going to replace that. This is a business that has -- for generations, has been built on relationships. And we want to build on, on top of that. And what we're trying to do -- our approach is very different than what you outlined in some of the companies that have tried to do this and probably got less results than they had hoped.

We're really letting our customers guide us. We're not building these things and then expecting them to come and use it and then, of course, pay for it. The seed selector tool that Mike just outlined, that was built because growers can't find a platform where they can get all the seed varieties in an unbiased view. And as a company that is independent and we sell it all, that should be our role. And we do that with our agronomists today, but now we're going to put not only our agronomists, but we're going to have the tool to help growers make these very complex decision. So we are excited about this. And we think, over time, there's going to be tremendous value created for farmers and for our shareholders. But this is an evolution in my humble view. This will not be a revolution.

Your next question comes from the line of Andrew Wong from RBC Capital Markets.

So I just want to ask about, just geopolitical risk at potash, on the upside or the downside. Belarus just had a pretty contentious election. Canada's relations with the U.S. and China are pretty strained. Russia's relations are strained with pretty much many countries. So is there anything we should be watching there in terms of impacts on the potash market, potential tariffs, potential sanctions, anything like that?

Andrew, yes, look, so we are in a world where I don't think we've seen as many geopolitical risks as we've seen over the last 2 to 3 years across the world in multiple industries. So I can't sit here and say, don't worry about it. But what I can say is, look, we're pretty well connected and plugged into at least the jurisdictions where we either produce or we sell. And I think the difference that we haven't seen any, even a hint of discussion in this really important, I think, businesses that we have, whether it's fertilizer or in our Ag Solutions business. And I think that the reasons for that is because these are products that are in high demand. We're talking about the overarching priority being food security. And if governments get this wrong because of playing politics, the first group that gets hurt with be their population or their voters. So I think that -- my view is that the risk is a lot lower than some other industries. And so far, we've seen very, very little, if anything at all, in terms of geopolitical risks that would concern us about altering trade patterns.

Your next question comes from the line of Jonas Oxgaard from Bernstein.

I was wondering about the online sales. You said you grew online sales quite a lot. Can you put that in contrast to the market as a whole? Do you know roughly what the U.S. average is? And as a follow-up question on that, just do you see regional differences between U.S., Canada, Australia, et cetera?

Mike Frank, why don't you take those questions?

Sure. Jonas, so we don't have industry level data in terms of how -- what percent of the overall input market is ordered online, but we know it's very small. It would be in the low single percentage digits. And so outside of what we're doing, which we're doing at scale, there's really no other platform that has the scale and reach that we do.

And so regionally then, Jonas, actually -- so today, our platform is focused on North America. And so whether it's across the U.S. or Canada, we don't see regional differences that way. Obviously, depending on the crop you grow, whether you're growing row crops in the Midwest or vegetable crops in California, the tools do vary, and they're built for purpose. And so we've -- we've built tools that -- and we adjust with the local market conditions.

I would also say, so as we think about the next 12 months, we're -- firstly, we're going to take our digital platform globally. And so we're now in the works of adopting and building these tools and leveraging our platform into Australia and South America. And we would expect by the end of next year, we'll really have the same set of tools for our businesses in those geographies as we have in North America today.

And maybe lastly, and this is just building on what Chuck mentioned here a minute ago, our digital platform doesn't stand-alone. And if it did, it wouldn't offer a lot of value. The combination of our digital platform, the relationships that we have with our customers and the reach that we have and our physical assets, and it's these 3 pillars together that really create the leverage opportunity that we believe we have uniquely in digital, because of our relationships and because of the extents of physical assets that we have. And so I really believe that's why we're able to leverage our digital tools to create real value for our customers and for our retail business.

Your next question comes from the line of John Roberts from UBS.

This is Lucas Beaumont on for John. So I just wanted to touch on your retail acquisition pipeline. So now that you've had a few more months experience with the current disruptions, what are your expectations now to be able to complete bolt-ons in North America in the second half? Given that's traditionally like your higher period of activity, are you expecting things to be lower this year, given like ongoing challenges with due diligence? If that occurs, would we be likely to see high deal activity in the first half next year? Or would that basically push everything back 12 months?

Could you also please discuss how your smaller retail competitors are faring currently? Are they sort of healthy or struggling, and how this is impacting potential opportunities.

Okay, Lucas. Mike Frank, over to you.

Yes. So Lucas, obviously, we've made a couple of nice acquisitions in Brazil. I would call them medium-sized acquisitions. We see more opportunity to continue to do that in Brazil. So I would expect we'll continue to have opportunity in that market, just like we've seen here over the past several months.

In North America, the pipeline has slowed down a bit. We talked about this after our last call, partly because of COVID, it makes the entire sets more challenging. And so we've seen that play out. I think some companies that maybe would have thought about exiting at this time are probably slowing down their plans a bit. So I do think that will impact our deal flow a little bit coming out of 2020. That likely builds opportunity for 2021, just as you mentioned.

Now in terms of how our other retailers doing, obviously, we're still looking at probably a dozen or so deals right now in North America. So we get to see the income statement and balance sheet from a lot of smaller players. And I would say it continues to be tough. I mean there's a lot of value and scale and you need capital to continue to upgrade your -- both your physical assets and training into your people. And we've seen that companies that are subscale are challenged because of that. And so I think that continues to play out, which, in my mind, means that we'll continue to see consolidation across the retail industry for the next several years ahead.

Your next question comes from the line of Vincent Andrews from Morgan Stanley.

Just kind of a follow-up question on the seed adviser platform, this recommendation platform. Curious if you know your customer base in North America, broadly. Does it match with the market shares of the large seed companies? Or are you overshared with the seed companies that you -- with growers that use the seed companies that you sell or versus pioneer, which you don't sell? And I guess what I'm getting at is with the seed adviser, if that adviser makes a recommendation that the farmer should be using, hypothetically, 100% pioneer, and they were using 100% or something else, presumably, you would lose seed sale because they're not going to be buying seeds from you. So just wondering if part of the idea of the seed adviser and being unbiased is to drive more growers into your overall network and not just sell some seeds, but maybe sell them -- all of the other inputs, and I'm just curious how this all works.

Mike Frank?

Yes. Vincent, good questions, a little bit detailed. But here's what I would say. So we have a very broad portfolio of seeds that we sow. We've got our own Dyna-Gro brand, where we have seed in corn, soy, cotton. We sell the Dekalb and Asgrow, we sell some Genta seeds. And we do sell Corteva Pioneer brand in the southern half of the U.S. We've actually acquired some Pioneer dealers in the Midwest. So we do sell Pioneer in select areas, in the Midwest as well. And then, of course, Corteva now has a new retail brand called Brevant, which they're providing us new germplasm to sell-through our platform as well.

So our seed adviser tool will present to our customers those seeds that we have the portfolio, where we can execute the sales. So if it's an area where we're not selling Pioneer, or another regional seed company, we won't be recommending those tools because we can't execute on the sale. But again, as a retailer, there's no retail company that has a broader seed portfolio than we do. And that's one of the benefits that we can take to our customers, that we sell seed from a variety of seed breeding companies and again, those varieties and hybrids that we have available, those are the varieties and hybrids that we'll show in our seed selection tools so that our customers can make the best decision on those products that we can offer them.

Your next question comes from the line of Chris Parkinson from Crédit Suisse.

Great. Can you just talk a little bit more about your nitrogen asset portfolio, how we should be thinking about your changing production over time, including gas contracts, your appetite for additional brownfield and debottlenecks, and even in M&A within the North American or global market?

Chris, I'll have Raef Sully just talk a little bit about the current portfolio platform and the brownfield projects that we've got underway, and then I can answer the larger strategic question. Go ahead, Raef.

Yes. Thanks, Chuck. So look, as you know, our plants are located in 3 different regions. We've got about 1/3 of our production in Canada on AECO gas. It's traditionally been lower price than Henry Hub. We've seen that gap close a little bit, but it's still very, very good cost gas. We've got a little over 1/3 of our production sitting in the U.S. on Henry Hub, and the remainder, a bit less than 1/3, in Trinidad.

You will have seen that we took a plant down in May and another one in June, just based on market conditions. The world's changed a little bit in the last 6 months. We've seen Trinidad go from a second or third quartile to a third or fourth quartile as a the glut in LNG has pushed down prices across the globe, particularly in Europe. Those plants in Trinidad are probably still down until we see market conditions improve.

What we have been focusing on is brownfields. As Chuck mentioned, towards -- we're coming close to being able to put it online close to 1 million tonnes more in North America. Some of that has helped us in this quarter with our record production. We'd like to continue that where it makes economic sense, that will be our focus. Chuck, I don't know if you have any to add to that?

Yes. And then Chris, just the broader strategic comment. So we like the nitrogen business. We're a top 3 producer globally. I think we're a strong operator. As Raef mentioned, we've got a good gas position. And if you look at some of our margins, there's some of the highest in the world based on how we operate our networks. I think the industry itself, it's the most -- as you probably know, it's the most fragmented industry that we certainly operate in. And I think we are a believer in consolidation. We like consolidation. We think consolidation drives cost efficiencies. And in a business, cost is everything.

So we would be always looking for a consolidation opportunity. But what I'd say right now is that our primary focus is the way Raef has described it, we've got about 1 million tonnes that's going to -- we've already seen some of that this year. But by the end of next year, we'll have a total of 1 million tonnes of incremental capacity, which I think is great. And we'll continue to look for both brownfield opportunities but also M&A opportunities, but they have to make economic sense.

Your next question comes from the line of Steve Hansen from Raymond James.

You've already described a number of different initiatives around M&A and retail and digital strategy expansion. I'm just curious, Chuck, how you think about all these opportunities relative to your own stock right now in terms of capital deployments. Stocks not trading at extremely lofty levels. Do you think about share repurchases being a priority through the back half of this year and into the next? Or do you feel like the opportunities are still better on the internal side?

Steve, so from a capital allocation perspective, what I'd say is as we look forward, some things haven't changed, and we're going to keep an eye on some other things. Obviously, for us, we want to make sure that our assets are very safe and reliable. And so we would allocate capital to sort of sustainability of our assets. The balance sheet, of course, we've got a strong balance sheet. I think Pedro and the finance team of the company has done a great job. And we want to ensure that we have maximum financial flexibility with that balance sheet. We consider it to be a core asset for us as we forward.

And then the dividends. So the dividends, as I mentioned in my prepared remarks, we like having a dividend policy where the dividend will grow and it's sustainable. And we've always said we want that dividend to be around 40% to 60% of our free cash flow. And at this point in the cycle, that's exactly where it is, but it's less than 60%, which is where we would expect it with the pricing that we've seen in the last few months or so. Now going forward, though, nothing is going to change in those 3 areas. The look forward for us, though, is that we are trying to balance the need to grow the retail platform. We did see some great opportunities in Brazil. I think the Ruralco acquisition, it's been accretive already, and it's got so much potential.

But you're right, when we look at our stock, that would also be a very strong use of capital. So we're going to continue to assess things. I think before we would get more interested in a buyback, it's less about the financial strength of the company, and just a bit more certainty in the forward markets when it comes to not just the agricultural industry, but the overall economic backdrop. So we're going to take a bit of a wait-and-see approach on the buybacks. And of course, we're working through the rest of our growth platforms. But they will be -- buybacks will be part of the decision on any internal investment. We will always compare a buyback to, say, an acquisition in a different country or in the United States, for example, because that's the prudent thing to do, and we've always done that.

Your next question comes from the line of Michael Tupholme from TD Securities.

Can you elaborate on your expectations for industrial ammonia demand in the second half? Talk about what you've seen so far through the first portion of Q3. And then also, what you've got baked into guidance as far as industrial ammonia demand?

Okay. So why don't we have Jason Newton just talk a little bit about the outlook for industrial demand. And then I can try to give you some perspective on guidance. So Jason, go ahead.

Yes, sure. So we started to see some improvements in certain markets, particularly if you look at China, for example, the industrial ammonia use has started to pick up. And in fact, Chinese imports of ammonia were pretty much in line with year ago levels through the first half of the year. And we've also seen demand start to pick up in some of the surrounding Asian markets, which is providing some support to that region.

On the other hand, in the western market, in Europe and North America, the rebound has been a little bit slower. So overall, on a year-over-year basis, we'd expect industrial nitrogen demand to be down about 10%. But we expect agricultural growth to offset that. So pretty flat, overall, nation demand outlook.

And then the way we've built our guidance is we still believe our order book is strong. So there'll be a shift of our product mix into agriculture. And if we get an early harvest and a nice wipe-all application season, we've seen that in historical years. So this -- our guidance really doesn't reflect a volume change. In fact, our volumes should be quite strong. It's just the reason we took the top end of the guidance range down is we just -- we were expecting stronger pricing. But of the slightly softer industrial demand that Jason's outlined quite nicely, we don't think we're going to see the same price momentum that we normally would have in the fourth quarter.

Your next question comes from the line of Michael Piken from Cleveland Research.

Just wanted to ask about your expectations for the fall season. It sounded like you have a pretty optimistic view for retail. And if we do end up getting kind of a bigger fall season, and there's potentially a contraction of several million acres in corn next spring, I mean, what type of retail trajectory do you think we could see from '20 to '21, if we end up with a big spring that we had this year following the weak fall, and then potentially strong fall season.

Mike Frank, do you want to take those questions?

Sure. So Michael, obviously, a lot has played out still this fall. I would say what we saw from planted acres this year, 87 million soybeans at 92 million corn, that's within our normal range. Obviously, cotton was down a couple of million acres. And those are high-value acres for us. And so we would expect, if weather improves in West Texas, that we'll see some cotton acres come back next year. But I'd say, look, it's too early to really forecast how 2021 is going to play out on the retail side. But right now, the way I would think about it is we would expect acres to likely be somewhat similar in terms of total planted acres to what we saw this year.

Obviously, the mix always changes a little bit from year-to-year depending on commodity prices. And if we get a great open fall window, that will obviously help our business this year, and then we'll get busy next spring with helping with the spring needs. So as Chuck said, we're expecting, with the crop progress that we're seeing this year, it's coming in pretty quick. It should line up for a nice open fall window for fertilizer applications, at least in North America this year.

Your next question comes from the line of Silke Kueck from JPMorgan Securities.

I have 2 short potash questions. Can you discuss what effect the repricing of potash tonnes in China had on the offshore potash price this quarter? And have all of the tonnes repriced?

And secondly, I was wondering what your potash forecast is for North America. Like does your 10.9 million to 11.5 million tonne forecast assume that there's a strong post-harvest season in the U.S.

Okay. Thank you very much for the question. Ken Seitz, why don't you take those?

Sure. Thank you, yes. So yes, we did -- with the pricing of the Chinese contract there on the last day of April, we did have a price adjustment in the quarter. And so we've taken all of that. That's behind us in our results.

With respect to sort of the balance of the season this fall, we talked about a little bit on this call, but with the flush of inventories throughout the balance this year, and assuming some good weather in places like China and North America, and certainly, we're seeing strong farmer affordability in Brazil and India. Yes, we expect, as Chuck shared, our guidance of 65 million to 67 million tonnes to be intact. And being committed out into October, we do expect our guidance of 12.1 million to 12.5 million tonnes to remain intact as well, which, as Chuck has shared, I think, positions us well as an industry and as Nutrien heading into 2021.

There are no further questions at this time. I'd turn the call over to Richard Downey, VP, Investor Relations, for closing remarks.

Thanks, operator, and thank you, everyone, for joining us this morning. If you have any other questions, IR is available to answer them.

This concludes today's conference call. You may now disconnect.