Nutrien Ltd. (NYSE:NTR) Q1 2024 Earnings Call Transcript

Nutrien Ltd. (NYSE:NTR) Q1 2024 Earnings Call Transcript May 9, 2024

Nutrien Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to Nutrien’s 2024 First Quarter Earnings Call. [Operator Instructions]. I would now like to turn the conference over to Jeff Holzman, Vice President of Investor Relations. Please go ahead.

Jeff Holzman: Thank you, operator. Good morning, and welcome to Nutrien’s First Quarter 2024 Earnings Call. As we conduct this call, various statements that we make about future expectations, plans and prospects contain forward-looking information. Certain 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 quarterly report to shareholders as well as our most recent annual report, MD&A and annual information form filed with Canadian and U.S. Securities Commissions. I will now turn the call over to Ken Seitz, Nutrien’s President and CEO; and our CFO, Pedro Farah, for opening comments before we take your questions.

Kenneth Seitz: Good morning, and thank you for joining us today to review our first quarter 2024 results and the outlook for our business. Nutrien delivered adjusted EBITDA of $1.1 billion in the first quarter, supported by improved crop input margins, increased fertilizer production, higher sales volumes and lower operating costs. Nutrien Ag Solutions adjusted EBITDA of $77 million was well above the prior year, driven by strong grower demand and a normalization of margins in North America. Retail crop nutrient sales volumes were up 17%, and per tonne margins increased by more than 15% compared to the compressed levels in the first quarter of 2023. We continue to grow our proprietary crop nutritional and biostimulant gross margins through differentiated product offerings and expanded manufacturing capacity.

These high-value products enhance margins for Nutrien and improve quality and environmental performance for our growers. Gross margin for crop protection products increased by 12% in the first quarter as margins in North America recovered to normalized levels. We continued to see pressure on crop protection margins in Brazil due to the persistence of high inventory levels in the channel. We reduced our crop protection inventory in Brazil by approximately $150 million over the past 12 months, and we’ll continue to tightly manage purchases as the market stabilizes. Our Australian retail business delivered strong results and was a significant contributor to our first quarter retail earnings, highlighting what are the advantages of serving growers in diverse geographies.

First quarter earnings for potash, nitrogen and phosphate were down from the prior year due to lower benchmark prices. However, our results reflect progress on a number of operational initiatives that contributed to higher operating rates, increased sales volumes and lower costs. In potash, we increased production by 15% year-over-year and lowered our controllable cash cost of production to $56 per tonne. We continue to advance automated mining initiatives that are providing safety and productivity benefits for our operations. North American potash sales volumes increased by more than 50% compared to the prior year supported by low channel inventories and more normal buying behaviors. We achieved this volume growth by flexing our granular potash production capability and leveraging our extensive North American distribution network.

Offshore potash sales volumes were up 18% in the first quarter, driven by strong demand in key international markets and improved supply chain performance. We increased nitrogen and phosphate production despite some weather-related outages, leading to higher sales volumes compared to the prior year. We adjusted our nitrogen production mix to optimize margins, resulting in increased downstream sales of urea and nitrogen solutions in the quarter. To summarize, we are encouraged by the strength of demand and continued market stabilization that we saw in the first quarter. Our results demonstrated the capabilities of our flexible, low-cost production assets and downstream distribution network to efficiently supply crop inputs to growers around the world.

Now turning to the market outlook for the remainder of 2024. U.S. corn and soybean planting has progressed in line with historic average levels and fertilizer application rates have been strong. Wet weather has recently delayed field work in some parts of the Corn Belt. And combined with production concerns in other key global growing regions has provided support for crop prices. In Brazil, crop margins for 2023 planted crop were compressed, which impacted grower sentiment. Prospective soybean margins based on 2024 prices and projected input costs are currently well above 2023 levels, which is anticipated to support Brazilian planted acreage and crop input demand in the second half. Global potash supply and demand is relatively balanced to begin 2024, and we maintained our full year global potash shipment forecast of 68 million to 71 million tonnes.

North American demand has been strong, and we believe distributors will attempt to end the spring season with limited inventory, which would support healthy engagement in the second half. Brazilian potash demand has strengthened in the second quarter, and prices have increased by approximately $30 per tonne over the past 3 months. We have seen good movement to Southeast Asian markets to start the year supported by lower inventory levels and favorable economics for key crops such as palm oil and rice. Standard-grade potash prices in this region have recently softened due to a seasonal lull ahead of anticipated contract settlements. In China, there has been a step change in potash consumption, reflecting strong affordability and as part of a long-term strategy to increase domestic food production.

China potash consumption increased by around 2 million tonnes in 2023 to over 17 million tonnes. At the same time, China’s domestic potash production declined by around 1 million tons. We believe these factors are behind the push to maintain higher port inventories and an increase in strategic reserves. Global nitrogen markets have fluctuated in 2024, driven by seasonal buying patterns, production outages and uncertainty over Chinese urea export restrictions and India’s import requirements. The U.S. nitrogen supply and demand balance remains relatively tight, in particular for ammonia and UAN, with net nitrogen imports down 21% on a fertilizer year basis compared to the historical average. We expect in-line nitrogen prices to remain firm through the spring season and then follow the typical seasonal reset for summer fill.

North American gas prices are advantaged compared to Europe and Asia and based on forward curve, we anticipate this favorable position to continue on a multiyear basis. I will now turn it over to Pedro to provide more detail on our guidance assumptions and capital allocation plans for 2024.

Pedro Farah: Thanks, Ken. As highlighted in our news release, we have maintained our 2024 retail earnings and fertilizer sales volume ranges as market conditions and operational performance have progressed in line with our previous expectations. For retail, our full year adjusted EBITDA guidance is unchanged at $1.65 billion to $1.85 billion. The midpoint of this range represents an increase of approximately $300 million compared to 2023. Our outlook includes an expectation for increased crop nutrients volumes and margins for our North American retail business in the first half and improved crop input margins in Brazil during the second half of the year. In April, we initiated a process to divest our retail assets in Argentina, Chile and Uruguay.

This region accounts for approximately 3% of our global retail sales and around 2% of adjusted EBITDA. The decision reflects our focus on core geographies and actions that enhance the quality of our earnings and cash flow. Our 2024 retail guidance reflects a full year of earnings from these assets as we currently do not have a time line for completion of the divestiture. We maintained our annual potash sales volume guidance range of 13 million to 13.8 million tonnes and expect a more even split between first and second half compared to 2023. We have taken proactive measures ahead of potential Canadian rail import strikes, but it a labor disruption, we could see an impact on second quarter sales volumes. Our nitrogen sales volumes guidance remains in the range of 10.6 million to 11.2 million tonnes.

At the midpoint, this represents an increase of approximately 500,000 tonnes [indiscernible] last year with the majority of this growth planned for upgrade prices such as urea and nitrogen solutions. We benefited from lower North American natural gas in the first quarter as we are likely hedged coming into the year. With the softening in prices during the first quarter, we saw an opportunity to handle a portion of our North American natural gas requirements for the remainder of 2024. Total planned capital expenditures of $2.2 billion to $2.3 billion is projected to be down $400 million compared to 2023. This total includes investing capital initiatives that drive organic growth in retail and operational improvements in potash and nitrogen. The focus in retail is to further expand our proprietary products portfolio, drive retail network optimization and enhance our digital capabilities.

In addition, we will continue to evaluate tuck-in acquisition opportunities in North America and Australia. The majority of planned investment capital in our of operations are related to mine automation projects in potash and the completion of low-cost brownfield expansions in nitrogen. These investments support the achievement of our mid-cycle sales volume growth scenario and improve the efficiency of our operations. Back to you, Ken.

Kenneth Seitz: Thanks, Pedro. To reiterate, we continue to see strong demand for crop inputs and increased market stability. We delivered solid operational performance in the first quarter and are maintaining our full year retail earnings and fertilizer sales volume guidance ranges. Our focus remains on strategic initiatives that enhance our ability to serve growers in our core markets, maintain the low-cost position and reliability of our assets and position the company for growth. We are hosting an Investor Day in New York on June 12, where we plan to further outline our strategic priorities and capital allocation plans. Registration is open on our website, and we hope to see many of you in person that day. We would now be happy to take your questions.

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Q&A Session

Operator: [Operator Instructions]. Your first question comes from the line of Joel Jackson.

Joel Jackson: Your midterm guidance says you can get to over $1.9 billion retail EBITDA guide, mid-cycle commodity prices. Assuming commodity prices stay where they are now, is that something you can get to in 2025? What do you have to do this year in the business to perceive that. And obviously, you’re going to see a 2% or 3% reduction maybe next year if you do sell the non-Brazilian South America retail assets?

Kenneth Seitz: Yes. Thanks, Joel. So we’ve talked about sort of mid-cycle. It really is — talk about normalization of margins and growth in proprietary products in retail. And that’s where we talk about the $1.9 billion to $2.1 billion of EBITDA in our retail business contributing to that 7 to 7.5 million that we talked about in the mid-cycle. We talked about prices and we can go commodity by commodity. But really, in some commodities, we’re not that — to your point, we’re not far off mid-cycle pricing today. A little bit lower in some nitrogen products today and depending on the region in potash as well. But then it is volume as well. We have our brownfields up and reliability projects that we’re funding in our nitrogen business that from 2023 levels could add 1.5 million to 2 million tonnes ultimately getting to 12 million tonnes.

And that assumes some better gas reliability in Trinidad as well. And as we’ve talked about, we’ve also made the investments to add 1 million to 2 million tonnes of potash over the mid cycle. So you put that all together, you said $1.9 billion to $2.1 billion in our retail business, some incremental tonnes in nitrogen and some gas in Trinidad that gets you to 12 million tonnes of nitrogen stabilization, normalization of prices at the mid-cycle and some extra tonnes in potash, the 1 million to 2 million tonnes, and that’s where we say 7 million to 7.5 million as a mid-cycle.

Operator: Your next question is from the line of Mr. Andrew Wong from RBC Capital.

Andrew Wong: So potash demand in China looks like it may have taken a step change last year. Your peer, Mosaic, also said something similar to your commentary. So what do you think is driving that growth. They’ve recently introduced more into the market, could that be driving yields and demand for more potash? And just given that pretty positive view on China, the demand in China will be stronger than the guidance that you have in your global outlook.

Kenneth Seitz: No, thanks for the question, Andrew. And yes, we would — as sort of the primary driver point to food security in China. And yes, the Chinese know what potash does for yields and for plant health and for disease resistance and have obviously been growing those volumes. But with this heavy focus in domestic food security, we see that in export volumes for other fertilizer crop nutrition as well that — yes, there’s this push on domestic food security. But I’ll hand it over to Jason Newton to talk more about that.

Jason Newton: Andrew. Ken hit it right with the concerns about food security. And if we go back 8 years or so from today, we saw a relatively stagnant demand growth for nutrients in China and subsequently also a plateauing of crop production, and we’re seeing that Chinese supplies of grain have large deficit to demand since 2020 and large import volumes as a result. And since that time, the government’s put a priority in boosting on production. And we’ve seen strong demand across all in China and a [indiscernible] step change in potash that we saw in 2023, also saw a 7% growth in Chinese urea consumption and in 2023 and growth in phosphates as well. And so we’ve seen the increase in nutrient demand to aim to boost crop production and getting — moving back towards that historical trend of growth in China.

Operator: Your next question is from the line of Jacob Bout from CIBC.

Jacob Bout: Wanted to get your thoughts on the growth in potash volumes both in North America and globally. And I guess, barring a strike in North America, first off, the strength you saw in the first quarter, does that extend in the second quarter into the second half? Maybe just talk a bit about your thoughts on end market inventory levels. And then internationally, Belarus and Russia clearly ramped up at or exceeding prewar levels. Do you expect them to be much more competitive as you move through the year?

Kenneth Seitz: Jacob. So yes, with respect to growth in potash in North America and globally, I’ll hand it over to Mr. Tarsi, Jeff Tarsi, our Head of Retail, has talked about what he’s seeing on the ground there, it really is owing to enter in the year with very low inventories and now strong application rates. But I’ll hand it over to Jeff. And then, yes, globally, we talked earlier this year about where we would see. We thought we would see recovery. And indeed, that’s what we’re seeing. But I’ll hand it over to Mark to talk about the global piece. Yes. And I’d just say on the volumes, I’ll hit that one. Yes, we are seeing and have been seeing volume come back into the market. But in terms of competitiveness, we are seeing a higher cost to serve.

And whether that is the Belarusian volumes with the [indiscernible] port, which is delayed, that’s we think another $40 a tonne or whether it’s Belarusian volumes by rail into China. We think if you’re going to going to try and do that, it’s probably $20 a tonne on a delivered basis. So we could talk about shifting trade flows and redistribution of potash on the planet. But actually, we think it’s the opposite. — what you said. We think it’s leading to a higher cost to serve. But yes, just back on what we’re seeing in North America, Jeff.

Jeffrey Tarsi: Yes, Jacob, thanks. And if I look at the North American market in the first quarter, back to the fourth quarter of ’23, we saw strong demand in the fourth quarter. We continue to see strong demand in the first quarter as well. And as I look at it across, really the U.S., I think pricing is attractive to growers. And I think that we’ve seen some really strong rates. That’s not surprising because we pulled a very large crop off in ’23. So we had a lot of replenishing to do. And I know as well as we go forward, we’re expecting our volume to be up on a full year basis and our margins to be up as well on North America on a full year basis. With that, Mark, I’ll hand it over to you.