Nutrien Ltd.

Greetings and welcome to Nutrien's 2020 second quarter earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. 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 Ferrara, our CFO, and the heads of our three 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 McGraw.

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 that food is 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, nutrients second quarter EBITDA was higher than the combined total of the next four largest crop nutrient companies. We also generated $1.6 billion in free cash flow this quarter, aided by strong working capital. I take three things away from our results today. First, the strength and performance of our retail egg solutions business and the benefits of our growth strategy. We generated nearly a billion dollars in EBITDA on 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 on-stream 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 markets. 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 egg solutions business delivered impressive EBITDA growth of 20% compared to last year, despite lower than expected US seeded acreage. Three quarters 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 on the first half of 2020, and we continue to be ahead of our RealCo synergy targets. Total Egg Solutions EBITDA margin exceeded 10% in the first half of the year, as gross 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 US 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 six 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 TechAgro acquisition and within North America with the recently acquired AgBridge, which provides valuable data transfer and management capabilities for equipment to our central data network. This startup 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 equipment. Shifting the 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 cast cost of product manufactured was $52 per ton, 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 ton 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 down time 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 a million tons 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 in potash segments, and we have raised expectations for phosphate. A few additional comments here on the ag market and fertilizers. The downward revision to the USDA's corn and total acreage has reduced carryout levels in stocks to use estimates and improve the outlet for the 2020-2021 crop year and farmer sentiment. Low crop production combined with a 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 planted 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 to 67 million tons, 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 costs 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.