Nutrien Ltd.

Greetings and welcome to the Nutrien 2024th 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, Vice President of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and welcome to Nutrien's conference call to discuss our fourth quarter 2020 and year-end results and outlook. On the phone with us today is Mr. Chuck McGraw, President and CEO of Nutrien, and Mr. Pedro Farrar, our CFO. As we conduct this conference call, various statements that we make about future expectations, plans, and prospects contain forward-looking information. Certain material assumptions were applied in making these conclusions and forecasts. Therefore, actual results could differ materially from those contained in our forward-looking information. Additional information about these factors and assumptions are contained in our current quarterly report to our shareholders, as well as our most recent annual report, MD&A, and annual information form filed with Canadian and U.S. security commissions to which we direct you. I will now turn the call over to Mr. Chuck Nago.

Thanks, Richard, and good morning, everyone. 2020 will go down as one of the most challenging years in recent history. And as you listen to this call, I hope that you and your loved ones are safe and healthy. As we look towards 2021, we can see prospects of a much better year, both socially and economically. For Nutrien, this includes stronger agricultural and crop input fundamentals than we have seen in some time. Before I review our results and our outlook, I'd like to take a moment to thank all of Nutrien's employees globally for their ongoing dedication to providing farmers the sustainable crop inputs and services they need during this pandemic. The importance of food security and nutrients purpose to feed the world has never been more apparent and important in your dedication and commitment are truly appreciated. That dedication was also evident in the impressive execution right across our businesses in the fourth quarter. We achieved excellent progress across virtually all key operating metrics, including our best year ever for health and safety results. We remain committed to our long-term strategy of both growing our business in a thoughtful and fiscally responsible manner, while also returning capital to shareholders. In this regard, we announced yesterday that we increased our dividend to $1.84 per share on an annualized basis as well as our intention to implement a new share buyback program in 2021. Last year demonstrated the strength of our business and we see three factors that have reinforced our conviction for 2021 and beyond. First, we believe there is a cyclical recovery in agriculture underway, aided by some structural catalysts, including solid growth in food and fertilizer demand, despite the global economic turndown. Second, Nutrien is very well positioned with earnings leverage from higher fertilizer prices and sales volumes growth. And finally, we have plans that will contribute to growth, cost reductions, and the implementation of industry-leading technologies that are within our control and that will further improve our competitive position across the Ag input value chain. Now, turning to the results. Earnings and cash flow in the fourth quarter were up significantly over the same period last year. On an annual basis, we generated free cash flow of $1.8 billion and $2.4 billion after accounting for improvements in working capital. Even at the low point in the cycle, our dividend was at 56% of cash flow, well within our target of 40% to 60%. Nutrien Ag Solutions delivered an excellent fourth quarter, with EBITDA up 29% year over year. This was mostly a result of organic growth, stellar performance in Australia and Brazil, and a wide open fall application season in the U.S. Retail gross margins for fertilizer and crop protection products this quarter were both up significantly due to higher volumes and firm percentage margins. Fourth quarter crop protection percentage margins were slightly lower than last year, due to a mixed effect from the growth in Australia and Brazil, where fourth quarter margins are typically lower than in the US. US crop protection margins were up noticeably year over year, both in the fourth quarter and for the full year. For 2021, we expect further improvement in our crop protection margins across all of the operations. We intend to continue to strengthen our competitive leadership position through innovation in the retail ag sector, offering new products and services and expanding our full acre solutions that generate value for our customers and grow our business and margins. Organic growth in 2020 accounted for about 60% of the $200 million growth in annual retail EBITDA, with the other 40% from accretive acquisitions. Our EBITDA per U.S. selling location increased 11%, surpassing a million dollars per facility and fast approaching our 2023 target of 1.1 million per facility. Our strong organic growth rates were also demonstrated by the size of the increase in our EBITDA margins across all major regions in 2020. Retail EBITDA sales increased by nearly half a percent to 9.7%, while U.S. EBITDA sales increased almost a full percentage point, reaching 10.6%. Retail earnings outside of the U.S. grew by 32% this year and accounted for just over 30% of total retail EBITDA in 2020. We also lowered retail's average working capital by nearly $900 million this year through supply chain improvements. These actions, combined with low-end inventories resulting from the extended fall season, helped drive our retail working capital ratio to a record low 15%, which is even below our 2023 target of 17%. Furthermore, our investments in technology and supply chain enhancements and our ongoing focus on cost reduction also contributed to an improved cash operating coverage ratio in 2020, which declined by one percentage point. This improvement was achieved despite the impact from the RILCO acquisition, which we continue to optimize. Our digital platform sales exceeded $1.2 billion in 2020, more than double our original goal of $500 million and over four times the 2019 levels. We expect to demonstrate continued momentum again this year and are now targeting digital orders of $2 billion in 2021 with a goal of achieving 50% of North American retail sales in the next three years. Moving to our potash operations, Sales volume surpassed expectations in the fourth quarter due to exceptional demand in the U.S. this fall and continued strength in offshore markets. We leveraged our flexible network to meet demand and we were able to increase our volume in North America. On an annual basis, volumes were up 1.3 million tons over last year. From a cost perspective, we achieved record low cash costs of $59 per ton for 2020. We are progressing our continuous improvement in automation programs that will further reduce cost and improve safety in our operations. Similarly, for our nitrogen business, we saw excellent sales volumes both for the quarter and the year. We increased our nitrogen sales volumes by 700,000 tons in 2020 due to strong North American operating rates and benefits from our de-bottlenecks and optimization projects and good agricultural demand. These factors also contributed to a significant decline in our controllable cash cost position. In addition, as part of our ongoing portfolio review, we sold our 26% equity position in the Mobco nitrogen facilities in Egypt for $540 million, as we believe we can reallocate this capital to higher return usage. Shifting to the outlook, the setup is excellent for the spring season. in North America, assuming we get normal weather. We could be seeing the start of a multi-year cyclical recovery in agriculture and crop inputs. Crop prices have improved for several reasons. While recent crop yields in North and South America have been slightly below trend, the major factor has been stronger demand, which we believe is more structural in nature. China is importing more grains and oilseeds to help ease food inflation as domestic corn prices are over $11 per bushel. We believe that China will need to rely more heavily on crop imports going forward as they transition their hog industry to professionally manage large-scale operations utilizing feed rations as they rebuild their herds following the devastation caused by African swine fever. We also see the potential for increased demand for crops in the future for use in biofuels to meet climate change objectives set by many countries around the world. In response to higher crop prices, we expect higher planted acreage globally. In the US alone, we anticipate total planted acreage to increase by approximately 10 million acres. With strong crop prices and the highest US grower margins in at least seven years, there will be strong crop input spend in 2021, which is supported by our level of customer prepay and soil sampling activity. Our annual guidance is for adjusted EBITDA of $4 to $4.5 billion, with all business units expected to achieve significantly higher year-over-year growth. We have good line of sight to a strong first half of 2021, and we'll continue to refine our outlook as we get more insights on the second half of the year. Nutrien Ag Solutions expects to benefit from higher planted acreage, increased discretionary spend in north america and continued growth in australia and brazil for potash prices are firming in every market the u.s has seen the strongest price rise so far but brazilian prices are now transacting at three hundred dollars a ton in southeast asia standard potash prices have lagged the increase seen elsewhere as they often do in a rallying market however we believe prices will firm further in the coming weeks and could approach $280 a ton in certain regional Asian markets. We continue to fill our order book at higher price levels, and we are fully committed on domestic and international sales through April without positioning or selling volume to India or China. Our 2021 sales volume guidance is for 12.5 to 13 million tons, and we expect to match strengthening market conditions. In nitrogen and phosphate, prices and demand and demand are being supported by stronger demand from higher crop prices and improved industrial conditions, as well as a higher cost curve. We are also constructive on these markets in 2021. 2021 will also be a significant year from an ESG perspective for Nutrien. We will unveil a comprehensive long-term strategy with performance metrics in the first half of the year, which will demonstrate our continued leadership in this area. In regards to our new carbon farming program, there has been an overwhelming interest in this one-of-a-kind program by growers around the world. We have 100,000 acres lined up for our pilot program across the US and Canada this spring, and we'll continue to work on scaling the program in the future. Nutrien is well positioned to lead in carbon management and its monetization in agriculture with our unique capabilities and expertise, including direct connection to growers and our investment in digital agriculture. We believe Nutrien is the best positioned company in the ag sector to capitalize on improving market fundamentals across the value chain. We have levers to grow our business and our earnings with actions under our control and exceptional leverage to improving market conditions. And as always, we will focus on what we can control and follow through on our commitments. At our recent investor day, we outlined a pathway to generate a billion dollars in value over the next five years that is within our control. This plan, plus the cyclical recovery in agriculture, presents a very compelling value creation opportunity we are currently experiencing. Finally, I wanted to let you all know that Mike Frank has decided to step down as Executive VP of Nutrients Retail Business. On behalf of the entire nutrient management team, we thank Mike for his valuable contributions over the past three years. and wish him all the best in the future. With that, operator, let's open it up for questions.