Nutrien Ltd.

Q3 2021 Earnings Conference Call

11/2/2021

spk16: Good day and thank you for standing by. Welcome to the Nutrien 2021 Q3 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Jeff Holzman. Please go ahead.
spk06: Thank you, operator. Good morning and welcome to Nutrient's third quarter conference call. On the call today is Mayo Schmidt, President and CEO, Pedro Farrar, CFO, Ken Seitz, Executive Vice President of Potash, Rafe Sully, Executive Vice President of Nitrogen and Phosphate. For retail, we have Jeff Tarcy and David Elser. We also have Mark Thompson, Executive Vice President of Strategy and Sustainability, and Jason Newton, our Head of Market Research. 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 shareholders, as well as our most recent annual report, MD&A, and annual information form filed with Canadian and U.S. Securities Commissions. I'll now turn the call over to Mayo for opening comments before we take your questions.
spk05: Good morning and welcome to Nutrient's third quarter earnings call. Our exceptional results this quarter highlight our team's strong execution significant competitive advantages, and leverage the strengthening market fundamentals. 2021 has been a remarkable year for global agriculture supported by strong demand and tight supply for most crops. Grain and oilseed prices are well above the historic average and food security remains a top global priority. Expect crop input markets will remain tight as we move into 2022 due to the significant supply-related outages and constraints that occurred in 2021. What sets Nutrient apart in this environment are the competitive advantages of our integrated model, our top quartile assets, and the decisive actions that we have taken across each of our business units. In potash, we quickly ramped up production by one million tons to meet the needs of our customers. This represents a portion of our low-cost available production capacity and is optionality that no other potash producer has today. Our low cost and strategically located nitrogen assets are generating higher margins and escalating feedstock costs and production curtailments impact producers in other regions. We continue to make investments to enhance our nitrogen position, including strategically expanding our capacity and completing projects It will support the achievement of our GHG emissions reduction targets and the commitments in our Feeding the Future plan. Our retail team effectively navigated a number of global supply chain challenges by utilizing the scale of our world-class network and strategic partnerships to supply our grower customers with the products and services they need when they needed it. These efforts have resulted in impressive market share gains and margin growth in 2021. Key to this performance is the dedication and focus of Nutrien employees around the world. Extremely proud of how our team has supported our customers in this dynamic market while remaining steadfast on our core values of safety and integrity. Turning to our third quarter results, adjusted EBITDA exceeded 1.6 billion in the quarter. an increase of nearly $1 billion compared to the same period last year. Nine months adjusted EBITDA increased by 61% to 4.7 billion and we generated free cash flow of 2.8 billion over this period. Retail delivered a record third quarter driven by higher sales and increased margins with significant earning growth achieved in each of the geographies in which we operate. Sales growth was supported by excellent agriculture fundamentals and market share gains across all major product categories. Due to our strategic inventory positioning and close connection with our customers via our 3,600 agronomists, we were able to capitalize on the strong demand for crop, nutritional, and fungicides in the quarter. Adjusted EBITDA margins increased by 1.5 percentage point, driven by strategic procurement in a rising price environment and stronger proprietary product results. Our adjusted average working capital to sales ratio remains at an all-time low of 12% due to strategic supplier management. We have grown our retail businesses outside the US with adjusted EBITDA from these regions up $150 million in the first nine months of 2021, accounting for over 30% of total retail EBITDA. We expect our proportion of retail earnings outside the US will continue to grow over the next five years through both organic and inorganic growth initiatives, providing us with further diversity and stability in our earnings base through exposure to geographies that are critical to global agriculture production. Our recent transactions in Brazil are performing quite well, and we have a robust pipeline of targets and a strong team in place to execute our growth plans. The potash team delivered a record third quarter with adjusted EBITDA up 131% from last year. Potash supply is tight and prices have increased significantly in all key spot markets. We expect to surge to an annualized run rate of 17 million tons during the fourth quarter and are on pace for record production and sales in 2021. Due to the flexibility provided by our low cost six mine network, we were able to significantly increase production of granular-grade potash in response to strong demand and higher prices for this premium product. Campotex increased shipments through its Portland and eastern Canadian port facilities in the third quarter to mitigate temporary restrictions on rail service to its port in D.C. Having access to multiple mines and offshore port facilities is a significant competitive advantage for Nutrien and underscores our leadership position in the potash business. Nitrogen and phosphate generated nearly $700 million in combined adjusted EBITDA in the third quarter, supported by higher selling prices across all product lines. These results demonstrate the benefit of our lower-cost nitrogen assets in market production facilities and extensive distribution networks. Nitrogen sales volumes were up 5% in the quarter, despite our production being impacted by weather-related downtime and planned maintenance projects. We completed two large nitrogen plant turnaround projects over the past six months, and I want to thank the teams at Borger and Redwater for their efforts. These are critical sustaining projects that will enhance our safety, efficiency, and reliability for our sites over many years to come. In addition, we completed the first phase of our nitrogen expansion project that were started in 2018 and expect to fully benefit from this expanded capacity in 2022. These are projects that were completed on time, on budget, and we expect will generate very attractive returns on investment. Now turning to the outlook for the business. We have prepared a few slides in the presentation posted to our website to help frame our view of the market and expectations going into 2022. Global grain and oilseed inventory is well below historic levels and crop prices and grower margins remain strong. We expect this will support crop input spending in key regions where we operate. In North America, sentiment remains positive and growers are investing in their soils and actively preparing for next year's crop. We have seen a strong start to the fall application season due to the relatively early harvest and favorable yields in most regions. We expect this robust demand to continue in the fourth quarter, weather permitting, and our retail network is well positioned to meet our customer needs. We expect growers to maximize planted acreage in 2022. as projected U.S. corn and soybean margins are approximately 60% and 35% respectively above 10-year average levels. If planting intentions start to shift before spring, we anticipate future markets will respond to ensure adequate acreage. Growers in Australia experienced a second consecutive year of historically high crop yields and margins driven by ideal weather and higher ag commodity prices. Growers in Brazil are making good progress on planting their soybean and corn crops, with acreage expected to be up 5 to 7 million acres. The strength in Brazilian ag fundamentals is fueling demand for all crop inputs, while with fertilizer consumption projected to grow by more than 10% in 2021. Similar to our third quarter results, we expect to generate exceptional retail fertilizer and crop protection margins in the fourth quarter, due to strategic purchasing in a rising market. And while we expect strong agriculture fundamentals next year, we anticipate retail fertilizer margins will return to more historic levels. As it relates to global fertilizer markets, supply is very tight and prices move significantly higher throughout the year. While there is potential for reduced demand in some markets due to limited supply availability, we believe there's a number of factors that could contribute to an extended period of market strength. Some of these factors are unique to each nutrient, but overall we expect support from higher agriculture commodity and energy prices, limited new capacity additions, and low channel inventories. In potash, global demand has been very strong while supply was impacted by mine flooding, new project delays, and limited availability of most producers other than nutrient to meaningful increased production. We estimate inventory levels in most major markets are below average due to record consumption and limited product availability. Additionally, buyers are dealing with the potential impacts of U.S. European trade sanctions on Belarus, which is impacting vessel chartering and U.S. dollar denominated transactions in other import markets. Prices have moved up in all key spot markets with Brazilian granular potash prices transacting above $750 per ton and recent tenders in Southeast Asia awarded at $600 per ton. We expect contract negotiations with China and India will progress during the fourth quarter and the new contracts will reflect prevailing market conditions. We are equipped and prepared to meet this demand. The nitrogen market has been impacted by the combination of soaring energy prices in Europe and Asia, plant outages, and Chinese government ordering fertilizer producers to halt exports until June of 2022. European gas prices have been trading at around $30 MMBTU, equating to ammonia production costs of approximately $1,100 per ton. This has resulted in at least 40% of European ammonia production being shut down and has increased the need for import. We expect nitrogen markets will remain very tight through the first half of 2022 and there is limited new nitrogen supply expected to come online over that period. We plan to increase our nitrogen production next year by approximately half a million tons through higher operating rates and the benefit of our recently completed expansion projects. We are now fully committed on potash volumes for the remainder of the year and the majority of our nitrogen and phosphate volumes are booked. We expect a normal two to three months lag in our price realizations and anticipate the increase in benchmark prices over the past few months will position us for a very strong start to 2022. We project full year 2021 adjusted EBITDA in the range of 6.9 to $7.1 billion for 2021, which at the midpoint represents a $3.3 billion increase in 2020. The increase in earnings and free cash flow is providing the opportunity to advance our capital allocation priorities. We repurchased 2.4 million shares in the third quarter and returned $900 million to shareholders so far in 2021 through dividends and share buybacks. We plan to significantly strengthen our balance sheet by reducing our long-term debt by approximately $2 billion over the next six months. This will provide flexibility to deliver on future growth opportunities and return of capital to shareholders while reducing our finance costs by approximately $50 million per year. We remain focused on growing our retail business through tuck-ins and acquisitions, building out our network in Brazil. We've announced five transactions in Brazil since the beginning of 2020 and have a good pipeline of accretive opportunities in this market. We are on track to achieve our target of 100 million in run rate EBITDA from Brazil by 2023 and deliver attractive returns on investment. After completing a successful first phase of nitrogen brownfield expansions, we have started a second phase of projects that are expected to add half a million tons of production capacity over the next few years and improve the energy efficiency of our plants. The total investment is estimated at $260 million, providing for some of the lowest cost, most efficient expansion tons in the industry. We continue to progress on previously announced decarbonization projects that are expected to reduce CO2 equivalent emissions by approximately 1 million tons by the end of 2023. Additional free cash flow beyond these identified opportunities will be allocated on a compete for capital basis and we will maintain our disciplined approach. Our board, our leadership team are focused on taking decisive actions to ensure we're positioned to deliver superior long-term value for our stakeholders. We continue to track very well compared to our long-term goals, and we'll provide an update on our targets, our strategic plans, and capital allocation projects and priorities at our next investor meeting in June of 2022. And with that, the Nutrien team is standing by and looks forward to your questions. Thank you.
spk16: At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from the line of Vincent Andrews of Morgan Stanley.
spk19: Thank you. And good morning, everyone. I was just wondering if you can talk about, you know, you mentioned the 17 million ton run rate in potash in the fourth quarter, and maybe you can just talk about sort of what your expectations are for potash production in 2022. And in particular, whether that run rate is sustainable or if that's just something that could be achieved. quickly in a short period of time, but you can't just keep doing it all the way through next year. So if you want to add more capacity for next year, it's a little more of a complex decision. So maybe you could just help us understand how those dynamics take shape.
spk05: Sure. I'd be happy to address that. Very, very good question. You know, one is our run rate is 17 million tons. has been due to the very quick reaction that we had. And I think you'll remember when we understood there was a loss of production on that Friday night. Our potash team, led by Ken Seitz, was able to, over the period of the weekend, identify another 500,000 tons by, you know, labor and, you know, mechanical machinery, et cetera, to be able to address that. And then, frankly, in another week, 72 hours was able to continue that study and that analysis and undertaking, come up with another 500. And that's really what that is, is that standby production that we've been talking about for a number of years. We feel it is sustainable, you know, only affected by turnarounds, necessary maintenance, and that we would do at our mines. But we think about the flexibility and the automation that we have in the six mines that we have, and that – that ability to address the demand. And what I'd like to do is just take a second and ask Ken to talk a little bit about his ability to not only sustain the 17 million tons, but also look toward other opportunities. Ken?
spk04: Yeah, thanks, Matt. Thanks, Vincent, for the question. So just to clarify, the 17 million tons annualized run rate is something that we're doing in the fourth quarter and not suggesting that over the course of 2022, we'd be able to sustain a 17 million ton run rates. We don't have labor or mining machines sitting at the face looking for that big an increase in production. But what we have done in 2021 is ramped up with labor and with mining machines for that extra million tons so that as we head into 2022, we're expecting stable global demand. That's a great thing for the market. And we expect that from a production and sales point of view, Will you know this year will produce around 14 million times and will preserve capacity to do a sort of a similar thing in 2022 that we did in 2021 in other words. To wrap up production again, perhaps by another million times over over this year's production rate so we're preserving that capacity strong global demand next year, but just to clarify that 17 million time run rate is for the fourth quarter only.
spk16: Your next question comes from the line of Christopher Parkinson of Mizuho. Christopher Parkinson Great.
spk18: Thank you very much for taking my question. So to the best of your ability, can you quickly comment on how you believe nitrogen trade dynamics will evolve just given the situations in both, I'd say, broader Europe as well as China, you know, as it sets up for the first half of, you know, 2022? And then also just for China, just what's your opinion on the intermediate to long-term export tonnage, if any at all. Thank you.
spk05: Ray, if you want to take that question, please.
spk07: Yeah, thanks. So, look, nitrogen trade is tight and will continue to be so. It was tight at the start of this year and was exacerbated when we saw energy prices spike in Europe. Now, I think our outlook for energy prices are for them to come back to more normal levels in the next 6 to 12 months. In the US, that would be $3, $3.50. In Europe, in the $8 range or something around that. Even so, while that's been happening, demand is continuing to grow. Just to put some perspective on this, the global ammonia market is about 170 million tonnes, of which about 20 million is traded. That market has been growing at 1.5% to 2% per annum for the last 30 years. is continuing to grow at that pace. That means every year there's two to three million tonnes of additional demand required to be supplied by the market. That demand is continuing. So despite the fact that there's been some curtailments this year in Europe because of the high energy prices, if you look forward for the next three years, you'll see that there are some projects coming on, but those projects do not offset the growth in demand. So we expect to see a good, tight market of nitrogen. through next year and beyond. I'm going to pass it now to Jason, who's got some additional color he'd like to add.
spk23: Okay, thanks, Ray. Just to touch on the trade flow question, it is an interesting and dynamic market to try to project at this point. The situation in Europe with respect to the shutdowns that have taken place, that's obviously in the short term it's been supportive for ammonia imports flowing into Europe. Longer term, you expect that ammonia production will need to come back on, will need to be bid into the market by higher prices. But in the meantime, we're losing nitrate production, and the result of that will be more positive urea imports into Europe. And that's why we've seen strength in global urea prices led by Egyptian prices. In terms of the Chinese exports, We see 2021 exports between four and a half and five and a half million tons. And we know that in the first half of this year, they exported about 1.7 million tons. And that will be down in 2022, just given the export restrictions. Historically, when export restrictions have been put in place, we've seen a weighting of exports from China more in the third quarter of the year, which we expect to be the case next year. And we need to see to balance supply and demand likely somewhere in the 4 to 5 million ton range of exports from China going forward. So without that supply, the market will be relatively tightening. We know the area of supply and demand balance after 2022 tightens globally.
spk16: Your next question comes from the line of Joel Jackson of BMO Capital Markets.
spk14: Good morning, everyone. I'll come back to the potash production commentary you gave. So if I understand what you said, you produce about 14 million tons of potash this year, and you expect to maybe produce 15 million tons next year. That's a million tons more, obviously. And your Capotex partner suggested that demand for potash might grow next year about 1.5%. That's about a million tons. So if I understand what you're saying, if all this is true, are you implying that you would expect to get all the incremental demand next year in potash? You know, Mosaic will have more, other competitors will have more. Or do you have a higher demand growth forecast than that 1.5%? Or is it something else? I'm off base. Thanks.
spk04: Yeah, it's Ken here, Joel. Thanks for the question. So, yeah, just to clarify, we're preserving that production capability. Again, we have stable global demand, we think, heading into 2022. We know that inventory is really and all of the markets that we serve are quite low at the moment. And, of course, we have these supply-related issues in the market. So it's just to say that we have this network of six low-cost mines, and we want to preserve the capability to do what we did in 2021 and potentially do that in 2022. And so, again, we're just formulating our plans now for 2022 as we're watching the China and India markets situation and inventories depleting there, a contract likely to come our way, if not later this year, early next, and formulating our plans. But again, it's just preserving that capability among our network of six low-cost mines.
spk16: Your next question comes from the line of Ben Isaacson of Scotiabank.
spk10: Thank you very much. Good morning. Perhaps a question for Ken and Jason, and I apologize, it's another potash question. We're hearing farmers moan and groan worldwide about high prices, which is nothing new. In potash, while we haven't seen any evidence of demand destruction yet, perhaps a bit of weakness in India, but we haven't really seen demand destruction, but we know prices will eventually soften. So with that context, Can you actually run through what your expectations are for 2022? Ken, you mentioned stable demand. Is it possible to see growth in various regions next year? And in terms of pricing, do you expect to see lower prices in one year from today in key potash markets? Would you be satisfied if Brazil was $600 in a year from now? Thanks so much.
spk23: Yeah, good morning, Ben. Just to comment on the demand expectations and point your direction to slides 19 and 20 in the deck where we do have a couple of slides on grower economics. And I think you hinted at it and we're seeing definitely some resistance in terms of seeing that the higher prices at the grower level. But if we look at the underlying economics of growers and especially in market driven markets like the U.S. and and Brazil is still really positive. In fact, significantly higher than they were a year ago at this time when they were pretty strong. So we wouldn't see in advance of spring any demand destruction in those spot markets and we've seen the market for crop prices be strong and we'd expect it to remain strong through the growing season in order to attract sufficient acreage to balance global crop supply and demand. I think where we've already seen some rationing is in the major contract markets and India is a great example where imports are down year to date because of constrained supply and what that means is that the The inventories as we go into 2022 are relatively tight, and we expect that to present a tailwind in demand. But at the same time, those non-market economies, look at India or Sub-Saharan Africa where there's more subsistence farming, that's where we think that the supply constraints will start to lead to some demand rationing.
spk16: Your next question comes from the line of Stephen Byrne of Bank of America.
spk03: Yes, thank you. So your potash price in the net realized price mind gate was in the low 300s in the quarter. When was that essentially booked? How many months back? And maybe more importantly, as you look forward at your forward sales in fourth quarter and more importantly in the first half of 22, would you say you're your forward sales are more or less than they would have been historically.
spk04: Hi, Stephen. Yeah, it's Ken. Thank you for the question. Yeah, with respect to the lag that you're seeing in realized prices versus posted benchmark prices, given the sort of rapid run-up in potash prices in really all the major markets over the course of the last decade, several months, and that lag is to be expected. And, you know, it could be that volumes are contracted two to three months prior to them being lifted from our minds, which is when we recognize revenue. So that lag is something that we experience all the time and certainly, you know, familiar to our realized price versus revenue recognition. But I can tell you, as we head into the fourth quarter here, we are fully committed. All of our volumes are committed to our customers. And as we head into Q1, we are now placing volumes into Q1. And I can tell you that we're placing those volumes at posted benchmark prices. And so that lag will catch up to the market to the extent that prices are stable, and you'll see that gap close. So Q1, starting to commit volumes at posted prices.
spk16: Your next question comes from the line of Michael Piken of Cleveland Research.
spk15: Yeah, good morning. A question on retail. If you could talk, you know, you mentioned that you're benefiting from some of the markups in fertilizer and crop protection prices that may not continue for next year. But if you could talk just in terms of your expectations for volume growth and retail organically, and then also, you know, just do you think that there are going to be any products on the chemistry side, most notably glyphosate or glucosinate that might be tight, that it might impact the number of acres that are planted either in Brazil or the U.S. Thanks.
spk05: We've got David Elser and Jeff Tarcy on the phone. Jeff, if you would comment first and then follow up with David, please.
spk00: Thanks, Michael. I think Mayo mentioned early on in his comments that we would expect retail margins to especially on the commodity fertilizers, MP and K, to return to something more of a historical nature going forward. But I'd also like to point out the fact that when you look at our margin on a per ton basis, as it relates to fertilizer, our proprietary nutritional products make up 30% of that. And we've had an outstanding year in 21 with our proprietary nutritionals, and we actually expect to see some growth in 22 with those products going forward, which kind of supports the margin side of things. You know, when you look at product-specific, Michael, and how that might relate crops and such, look, we dealt with those challenges throughout 21. We actually weren't alerted to them until about March of this year. And if you look at where we are today, And David can comment after I finish here, but we kind of know what our challenges might be in 22. And the advantage we have is we got about a six month head start on that. And so, as you know, we have a very close relationship between our agronomist and our growers. We've already started. We started the process two months ago. We're sitting down with our growers and when we detail out our solutions, that we build for them. We're building those solutions to circumvent what we anticipate some of those issues to be. I actually think it creates an opportunity for us in 22. With that, David, I'll let you speak specifically to some of those chemistries that we're paying close attention to from an inventory standpoint.
spk01: Yeah, Michael, good question. And, you know, Jeff, you nearly nailed all of it. But, you know, really due to the scale of nutrient egg solutions and the strategic partnerships that we have in the industry and our multi-sourcing strategy from a supply chain perspective, we weathered the storm quite well in 21 and, you know, put ourselves in a position to be ready to be ready for 2022, as Jeff said. You know, we're much more on the front foot relative to understanding what the situation looks like. Hurricane Ida obviously put a little bit of a challenging position in place on glyphosate. Some of the energy crisis is going on in China, you know, continue to put some constraints on certain active ingredients. Glyphosate, as you mentioned, Michael, is one that, you know, was challenging in 21, is going to be a challenge in 22. We know from our seed sales that more area will be enabled for the use of glufosinate and therefore put constraints on supply. As Jeff said, our supply chain organization is directly connected to our sales organization and we have tight communication so we can help agronomists best position our current supply situation as well as bring forward other agronomic solutions to farmers, as Jeff said, to meet the needs, whether it's in weed control, disease control, or insect control.
spk16: Your next question comes from the line of Adam Samuelson of Goldman Sachs.
spk11: Yes, thank you. Good morning, everyone. So maybe a question on capital allocation. I'm just thinking about profitability where we're tracking in the second half of this year and where we'd look to be tracking in the first half of of next year, uh, the EBITDA and the cashflow generation here is very sizable. You're buying back stock. You've talked about a $2 billion reduction in, uh, in long-term debt over the next six months, but can you help us think about kind of what the internal kind of CapEx opportunities would look like where, what inorganic or scope or size of inorganic opportunities that might be out there versus, uh, an acceleration of cash return to shareholders. I'm just trying to think about how these kinds of prices and cash flow kind of get deployed over the medium term.
spk05: Sure. No, thanks for that question. You know, I think what I would point to, and I'll pull in Pedro here in a moment, but when we think about our integrated platform, we have a number of avenues, several, to drive value for shareholders. And I think that, quite frankly, that's evidenced more pointedly this year than ever before. relating to execution. We've been growing the business strategically. You've seen us, you know, down in Brazil and then in the past. Obviously, Australia has worked out very, very well meeting our return standards. And, you know, it's driving value through our entire cycle because when you think about the vertical integration we have between the supply chain in terms of production all the way through the retail and the agronomists in the field providing the guidance to the producers, to our farmers, that can ultimately make them successful in the soil chemistry, it puts us in a really good position to think about strategically how we want to allocate capital to any one of those venues, which we, as even David and Jeff have just articulated, how close we are to every sale of every chemical and every fertilizer. So, Pedro, I'd like you to maybe take a crack at that.
spk17: Yeah, no, thank you, David, and thank you, Adam, for the question. As you put it out, this is a good problem to have right now, especially the strength of our earnings. And we have already distributed quite a bit of the cash flow this year, and you would have noticed that we have done some share repurchases so far. But there are, in addition, a number of different opportunities for investment in the business, as Mayweather has mentioned. in the diversification of retail. We continue to have a very robust pipeline in Brazil. We also have expanded in the past a million tons in nitrogen, and the additional free cash flow that we have are going to allow us to not only do what you mentioned as the de-levering of our balance sheet, which creates options for us for both investments and further shareholder returns through this cycle, but also continue with the same investments in retail decarbonization of nitrogen. We have just completed a successful phase one of nitrogen that added about a half a million ton of nitrogen. We're now embarking on a second phase for nitrogen with another half a million ton. Those projects are very, very profitable. And we are coming at a very good time as well. And for potash, we still have opportunities as well for next gen initiatives and additional projects for cost reduction as well in brown Ground fields are coming at this point in time at virtually no capital, so there will be a while until we actually have to even use capital there. So anything over in addition to that will apply on a compete for capital basis. I think we have enough inside programs right now for the foreseeable future, but we will be coming back to everybody with our plans in next June for the sort of excess capital that we might have at that point in time and how that aligns with our growth initiatives.
spk16: Your next question comes from the line of Steve Hansen with Raymond James.
spk02: Yes. Good morning, everyone. Thanks for the time. Just curious how proprietary products play into the capital deployment strategy here. I'm thinking back to the 2019 acquisition of ActiGo, for example, and wondering if you might also be targeting similar type deals or perhaps even if there might be specific capabilities or product sets you might be looking to target in Brazil. Thanks.
spk22: Hey, good morning, Steve. It's Mark. Thanks for the question. Yeah, so Steve, as you noted, the proprietary products business has been a very attractive platform for nutrient and nutrient ag solutions in particular. We spent many years, you know, over the past decade in North America building out that model, building our level and products business, which is our specialty chemistry and specialty nutrition lines. And then as you noted, which is performing very well a few years ago. And we've taken a similar approach to Brazil as well. So you've seen us acquire Agrochem several years ago to provide us with a platform in nutrition. And we also completed the acquisition of Tech Agro just recently, which provided us with a really attractive soybean seed platform in Brazil. And that's a real differentiator for us when you think of how we've added value through core retail distribution in our business, but also bolting on specialty and products and services that really provide that full acre solution for growers. With the portfolio that we have, we feel we've got a great organic growth opportunity in expanding the penetration of the existing Loveland products portfolio, the active growth portfolio, and then the Brazil acquisitions as well as we continue to grow that network out. So a really good organic opportunity that doesn't require further capital investment. But, of course, as we look to geographic expansion of the retail business over time, it's an area for us that's extremely high margin. It differentiates us at the farm gate. So we'll continue to look opportunistically in that area, as it is, of course, strategic fit. But we're very happy with what we've got today, and obviously it's contributing in a meaningful way to our growth.
spk16: Your next question comes from the line of Jeff. Zakowskis, J.P. Morgan.
spk09: Thanks very much. There are high natural gas prices in Europe, Eastern Europe, and Russia. How much end capacity do you think is offline on a global basis? And in the phosphate area, what do you think China phosphate exports will be in 2022.
spk23: Good morning, Jeff. If we look in Europe itself, the capacity of ammonia in Western Central Europe is about 20 million tons. And we think there's about 40% offline. And so that equates to roughly 8 million tons of ammonia capacity currently offline. And that would exclude Ukraine. And there's additional capacity in Ukraine that's also offline at the current time. As we look toward 2022, in terms of phosphate exports from China, We expect China to be somewhere in the 9.5 million tons of exports this year, but they export a little over 5 million tons in the first half of 2021. And given the constraints right now, in terms of export restrictions, we wouldn't expect them to be at that level next year. And so it's a bit early to estimate where those will be in 2022 and still uncertain how those export restrictions will be applied. We certainly need, from a supply-demand perspective, need volumes of exports to keep moving from China, but exports in the range of 8 to 9 million tons, sort of similar to where they were in 2020, is likely a realistic level given the increased constraints.
spk16: Your next question comes from the line of Jacob Bout, CIBC.
spk20: Good morning. Wanted to go back to that discussion on retail organic growth. And I think same store sales were up a little bit more than 5% year to date. How sustainable is this? And can you talk a bit about, you know, what you've been seeing this year? I know you hinted at, you know, supply chain certainly helped, but How should we be thinking about that from a normalized perspective?
spk05: You know, I'm going to maybe just first comment that we continue to see opportunity in this market. We've, I would say, outachieved our expectation in terms of our ROIC on those. But what I'd like to do then is probably pass that along and have the next leader look at that, Jason. Over to Mark.
spk22: Yeah, Jacob, maybe I'll just make a few comments. This is Mark, and then I'll have Jeff comment from our retail business. So in terms of the organic growth that we've delivered in the business this year, you know, of course, the print was very attractive and strong. I think that's part and parcel of the strong fundamentals that we've seen generally in agriculture. In the market, we've seen strong growth in demand for crop inputs, which, of course, buoys our performance from a same-store sales standpoint. I think as Jeff and Mayo both alluded to in the prepared commentary and some of the earlier remarks, we've also seen share gains across input shelves and made up some attractive ground continuing to build our leadership position in the market, expanding market share across several of the shelves. Jeff, maybe I'll pass it to you to provide a little bit more detail.
spk00: Yeah, sure, Mark and Jason. Thanks. And look, when I look at this business and, you know, organic growth was a tremendous focus for us in both 2020 and 2021. It'll again be at the top of the radar in 2022. And if I look at this past year, you know, I think we've mentioned we've had great success with our proprietary products. When I look a little bit deeper into it, we saw growth in all four shelves this past year with proprietary products, our adjuvants, crop protection, plant nutrition, and seed treatments, uh, revenue increases of 14% gross profit of 21% in that segment. If I look at it from a pure market share standpoint, as, as Mark just said, uh, we feel like we grew our market share in all three of our primary shelves, their fertilizer, crop protection and seed. And, uh, seed and fertilizer somewhere between 40 and 50 basis points. And look, seed has been a major focus for us from an organic growth standpoint. As a matter of fact, that's our largest opportunity going forward from an organic growth standpoint is to grow our seed shelf. And we've got an initiative in place. It's a five-year initiative. We got off to a great start this past year, and we expect to increase that even more in 2022, and that's one of the areas, Jacob, that there's not a supply concern. All indications in talking with all of our major suppliers is that the seed shelf is going to be in really good shape. We actually think we have an opportunity to trade up when it comes from a trait and variety standpoint in 2022 just because of some of the issues that we've seen this past year around disease and corn rootworm pressure and things like that. We're also in an excellent position with both our Dynagrow and Proven varieties as well as it relates to availability for 2022. And we had just tremendous results in what we're seeing coming off right now. So I feel really good about the organic growth opportunities that we still have in the U.S. even stronger in Canada in that market. And obviously Rob and what he's doing in the Australian market and, you know, increasing our proprietary business there as well with it. So we feel real good from an organic growth standpoint. I think you'll continue to see that increase over time.
spk16: Your next question comes from the line of PJ Javakar, Citi.
spk12: Yes, good morning. Just a couple of quick questions. First, for Ron, can you talk about sort of the price mix in seeds? You know, what are the price cuts indicating this year, and where do you see that going into the growing season? And secondly, for Mayo on potash, you know, you ramped up your potash production by 1 million tons, and I guess you have at least 3 million tons of low-cost capacity left. When would you like to activate that capacity if this tightness continues, especially in light of the Janssen project that's coming online in, say, five to seven years? Thank you.
spk05: Thank you. Jeff, I'll let you take the first half, which was directed to you, and then I'll be happy to start on the second.
spk00: Yeah, I think from a seed standpoint and pricing standpoint, we saw modest increases that were released late summer, early fall. and we would expect those increases to obviously carry into the 22 season. We're just getting started really heavily with our fall booking of the seed business, but I think we were probably pleasantly surprised the way the increases came out. Some indications were that maybe they'd be a little bit heavier than they were, but there have been increases across all the major lines for seed and and modest, and I think that speaks well for what we want to do in 2022 as far as increasing our share. David, you might have a few more comments on the CPC.
spk01: Yeah, Jeff and PJ, thanks for the question. You know, when you look at seed price cards, particularly across corn and soybeans, as Jeff said, you know, probably a little surprised on the modest increase. We, on average, sort of three to seven percent across both corn and soybeans. And in terms of our own, you know, proprietary brands, you know, we look to lead or look to follow and be at the top end of that range. So, as Jeff said, teams are out in the process of booking seed now. Farmers are in the process of finishing up harvest and momentum into 2022.
spk05: Coming back to your good question on 2021 potash production, and I'll ask Ken here in a second, but to your good question, we're on pace to deliver a million tons of additional sales, and as Ken indicated earlier, that would be reflected in our guidance of 13.6 to 13.9 million metric tons, and That really is supported by, as I mentioned in my remarks, the six low-cost mines, which really gives us that competitive advantage. But I think as you look forward, there's probably additional downtime. We took in quarter three, and that was we had COVID restrictions, but the mine network is operating very effectively. No doubt we'll expect to take some additional downtime in 2022 because there's always the need to catch up on additional maintenance projects. And then when you think about the Janssen project, and we've commented on that at least a number of times in the past, is if you look at the next nine years and the growth of 2% to 3% in potash demand, so that takes us between 20 to 24 million tons of extra demand in the marketplace. So we really do think that when that Janssen project comes online, maybe seven years, maybe nine years, with 4.5 million tons, that the market will have easily absorbed if not looking for more production. So, Ken, I don't know if you want to add anything to that.
spk04: Yeah, I think just consistent with what you're saying there, Mayo, this year, close to 14 million tons of production, preserving an additional million tons for next year. The market is growing 2% to 2.5% average annual growth rate, so we expect to maintain market share. And so, yeah, we'll be increasing production eventually to 18 million tons, but recalling also that we have an additional 5 million tons of very low-cost brownfield capacity after that, about $500 per ton. So we'll be pacing our growth as long as our customers are calling for potash. We'll be there to provide it. And yeah, the comments on gents and nothing to add there, Mel. Couldn't agree more.
spk16: Your next question comes from the line of John Roberts, UBS.
spk21: Thanks, and congratulations on a nice quarter. Alberta is promoting carbon sequestration. We've had recent blue syngas plant announcements by Air Products and Dow, and then we also had the blue ammonia project in the Gulf Coast. Do you expect Nutrient to be pursuing bigger sequestration-related projects than what you currently have underway?
spk07: John, I appreciate the question. I guess to start, we would think that low-carbon ammonia would be an important part of global efforts to decarbonize. If you think about agriculture or energy alternatives, whether that's the marine transportation or power generation or even as a hydrogen carrier, low-carbon ammonia certainly fits into that puzzle. There are different technologies available out there from electrolysis through to the carbon sequestration that you talked about. We're in an interesting position here. We've got some competitive advantages. Particularly if you look at a couple of the sites we have. So let me start with Geismar in Louisiana. We already do CO2 sequestration there. So we have an existing pipeline to the site. We have existing relationships with the company to do the sequestration for us. We've got deep water access. So if anybody is able to build low-carbon ammonia to be part of that global decarbonisation, we certainly So we're looking hard at that. Obviously there are some technical discussions to be had around which technology to choose coupled with the sequestration. And then there's the commercial discussions to be had as well. We already have about a million tonnes of low carbon production out there. So in that regard we're ahead of our competitors. We also have the Alberta side. you know, around Edmonton locations at Redwater and Port Saskatchewan and at Carson. So we're certainly in a position there to be able to tie into trunk lines in those areas as well. So I think the answer is, you know, we're certainly looking at this. I think we've got an advanced position. And when we're ready to talk about some definitive projects, we'll be back out to the market.
spk16: Your next question comes from the line of Andrew Wong, RBC Capital Markets.
spk13: Hi, thanks for taking my question. Just wanted to go back a little bit on potash quickly and wanted to ask about potash inventories. So there's been a lot of concern from potash buyers around Belarusian sanctions and maybe the potential for limited availability coming out of there. And we've seen some impact on prices and the recent purchasing activity. So, you know, in your view, is there any buildup of inventory from these from these buyers that have these concerns and who have been active in the market? And is there any possible risk that if the sanctions aren't as strict that there may be some overhang afterwards? Thanks.
spk05: Let me just start the comment by, you know, I think just clearly potash consumption is far exceeding shipments in many of the key regions around the world. And that, of course, is leading to a drawdown in these global inventories. And You know, when we think about China port inventory, between 2 to 3 to 2.5 million metric tons, which includes their strategic reserves, which they already begin to auction. So they haven't been able to sustain those elevated levels at the port, and it is reflecting on, I think, some of the global benchmark. And whether Jason or Ken would like to further comment?
spk23: Yeah. I think Mayo touched on the Chinese situation. We also see extremely low inventories right now in India, which was mentioned earlier. We think that that will be a tailwind as we move into 2022. In Brazil, inventories really are right in line with where they have been over the past couple of years, and we'd expect them to finish the year in line with where they have been. Right now, they're about 1.6 million tons. And in the U.S., we're just in... the midst of the fall application season, the supply chain is in good supply and we expect a strong fall application season just given the early harvest, which tends to lead to low carry out inventories at the end of the year. So overall, we haven't seen build up in inventories globally and in some markets, especially the contract markets, we've seen them come down pretty significantly year over year.
spk16: Your next question comes from the line of Adrian Tamagno of Berenberg.
spk08: Hello, good morning. I have a question about nitrogen. When is it fair to expect the incremental 500,000 tons from your Phase II expansion? And all in all, you will have 1 million ton extra product for nitrogen when this will be achieved. So can you give more color around which products that would be directed this extra million tons? Thank you.
spk07: Yeah, Adrian, certainly. So the first phase of our brownfield expansions were announced in 2018. That's when we started them. So it's taken us this time to get them in place. So they will help us get production up to about the 11.3 million tons next year. As Pedro mentioned, we have started on our phase two projects, that's another half a million tonnes. You can expect most of those online by the time we get through 2024. So by the time we finish the five-year plan we should be pushing close to 12 million tonnes. Now in addition, those expansions are targeted on downstream products from ammonia. So while there is some small ammonia while there are some ammonia increases there, that's to help us produce more urea, more UAN, more DEF, and those products where we feel the market is growing and where we need some added flexibility to improve profitability. So that's the expansion. In addition to those expansions, we've been working quite hard on reliability improvements. And so over time, you should see capacity utilisations increase. Pulling against those two, are the increased turnarounds that we're having to undertake. We had a couple of the largest ever turnarounds we've done this year at Borga and at Redwater. That's because the plants are over 50 years old and as we get into these turnarounds now we're seeing an increased scope of work as we try and replace these components that are 50 years old and keep the plants in top condition. So, you know, working against us, we've got the age of the plants, but then we've got the expansion projections, as I mentioned, half a million tons now, half a million tons by the time we get into 2024. And there may be further. We're certainly open to looking at additional expansions beyond that. And as I said, the downstream products predominantly, so urea, UAN, ZEF. Hope that answers your question.
spk16: There are no further questions at this time. Presenters, do you have any closing remarks?
spk06: Thank you, operator. The investor relations team will be available for any follow-up questions.
spk16: This concludes today's conference call. You may now disconnect.
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