Q2 2020 Nutrien Ltd Earnings Call
This time, all participants are they listen only mode. A question answer session, we'll call would be formal presentation.
As a reminder, this conference is being recorded I wouldn't like to turn the conference over to Richard Downey VP of Investor Relations.
Thank you operator, good morning, everyone and welcome to nutrients conference call to discuss our second quarter 2020 results and outlook on the phone yesterday as Mr. Truckmaker, President and CEO of nutrient Mr. Pedro for our CFO and heads of our three business units as we conduct this conference call very statements, we make about future expectations plans and prospects.
Contain forward looking information certain material assumptions were applied in making these conclusions 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 Mdna, an annual information form filed with Canadian and U.S. Securities commissions to which we direct you.
Now turn the call over to Mr. truck makers.
Thanks, Richard and good morning, everyone nutrient second quarter results demonstrate 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 and meet the growth globally.
Our adjusted EBITDA was over $1.7 billion this quarter and we demonstrated significant progress.
On our strategic and operating.
We were able to produce these results despite cyclical.
Weakness and fertilizer prices and global economic uncertainty in fact, nutrient second quarter, EBITDA, but higher than the combined total of the next four largest crop nutrient [laughter].
We also generated $1.6 billion and free cash flow this quarter aided by strong working capital [laughter].
I take three things away from our results today [laughter] first.
Strengthen performance of our retail AG solutions business and the benefits of our growth strategy.
We generated nearly $1 billion in EBITDA on the first half of the year.
I'm early due to strong organic growth and significantly higher mark.
We also had tremendous uptake of our digital platform, which we continue to build out.
Second.
We achieved excellent operational results in our potash in nitrogen business units with strong Onstream times and lower production costs, demonstrating that we generate strong cash flows.
Even at the bottom of the cycle.
And third the fundamentals of the commodity markets are improving including the agricultural 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 AG solutions business delivered impressive EBITDA growth of 20% compared to last year, despite lower than expected U.S. ceded 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 real cool acquisition in Australia.
Our Australian business continues to perform extremely well contributing around 150 million EBITDA in the first half in 2020, and we continue to be a head of our real cost synergy targets.
Total AG 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 U.S. location.
As well as making solid progress towards all operational targets set at our last Investor day.
We continue to make great strides in the adoption of our AG solutions digital hub.
On a year to date basis sales through the platform surpassed $700 million exceeding our annual goal of 500 million in just 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 month.
This is the data analytics decision support tool that helps evaluate seed options using the best and unbiased information and consider soil weather and see trial performance data.
We also continue to grow our footprint in Brazil, with the Tech Agro acquisition and within North America with the recently acquired AG Bridge, which provides valuable data transfer and management capabilities for equipment to our essential data network.
This startup company as a small acquisition from a dollar perspective, but we believe that it will help improve our digital agronomy offering for growers and lead to improve 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 cash cost of product manufactured was $52 per ton.
Down $8 from the first quarter and what's 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 for 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 took downtime at our Trinidad facility to help balance regional trade and improve our cost position.
We were able to lower our overall cost profile and achieved an impressive 97% operating rate on our north American asset 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 that shit shifted 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 as largely intact and we only lowered the top end in nitrogen to reflect a modestly slower recovery for ammonia and UAN prices.
We maintained guidance for our AG solutions, and potash segment, and we have raised expectations for phosphate.
A few additional comment here on the AG market and fertilizers, the downward revision to the UstaĊĦas corn and total acreage has reduced carry out levels and stocks to use estimates and improve the outlet for the 2000 22021 prop here and farmer sentiment.
Lower 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 at historically high percentage of their anticipated 2021 harvests.
Resilient 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 as the key reason why building, our Brazil AG solutions business is strategically important for us.
In Australia moisture levers 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 end demand continues to be solid.
Our order book is fully committed into October and.
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 in 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 tight and markets to continue to recover.
Our global potash demand forecast for this year is still hold to 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 current costs will be slightly higher in the second half of the year.
And nitrogen we reduced our full year earnings expectations as prices have been Florida 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 to two will nitrogen demand and prices.
So 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 offerings.
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 cyclical 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 nutrients top priority is ensuring the safety and health of our more than 25000 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 cold at 19, and 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 nutrient continues to be committed to improving SG performance and reporting we achieved another quarter of excellent results across our key metrics. We also issued nutrients for CSG report in April and since that time, we have achieved significant company and sector rating improvements from a number of third party SG agents.
We expect this trend to continue over the next year as we laid out our climate NFC strategy and targets to lead the way for our industry.
In closing.
Nutrient performed extremely well across all business units in a difficult and uncertain environment.
We are well positioned with a stable and growing dividend significant free cash flow a solid balance sheet and end markets, where demand continues to increase now more than ever we are proud of the significant role we play in feeding a growing world with that operator, I'll turn the call over for questions.
Operator, you there.
At this time, if you would like to ask your question. Please press Star then the number one on your telephone keypad.
Analysts will be limited to one question. Once again that is star then the number one on your telephone keypad, we will pause for just a moment to compile the acuity roster.
Your first question comes from the line of PJ.
Jucar from Citi. Your line is open.
Great. Thank you. This is Ken marks our on for PJ.
So just looking at retail so during first quarter results. You noted that you want and retail inventories pretty low we expected there would be low so you could restart going into the fall. So just given very strong sales in retail in the first half can you provide a little bit more detail on the inventory situation there specifically within crop.
Nutrients and crop protection.
And would you say they are lower than normal or just to add inline with what you were expecting.
Hi, Good morning, Kendall, Yes, I'll have Mike Frank answer the question specific to retail.
Yes, Kendall so our inventories across our network globally are lower in Q.
Crop protection and crop nutrients.
In particular in North America.
We did come out of the season, we strong sales as you saw from the C. B report today.
And overall lower inventory. So we did achieve the operational metrics that we were we were looking for any back if you look at our overall working capital metrics, we're down to about 18%.
Working capital ratio, which is really strong performance for us and so were you, saying, we're probably a little bit ahead of expectations.
Just more broadly speaking Kendall what I would say is across our AG value chain, so including the wholesale businesses.
Generally speaking the after 2019, we in the industry had a significant amount of fertilizer inventory because of the poor application seasons, we saw last spring and last fall. We're feeling very good. It's part of the reason why were more constructive for the second half and as we move into 2021 that most of that inventory now has no.
Normalized in fact in some parts of the AG value chain as Mark as Mike has.
Alluded to it's quite it's quite fit in terms of our inventory position and and as I mentioned looking at our order book on a forward basis, our order book as quick as quite fall right through the third quarter now.
Your next question comes from the line Ben Isaacson from Scotiabank. Your line is open.
Good morning, a nice job on the corner.
Chuck you guys have spent billions of dollars on cyclical retail infrastructure, obviously, including tuck in strategy.
You've now realize I think 45% North American retail sales available, but we remain on the digital platform as that continues to succeed.
Just looking at backwards, if you're realizing 55 to 60 cents on the historical dollar from the physical infrastructure is the most efficient use of capital going forward is their shareholder value that can be unlocked by consolidating or spinning out the brick and mortar business model and retail. Thank you.
Yes, good morning, Ben So look we've always said that the digital strategy is it's integrated we call. It an omnichannel with with the physical distribution network. In fact, we couldn't deliver the great results on the digital platform without the several thousand aggregate economists that work in.
Side, a new trend and with farmers on a day to day basis.
And of course, the physical facilities to move the product.
Agriculture is one of these very unique industries, where.
When the season is open and farmers are ready to go to work, we need to get product people.
And our assets on the farm in short order in a matter of hours. So we think that the work that we've done on the digital platform is fantastic we do believe that.
We're going to change, how how and what we can offer farmers and make farmers more profitable help them manage their farms.
As well as his help them.
Kind of maneuver the sustainability world.
And that's a big big part of our investment, but we do think that it goes hand in glove with our physical network. In fact, we're very confident we've seen other players in this industry just have up.
Digital platform and not have the physical infrastructure and they just cannot be successful given the demands that are pressed when we're in the heat of the season and the requirements that our customers need.
Your next question comes from one of Steve Byrne from Bank of America. Your line is open.
Yes. Thank you.
As you noted the urea prices are really ripped in the last couple of weeks and if we look into the us Midwest pricing the.
Urea on a per unit nitrogen basis relative to you again and pneumonia is at a real premium.
The.
You again and ammonia pricing bearings. These mere multiyear lows. So curious procure what your view is for where does that disconnect go from here do you think that that.
Disconnect narrows, because urea pricing.
Potentially unsustainable.
Or that you think you where you had an ammonia pricing.
Raleigh action here.
Which which of those scenarios is likely to again reflected in your guidance.
Good morning.
Steve I'll hop, Jason Im just talk with the dynamics between urea ammonia, new and what we're seeing and then I can address the guidance question at the end go ahead Jason.
Hi, good morning, Steve.
Yes typically.
What you see especially at this time of year is that urea market is being.
Driven by dynamics offshore and in particular, the really robust.
Demand that we're seeing from India and today.
A little ability inability for Chinese suppliers to get on getting on those tenders and so.
It's seen a tight global urea market and prices moving up in response and typically historically you don't see the other.
Product prices ammonia and UAN.
Moving in tandem.
At unless you're in season, so the spread fluctuate.
Because urea prices volatile as we get closer to product actually being applied.
You'd expect that those moves the market prices of ammonia and UAN will move.
To be more in line with historical levels relative to urea and I think you've you've already seen some of that sentiment.
Trying to get more positive.
Toward the other products because of the strengthen urea market.
Yes, just to put that together now with our guidance and how we're thinking about it. So look we think that that the crop maturity is quite advanced right. Now for this time of the year, we are expecting an early harvest and a nice application window.
Fall application so from a demand perspective, and that's clearly what are our order book is showing right. Now is that we're expecting solid demand I'd say this is a general comment not only for nitrogen, but potash and phosphate.
Which is helpful and the reason we trimmed our guidance in nitrogen with purely just on the ammonia and UAN. We just don't think that there's going to be because of the economic slowdown.
In the hit to the industrial demand for for nitrogen products. We just don't think that there's going to be is much forward momentum when it comes to pricing, but we do think that urea certainly is strong and there's reasons for that the supply demand is quite tight as jason's articulated.
And what we what when you look at the bottom end of our rate of our range, what we'd need is a weather event, so very shortened application season.
And we're not calling for that today, but that would be the bottom of the range and on the top and of course is a nice wide application season, and a little bit of forward momentum when it comes to to recovery and some nitrogen prices, but not a lot we don't really need a lot to hit the top end.
Your next question comes from the line of Jacobs from Sea IVC. Your line is open.
Good morning, My question is on the retail margins.
So solar improvement.
We look at a year on year basis.
Talk a bit about what drove this was was mixture or what else is going on here.
What role the digital play and thus and just lastly, what is your ability to.
Improve margins further.
Good morning, Jacob Mike frankly, you take that question.
Sure. So Jay could look our first half's was really about driving operational excellence and.
Focused on organic growth and EBITDA margins, and we executed against that strategy.
Stronger margins are partly a result of mix and so for example, and in crop protection. We saw a really strong market for her please and in both corn and soybeans and Theres solid margins on on those products obviously in in crop nutrients.
Prices were off but if you if you saw in North America, we pretty much we able to hold.
Ton margins and sorry, our teams did a really good job of selling the value of the products.
And that that's a little margins I would say lastly on the seed side.
Our seed our revenues are about flat, we actually walked away from some of our wholesale seed business, which impacted revenue in a market, where there was more planted acres, but it strengthens our margins and so we just executed across each one of our of our platforms and we think that these maher.
And our sustainable.
Obviously, the digital platform is giving us more insights in helping us worked with our customers to make better agronomic decisions and it's also simplifying and meet the entire purchase process more efficient and that's also driving you know some margin efficiency for us So it's a number of.
He says that that came together.
But Jay could we think these are sustainable in fact, we think there's a runway of opportunity ahead to continue to drive both organic gross and EBITDA margins, Yes, and Jacob just one further point.
We also think theres some further upside in margin simply because we're still integrating the real co acquisition that was a large acquisition for us. It was a public company and we laid out the synergy targets that are going to take a couple of years to accomplish so as the rest of the synergy comp.
Synergies are delivered we do think that will have some upward potential for overall margins because it was such a large acquisition. So we like what we see I think Mike in the leadership team of the retail group has done a great job and there's some there is some upside as we further integrate the roko acquisition into the overall company.
Your next question comes from the line of Joel Johnson from BMO capital markets. Your line is open.
Hi, good morning.
I did want to follow up on some of the commentary on CNC margins.
It was a I think a more competitive dynamic and see this year, especially in soybeans and you mentioned your margins.
And is also a bit of now uncertainty around what will happen with dicamba you. So I guess the value of extend if you don't get new registrations later this year for next year.
So one maybe two part question no how is the seed price dynamic evolving do you see more competitive.
Market and how how might that pressure not pressure margins and then what is sort of your plans.
For some of the uncertainty around extend and having list is ramping up thanks.
Good morning, Joel Mike frankly, you take those questions. Please.
You bet so Joe good good questions.
Okay. I think you can you just kind of look across the seed industry. If you start with corn.
What we saw on on unit pricing in our retail businesses that prices were.
Up just a bit about $3 a unit so.
Less than 1% price appreciation. So it's a competitive market, we didnt see a big she gets in treat mix and so.
The core and market seems pretty stable margins are relatively stable as well.
And even though as I just mentioned previously we walked away from some wholesale business both ends in corn seed, but as well as in soybean seed and.
Specific to the swine market, it's extremely dynamic obviously with the the legal issues on day Cambodia.
We were faced with at the end of the application window.
Those were challenges, but in the end, we were able to get by camera on most of the acres that that farmers wanted to get it down on.
We are pricing on soybean seed was roughly flat in fact, there was no appreciation or depreciation on selling price.
Early in the season, there was some really aggressive pricing we for the most parts need out of that and then the market came back and overall again, we saw pretty flat pricing and and on the retail side.
Similar to flat margins on on soybean.
Now going into 21, obviously, there's a question on whether or not you know extend is going to be registered and so we're working closely with our suppliers bear BSF hotel.
We'll be prepared to sell whatever the farmer ends up wanting.
We expect that we're going to sell both extend in them. This seed next year. The real question is whether or not theres going be.
Registration to allow us to apply camp over the top from so I think we're going to continue to see strengthening of the enlist platform. We think it will be this year. It was about 20% of all of our mix next year, we think it will be more to 30, so theres definitely.
The momentum with English late now, but again, we're kind of back and waiting to see.
Both from a legal standpoint, and a regulatory standpoint, what tools that our customers can use and we'll have the available seat.
I had to solve them regardless of how these regulatory decisions get made.
Your next question comes from the line of items and Wilson from Goldman Sachs. Your line is open.
Yes, thanks, good morning, everyone.
So.
The question.
As a as on the potash market and I would love to just get your your views.
On China as we think about the second half of the year and into next Chuck in your prepared remarks, I think areas of strength in the potash market, China was notably absent from that list and just reflect on kind of how the contract evolved this spring.
Port inventory, then kind of how you think the utility of China contract kind of works going forward given the experience. Both this year in last couple.
Okay. Good morning, Adam.
So look yes, the market fundamentals for potash as we said.
Very good first half demand was strong.
We're seeing.
Brisk movement, we mentioned I mentioned already a couple of times, our order book and the markets I did call out for strengths, where Brazil in southeast Asia and India.
And we are holding our overall market demand forecast to 65 to 67 million tons in 2020, and certainly we think that in 2021 the market will grow again.
Specific to your question on China, We do think that shipments into China in 2020 will be down.
Thats built into our overall forecast and the numbers, we provided it's clear that they drew down their inventories they tap their strategic reserves to gain leverage in the last contract.
They won't be able to do that again this year.
Yes, those shipments are significantly higher than what we predict so I'm not really overly concerned about support inventories I think theres, some gamesmanship happening here and we view overall inventories in China. So just not just the port but in country to be actually reasonably tight because the fundamental demand for for potash.
Sure in China, We think grew year over year. So we're feeling very good about the overall potash market China included.
If we can get to a point here, where we continue to see solid demand in 2020, I think it sets up for another growth and good year in 2021.
Your next question comes from the line of Duffy Fischer from Barclays. Your line is open.
Yes, good morning.
Two questions first one is just there's been a couple of news articles about coal that may be hindering the overall ability to pull in the crop this year and to prep for next year. So just with all your touch points field do you think cove. It will be an issue. This fall on kind of a macro basis for North America and then.
The bigger question is we're about a decade into the push into digital it was about maybe seven years ago or so the climate Corp. got sold which is when I think it came to investors minds, how big this might be.
Regionally people thought it was going to be revolutionary you might have one winner.
Obviously, none of that has really played out if anything it's been evolutionary to kind of non existant with what we see from the outside as analysts looking at the numbers for the company. So one what's gone wrong with digital or what Didnt happen over the last five to seven years. It was supposed to two can we cracked those nuts going forward and do you see digital because.
Let me kind of revolutionary can it really move the needle at some point or will it continue just to be evolutionary in your mind.
Good morning, Duffy, what I'll do it will have Mike Frank give a perspective, because he's closest to the farmer on Cove. It in the heart harvest Mike. Please please feel free to comment on your views on digital and then I can I can come back to that as well.
Yeah, you bet soon Duffy look I I I wouldn't anticipate any issues getting the harvest off I mean.
If you think back to kind of the middle of March when.
Coal would depend demick into concerns were really ramping up that obviously was right in the busy time of farmers in North America, getting the crop planted and.
Firstly, our employees on the front line.
They didnt lose a beat the every day they came to work and they focused on making sure. They were safe from the customers were safe and very importantly, making sure that our customers were making the right decisions and so I think it's going to be the same thing as the crop comes out farmers will get in the field harvest.
Grain elevators will operate and I wouldn't anticipate any any material issues on from a cobot standpoint now look good question on digital.
Evolutionary versus revolutionary.
Our focus on digital has been very pragmatic and it's really about what we can do as a retailer based on the breadth, we have often and the focus in the value that we add.
In the value chain.
So we're using our tools our digital tools to help our hurdle on I, Miss and our customers make better run and be decisions and we're doing that with seed we're doing it with fertilizer variable rate applications and I would say that those two tools are working extremely well and our adding value to our customers and and.
To our business.
We're also now using our digital platform to help our customers plan ahead, and so doing complete crop plans.
Their entire farm input by input ultimately, creating a business plan and then being able to execute that business plan United season plays out.
And all of this being done digitally ultimately streamlined the entire operation from our perspective in terms of how we work with our customers because once you plan to head then you can basically execute on that plan.
And again, it's as simple as going into that into our digital hub and ordering the products, whether it's our customers doing that directly or our sales have gone I missed on their behalf.
The other thing I would say is over adding new features really month by month Chuck talked about this in his prepared remarks. This new seed selection tools that we just rolled out will be the industry leading seat selection tool.
We'll have all of our our seeds that we offer to our customers and we've got an incredible database.
Both research and plot data and public trial data.
Cross by weather and and soil environment, and so we will be able to help our customers make really good ROI decisions on seat selection will be able to get access to the best financing programs through that same tool and then ultimately order the products and so again it not only does it help from.
And the grown grown any decision standpoint, but it's incredibly efficient for our customers and for us and so we think thats. How this continues to play out and so you know I didn't know if that's evolutionary not revolutionary, but it's making us.
Customers make better decisions, it's making us speak to your supplier to them.
Our organic growth is being driven in part because of our digital tools.
And that's making a big difference in terms of our overall performance and so we see digital has a very important tool.
In our retail business going forward Lastly, I'll, just say with AG Bridge acquisition.
We'll now be able to stream all of our data.
Yeah, just patiently that we're applying flood lives you or crop protection products across our entire fleet and so that again. It's just can you give us a deeper database to be able to drive even better economic decisions going forward. So we're extremely excited to both our our digital tools today, and where we're going we believe that.
You to invest north of $50 million a year in our digital strategy and that makes sense for us based on the size of business that we can leverage out against.
Yes, Doug just a few other comments to augment what Mike has said is.
Look we don't really think about it in those terms, what we do know, though being so close to the customer as a as an independent advisor is that the relationship matters.
We don't we don't expect ever that that digital platform or portal is going to replace that.
This is a business that has for generations has been built on relationships and we want to build on on top of that.
And what we're trying to do is our approach is very different than what you outlined in some of the.
Companies that have tried to do this and probably got less results than they had hoped is we're really letting our customers guide us we're not building. These things and then expecting them to come and use it and then of course pay for it the feed selector tool that Mike just outline that was built because growers cap.
Find a platform where they can get all the seed varieties in an unbiased view and as a company that is independent and we sell it all.
That should be our role and we do that with our agronomists today, but now we're going to put a not only our agronomist, but but we're going to have the tool to help growers make these very complex decision. So we are excited about this and we think over time, there is going to be tremendous value created for farmers and for our shareholders.
But this is an evolution in my humble view this will not be a revolution.
Your next question comes from the line of Andrew Wong from RBC capital markets. Your line is open.
Hey, good morning, Thanks for having me on the call. So I just want to ask but.
Just geopolitical risks as potash coming on the upside or downside.
Dollar is just had a pretty contentious election, Canada's relations with us in China pretty strange.
Russia's relations a strain was pretty much many countries.
So is there anything we should be watching there in terms of impacts on the potash market potential terrorists potential sanctions or anything like that thanks.
Good morning, Andrew Yes, Yes look so we are in a world, where where I don't think we've seen as many geopolitical risks that we've seen over the last two to three years across the world in multiple industries. So I can't sit here and say don't worry about it.
But what I can say is look we're pretty well conducted in plugged into.
Leaf.
The the jurisdictions, where we we either produce or we sell and I think the difference that we havent seen any even a hint of discussion in these really important I think businesses that we have whether its fertilizer or in our AG solutions business and I think that the reason for that.
Because these are these are products that are in high demand we're talking about.
The overarching priority being food security and if governments get this wrong because of playing politics.
The first group that gets that gets hurt will be will be there their population or their voters, so I think that.
My view is that the risk is a lot lower than some other industries and so far we've seen very very little if anything at all in terms of geopolitical risks that would concern us about altering trade patterns.
Your next question comes from the line of Jonas Oxgaard from Bernstein. Your line is open.
Thank you.
I was wondering about the online sales you said you you grew online sales quite a launch.
Can you put that in contrast to the market as a whole do you do know roughly what the U.S. averages.
And on the as a follow up question on that just do you see regional differences between US, Canada, Australia et cetera.
Yes, good morning have Mike Frank why don't you take those questions.
Sure So good morning Jonas.
We don't have.
Industry level data in terms of home what percent of the overall input market is ordered online, but you know it's very small.
It would be in the low single percent digits. So.
Outside of what we're doing which we're doing at scale Theres really no other.
Platform that has the scale and reach that we do.
And so regionally then Jonas we actually so today our platform is focused on North America, and so whether it's across the us or for Canada, We don't see regional differences.
That way.
Obviously, depending on the crop you grow what do you know you're growing row crops in the Midwest or or vegetable crops in California that the tools do vary and they're built for purpose and so we we built tools that that address the local market conditions I would also say, yes. So as we think about the next.
12 months.
First the we're going to take our our digital platform globally and so we're now and in the works of of.
Being and building these tools and leveraging our platform into Australia, and South America, and we wouldn't expect by the end of next year will really have the same set of tools for our businesses in those geographies as we have been in North America today, and maybe lastly in this is just.
Building on what Chuck mentioned here a minute ago.
Our digital platform Doesnt Standalone and if it did it wouldn't offer on a lot of value. It's the combination of our digital platform. The relationship. So we have with our customers in the reach that we have and our physical assets and its these three pillars gather that are really crazy to leverage opportunity that we.
I believe we have uniquely in digital because of our relationships because of the extensive physical assets that we haven't so I you know I really believe that's why we're able to leverage our digital tools to create real value for our customers and for our retail business.
Your next question comes from the line of John Roberts from Yes. Your line is open.
Good morning. This is look at spend on for John So just wanted to touch on your retail acquisition pipeline. So no I think you've had a few moments experience with the current disruptions what are your expectations now to be out a complete bolt ons in North America in the second half.
Given that's traditionally like your high period of activity.
Are you expecting things to be lower this year, given like ongoing challenges.
Due diligence if that occurs we'd be likely to say hi deal activity in the first half next year or would that basically push everything back 12 months.
Could you also please discuss how you are smaller retail competitors a fairing currently as I sort of healthier struggling and how this is impacting potential opportunities.
Okay. Good morning, Lucas, Mike Frank over to you.
Yes, so Lucas obviously, we've made.
Couple of nice acquisitions in Brazil, I would call the medium sized acquisitions, we see more opportunity to continue to do that in Brazil. So I would expect will continue to have opportunity in that market just like we've seen here over the past several months.
In North America, the pipeline has slowed down a bit we talked about this after our last call partly because of coated it makes the entire process more challenging.
So we've seen that play out I think some companies that maybe you would have thought about exiting at this time are probably slowing down their plans a bit. So I do think that will impact our deal flow a little bit coming out of 2020 that likely builds opportunity for 2021, just as you mentioned now.
In terms of how or other.
Retailers doing.
We see we're we're still looking at probably a dozen or so deals right now in North America. So we get to see the income statement and balance sheet from a lot of smaller players and I would say you know you continues to be tough I mean, you. There's there's a lot of value in scale and.
And you need capital to continue to upgrade your you both your physical assets and meaning into your people and we've seen that you know companies that are sub scaled our challenge because of that in so I think that continues to play out which in my mind means that we will continue to see consolidation across the retail into.
Three for the next several years ahead.
Your next question comes from the line of Vincent Andrews from Morgan Stanley. Your line is open.
Thank you and good morning, everyone.
Just to kind of a follow up question on the seat advisor platform restrict mission platform curious if you know your customer base in North America broadly does it match with the market shares of the large seed companies where are you over shared with the seed companies.
The two whether you quit with part with growers that use the seed companies that you sell or versus pioneer, which which you don't show and I guess I'm, what I'm getting at is with the.
I see the advisor if that advisor makes recommendation that the farmers should be using hypothetically, 100% pioneer and they were using 100% something else, presumably you would lose that seat sale, because they're not going be buying seats for me. So I'm. Just wondering is part of the the idea of the seat advisor and it being on bias is to drive more growers.
Into your into your overall network and not just seldom sees but maybe sell them all the other inputs that they need and I'm just curious how that how this is all works.
Good morning, Vincent Mike Mike Frac.
Yeah, Vincent good question, a little bit detailed but here's what I would say so we we have a very broad portfolio of seeds that we sell we've got our own Dyna Gro brand, where we have seeds in.
Corn, so cotton, we sell the Calvin as grow.
We sell Syngenta seeds, and we do sell.
Hi, New brand in a in the southern half of the U.S., we've actually acquired some pioneer.
Dealers in in the Midwest. So we do sell pioneering in select areas in the Midwest as well and then of course.
You know Cotempla now has a new retail brand called bond, which they are providing us new germplasm to sell through our platform as well so our seed advisor tool will present to our customers those seeds that we have the portfolio, where we can execute the sales. So if it's an.
Area, where we're not selling pioneer for another regional seed company, we won't.
Be recommending most tools, because we can't execute on the sale, but again as a retailer. There's there's no retail company that has a broader see portfolio than we do and that's one of the benefits. So we can take to our customers that we sell seed from a variety of of seed breeding companies and the again those Brian.
These and hybrids that we have available those are the debridement hybrids that will show in our seat selection tools. So that our customers can make the best decision on those products and we can offer them.
Your next question comes from a line of Chris Parkinson from Credit Suisse. Your line is open.
Great. Thank you very much can you spoke a little bit more about your nitrogen asset portfolio, how we should be thinking about your TNT production over time, including gas contracts your appetite for additional brownfield and de bottlenecks and even M&A.
In the North American or global market. Thank you very much.
Good morning, Chris So I'll have rave Sallie just talk a little bit about the current portfolio platform and the the brownfield projects that we've got underway and then I can answer the larger strategic question go ahead right.
Thanks, Jeff.
So look as you know.
Plants of located in three different regions.
We've got a benefit of that production in Canada.
I guess, it's traditionally been.
Lower price and Henry hub, we've seen that get close a little bit.
But it's still very very good cost.
Yes.
We've got a little over third.
That production sitting in the us on Henry hub and the remainder.
Listen to Thirtys and Trinidad.
You are saying that we took a plant down in may and another one in June just based on market conditions.
The world's changed a little bit in the last six months, we've seen trend that go from a second or third quarter, all to a third or fourth quarter off as it glutton LNG is pushed out pushed down prices.
Across the globe, particularly in Europe.
Those plants, some true that probably stay down until we see market conditions improve on what we have been focusing on this brownfields Chuck mentioned we.
Towards [noise].
Becoming close to being able to put online.
Plus 2 million tons more in North America.
Some of that has helped us in this quarter with a record productions.
We'd like to continue that where it makes economic sense that'll be a focus Chuck if you had that add to that.
And I guess, just the broader strategic comments, so we'd like to nitrogen business, where a top three producer globally.
I think we're a strong operator as rich mentioned, we've got a good gas position and if you look at some of our margin Theres some of the highest in the world based on how we operate our networks.
I think the industry itself is the most as you probably noticed it it's the most a fragmented industry that we certainly operate in.
And I think we are believer in consolidation, we like consolidation, we think consolidation drive cost efficiencies in in this business cost is everything.
So we would be always looking for for a consolidation opportunity.
But what I'd say right right now is that our primary focus is the way rapists described it we've got about a million tons going and thats going to we've already seen some of that this year, but by the end of next year, we'll have a total of 1 million tons.
Incremental capacity, which I think is great and we'll continue to look for both brownfield opportunities, but also M&A opportunities, but they have to make economic sense.
Your next question comes from one of Steve Hansen from Raymond James Your line is open.
Yeah, Good morning, guys.
We've already described a number of different initiatives around M&A and.
Retail and digital strategy expansion I'm, just curious Chuck how do you think about all these opportunities relative to your own stock right now in terms of capital deployment.
Stocks not treating it it's really lofty levels do you think about share repurchases being a priority through back after this year and into next year or do you feel like the opportunities are still better on the internal side. Thanks.
Good morning, Steve So from a capital allocation perspective, what I would I'd say is as we look forward.
Some things haven't changed and we're going to keep an eye on some other things.
Obviously for US we want to make sure that our assets are are very safe and reliable and so we would allocate capital to sort of sustainability of our asset.
The balance sheet of course, we've got a strong balance sheet today, I think Pedro and finance team at the company has done a great job.
We want to ensure that we have maximum financial flexibility with that balance sheet would you consider to be a core asset for us as we move forward.
And then the dividend so the dividend as I mentioned in my prepared remarks.
We like we like having a dividend policy, where the dividend will grow and it sustainable and we've always said, we want that dividend to be around 40% to 60% of our free cash flow.
And at this point in the cycle, that's exactly where it is it's less than 60%.
Which is where we would expect it with the pricing that we've seen.
In the last few months or so.
Now going forward, though nothing is going to change in those three areas. The the look forward for US though is that we are trying to balance that the need to grow the retail platform. We did see some great opportunities in Brazil, I think that real co acquisition and it's been accretive already.
And it's got so much potential, but you're right when we look at our stock.
That would also be a very strong use of capital. So we're going to continue to assess things I think before we would get more interested in a buyback it's less about the financial strength of the company in just a bit more certainty in the forward markets. When it comes to not just the they agricultural industry, but the overall economic backdrop.
So we're going to take a bit of a wait and see approach on the buyback.
And of course, what we're working through the rest of our growth platforms, but they will be buybacks will be part of the decision on any internal investment we will always compare a buyback to say an acquisition in a different country or in the United States. For example, because that's the prudent thing to do and we've always done that.
Your next question comes from the line of immigrants of home from TD Securities. Your line is open.
Thanks. Good morning can you elaborate on your expectations for industrial ammonia demand in the second half.
Talk about what you've seen so far through the first portion of Q3.
And then also where you've got baked into guidance as far as industrial ammonia demand.
Okay. So why don't we have Jason Newton, just talk a little bit about the outlook for the industrial demand and and then I can try to give you some perspective on guidance. So Jason go ahead.
Yes, sure. So we've started to see some.
Some improvement in certain markets, particularly if you look at.
China for example, the industrial ammonia use it started to pick up and in fact.
Chinese imports of ammonia or pretty much.
Inline with your growth levels through the first half the year no machine demand start to pick up in some of the.
Surrounding Asian markets, which has provided some support.
To that region on the other had in the western markets in Europe, and North America rebound and it's been a little bit slower so overall.
On a year over year basis, we'd expect industrial.
Nitrogen demand to be down about 10%.
Correct agricultural.
Drove to offset that so did so pretty flat overall.
Nitrogen demand outlook.
And then the way we built our guidance as we still believe our order book is strong so there'll be a shift of our product mix into agriculture, and if we get an early harvest and.
Nice wide fall application season, we've seen that in historical years, so that our guidance really doesn't reflect a volume change in fact, our volume should be quite strong. It's just the reason we took the top end of the guidance range down as we just we were expecting stronger pricing, but because of the slightly softer industrial demand.
Jason's outlined quite nicely, we don't think we're going to see the same price momentum that we normally would happen in the fourth quarter.
Your next question.
Comes from the line of Michael Picken from Cleveland Research. Your line is open.
Yes, good wondering I'm just wanted to ask about your expectations for the fall season. It sounded like you are pretty optimistic view for retail and if we do end up getting kind of a bigger fall season, and theres potentially contraction of several million acres in corn next spring I mean.
What type of retail trajectory do you think we could see from 20 to 21, if we end up with a big spring.
We had this year following the week fall and then potentially a strong fall season. Thank you.
Good morning, Michael Mike Frank do you want to take those questions.
Sure. So you know Michael obviously, you ought to play out still this fall I would say you know what we saw from planted acres. This year, you know 87 million soybeans.
92, corn that that's within a normal range, obviously <unk> was down a couple of million unique hers and those are high value makers for us and so we would expect if if weather improves in west, Texas that we'll see some cotton acres come back next year, but I'd say look it's too worried as to really forecast how 20.
When you want going to play out on the retail side, but right now the way I would think about it is we would expect acres to likely be somewhat similar in terms of total planted acres to what we saw this year, obviously the mix always changes a little bit from year to year, depending on commodity prices.
And if we get to a great opened fall window.
That'll obviously help our business this year in and.
Then we'll get busy next spring with helping with with the screen need so.
You know that that as chip said, we're we're expecting a with the crop progress that we're seeing this year, it's coming in pretty quick.
Should it should lineup for a nice open for window for fertilizer applications at least in North America. This year.
Your next question comes from the line of so he can work from JP Morgan Securities. Your line is open.
Hi, Good morning, How're you.
Good thank you.
Two on short potash questions I'm.
Can you discuss what.
What effect, Nick repricing of potash tongue in China I had on a.
Offshore potash prices went out and have all of the tons we price.
And secondly, I was wondering what your potash and forecasts and.
North America like that does.
10.92, nap and a half million ton forecast assume that this a strong post harvest season in the U.S.
Okay. Thank you very much for the question Ken Seitz why don't you take those.
Sure Good morning, and thank you, yes, so yes, we did with the.
Pricing of the Chinese contract there in the last April we.
We didn't have a price adjustment in the quarter and so we've taken all of that.
That's behind Us and our results.
With respect to sort of the balance of the season in this fall, we talked about a little bit on this call but.
You know with to flush of inventories throughout the balance this year and assuming some good weather.
In places like China, and North America uncertainty, we're seeing strong farmer affordability in Brazil, and India, India, Yeah, we expect.
As Chuck shared our guidance of 65 67 million tons to be intact and being committed out into October we expect our guidance of.
12.1 to 12.5 million tons to remain intact as well.
Yeah, and which as Chuck has shared I think positions us well as an industry and this new train heading into 2021.
There are no further questions at this time I turn the call to Richard Downey, VP Investor Relations for closing remarks.
Thanks, operator, and thank you everyone for joining us. This morning, if you have any of its the questions IR is available to to answer them. Thank you bye bye.
This concludes todays conference call you may now disconnect.
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