Q3 2020 Nutrien Ltd Earnings Call
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Plenty global potash shipment forecast at 65 to 67 million tons with increased consumption in all key regions, including China. The market conditions have tightened significantly and we are taking domestic order.
Theres at $30 per ton above our summer fill program.
Reports indicate that most of the major suppliers are sold out for the rest of 2020 cap.
Cabot text will not place product into China warehouses. After October thirtyth contract expires in other key markets are on sales allocation.
We believe the pop that potash reached floor levels early in 2020.
For nitrogen we believe there was little growth in global demand. This year due to the macroeconomic impacts of COVID-19, this significantly reduced industrial demand, which we expect has delayed the recovery and nitrogen by about a year.
However, strong urea demand in India, and Brazil, combined with lower supply from China has provided the market with stability and the recent increase in natural gas prices, especially in Europe should help support global nitrogen pricing.
Ammonia prices have also formed over the past few months in North America urea prices are likely to rise to close the gap against global benchmark pricing.
While there is still some new nitrogen capacity coming online the regions, where most of this new capacity is located have encountered significant delays or have low historic operating rates with limited new supply after 2021 growing.
Growing demand higher global energy prices and an expected recovery in the global economy, we expect the nitrogen market to tighten overtime.
Nutrient expects to lead the next wave of innovation and sustainability in agriculture and in the first half of 2021, we will lay out our climate targets and commitments, which include tools that can fundamentally change sustainable agriculture.
We will provide more details.
On this at our Investor Day on November Thirtyth, and we encourage you to sign up for this on our website.
As we look at 20 to 2021, we believe the fundamentals for our business, our strengthening and while we execute on closing out a solid 2020, we see compelling drivers for improved results across our businesses in 2021, we.
We would now open the call to your questions on the quarter and the outlook for our business.
As a reminder to ask a question you need to press Star then one on your telephone and withdraw your question first is hundred Sq.
Please limit yourself to one initial question and you May then rejoin the queue after.
First question is from PJ Juvekar Citigroup.
Your line is open.
Yes, hi, good morning.
So a quick question on phosphate you do good I'd known in phosphates due to structural oversupply.
When you take a charge like that do you have already does make you look at sort of the next five year outlook.
And there was the CVD case filed by a competitor, which led to higher US prices did you taken that into consideration maybe just talk about the timing of this charge and how do you.
The outlook that led to it.
Yes, good morning, PJ, So Pedro our CFO clinics can answer your questions go ahead Pedro.
Thank you Chuck and thank you.
So for us our auditors look to answer that.
We do.
Very frequent reviews of all of our assets there was a certain scheduled for this.
I think the impairment was triggered by a review with the board of our long term outlook.
For Foster crisis.
And that was corroborated with a number of different.
Outside sources as well so it was not only a.
Site Fourq.
Forecast, but also corroborated by outside sources so.
We could see that the values. We are carrying now books, we're no longer supported by those prices and margins into the future.
Okay.
Thank you.
And just quickly I know you were going to talk about your climate goals in mix.
At your analyst day, but well just wondering you know some of your competitors have.
Taken steps would blue and green ammonia.
I was wondering if you have any initial thoughts on that thank you.
Yes, we do of course, so look our ultimate goal is to be a leader in DSG globally.
And for that we have some very big plans that we will start to introduce to the marketplace at our investor day, but but here's just a quick preview. So we've been working of course on a lot of our digital tools and we think we now have an excellent tool kit probably the best in the industry to really change the way AG.
Our culture is fundamentally conducted on the farm now the starting point for that will be of course, our own footprint. So just to your specific question on nitrogen. Yes, we are looking at our nitrogen footprint in our product slate and what I'd say is even if you look at our product slate today a third.
Third of our ammonia sales today would be from low carbon. So if you use the phrase blue ammonia.
About a third of our sales were already come from that so we're already a leader today in low carbon ammonia production, we are looking at green ammonia like.
Like like every major player in the industry and we're working through the technology and the economic issues.
The next question is from John Roberts with CBS. Your line is open.
Thank you can you hear me it sounded like things dropped off there.
Yes, Chuck I think I could not hear part of it.
Yes.
Are we both open PJ.
Operator, I think we may have lost nutrient.
Okay Conservative on standby will be reconnect the audio surgeon doing there.
Okay.
Operator can you still hear me Pedro photo.
And able to hear everything else it sounds like we've just lost one speaker line.
And operator.
My line open as well as pj's.
No. It's just you're right sort of its open at the moment.
Funny, because I can hear PJ.
Okay.
Okay. So to some degree on standby looks like reserving audio difficulties, we're just going to put the conference on musicals and will result in just a moment again my apologies.
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Hi, everyone. I Hope you can hear me now I'm not sure what happened we got dropped there so I'm going to ask Chuck you've got a great answer on the FCC Im going to ask you to repeat it.
PJ.
Go ahead, John Yes, sorry about that PJ, we had a bit of a technical issue on the call is dropped so hopefully everybody can hear me now.
And I'm not sure how much you actually caught but but look obviously, we have a big.
Big plans to be leaders in EPS, GE, and specifically around the whole nature of climate change and sustainable agriculture and for us from a nitrogen perspective, we are looking at our footprint and our product slate and if you look at our existing product slate today about a third of our ammonia sales would be.
I considered to be low carbon production. So you can use the phrase blue ammonia, if that's what you're comfortable with and today, we would be a leader in blue ammonia production. We are looking at green of ammonia options, we're working through the technology and the economic issues and at the right time, we'll have more to say about that but that really from us.
From an overall climate change impact perspective, Thats just table Stakes. If you look at how nutrient is structured probably different than the other or other peers is we're very uniquely positioned to really change what happens on the farm because of our integrated business model and that's really our objective is we want to and we have been in.
Shifting significantly in building tools and technology to help farmers really sequester carbon and to monetize that so we think we've built just a phenomenal product slate right now and we'll be talking more about that of course soon.
Our overall goal is just to help farmers sequester carbon and to monetize that because that's really how agriculture needs to evolve over time to help with climate change. So that's a bit of a preview of what we plan to rollout on November thirtyth at our Investor Day, and I'd encourage you all to participate.
The next question is from John Roberts with you, Yes, you're right.
Okay.
Thank you last quarter mosaic was talking about the potash market entering a new EPS up phase here.
Nutrients comments last quarter I think we're much more restrained as another quarter of sequential improvement make you more optimistic than you were last call. It sounds like you are pretty optimistic about 2021 overall.
Yes, Hi, John So look we're certainly more optimistic overall.
At the end of the third quarter than we were at the end of the first and second quarter and its for the reasons, we outlined in the prepared remarks, we've seen crop prices rally.
Six months ago, we were talking about sub $3 corn now, we're talking about $4 corn inventories have tightened and demand around the world for crop is is increasing substantially including in China.
So we are feeling better and certainly more confident as we as we enter 2021 now specific to potash, yes, I would say look if you look at overall the potash fundamentals leave improved throughout this year certainly when we think about demand demand is up about 2 million tons that would be.
Our guest today so.
So that has really been a nice.
Event in the in the industry and we think 2021 demand will continue to grow. We also think that globally inventories are are where they should be at this time of year.
And so what we think will happen is that youre going to see the potash market continue to grow there is a little bit more new supply that needs to come to the market, but the growth should easily absorb that and if you look at nutrients position, we said very clearly on the prepared remarks that.
Capital is not shipping product into China now that the contract has expired. We do believe that inland inventories are low in China and that they need the product and potash domestic pricing in China is quite a bit higher than the contract pricing. So all this bodes well I think for a good contract negotiation as we enter 2000.
21, and overall I think we're seeing demand not only in China, but in all the core markets for potash. So yes, we're feeling a little bit better about the potash market and for US. We are also focused on our cost. So another quarter of 50 to $53 cash cost. It shows the integration that we've done since the merger and.
The investments that we put into the potash business and I think we're well prepared to continue to focus on low cost and as the market grows we'll be able to put more tons into the market at lower cost. So we like that position as we head into 2021.
The next question is from Jeff Zekauskas with JP Morgan revenue.
Thanks very much.
Hey can you, let us know what the capital expenditures are for the retail business and whether they changed very much over time.
And secondly, you are differentiating retail more and more hit its now 70% of the revenue. So the company do you ever revisit the question of whether retail should be separated increased shareholder value.
Good morning, Jeff So I'll have Pedro talk a little bit about Capex, and then I'll come back and answer your second question. Thank you.
Pedro.
Yes, so in relation to Capex, we of course guided between one and 1.14 sustaining capital.
A good portion of that is actually NPK the retailer.
Retail is a bit less and this year has been coming a little bit lower than normal due to cope with restrictions where we couldnt.
To some of the turnarounds.
Because we couldnt crowd.
Crowd some of the spaces that we we had four for that so we are trying to recover some of that next year, we're going to be approximately $1.2 billion in terms of investment of capital. We are still leaning towards more retail more digital and looking more at.
Phil.
So that that's continues to be.
The preference in terms of capital allocation for our investment capital.
And then just on your question on on whether its a revisit or look at how the company is structured so what I would say there is.
We do look at all.
All of our businesses, we look at the portfolio, we're constantly optimizing our overall portfolio and when it comes to the specifics around the integrated model, we actually look at that with some frequency and we monitor the sum of the parts of course as well as other valuation metrics that we have.
And it's not only the management team that does this we put this in front of the board with some frequency just to ensure that we've got the right strategy with the right structure to drive long term shareholder value what I'd tell you right now, though is that when we look at the market conditions, the volatility and how our company has.
Performed relative to other players in the crop input space, we would say that the integrated model has as Sean through and that if you look at our free cash flow and our earnings we have been a much more stable investment than many of our peers because of the way. The company is structured and then if you look at how we've allocated capital the reason.
And we have the dividend policy that we have as nutrients is because of the integrated model and at this point in in the in the market, whether it's the economic market or the industry that we're operating in in terms of crop input we have a really attractive dividend policy, it's very stable it's growing.
And with interest rates the way they are today, it's a very attractive investment for shareholders and many of the shareholders that I talked to love This model where at the bottom of our cycle, which is where we think we are today shareholders are getting paid a very healthy dividend to wait for the market to recover which we hope. It now is on our doorsteps and then add some.
Market does recover we still have significant leverage to the upside. So the integrated model I think has been proven to show that we have less downside risk and still significant leverage to the upside and I think most shareholders would agree that that is an unique combination for companies in the material in.
Industrial space.
The next question is from Chris Parkinson with Credit Suisse. Your line is.
Great. Thank you guys want to drill down a little bit more on the potash fronts.
Appeared certain markets are actually really beginning to turn throughout Asia.
And it appears that you're confident in rebound in China. Just in your overall analysis is that complete region heading into 21, 22 core screens oilseeds and even under forward looking perspective indeed.
How should we be thinking about the regional demand dynamics.
And how does that flow through into your general views, which you're articulating going forward do you think theres upside your estimates. Thank you.
Yes, good morning, Chris So maybe I'll have Ken Seitz, our our leader of our potash business just quickly go around the world for you and give his perspective go ahead, Ken. Thanks. Good. Thanks, great. Thanks, Chris and thanks, Chuck Yes, So Chuck talked about China, and why we're confident there and that's owing to yes, some inventories that are a bit above three.
In tons at the moment, but we're seeing strong demand there in the fall.
And it's reflected in the domestic price low inland inventories as well so as the lowest potash price market in the world We're confident about.
Good contract negotiation in 2021, and we expect demand as usual be robust in China.
India, we're going to end the year with lower inventories year over year than we've seen lower than historic averages. It has been a great year.
And into the fall season with their Crieff.
They're creep crop, we expect that Indian farmer economics will continue to be very good and so will we expect strong demand in India in 2021, as well, Indonesia, and Malaysia, you can see that the palm oil prices now north of 3200 ring it per ton and that bodes very well for.
For the plantation owners in terms of potash affordability, so we're expecting growth in.
Southeast Asia into 2021.
The Brazilian market continues to be very strong as well and again in 2021, we expect some growth there, but the farmer economics and farmer affordability for potash or just excellent in Brazil, and then finally in the U.S.. We are having a very strong fall into the U.S., we have great weather great farmer affordability.
We're seeing strong.
Potash application into the fall and so that team.
Tees us up well for lower inventories across the board and then into 2021.
Expecting yes demand growth as Chuck said and favorable pricing as well.
Your next question is from Jacob bout.
Yes.
Hi, good morning.
So you are trying to retail EBITDA guidance for the year.
Can you talk a little bit about what's driving this.
Is this just margin pressure I know you talked about competitive pressure in crop protection.
And then if thats the case why is this the new normal.
Yes, so Jacob I'll talk about guidance and then Mike can give yes, Mike Frank can give you his perspective on.
What he sees going forward towards the end the year and then into 2021. So look overall, what we did with guidance is we just took the top end of the EBITDA guidance range down there.
There were some minor tweaks in potash and nitrogen potash was raise modestly because of higher volumes and prices as the last question was addressing and nitrogen was lower just modestly because of pricing and slightly higher gas cost.
Our biggest change in our in our guidance overall was to retail.
And that is a bit unusual for Q3 in retail, but I think that this year, what we've what we've seen if you look at why we lowered the guidance and retail there are three drivers to that the first is just the lower planted acreage so.
The U.S.J. was still tweaking their numbers as of late as of October.
So we were expecting and I think many others would would be expecting a higher planted acreage and throughout the year and we now know that we had a softer Q3 because of that but also crop protection application in the third quarter was lower we had drier weather in the corn belt and not a lot of pest.
Sure. So that was another driver and then the the last topic, which I did introduce in my prepared remarks, which is we have seen some deflationary pricing in the crop protection market because of some competitive pressure in the upstream.
Competitors.
Matt when we combine all that what what I would say to you is that we certainly think that most of this is just Q3 specific.
But I'll have Mike give his view on crop protection as we get through the rest of this year and into 2021. So go ahead Mike.
Yes, Thanks, Chuck and thanks, Jacob Yeah. So look if you look at our 2020 crop protection margins. Obviously, there were strong through the first half and the deteriorated in Q3.
As Chuck just mentioned I mean, a big part of the Q3 impact was the fact that there was lower especially in the corn belt insect.
And disease acres for us to treat the.
The channel ourselves included were loaded up with inventory.
And so it ended up being a hyper competitive market and we saw the the margins deteriorate because of that I think that that's a that's a unique event. This year, we haven't seen that in the past and so I wouldn't expect that to repeat the other impact that we're going to see through the whole year is just the impact of rural.
Also on our crop protection margins like if we look at the year to date.
Oracle crop protection margins, there about 13%.
And typically our Australian margins are close to where we have globally. They are in the 20% to 22% range.
So with Rocco, we have to sell off the existing inventory and the purchase commitments that they made for the 2020 season.
We're pretty much through all of that inventory and so as we look towards 2021.
We'll also have nutrient AG solutions.
Costing across our whole Australia portfolio, and so thats also going to be constructive to margins as we look forward into 21.
Our next question is from Steve Byrne with Bank of America.
So.
Yes, I was curious about whether there was anything structural about your phosphate assets.
Led to the write down is there just potentially.
Subscale.
Aurora and White White Springs.
Or any technical issues there.
Or do you just see the recent run and global prices on this unsustainable.
Yeah.
Oh, sorry, sorry.
Operator, it seems were having technical issues again could you put the call on hold.
We're we're back to you were back and if you can just repeat the question for us.
Sure.
Question was about your phosphate assets and whether there's anything.
Structural or technical or scale related White springs in a war that contributed to the decision to write downs.
The assets or is it is it solely on a longer term outlook on phosphate supply and demand.
Might suggest the recent run in prices on sustainable.
Well look if you think about what we've done since the merger in our phosphate business Park.
Part of the synergies that we delivered through the movie.
Was related to optimizing phosphate businesses that the two prior companies had and so we moved from.
Three facilities to two we increased operating rates lowered our cost substantially and all of that health and thank goodness that we did that.
What we what the reason for the impairment to be very candid, though is that we have a view that that the market has a lot of fundamental oversupply in low cost jurisdictions around the world and that supply will continue to increase and so when you look at our footprint in the United States.
These assets are strong regional players, but they're not world scale.
And so when you put all of that together.
The way the process is conducted by by our finance organization with our outside auditors, that's what triggered the impairment.
When we look at this from our our focus now for our phosphate business is really we're going to continue to drive our costs down and diversified products, which we have done over the last three years and we'll continue to look for opportunities, but this business now I think when we when we look at it we just fundamentally believe that.
The long term outlook for the phosphate business is very different than say the potash in the nitrogen business and that's taking all this into consideration is where we land.
Next question operator.
Sure.
Operator.
Hi, Bogies. Our next question is from Joel Jackson with BMO capital markets. Your line is open.
Hi, Chuck good morning.
Good morning.
You know palm oil so if.
Some of the renewable diesel.
Forecasts bullish forecasts are correct next year or two you would think that that would lead to a lot higher palm oil prices and that should lead to a lot of potash demand in Indonesia, Malaysia Southeast Asia.
He spoke how things are improving upon all time, but I think it's been surprising that potash prices really haven't written in southeast Asia. So can you speak about.
Some of that long term bullishness.
Does that play out in potash when does it happen and if you could help you guys would be helpful.
Yes, good morning, Joel So what I'll do is I'll have Jim Newton, our chief economist just address the palm oil dynamic and then I'll give you a couple of comments on the broader potash industry. So go ahead.
Good morning, Joel Yes, we've seen a combination of supply and demand factors really helped out the potential market.
Bottoming in May so we're up around 50% since that time.
Part of it is supply and that migrant Labour has made in Malaysia, which is.
You had some negative impact on.
On production unavailable utility from there. It's also demand driven so we're seeing strong demand in China has mentioned.
India demand has been strong as well.
And then we also have the biofuel dynamics, which I think is.
Supportive as we look longer term I think if you look at how the prices have performed.
In that market it always lags what's happening.
Other spot markets, especially the granular spot markets in Brazil, and you asked.
So we never saw prices go as low and Indonesia, Malaysia, They did in Brazil.
And they haven't haven't increased by the same amount, but if you look at the.
Relationship where they are today versus the prices in Brazil, it's more along the lines of warehouse space, historically, and I think given the fundamentals in that market as we look toward unleashed.
2020 and into 2021, there's certainly a lot of fundamental support for prices in that region.
Yeah, Joel so that I covered the potash our view of potash I think pretty well globally from a fundamental perspective. That's the nuance then if you go back to China.
What we're seeing in China, though I think it's early days, but we think there's some really interesting structural changes happening there. There's good demand for grains and oilseeds, you can see corn to soybean imports well above the historical levels.
In China inventories have been depleted so when we look at this and we see China pricing for for potash, but also for for food, it's much higher than the global benchmark prices. So what's happening is if you look at African swine fever, which was a major headwind.
For the industry last year now, that's becoming what we think of structural tailwind because as the Chinese rebuilt their their hog records, they're doing it with what I would call professionalism and commercial aspects around the world and so the bringing in professional commercial feedlots, which are going to use a lot more.
Crops, and I think thats, a safer way to grow the these animals, but it's also I think going to drive I think a change in demand for crops around the world.
So all of this is positive I think for for for crop fundamentals, but also for NPK.
And so that's why you know you've noticed maybe a slight change in our and our views now is that we've been watching this for the last I'd say six to nine months and there's still some more to kind of understand as this unfolds, but we are more optimistic today than we have been in the last two or three quarters.
The next question is from Andrew Wong with RBC capital markets. Your line is.
Hey, good morning.
So just wanted to ask a question on nitrogen I don't think weve covered much of that on the call.
Got it and action cost curve looks like us a lot of moving parts here with energy prices oil leak.
Nat gas prices are rising globally coal prices are going up in China, I would just whats your outlook the cost over the next six to 12 months and then more specific to.
New trend, obviously AECO gas has gone up.
But you still got a pretty good margin there could you just maybe give us a little bit of a.
Preview into 2021, a bit on how that segment might play out. Thank you.
Sure. Good morning, Andrew So look I'll stay at the high level and then certainly we can unpack this.
You'd like or we can take it offline, but what we've seen in the nitrogen fundamentals is sort of.
That the recovery has probably been pushed out by about a year or so that we had originally thought and if theres one part of our business, but also the AG industry that has been impacted by co bid. It is the nitrogen industry that the rest of our businesses I have not been really overly impacted theres been puts into.
Takes around.
Crop mix and things like that but the nitrogen industry because a part of it is industrial that goes into the general economy.
What we've seen is that global demand overall for nitrogen is going to be up modestly I'll call. It flat good demand growth in AG, but but of course declines around the world for industrial nitrogen and then some of the new production that was intended to come online late last year and then.
Earlier this year that also has been pushed out so as we look at 2021, our view would be that we're going to see growth in nitrogen next year in AG, but also in the industrial complex as the broader economy recovers the new supply will come online and what we would say that 2021 from a.
In perspective, it's probably more balanced.
Fruit for 2021 than we had originally thought.
As compared to potash, where we see very good demand growth in potash there is more supply coming on in potash, but we think that the supply demand in potash tighten next year, and we think that nitrogen it will be more more balance within good growth in 2022, and 2023 and beyond that.
The next question is from Duffy Fischer with Barclays. Your line is open.
Okay.
Yes, good morning, guys.
Question, just around China. In particular, you had mentioned the potash prices internal or higher than global prices. I think you can see the same thing for corn.
And it's been a while since you've seen that kind of delta where there is more value in AG inside of China. So maybe if you would take a first cut across and P and K, whether they are a net importer next quarter. How you think that net import export number changes next year relative to this year for China.
Okay. Good morning, Duffy Im going to have Jason Newton just go through that for you.
Hi, good morning, Doug.
It's a good question.
And I think if you look at the AG.
Hey outlook in China, it's definitely a lot stronger.
And it has been in some time.
And we think that supports.
Fertilizer consumption within within China, and I think if you look at the numbers for this year, we've seen that across all three NPK.
So looking at the export balances.
We expect Chinese urea exports this year will be in the 5 million.
Ton range roughly in line with where it was a year ago and as we look toward next year the combination of.
Increased demand domestically and some continued supply reductions and this market we'd expect that.
Domestic exports will decline so it's probably in the range of 1 million ton decline in Chinese exports.
In 2021.
We've already seen lower.
Lower exports this year.
He'd seen trends of increased consumption domestically.
Which should.
Reduce the export surplus there and then on the potash side.
We have seen increased domestic consumption in.
2020.
Minutes are down as we look toward.
2021, we expect modest increase in shipments depending on what what happens with imports as we get into a week.
This year, but but strong domestic consumption growth again quite 21, China.
Your next question is from Vincent Andrews with Morgan Stanley Your line is.
Thank you good morning, everyone.
Just wanted to drill down a little bit more into the natural gas equation on the eco Henry hub piece, just looking at slide 21, we've always talked about Diego advantage in that chart generally shows it but more recently since maybe the end of last year that advantage is narrowed and just.
Just curious what you think is causing that and then if we do see a further spike in Henry hub.
Whether youd anticipate echo falling at or not thank you.
Okay, Vince and good morning, Ray Sally our head of nitrogen and phosphate can can take that question go ahead race.
Thanks, Jeff So just to reiterate.
Thanks, Chuck mentioned.
Globally, we're seeing prices.
Increase we see LNG come up.
It's pushing European gas prices up to a more natural position, which is pushing them to the right the curve.
I want him to have Ralph.
We still think that we'll see an advantage.
Through next year.
There's a lot of production available there.
At the current prices C. so.
We think its peers.
We'll still be advantaged to Henry hub.
Likewise, I think some uncertainty around Henry hub of them I'm, just because of the election.
But despite that there was a lot of capacity available.
In the 275 to 325 range, so again, a henry hub and I kind of might come up a little.
But the amount that come up is capped compared to the LNG prices and process and there's the world and so we think.
We'll have a pretty advantaged position.
Some of the other competitors that have enjoyed like gas prices recently.
The next question is from Ben Isaacson Scotiabank ones open.
Thank you very much and good morning, you guys have given a very clear outlook on your views.
With respect to nitrogen over the mid term at least from a non controllable point of view when it comes to Controllables. What is your strategy for nitrogen you've talked in the past about de bottlenecking, what about product mix shifts or lowering costs or potentially offshore investments consolidation et cetera. Thank you.
Yes, good morning, Ben rate breaks you want to take those questions. Please.
Yeah that from Chuck So ive been looked on the Controllables. There's a number of things that we're focused on here. The first is starting with reliability of the equipment.
We've had a big push in the last three years to improve the reliability of the equipment.
By making sure that EPS sustaining capital is focused on things that matter.
You've seen that come up now we're.
We're on track this year to have a to reach a high watermark around that.
At 93 non.
94% capacity utilization, we were going to try and push on beyond that in the next few years.
We're also have invested about $300 million in increased capacity that has allowed us more flexibility.
With downstream products. So that's allowed us to move the ammonia molecule into urea and UAN in which has served us well.
And also many himself.
We have identified additional local brownfield expansions Liza.
The low cost compared to Greenfield expansions and these brownfield expenses are focused on again product mix flexibility.
On a regional basis, so looking at the individual rigs threatened where we need that extra flexibility there also.
Just on energy efficiency.
So again.
And reliability and so you should see us continue to be able to improve the reliability.
The equipment, we have and also get a little more flexible.
Product mix that will allow us to handle some of the variability we see.
In the application windows.
The next question is from Adam Samuelson with Goldman Sachs. Your line is open.
Hi, Thank you good morning, everyone.
So the question is on retail and really as we think out to 2021, the crop price environment in the farm income environment.
It is considerably more favorable maybe a little more skewed to soy and corn pricing at current prices, but just trying to think about.
The nutrient operating leverage to that and retail next year.
Do we see a slowdown in opex growth as we kind of proper OCO.
Or is there an additional step ups in investments in digital in Brazil that mean that we could still see opex grow as fast or faster than gross profit next year.
Good morning, Mike you want to take that question.
Sure you bet Chuck Good morning, Adam So first let me talk about Opex Firstly this year.
The vast majority over 90% of the Op X increase this year is coming from acquisitions in particular roll call, but we also had a couple of medium sized acquisitions in Brazil, and so that's where we're seeing opex growth. This year right now going into 2021 were we don't have those big acquisitions at this time.
That are going to have that same kind of impact into our 2021 year in so I would expect a more stable opex growth.
Growth going into next year, probably less than inflation.
Look in terms of grower sentiment you're right whether it's for us.
Obviously, it was an 40 harvest good yield strong prices right now and good government support programs.
We're seeing that play out our seat bookings are up.
We had a we've had a record October from a ton standpoint in terms of getting applications fertilizer on the ground and.
And we've also seen a record number of soil samples come into our waypoint analytical lab network and so we are seeing growers really starting to think about how do they make investments into the 21 crop that are going to really be focused on maximizing yields of course, it's the same in Brazil more margins are extremely strong and OSP.
Failure, there were just about to harvest what looks to be a really good crop and and moisture conditions are once again looking positive going into the 21 season. So across the board I would say you know all those things are setting up right now.
A really strong grower fundamentals.
And when that's the case there is a positive impact of course on our retail business from product sales margins.
And obviously there is lots of play out in terms of planted acres for 21 between corn and soy.
But.
You know as Chuck mentioned in the prepared remarks, there was about 8 million acres that didnt get planted this year.
Because of prevent plant and so again I think as we're looking at the 21 season.
We're expecting a lot of those acres to come back into play in the us as well.
The next question is from Jonas Oxgaard with Bernstein. Your line is open.
Hi, good morning.
We've talked a lot about China and the outlook for so pretty.
Strong potash application.
But.
Are you are you thinking about China.
Differently in the strategic sense this upcoming year might it feels like we are repeating the same story every year.
Spending too much volume to China, the negotiating from a position of weakness.
Yes, so good morning.
Look I think.
The way, we think about this coming contract with China.
Is fundamentally different than what what happened over the last couple of years. So.
Well, if you recall, we signed and being Canpotex signed the contract only till October so it wasn't even 12 months last time.
I think we made it very clear that we fundamentally believe that the contract price was not sustainable at that level.
And temple, Texas now not shipping any volume after the contract in October So I think that that is a very important differentiation and distinction.
And then if you look at how we're forecasting our volumes into 2021, and we'll talk more about that.
As we enter the new year is we don't we're not relying on China for a lot of volume early in 2021.
And then the comment that we've already made a couple of times today, the China domestic potash price is much higher than that contract price.
So in my in my Eyes, I think we have set up a different dynamic now this is always going to be a tough contract negotiation people are constantly referring to what they can see at the port inventories and that's the most visible and transparent number so the Chinese understand that but from my perspective, what I would say is that I believe.
There's only one way potash prices are going to go in China other questions just by how much.
The next question is from Michael Toppled with TD Securities. Your line is open.
Thanks, Good morning.
I know you feel very strongly about the robustness of your digital platform I'm just.
I think about the strength you've seen in that platform, you've well exceeded the targets you put out and I'm just wondering if.
You can talk about what what you think it is that allowed you to do that and then how you think about that going forward.
Sure thing Mike Frank when you take that question. Please.
You bet Chuck Yeah, So Michael obviously.
The the platform has exceeded our expectations this year and in terms of revenue. That's that's come in on the digital portal, obviously that was aided by coded.
Where we got into the March busy season.
You know when we wanted to make sure that both our employees and our customers stayed safe and healthy and so we really turned to the digital tools.
And leverage them in that window, but the good thing is we have seen that continue.
Through the third quarter and even in the early start of the fourth quarter. So look I think the benefit if theres really two big categories benefits that were seeing firstly, it's around efficiency. So our best sales agronomists that are at capacity you know doing it the old way with these digital tools they were able to increase.
The number of acres that they can serve by probably 25% to 40% just.
Just because of these tools allow them to reach the growers in and help to growers make decisions in a more convenient way.
And we're also seeing less duplication of kind of back office work and so there is also a leaning down of the administration that we're seeing and we can anticipate as we do more and more transactions on the digital portal and get more payments through through the portal that it's leaning down our administration.
The other big area benefit is really I would say both grower convenience as well as our sales are brought them is convenience.
We're seeing for example, growers that are engaging online are turning less they are more likely to buy multiple shelves from us and so we do see this as an Avenue I think it's early days, but it's an avenue for us to drive organic growth as well.
Operator, we have time for just one more question.
Thank you. Our final question is from Michael Picken with Cleveland Research. Your line is open.
Taking the question just wanted to go briefly through the seed and crop protection market, you mentioned that thats, causing some pressure on in terms of your retail margins. How do you see that evolving into 2021, and maybe you could talk about kind of the competitive dynamics. It seems a little bit right now with the price cards now thanks.
Good morning, Michael Mike Frank.
Yeah, Michael So look I think we already talked about the crop protection market.
Market and the impact this year in particular, the impact of of rural Cohen and the mix effect that Roper had on our overall margins as well as just a very competitive Q3 that is.
Obviously lowered our margins in the us in Q3 as we sold through the.
The inventory based on on the smaller market.
Now I would say on the seed side look if you look at our margins year to date.
Our margins are strong on seed.
They are strong because we we've performed well with our proprietary products I see portfolio and I would say, we've never had a stronger proprietary product portfolio than than we had going into the 21 season. So we feel really good about that.
And right now again I think based on positive grower sentiment growers are focused on.
The seed that's going to help maximize yields so that they can take advantage of you know 10, $10.40 soybeans or or $4 corn and so we're seeing actually in soybeans, probably a trading up.
Less roundup ready two soybeans less runner party by Liberty link soybeans, and we think that our overall.
Ratio of both enlist and extend and extend flex beans are going to be up this year and so it's a competitive marketplace, but again growers are focused on making sure. They can get the best seed and really its a same on the corn side.
We're we're not seeing extraordinary.
Competition, I would say right now and see it I mean the market.
He is focused on getting the best see making sure that we have inventory of it.
And that's where the focus is right now it's more it so there than it is on I would say on the price equation.
Ous so its Richard Downey here. Thank you for everyone, who dialed in my apologies for the technical difficulties this morning, but.
We are available for any follow up questions. You may have thanks for joining us have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
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