Nutrien Ltd. (NYSE:NTR) Q3 2023 Earnings Call Transcript
Nutrien Ltd. (NYSE:NTR) Q3 2023 Earnings Call Transcript November 2, 2023
Operator: Greetings and welcome to Nutrien’s 2023 Third Quarter Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Jeff Holzman, Vice President of Investor Relations. Please go ahead. Please go ahead.
Jeff Holzman: Thank you, operator. Good morning and welcome to Nutrien’s third quarter 2023 earnings call. As we conduct this call, various statements that we make about future expectations, plans and prospects contain forward-looking information. Certain material assumptions were applied in making these conclusions and forecasts. Therefore, actual results could differ materially from those contained in our forward-looking information. Additional information about these factors and assumptions are contained in our quarterly report to shareholders as well as our most recent annual report, MD&A and annual information form filed with Canadian and U.S. Securities Commissions. I will now turn the call over to Ken Seitz, President and CEO and Pedro Farah, our CFO, for opening comments before we take your questions.
Ken Seitz: Good morning, everyone and thank you for joining us today. Nutrien delivered adjusted EBITDA of $1.1 billion in the third quarter and $5 billion through the first 9 months of the year, down from the record comparable periods in 2022. We saw a number of positive market developments in the third quarter that are constructive for our business, including strong crop nutrient demand in North America and increased stability in global potash markets. In retail, North American crop nutrient sales volumes were up 5% in the third quarter and 10% on a year-to-date basis as growers were incentivized to maximize crop production. North American crop nutrient margins in the quarter increased by $10 per ton compared to the prior year supported by improved margins for commodity fertilizers and growth in our proprietary crop nutritional and biostimulant products.
These high value proprietary products contributed nearly $350 million in gross margin through the first 9 months of 2023. Crop protection sales in North America were down from the record prior year due to lower prices for certain commodity products and slightly lower sales volumes, a result of dry conditions in the U.S. Midwest. We ended the quarter with North American crop protection inventories down more than $200 million from the prior year and we will be patient with our approach to restocking inventories. Crop protection inventories in South America remained more elevated resulting in pressure on prices and margins. Crop nutrient volumes for our South American retail business were up 25% in the third quarter, due to improved grower demand and the benefits of our Casa do Adubo acquisition in the fourth quarter of 2022.
Nutrien financial sales increased in the third quarter and first 9 months of 2023 due to higher utilization of our financing offerings in the U.S. as well as the recent launch of our digitally enabled financing program in Australia. We are pleased with the uptake of our financing programs and see additional opportunity to drive organic growth for our retail business. In potash, we delivered record sales volumes totaling 3.9 million tons in the third quarter. North American channel inventories were at multi-year lows entering the second half and customers secured supply in anticipation of a strong fall application season. We had a very positive response to our summer fill program, utilizing the strength of our distribution network to deliver 1.7 million tons to customers in North America.
Our potash volumes and net realized prices were impacted by logistical challenges associated with the port strike in Vancouver and an outage at Tampa, Texas export terminal in Portland. Shipments through Vancouver returned to normal late in the quarter and we expect the Portland terminal to be operational by the end of the year. We increased granular potash production to meet the surge in domestic demand and our controllable cash cost declined to $56 per ton in the third quarter, highlighting the advantages of our low cost six-mine network. Our nitrogen realized prices in the third quarter reflected the reset in benchmark values at the time of summer fill programs. Nitrogen sales volumes declined from the prior year due to production outages at our Trinidad, Borger and Geismar.
We completed two smaller Brownfield expansions at our Geismar facility and installed the final of 8 N2O abatement projects at our nitrogen sites, which we expect will be a key contributor to reducing our greenhouse gas emissions. Phosphate sales volumes increased in the third quarter due to a strong engagement from phosphate fertilizer customers. We did however encounter hurricane related downtime in our White Springs facility that impacted production volumes and costs. Excluding this downtime, our phosphate plants have operated well following the completion of reliability initiatives in the first half of 2023. Now, turning to the market outlook, global grain yields are projected to fall below trend in 2023 for the fourth consecutive year, limiting any meaningful recovery in stocks.
New corn crop and soybean prices have incurred some seasonal pressure, but remain 10% to 15% above the 10-year average. Fertilizer affordability has improved significantly over the past year and projected grower cash margins are above historical average levels. Harvest in the U.S. has progressed ahead of average, providing an open window for fall fieldwork. We project U.S. fertilizer demand will be up 5% to 10% in the fourth quarter compared to the prior year. Global potash demand has increased in the second half driven by greater price stability and improved grower affordability absorbing the gradual increase in Eastern European export volumes. We now forecast global potash shipments in the range of 65 million to 67 million tons in 2023. We expect robust agricultural fundamentals and the need to replenish soil nutrient levels will support increased potash consumption in 2024.
We project global potash shipments next year in the range of 67 million to 71 million tons with the majority of year-over-year growth in Southeast Asia, Latin America, Europe and India. Global ammonia supply has been tight to start the fourth quarter due to outages in Europe and production challenges in other key regions. The urea markets are relatively balanced as Chinese export restrictions and strong import demand in India offset weaker seasonal demand in other regions. Geopolitical conflicts have the potential to create additional volatility for global energy prices and nitrogen supply. Most notably, European natural gas prices have increased by 20% over the past month and nitrogen production in Egypt has reportedly been curtailed due to gas availability.
To summarize, agricultural fundamentals remain supportive and we are seeing strong demand for crop nutrients and from our grower customers. Global potash demand has strengthened in the second half of 2023 and we expect this trend will continue into 2024. And we anticipate constraints on global energy and nitrogen supply will continue to provide a positive backdrop for our low cost nitrogen assets. I will now turn it over to Pedro to review our guidance assumptions and capital allocation plans.
Pedro Farah: Thanks again. I will start with our updated guidance for potash. We increased the bottom end of our full year potash adjusted EBITDA and sales volume guidance to reflect the strength of our market fundamentals in North America. We continue to see strong customer engagement and have increased our domestic reference price for deliveries in the fourth quarter. Spot prices in offshore markets have been relatively stable and Canpotex is fully committed on its sales plan for the remainder of 2023. In nitrogen, we narrowed our adjusted EBITDA guidance range as higher benchmark prices offset lower projected sales volumes. Our North American nitrogen plants are operating at higher utilization rates in the fourth quarter, including isomer, where we have recently completed expansion projects.
We made a decision to bring forward a planned outage at our border site to address reliability issues that impacted production in the third quarter. We lowered the top end of our retail adjusted EBITDA guidance range to reflect pressure on crop protection margins in South America and the impact of weaker livestock markets in Australia. We maintain our outlook for North American retail business as fall fertilizer application rates have been strong and per ton margins are expected to be above historical average levels. Based on these factors, Nutrien’s full year adjusted EBITDA guidance range was narrowed to $5.8 billion to $6.4 billion and adjusted net earnings was revised to $4.15 to $5 per share. Our effective tax rate on adjusted earnings in 2023 has been impacted by non-cash impairments and an unfavorable geographic mix of earnings.
We do not expect these to be recurring items and anticipate our effective tax rate will return to more historical levels in 2024. We are projecting total capital expenditures of approximately $2.7 billion in 2023 and plan to return over $2 billion to shareholders through dividends and share repurchases. We are focused on investments to sustain our assets in highly targeted growth projects in our retail, potash and nitrogen businesses. Based on current planned initiatives, we expect to reduce annual capital expenditures to a range of $2 billion to $2.5 billion going forward. In retail, our focus is on increasing earnings and free cash flow by enhancing margins and asset efficiency. This includes investing in our proprietary production capability and network optimization and digital initiatives, which are all key drivers of organic growth for retail.
We continue to evaluate retail tuck-in acquisitions in the U.S. and Australia and will remain selective based on strategic fit and valuation. In Brazil, we believe the long-term prospects for agriculture are very strong and see opportunity for future growth of our retail platform. However, in the near-term, we have paused additional investments until there is greater stabilization of the market. We will utilize the spirit to integrate recent acquisitions and optimize our cost structure. In potash, our mid-cycle scenario assumes global demand returns to historical trend and Nutrien’s sales volume is in the range of 14 million to 15 million tons. This translate into volume growth potential from existing operational capability of 1 million to 2 million tons compared to 2023.
We are continuing to focus on further automation of our fleet enhancing safety and productivity. Lastly, in nitrogen, our priority is to complete in-flight Brownfield expansion and reliability projects that support our mid-cycle sales volume scenario of 11.5 million to 12 million tons. Brownfield projects are expected to add approximately 0.5 million tons of nitrogen production capability by 2026 with projected returns well above our hurdle rate. Back to you again.
Ken Seitz: Thanks, Pedro. I will just make a few final comments. We are encouraged by the positive market developments over the second half of 2023 and particularly the strength of crop nutrient demand in North America and increased stability in global potash markets. We are optimistic on the outlook for our business going forward and we will continue to position the company to efficiently serve the needs of our customers. Our focus is on initiatives that strengthen the advantages of our integrated models, drive operational efficiencies and increase free cash flow. As Pedro highlighted, we are proceeding with highly targeted investment opportunities and will maintain a balanced and disciplined approach to capital allocation, including the return of meaningful capital to our shareholders. We would now be happy to take your questions.
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