Nutrien Ltd. (NTR) Q2 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to Nutrien Ltd Q2, 2018 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Richard Downey, VP of Investor Relations and Corporate Relations. Please go ahead.

Thank you, Operator. Good morning, everyone. And welcome to Nutrien’s conference call to discuss our second quarter results and outlook. On the phone with us today is Mr. Chuck Magro, President and CEO of Nutrien; Mr. Wayne Brownlee our CFO, and the heads the of our business units. As we conduct this conference call, various statements that we make about future expectations, plans and prospects contain forward-looking information. Certain material assumptions were applied in making these conclusions and forecasts. Therefore, actual results could differ materially from those contained in our forward-looking information. Additional information about these factors and assumptions are contained in our current quarterly report to our shareholders, as well as our most recent annual report, MD&A, and Annual Information Form filed with Canadian and U.S. Securities Commissions to which we direct you. I will now turn the call over to Mr. Chuck Magro.

Thanks, Richard. Good morning everyone. And welcome to the Nutrien second quarter earnings call. Today, I’ll recap our performance for the quarter and the first half of the year, which highlighted the value of our ingredient business model. I will also provide an update on the outlook for the remainder of the year and the significant progress we have made on our strategic priorities. I’m particularly pleased with how well the merger has progressed across many fronts. I want to take a moment to thank all of Nutrien’s employees for the commitment they have demonstrated in so many ways. It’s truly been impressive and rewarding to watch how the Company has grown in the past seven months, how much we’ve accomplished in a very short period of time, and we see great promise for the rest of 2018 and beyond. Now, turning to our second quarter and first half performance. Nutrien Ag Solutions, our retail business delivered excellent results, both on second quarter and first half basis with gross margin higher for all major retail categories this year. Retail EBITDA was up 17% for the second quarter and 10% for the first half with most of this improvement driven by organic growth. This included strong performance from our proprietary products line. On a geographic basis, U. S. retail EBITDA in the first half of 2018 was up 6%, both crop protection and seed margins in the U. S. exceeded the previous year and we saw excellent demand for all crop inputs despite some pressure from the delayed application season. The Australian market has been impacted by severe drought conditions this year, but our business continues to perform extremely well. In the first six months, Australian retail EBITDA reached a record $99 million, up 23% over the same period last year. The importance of having a world class logistics and distribution system was evident in the compressed season, clearly demonstrating Nutrien’s competitive advantages. To give a sense of this capability, in the two week window starting April 29th, we delivered $1.2 billion in products and services from our North American retail sites to the grower. This equates to almost $90 million delivered every day through the peak of the spring season, with many of these products and services requested by our customers with just a few hours notice. Meeting this demand requires a significant infrastructure investment across the value chain and a substantial dedicated workforce. Turning to our wholesale business. We delivered another strong quarter in potash with EBITDA increasing 32% year-over-year. Our average realized potash price was up $27 per ton compared to the second quarter of 2017, a reflection of improved prices in all major spot markets. We achieved higher offshore sales as we benefited from strong demand, tight global surprise and a greater crop protect allocation. Our potash cap cost to production declined to $60 per ton in the first half, supported by network optimization and the realization of merger synergies. Nitrogen EBITDA increased by 29% in the second quarter due to improved market fundamentals and lower production costs. We had lower gas costs across our network of nitrogen facilities. And it is important to point out the significant advantage we had at our Alberta Nitrogen plants with [indiscernible] gas cost this past quarter under $1 per MMBtu. Also, our nitrogen plants operated very well with utilization rates at 93% through the first six months, up 3% compared to last year. Phosphate prices remained strong and more than offset higher sulfur input costs, supporting a 42% increase in EBITDA compared to the second quarter of 2017. We benefited from strong demand and higher plant utilization rate, providing for a significant increase in our phosphate fertilizer sales. With improved results across all business units, Nutrien’s adjusted net earnings for the quarter was $1.48 per share and $1.66 per share for the first half, which is at the top end of our earnings guidance range we provided in May. Adjusted EBITDA totaled $2.2 billion in the first half, up 15% from the comparable period in 2017. These results demonstrate the strength of Nutrien’s integrated business, the realization of merger synergies and our leverage to improving market conditions. With the strong first half behind us, we now turn to the outlook for the remainder of the year. Global agriculture fundamentals remains generally positive, but we have seen pressure on most crop prices over the past quarter; favorable U. S. crop prospects is one reason for the weakness; the second factor is related to the uncertainty over-escalating trade restrictions, particularly between China and the U. S. While it is difficult to predict the magnitude and duration of these potential trade restrictions, we believe it is unlikely there will be a long-term impact on North American agriculture. So far we have seen U. S. growers continue to invest in plant health and nutritional products to enhance their yields. We also anticipate solid demand for fall application this year as we expect an early start to the harvest and strong removal of Nutrien’s associated with what should be excellent yield. However, farmers will be watching crop prices and trade developments closely, particularly post harvest, and are likely to become more concerned if there is not a resolution on the trades front buyback time. In potash, we expect strong global demand in the second half and have increased our forecast for global shipments slightly to between 65 million and 67 million tons. [Indiscernible] is fully committed until October and we expect strong domestic volumes in the third quarter with a large order book committed to our summer fill program. As contract negotiations continue in China and India, our position is clear. The new price must be reflective of increases seen around the world. Given the continued improvement in market conditions, we have increased our potash sales outlook for 2018 to 12.3 million to 12.8 million tons, and increased our products EBITDA guidance to $1.4 billion to $1.6 billion. Nitrogen prices have remained relatively firm in the third quarter supported by strong global demand and reduced supply from key export regions such as China. Higher energy prices for marginal producers in Europe and China have also provided additional support to the market. With higher Nitrogen prices and lower gas cost compared to last year, we see an opportunity for strong nitrogen margins through the remainder of 2018 and beyond. Phosphate prices have held up better than anticipate supported and improved earnings outlet for our Phosphate business. Based on these conditions, we have raised our adjusted annual earnings guidance to $2.40 to $2.70 per share and adjusted EBITDA guidance to $3.7 billion to $4 billion. The earnings per share guidance include approximately $100 million in additional annual depreciation related to the conversion of our Redwater phosphate facility to produce ammonium sulfate. We expect our second half EBITDA to have a similar quarterly profile to our combined 2017 with third quarter accounting for up to 45% of the second half total. The final item I would like to cover is the progress we've made on integration and our capital allocation priorities, first on synergies. We achieved a run rate of $246 million as of June 30, which means we’ve almost reached our initial year-end target of $250 million for 2018, well ahead of schedule. Therefore, we have raised our 2018 run rate synergy target to $350 million. The total target remains the same, which is $500 million in run rate by the end of 2019. The advanced realization of synergies has been achieved across all four of our major synergy buckets as outlined in our quarterly earnings release. We achieved distribution and transportation optimization synergies through the first six months by selling incremental volumes through our retail network and eliminating 900 railcars in 15 distribution points. We have also reduced fixed costs across our portfolio of wholesale assets and eliminated nearly $50 million in sustaining capital redundancies at our potash and phosphate sites. In early July, we announced that our small Geismar Phosphate facility will close by the end of 2018, combined with the previously announced conversion of our Redwater Phosphate plant, means that all of our phosphate rock contracts will be complete by year-end, with Nutrien no longer requiring any offshore phosphate rock imports. This is consistent with our phosphate integration plan and will allow us to reduce cost by increasing operating rate better integrated phosphate facilities in Aurora and White Springs. We also made significant progress on the sale of our equity stakes, finalizing an agreement to sell our SQM Series A shares to Tianqi Lithium, and completing the divestment of our SQM Series B Shares through an option process. And in July, we signed an agreement to sell our Arab Potash stake to SDIC Mining Investment. Along with the sale of our ICL stake earlier this year, we expect to realize net after-tax proceeds of approximately $5 billion and complete all divestitures by the end of 2018. With market conditions improving, synergy tax progressing ahead of schedule and the expected proceeds from equity sales, our net debt to EBITDA ratio could fall below 2 by the end of 2018. In this position, Nutrien has a lot of flexibility to return capital to shareholders and invest in growing the business. Maintaining a steady and growing dividend remains a top priority and is underpinned by the growth and stability of our retail business. We’ve also moved aggressively on our share buyback program that was implemented in February. So far we have invested $1.5 billion to purchase 29 million shares, and we’ll look to complete the remaining 9% in 2018. Retail remains the top priority for allocating the capital, and we have a number of avenues to grow our business. First is the expansion of our existing footprint through tuck-in acquisitions and select Greenfield builds. These opportunities remain highly accretive and we see a strong pipeline of acquisition opportunities in both North America and Australia. The second element is to continue to grow our proprietary products line as we are able to generate higher margins from these products, while bringing value to our grower customers. Third, we are focused on expanding our footprint in Brazil, due to the tremendous growth potential this market and the opportunity to leverage our retail distribution proprietary products model, and our leading digital ag platform to generate significant long-term value. And the final point on our retail strategy is the significant progress we’ve made to advance our digital capabilities. In July, we launched our integrated digital platform and made two strategic acquisitions that will greatly enhance and accelerate our digital capability and interaction with our customers. One of the acquisitions is Waypoint, the largest agriculture laboratory group in the U. S., but we see opportunities to combine their sampling, testing and analytics capabilities with our new digital platform. The second acquisition was Agrible, a company that has an impressive set of agronomic and sustainability tools, which can be immediately incorporated into our existing digital platform. Nutrien has an unmatched opportunity to combine this digital capability with the independent knowledge from our local agronomist network, our extensive distribution system and proprietary portfolio to create the superior value for our customers and our shareholders. In summary, Nutrien delivered solid operational performance during the first half and made significant progress on strategic priorities. There is more work to come, but I believe we demonstrated the capability of our world class fertilizer production in retail distribution network, not only meeting the crop input demands of our customers but exceeding them in what was an extremely tight application window. We think the investment thesis for Nutrien is clear, the fundamentals of our business are improving and no one in our industry has the leverage to the upside with every $25 per ton increase in crop Nutrien prices, contributing approximately $650 million in additional EBITDA. Our leading retail provides protection on the downside and the ability to provide shareholders a solid and growing dividend. We expect to have $6 billion to $8 billion in cash to redeploy over the next three years that will provide tremendous opportunities to grow the Company and return cash to shareholders. Thank you for listening. And we’ll now be happy to take your questions.

Thank you. At this time, we’ll be conducting a question-and-answer session [Operator Instructions]. Our first question comes from the line of Ben Isaacson with Scotia Bank. Please proceed with your question.

I was hoping to talk a little bit about the investment dollars or the amount of capital that you're allocating to the digital integrated platform. Is this an investment where you can measure a return, or is it just a new cost of business? Perhaps from another way, in a year from now when we look back at your progress versus your actual spend. How do we know and how do you know if you're getting a good job?

On our digital capability, I’ll have Mike Frank, our President of Retail give you some of the more specifics of the plan and how we measure the value that we’re going to create for all stakeholders, our customers, our shareholders. But look, I think when I look at the strategy the world is heading to a more digital platform in almost everything. And we believe that having the digital capability, coupled with what we consider to be the world's best distribution network, the best agronomist services organization that we have, I think it’s going to help us set better ourselves apart. And really our goal is to become the best crop advisor and the easiest to deal with. And we’re going to combine the physical aspects, the people assets that we have on the ground working with farmers every day with the digital capability, and there is a clear return on investments. But I’ll have Mike to talk about the strategy that we’re invoking and how you’re going to see the return on the investments.

So when we look at the recent acquisitions, we really like what both YieldPoint and Agrible bring to us. We really believe now that we have the capacity and the capability to build the leading digital agronomy platform in the industry. And we launched our platform on July 1st. A lot of the Agrible tools will be immediately put into our platform, which we think will improve the customer experience. And to your question in terms of how do we measure success. Obviously, there are a number of areas where we do charge for the service on the platform Variable Rate Fertilizer, Variable Rate Seeding Applications are two examples of that. So we do believe that there will be some discrete line items that we can measure and quantify from a value generation standpoint. But I think we’re in a unique position from a digital standpoint, because we are in retail. And we believe that by leveraging the data science capabilities that we have to bring true solutions to our growers, we will earn more of their business and we’ll earn some new business from new customers. And so we’re in the unique place in the value chain where we think we can grow our business to having the leading digital platform in the industry. And so I think we’ll see it on our base business and we’ll also see it specifically in some line items in our digital platform.

And then just a couple of other comments, we don’t feel we need to do any large extensive acquisitions in this space. The investments that we made on a relative basis are quite modest. They were quite strategic to build some specific capabilities we were looking for. That’s not to say we might not -- have other bolt-ons, but we don’t think we need to have some very large expensive acquisitions in this space. And I think how we’re going to measure the return will be in multiple facets but share of wallet and reduce turnover our customers, I think are the two of the key KPIs that we’re measuring certainly internally right now.

Our next question comes from Christopher Parkinson with Credit Suisse. Please proceed with your question.

So now that you execute on the SQM on APC transactions. Can you just walk us through your updated thoughts on the M&A pipeline in retail across the Americas? Maybe comment on whether or not you’d be interested in expanding your nitrogen portfolio either domestically or broad. Just any sense on how you’re evaluating those opportunities versus a buyback would be very helpful. Thank you.

So I think to your question, priorities for capital now that at least all of the equity stakes of the deals have been announced. So obviously we’re working hard to get the remaining ones closed. And as I mentioned in my prepared remarks, we think that that will happen by the end of the year. So if you look at that, we are expecting net after tax proceeds of approximately $5 billion and then the base business and even in today’s market fundamentals generating significant free cash flow. So if you look at the next two to three years, after we pay our sustaining capital and the dividend, we still will generate significant free cash flow. And we think that that will be somewhere between $6 billion and $8 billion in the next three years that we’ll have to redeploy. So the next logical question is, okay, what are those priorities for that capital. And one of the fundamental growth priorities of course is retail and we have a lot of opportunity to grow retail. We can grow the retail business through the traditional network in North America and Australia. We’ve been quite vocal about our aspirations to replicate that model in Brazil. And we will most likely allocate somewhere between $1 billion and $2 billion of capital in Brazil, I’d say over the next five years or so. And as well as investment backward integrating into the Lavalin product portfolio, which has been just wonderful investment for us and it’s driven a lot of our margin enhancement that you’ve seen in the retail business. Now, compare that to say a buyback, what I would tell you there is we’re not even complete the first buyback yet, we still have the remaining 10%. We will complete that as I mentioned this year. And then we’re always looking at what’s the best use of long-term capital to grow shareholder value and we’ll make those decisions in due course. But I think just the sheer nature of having $6 billion to $8 billion over the next three years or so, I believe we’ll be able to do a lot of different things with it. And we’re going to balance growth with shareholder returns. And I really can’t say much more than that at this point but I think we’ll have enough capital to do both.

Our next question comes from Andrew Wong with RBC Capital Markets. Please proceed with your question.

So yesterday there’s an announcement small capacity reduction at Vanscoy. Obviously, there is some new capacity that eventually will be coming online from the other competitors, so it make sense to offset that. But the demand is also pretty strong right now. So just wondering is it closure -- just you trying to get ahead of the curve a bit to make sure that market just remain balanced and healthy and what's the longer-term outlook for potash production? Thanks.

I’ll give you a strategic overlay on what we announced yesterday and then I’ll just have Susan Jones, our Head of the Potash Business just to give you a little bit more of the specifics on the outlook. So yesterday’s announcement was really the result of several months of pretty intensive analysis and planning and this is where we landed for what I’d call our go forward operating strategy based on what we can see today in the markets. And we think that the announcement that we communicated earlier this week on the workforce reduction, it really does allow us to optimize our network. So the six in Saskatchewan and of course reduced some cost, it does improve our overall global competitiveness, which I think is important. But more than that, it does allow us to maintain sufficient ramp up capability if and when needed and the markets are improving. And the potash market that you can see today we even increased our overall global shipments up by about 0.5 million ton. So that’s the strategic overlay and the rationale is to optimize -- continue to optimize our network, drive our competitiveness but have sufficient ramp up capability if needed. And I’ll just have Susan talk about the specifics of the Vanscoy announcement and then just about the outlook.

I think the announcement yesterday was more about rebalancing the potash between our facilities as opposed to taking volumes out of the market. As you mentioned, we are seeing very good demand. And what I should mention is that this whole shift of production volume from Vanscoy to other sites will contribute to our overall synergy plan. And you’re going to see by the end of 2019 we’ll have annual run rate synergies in potash that will be delivering of approximately 80 million to 100 million. Some of that will be production allocation and some of that will be sustaining capital. So that’s really what you’re seeing in that announcement yesterday.

Our next question comes from P.J. Juvekar with Citigroup. Please proceed with your question.

Chuck, your seed sales were up. Can you just break that down between price and volume? And the reason I asked is that there were some reports that seed prices were under pressure before some of these big mergers took place. So given all these mergers, have you seen any behavioral changes from your suppliers in terms of seed pricing and market share -- defending market share? Thank you.

I’ll ask Mike Frank answer that question for you.

As you saw, our margins are up on seed overall all driven really by volume. And so our gross margin percent, they are really flat year-over-year and we believe we’ve gained share in the marketplace. When we look at our market research that indicates that the entire U.S. seed market is probably flat to down a little bit and we’re up. And so your questions in terms of what are we seeing from suppliers, I think this market has been highly competitive for the last several years. It continues to be competitive this year. In soybeans we have now about half of our mix in dicamba, and so that continues to be a growth opportunity for us. But the market continues to be competitive. And I’d say we haven’t seen any shifts in behavior due to the mergers that have taken place.

Our next question comes from Adam Samuelson with Goldman Sachs. Please proceed with your question.

So question on the outlook for potash, and understanding the pricing year-to-date has been strong, wondering if you can comment a little bit on how you think about the back half and later into the year given the crop price outlook. I mean, are you seeing any concerns about affordability prices in Southeast Asia and come off pretty considerably? Do Chinese contractors you eluded to in the prepared remarks have not been resolve yet? Just trying to think about the run up that you’ve seen in potash prices and phosphate prices as well relative to the crop price environment that we’re in and the currency environment that we’re in that it seems to be a little less beneficial?

I’ll have Jason Newton, our Head of Market Research to give you a view of what we’re seeing globally. And then I’ll give you a couple of comments at the end.

And I think really if you look at our global potash shipment forecast, I think the agriculture fundamentals really defer depending on what geography you’re in. So absolutely I’d say within North America we’ve seen crop prices come off versus where they were during the spring season. And crop prices are biggest contributor to grower margins and so obviously grower margins at current prices are being squeezed. Although, current prices don’t really mean a lot if there is no crop being sold. That said, current potash prices within North America remain highly affordable and low by historical standards. And from a North American perspective, we’ve seen the crop is well ahead of normal progress in terms of maturity. And typically the biggest driver of that fall season is length of that season and how weather cooperates. And so the outlook for the second half looks pretty positive. In Brazil, we did see some logistical bottlenecks in May and June, driven by the trucker strike and that dispute. But really as we look towards the second half of the year, we think that those issues are resolving themselves. And from a grower perspective, the soybean prices are very strong and we expect an increase in acreage, which should support demand there. And good points on Southeast Asia, we have seen palm oil prices are lower, definitely year-over-year but the economics remains really positive even at the lower prices. And we continue to see strong demand in that market. And from a potash shipment standpoint, we’re maintaining a flat outlook for that market in 2018 versus a record in 2017. So that continues to be really positive. And I think the uncertainty is with China and India in the back half of the year and driven by the contracts. And I think it’s one of the biggest drivers of the range in our potash shipment forecast at this point.

So Adam, from perspective, you’ve got a potentially an early harvest in the U. S. excellent yield, so the application window will be open and the products will be needed. The summer fill program that Nutrien had was highly successful. So there is good demand for our products right now and crop protect as we mentioned it is sold out until October. So when we look at the global market, you’re right to call out India and China, but we also know that they need the product. And so I don’t know exactly when we’re going to have a settlement but we do know that they need the product for their market. And so it will come to a conclusion at some point. And we do think that given everything we see around the world when it comes to supply demand fundamentals that we are fairly bullish that we’re going to have a fairly strong second half of the year for all those reasons that Jason and I just mentioned.

Our next question comes from John Roberts with UBS. Please proceed with your question.

Chuck, at the start of your call, you highlighted your retail business ability to handle surge conditions like we have here in the spring. Could you remind us on an annual basis, what percent of your retail sales you actually apply for farmers? And how big is your fleet of equipment now?

So about half of our products are put down by our own customer application, of course it depends on the area. In some areas, we have our own equipment. In some areas, we partner with other third parties as well. So it’s an important part of our business. And again every part of the market is a little bit different in terms of whether the farmers have their own equipment or whether they need those services from us. And so we have the largest application fleet by far in the industry. We have the 7th largest fleet of vehicles in the U.S. And so we have a lot of capacity to deliver products on farm. Today, most of the products that we deliver are delivered right to the farm gate. And so we’re uniquely positioned when it comes to a tight application window like we’ve seen this year to be able to use our supply chain to satisfy our customer needs.

Our next question comes from Steven Byrne with Bank of America Merrill Lynch. Please proceed with your question.

What fraction of your crop chemical sales through the retail business is represented by the Lavalin brand? And what would you view as a targeted percentage of that mix being Lavalin? And do you drive that by just pushing more of your suppliers into these types of agreements where you can use their product in your private label brand? Or do you need to develop new formulations to do this?

So specifically on crop protection products about this year, about 27% of what we sold in the crop protection category would be Lavalin products. And so that’s -- last year we were just a bit over 25, and so we’ve seen some nice growth in that area. But of course, it also means that we’re selling three quarters of the crop protection products from third parties. And so I would say our relationship with our key suppliers is getting stronger and stronger as the industry is consolidated. They need us more and we need them to take their new technology to help our growers. And so we believe we can do both, we can drive our Lavalin products portfolio and partner strategically with the R&D companies that are bringing new technology. On the seed side it’s about the same 26% of what we sold this year will be proprietary Dyna-Gro or proven brands, and that's also growing year-over-year. And so we see nice growth in proprietary. And again, we’re partnering very closely with the R&D companies that are bringing new technology as well.

Our next question comes from Vincent Andrews with Morgan Stanley. Please proceed with your question.

Just thinking about the tariffs a little bit, maybe you could just discuss specifically if they remain in place through the fall application season. And what you think the farmer may do if there is a significant level of concern? And second to that, it would seem like Latin America is going to plan a lot more soy this year, and obviously even more prices are but also the tariff situation, I guess, is the same thing. But presumably, that leads to more corn acres in the U. S. versus soy going into next year. And can you just remind us how much more favorable a greater corn mix is for you versus a soy mix and how we should think about that?

I’ll answer your first question on trade and then I’ll have Mike Frank answer the specifics around soybean versus corn. So as we said in this morning in the prepared remarks, we not sure how this like anybody else -- we’re not sure how this is going to unfold. Obviously, a trade war isn’t good for anyone. And I think the difference in agriculture though is when it comes to farmers is we are completely focused on the financial health of our North American farmers. And farmers can’t really afford to have one bad year. In fact, that would be quite impactful across this entire value chain and we’ve seen I think in the broader economy. So that’s where our concerns lie it’s the financial health of the farmer and nobody knows how this is going to play out. But what we do think just looking at it is if you set back and you look at the U. S. farmer, they are some of the lowest cost most efficient producers of food in the world. So the acres are going to get planted. Now the mix could shift to your second question but the world needs the food and the U. S. farmer is one of the lowest cost most efficient producers in the world. So we think that the total acreage will not be impacted. And so now to your second question, which is what could happen from a mix and what would the impact be on our business. So Mike, maybe give your view on corn versus soybean if that were to happen.

So Vincent as we probably know there is strong crop that’s coming across North America. And we continue to see farmers invest in that crop, even through July, we’ve seen higher rates of both fungicides and nutritionals get applied on the crop. And so farmers continue to invest in this year’s crop, which is a good indication. And we also know that a lot of the commodity prices have been locked in earlier in the year at higher prices. And so really the questions becomes what are commodity prices coming out of harvest for next year’s crop. I mean that will be a key indicator as to how farmers think about investing. We know that there is going to be a high withdrawal of Nutrien’s coming out of the soy, because of the strong crop that’s coming. And to your point, Latin America, Brazil in particular, we expect to see probably 7% or 8% increase in soy acres based on the profitability of soy down in Brazil. So that could point to more corn acres in the U. S. On average, we generate about twice the margin on a corn acre versus a soy acre. And so that’s favorable. But as Chuck mentioned, our complete focus is on helping the farmers succeed. And our read of the situation right now is farmers still have good liquefy, their balance sheets are strong. Obviously, the federal program the $12 billion program that was [Technical Difficulty] …talk quickly about your -- how quickly you can ramp up production if you do get into a deficit market?

I think Jason covered this pretty well. Where prices are at today and the demand that we’re seeing in the potash markets, I’d say around the world, we’re still quite a ways away from having any compression issues when it comes to the economic health of the farmer, because of potash pricing. I don’t have a specific number to give you. But when we look at the numbers and we run them, we are quite a ways away from that happening. So that’s really the answer to your question. The second question was related to the ramp up. So your second question on ramp up, Susan, why don’t you take that question?

We are and this is also linked for outlook for rising demand. As we’re seeing tight supplies this year, you’re seeing exactly that in terms of our expected demand we’re able to ramp up. And this is the time where Nutrien Potash network can really shine. We’ll always make sure that we have adequate supply so that if markets are tight and we’re seeing good demand, we can move products into the market on fairly short notice. So great question, and I do think that you’re seeing that as well this year on our outlook.

Our next question comes from Joel Jackson with BMO. Please proceed with your question.

So you’ve been able to raise your guidance a fair bit on Nutrien side but you didn’t raise any guidance for retail. And also [Technical Difficulty] observation is that retail margins for retail, or fertilizer margins for retail are lower this year. So maybe talk about that. Why didn’t you raise the outlook for retail and why are fertilizer margins lowering?

Mike can answer your question on retail margins. But from a guidance perspective what I’d say is you’re right. The guidance is being driven by two factors; one is faster delivery of the synergies; and improving market fundamentals when it comes to our wholesale businesses. We’re just seeing higher volumes and prices. Retail guidance range if you think about it and if you step back year-over-year, it’s up about 9% or 10%. So going into the year -- and retail is a bit more ratable when it comes to earnings profile that’s what we like about the retail business is it’s more stable, it’s more resilient and you won’t see just because commodity prices are moving up that we’re going to be able to raise guidance because of retail, that’s not how the retail business is built but I think you understand and know that. So I think that beginning of the year, we had a healthy increase in retail earnings of 9% or 10%, it’s not related to crop pricing and demand for Nutrien so that’s why. And then on retail margins, what I would say is when I look at the overall shelf and the margins across the shelf, I think the business is held up brilliantly, it’s been extremely resilient. If you just think about the pressure that we were under in the early second quarter, because of that compressed spring season and for retail to hold this margins in a season like that, that just shows the strength and stability of that business model. But Mike can give you a little bit more color.

So we’re pleased that we’ve seen growth in all regions where we have retail, North and South America and nice growth in Australia as Chuck mentioned earlier. We believe that the retail market overall is probably flat and so we’re growing on the EBITDA line at 10% year-to-date in probably a very flat market and in fact in Australia with the significant drought in New South Wells. It’s a very tough market in that area as well. On fertilizer, our margins are roughly flat. Our average cost of good increase this year was about $15. We covered all of that other than $0.23. And so we’re roughly flat on margins and we grew volume significantly. Going into the second half, we still expect to see growth. We expect the market to be tough. As you would recall last year in Q4 we had a very strong Q4, because the window stayed open, especially in the U.S. from a fertilized standpoint. So we’re expecting not only to repeat the strength we had last year in the second half, but to grow on top of that and when we do that that will produce in the range that we’re forecasting here.

Our next question comes from Steven Hansen with Raymond James. Please proceed with your question.

You probably don’t want to get too far out of your skies here, I understand you have targets. But given the pace that you’ve been trending at, have you started to think beyond the $500 million run rate target? And if so, I am sure you don’t want to put a number on it. But if so, are there buckets where you think you could potentially exceed that opportunity set that you initially described? Thanks.

I’ll have Steve Douglas who is looking after synergies and integration to answer your question.

You’ve seen us raising our guidance for run rate for the current year is really a great work performed by the business units in terms of assessing what it is they could pull back out of 2019 into 2018. There are some puts and takes on what we’re seeing but the lion share of that is really just pulling back future synergies back here the current year, which I think is given that in fact dollar today is versus more than dollar one. In terms of exceeding the $500 million aspirationally I think we’ve talked about always wanting to do that. We have constantly weighed other opportunities and we’re very cognizant of the fact that these synergies have to be firm, tight, repeatable and capitalizing. So we’re not ready to expand past the $500 million but I can tell you we’re constantly exploring ways to continue to grow that.

Our next question comes from Michael Piken with Cleveland Research. Please proceed with your question.

Just wanted to delve a little bit deeper into where crop protection inventories are in the U.S. and specifically, if you could break it out between or besides fungicides and insecticides that’d be helpful, as well as what you are seeing in terms of farmer consumption this season. Thanks.

Mike Frank will, I think give you a higher level of view on where we think crop inventories are as well as maybe fertilizer…

So our inventories right now on fertilizer is about flat to last year coming out of Q2. Crop protection inventories are up. Our mark of research would indicate that in the U.S. the entire crop protection sales to farmer was probably up about 0.3%. We were up over 5%. And so again it’s a category where we feel strong and we performed well and gained share. So the increase in inventory that we had coming out of Q2, we have actually already absorbed a lot of that with the strong July in the U.S. And so we feel good about our inventory position across all of our shelves at this point in time.

Our next question comes from Jonas Oxgaard with Alliance Bernstein. Please proceed with your question.

I was wondering if you could talk a little bit more about the Brazil retail strategy. There’s couple of angles I was curious about one that the truckers strike that was in. Does that do anything to your business case, on the flip side, the tariff seems to be make Brazil a better environment? And then also what’s the competitive landscape down there, who are the main competitors and how does that impact what you’re doing?

I’ll give you the strategic overlay and then Mike Frank can give you his perspective on the competitive situation in Brazil. So the overall goal here is to replicate what we’ve built in North America, and I’d say in Australia and in Brazil. And so we’d like to build a leading retail platforms that is backward integrated with Lavalin products, it’s a full service high touch model that has all the precession agriculture, agronomic service application, same as North America. And we think that that is going to be very unique and value creating for the Brazilian farmers, which should all has to start with creating value for the Brazilian farmers. So that’s what we’re trying to replicate. As I mentioned, we are going to allocate some capital into Brazil to grow that business. And in time we’d like the retail -- that business in Brazil to be the second largest business that we’ve got in our portfolio of retail businesses. There are many ways to enter the Brazil market. We could certainly look at acquiring a wholesale fertilizer blender and then adding back the crop can, and seeds and the service afterwards. There are traditional retailers, there is not any national presence that traditional retailers but they do exists. So, think about a tuck-in roll up strategy similar to what we do in the U. S. to build it out. And then our acquisition in the first quarter Agrichem, the other way to answer your Brazil is through a Lavalin product, which we’ve already done and entered the market with that offering and then understand who they’re selling to understand that market and build the retail model that way. So we’re looking at all of those options and weighing multiple opportunities as we speak, but there is competition. But I think our upfront would be very, very unique and quite competitive. And Mike may be can give you perspective…

Chuck you covered a lot. The fundamentals in Brazil are very strong today, farmer profitability is high. And as we mentioned earlier, we expect to see soy acres continue to expand going into this next season. The retail market is very fragmented. And so we’re scanning the market today and having a number of conversations to really develop our strategy around how can we consolidate that industry which we think has opportunities too. We’ve got a handful of Greenfields that we’re investing in right now. And as Chuck mentioned, we also want to have our own proprietary products company, just like we have in the U. S. and other markets. And so the acquisition of Agrichem was a very good start to that strategy. And so its early days but we think there is lot of opportunity in Brazil.

Our next question comes from John Chu with Laurentian Bank Securities. Please proceed with your question.

So Chuck, earlier you mentioned in terms of your retail M&A focus would be the U. S. and Australia. So just on the Australian market, I was under the impression that there is really three main players that had about 30% market share. And effectively that market share is more or less capped. So how do you intend to grow that market and/or is it something where you could take on one of the bigger players there? Thanks.

So you are right. I think the market in Australia we do have close to 30% of the market share in Australia. There are some other large, what I’d call national players in country. But there is still a lot of independent owner-operators smaller companies that exist. We’ve been actually rolling up the market similar to the U.S. and Canada, and Australia for the last couple of years. Once Australia hit its legs and started to perform well, we started to allocate very small amount of capital into Australia to continue to roll up that market place. And I think the results have spoken for themselves. Whereas, certainly, very solid performance over the last two or three years with record performance year-after-year. So that’s what we are thinking and that’s what we are talking about is more of a tuck-in roll up strategy in Australia. And then more penetration of our Lavalin products, which are still relatively new in Australia, bringing in our nutritionals, our biological product some of the higher technology products into that country to help Australia farmers maximize their yields. And we could get a nice lift we think with more backward integration into Lavalin products.

And that’s all the time we have for today. If there is any additional question the IR team is ready to answer them. Otherwise have a good summer and we will see you soon. Thanks.

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