Greetings, and welcome to the Nutrien’s Second Quarter 2019 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Richard Downey, Vice President of Investor and Corporate Relations.

Thank you, operator. Good morning everyone, and welcome to the 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. Pedro Farah, our CFO; and the heads of our three 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 forecasts and conclusions; 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. Security 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 Nutrien’s second quarter earnings call. As always, I will walk through the results and speak to our outlook, but before doing that, I want to share a few broad comments with you. First, the weather. In North America, it has been like nothing we have ever seen before. In fact, it has gone into the history books as the worst nine months weather period in U.S. history, millions of acres went unplanted. This resulted in a lot less spend on crop inputs and it is a big reason why we are seeing a pause in global fertilizer demand growth this year. Second, our business continued to show resiliency and stability. Nutrien delivered higher earnings in the first half supported by the quality of our assets and the strength of our integrated model. Even in Retail, our results were solid despite excess moisture preventing over 10 million acres of prime U.S. farmland from being planted. And that was just the headline number, a shortened application window also reduced crop input spending on many acres that did get planted. Third, demand for grains and oil seeds is still growing, and supply is tightening. With fewer acres and what will almost certainly be below trend yields. We expect U.S. corn ending inventories to drop by as much as half this year. Markets have started to respond with corn prices up about 20% year-over-year. This is expected to set up for a significant increase in U.S. corn acreage and a strong rebound and crop input demand next year. The final point is that we remain focused on our controllables, managing our costs and leveraging our ability to invest counter-cyclically is where we are focused. We outlined a plan at our Investor Day in May that provided…

[Operator Instructions] Our first question comes from Andrew Wong with RBC Capital Markets. Your line is now open.

Hey, good morning and thanks for taking my questions. So, obviously, 2019 is in pretty difficult operating environment, a lot of market factors, trade disputes, weather disruptions that kind of stuff. But you’ve done well to grow your earnings executing on your controllables. So, if you’re thinking to next year and I know it’s a little early for that, but we’re already into the next ag season, right? So, can you just talk about some of the earnings catalyst we should be thinking about both from a market side of things and company-specific side? I know you touched on some of them in the prepared remarks, but it’d be great to hear more about that.

Good morning, Andrew. Sure. So, it is a little bit early, but I think that the backdrop that we’re seeing right now is that we do expect a pretty significant rebound in the market fundamentals in 2020 and you can see it in crop pricing futures, but you can also see it in some of our business that we’re seeing in retail with crop protection in the third quarter. The fall season we think, will be quite strong as well. It’s going to be of course, the weather dependent and see if we have the application window. But I think 2020 is setting up to be a very good agricultural year and that’s going to be company independent. from nutrien’s perspective of course, we’ve been aggressive with our M&A activity in retail and I think you’re going to see the full value of the those investments from a shareholder perspective in 2020 in a more, what I say, normal or strengthening year. And so that is certainly going be something that’ll be on full display when it comes to nutrien’s specific earnings growth for retail. I think the work that we’ve done in our production businesses in nitrogen and phosphate, but also in potash to take our costs out and to optimize the network. So, there’s still some of the full value that you were going to see from the synergy capture that we’ve delivered and the incremental work that we outlined at our Investor Day in May. I think you’re going to see continued improvement in our cost in the production business and of course, the demand increase is particularly in potash. I think we’ll be one of the few companies that can kind of rise to the demand needs that we think will happen in 2020. So, overall, things are early to really comment definitively, but what we see is that I think we’re going to be having the company fundamentals that we’ve been focused on and investing on for the last couple of years beyond full display for 2020. But the backdrop of the agricultural fundamentals in 2020, I think it’s going to be quite a rebound year based on what we’re seeing so far.

Our next question comes from Steve Hansen with Raymond James. Your line is now open.

Yes. Good morning, guys. Thanks for the question. Just wondering if you could quickly discuss the demand outlook for potash into China and India, where you’ve notably pulled back your expectations a little bit on the back half of the year and just any nuances around the settlements that you’ve previously alluded to at the event that you might settle? Thanks.

Sure. I’ll give you a high-level perspective and then I’ll have, Susan Jones, our potash CEO talk about some of the specifics. So, you’re right, Steve, what we did with the guidance we did reduce it by two million tons. and that’s simply because we believe that in North America, we’ve lost somewhere around 800,000 tons, maybe even a bit more because of weather, and not being able to get the applications down. We are seeing some what I call short-term softness in Southeast Asia due to corn prices, which we believe will improve next year as well. And so that’s all in the consideration of the reduction in guidance. So, now when it comes to the China, what I’d say is that so far this year, we’ve seen good demand. in fact, it’s one of the reasons why I think we’ve had a good first half of the year and we do believe that China needs even more of the potash this year. So, what I think will happen though is that we will see probably a delayed, a timeline for the contract in China simply because they know that a demand in the U.S. has been off. And for us, our position is quite clear when we set our guidance, you can see it in the downside. And then in the upside of our guidance is we believe that certainly in the short-term, no deal with China’s better than a bad deal, because the overall fundamentals for potash are improving and the global markets are tightening and as we move into the fall and into 2020, we think that we’re going to see strengthening in the potash markets. And so we’re going to be patient with the contract negotiations for China this year. Susan, do you want to add a little bit more color, maybe comment on India.

Sure, Chuck. Good morning, Steve. As Chuck mentioned, the demand into China, the first half this year has been particularly robust and our expectation of imports into China year-over-year will be up a million ton. They have indicated that they will not be allowing seaborne imports into the country after the end of August. While we do know that port inventories are higher than this time last year, we also know that inland inventories are low and what’s going to really determine when they settle their contract will be how soon the NPK producers will start taking products and draw them from the ports. But what I can say is that the longer they delay the contract settlement, the higher the demand is going to be for 2020. It’s going to set us up really nicely for that year. in terms of India, our intelligence is that they do expect to be actually settling their contracts this fall and we do expect they will come in and settle before China. They have certainly had some delays in demand due to lower monsoon, but we are expecting that that is a short-term and they will come in for about normal to maybe a little bit less than last year.

our next question comes from Ben Isaacson with Scotiabank. Your line is now open.

Thank you. Good morning. nice job stick handle in Q2. Just a question on nitrogen and potash; on nitrogen, I keep hearing how the fall is setting up to look really strong and I was hoping you could frame that or add some goalposts. given farmer economics, where a dealer and even farmer inventories and how do we kind of break up ammonia, urea and nitrates and kind of maybe a trade war resolution. What does that mean? on potash, you’ve talked a lot about demand and seeing some pockets of softness there. What are you seeing on the supply side? Any abnormalities or any surprises coming out of Russia, the Bethune project or anything else like that? Thanks.

Good morning, Ben. So, what we’ll do is we’ll have Raef Sully talk about that the nitrogen in the fall. I think it may be helpful to also have Mike Frank talk about what are you seeing at the farm level and the retail level. and then we’ll move over to Susan for the potash demand supply question. So, go ahead, Raef.

Thanks very much. So, Ben, we've very bullish on the outlook for nitrogen in the second half is a few things here. obviously, in Chuck’s comments, we noted that crop prices are supporting large corn acres in 2020. That’s going to drive a very good fall application for just across all of the nutrients. but nitrogen though, let me just start with the ammonia, if you look globally at the supply and demand, supply is tightening. in 2018, there was a net addition of at 1.1 million tons of merchants ammonia. in 2019, it’ll be about 0.6 million tons against that global demand is increasing by 2 million tons to 2.5 million tons a year. So, it wasn’t for the fact that we had such a bad spring application of ammonia, I think you’d start to see tamper moving up already. It rolled last time. So, it’s flat at 215. We think that’s the bottom of the market. We think we’ll start to see at tightening and going up. urea showed some strength through the season. that’s been helped offshore demand. So we expect to see urea process tick up as well and you will have noted CS being out in the market in the last couple of days with the UAN fuel price. We feel pretty confident about it. if there is a narrow application window, we think that’s actually an advantage to us. in narrow application windows, we have the depth of distribution to be able to get the product after the customers. So, we actually feel that’s an advantage to us.

And then Mike, why don’t you talk about nitrogen demand for the fall that you’re seeing at the retail and farm level.

Sure. Thanks, Chuck. So Ben, maybe, I’ll first start a little bit about our fertilizer sales in the first half of this year, even though as you know, we’ve lost over 10 million acres of planted acres, our retail business performed very well on fertilizer. Our volumes were about flat in potash, and up about 3% in nitrogen and our margins were up about $10. And so it really demonstrated our supply chain in the challenging market, will be delivered at the farm-gate. As we talked to farmers right now about their plans for 2020, most of these acres that didn’t get planted we expect are going to go into corn, there’s going to be more corn on corn. And so it’s easy to see 95 million plus acres setting up for 2020 especially with where commodity prices are today. And our customers are all already talking to us about making sure that we’re going to be ready to service their fields this fall as soon as the window opens up. And so we need a window to get some fertilizer down this fall. last fall was a challenging window. We didn’t get down as much as we expected. So, the window does matter, but we do expect demand for NP&K to be extremely strong going into 2020.

Thanks. Susan, why don’t talk about potash supply please?

Okay, thanks. Good morning, Ben. just before I get into the supply side, I do want to address the second half domestically, because I was discussing offshore in my last question. So, in terms of a fall application, assuming the weather enables a strong application season this fall, we do expect to see robust demand in the U.S. Given the lack of application both this spring, but also last fall, because they need to replenish the nutrients removed. And just to give you a sense of that, we ran a very successful summer fill program. We were oversubscribed on this and we had to close it early. And as recently as last week at the Southwest Fertilizer Conference, there was a lot of optimism by retailers expressed by their growers on both second half shipments that continued affordability of potash, but also looking out into 2020. In terms of supply, yes, I would say that perhaps we’re not surprised, but we have seen continued flow ramp-ups from our competitors. You asked about K+S, they did recently announce lower volumes due to longer turnaround to address all the issues and it looks like they’ll be coming in as they have stated at about 1.7 million tons this year on the lower end of guidance. in addition to that, EuroChem did announce the delay of the VolgaKaliy operation till 2020 and Eurokali has indicated further issues with us too. So, as expressed at Investor Day, I think this continued slowness of ramp up, is what we would expect to see as these ramp-ups continue, but it’s also helping to support the firmness and the supply demand balance.

Our next question comes from Joel Jackson with BMO Capital Markets. Your line is now open.

Thanks. Good morning everyone. maybe a two-part question, just following up on the inventory situation. Maybe, Mike could talk about what we’re seeing in the channel for inventories of the different crop protection chemicals and seeds. And then maybe Chuck, you could talk about, I think, you did many share buybacks in the first half of the year as largely, you closed the authorization, could we see more buybacks in the second half with the new authorization? Thanks.

Thanks, Joel. Mike, go ahead and talk about inventory please.

Yes. good morning, Joel. So as you know, the entire retail industry brought a lot of inventory into the 2019 year. on crop protection and everyone was set up for a strong both seed and fertilizer market. And of course, the way they first half played out with weather and then acres ultimately not getting planted, it had a significant impact. As Chuck mentioned in his opening remarks, the crop protection market based on point-of-sales data is down 11% in the first half of the year. And yet our business is only down 3%. So, we performed extremely strong in the crop protection market. Our inventory, I can’t speak to the rest of the industry, but our crop protection inventories are now coming out of the end of the first half. We’re flat with last year. And as chuck mentioned, we’ve had a really strong July in fact, we’ve continued to sell a lot of herbicides through the month of July. So, we’re now pulling down inventory on a comparable basis. And so we feel good going into the second half of the year as we prepare for 2020 in the year that’s coming, our crop protection inventories are back in line with where we want them to be. Seed inventories, of course, we have some of our own seed business, where we’re going to be carrying higher inventories into next year, because of acres that didn’t get planted. And on third-party seed that we sell, that does get returned to our supplier. And so we’re restocking that seed right now. We’re checking for quality and we’re setting up to get ready for next year’s season. So, overall, both on crop protection and seed, we feel good about where we’re at with inventories. finally, with fertilizer again, this season didn’t play out exactly as we expected, but we did a good job of de-inventorying our fertilizer. We’re up in a couple of areas like ammonia for example, which this spring just didn’t allow for the ammonia to go down as we expected. But we’re restocking fertilizer right now in preparation for a window this fall.

And Joel, on your buyback question, so we look at what we’ve done so far since the merger, January 2018, we’ve purchased 11% of the shares outstanding, spending about a $3.7 billion at an average price of just over $51 a share and we’ve been very aggressive. And we’ve communicated that very clearly, I think to our stakeholders and the most recent buyback as we referenced in the prepared remarks, we did the 5% in about four months. And so what I’d tell you right now to your question on what’s next is our capital allocation priorities really haven’t changed. We’ve been very consistent that we want to have a combination of growth and significant returns to shareholders. And I think we’ve lived to that both of those objectives. We’re seeing some very good opportunities right now in the M&A pipeline. We’ve got some other things we’re looking at as well. But what I’d say right now from a buyback perspective is everything’s on the table. The markets have been quite volatile and we have the balance sheet and the free cash flow to make smart quick decisions to create shareholder value. So that’s how I would answer the question is I’d say right now everything’s on the table.

Our next question comes from P.J. Juvekar with Citi. Your line is now open.

Yes. Hi, good morning. A couple of questions, if your prevent planting acres were in corn, were close to 10 million acres, how did your overall sales in the retail seed sales in the retail go up? Was there pricing? Was the pricing that much better or are you gaining share? And then second question on chemicals, you mentioned that crop chemical inventory for you is flat and maybe, you’re exhibiting really well and your inventories are flat. What do you think and when – where do you think inventory levels are in the channel from the producer to the farmer and are those high compared to sort of five-year average? Thank you.

Good morning, P.J. We’ll have Mike answer those questions for you.

Hello, P.J. our seed business performed extremely well this year and just like with crop protection, we know that we’ve gained pretty significant share in the marketplace. on the revenue line, as you’ll see in the first half, we’re up about 2% on revenue. When we look at pricing, pricing both in corn and soybeans was pretty flat year-over-year. Replants were up. And so we do, we do know that about 4% of our sales were replants. And so kind of if you net that off, our seed sales are probably down 2% in terms of kind of apples-to-apples. But again, in the market that’s extremely strong performance and you’re seeing that I think as other companies are announcing their earnings and showing significantly lower seed sales than that. Look, we – again, I can’t comment, because we don’t know what inventories are for our competitors. you asked about farm-gate inventory on crop protection. For the most part, at least what we do is if our customers changed their plans and they don’t need a product, then we restock it and we sell them the product that they need. And so I would say are our customers inventory at the farm-gate are non-existent, because they don’t hold inventories and we serve them in a different way than maybe some other retailers do.

Our next question comes from Jacob Bout with CIBC. your line is now open.

Good morning. I had a couple of questions on U.S. retail. I guess first off, market share, what is it currently? How aggressive do you expect to be in tuck-ins for the remainder of the year and what type of multiple are you looking at? And then maybe just to wrap it up, just when you’re thinking about U.S. retail, how are you looking at buying versus actually doing greenfield?

Good morning, Jacob. Mike, go ahead.

Yes. Good morning, Jacob. Our market share in the U.S. is definitely ticked up this year. We made some good acquisitions at the start of the year. A couple of large retail multi-branch retail companies in the Midwest, strengthened our position there. But our base business just from a market share standpoint, we think we probably grew in the range of 140 basis points to 160 basis points of market share. And so it’s extremely strong and it really speaks to both the transformational efforts that we’re focused on our digital efforts and just our supply chain capability and our people in the marketplace. So, overall, we’ve talked about our market share being in the 20% range. Look, there’s still some way to go – that goes out 2019 and so at the end of the year, we’ll update that number, but we do believe that we’re gaining market share. on tuck-ins, we do expect there to be a busy season in the second half of the year. It is typically when things do pick up and our phones are ringing. We’re going to continue to look for high quality assets. And like we did at the beginning of the year, we really liked buying multibranch, retail outlets that fit well with our business. We’re not seeing really a change in multiples. And so depending on the quality of the assets, it’s anywhere from five to seven, is a typical tuck-in multiple. And we would expect that to probably continue to be the range that we’re going to be investing in the future. And then finally, how do we look at tuck-ins versus greenfields? We’re now operating about 16 new greenfields that we’ve set up in the last 18 months. they’re performing as expected, which is good. We have nine more that are in various states of build right now. And so we are continuing our greenfield investments. That being said, I think, whenever we can acquire an existing business that fits into our footprint either, where we have a gap or where we can consolidate branches, that would be our first preference. When you make an acquisition, you get a customer list, you get sales people. and so you can hit the ground running. And so, we’ll continue to focus primarily on acquisitions and tuck-ins. And then just use our greenfield strategy either to consolidate multiple retail points or to look for open space, where we don’t have an opportunity for tuck-ins.

Our next question comes from Duffy Fischer with Barclays. Your line is now open.

Yes. Good morning. A couple of questions, first just your outlook for Latin America, kind of however you want to define it, how much you think corn, soy acres will be up down there and kind of inputs per acre. Just I mean, how good could Latin America be this fall? Second, the retail acquisitions you’ve done so far if you assume that Ruralco closes this year, how much incremental EBITDAs at next year? And then the last one on the digital platform, will you be able to start to price for that next year do you think? Or is it still kind of in the penetration phase, where we’re more than a year away from pricing for it?

Okay. Duffy, so we’ll have Jason Newton just to talk a little bit about what we’re seeing in Latin America and then we’ll move over to the retail questions.

Yes. Good morning, Duffy. Just in terms of Brazilian acres that we expect to be planted, I guess in our fall and next spring. I think if you look at where soybean prices are currently in Brazil, actually, they aren’t – they definitely are weaker year-over-year and in some sense falling that the global fundamentals in that market. And so we don’t – we don’t see acreage increasing probably, about the same as it did a year ago. So, in the range of 1% to 2% year-over-year. And as we look toward corn, I think a lot rides on the uncertainty with respect to the U.S. production. And so there definitely is upside in Brazilian corn planting for the safrinha crop depending on what happens from a U.S. perspective. And the U.S. acreage and yield turnout has sort of the base case of the scenarios project, I think there is more upside and soybean are in corn acreage in the safrinha crop in Brazil. As a result, we expect strong nutrient demand as we move into later this year and into the spring of planting period.

And then just on Ruralco, so we’re still working through the antitrust process and we do still expect the deal to close in the late third quarter. And then I’ll just turn it over to Mike just to talk about sort of what we could expect to see from an earnings perspective, let’s say for 2020, not really the second half of this year. And then your last question, Duffy. Go ahead, Mike.

Yes. good morning, Duffy. So, in terms of, obviously, we’re – as Chuck said, we’re expecting to close ruralco late third quarter of this year. And so we’ll get a bit of a sub-year with ruralco this year as well as with aftergrowth. So, if you look at 2020, with those two businesses and compared to say 2018, where we didn’t have any part of their business, we would expect an EBIDTA lift of about $100 million between those two businesses. And so they’re both expected to contribute significantly to our 2020 earnings. On digital, so with corn prices going up, we do expect the digital services that we provide our customers today that we do largely charge for like variable rates planting prescriptions and variable rate fertilizer prescriptions. That part of our business continues to grow. So, you’ll see that in our services line. And so we do expect that to grow. our large focus right now is also getting our customers and our employees engaging in our digital tools and we’re off to a really solid start in 2019. As you may know, we launched our customer portal about a year ago. We’ve got close to 60% of our customers now signed up and engaging with us on the portal. And we turned on the ability at the beginning of this year for our employees and our customers to use the portal to order – to put orders online directly to create efficiency and more price transparency and we’re getting great feedback on the platform and every month and every week, in fact, we see the adoption of those tools go up. And so we’re really pleased with where we’re at on our digital journey. there’s obviously a lot still ahead of us, but the tools we’re putting in the marketplace are hitting the mark right now.

And operator, it’s Richard Downey, can I ask all the participants to limit yourself to one question? Thanks.

Our next question comes from John Roberts with UBS. Your line is now open.

Thank you. How do you think about China hog feverish, you do your planning for the next few quarters in next year?

Yes, John. Jason will give you sort of our latest thinking and then I’ll give you a bit of color commentary. Go ahead, Jason.

Hey, good morning, John. As we look at the African swine fever, there really hasn’t been a lot of updates in terms of what’s happening there compared to what we’ve talked about in quarter and on Investor Day. I mean it’s a significant issue for African swine numbers and the numbers are anywhere from 20% to 40% and even above in terms of the loss of the numbers in the swine herd. Now, it seems as you look at the actual impact in terms of global grains, but to date it’s been a relatively muted. And actually, if you look at the USDA’s current forecast for 2019 both global feed demand, and if you look at global meal demand are both projected to be at above trend levels even with flat to lower demand in China. So, they’re expecting to see a rebound in feed demand in other markets globally. And if you look at livestock prices, we did see a significant increase in livestock prices earlier in the year as the news of the problem and the fears about the problem increased and those have come back down also. So, there does seem to be a bit of a delayed impact and what’s happening in China. A part of that is that there really is a lot of uncertainty about how much loss of a herd size there has been. Some is that the existing herds both within China and throughout the world are growing to higher weights and there’s increased supplies coming out of frozen stocks and so on that is limiting the supply tightness. So, on a short-term basis, we definitely haven’t seen some of the impacts that would have been feared even a few months ago. And I think if we look longer-term, we don’t expect that global meat consumption trends will change. And so if you look on a global basis, we expect that meat consumption will continue to rise in the developing world and returned to more normal levels in China and ultimately that’s what drives global feed consumption in terms of crop input demand globally.

Yes. John, from my perspective, the market’s behaving the way it should. Protein prices are increasing and other markets are compensating. So, we’re not – we’re not factoring or forecasting a significant reduction in global grains and oil seeds in there for crop inputs.

Our next question comes from Christopher Parkinson with Credit Suisse. Your line is now open.

Great, thank you. Can you just talk a little bit more about your outlook for ammonia from both an ag perspective as well as industrial? Just you have any strong views on the U.S. under Caribbean market developments for the second half of 2020; just any comments on that operates would be appreciated. Thank you very much.

Good morning, Chris. Raef Sully can answer your question.

Yes. look, I mean, I’m not sure, I’ve got too much color to add, what I mentioned previously. Again, just starting with global perspective, merchant available ammonia and the supply of that has been gradually decreasing compared to where it was three to four years ago. The global market is growing at 2 to 2.5 million tons a year. So, I think we’re just seeing 10 per roll from 215 in August. obviously, we’re waiting to see what happens next month. But there should be a tightening globally in ammonia. Urea continues to be tight to globally, again, when you look at the projects that we’re in the market for additional urea and ammonia three to five years ago. We just don’t see that overhang today. There’s much less supply coming on and so again, that the market is tightening.

Yes, Chris. from my perspective, the midterm here and now, I think Raef covered it very well, but long-term, we’re constructive on nitrogen. Most of the major global supply now is in the market. The demand continues to grow at historical demand growth rates and we think that there’s going to be a significant tightening over the next couple of years. And so that’s why when you look at what we’re doing from an allocation of capital perspective, we have some very high return expansion; the bottleneck type projects are very small. They’re in multiple plants. So, the risk to do this for us is quite low, but we also think that that’s the best way to add low risk incremental tons into the market in the next two to three years. Greenfield economics still don’t make any sense with today’s prices. So, we think that what will happen is that the market will continue to tighten over the next couple of years. And we’re the third largest nitrogen producer in the world. So that’s beneficial for us. And we have a third of our gas on AIKO gas and a third of our gas on NYMEX gas in the U.S. So, I think the outlook for us is pretty healthy.

Our next question comes from Adam Samuelson with Goldman Sachs Group. Your line is now open.

Yes. Thanks. Good morning everyone. Questions in Retail, just trying to get a little bit more color around the gross margin kind of drivers in the quarter, I guess specifically in crop protection and seed, just trying to disaggregate a little bit, just market pressures from just acres down versus input costs versus mix on the proprietary product side. And then just within Retail also, just a little any color on the growth in operating expenses relative to gross profit in the quarter or in the first half and I presume there’s some M&A that creates noise in that calculation, is there any color on how that performs? Thank you.

Good morning, Adam. Yes, Mike, go ahead.

Sure. Hello, Adam. So, you can see our gross profit is down on a percent basis year-over-year and it was an extremely competitive marketplace. As we talked earlier, the retail channel broadly carried a lot of inventory into 2019, and when the market didn’t develop, Q1 was quiet, because it was wet in Q2 continue to be quiet, because it was so wet and then acres didn’t get process. there was extreme competition in the marketplace. And so when customers were buying, the prices got beat up and it was more competitive. And so we saw that in our margins. The second impact from a margin standpoint from our business is that in the Midwest, where we do a lot of custom application that was the market that was most impacted by the delay and the unplanted acres. And when we do custom application not only do we charge for custom application, but we also see higher margins. And so just from a mixed standpoint, a mix of custom application acres that also had a material impact on our margins in the first half. Now again, as we look to the second half of the year and July specifically, we’re seeing margins rebound back to kind of historical norms. And so we do believe it was a seasonal impact and that will get back to normalized margins going forward. And really kind of similar in seed, when there’s – the entire retail channel is prepared to sell 90 or 91 million acres of corn seed and same for soybeans and you drop off kind of 11 million acres of market. The market gets more competitive as everyone’s trying to get rid of their inventory. And so that was the same thing that we saw in the seed business. Again, overall, we’re – we think we did a good job of not only maintaining our business, but growing share, but margins were challenging. From an OpEx standpoint, look, when we look at year-over-year increase obviously, wages and then specific investments in digital and supply chain transformation, our core costs are up about $7 million. Other increases in costs, as you said, is really coming from things like the M&A and so there was about $50 million of increased costs coming into this year, just from an M&A standpoint of tuck-ins and other businesses that we acquired in the last 12 months.

Our next question comes from Vincent Andrews with Morgan Stanley. Your line is now open.

Thank you and good morning everyone. Just looking at your presentation slide, Slide 16 with the Corn S&D. I’m just – you mid-take is for 7% stocks to your high take of 10%, you’re looking into 3%, right? And if I look back at the bar chart, the last time, we had 7% corn was almost $7 and December 2020, right now think about 415. So, why do you think that the commodity markets haven’t responded? The corn market hasn’t responded faster to what’s happening in the ground. It’s already the end of July. Where do you think the market’s waiting to see if we’re really headed to 7% stocks to you?

Thanks, Vincent for the question. Jason Newton can answer it.

Yes. Hi, Vincent. It’s a great question. And in our opinion, the market today is trading an S&D probably more like the high scenario that we showed in the slide deck. And then there is a lot of uncertainty with respect to both planted and harvested acres as well as yield. And so I think, I think there is a wide range of scenarios. If you look back to 2012, 2013 when we had 7% stocks we used that was with an extreme amount of demand rationing. And so that’s probably more like our low case scenario than the mid case. And we are in a bit of a different world at this point. And we were in 2012, 2013 with a larger production base in Brazil. At that time, you had large production responses from both Brazil and Ukraine and that’s stuck around to some extent. And so it’s reduced the importance to some extent of the U.S. on its own, but I think if you look in any of the scenarios, we’d expect to see a significant decrease in corn adding stocks and stocks to use ratio. And we see that today with where corn prices are, which are in the range of $0.40 per bushel above where they were a year ago and we saw a significantly higher prices even just a month ago. And so I think from a corn supply and demand standpoint, we’re tighter and prices are higher than they were at this point a year ago and supportive of our acreage outlook for next year.

Our next question comes from Don Carson with Susquehanna Financial. Your line is now open.

Thank you. Chuck, a question for you on phosphate. On your commentary, you expressed some reservations about the phosphate outlook just due to increased supply from the Middle East and North Africa, higher China exports. So, is this just a near-term weakness that you see or what’s your longer-term view and phosphates are relatively small business for you given this outlook, any thoughts as to perhaps exiting that business from a wholesale standpoint?

Well, good morning, Don. So, our view is that, right now, there is probably more pressure on the phosphate business than the other businesses in entities short-term in fact; the demand growth for phosphate globally looks pretty good. When you get a little longer term though, we are still concerned about some of the new supply that is still going to come into the market from the low cost global players. So that’s a little bit of a different from a fundamental perspective than what we have in nitrogen and potash, where nitrogen is behind us, potash is right, most of it is behind us now, and phosphate, there’s still more to come. So, the longer term S&D for phosphate I think is a little bit more concerning for us when we look at the outlook. So, to answer your second question, in terms of the strategic direction for our phosphate business, we’ve made some very good moves as part of the merger. We’ve went from three facilities down to two. We’ve expanded some production in those two and they’re very strong regional players with a good mix of ag phosphate and industrial phosphate. So, we are diversified and consolidated when it comes to the market, but also diversified from the product slate. And now, what we’re focused on is just finalizing the synergy delivery. Remember that at the end of the first quarter, we were at about 620 million of synergies and we started a little bit to go, because we needed to bring up the ammonium sulfate business in Canada. So that’s what the phosphate business team and what the organization is focused on. Longer-term, we’ll have to see; right now, the business is making a modest return. And I think it fits well with our network and we are using some of the ag tons in our retail business. But over time, we’ll have to kind of assess the business. But right now, we’re very pleased with actually the synergies that we have delivered, because of the merger has made the business at least now positive from a contribution of a margin perspective.

Our next question comes from Mark Connelly with Stephens. Your line is now open.

Thanks. Chuck, I was hoping you could just bring us up to date on private label where you see the growth from here? Where you have meaningful gaps in your portfolio? And how much of your private label is geared towards real crops?

Good morning, Mark. Mike can answer that question for you.

Mark, good morning. So, as you can see in our mix this year, we were focused on selling what we had an inventory. And so we changed the trend line a little bit, where we really de-inventoried our branded products and that did have an impact on our mix of proprietary. We also expect that to straighten out going forward, because we really do like our proprietary products business. It adds value to our customers and obviously, it creates margins for ourselves. And so we expect that business to continue to have a long runway of growth. From an active ingredient standpoint, we don’t have a lot of holes in our portfolio. And so we’re not looking to add a number of new products from our crop protection standpoint, but we continue to look for other areas to grow that business, seed treatments, microbials; in that part of our business, we do see long-term growth in our proprietary products business. And so that’s kind of where we’re focused, Mark, we don’t really look at it as a private label business. This is a value added business, where we’re bringing unique products to our customers.

Our next question comes from Jonas Oxgaard with Bernstein. Your line is now open.

Hi, good morning, guys. I’ve been trying to wrap my head surrounding your Brazil retail strategy and I’m a little bit of a loss. My understanding of Brazil is that it’s really a large inland market, but out any retail presence and then a coastal market with a lot of retail, but with zero profitability. And so neither of those two things to fit with your U.S. retail strategy, can you expand little bit on what you’re trying to do in Brazil? And how that fits with the rest of you?

Yes. Good morning. I’ll take the question and Mike can add any comments after. Certainly, if you look at Brazilian agriculture and even in this first half of the year, we would have loved to have a bigger retail business in Brazil. So, it does help from a diversification of our business and our strategy. But we’ve been in the Brazilian market now since 2012 and we’ve been operating what I would consider to be Nutrien’s full service Retail business in the south with great success. And by that, I mean we’ve grown our sales year-in and year-out and our margins are almost equivalent to the United States. So, we believe that our offering would be unique as you mentioned, but value enhancing for both Brazilian farmers and for Nutrien’s shareholders. And so that is really the overall goal is to bring something different. Our Retail business would be different in Brazil, but we think there’s a lot of value that can be added. And our plan now is to prudently grow our retail footprint through a series of acquisitions and greenfield builds, which we have several under construction now to enter the market. because the market we want to be cautious and we want to make sure we get this right. But certainly what we’ve seen with the pilot program as I will call it, since 2012, is that there is a lot of value creation potential with a full service offering of not just fertilizer chemistry and seed, but agronomic knowledge and high technology. Mike, anything to offer?

Yes. A couple things, so Jonas, to your point, we’re not looking to copy what’s already happening in Brazil. If you think about it from a farmers’ point of view, they got somebody calling on them to sell them fertilizer, somebody else calling on them to sell them seed, somebody else calling on them to sell them crop protection products. And even within crop protection, there’s a Bayer channel, and there’s a Syngenta channel, and there’s a BSF channel. What we’ve done is we’re bringing full acre solutions to the growers and that’s our model that we’re bringing to Brazil. We’ve been successful with that model in every one of the other markets that we operate in. And as Chuck said in the pilot that we’ve been running in Brazil for the last six years, six, seven years, we’ve been successful with it. And so we’re looking to bring full service, full acre solutions, where we can serve as customers both from a fertilizer, seed and a crop protection standpoint and really serve them what they need on their farm to maximize yields and to minimize risks. And so that’s our model and that’s what we’re building right now in Brazil.

Our next question comes from Michael Piken with Cleveland Research. Your line is now open.

Yes. Good morning. I just wanted to talk a little bit more about kind of the global cost curve for nitrogen and what type of impact you might think that, that’ll have in terms of where prices can go. And then secondarily, some of the nitrogen or urea plants down in China, you have a chart in your slide deck on Page 20 that shows some of the capacity closures like how much of the capacity closers could come back online theoretically?

Good morning, Michael. Jason Newton can answer your question.

Good morning, Michael. Yes, obviously, the evolution of the cost curve in nitrogen in 2019 has been negative for prices. especially in Europe, the hub based prices are down significantly from where they were a year ago. And that’s pressured, particularly ammonia UAN prices, but also urea, but for urea, you mentioned that in the second part of your question. I mean, if you look at Chinese costs year-over-year, they’re down. But putting marginally – but if you look at prices both in China and the Rest of the World, their op and so the profitability levels have increased in China and production levels have stayed higher as a result. And that’s part of the reason why they’ve had more supply to increase exports. And then why we increased our range of exports for Chinese urea in the second part of the year. Second part of your question on whether they can bring these plants back on stream, we really haven’t seen that yet. And I think a lot of the plants were shut down in not great condition and require significant investment in environmental controls in order to start back up that as well as additional investment, because of the condition that they’re shut down and for the last period of time before their shutdown, they were really run without any maintenance. And so these plants require investments. And while the plants today are making money at current levels and our operating rates have increased with the existing production base. We don’t think there’s enough there is enough spare to justify investments in plants at this time. And really, we’ve seen that if you look at where production rates are, over the past couple of years as they really peaked out at similar levels in 2019 as they did in 2018, and just – and just held higher levels for longer periods of time.

Our next question comes from Steven Byrne with Bank of America. Your line is now open.

Yes. Thank you. Buyer indicated this morning that that came to beans out there, a little more than half of the soybean market in the U.S. Can you just give us an update on what you’re seeing in terms of dicamba drift? What kind of a liability is that for you and it doesn’t appear that you experienced the same pricing pressure that they did?

Good Morning, Steve. Mike Frank, go ahead.

Yes. Good Morning, Steve. The Xtend soybean technology, what also represents about half of our mix? Probably, we’re maybe a little bit more than half. So, it’s a big part of our soybean sales. Look, as I said, it was a very competitive marketplace this year. And so I haven’t seen what they reported, but prices were under pressure, but again, we believe we performed very strong in that challenging market. In terms of the stewardship with dicamba to apply over Xtend soybeans; it’s a very important issue. Our custom applicators are very well trained. We make sure that they know exactly what to do. We record the wind. We look for inversions and we make sure that when we’re applying dicamba over the top of Xtend soybeans that the product is hitting the intended target. And so we haven’t seen an issue with that. From a weed control standpoint, dicamba is doing a very good job of controlling the weeds that they’re talking about is being had before. And I would say our customers are very satisfied with the technology.

Our next question comes from Jeff Zekauskas with JPMorgan. Your line is now open.

Good morning. It’s Selka Cook for Jeff. I have a two-part question, but they are both quick. The first one is you given the – given the stages like were corn, I guess, soybean part setting as and everything being delayed. Is there a scenario, where the harvest could be late and if that’s the case, is that factored into the bottom end of your guidance? And my follow-up question is that I was wondering what the expectation for North American potash prices are sequentially in the second half based on success of the summer fill program? Thank you.

Yes. I’ll have Susan Jones talk about second half potash prices and then I’ll address the harvest delay question.

Yes. good morning. In terms of the second half, potash fill program, we’re about 50% committed for the second half. So that answers the question in terms of how we’ve set it with summer fill, it’s about 50% of the volume. And just as a reminder, we do have industrial potash that and specialty that flows through as well.

Yes. And then just to your question on corn and late harvest in our guidance assumption. So, the short answer is the low end of our guidance, it still assumes that we have a fall application season. It doesn’t have to be a normal fall application season, but it can’t be what we saw in 2018. The other thing that I would say is that what we’re seeing today from a retail perspective in Q3 is supportive of say, the upper end of our guidance range. So, there is a scenario, where we believe we can get to the upper end of our guidance range. And in the lower end of our guidance range, what I’d say is that, it’s absolutely needed that we have a fall application season and – but it doesn’t have to be a normal season it just can’t be like last year.

Thanks, everyone. Thanks for calling in. And if you have any other questions, all our guys are ready to answer on the phone. Thank you.