Nutrien Reports Solid 3rd Quarter Operating Results; Raises 2018 Guidance, Dividend and Synergy Target
TSX - Toronto Stock Exchange
Canada NewsWire
SASKATOON, Nov. 5, 2018
NYSE, TSX: NTR
SASKATOON, Nov. 5, 2018/CNW/ - Nutrien Ltd. (Nutrien) announced today its 2018 third-quarter results, with net loss from continuing operations of $1.1 billion1 ($1.742loss per share). Third-quarter adjusted net earnings was $0.47per share3 and adjusted EBITDA4was $839 million. Adjusted net earnings and adjusted EBITDA exclude a New Brunswickpotash non-cash impairment of $1.8 billion($2.15per share) and gain on adjustment of pension and other post-retirement benefit plans of $151 million($0.18per share). For a description of other adjustments in net earnings and EBITDA, please see pages 33 and 34, respectively.
Nutrien also announced that its Board of Directors has declared a quarterly dividend of US$0.43per share payable January 17, 2019to shareholders of record on December 31, 2018. This represents a 7.5 percent increase in the dividend and is representative of improving market fundamentals and confidence in our operational cash flow moving forward. See "Quarterly Dividend" section for additional details regarding the dividend.
"In the third quarter, Nutrien delivered solid operating results. Retail earnings increased by 10 percent year-over-year3while our nutrient production operations reported higher volumes, margins and significantly lower costs. We also made significant advances on our strategic priorities including raising the dividend and our synergy target, completing our share repurchase program and closing the sale of our stake in Arab Potash Company (APC). We remain on track to receive $5 billionin net proceeds from the sale of our equity investments. Nutrien has also raised its annual guidance due to the strength of market fundamentals and acceleration of merger synergies. We continue to be well positioned to deliver strong long-term shareholder returns," commented Chuck Magro, Nutrien's President and CEO.
HIGHLIGHTS
Nutrien achieved $401 millionin annual run-rate synergies as at September 30, 2018and now expects to achieve its $500 millionannual run-rate synergy target by the end of 2018 and is raising guidance on the annual run-rate synergy target to $600 millionby the end of 2019.
Nutrien full-year 2018 adjusted net earnings per share and adjusted EBITDA guidance were raised to $2.60to $2.80per share and $3.85to $4.05 billion, respectively (up from $2.40to $2.70per share and $3.7to $4.0 billion, respectively).
Retail EBITDA increased 10 percent in the third quarter from the same period3last year due to strong fertilizer demand, recent acquisitions and an increase in comparable store sales.
Potash adjusted EBITDA4was 64 percent higher in the third quarter compared to the same period last year due to higher net selling prices, record sales volumes and lower cash cost of goods sold per tonne including realized synergies.
Nitrogen EBITDA more than doubled compared to the same period last year as a result of higher nitrogen prices, increased sales volumes and lower cash cost of goods sold per tonne including realized synergies.
Nutrien completed its normal course issuer bid with approximately 32 million shares repurchased at a weighted average price of $51.62per share.
Nutrien closed on the sale of its stake in APC for $502 million. We expect to close on the sale of our Sociedad Química y Minera de Chile S.A. (SQM) series A shares investment to Tianqi Lithium Corporation by the end of 2018.
Results were adjusted for a $1.8 billionnon-cash impairment of the New Brunswickpotash facility (which has been in care and maintenance mode for almost three years) in the third quarter. This non-cash impairment has no impact on our effective operating capacity or on our short and long-term outlook for the potash business.
MARKET OUTLOOK
Agriculture and Crop Input Fundamentals
U.S. soybean prices have been pressured by record domestic yields and continued uncertainty as a result of the U.S. trade dispute with China.
U.S. corn prices are in-line with last year's levels. The global corn supply/demand balance has tightened, and U.S. corn stocks-to-use- ratio is the lowest since the 2013/14 crop year despite record yields this year. Chinese corn ending stocks are projected to be down almost 50 percent over the past three years and more than 20 percent below the ten-year average.
Solid crop economics, combined with favorable planting conditions, has supported a rapid start to planting in Brazil. Analysts expect a three to five percent increase in Brazilian soybean area and more than a five percent increase in corn area.
While North American crops developed at a faster-than-average pace in 2018, adverse weather since September delayed harvest and has narrowed the fall application season somewhat.
We expect an increase in North American corn acres relative to soybeans, which would be positive to overall crop input expenditures as corn generates a higher per-acre spend than soybeans.
Potash
Potash prices continue to be supported by strong demand and tight availability. Prices in major spot markets are up 20 to 30 percent compared to the third quarter of 2017 and contracts with Indiaand Chinawere settled at $50per tonne and $60per tonne increases, respectively. We raised our 2018 global potash shipment forecast to a range of 66 to 67 million tonnes.
We expect that capacity curtailments and permanent closures in 2018 will match or exceed new production capability, excluding Nutrien's expected increase in production.
Downstream inventories in major global potash markets remain relatively tight, which is supportive of sustained demand in late 2018 and early 2019.
High nutrient removal in 2018 related to expected record crop yields, combined with potash prices remaining affordable relative to grower revenues, are expected to support continued strong consumption in major markets including North America.
Nitrogen
Tighter than expected supply and continued demand growth has provided support to prices for all nitrogen products. Ammonia production has been pressured by operational issues, turnarounds and slower than expected supply ramp-ups, while urea continues to be supported by lower Chinese exports and uncertainty regarding Iranian availability.
Global nitrogen prices are also being supported by higher European natural gas prices, with hub-based and formula-based prices up approximately 80 percent and 40 percent, respectively, from 2017 lows.
Prospects for nitrogen demand through the first half of 2019 remain strong, supported by the expectation of increased corn area in North and South Americaand increased winter wheat area in the Northern Hemisphere. There is some risk to the fall ammonia application season in North Americadue to wet conditions.
Given favorable demand prospects, limited new capacity and a relatively stable urea supply outlook in China, we expect the global nitrogen supply/demand balance will remain tight into 2019.
Phosphate
Continued strength in sulfur and ammonia prices and delayed project ramp-ups continue to support phosphate prices, however, the decline in the value of the Indian rupee is a source of demand risk for late 2018 and early 2019.
FINANCIAL OUTLOOK AND GUIDANCE
Taking the above factors into consideration, we have revised our 2018 annual guidance ranges as follows:
We raised our guidance range for Potash sales volumes to 12.5 to 13.0 million tonnes and increased the bottom end of our Potash Adjusted EBITDA range from $1.4 billionto $1.5 billion. Nitrogen EBITDA guidance has been raised to $1.15to $1.25 billionand the bottom end of our Phosphate and Sulfate EBITDA range increased from $0.2 billionto $0.25 billion.
Based on these factors, we are increasing our full-year 2018 adjusted net earnings guidance to $2.60to $2.80per share (previously $2.40to $2.70per share) and adjusted EBITDA guidance to $3.85to $4.05 billion(previously $3.7to $4.0 billion). Additionally, adjusted net earnings guidance for the fourth quarter of 2018 is $0.46to $0.66per share.
Excluded from guidance are the New Brunswickpotash non-cash impairment of $1.8 billion, expected costs to achieve synergies (net of one-time savings) of $40to $50 million(reduced from $50to $75 million), share-based compensation as well as the impact of incremental depreciation and amortization of approximately $200 millionresulting from the fair valuing of Agrium's assets and liabilities as of January 1, 2018in accordance with purchase accounting.
Dividend income from investments in APC and SQM is recorded net of tax in discontinued operations and is still expected to approximate $130 millionand is included in our adjusted annual net earnings per share guidance, but is not included in adjusted EBITDA guidance.
All annual guidance numbers, including those noted above, are outlined in the table below:
| | | | | 2018 Updated Guidance Ranges | | | | | | | | (Annual Guidance, except where noted) | Low | High | | Adjusted net earnings per share 6 | $2.60 | $2.80 | | Adjusted EBITDA (billions) 6 | $3.85 | $4.05 | | Retail EBITDA (billions) | $1.2 | $1.3 | | Potash Adjusted EBITDA (billions) 6 | $1.5 | $1.6 | | Nitrogen EBITDA (billions) | $1.15 | $1.25 | | Phosphate and Sulfate EBITDA (billions) | $0.25 | $0.30 | | Potash sales tonnes(millions)(a) | 12.5 | 13.0 | | Nitrogen salestonnes (millions)(a) | 10.3 | 10.7 | | Depreciation and amortization including purchase price allocation impact (billions) | $1.5 | $1.6 | | Integration and synergy costs (millions) | $40 | $50 | | Effective tax rate on continuing operations | 23% | 25% | | Sustaining capital expenditures (billions) | $1.0 | $1.1 | | | | | | 2018 Annual Assumptions & Sensitivities | | | | | | | | FX rate CAD to USD | | $1.29 | | NYMEX natural gas ($US/MMBtu) | | $2.95 | | $1/MMBtu increase in NYMEX ($/share)(b) | | $(0.19) | | $20/tonne change in realized Potash selling prices ($/share) (b) | | $0.26 | | $20/tonne change in realized Ammonia selling prices ($/share) (b) | | $0.06 | | $20/tonne change in realized Urea selling prices ($/share) (b) | | $0.09 | | | | |
| (a) Potash and nitrogen sales tonnes include manufactured product only. Nitrogen sales tonnes exclude ESN® and Rainbow products. | | (b) Sensitivities are calculated pre-synergies resulting from the merger. |
THIRD-QUARTER RESULTS
The comparative figures throughout this release are the historical combined results of legacy Potash Corporation of Saskatchewan Inc. (PotashCorp) and Agrium Inc. (Agrium) for the three and nine months ended September 30, 2017and are considered to be non-IFRS measures. For International Financial Reporting Standards (IFRS) purposes, the comparative amounts are the results of legacy PotashCorp, which is the accounting acquirer. Compared to the IFRS figures, the change is the result of the merger involving Agrium and PotashCorp. Refer to the Selected Non-IFRS Financial Measures and Reconciliations and Supplemental Information section.
Consolidated
| | | | | | | | | Three months ended September 30 | | | | | | 2018 Actual | 2017 Combined | Change | | (millions of U.S. dollars) | | | | | | Sales | | 4,034 | 3,586 | 448 | | Freight, transportation and distribution | | (253) | (236) | (17) | | Cost of goods sold | | (2,626) | (2,557) | (69) | | Gross margin | | 1,155 | 793 | 362 | | Expenses | | (2,514) | (719) | (1,795) | | Net loss from continuing operations | | (1,067) | (53) | (1,014) |
Nutrien third-quarter net loss from continuing operations totaled $1.1 billion, lower than the $53 millionloss in the third quarter of 2017. Results for the quarter reflected a $1.8 billionnon-cash impairment of the New Brunswickpotash facility and a $151 milliongain on adjustment of pension and other post-retirement benefit plans.
Earnings were supported by higher sales volumes and realized prices in potash and nitrogen due to strong global demand and tight supply. Retail reported improved results supported by strong North American crop nutrient applications. Depreciation and amortization expense increased by $126 millionthis quarter, in part due to the merger-related purchase price allocation (PPA) impact. The IFRS comparative figures for PotashCorp are detailed in the financial report of Nutrien for the third quarter of 2018 and its management's discussion and analysis for the same period, both of which will be made available under Nutrien's profile on SEDAR at www.sedar.comand on EDGAR at www.sec.govin November 2018.
Retail
| | | | | | | | | | | | Three months ended September 30 | | | | | | | | | | 2018 Actual | | 2017 Combined | | Change | | | | | (millions of U.S. dollars) | | | | | | | | | | Sales | | 2,175 | | | 2,067 | | | 108 | | Cost of goods sold | | (1,642) | | | (1,549) | | | (93) | | Gross margin | | 533 | | | 518 | | | 15 | | EBIT7 | | (6) | | | 32 | | | (38) | | EBITDA | | 116 | | | 105 | | | 11 | | Selling and general and administrative expenses | | (577) | | | (489) | | | (88) |
EBITDA – Retail EBITDA in the quarter was 10 percent higher than the same period last year driven by solid crop nutrient performance across all regions, recent acquisitions and an increase in comparable store sales. Total gross margin percentage was 25 percent, equal to the same period in 2017.
North American Retail EBITDA was impacted by an early maturing crop which positively supported fertilizer demand while reducing the demand for crop protection products.
Selling and general and administrative expenses (S&GA) – Retail S&GA expenses increased by 18 percent this quarter compared to the same period in 2017, primarily due to higher depreciation and amortization expense related to PPA and a higher employee headcount due to recent acquisitions.
| | Three months ended September 30 | | | | | | | | | | | | | | | | | | Sales | Gross margin | Gross margin (%) | | | | | | | | | | | | | | | (millions of U.S. dollars, except where noted) | 2018 | 2017 | Change | 2018 | 2017 | Change | 2018 | 2017 | | | | | | | | | | Crop nutrients | | 650 | | 528 | | 122 | | 142 | | 120 | | 22 | | 22 | | 23 | | Crop protection products | | 1,086 | | 1,117 | | (31) | | 236 | | 243 | | (7) | | 22 | | 22 | | Seed | | 60 | | 59 | | 1 | | 14 | | 21 | | (7) | | 23 | | 36 | | Merchandise | | 205 | | 187 | | 18 | | 27 | | 29 | | (2) | | 13 | | 16 | | Services and other | | 174 | | 176 | | (2) | | 114 | | 105 | | 9 | | 66 | | 60 |
Crop nutrients– Sales in the third quarter were 23 percent higher than in the same period last year as North American and Latin American growers prepared to replenish soil nutrients removed from bumper crops in addition to strong demand in Australia. Crop nutrient deliveries and realized selling prices increased in the quarter, resulting in 18 percent higher gross margin compared to the third quarter of 2017. Gross margin per tonne was stable partly due to rising crop nutrient costs.
Crop protection products– Third-quarter sales were 3 percent lower than the same period in 2017, due to the rapid crop development, limited pest pressure and an early start to the harvest season in North America, as well as, dry and unfavorable weather conditions in Australia. Gross margin percentage was stable during the quarter.
Seed– Sales in the quarter were similar to the same period last year, while gross margin percentage decreased due to seed sales mix and timing of vendor programs.
Merchandise– Sales were up 10 percent from the same period in 2017, supported by higher fuel sales in Canadaand higher animal health and fencing sales volumes in Australia. Gross margin rates decreased by 3 percentage points due to the higher proportion of lower-margin Canadian fuel sales.
Services and other– Third-quarter sales were similar to the same period in 2017, but gross margin percentage grew 6 percentage points driven by higher-margin application services and financing services.
Potash
| | | | | | | | Three months ended September 30 | | | | | | 2018
Actual | 2017 Combined | Change | | | (millions of U.S. dollars) | | | | | | Net sales 3 | | 817 | 590 | 227 | | Cost of goods sold | | (358) | (323) | (35) | | Gross margin | | 459 | 267 | 192 | | EBIT | | (1,439) | 210 | (1,649) | | EBITDA | | (1,311) | 303 | (1,614) | | Adjusted EBITDA 4 | | 498 | 303 | 195 | | Provincial mining taxes | | (78) | (48) | (30) |
EBITDA and Adjusted EBITDA– The non-cash impairment of our New Brunswickpotash facility negatively affected Potash EBITDA in the quarter. Excluding this impact, Potash adjusted EBITDA was up 64 percent from the third quarter in 2017 due to a combination of record sales volumes, higher net selling prices and a lower cost of goods sold per tonne.
| | | | | | | | | Three months ended September 30 | | | | | | 2018
Actual | 2017 Combined | Change | | Manufactured products | | | | | | Sales volumes (tonnes 000's) | | | | | | North America | | 1,678 | 1,373 | 305 | | Offshore | | 2,180 | 1,938 | 242 | | Total | | 3,858 | 3,311 | 547 | | Net selling price ($/tonne) | | | | - | | North America | | 213 | 192 | 21 | | Offshore | | 210 | 168 | 42 | | Average | | 212 | 178 | 34 | | Cost of goods sold ($/tonne) | | (93) | (97) | 4 | | Gross margin ($/tonne) | | 119 | 81 | 38 | | Depreciation and amortization ($/tonne) | | 33 | 28 | 5 | | Gross margin excluding depreciation and amortization
($/tonne) 3 | | 152 | 109 | 43 |
Volumes– Total potash sales volumes were up 17 percent compared to the same period in 2017 (this was a record compared to any previous quarter) due to strong demand in the North American market, as well as, offshore markets supplied through Canpotex Limited8(Canpotex). The largest portion of Canpotex's volumes for the quarter were sold to Latin America(40 percent), Other Asian markets (37 percent) and Indiaand China(11 percent and 7 percent, respectively).
Price– The weighted average realized selling price was 19 percent higher in the third quarter compared to the prior year's third quarter due to strong global demand and tight supply. Offshore realized selling prices increased 25 percent and North Americarealized selling price increased 11 percent from the third quarter in 2017.
Costs – Cost per tonne of product sold was 4 percent lower compared to the prior year's third quarter. This was due to a larger proportion of supply produced at our lower-cost facilities, realized synergies and higher overall production volumes that more than offset the effects of PPA depreciation. Cash cost of product manufactured39was significantly lower at $56per tonne compared to $72per tonne for the same period last year.
Nitrogen
| | | | | | | | | Three months ended September 30 | | | | | | 2018
Actual | 2017 Combined | Change | | (millions of U.S. dollars) | | | | | | Net sales | | 612 | 496 | 116 | | Cost of goods sold | | (457) | (441) | (16) | | Gross margin | | 155 | 55 | 100 | | EBIT | | 146 | 47 | 99 | | EBITDA | | 257 | 113 | 144 |
EBITDA– Total nitrogen EBITDA in the quarter increased 127 percent from the third quarter of 2017 due to higher realized prices, increased sales volumes and lower cost of goods sold excluding depreciation and amortization.
| | | | | | | | | Three months ended September 30 | | | | | | 2018
Actual | 2017 Combined | Change | | Manufactured products | | | | | | Sales volumes (tonnes 000's) | | | | | | Ammonia | | 750 | 724 | 26 | | Urea | | 691 | 626 | 65 | | Solutions and nitrates | | 1,018 | 929 | 89 | | Total | | 2,459 | 2,279 | 180 | | Net selling price ($/tonne) | | | | - | | Ammonia | | 253 | 206 | 47 | | Urea | | 286 | 228 | 58 | | Solutions and nitrates | | 156 | 141 | 15 | | Average | | 222 | 185 | 37 | | Cost of goods sold ($/tonne) | | (165) | (165) | - | | Gross margin ($/tonne) | | 57 | 20 | 37 | | Depreciation and amortization ($/tonne) | | 45 | 29 | 16 | | Gross margin excluding depreciation and amortization ($/tonne) | | 102 | 49 | 53 |
Volumes– Total nitrogen sales volumes were 8 percent higher than in the third quarter of 2017 due to higher operating rates and strong demand. Both urea and solutions and nitrates volumes were up 10 percent due to a strong in-season demand for nitrogen fertilizer application. Ammonia sales were up 4 percent, supported by higher production volumes.