INSIGHT: Nutrien’s difficult first year

LONDON (ICIS)–One year after the merger of Canadian muriate of potash (MOP) fertilizer players PotashCorp and Agrium, the agricultural behemoth born of the pair, Nutrien, is yet to find its feet.

Nutrien began operations on 1 January 2018 with a total of 20,000 employees — 4,500 based in Canada’s Saskatchewan province.

The world’s single-largest provider of crop nutrients, Nutrien’s assets include 22m tonnes/year of MOP capacity in Canada alone — the largest volume globally — while Agrium’s contribution makes the firm the world’s third-largest nitrogen fertilizer producer, with sales of nearly 11m tonnes of product annually.

SLEEPLESS NIGHTS
The merger was first announced in September 2016, after being unanimously approved by the boards of both companies, and promised an enterprise value of around $36bn.

Thereafter followed a long, difficult path of regulatory review and approval, with both companies lobbying the governments of Brazil, Russia, the US, China, and India to approve the “merger of equals”.

The US government was the last to sign-off on the deal in late December 2017.

Although Agrium was left largely untouched throughout the process, PotashCorp was required to divest its minority stakes in competing potash producers SQM, Arab Potash (APC), and Israel Chemicals (ICL).

Collectively, the sales have netted the Canadian major approximately $5bn — although the cash generated by the sale of its stake in Chile’s SQM was somewhat delayed by a legal spat, and subsequent mud-slinging.

Speaking in an announcement on 2 January 2018 confirming the successful merger, Chuck Magro — former President and CEO of Agrium, and now head of Nutrien — said: “Our company will have an unmatched capability to respond to customer and market opportunities, focusing on innovation and growth across our retail and crop nutrient businesses.

“Importantly, we intend to draw upon the depth of our combined talent and best practices to build a new company that is stronger and better equipped to create value for all our stakeholders.”

At the time, Magro added that Nutrien expected to achieve synergy savings of approximately $250m by the end of 2018, with the full annualised run-rate achieved by the end of 2019.

Although appearing somewhat bombastic at the time, Magro’s claim of $250m in savings was to be achieved and surpassed, to the tune of an additional $250m — but not without some serious repercussions.

THE FOURTH ‘TRIMESTER’
In its Q1 2018 financials, Nutrien took pains to keep Agrium and PotashCorp’s earnings separate, suggesting that the merging of both company’s assets still had some way to go.

As its Q1 net loss of $1m demonstrated, that assertion turned out to be correct.

Indeed, Nutrien’s Q1 results left much to be desired, as the challenges of administering such an immense enterprise resulted in a mixed first few months.

At the time, CEO Chuck Magro attributed the loss to a vague grab-bag of issues, saying: “Nutrien’s first quarter was affected by a late start to the spring season across North America, and west coast rail performance issues.”

These rail issues were subsequently resolved after a short-lived strike.

Despite the initial jitters — to be expected, considering the size of the new-born enterprise, and the necessity to merge two sets of executive teams, offices, and logistics concerns — Nutrien managed to wrestle its fortunes into a stronger position; reporting net earnings of $741m in Q2.

Nutrien Q2 2018 earnings ($m)

	Q2 2018	Q2 2017*	Change (%)
Sales	8,145	7,348	10.8
Freight, transport, distribution	-214	-234	-8.5
Cost of goods sold	-5,800	-5,323	9
Gross margin	2,131	1,791	19
Net earnings from continuing operations	741	705	5.1
*2017 figures are historical combined results of legacy companies PCS and Agrium

Although investors were pleased; the staff at Nutrien’s Vanscoy operation were less impressed.

Indeed, on the same day as it released the Q2 figures, Nutrien also announced a “rebalancing” of its potash production.

This would lead to a reduction in workforce of approximately 30 staff and 50 hourly positions at Vanscoy, taking effect from the fourth quarter.

New Brunswick was to follow.

SIX TO NINE MONTHS
Despite a much-lauded net profit in Q2, the third quarter took a serious bite out of the company’s jubilance.

Towards the end of Q3, Nutrien opted to close its New Brunswick facility, following a wide-ranging strategic review.

In a statement, the producer said the decision to close the New Brunswick potash facility reflected Nutrien’s ability to increase potash production in Saskatchewan at a significantly lower operating and capital cost than resuming production at New Brunswick.

Despite the facility being in care and maintenance since early 2016 — and having not produced any MOP since then — the move lumped a $1.8bn non-cash impairment into the third quarter financials.

The company’s share price naturally took a knock, falling to Canadian dollar (C$) 59.97/share in December, before rebounding.

Nutrien Q3 2018 earnings ($m)

Nutrien	July-Sept 2018	July-Sept 2017*	Change
Sales ($)	4.034bn	3.586bn	448m
Net loss ($)	1.067bn	53m	1.014bn
MOP sales volumes (tonnes)	3.858m	3.311m	547,000
*Consolidated results for PotashCorp and Agrium

Despite the blow to its potash portfolio, Q3 did however demonstrate the strength of the former Agrium nitrogen fertilizer assets.

Indeed, the improved return on nitrogen fertilizer sales prompted Nutrien to consider the future of its nitrogen business activity, including the potential expansion of its nitrogen plants.

While cautioning that greenfield projects do not make economic sense, even amid a more robust time for the nitrogen market, Magro added at the time: “Nutrien is looking at several brownfields through our network, primarily in North America. But it’s a little too early for us to talk specifically about that.

“We will most likely have some brownfield expansions. But right now we’re primarily focused on delivering our synergies.”

By now, the company’s synergy savings target was set at $500m — and so confident was the company’s executive team, that they then upped the target to $600m by the end of 2019 — but no further.

It was also at this time that the spectre of Nutrien’s unused production capacity — approximately 6m tonnes/year of untapped potash potential — reared its head.

In an interview with news agency Reuters in mid-August, Magro said: “There will be a price in the global market that once we get there, you will see Nutrien put more tonnes into the market because the demand is there. We will not be shy.”

The claim remains at the forefront of competing MOP majors’ minds to this day — although the exact “price in the global market” remains as-yet unreached.

THE ‘BIG ONE’
And so, we come to Nutrien’s Q4 results — the culmination of a difficult first year which, as any parent can tell you, is half joy, and half nightmare.

And as many one-year-olds are prone to do, Nutrien wanted to hit the ‘big one-year’ standing on its own two feet — by not including in its fourth-quarter financials Nutrien’s divestments of its shares in Chile’s SQM, ICL, and Jordan’s APC, which it classified as discontinued operations.

Nutrien in early February reported a Q4 2018 income from continuing operations of $296m, up from a loss of $93m for Agrium and PotashCorp’s combined Q4 earnings in 2017.

Magro’s synergy target, meanwhile, came in at $521m saved.

Nutrien Q4 2018 performance ($m)

	Q4 2018	Q4 2017*	Change
Sales	3,762	3,498	7.50%
Distribution costs	189	200	-5.50%
Cost of sales	2,314	2,569	-9.90%
Gross profit	1,259	729	72.70%
Income from continuing ops	296	-93
*Combines PotashCorp and Agrium figures

Indeed, after finishing its first difficult year on what appears to be a high, Nutrien’s executives continued the bullish path to profit first set out by Magro, with his claim of creating “a new company that is stronger and better equipped to create value for all our stakeholders”, by issuing positive 2019 guidance:

NUTRIEN 2019 GUIDANCE

Adjusted earnings/share	$2.80-3.20
Adjusted EBITDA	$4.4bn-4.9bn
Potash volumes	13.0m-13.4m tonnes
Potash EBITDA	$1.8bn-2.0bn
Nitrogen volumes	10.6m-11.0m
Nitrogen EBITDA	$1.3bn-1.5bn
Phosphate EBITDA	$200m-300m

Indeed, it would be easy to look at Nutrien’s Q4 results and feel the company is getting close to stability — but there remain a number of issues the Canadian giant must surpass before it can reach a position of true safety.

The most pressing is the competition. With the likes of Russian agricultural major EuroChem working to open two massive MOP mines — and taking aim at business with net importers like southeast Asia, India, China, and Brazil, Nutrien — through Canadian MOP marketing arm Canpotex — will need to fight all the harder to place its cargoes with one eye on agreeable netbacks.

Then there’s the many smaller potash-start ups, such as Brazil Potash, Danakali, the five SOP prospectives in Western Australia, and even the UK’s Sirius Minerals — all of which stand to weaken Nutrien’s selling ‘clout’ on the global stage.

Plus, there’s Germany’s K+S, which is encroaching on its territory with the Bethune mine in Nutrien’s heartland of Saskatchewan province.

And finally, add to this the continued difficulties faced by Magro and co as they combine executive teams and company assets — all without breaking promises made to the Canadian government to keep the company’s HQ in sparsely populated Saskatchewan.

The sleepless nights are likely far from over for one-year-old Nutrien.

Insight by Andy Hemphill

Additional reporting by Mark Milam and Al Greenwood