Greetings, and welcome to the Nutrien First Quarter 2019 Earnings Call. [Operator Instructions]. And as a reminder, this conference is being recorded. I would now like to turn the conference over to Richard Downey, VP of Investor and Corporate Relations.

Thank you, Operator. Good morning, everyone, and welcome to Nutrien's conference call to discuss our first 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 3 business units. As we conduct this conference call, various statements 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 First Quarter 2019 Earnings Call. This quarter is seasonally our lowest earnings period, and this year was impacted by harsh winter weather conditions across North America. In fact, the U.S. experienced the second wettest 6-month period in 125 years. The spring season is now well underway across much of North America, and although we are still getting more moisture than we want in some regions, farmers are actively applying fertilizer and feeding. And at the end of April, all of our businesses were ahead of last year. As always, we remain focused on delivering what we can control. First is the successful completion of our merger synergy program. At the end of the first quarter, we achieved run rate synergies of $621 million, exceeding our revised 2-year target well ahead of schedule. The realization of synergies has meaningfully lowered our operating costs and our sustaining capital. Our cash G&A expense, excluding retail, was down 8% in the first quarter. Now that we have exceeded our revised target, we will no longer be providing quarterly synergy updates. However, we still expect to achieve additional phosphate synergies once the conversion of our Redwater facility is completed later this summer, which will increase total synergies delivered from the merger to over $650 million. Furthermore, we have plans to capture additional operating improvements across our businesses, and we'll provide new targets at our Investor Day in Toronto on May 28. We utilized our strong cash flow and balance sheet to strengthen our retail business, allocating almost $1 billion, highly accretive acquisitions in the U.S. and Australia since January. We acquired approximately 40 U.S. retail locations during the quarter with revenue around $400 million and expect the strong pace of retail consolidation to continue. We closed…

[Operator Instructions]. Our first question comes from Jacob Bout with CIBC.

Hoping you can talk about the assumptions behind your first half guidance, specifically how application is actually going -- did you actually say that application was harder than 2018 levels? And then, if the delays continue, at what point should we think about revising this lower?

So let me try to set the stage from a guidance perspective for you. So we are maintaining full year guidance, and we set the first half guidance based on what we've seen through the month of April and then early in May. So from an April perspective, all of our businesses were ahead of last year. And the application rates in the areas where we were moving and had cooperating weather, they were above last year. That's exactly what we've seen. Now there are pockets where we're behind because of the weather. And our view though is that we still have plenty of time to get the applications down. In fact, every day now counts, but through the end of May, there is a good size window to deliver on all the applications and get the fertilizer on the ground. So when you look at our guidance then, the way we think about it is, if you just compare it to last year, at this time last year, we raised the bottom end of -- the lower end of our guidance range. Because generally by that point, volumes are not a question, it's really a matter of price. This year, we've left the range the same because of the weather uncertainty. So what we would expect is that if weather normalizes in the remainder of May and pricing for fertilizers stays the same, we would expect to be somewhere between the midpoint and the upper end of our guidance range. Now if weather continues to be challenges in pockets, because now it is really down to pockets in the U.S., then we would drift below the midpoint towards the lower end. But right now as I mentioned, we still think we have plenty of time in the month of May to get the fertilizer down and get the seeding in.

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

So not to steal the thunder away from your Analyst Day later this month, but if you can provide a little bit of a preview on some of the cost savings that you'll be targeting?

Sure. Maybe I'll give a broader preview of the Investor Day. So the themes around the Investor Day will be, we will set operational targets for all 3 of our businesses. And they will -- embedded in them will be cost savings, but also our plans to drive margin enhancement beyond just costs. And what I think we're trying to clarify is different things for some of our businesses and then looking at the overall Nutrien picture. So we will layout 5-year plans for each of those businesses. They will have key performance metrics. And I think that when you see those, they will be quite impressive. The other thing we're going to do is, we're going to lay out the 5-year plan when it comes to the allocation of capital from a Nutrien perspective. And I think that this is really important. And just to give you a bit of a preview, if you take our -- midpoint of our guidance from an EBITDA perspective and you back calculate cash from operations, you're going to get a number for this year of somewhere between $3.5 billion and $4 billion. If you then take out the dividends and the sustaining capitals, you're going to be left with about $2 billion of free cash flow. And that's just for this year with no price appreciation at all. So you can see that where we are in the cycle, there is more upside than downside. That's our strong belief. The company is going to generate significant free cash flow in that 5-year period. And in the Investor Day, what we plan to do is lay out a plan for that capital that will balance investment in our businesses to drive long-term shareholder value and a significant return of capital to shareholders. So that's the preview, and I'm -- we're really hoping that you will join us.

Our next question comes from Chris Parkinson with Crédit Suisse.

This is Graeme Welds on for Chris. Curious about your expectations for pricing coming into 2Q season with everything being so condense. We're seeing very healthy Midwest premiums, particularly in the nitrogen space, but at the same time, we've also seen pretty choppy conditions of pricing in the Gulf and the Caribbean. So I'm curious with the nitrogen assets that you have both in the interior and in the Caribbean, how you're thinking about balancing that and what your thoughts are around nitrogen price realizations going into 2Q?

We'll have our Raef Sully, our Head of our Nitrogen business answer your question.

So look, you've got to separate our business into a couple of different areas. The Trinidad volume going offshore is industrial and it's forward -- it's priced to Tampa. The stuff inland, we're in a good position to take advantage of. We've got great supply chain, we've got a great product there ready to go. We're about 65% of the -- committed for quarter two on the nitrogen products. Those commitments are at prices that are in line with our forecast. So 35% ready to go in the spot markets in those areas away from the Gulf. So we should see some good price realization in this quarter.

Just a couple of other comments maybe, Graeme. So look, it has been a volatile market, but it's been weather driven. The underlying fundamental demand, we think, is quite strong. And certainly what we're seeing right now is in areas where the weather has been moderated or normalized, growers are doing everything they possibly can to get nitrogen down. And we expect that, that will continue through the spring season. So we're optimistic that there will be the window to get the nitrogen down and growers are certainly motivated because of the impact that they did not get as much down in the fall of last year. So certainly we think that the underlying fundamentals are strong.

Our next question comes from Ben Isaacson with Scotiabank.

Trying to figure out what the incremental value is to Nutrien of 1 million acres of corn over soybean. So in other words, if we see switching from corn to soy, what does that mean to Nutrien when it comes to seed, crop protection service, and then of course NP&K.

Mike Frank, our Head of Retail can answer that question for you.

So every 1 million acres of switch between soy and corn for us translates to about $3 million at the EBITDA line. So as Chuck mentioned, we're expecting corn acres up 3 million to 4 million this year. Our seed sales would be consistent with that. So I do believe that, that is the growers intentions. And so we'll see a lift of about $9 million to $12 million if we see that those acres shift that way.

Our next question comes from Vincent Andrews with Morgan Stanley.

Just a question. Looking at Slide 21, the natural gas prices and the nitrogen cost curve. Just curious if you guys have a view on European hub gas, sort of not just -- but I think we all know what caused the collapse of it, but what the forward-looking outlook for that is and what impact you think that's going to have on -- if any on nitrogen prices going forward?

Jason Newton, our Head of Market Research can answer our question for you.

We certainly have seen the European hub gas prices decline in the first part of this year and then down under $5 today. I think, as we look forward, I think the forward curve is definitely above current values. And if you look at where the oil index values are, it's more in the $8 range today, and historically you see those converge. And so we expect that to converge as we get later in the year from current levels. Definitely, if you look this year compared to where we were a year ago, that is a factor that has put some pressure on nitrogen prices as those nitrogen producers in, particularly, Western Europe that are using the index-based gas are benefiting from lower gas prices today.

Our next question comes from Jeff Zekauskas with JPMorgan.

Do you expect your potash shipments to North America to grow this year?

Susan Jones, Head of our Potash business can give you our perspective on that.

I think you should be looking at our North American shipments to be pretty steady year-over-year. Offshore, on the other hand, we are seeing very good growth. And I would say that if you look at our offshore shipments for the first quarter, we are up about 75,000 tonnes, and we actually could have -- we saw demand for about another 100,000 tonnes of that despite the railroads not being able to move that. So we are really seeing good demand growth. We expect global demand to be kind of between the 67 million and 69 million tonne, and you can expect that we're going to maintain our market share and continue with those robust shipments into the U.S.

Our next question comes from Don Carson with Susquehanna Financial.

Two Canadian questions. One on canola. With the trade issues going on with China, what kind of acreage shifts do you expect on canola and what's the impact on your retail and wholesale business? And secondly, on carbon taxation in Canada. I mean, you had some positive regime change in Alberta, but you still have a very unfriendly federal government. Do you see them trying to lift the level of carbon taxes on industrial natural gas? And if so, what impact could that have on your cost competitiveness?

Great questions, by the way. So look, on canola, the situation is about 30% of the total Western Canadian acres we have canola grown. And 40% of that crop goes to China. So right now the situation is quite dynamic and fluid. But what we understand by looking through our retail business is that we do expect what I would consider to be a modest acreage shift from canola through to the cereals, either wheat or barley. And that will have an impact on farmer economics and will have a modest impact on us. For every -- just a rough guideline, for every 1 million acres that shift, it's a couple of million dollars of EBITDA for us. So if 1 million to 2 million acres shift, you can see that the impact will be $2 million to $4 million for us. So it's modest. That's not the issue for us. The issue is making sure that our farmers have access to markets that they need and that they're getting the support from the government to resolve this issue because China is a core market for canola. As for carbon tax, yes, you're right. So the Alberta government now has changed and they have made it one of their mandates to resist the federal carbon tax. It's too early to comment on exactly what that could mean for Nutrien. But I'll just remind you that we already have a carbon tax for large emitters in Alberta. It's been in place for some time, we already pay that. So if that's where we land, then there would be absolutely no impact. And I think that there is a lot more to come on this story. But certainly we believe that what's in place today works in the province and we already pay that today. So we're hoping that this will come to the right conclusion, and we won't see a material impact at all when it comes to our carbon production or taxes.

Our next question comes from Joel Jackson with BMO Capital Markets.

Maybe I'll ask a two-parter. The first one will be a follow up. My memory is that part of the, I guess, we'll call the phosphate synergy bucket as you were going to repurpose Redwater into ammonium sulfate, part of that was to target higher canola acres. So can you talk a little about the impact on that? And my second question would be on seeds. I mean, I think we've seen some pretty competitive seed pricing on germplasm from some of the big players. Can you talk about how that's filtering in your business and on seed margins going forward?

So we'll have Mike Frank talk about seed, and then I'll answer your phosphate question.

So as you can see in our first quarter numbers, our seed margins are strong. They're up a little bit. Part of that's because corn acres are up and our margins are strong in corn. Also our proprietary mix is up in seed as well. And so what we're expecting for our own business from a margin standpoint is that our seed margins are going to be strong this year. I think at the grower level, it's an extremely competitive market, where we are seeing as much or more discounting coming from our suppliers that flows through to farmer customers. And so it's a very competitive market, both in soy and in corn. And so it's -- that's how it's playing out so far.

And Joel, on your question on phosphate related to canola acres. So you're right. If you recall that the phosphate plan was to go from 3 phosphate operations down to 2, we've just made great progress. The expansions in White Springs are up and running, and they came in actually under budget. The team there did fantastic work. We did shut down our phosphate operation in Redwater just this week after 50 years of phenomenal production, and that team should be celebrated as well. The ammonium sulfate plant is -- will start up, the expansion will start up in the second half of this year, so we still have a few months. That project is also well on schedule and on budget. And the marketing plan was a combination. It was to sell some tonnes in Western Canada on more canola acres, but really the existing production really satisfies that. The marketing plan for this was to move more into the U.S. And we still think that over time because there's going to be a ramp-up, not only for production, but sales over the next, call it, 18 months or so, we are hopeful to see some resolution to the Canada trade situation.

Our next question comes from Adam Samuelson with Goldman Sachs.

I was hoping to dig a little bit more into the potash outlook and -- both domestically and internationally. Domestically, just from what you see in your retail business and the orders that you see on the wholesale side, just the confidence level that you have that the inventories that are built in the system from a sluggish fall and a wet 1Q get cleared in the second quarter? And then on a global basis, just talk about the demand environment, Southeast Asia, Brazil, China, how we think about different market dynamics impacting the pricing outlook for the balance of the year?

Susan will answer some of those questions, and then I'll provide some color commentary as well.

Let me start with the North American market. So as we've discussed in our prepared comments, we have had impacts from the spring season. You saw that through Q1. However, what I want to just clarify is the windows have opened up, there has been very strong pull that we've seen by growers. And our ability to get potash to the ground, obviously, is going to depend on the next few weeks. But as Chuck Magro has mentioned, this is really coming in pockets now versus all over the U.S. In areas where the weather has been closer to normal, we've seen very high application rates and excellent disappearance, including restocking. So this is really positive and what we expect to see for good demand. If the window closes out and we don't get it all down in the first half, we do expect the fall to be robust because the soil needs to be replenished, and so we're very optimistic for the second half domestically. In terms of the offshore markets, as I've already mentioned, we did have volumes up on a year-over-year basis into the offshore markets. We continue to see robust demand. Canpotex is sold out until June. And what I would say by markets is, we've got Brazil sitting at around 340 to 355 right now. They're pretty constant. We do expect to see volumes as good, if not a little bit better in that market this year. China, we do expect to see volumes come up. And I would just say for China and India, we -- our expectation is, moving into the second half of the year when they settle out their contracts, that they are going to have to come up from the 290 where they're at today. And then we continue to see good growth in Africa, Latin America. And so our view on the outlook both offshore and domestically is fairly robust for the second half of the year.

Adam, just a few more comments. Susan covered that very well. Just at the macro level, the way we were coming into this year was we expected global demand to grow. If you just take the midpoint of our guidance range, it's up about 1.5 million tonnes and that's a global number. And then if you look at the new supply, what's been communicated by the new supply coming into the market, that number would be closer to 1 million tonnes. So that's why we raised our guidance level up to make up the difference. Now the weather is the weather and we can't control that. That may impact some movements from the spring into the fall, we don't know. But the underlying fundamentals and the supply-demand is getting tighter for potash. And whether that spills over into the fall or even next year, we are not so bothered about that because we strongly believe that what we're seeing here and what we saw over the last two years is really good demand growth globally for potash and limited supply coming online. And we expect those trends to continue. So when you look at the end of the day, Nutrien is one of the only companies that has excess capacity, and that's what we plan to put in the market over time.

Our next question comes from Michael Piken with Cleveland Research.

Just wanted to follow up a little bit on your commentary here that you mentioned on potash. So is the implication then in your full year EBITDA guidance for potash that prices are going to be up for China and India. And then what type of expectations should we expect for you guys in terms of field pricing in the U.S. for the back half of the year to hit the potash EBITDA range that you provided?

We don't really want to get into giving pricing guidance. I think that that's not our job. So when you look at our guidance range, what I would say is that between the lower end and the upper end of the range, there is the whole host of views that we're continually and constantly monitoring and refining. What I said earlier will still hold is that if prices hold to as of today's prices, we would be at the midpoint to the upper end of our guidance range. So we don't need a lot of price appreciation to get there, but some is built in. And that I don't really want to say much more than that. But if you look at the supply-demand fundamentals, what -- and Susan mentioned it and I'll just reiterate it. If you'd even just look at China inventory, so I know that there's been some concern about inventories at the port, but inland inventories in China, we think, are quite tight. And they still need a lot more potash for their year this year. So we do think that the supply-demand is tight, inventories in China are reduced, even though that there's been some recent volume going in. And that will all manifest itself when Canpotex talks to them about price. But we certainly don't want to get ahead of those discussions.

Your next question comes from John Roberts with UBS.

This is Josh Spector on for John this morning. Just a question around the retail side of the business and kind of the phasing through the rest of the year. So 2Q last year hit a pretty high watermark given the weaker 1Q season, kind of similar to this year. I'm just thinking this 2Q EBITDA, are you thinking that similar to last year? Do you have the opportunity for it to be higher than last year? Or are you thinking that the rest of this year is a little bit higher given potentially longer application seasons and the acquisitions rolling through?

Mike Frank will answer your question.

So you're right. Last year Q2, we hit a high watermark in terms of our business. And the way we started Q2 this year with a very strong April, we expect to see the same trend. And so we do believe that Q2 this year will be likely quite a bit stronger than last year's Q2, and so far we're starting out that way. Obviously, we need to get the corn and beans planted in the eastern corn belt, which is where they've been really wet. The outlook for the next 10 days looks pretty good there, and so we expect fertilizer to start going down and corn and beans to start getting planted. So look, I think at the end of the day, there is likely going to be a little bit more sidedress that goes on with planting this year. And that also means there's going to be more topdress and so some of that could get pushed into July, but nonetheless, we were expecting a very strong Q2, which should be stronger than last year.

And then, Josh, if you just go out just a little longer, in the first quarter this year, we've allocated nominally about $1 billion towards M&A in retail. Some of that is closed and being integrated as we speak. And of course, Ruralco is still pending and we expect that to close in the third quarter. So if you look forward to 2020, you can see that there's going to be significant EBITDA growth in the retail business. Not just from M&A, but from some of the investments we've made in our supply chain and our marketing organization to drive up overall margins as well, so organically. So looking over the next couple of years and we'll lay this out for you at our Investor Day, we do expect significant bottom line growth in the retail business through a combination of organic growth and M&A.

Our next question comes from Steve Byrne with Bank of America.

Can you talk a little bit about the dynamics that you're seeing in these competitive pressures in crop protection chemicals? Is this coming from your suppliers that are getting more aggressive because of inflated inventories? Or is this more your competitors at the retail level? Or is this an e-commerce driven impact on pricing?

Thank you for your question, Steve. I'll have Mike Frank answer that for you.

As you can see, in our Q1 results, Q1 was a slow quarter for crop protection sales. We carried significant inventory into the start of this year. We know that was true for our competitors as well. And so when you have a market where sales are slow and inventories are high, you get a very competitive marketplace, which we saw in Q1 and that reflected in our margins that were down slightly. But the real story is, as Q2 starts to unfold and we really move into the crop protection season, we're expecting normal margins similar to last year, and we're already starting to see that. So based on mix, based on our proprietary products and as inventories start to get drawn down from our sheds and from our competitors, we are seeing our return to, say, normal margins on our side. To your point on e-commerce, that really hasn't been an impact. Of course, we launched our own e-commerce capability here at the start of the year. And so we're engaging with our customers and we are pleased with how that's going. But in terms of online business from nontraditional competitors, I would say that's a nonissue. It doesn't come up when I talk to growers and it's not coming up through our field.

Your next question comes from Steve Hansen with Raymond James.

Just a quick question on the M&A outlook. You've clearly been very active over the past five months. Do we expect you to moderate your pace a little bit in the coming quarters here or maybe just give us a fair bit of description around how the pipeline looks and how you feel about your integration efforts relative to further business development on that front?

Good question. So look, we can't do $1 billion a quarter, even though some of us may want to. So look, I think that was an atypical quarter. We were able to acquire assets and companies that were top quality, fit well within our overall strategic plan and highly, highly accretive. So going forward, what we would expect is that we would be more towards the normal end of our M&A -- historical M&A ranges to the upper end. The pipeline that we have today is quite strong in the U.S. and we are building a pipeline in Brazil. And of course, with Australia now, we're really focused on closing the transaction and then getting onto the integration work because the synergies for that transaction are very accretive and that will be the focus area. So I would say going forward, a solid M&A pipeline, but not to the levels that you saw in the first quarter.

Your next question comes from Jonas Oxgaard with Bernstein.

Chinese crop protection prices are already elevated before the explosion dealing and so it looks like it might get even higher, and now we have the awesome spectra of even more tariffs. Can you talk a bit how the -- how you see that evolving and how that impacts you?

Great question. So I'll have Mike Frank talk about the hearing now and what he's seeing, and then I'll give a strategic overlay.

So you're right. I mean, if you look back over the last 12 months, crop protection products that have been imported from China, we've seen inflation on those, both because of the environmental controls that are being put in place and that reflecting in higher costs, and then of course, the -- what are 10% tariffs that have now been turned up to 25%. I think if you look across the U.S. market, there is just over $600 million worth of active ingredients that are imported from China. And so you can calculate yourself the impact of that going from 10% to 25% tariffs. I think as you think about 2019, at least from our perspective, we've already secured our inventory for 2019, and so we won't see an impact from our own cost with the increase in tariffs. I can't speak for the rest of the industry. But we feel like we're secured for this year. And of course, if the 25% tariffs continue into 2020, then that will be a market-wide impact for sure.

And just a little bit more on that. I think we're well positioned as a company from an inventory perspective. The concern lies beyond that. If this situation persists for the foreseeable future, we just have underlying concerns that this is more headwind for U.S. farmer economics. Of course, it's not just higher cost from crop protection products, but we do believe that there is an influence on crop pricing itself because of the uncertainty. This isn't good for the U.S. farmer and the long-term health of the U.S. farmer. And like Mike covered very well, this year, we think that the crop will get planted and we're well positioned from a crop protection product. Our concern is if this becomes the new normal and this continues into 2020, then we would have a different view of the situation.

Our last question comes from Alex Falcao with HSBC.

Just wanted to see your take on the effects of the African swine fever. Is that something that concerns you? Do you have any sausage you can -- that you can share on that in terms of specifically for China, but the impacts on the global value chain?

Jason Newton will answer your question for you.

Yes, definitely, I mean, it's a significant issue for the Chinese swine population. There's been a dramatic, and the numbers are sort of all over the map as far as how much the size of the herd has declined, but it could be as much as 25% to 35%. So it's a significant reduction, which obviously will have a negative impact on domestic feed demand. I think it's too early at this point to really know what the full impact will be. And I think as we look longer term, what we've seen in the past when these situations develop is that the herd will be rebuilt, and in the meantime, it's likely positive for domestic poultry and beef consumption trends. And elsewhere in the world, it's good for hog producers and major hog producing countries like Brazil and the U.S. and should be positive for feed consumption in those markets.

Operator, that looks like all the questions we have in the queue for this morning. I want to remind everyone, we have Investor Day in Toronto May 28. So hopefully we'll see you all there. And thank you for attending this morning.

This concludes today's conference call. You may now disconnect.