Our view: We believe management laid out a realistic and achievable long-term plan for Nutrien, with a central focus on simplifying the portfolio (pruning low returning assets), realizing operational efficiencies and cost savings (>$200M annual savings target), and focusing investment efforts on efficient, high-returning initiatives (Retail proprietary products, nitrogen brownfield). We also think Nutrien has improved focus on enhancing cash generation and conversion from operations, but these efforts may not be enough to fully offset recent impacts from higher interest rates and inflationary pressures on sustaining capex. Overall, we think continued execution and a normalizing fertilizer market should help shares re-rate over time, but a lack of major near-term company/market catalysts and lower cash conversion may continue to weigh on shares in the near-term.
Retail margin expansion and portfolio optimization in focus, with potential future growth in non-core regions: Nutrien guided to $1.9-$2.1B Retail adj. EBITDA by 2026 (from ~$1.46B in 2023 and 2024 guidance midpoint of $1.75B). Management expects Retail to benefit from increasing sales of higher-margin proprietary products (targeting $1.4B gross profit by 2026, from $1.0B in 2024), with a focus on the fast growing biostimulant and bionutrition market (+10% CAGR). We also see a focus on streamlining the Retail portfolio including rationalization of the North American footprint (i.e consolidating legacy sales centres), divesting Chilean, Argentinian, and Uruguayan operations (~2% of Retail earnings), and optimizing Brazilian operations. Management also highlighted a potential future growth opportunity into international regions outside the core markets (North America, Australia, Brazil) through third-party distribution, noting already strong relationships with distributors across many regions through the fertilizer wholesale business and strong demand for Nutrien's proprietary product solutions. While management was reluctant to provide more specific details or targets on this opportunity, we think this could be a significant long-term growth driver beyond the guided 2026 timeframe.
Potash costs to stay bottom-quartile while volumes grow with market: Nutrien is focused on improving potash operations with autonomous mining, highlighting a planned increase to 40-50% of ore mined autonomously by 2026 (from 22% in 2023) which benefits the cost structure and ensures Nutrien remains in the first quartile of the global cost curve against a backdrop of inflationary pressures pushing the global marginal cost of supply higher. Management guided to an increase in sales volumes to 14-15Mt by 2026 (from 13-13.8Mt in 2024) while maintaining the potential to flex production higher in the event of market tightness or industry supply shocks. Nutrien forecasts global potash demand grows to 80-85Mt by 2030, from ~70Mt in 2024, supported by a structural demand step-up in China and consistent growth in other regions, which should allow room for Nutrien to realize moderate sales volume growth even after taking into account new market supply.
Increasing nitrogen capacity headlined by incremental operational improvements: Nutrien expects debottlenecks and improved gas availability in Trinidad to support higher volumes at 11.5-12.0Mt by 2026 (from 10.6-11.2Mt in 2024). Management highlighted their confidence in Trinidad nitrogen operations to improve with a proactive maintenance strategy and better gas availability. Management expects to improve consolidated nitrogen reliability, lifting expected operating rates to 92%-93% (4-5% increase). Outside of reliability projects and improved Trinidad gas availability, the remaining nitrogen segment growth will come from low capital intensity brownfield expansions.
Focus on better cash generation to support a balanced capital allocation plan: Nutrien guided to $5.25B operating cash flow under the mid-cycle price scenario and $4.35B under the 10Y average historical price scenario, resulting in $1.65B and $2.55B of free cash flow, respectively (after taking into account sustaining capex and lease liabilities). Comparing FCF to EBITDA, this results in cash conversion of ~30-35%, below historical levels at ~50%, mainly due to the impact from higher interest rates and sustaining capex. We think Nutrien is doing the right things to improve cash generation by targeting higher operational cash conversion (before finance costs and capex) of 70-75% (up from ~70% previously) to help offset these pressures, through trimming poor cash generating assets (i.e. selling some South American assets) and tightening capital uses (i.e. better working capital management), but we see lower free cash flow conversion from EBITDA as potentially an ongoing drag on valuation.