In 2019, American farmers have dealt with trade wars, historic flooding, and, somewhat ironically, water shortages. That's led to a significant delay in the planting season for corn and soybeans, and prevented the planting of a record 10 million acres of crops. It weighed on the operations of fertilizer titan Nutrien (NTR 1.74%), too, although the business proved surprisingly resilient in the second quarter and first half of 2019.
The company delivered growth in revenue, income, and free cash flow compared to the year-ago period. While Nutrien had been relying on its enormous retail segment to drive growth in previous periods, that hasn't been possible in the first six months of the year due to the slumping American market. Luckily, healthy potash sales in international markets have kept the growth engine humming along during that time span. Here's what investors need to know about the latest operating results.
Image source: Getty Images.
By the numbers
Nutrien stayed afloat despite the historic flooding and rainfall in the American Corn Belt. That's pretty impressive considering that the business owns a 20% share of the $40 billion U.S. agricultural retail market, and that the company's retail segment generated 70% of total revenue in the first half of 2019. Here's how the first six months of the year compared to the first half of 2018:
|
Metric |
First Half 2019 |
First Half 2018 |
Change |
|---|---|---|---|
|
Revenue |
$12.3 billion |
$11.8 billion |
5% |
|
Gross profit |
$3.3 billion |
$2.9 billion |
10% |
|
Gross margin |
26.6% |
25.3% |
130 basis points |
|
Income from continuing operations |
$899 million |
$740 million |
21% |
|
$2.37 billion |
$1.99 billion |
19% | |
|
Free cash flow |
$1.69 billion |
$1.15 billion |
47% |
Data source: Nutrien earnings press release.
Revenue was up and expenses were down -- the ideal scenario for shareholders. That was partially due to the continued realization of cost synergies from its 2018 merger, which are expected to continue. Nutrien estimates it will reap $650 million in annual run-rate cost savings by the end of 2019, although it wasn't clear if that's cumulative for the entire year or covers just the second half.
The primary driver for the strong first-half performance was a solid year-over-year increase in fertilizer segment performance and significantly reduced downtime for the company's potash production facilities, from 24 weeks in the year-ago period to just 16 this year. Consider how each segment fared when it comes to earnings before interest and taxes (EBIT):
|
Metric |
First Half 2019 |
First Half 2018 |
Change |
|---|---|---|---|
|
Retail EBIT |
$529 million |
$631 million |
(16%) |
|
Potash EBIT |
$800 million |
$530 million |
51% |
|
Nitrogen EBIT |
$466 million |
$405 million |
15% |
|
Phosphate EBIT |
($16 million) |
$39 million |
N/A |
Data source: Nutrien earnings press release.
While the operating results are solid, investors cannot forget that the agricultural markets are seasonal. That means the business will be facing the effects of historic flooding in America's Corn Belt for the rest of the year.
Image source: Getty Images.
Looking ahead
Management expects the delayed and prevented planting in the United States to have a significant effect on the retail market this year, but also predicts that farmers lucky enough to proceed will be eager to maximize yields. That should help offset lower nutrient, crop protection, and digital agriculture sales from the 10 million acres that will be on the sidelines this year. There's also the expectation that farmers in other global breadbaskets, notably South America, will step in to fill the void left by the Americans this year.
Nonetheless, management decided to slightly reduce its full-year 2019 guidance as follows:
|
Metric |
New Guidance |
Previous Guidance |
|---|---|---|
|
Adjusted earnings per share (EPS) |
$2.70 to $3.00 |
$2.80 to $3.20 |
|
Adjusted EBITDA |
$4.35 billion to $4.70 billion |
$4.4 billion to $4.9 billion |
|
Retail EBITDA |
$1.2 billion to $1.3 billion |
$1.3 billion to $1.4 billion |
Data source: Nutrien earnings press release.
It appears all other guidance numbers -- there are 12 (!) total -- have remained unchanged from previous expectations. All things considered, the slight reductions to the metrics in the table above aren't going to scare investors with a long-term mindset, although the numbers could be reduced even further if management has underestimated the headwinds it will face in the second half of 2019.
A strong showing in a tough market
Nutrien delivered an impressive operating performance in the first half of 2019 given the circumstances. Strength in the company's potash segment more than offset weakness in retail driven by a historic reduction in planted acres in the United States. Both trends are expected to continue for the remainder of the year, although the company's global footprint should allow it to help farmers elsewhere make up for the weakness in the United States. Simply put, investors should be pleased with the trajectory of the business and maintain their previously held views of its potential.
