Global fertilizer industries have mined, manufactured, and shipped agricultural nutrients to the world's breadbaskets harvest after harvest for much of the last century. Seeing how farmers will always need to supply their crops with nitrogen, potassium, phosphorus, and other nutrients, it may be tempting to think that the markets will continue on a predictable trajectory for the foreseeable future. But that seems increasingly unlikely thanks to a handful of emerging technologies.
Farms from America's Corn Belt to Brazil are leveraging digital tools to plan each harvest, including more efficient use of inputs such as seeds, water, and fertilizers. Meanwhile, next-generation biotech products in development today are seeking to boost agricultural yields, protect crops from pests, and even displace synthetic fertilizers altogether.
While fertilizer companies generally have been slow to address the growing threats from these emerging technologies, Nutrien (NYSE: NTR) has quietly begun positioning its business for the future of agriculture. Investors shouldn't ignore the shift.
Pouncing on a long-awaited opening
Nutrien is the result of a huge merger between Agrium and PotashCorp, which consolidated following a nasty fertilizer market correction brought on by years of unchecked supply expansion and the dissolution of a major potash cartel in Eastern Europe in 2013. Today, more than a half decade later, markets are finally beginning to rebalance -- and the $31-billion fertilizer titan sees an opening.
A combination of rising selling prices, cost savings from the merger, and a significantly increased global footprint have Nutrien on solid financial footing. Free cash flow jumped 53% year-over-year to settle at $2 billion in 2018. Adjusted EBITDA climbed from $3 billion in 2017 to $3.94 billion in 2018. Management's initial full-year 2019 guidance estimates that the business will generate adjusted EBITDA of roughly $4.65 billion this year.
Strengthening operations are coming at an opportune time. Global trade authorities approved its merger on the condition that Nutrien sell its nearly 24% equity stake in Sociedad Química y Minera de Chile S.A. (SQM), one of the world's largest lithium producers (large amounts of potash are produced from South America's lithium brines). That sale resulted in net proceeds of $5.3 billion. While a significant amount of that will be spent on increased dividend payments and a generous share repurchase program, management has also plowed over $1 billion into acquisitions and investments aimed at future-proofing its single-largest segment: retail.
Leveraging retail to distribute next-gen tools
Nutrien generated a whopping 28% of total full-year 2018 adjusted EBITDA from its retail segment, which is now called Nutrien Ag Solutions. It provides an important source of diversification for the fertilizer producer, as well as a test-bed and launchpad for innovative new products.
For example, Nutrien launched a digital agriculture platform in April 2018 to help farmers better manage the timing of planting, fertilizer and pesticide application, and harvest with current and historical data on weather and climate. The launch allowed the fertilizer giant to compete directly with digital offerings from major chemical companies, notably The Climate Corporation from Monsanto (now part of Bayer) and Corteva Agriscience (soon-to-be spun out from DowDuPont).
Nutrien Ag Solutions hit the ground running. It acquired software tools covering an 11-million-acre network from Agrible three months after launch. Just six months after launch Nutrien had customers representing over 50% of its North American Retail sales, which totaled $12.6 billion in 2018, using its digital platform.
The fast-growing digital platform incentivizes Nutrien to keep plowing capital into both its global retail footprint and data-crunching start-ups. Consider the range of announced partnerships and acquisitions since the digital platform launched 12 months ago:
As the acquisitions of Waypoint Analytical and Actagro suggest, Nutrien is quickly and quietly moving into the ultra-competitive space for next-generation biotech products called biologicals.
First commercialized by The BioAg Alliance, a more than $600 million joint venture between Monsanto and Novozymes, biological products use naturally occurring soil microbes to boost the health of crop root systems. "Simply" coating soil microbes onto seeds can lead to double-digit yield increases, and may one day protect against pests without the need for chemical pesticides. They could also allow plants to acquire their own nitrogen from the environment, significantly reducing the need for synthetic fertilizer applications, which would be a significant breakthrough for global agriculture, but a bit of a headache for Nutrien shareholders.
Aside from The BioAg Alliance, the opportunity is more hype and headline than reality today. Success will require a wealth of soil samples, high-quality data from the field, biological engineering R&D prowess, commercial means for producing and distributing products, and significant capital. Nutrien is one of the few companies that checks many of those boxes -- and can acquire check marks it lacks today.
Nutrien is going digital
Given the risks to the world's largest fertilizer companies, it was always a little surprising that the industry appeared to be ignoring emerging technologies in the digital and biotech realms. But Nutrien has awakened to the risks and opportunities. While its massive share buyback program might make headlines as the primary use of the $5.3 billion windfall from the sale of its equity stake in SQM, the build-out of digital and biological platforms is likely to provide much greater value for long-term shareholders.
Simply put, Nutrien is going digital, and investors can't overlook the significance.
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Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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