Greetings, welcome to the Nutrien Third Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the conference over to Richard Downey, VP of Investor & Corporate Relations.
Thank you, operator. Good morning, everyone, welcome to Nutrien's conference call to discuss our third quarter results and outlook. On the phone with us today is Mr. Chuck Magro, President and CEO of Nutrien, other heads of the executive leadership team. 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 conclusions and forecasts, 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, welcome to Nutrien's third quarter earnings call. Before I discuss our results this quarter and the outlook for the remainder of 2018, I'd like to make a couple comments on the progress we have made on our strategic priorities, and how we are positioning the company to enhance shareholder value going forward. First is the progress we've made on synergies. At the onset of the merger, we targeted $500 million in annual run rate synergies within a two-year period, we now expect to achieve that goal in the first 12 months. Furthermore, we have increased our total synergy target by 20% to $600 million by the end of 2019. I have been very impressed with how our teams have rolled up their sleeves to accelerate the pace of synergy capture.
You can see the value it is creating by lowering production costs for potash and nitrogen, increasing volumes through our integrated platform, reducing sustaining capital spend. The second strategic priority is the sale of our equity stakes. In October, we closed on the sale of our APC investment for proceeds of approximately $500 million, expect to complete the sale of our SQM A shares to Tianqi by the end of the year. We anticipate net proceeds from all equity stakes of around $5 billion, which will provide tremendous opportunity to deploy the cash to generate additional shareholder value. Finally, we moved aggressively to complete our 5% share buyback, repurchasing a total of 32 million shares since late February at a weighted average price of $51.62 per share. Combined with our dividend payout, we will return over $2.6 billion to shareholders in 2018 alone.
With that overview, I will now turn to our results for the quarter. Retail performed well again this quarter, with EBITDA up 10% from the same period last year, despite challenges from low pest pressure this season and low crop prices. This illustrated the strength of our business model and benefits of our geographic and product diversity. Ideal growing conditions and rapid crop progress contributed to higher fertilizer demand than normal for the third quarter, but limited crop production sales. The lower demand for crop protection products was also due to grower caution related to trade tariffs. The third quarter is not a significant quarter for seed sales, and the dip in gross profit was primarily due to timing of vendor programs. This quarter's potash and nitrogen performance was exceptional and demonstrated our significant leverage to improving market fundamentals.
Potash adjusted EBITDA was 64% higher than the third quarter of last year, as we benefited from higher prices, record volumes, and much lower costs. Sales volumes were almost 4 million tons this quarter, which was an all-time record, as we were able to capture incremental sales in a tight global market. Price increases were most pronounced in offshore markets, with our average realized price increasing 25% compared to the third quarter of 2017. This reflects a significant increase in spot market prices and the settlement of new contracts with India and China at higher prices. Our potash cash cost of product manufactured declined by 22% to $56 per ton in the quarter, a result of higher production volumes, merger synergies, and a greater proportion of supply from our lowest cost mines.
We surpassed our previous third-quarter production record by nearly 600,000 tons, including increased production from Rocanville, which had cash cost of $40 per ton in the quarter. This places us among the best and lowest cost producers in the world. Following a strategic review of our potash portfolio, we decided to permanently close our New Brunswick potash facility and took a $1.8 billion non-cash impairment in the third quarter. The decision to invest in the operation was approved back in 2007, and the facility has been in care and maintenance mode for almost three years now. We remain positive on the long-term fundamentals for potash and can increase production in Saskatchewan at a significantly lower cost than resuming production in New Brunswick. Nitrogen EBITDA more than doubled in the third quarter as we benefited from higher prices, increased sales volumes, merger synergies, as well as low-cost gas in North America.
The gas price spread between North America and major nitrogen-producing regions such as Europe and Asia has widened, providing a significant margin advantage for our well-positioned assets. We also reduced our urea controllable cash cost of product manufactured in the quarter by 16% compared to last year. Our nitrogen plants have operated very well in 2018, with utilization rates of 93%, up 7% from last year. We also recently signed a new gas contract in Trinidad, where operating rates have been higher year-over-year. Phosphate and sulfate EBITDA increased to $88 million this quarter, driven by higher realized prices, in particular for fertilizer products. Our phosphate team remains focused on minimizing costs and optimizing our product mix. This includes expanding production of our U.S. phosphate sites and completing the transition of our Redwater facility to ammonium sulfate, which is expected to be completed in the third quarter of 2019.
With strong results across all business units, Nutrien's adjusted net earnings for the quarter was $0.47 per share. Adjusted EBITDA totaled $839 million in the quarter, up nearly 80% from the comparable period in 2017. Turning to the outlook. We are nearing completion of another strong harvest in North America. Record yields remove significant crop nutrients from the soil that will need to be replenished. While the higher yields and trade tariffs have impacted crop prices, in particular for soybeans, the underlying market fundamentals remain supportive. Global grain stocks are projected to tighten during the 2018-19 crop year, especially for corn. Lower corn stocks, along with higher cash margins relative to soybeans, will support a significant increase in corn acreage both in North and South America in 2019. As a result, we expect a strong fall application season in North America, despite weather challenges experienced earlier this fall.
Turning to the potash markets, we increased the low end of our 2018 global shipment guidance and now expect demand in the range of 66 to 67 million tons. Canpotex is positioned for a record year and is fully committed to January 2019. Prices in all major spot markets continue to firm, and the settlement of contracts with China and India at $60 and $50 per ton increases will support offshore netbacks. We anticipate healthy demand in the domestic market and recently announced a $25 per short ton price increase. Importantly, we continue to see strong underlying consumption trends and limited distributor inventory that should support solid customer engagement well into 2019. We have responded to this market opportunity and increased potash sales volumes by 1 million tons in 2018.
We also have at least 5 million tons of incremental operational capacity in Saskatchewan that we can bring online as global demand grows and have the capability to add further brownfield expansions in Saskatchewan that are much lower cost than greenfield expansions. The nitrogen markets improved faster than many predicted, and we see positive fundamentals for the remainder of 2018 and into 2019. We expect favorable demand conditions, limited new supply next year, and anticipate relatively stable Chinese urea exports going forward. Importantly for our nitrogen margins, we expect the North American natural gas advantage to remain very wide relative to other key producing regions globally. Based on these market conditions, our 2018 annual earnings guidance is now $2.60 to $2.80 per share, and the midpoint of our adjusted EBITDA guidance increased to almost $4 billion.
The midpoint of our EBITDA range represents a more than 35% increase over 2017 combined adjusted EBITDA, which demonstrates the strength of Nutrien's integrated business, the realization of merger synergies, and our leverage to improving market conditions. Nutrien has made significant progress on its strategic priorities and delivered strong financial performance over the first three quarters. Looking ahead, we expect to generate stable and growing free cash flow and have a balance sheet that is second to none in our industry. We expect to generate between $6 and $8 billion in cash over the next three years that will be allocated to growing the business and returning cash to shareholders. In terms of growth, we remain focused on expanding our retail footprint in North America and Australia and have very strong pipeline of acquisition opportunities.
Far this year, we have acquired 50 locations with expected EBITDA close to $30 million, and we will close more before the year ends. We continue to actively evaluate opportunities in Brazil and expect to develop a strong footprint in this growing agriculture market over the next three to five years. We are also evaluating opportunities to grow our Loveland Products business, which provides significant margin enhancement across our retail portfolio and value to our customers. In the third quarter, we launched our retail digital platform and have already signed up customers representing an estimated 30% of our North American retail revenue base. Combining this digital capability with our industry-leading distribution system, local agronomist network, and proprietary products offering will provide a significant competitive advantage in delivering value to growers.
We expect it to deliver significant value to Nutrien by improving customer retention, share of total spend, while generating operational efficiencies across our network. Furthermore, yesterday we announced a 7.5% increase to our dividend, taking our annual dividend to $1.72 per share. This increase reflects our confidence in our improving operational cash flow, continuous growth in retail earnings, and greater synergy expectations. Our objective is to provide a steady and growing dividend that is closely tied to growth in retail earnings and have targeted a range of 40%-60% of free cash flow after sustaining capital through the cycle. Finally, I would like to acknowledge the retirement of Wayne Brownlee at the end of October. Many of you knew Wayne during his many years as CFO.
Wayne made significant contributions toward the creation and financial strength of Nutrien, and we would like to thank him for his leadership and wish him well in his retirement. We are making good progress on selecting a new CFO and expect to make an announcement by the end of the year. I have our interim CFO, Fred Toone, on the call with us today to help answer any financial questions. Fred has held senior financial roles at Nutrien and predecessor companies for the past 14 years. This is an exciting time for Nutrien. We have accomplished a lot in the first nine months and look forward to delivering on the significant opportunities that lie ahead. Thanks for listening, and we would now be happy to take your questions.
Thank you. We will now be conducting a question-and-answer session. If you'd like to ask a question at this time, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue, and you may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit yourself to one question during the Q&A session. Again, that is star one to ask a question at this time. Our first question comes from the line of Ben Isaacson, Scotiabank.
It's Oliver Rowan for Ben. Thanks for taking my question. What gas and urea price environment do you need to see in the North American nitrogen market in order to invest in building new capacity? I guess, what do you think the incentive price is in North America for greenfields in general?
Yeah. Good morning, Oliver. Look, we've been doing a lot of thinking about our nitrogen business. You can see that we've got lower costs, higher sales volumes through the network. We're really focused right now primarily on driving through the rest of the synergy capture. When we look at North America and just the strong fundamentals that we're seeing around the world when it comes to nitrogen, we think we're still a long ways away when it comes to prices that are needed to justify greenfield economics. Look, when we think about greenfields, it's not just about a market price that's needed, it's also about risk management. Specifically, when you look at North America, right now in North America, getting a lump sum turnkey-type project to build a greenfield project is almost impossible.
When we look at the risk versus return, even when we have quite a bullish view of long-term pricing when it comes to nitrogen, it would not warrant, in our opinion, greenfield economics. We're nowhere near that. Now, when it comes to brownfields, certainly brownfields could make sense. 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. Most of the brownfields we're looking at actually will drive either cost efficiencies or product mix optimization. I think there's going to be a lot of value that we can generate simply by looking at our network. We will most likely have some brownfield expansions, but right now we're primarily focused on delivering our synergies.
Thank you. Our next question comes from the line of Jacob Bout with CIBC.
Hi. Good morning.
Jacob.
Clearly, potash market's very tight. I think I've read that Canpotex has sold out to the start of 2019. Can you talk a bit about what your outlook is for 2019 given the ramp of greenfield capacity by competitors? Maybe talk a bit about what's driving that strong potash demand in North America.
Sure. Good questions, Jacob. I'll have Jason Newton, our head of market research, give you a view of how we see the fundamentals, then I'll provide some higher-level overlay. Go ahead, Jason.
Hey. Good morning, Jacob. As we look out into 2019, as you mentioned, most producers are relatively heavily sold into early 2019. As we look at the year, we think that given where South American soybean planting is today, we expect to see a significant increase in second crop corn as well, so we expect demand in South America to remain strong. We also expect that given, I guess, just to touch on the second part of your question, given the record yields that we've seen in North America, we expect to see very strong North American demand. With the way harvest has come off over the past couple of weeks, I think the fall application season looks good, and how that progresses will drive demand in the North American market in the first half of next year.
I guess overall, when you look at the supply-demand balance and the capacity ramp-ups that we expect to see in 2019, we expect a relatively balanced supply-demand balance or capacity utilization rate in 2019 to what we saw this year. We know, and we continue to see it, that the supply, even as projects ramp up, that the supply coming to market tends to be lower than what the capacity ramp-ups are. We've seen that this year, and we expect that to continue again next year. We also have closures coming into the market again next year. We know that there's a German mine shutting down at the end of the next year that'll take some capacity offline.
Overall, we expect to see a relatively stable capacity utilization rate in 2019, but expect the tight supply-demand balance that we're seeing today to persist at least through the first half of next year.
Yeah, Jacob, just looking a little further ahead then. Look, we've had a strong year, and it's a function of supply-demand, solid demand fundamentals over the last several years. Demand has been growing, even this year, where we've seen what I would call normalized potash demand globally. The market is very tight. We expect that that tightness will continue in the next year or two. Once the new supply comes online from Canada and from Russia, we expect then that there would be quite a pricing momentum beyond that. When we start thinking about 2021, 2022, a little bit more midterm, we see very tight supply-demand fundamentals, and we see that we would almost start to be entering peak-type conditions where we have a strong and sustainable cycle.
Because after the new capacity that's been well documented and discussed, there's nothing behind it to speak of. Once we get out to 2021, 2022, we think that this could have quite a sustained recovery.
Thank you. Our next question comes from the line of Don Carson with Susquehanna.
Hi, this is Jay, Don for Don. On the retail side, has Nutrien been named as a defendant in any of the glyphosate suits given your leading distribution position there, or are plaintiffs just going after the manufacturers?
No, we have not.
Thank you. Our next question comes from the line of Andrew Wong with RBC.
Hi, good morning. Just regarding the SQM sale, do you anticipate any more hurdles that could potentially come up? Is that deal now pretty much in the clear? Just following the deal, what do you plan to do with the cash? Thanks.
Good morning, Andrew. If you step back and you look at what we had to accomplish at the beginning of the year, we've now completed all the transactions except for the SQM A shares. Specific to that deal with Tianqi, we have all the necessary approvals that we need. As we've communicated this morning, and I think we've been pretty consistent in our communication, we do expect that we will now complete that transaction and close the deal by the end of the year. Once that deal is closed, we do expect that we will have approximately $5 billion of net proceeds after tax. That's really the focus.
The use for capital then, when you start thinking about that from a capital allocation perspective, if you use that number as a starting point of $5 billion after tax, plus the organization and the company itself is generating very substantial free cash flow, even after you remove sustaining capital and the dividend. We do expect that we will have somewhere between $6 billion-$8 billion after the dividend, after sustaining capital to allocate in the next three years. Our priorities for growth really haven't changed. We think where we are right now in the cycle, there's a huge strategic opportunity to continue to grow our retail business. That's what we plan to do. We plan to continue to look for consolidation opportunities in North America. We are looking aggressively at Brazil.
We've been quite patient in Brazil, but we think there's a real opportunity to replicate our retail model in Brazil, as well as backward integrating into our Loveland Products portfolio, which that business has been just operating so superbly, we see more opportunities there. Beyond that, though, we also think that there will be an opportunity to return more capital to shareholders. Until we actually have completed and closed all the transactions, it's a little too early to get more specific than that.
Our next question comes from the line of Mark Connelly with Stephens.
Good morning. It's actually Joan Tong for Mark Connelly. Sticking with Brazil, I'm just wondering, with this shift in politics change, I was just wondering if your view on Brazil in terms of relative attractiveness and expanding in that market, has it changed? As compared to maybe other geographic regions? How is the hurdle rate that you apply to potential Brazil investments different from what you use in weighing the U.S. and Canadian investments? Thank you.
Thank you very much for the question. To answer it directly, it really hasn't changed. Our view of Brazil is one of being a long-term investor. We see the agricultural market in Brazil as having very significant opportunities long term. I think there's going to be more agricultural land put into production. We think that our products and services, our technology, our digital capability can add significant yields to Brazilian farmers. I think we can also make some money doing it. When I look at Brazil, the new government we consider to be pro-business. We consider that government to be pro-agriculture. If anything, it's another step forward in terms of being more positive.
When we look at the hurdle rates, specifically, obviously, the hurdle rates in Brazil will need to be higher than in North America when we look at investing capital, because the risk profile is different. I do want to make sure that I just communicate really clearly. The first series of acquisitions probably will not meet those hurdle rates because there's no synergies. Longer term, we will absolutely get there. We firmly believe that Brazil, over the long term, will become a very significant part of our retail portfolio. We actually think it could become the second largest part of our retail portfolio over many years, and we will deliver the hurdle rates that Brazil needs. The first several acquisitions, I just want to make sure that we're clear, will most likely have less of a return because there won't be synergies.
Our next question comes from the line of Chris Parkinson with Credit Suisse.
Hi, good morning, everyone. This is Graham Wells on for Chris. I just had a question about the breakdown of retail results. Obviously, there was some pressure on crop protection, and the [quarters] had just gone while nutrients were quite strong. I am curious what your outlook is for the different sub-segments in retail heading into next spring, where we are expecting the shift from some soybean acres over to corn in the U.S. and the impact that that might have. Thanks.
Yeah. Thank you very much for your question. Mike Frank, our President of Retail, can take those.
Good morning, Graham. As you know, our Q3 is not a significant quarter for retail. We did see some impact on our crop protection business. The year started out, especially in the U.S., cold and wet. Summer got hot and dry. The need for both insecticides and fungicides was a little bit lower this summer than it was last summer. That had a bit of a negative impact on volumes of crop protection. Of course, we had a good quarter from a fertilizer standpoint. Looking into next year, we are at a point where we are now obviously selling fall fertilizer. Harvest progress is similar to what it was this time last year. We had a good October. Counting on normal weather conditions, we believe that our fertilizer business will be very strong in Q4.
Looking at early next year, both seed and CP, we have a lot of momentum. We gained pretty significant market share in the U.S. in crop protection in 2018. Our results are up about 6% versus the market up about 1.7%. We also gained share in seed. While seed margins were flat, we actually expanded margins in crop protection, largely because of the benefit of our proprietary products. We believe that momentum will drive us into next year. Obviously, our farmer customer margins are compressed, so the value that we bring as a trusted advisor has never been more important. We're expecting more of the same and another year of growth looking at 2019.
Our next question comes from the line of Duffy Fischer with Barclays.
Yes, good morning. Couple questions, maybe three, around retail. First is just with the consolidation of several of the very large suppliers into your retail business, is there anything different over the next year? What I would think of is, did Monsanto pay out its volume program in the third quarter, but Bayer in the fourth quarter? Now that's going to change to one or the other. Is there anything lumpy from that? The second is just, what metrics will you give us around your retail digital customers, and how should we grade you on that over the next several years? The last one is just around the Brazil retail acquisitions. Are those generally done in BRL where the move in BRL actually might have just made some of those more expensive?
Like a lot of ag down there, is that kind of a dollarized purchase price?
Good morning, Duffy. Mike Frank can take your questions.
Duffy, first on the consolidation of suppliers, I would say at this point in time, there's been really no impact on programs or the timing of programs, I wouldn't expect to see any impact in FY 2018 or even next year because of that. We're working with all of our suppliers. Specifically, you asked about Bayer, Monsanto. With them just getting their deal closed here recently, a lot of the programs, even for this upcoming year, are really the same as the programs that they've had in the past as independent companies, we're not seeing any change on that at this point in time. Your second question with respect to digital. We're off to a great start. We launched our integrated digital platform back in July, our first version, and we continue to make updates to the version.
We already have about a third of our customers that have already signed up and are now engaging with us on our new digital tool. We're very excited about where this is going. We think we have a unique opportunity because of our relationship with the growers, our extensive supply chain to really bring an integrated digital platform, both from an account management, a retail, and a digital agronomy perspective. We're putting that all together. It's an open architecture, we'll also have third-party apps that'll be on our platform as well, and it'll be a single-stop shop for our customers that are looking for digital solutions and digital tools. Finally, your third question in terms of Brazil acquisitions. We would expect most of them to be in Reais. Again, we haven't announced anything here recently.
We closed the deal of a company called Agrichem early in the year. We're obviously aware of and watching where the BRL moves.
Typically, we'll pay a multiple on Real EBITDA. I think that in some way hedges our cost against the dollar move with the real. We would expect to pay Reais for most of the transactions, if not all of them.
Our next questions are from the line of Joshua Spector with UBS.
Hey, guys. Just a question around free cash flow, specifically looking at working capital. I guess it's been a pretty big use for the past three quarters, and if I assume a normal give back in fourth quarter, I still get cash use of around a few hundred million, a half a billion for the full year. I was wondering if that's consistent with the way you're thinking about working capital for the year, if there's some other assumptions that I should consider.
Good morning, Josh. We'll have Fred Toone answer that question for you.
Hi, Josh. It's Fred here. You are correct. Our working capital, as it has done in the past, tends to be an outflow for the first three quarters of the year. What you do see in the fourth quarter is we begin to collect all the harvest-based receivables in our retail business. Additionally, we begin to get a very large customer prepay balance come in toward the end of the year. What's a bit different this year versus last year is two things. One is that our retail business is bigger, so we are expecting growth in some of our fourth quarter receipts. The second thing is that we are moving up in the commodity cycle. There may be a bit of an offset there just as fertilizer prices rise and we begin to restock.
Our next questions are from the line of Steve Byrne with Bank of America.
Hi. Thanks. This is Ian on for Steve. The impairment charge that was taken for New Brunswick, could you elaborate a little bit more on why the accounts deemed it was necessary to take that charge today? Operationally, is there anything at all that changes as a result of that? Thank you.
I'll talk to you about the decision that was made. Operationally, I can have Susan Jones, our President, talk about that. Look, as we said early in the year, we're doing a full portfolio review of all the company's assets and businesses and operations. We went through It's been a many-month process. We went through the strategic review with the board of directors very recently, and just yesterday actually took a final recommendation to them. This really has to do with just where do we think that the market is best positioned. We looked at our network now. You look at having the six mines in Saskatchewan, what we think we can deliver from the mine from a nameplate capacity, where the best use of capital is to expand it.
The decision is pretty obvious when you look at, we have 5 million tons in Saskatchewan of excess capacity today, and if we invest a little bit of capital into the 6 facilities in Saskatchewan, we can even go much higher than our operational capacity that's stated as 18 million tons for very economic expansion. The cash cost of production in New Brunswick is just so much higher than Saskatchewan, so it's the best use of cash. That's the analysis that took some time to work through. We needed to make sure that we did all the engineering and the analysis, financial modeling behind it. The recommendation was simply taken to the board just recently. Operationally, Susan?
Yeah. Good morning, Ian. Chuck has reiterated that the capital and the operating costs to run New Brunswick is significantly higher than Saskatchewan. I did want to just reaffirm that our outlook for potash markets has not changed, and that we do believe that we can continue to bring on Saskatchewan production quickly at a much lower cost. You'll have seen this year, we brought on 1 million tons, and we do expect that to continue to increase next year. I think the way you should just look at it is the portfolio review is completed, and we believe that this is going to ultimately drive our cost of product manufactured down while continuing to meet market demand in the future.
Thank you. Our next questions are from the line of Joel Jackson with BMO.
Hi. Good morning. I actually wanted to follow up on that line of questioning. How do we account for the New Brunswick mine now coming off care and maintenance and shutting down? Is that a good share of the $75 million of increased production optimization synergies, or is there another cost impact or benefit we'll get from New Brunswick? I appreciate the rationale for shutting down New Brunswick. Is there also a concern about, I know when it came on, there was a crack in the shaft issues. Is some of that still lingering?
Susan, go ahead and answer the first question.
Good morning, Joel. In terms of synergies, no, the synergies are not related to New Brunswick shutting down. I'll address the cost of New Brunswick first. New Brunswick is costing about $25 million a year to keep in care and maintenance. We'll expect to see shutdown costs over the course of the next one to two years, and then that will be depleted. After that, we are fully provided for, in terms of our remediation costs. In terms of synergies themselves, our synergies are driving from two main buckets. The first is sustaining capital savings that we're achieving at our Vanscoy facility. You will recall that we announced earlier in the year taking Vanscoy from 2.7 million to 2.1 million tons and actually shifting that production to our lower cost mine.
We are able to pull Vanscoy into the network, reduce sustaining capital, and we also, in the same token, are reducing our cost of product manufactured by shifting it to lower cost mines. That's where the synergies are coming from.
Yeah, Joel, it's Chuck. The New Brunswick shutdown has nothing to do with the $600 million of synergies that we announced today. I just want to make that clear that the cost savings will actually be post 2019, of course, our synergy target will be delivered by the end of 2019. To your second question, all I will say today is that when we look at New Brunswick versus our network in Saskatchewan, dollar for dollar, you'd put it in Saskatchewan because we can get a bigger bang for our buck. It's simply a strategic shift to go from relatively high-cost production to low-cost production and having the capability now that we've had a really good look at our network in Saskatchewan.
We have the capability to bring on pre-economic brownfield capacity expansions in that network at a fraction of the cost it would take to bring up, say, a greenfield plant.
Our next question comes from the line of Adam Samuelson with Goldman Sachs.
Yes, thanks. Good morning. Maybe continuing on the change in the synergy outlook, I just want to be clear, the $600 million run rate target that you've now outlined, that's all operating expenses or is there sustaining capital benefits embedded in that doesn't actually hit the P&L per se or EBITDA? Then just a little bit more detail on what has changed in the areas where you're seeing better synergy realizations, and if you can provide any buckets by business, that'd be helpful. Thank you.
Yeah, sure. We'll have Steve Douglas, our Chief Integration Officer, walk through those questions for you.
Sure thing. The $600 million does include some component of reduced capital spend, but I'd say the lion's share of this number is related to operating costs that will make their way to the P&L. Now, ultimately, the reduction in capital spend means less capitalization, which means lower depreciation in the future. That also will ultimately hit EPS, but it does take a little bit longer, obviously.
Our next questions are from the line of Michael Piken with Cleveland Research.
Hi, I just wanted to talk a little bit more on the retail side in terms of how you're thinking about sourcing raw materials in the face of some of the tariffs and what the inventory situation looks like for crop protection at the end of the season. Thanks.
Michael, I'll have Mike Frank. We have made some strategic purchasing to work our way through the tariff issue that we're seeing between the U.S. and China, Mike can walk you through that.
Yeah. Good morning, Michael Piken. Firstly, there will be an impact on crop protection prices and costs going into 2019. There is a number of products that are being sourced from China, from various suppliers, that are going to get impacted with the 10% tariffs. We are already seeing that, and with the rumors of a 25% tariff coming in the new year, it could have even more impact. As Chuck Magro mentioned, we did make a decision several months ago that we were going to strategically build up some of our crop protection inventory. We are sitting with about $300 million more of inventory this time than we were at this time last year in anticipation of that. That being said, one of the other hedges that we have against this is our proprietary business.
We are looking at a diverse supplier base for our proprietary products. There are a few of our products that will get impacted by tariffs, but we are going to be largely unaffected in our proprietary business, which should give us a competitive advantage. This is going to be very dynamic as it plays out over the course of this next season. Depending on what happens to the tariffs, if they go away or if they get increased, the market will react to that. We are being very cautious in terms of the amount of products that we are bringing in at this point in time that have a tariff impact.
Our next questions are from the line of Steve Hansen with Raymond James.
Yeah. Good morning, guys. Just a quick one on the M&A front for the retail domestically here. I think you described your M&A pipeline as pretty full. I think you have also got some brownfield efforts that are progressing. If you were to contemplate next year growth in the domestic location base, how would you expect that to change relative to what you have done this year? I think you described 50 thus far with a few more to go. Just trying to understand the cadence of M&A growth domestically.
Yeah. Hi, Steve. Mike Frank can take your questions.
Yeah, Steve. As Chuck has already mentioned, our pipeline is significantly fuller now than it was at this time last year. Not only have we had a record year already in terms of the number of tuck-ins that we've done. We expect to do some more between now and the end of this year. I would say geographically, we are looking for opportunities across the U.S. I think the fact that grower margins continue to be compressed, as we just talked about on the previous question with the tariff impact on crop protection products, I would expect another very challenging year for the retail market in general. That gives us an opportunity to continue to aggressively drive our consolidation and professionalization strategy.
We would expect an even higher rate of tuck-ins, both in terms of numbers and especially in terms of dollars going into next year in the U.S. As Chuck mentioned earlier, we would expect it at some point in the next 12-18 months to make some significant moves in Brazil as well.
Our next questions are from the line of Jonas Oxgaard with AllianceBernstein.
Good morning, guys. This is Jackson Cluison for Jonas. You said that you expect peak potash tightness in 2021 to 2022. Can you talk about how you think about the upper bound for potash pricing in that environment and what you guys are going to do to manage your production?
Yeah. Thank you for the question. If demand grows at a normal pace over the last 10-year rate is, let's say, 2.5%-3% per year. With the new capacity coming into the market, certainly when we look at the overall supply-demand by 2021, 2022, the supply-demand is very tight. In that situation, what you have is you have really Nutrien sitting there with the only material incremental capacity to put into the market. Our strategy has always been just to meet our demand with our production. It's a little early for us to talk to you about what we will do in 2021, but you can imagine that with being the only company that will have any real incremental capacity left at that period of time, our view is one of we will meet the market, and that's an important guideline.
If you look at this year alone, we're up 1 million tons, and global demand is up somewhere between 1.5 million-2 million tons. We did increase our capacity and our sales quite aggressively because the market needed the tons, and we saw an opportunity to create shareholder value. It's not anything more complicated than that. We'll have to assess the situation at the time, but given the supply-demand, I think where this thing is going to end up is that Nutrien will be really one of the only companies that have any real capacity to put in the market at that time.
Our next questions are from the line of Vincent Andrews with Morgan Stanley.
Hi, this is Neil calling in for Vincent. What type of impact do you expect to Chinese urea production during the winter heating season? Do you think there will be significant restrictions to gas and coal feedstock usage for urea producers like last year?
I'll have Jason Newton answer that question.
Good morning, Neil. I'd say looking through the winter months, we definitely did see as we got into late in 2017 and early 2018, that production rates declined. We expect that given the current natural gas, supply-demand situation, that natural gas availability will tighten as we go through the winter months, and that will lead to lower production. As an offset to that, we are definitely at higher prices today than we were a year ago, and the rates of production have been relatively strong of late. So, I think as we look toward the next few months and into early 2019, we wouldn't see a significant difference early in the year in terms of Chinese exportable capability than what we saw this year.
Thank you. Our next question comes from the line of Alex Falcao with HSBC.
Thanks. I have two questions. One regarding phosphates. When you guys did the integration, where are you right now when you first idealized where you're going to be in phosphates? If there was to be a divestment here, do you think it would be any buyers for the U.S. assets? That's question one. Question number two, in Brazil, are there any plans other than to buy small distribution companies in Brazil? We know that some of the traders are struggling and their distribution arms could be up for sale. Is that something that you guys would explore? Any of the logistics that are for sale in Brazil as well? Thank you.
Thank you for your question. I'll have Raef Sully, our President of Nitrogen and Phosphate, take your first question, then I can answer your Brazil question.
Alex, just on the synergy development, we're on track as planned. We will be ramping up production at White Springs in the first quarter of 2019. We will be closing down our Redwater facility in the first quarter of 2019 and then changing over to ammonium sulfate by the third quarter of 2019. All that is on track. The three projects associated with that are on schedule and on budget.
For your Brazil question, look, our model for retail is very different than just being a pure distributor. We have of course fertilizer, chemistry, seed. We provide agronomic knowledge and advice, services, and digital technology, and of course our proprietary product portfolio. That's how we think that the model will create a lot of value for Brazilian farmers. Now, we have in one of our first acquisitions in Brazil was buying a distributor that we then converted to what I'd call a full-service retailer. It is a potential for us to enter the market through a distribution type acquisition. Over time, we would add the rest of our products and services to make it a more full-service offering that you're used to seeing in our other geographies. It is an option.
Our next questions are from the line of John Chu with Laurentian Bank.
Hi, good morning. Just on the higher synergy targets, I'm just curious regarding the distribution and on the procurement side, those targets were not revised higher for 2019. On the distribution side, you're about 80% towards your target. Is there any more room to improve there, or is it safe to assume there isn't much more upside? Similarly on the procurement side, just curious if there's any more potential for revised higher targets somewhere in the first half of next year. Thank you.
Hi, John. I'll have Steve Douglas take the question.
I think Susan laid out some of the changes in the numbers for next year. Some of it was also administrative related to some costs associated with benefits and some costs associated with insurance. We are constantly looking for new sources of synergies, but that said, we have to target the ones that we think are the most realistic, the ones that are easily achievable relative to the others, and the most bang for your buck. While we'll constantly look for new synergies in every one of these particular areas, we've raised the number predicated on what we think is most imminently achievable and again, delivers the fastest return.
That said, we are constantly looking. I think we did spend. When you look at the fact that the deal closed somewhat later than we anticipated, we spent a lot of time to the extent we could from an antitrust perspective, making sure that we found a lot of the synergies ahead of time. While we haven't raised those targets doesn't mean we're not looking, but we only really raise it when we're, A, confident, and B, think it's the most advantageous for us to achieve.
John, just one last thought on synergies. We've set the target of being the end of 2019. We do have other savings, and you could even say synergies that will most likely take us well beyond 2019 into 2020. We're most likely not going to call those a synergy. We're going to probably come out at some time next year with a set of operational efficiency targets for all of our businesses and the corporate organization that will have some of this thinking and analysis built into it. Three years after a merger, we can't sit here in good faith and say it was all because of the merger.
That's all the questions we have this morning. The IR team's available to answer any other follow-up questions. Thank you for joining us. Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.