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Quality of Earnings Insight Report

Date: June 17, 2025

Prepared by: Senior QoE Analyst

Important Note on Report Scope: The query provided, "Iran Conflict Fuels Fertilizer Stocks’ Bullish Setup," refers to a market observation or news headline, not a specific company. A standard Quality of Earnings (QoE) report is conducted on an individual company using its detailed financial statements.

This report will first briefly address the market theme. Subsequently, to illustrate the principles of a QoE analysis and provide a structured response, this report will focus on a representative publicly traded company in the fertilizer sector: Nutrien Ltd. (NTR). The analysis of Nutrien Ltd. is based on publicly available information and serves as an example of how a QoE assessment might approach evaluating a company in this industry. A comprehensive QoE engagement would involve access to non-public data and deeper investigation.

Table of Contents

• 1. Executive Summary
• 2. Market Context: Geopolitical Impacts on Fertilizer Stocks
• 3. Illustrative Quality of Earnings Analysis: Nutrien Ltd. (NTR)
  • 3.1 Company Overview
  • 3.2 Financial Performance Review
  • 3.3 Cash Flow Analysis
  • 3.4 Business Model Assessment
  • 3.5 Growth Trajectory Evaluation
• 4. Financial Charts
• 5. Illustrative QoE Summary for Nutrien Ltd.
• 6. Conclusion
• 7. Citations

1. Executive Summary

This report addresses the market theme "Iran Conflict Fuels Fertilizer Stocks’ Bullish Setup" and provides an illustrative Quality of Earnings (QoE) analysis for Nutrien Ltd. (NTR), a major global fertilizer company. Geopolitical tensions, such as conflicts involving key energy-producing regions, can significantly impact fertilizer markets by affecting natural gas prices (a key feedstock for nitrogen fertilizers) and global supply chains for nutrients like potash.

Nutrien Ltd.'s financial performance over the past three years (2021-2023) reflects the volatility inherent in the agricultural commodity markets. The company saw a peak in 2022, driven by strong pricing, followed by a normalization in 2023. Key aspects of this illustrative analysis include:

• Earnings Quality: Nutrien's earnings are significantly influenced by global commodity prices for potash, nitrogen, and phosphate. While the company generates substantial operating cash flow, earnings volatility is a key characteristic. Adjusted EBITDA margins have fluctuated, highlighting sensitivity to market conditions. A full QoE would delve into the nature of adjustments made to arrive at "Adjusted EBITDA."
• Business Model: Nutrien's diversified model, spanning nutrient production (Potash, Nitrogen, Phosphate) and a large Retail distribution network, offers some resilience. However, cost drivers like natural gas prices remain a critical factor, especially for the Nitrogen segment.
• Growth & Risks: Future growth is tied to agricultural fundamentals, nutrient affordability, and strategic capital allocation. Key risks include commodity price volatility, geopolitical instability impacting input costs and market access, weather patterns, and regulatory changes.

This analysis uses publicly available data and is for illustrative purposes. A comprehensive QoE review would require more detailed information and scrutiny of non-recurring items and accounting policies.

2. Market Context: Geopolitical Impacts on Fertilizer Stocks

The headline "Iran Conflict Fuels Fertilizer Stocks’ Bullish Setup" suggests that geopolitical events, particularly those involving Iran and the Middle East, can create positive sentiment or actual tailwinds for fertilizer companies. This is primarily due to several factors:

• Natural Gas Prices: Natural gas is a primary feedstock for nitrogen-based fertilizers (e.g., ammonia, urea). Conflicts in energy-rich regions can disrupt natural gas supplies or increase price volatility. Higher global natural gas prices can increase production costs for fertilizer producers in affected regions, potentially benefiting lower-cost producers elsewhere or leading to higher overall fertilizer prices.
• Supply Chain Disruptions: Geopolitical instability can disrupt global shipping routes and logistics for fertilizers and their raw materials (e.g., potash, phosphate rock). This can lead to tighter supply in certain markets and price increases.
• Trade Flows: Sanctions or export restrictions related to conflicts can alter global trade flows of fertilizers. For instance, if major fertilizer exporters are impacted, other producers may see increased demand.

Historically, events impacting energy markets or major agricultural input producing regions have led to significant price movements in fertilizer stocks. Investors anticipate that companies with secure feedstock supplies, diverse production locations, and strong market positions may benefit from such environments. However, these situations also introduce heightened volatility and uncertainty.

3. Illustrative Quality of Earnings Analysis: Nutrien Ltd. (NTR)

3.1 Company Overview

Nutrien Ltd. (NYSE: NTR, TSX: NTR) is a Canadian-based company and one of the world's largest providers of crop inputs and services. It produces and distributes potash, nitrogen, and phosphate products for agricultural, industrial, and feed customers worldwide. Nutrien also operates a vast agricultural retail network, providing crop nutrients, crop protection products, seed, and services directly to growers.

3.2 Financial Performance Review

The following table summarizes key financial data for Nutrien Ltd. for the fiscal years 2021, 2022, and 2023. Data is sourced from Nutrien's 2023 Annual Report. (All figures in USD millions).

*Nutrien defines Adjusted EBITDA as "Net earnings (loss) from continuing operations before finance costs, income taxes, depreciation and amortization (EBITDA), and excluding K+S Potash Canada GP acquisition and integration costs, unrealized gain or loss on Blue Chip Swaps, impairment or reversal of impairment of assets, and carbon tax and related costs (credits)." (Source: Nutrien 2023 Annual Report, pg. 40). A QoE analysis would scrutinize these adjustments for their nature (cash vs. non-cash, recurring vs. non-recurring) and impact on sustainable earnings power.

Normalized EBITDA and Earnings Quality Considerations:

From a QoE perspective, understanding the "quality" of these earnings is paramount:

• Revenue Recognition: For a commodity producer and retailer like Nutrien, revenue is typically recognized upon transfer of control of products. A QoE would verify the consistency of policy application, any significant changes, and investigate deferred revenue or accounts receivable aging for potential risks.
• Cost Structure: Key costs include raw materials (especially natural gas for nitrogen), labor, and distribution. Volatility in natural gas prices directly impacts nitrogen segment profitability. A QoE would analyze the stability and predictability of these costs.
• Margin Sustainability: The significant fluctuation in Gross Margin and Adjusted EBITDA Margin (peaking in 2022) highlights the cyclical nature of the business and its sensitivity to global commodity prices. A QoE would aim to identify a "normalized" margin profile, considering long-term commodity price trends and stripping out unusual highs or lows if possible.
• Non-Recurring Items: Nutrien's definition of Adjusted EBITDA already excludes certain items (e.g., impairments, acquisition costs). A QoE analyst would:
  • Assess if these exclusions are appropriate for determining future earnings capacity.
  • Look for other potential non-recurring, one-time, or unusual items within COGS or Operating Expenses that might not be captured in the company's "Adjusted EBITDA" but could distort period-over-period comparisons. Examples could include significant inventory write-downs (if not separately disclosed but unusual), restructuring costs not part of defined adjustments, or gains/losses from asset sales.
  • Evaluate the recurring nature of items deemed "non-recurring" by management.

3.3 Cash Flow Analysis

Cash flow is a critical indicator of earnings quality. High-quality earnings are typically backed by strong cash conversion.

**Capital Expenditures (Investing) includes additions to property, plant and equipment, and intangible assets, less proceeds from disposal of assets, as derived from Nutrien's Consolidated Statements of Cash Flows investing activities. A more detailed QoE would distinguish between maintenance and growth CapEx.

Working Capital Movements:

Working capital efficiency impacts operating cash flow. Key components:

Observations for QoE:

• The cash conversion (Operating Cash Flow / Adjusted EBITDA) was approximately 87.6% in 2023, 66.3% in 2022, and 76.9% in 2021. The dip in 2022, despite record EBITDA, was partly due to significant investments in working capital (particularly inventories) amid rapidly rising prices and supply chain concerns. The subsequent release of some of this working capital in 2023 supported cash flows despite lower EBITDA.
• A QoE analysis would examine the drivers of working capital changes, including inventory build-up (volume vs. price effects), receivable collection periods (Days Sales Outstanding), and payable terms (Days Payables Outstanding) to assess efficiency and any potential risks (e.g., obsolete inventory, uncollectible receivables).

3.4 Business Model Assessment

• Core Revenue Streams:
  • Potash: Mining and processing of potash for fertilizer and industrial uses. Nutrien is one of the largest global producers.
  • Nitrogen: Production of ammonia, urea, UAN solutions, and other nitrogen products. Highly dependent on natural gas as a feedstock.
  • Phosphate: Production of phosphate fertilizers and feed/industrial products.
  • Retail: Nutrien Ag Solutions is a leading direct-to-grower retail network providing crop inputs (nutrients, crop protection, seed), services, and digital tools across the Americas and Australia. This segment provides some stability and diversification.
• Cost Drivers:
  • Natural Gas: Primary input for nitrogen production. Price volatility is a major factor.
  • Raw Materials: Ammonia (for upgraded nitrogen and phosphate products), sulfur (for phosphates).
  • Mining & Production Costs: Labor, energy, maintenance for potash and phosphate operations.
  • Distribution & Logistics: Transportation of bulk commodities and retail products.
• Scalability and Sustainability:
  • Scalability in production segments is linked to plant capacity, mine life, and capital investment. Retail scalability involves network expansion and service enhancement.
  • Sustainability concerns include energy consumption, greenhouse gas emissions (especially from nitrogen production), water usage, and land stewardship. Nutrien has initiatives addressing these areas. Long-term sustainability is also tied to responsible resource management and adapting to climate change impacts on agriculture.
• Key Operational Risks and Dependencies:
  • Commodity Price Volatility: Earnings are highly sensitive to global prices of potash, nitrogen, phosphate, and agricultural outputs.
  • Input Cost Fluctuations: Particularly natural gas prices.
  • Geopolitical Risks: Impacting supply chains, market access, and energy prices (as per the initial theme of this report).
  • Weather Conditions: Affecting agricultural demand and planting seasons.
  • Regulatory Environment: Environmental regulations, trade policies, carbon pricing.
  • Operational Risks: Plant outages, mining challenges.
  • Competitive Landscape: Competition from other global nutrient producers and retailers.

3.5 Growth Trajectory Evaluation

• Historical Growth:
  • Nutrien's revenues and earnings have shown significant cyclicality, with strong growth in 2021 and 2022 driven by favorable market conditions (strong demand, high prices), followed by a pullback in 2023 as prices normalized.
  • Growth has been driven by both organic factors (volume, price) and inorganic factors (the company was formed by the merger of PotashCorp and Agrium; periodic tuck-in acquisitions in Retail).
• Future Growth Potential:
  • Dependent on long-term agricultural fundamentals: population growth, dietary shifts, demand for biofuels, and the need for yield improvement on finite arable land.
  • Strategic initiatives: optimizing production assets, expanding the Retail network, investing in proprietary products and digital agriculture.
  • Market conditions: Global nutrient affordability, stock-to-use ratios for grains, and farmer economics will heavily influence short-to-medium term growth.
  • Capital allocation: Investments in new capacity (e.g., potash ramp-ups, clean ammonia projects) versus shareholder returns.
• Benchmarking:
  • Performance would typically be benchmarked against peers like The Mosaic Company (MOS), CF Industries (CF), Yara International (YRAIF), and other major fertilizer producers and agricultural retailers.
  • Key metrics for comparison include sales growth, EBITDA margins, return on invested capital (ROIC), and cash flow generation. Nutrien's diversified model (production + retail) differs from some more specialized peers.

4. Financial Charts (Illustrative for Nutrien Ltd.)

5. Illustrative QoE Summary for Nutrien Ltd.

Based on this high-level review of publicly available information for Nutrien Ltd.:

• Strengths:
  • Leading global market position in potash and retail distribution.
  • Diversified business model across different nutrients and into retail, offering some earnings stability compared to pure-play producers.
  • Significant cash flow generation capacity, even in varied market conditions.
  • Strategically located assets in North America.
• Risks and Areas for Further Due Diligence:
  • Earnings Volatility: High exposure to cyclical commodity prices. Understanding the drivers of the 2022 peak and 2023 normalization is crucial. A QoE would focus on establishing a "normalized" earnings baseline.
  • Dependency on Natural Gas: Nitrogen segment profitability is highly sensitive to natural gas prices. Hedging strategies and cost pass-through ability would be examined.
  • Quality of "Adjusted EBITDA": The adjustments made by management (e.g., for impairments, acquisition costs) require careful scrutiny to determine if they truly represent non-recurring items that do not impact future sustainable cash flows. The recurring nature of "one-time" items is a common QoE focus.
  • Working Capital Management: Fluctuations in working capital, particularly inventory levels, can significantly impact cash flow. The efficiency and risks (e.g., obsolescence) need assessment.
  • Capital Expenditures: Distinguishing between maintenance CapEx (to sustain current earnings) and growth CapEx (for future expansion) is key for understanding true free cash flow available to investors.
  • Geopolitical and Market Risks: Events like the "Iran conflict" scenario can directly impact input costs and market dynamics, requiring ongoing monitoring.

A full Quality of Earnings report would involve a much deeper dive into the company's accounting records, internal controls, management assumptions, customer and supplier relationships, and detailed analysis of all proposed QoE adjustments to arrive at a defensible normalized EBITDA figure for valuation or credit assessment purposes.

6. Conclusion

The theme "Iran Conflict Fuels Fertilizer Stocks’ Bullish Setup" highlights the sensitivity of the fertilizer sector to geopolitical events, primarily through impacts on energy prices and supply chain stability. Fertilizer companies, especially those with favorable cost structures or diversified operations, may see periods of increased investor interest under such conditions.

The illustrative analysis of Nutrien Ltd. demonstrates key financial characteristics of a major player in this sector: significant revenue and earnings potential, coupled with inherent volatility tied to global commodity markets. From a Quality of Earnings perspective, understanding the sustainability of reported earnings, the nature of adjustments to EBITDA, cash flow conversion, and the impact of external factors like input costs and geopolitical events are critical. For Nutrien, its diversified model and strong market presence are strengths, while earnings cyclicality and input cost sensitivity are key risks requiring careful management and investor scrutiny.

Any M&A, investment, or due diligence process involving a company in this sector would necessitate a thorough QoE analysis to look beyond reported figures and assess the true underlying earnings power and risks.

7. Citations

• Nutrien Ltd. (2024). 2023 Annual Report. Available at: Nutrien Investor Relations website. (Specific financial data was sourced from pages F-4, F-5, F-6, and 40 of this report for FY2021-2023).
• Yahoo Finance. Nutrien Ltd. (NTR) financial data. (Used for general reference and cross-checking, primary data from Annual Report).
• General market commentary on fertilizer stocks and geopolitical impacts is based on common knowledge and typical analyses found in financial news outlets (e.g., Bloomberg, Reuters, Wall Street Journal, specialized agricultural publications). No specific article is singularly cited for the "Iran Conflict" theme as it's a general market observation.

© June 17, 2025. Quality of Earnings Insight Report. For illustrative purposes only.

This report is based on publicly available information and represents a high-level analysis. It is not financial advice.

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