Earnings Call Transcript - NTR Q1 2023

Operator, Operator

Greetings, and welcome to the Nutrien 2023 First Quarter Earnings Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to Jeff Holzman, VP of Investor Relations.

Jeff Holzman, VP of Investor Relations

Thank you, operator. Good morning and welcome to Nutrien’s first quarter 2023 conference call. As we conduct this call, various statements that 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 quarterly report to shareholders as well as our most recent annual report, MD&A, and annual information form filed with Canadian and U.S. Securities Commissions. I will now turn the call over to Ken Seitz, our President and CEO, and Pedro Farah, our CFO, for opening comments before we take your questions.

Ken Seitz, President and CEO

Good morning. Thank you for joining us today. Nutrien’s first quarter results reflect the impact of structural supply issues and shifting buying patterns that have contributed to an unprecedented period of market volatility. We delivered adjusted EBITDA of $1.4 billion, the second highest for any first quarter on record, continuing to demonstrate the advantages of our flexible low-cost production assets and global distribution network. We invested $700 million to sustain and grow our assets and returned over $1.1 billion to shareholders in the first quarter. While our full year outlook is lower than previously expected, we are encouraged by the continued stabilization of crop nutrient markets and anticipate increased fertilizer demand in the second half of the year. We expect to generate strong cash flows in 2023 and maintain a balanced and disciplined approach to capital allocation. Shifting to the highlights from the first quarter, Nutrien Ag Solutions results were impacted by delayed grower purchases and lower margins compared to the exceptionally strong period in 2022. Retail fertilizer prices declined in the quarter, albeit at a slower pace than wholesale benchmark prices, and margins were below normalized levels as we worked through higher cost inventory. We ended the quarter with U.S. fertilizer inventory down 10% year-over-year, leaving a significant amount of our spring fertilizer volume to procure in the second quarter. Crop protection product margins were impacted by lower prices for certain herbicide products and later grower engagement compared to the previous year. This resulted in a temporary build of crop protection inventory, but this product is moving through the channel in the second quarter as fieldwork has accelerated. Seed sales and margins improved due to higher prices, increased crop acreage, and the strong performance of our proprietary seed lines. We completed eight retail acquisitions during the quarter in the U.S., Brazil, and Australia. In Brazil, our primary focus in 2023 is on the integration of acquisitions completed last year. The results from our potash, nitrogen, and phosphate business were impacted by lower benchmark prices compared to the exceptionally strong period in 2022. We had good initial uptake for our potash fill program in North America. However, volumes were down from the prior year as customers purchased on a just-in-time basis. Canpotex sold record volumes to Brazil, driven by strong demand for the spring planting season and lower imports from Eastern European producers compared to Q1 2022. Potash shipments to spot markets in Asia declined as our customers worked down inventory and contract settlements with India and China were delayed as buying patterns continued to evolve. Global potash prices were relatively stable to begin the year but declined later in the quarter due to the lack of consistent market engagement. We adjusted potash production across our low-cost network and pulled forward maintenance activities, preserving the flexibility to quickly ramp up production when stronger demand re-emerges. Nitrogen benchmark prices were highly volatile due to a sharp drop in European gas prices, lower Indian urea imports, and weaker industrial demand. Our North American nitrogen plants operated very well in the quarter and benefited from low natural gas costs in comparison to other global producers. Trinidad was impacted by gas curtailments of approximately 20%, which was in line with our previous expectations. We are progressing well on engineering work for our Geismar clean ammonia project and remain on track to make a final investment decision in the second half of 2023. In recent months, we have received significant external interest regarding co-investment or potential equity partnerships in the project. We plan to explore these options as we continue our evaluation of the project with a view of maximizing value for shareholders. Our phosphate business benefited from the stability of our feed and industrial product lines, partially offsetting the impact of lower sales volumes and fertilizer prices. We completed maintenance and reliability initiatives during the quarter and are targeting utilization rates above 90% in the second half of the year. Turning to the outlook, geopolitical and weather-related challenges continue to impact global agriculture commodity markets. The global grain stocks-to-use ratio is at its lowest point in more than 25 years, and we expect it will take multiple cropping cycles to restore stocks to more adequate levels. Agriculture is a seasonal business, and there has been some near-term pressure on crop prices resulting from a record Brazilian soybean harvest and favorable planting progress in the U.S. Even with this recent softening, new crop futures for corn, soybeans, and wheat are around 15% above the 10-year average. Growers are increasing acreage and have the incentive to invest in their crops, leading to strong demand for crop inputs as the planting season progresses in the northern hemisphere. To give you some context from a fertilizer demand standpoint, our second quarter U.S. retail fertilizer sales volumes are currently up 40% compared to the previous year. With product moving rapidly through the supply chain, we have seen some spot shortages in the U.S., particularly for potash and urea. This is highlighting the challenges that can emerge from just-in-time purchasing. Retail fertilizer inventories are projected to end the second quarter down significantly compared to last year, which supports the need for a strong summer refill. We expect second half global potash demand will be up significantly compared to the same period in 2022, with the majority of the increase in Brazil and North America, which are the two largest markets for our potash. The timing of a new China contract remains uncertain, but we do not view this as a significant impediment to our recovery in global demand. Global trade flows have evolved over the past year, and China's seaborne imports now represent only 5% of global shipments. For Nutrien, it also represents a relatively small percentage of our total sales, so we have shifted more volume to higher net-back markets. On the supply side, Belarus has gradually increased potash exports through ports in Russia, partially offset by lower Russian production and producer exports. We expect Eastern European potash shipments will be up approximately 15% in 2023 compared to last year, but still down 30% from 2021. We maintained our global potash shipment forecast at 63 million to 67 million tonnes, which is well below the estimated trend demand of above 70 million tonnes. We expect increased demand as markets stabilize, driven by growth in global crop production, lower channel inventories, and the need to replenish potassium levels in the soil. I will now turn it over to Pedro to review our guidance assumptions and capital allocation plans for 2023.

Pedro Farah, CFO

Thanks, Ken. Good morning. Our revised full year guidance reflects changes in fertilizer benchmark prices since mid-February and our expectation of a stable market going forward. In retail, our initial guidance assumes a reset in crop nutrient and crop protection margins compared to the extraordinary levels achieved in 2022. In North America, demand is accelerating as expected, but we have seen fertilizer margins temporarily drop below normalized levels as we work down higher cost inventory. We expect to end the spring season with very low inventories and for North America crop nutrient margins to recover in the second half. We could still see below normal margins in Brazil in the third quarter as grower purchases are not likely to accelerate until closer to the spring planting season in September. Turning to potash, we assume North American prices remain firm through spring and then follow a typical seasonal pricing pattern. Offshore prices have moved lower in the second quarter due to the lack of consistent buying; however, we forecast prices to stabilize in the second half as demand increases. We lowered our 2023 potash sales volume guidance to 13.5 million to 14.3 million tonnes due to delayed contract settlements and slightly higher export volumes from Eastern Europe. We have adjusted our production plans accordingly and will maintain a flexible approach to our potash ramp-up, basing the timing of capital expenditures on the expected recovery in demand. The investments completed to date have provided for greater production flexibility and increased our autonomous mining capabilities. These are important initiatives that enhance safety and reliability while supporting the low-cost position of our potash mines. In nitrogen, we forecast a normal seasonal reset for urea and UAN prices following spring. We expect an increase in global ammonia prices during the second half as prices are currently trading well below the estimated marginal cost, which we do not believe is sustainable over an extended period. We are assuming U.S. natural gas prices will average around $3 per MMBtu in 2023 and Western Canadian gas below that level, continuing to position our nitrogen assets at the low end of the global cost curve. Cash from operating activities is projected at $5 billion to $5.8 billion in 2023, a relatively small decline compared to our previous forecast. As we have stated before, one of the benefits of our integrated business is the counter-cyclical impacts on cash flow. We project a large increase in working capital release with a reset in fertilizer prices. Our cash conversion ratio would have been even higher this year if not for the timing impact of cash tax payments. We continue to deploy a disciplined approach to capital allocation that balances our priorities of maintaining a strong balance sheet, investing in sustainability and growth of the business, and providing meaningful returns to shareholders. While our cash flow allows us to fund all of our strategic projects and we have a strong balance sheet to cushion the volatility, we will continue to review our investments to ensure they provide the best return on investment through this cycle. We allocated $900 million to share repurchases in the first quarter and intend to remain opportunistic, taking advantage of our existing CIB. We announced a 10% increase in our dividend per share in February that aligned with the significant reduction in share count over the previous 12 months. Since 2018, we have reduced our outstanding share count by 23% and increased the dividend per share by 33%, demonstrating our commitment to capital returns through the cycle. I'll pass it back to Ken.

Ken Seitz, President and CEO

Thanks, Pedro. I would just make a few final comments. The fundamentals for our business remain strong. We anticipate increased fertilizer demand in the second half of 2023, and supply issues that emerged in 2022 have yet to be resolved. Following a period of unprecedented volatility, we expect fertilizer prices to stabilize near mid-cycle values, reflecting the strength of underlying market fundamentals. We are generating strong cash flow from our integrated business and will remain disciplined in our capital allocation approach as we position the company to serve the needs of our customers and deliver long-term value for our shareholders. We would now be happy to take your questions.

Operator, Operator

Your first question comes from Ben Isaacson from Scotiabank. Your line is now open.

Ben Isaacson, Analyst

Thank you very much and good morning Ken and everyone. Just on potash. You talk about just-in-time buying, Southeast Asia is destocking. Can you, Jason, or Chris remind us of when the key buying times are in each of the main regions and how are channel inventories in those regions? And if I can just sneak in a really quick one. On the Q4 call, when you talked about your 5% buyback, the stock was about $80 and now it's about $60. Has that changed your philosophy in terms of how aggressive you'll be when it comes to buybacks? Thank you.

Ken Seitz, President and CEO

Yes. Good morning, Ben, and thank you for the question. And yes, absolutely sort of walk market by market on potash, as we've done in the past. And so maybe I'll hand that over to Mark and probably augmented by Jason. And then on the share buyback question, I'll hand it over to Pedro. So thanks, Ben.

Mark Thompson, Executive

Yes, good morning, Ben. This is Mark. So maybe I'll just do a bit of a flyover on some of the key markets. And then I'll pass it to Jason to talk about specific timing of application. I think, generally, as Ken said in his comments, there are really three key themes here we see in potash globally. I think first, there remains a supply-constrained market. And really, what we see relative to our expectations in February, is about a million more tonnes coming out of the former Soviet Union as a whole. I think second, as Ken mentioned, we are seeing trade flows shift structurally. And the biggest themes that we see are that North American production is becoming more important and a bigger proportion of buying in markets like North America, Brazil, and Southeast Asia, while former Soviet Union production is disproportionately moving into China. And then third, production of Laos is increasingly finding markets in China and Southeast Asia. So I think those are the three biggest factors as they relate to the structural shifts. And third, as Ken mentioned, we do see demand recovering in the second half and certainly do see long-term trend demand intact. So maybe just to drill down into some of the markets more specifically. Brazil was certainly a bright spot in Q1. Canpotex had record shipments into Brazil in Q1. We did see a recovery there, and we do expect buying to accelerate to meet seasonal needs as we move through the second quarter and into the second half.

Jason Newton, Chief Economist

Sure, thanks, Mark. Just to start with Southeast Asia and the timing of shipments and applications in that market. It is a region, particularly as we look at Indonesia and Malaysia, where there's a long lead time between purchases and applications. And that's part of the reason why the high-priced inventories are holding up there. So there are large volumes purchased earlier in the second half of last year that flowed in through the end of 2022 and carried over into early 2023 and start to see applications in late Q1, which will allow those inventories to move lower through the second quarter of the year in Southeast Asia. And then in Brazil, in terms of the timing, we just did see unusually strong imports of potash from Brazil in the second quarter of last year, which really led to a buildup in inventories in that market in front of Q3. We would expect more normal levels of imports into Q2 and the seasonally normal volume of imports coming in late Q2 and early Q3 in front of the applications for their spring season in September.

Ken Seitz, President and CEO

And maybe Ben, just to address your last question about the buyback. So we intend to remain opportunistic in the market. As we mentioned before, we've bought 23% of our share count. We do have a very strong balance sheet that allows us to take a long-term view in terms of value, and that continues to pay off in terms of our free cash flow per share. So just to kind of give you a quick comparison, in 2021 when our EBITDA was $7.7 billion, our free cash flow per share was $3.4 per share. If we jump now to a similar year—I'm excluding 2022 because, of course, that was an anomalous year. In 2023, we have a midpoint of our guidance of about $7.3 billion, and our free cash flow per share is $4.7. So that's almost a 40% increase in our free cash flow per share. So we think that strategy is paying off, and we intend to use the balance sheet and if we see value, we will be optimistic about it.

Operator, Operator

Your next question comes from the line of Jacob Bout from CIBC. Your line is now open.

Jacob Bout, Analyst

Good morning. My question is on normalized EBITDA, and how are you thinking about that? If we go back to your Investor Day last year, you walked through the case of normalized EBITDA around $9 billion. Do you still think this is realistic? I know you're making some commentary about mid-cycle prices for the remainder of the year. But the midpoint of '23 guidance is well below that $9 billion. Any commentary would be helpful.

Pedro Farah, CFO

Yes. Good morning, Jacob. And thank you for the question. What we would say is yes, we do. And there are a few reasons for that. When you look at the assumptions when we talk about mid-cycle EBITDA of $9 billion, it's really predicated on the structural shift that we've seen in energy, agriculture, and crop nutrient markets, and really lending to what we see as a strip going forward that’s about $50 more across crop nutrients than we had assumed prior to this conflict in Eastern Europe. It also assumes additional volumes, and there’s a timing effect here, obviously, as we look at ramping up potash volumes over time, and as we talk about our brownfield investments and our nitrogen fleet, and also clean ammonia project, which is also going to bring volume. And finally, when we talk about normalized EBITDA ranges within our retail business, and it is true that we’ve had a reset in our retail business, we talked about that at the end of last year. We expected that to happen this year, of course, as it relates to the softness we saw in crop nutrient markets in the first quarter; that reset is bigger than we had anticipated, and that’s reflected in our results. But when we think about normalized EBITDA ranges, that of our retail business too contributes to that $9 billion mid-cycle. So if we walk across those assumptions, there is a timing effect here, but we believe those assumptions remain intact.

Operator, Operator

Your next question comes from the line of Joel Jackson from BMO Capital Markets. Your line is now open.

Joel Jackson, Analyst

Hi, good morning, maybe a two-parter for me. So if we take your potash volume guide, it's going to be the best nine months of the best Q2 to Q4 in aggregate that Nutrien’s ever had, 11 million tonnes. Can you do that in a year without meaningful seaborne Chinese volumes? And what do you assume in the midpoint of that for Chinese seaborne volume? And then just back on the buyback? If you look at the slide now that shows your operating cash flow, it looks like you're suggesting there's really no more room for any additional repurchases this year at the midpoint? Thanks.

Ken Seitz, President and CEO

Right. So as it relates to our plan for potash this year and the shifting trade patterns that Mark described earlier and how we're navigating that, I will pass that back to Mark. And then as it relates to what we might do this year regarding share buybacks, we’ll ask Pedro.

Mark Thompson, Executive

Yes, good morning, Joel. So just to reiterate a couple of comments I made earlier and then Ken said. We do see the shifting trade flows playing a role here. But nonetheless, even at 5% of global shipments, China is likely going to need 3.5 million tonnes, give or take 0.5 million tonnes on either side of that in seaborne imports that are going to have to be met. We ultimately believe that in the second half, China is going to need that volume. So we do see Canpotex playing a role in meeting those needs. But one of the other points that I’ll call out again is the record volumes that we’ve seen in Q1 from Canpotex into Brazil. And the fact that we are seeing Canadian production become far more important in some of these other key markets, including Brazil and Southeast Asia. So when we consider the fact that we do believe China’s going to have to come back to the market to meet its second half needs for potash, we expect Canpotex to play a role in that. And again, when we look at our projections across markets, we look at the economics for growers in these markets, and the healthy demand recovery that we expect, we would also see shipments growing in places like Southeast Asia and Brazil overall this year. So you put all of that together, and we do believe that we can meet the shipment numbers that we've talked about.

Pedro Farah, CFO

Okay, so just Joel, on the buybacks, I think we are not circumscribing ourselves to the fiscal year here. I could have said before we do have a strong balance sheet. We are obviously going to monitor the business, but if we do see value, and we soon see the direction of travel being as we expect, we intend to be opportunistic in the market and use the flexibility we have to capture that value.

Operator, Operator

Your next question comes from the line of Adam Samuelson from Goldman Sachs. Your line is now open.

Adam Samuelson, Analyst

Yes, thank you. Good morning, everyone. Maybe continuing on potash. I mean, if I look at your shipment guidance for 2023, the volumes are up about a million to 1.8 million tonnes. Can you break out kind of the incremental that that's domestic versus offshore? I presume that at least a million of that was implied domestic over the balance of the year. And if that's the case, that gets your North American business back pretty close to historical norms, which would mean that you would need to see a disproportionate kind of offshore growth in '24 and beyond to be the outlet for your incremental production tonnes? And I'm just trying to get a sense of your confidence in that view, and kind of where you think the market share gains from Canpotex can be durable, especially with China getting more tonnes out of the former Soviet Union and Laos.

Ken Seitz, President and CEO

Yes, good morning, Adam. And thank you for the question. Yes, so I would just say a few comments, and maybe pass it over to Mark. In 2021, we saw potash demand shipments on the planet of about 70 million tonnes, and we saw that drop to 61 million tonnes last year. And now seeing a rebound, we expect to 63 to 67 million tonnes. We're maintaining that range, albeit in a supply-constrained environment. And importantly, this is a market that's growing. We have seen 2.8% compound annual growth rates in the potash market for the last 20 years, and we expect that to continue to grow for all the reasons we've talked about—growing population and the need for more food. So, we're in a market that's growing, and as we look at where that growth is going to take place. Yes, last year, the North American market was down significantly due to the late spring weather last year. Here we are this year, and what we have seen some incredible volatility and movements of inventory, we are now in the heart of the planting season and seeing very strong movement of volumes in North America. Application rates are up, and inventories are being drawn down. As I said in the opening remarks, we've seen a 40% increase in Q2 follow volumes quarter-to-date over last year.

Mark Thompson, Executive

Yes, thanks, Ken. Good morning, Adam. So yes, maybe just to start with North America. And again, the assumptions are laid out in our investor package for the call. But we do expect North America to be back to a relatively historical level of shipments this year. So we're estimating 9.5 million to 10.5 million tonnes of shipments into North America. In 2022, it was certainly an anomalous year in terms of inventory stocking and drawdown. The return to normal will see us back in normal levels in North America with shipments somewhere between 4.5 million and 5 million tonnes. The split we see between domestic and international is much more typical for us, roughly one-third domestic and two-thirds international moving through Canpotex. Just on your second question about where that growth will come from, as Ken talked about, the last few years have been a major shock to the market. We certainly believe that the long-term demand trend is intact in these markets, and we expect to see a rebound in markets like Brazil and Southeast Asia, where Canpotex and Canadian production have become increasingly important from a share perspective. So the growth in those markets over time can certainly sustain the volume growth in our business from our perspective.

Operator, Operator

Your next question comes from the line of Vincent Andrews from Morgan Stanley, your line is now open.

Will Tang, Analyst

Hi, guys, this is Will Tang on for Vincent. Thanks for taking my question. You mentioned Belarus being more active and Russia being less active in the export market than what you had previously expected. Can you talk about whether this changes how quickly you think Belarus can get back to those pre-war shipment volumes and what would need to happen for them to get there? And then, if you could give us a little bit more color on why Russia isn't exporting as much, that would be helpful as well.

Ken Seitz, President and CEO

So yes, we had started the year with a set of assumptions or beliefs about shipments out of that region, and this is really following last year where we saw substantive volumes out of Belarus and Russia shut in with the effect of sanctions. To your question, Will, Belarus is really having difficulty getting access to tidewater for seaborne exports, and some of the logistical challenges with rail. Albeit, as Mark mentioned earlier, we are seeing those rail movements increase out of Belarus to China. So there is a bit of an outlet there. When we started the year, we thought that we said that Russian volumes we thought would be down 15% to 30%, and that Belarusian volumes would be down 40% to 60% compared to 2021 levels. If you look at exports out of the region, we've adjusted those numbers, so we think Belarusian volumes will be more like 25% to 40%, and Russian volumes more like 25% to 35%. But importantly, while it is closer and maybe even a little bit above the top end of what we had assumed in exports out of the region, there's still a lot of volume that's not getting out of the country. What would it take? I think what we're seeing with Belarus for seaborne imports is that some of those volumes are going through Russian ports, but at the same time, that seems to be displacing Russian volumes out of those ports. And then finally, one of the other outlets, is, of course, rail to China, we've talked about that. I assume for Belarus to continue to increase volumes, they will maximize those rail volumes, but we believe we need to see new port capacity and new port capacity on the Russian coast. And, of course, we've talked about that, and that’s going to take a bit of time, so we believe exports out of the region will continue to be challenged.

Operator, Operator

Your next question comes from the line of Steve Byrne from Bank of America. Your line is now open.

Steve Byrne, Analyst

Yes, thank you. A couple of years ago, Ken, if you had thought that there'd be a 9 million tonnes shortage out of the former Soviet Union of potash, maybe net 5 million tonnes with some increases elsewhere? Would you have predicted a $370 realized price for your offshore business? Does that seem fair to you? And on a going forward basis, maybe the math has some strange items in there, but it seems lower than what we were expecting for the quarter? And then maybe another potash question on your domestic side. The surge of sales through customer-owned warehouses... How is the price set there when that customer decides to pay you? And do you have negotiating or pricing power, given what seems like a tightening market in the U.S. when your product is in their warehouse?

Ken Seitz, President and CEO

Right. Good morning, Steve. And thank you for the question. So I'll start with just obviously, as you've observed, there are challenges on the supply side of the equation for potash. But as you put it, there are some anomalous effects that are leading to what we are experiencing with softening crop nutrient pricing, potash pricing in the first quarter of the year, which frankly, domestically is a rarity, something that we've really never seen, but that's just one of the anomalous observations. If you look at we look at 2022 and obviously this terrible event which we all want to come to an end and stability back in the markets and the challenges that created for some of the big potash importers and users. The inventory rush to get hands-on inventory and the inventory build that took place and the price spike that followed that. I mean, we saw that inventory build and there were some weather-related effects. So that when we headed into the fall, the world started on a large inventory drawdown, watching prices soften. And that inventory drawdown was one of the most dramatic again that we've ever seen, carried through the first quarter of this year, as farmers and growers exercised really cautious buying behavior. We talked about it as just-in-time buying—really only stepping into the market now when they absolutely have to as all of these big volumes go to ground. So cautious buying may—sorry, wanting to shore up inventory with supply concerns in 2022. So we’re watching the prices stabilize, and volumes are moving. Steve, how this translates into price and market volatility, what we would say is that we’ve now approached sort of a form of stability and what we would call sort of mid-cycle pricing for potash. And that’s what we’ve assumed for the balance of the year. As it relates to the supply shortages, we're watching that incredibly closely. It's going to impact how we think about increasing our own volumes. It will continue to do that as we seek to meet the needs of our customers. But yes, some of the supply challenges remain, and we’ll see how that plays out over the balance of the year. Maybe Mark, if you want to provide some thoughts on pricing with our customers in the domestic market?

Mark Thompson, Executive

Sure. Good morning, Steve. So yes, I think this is a relatively simple answer. Overall, I think first and foremost, we continue to contend that we've got the best and most robust distribution network in North America for potash, and the majority of those assets are owned assets. As I've mentioned, I was just out at our Hammond, Indiana terminal last week, which was about 80,000 tonnes of storage. Our primary mechanism for moving product into the North American market is through our own warehouse and distribution system. From an efficiency perspective, we do have agreements with some customers that Nutrien Ag solutions is one of those customers, as well as our other major customers. And that's really efficiency from a logistics standpoint, so that we're not spending unnecessary dollars where they're not needed on distribution infrastructure and taking advantage of the assets that exist in the market. And from a pricing standpoint, actually, things have been relatively straightforward. As we’ve talked about in the commentary today. We saw product move very quickly, a lot of hand-to-mouth buying. So what was being sold was largely going directly to the ground and moving through the channel quite quickly. What we found from a commercial perspective, generally, is that as we've seen these supply-demand shortages emerge at inland distribution points, we've been tracking those prices higher as they've emerged throughout the spring season.

Operator, Operator

Your next question comes from the line of Christopher Parkinson from Mizuho, your line is now open.

Christopher Parkinson, Analyst

Great, thank you so much for taking my question. Just from a strategic perspective, is there any remaining apprehension to walking away from the contract structure of the Indian and Chinese markets? It seems your exposures in other markets, Southeast Asia, Brazil, from a spot perspective are continuously growing, and it seems like there's the flexibility of the marketplace? So just what's in terms of how you've been thinking about this for the last several decades versus the future? Can you just walk us through what you see as the merit of the current market dynamics? Thank you.

Ken Seitz, President and CEO

Yes, thanks, Chris. I would say that as we look at our portfolio sales in over 40 countries around the world, importantly, we see agriculture markets that we see growing. What are they? We’ve talked about Brazil, but it’s certainly India, it’s certainly Southeast Asia, and it’s certainly China. Canadian potash is an important supplier into all of these regions. We have worked hard in these regions to establish a really enviable customer base, and we’ve worked hard over the last 40 years to do that. So we have had success in these growing markets—markets like China, India, Southeast Asia, and of course Brazil. When we talk about offshore markets, we continue to believe that this customer base will be important to us as we grow our volumes.

Operator, Operator

Your next question comes from the line of Joshua Spector from UBS. Your line is now open.

Unidentified Analyst, Analyst

Hi, good morning. This is Lucas filling in for Josh. I just wanted to follow up on the mid-cycle expectations that you're saying pricing is basically now baked into the updated guidance. So could you just clarify for us exactly what your expectations are either directly or as a range in terms of pricing for potash, ammonia, urea, phosphates, and your energy cost assumptions? Thanks.

Ken Seitz, President and CEO

Yes, we can provide those ranges, Lucas. And I'll hand it over to Mark to talk about those specifics.

Mark Thompson, Executive

Yes, Lucas, I think with respect to mid-cycle prices, as Ken said, when we came out at last year’s Investor Day and talked about the structural shift, we expected from all the factors that I mentioned today, our expectation was that generally higher average across the fertilizer price complex, that we would see prices shift by about $50 across all the nutrients. Probably specifics on every product line is beyond the scope of today’s discussion. But what we’re seeing generally is that as prices are stabilizing—and Ken has talked about that process continues for both nitrogen and potash domestically and internationally. Currently, prices are sitting within $20 or $30 of those assumptions we made in terms of what new mid-cycle prices would look like. So when we look across the fertilizer complex, and we see things stabilizing today, that is what's inherent in our guidance.

Operator, Operator

Your next question comes from the line of Andrew Wong from RBC Capital Markets, your line is now open.

Andrew Wong, Analyst

Hi, good morning. So with pricing now near what you would consider as mid-cycle levels, has there been any change in your view on capital allocation and investing in more capacity? Would you consider slowing down the potash ramp a little bit more, maybe until demand re-engages? And would it make sense to use some of that capital if you do delay some of those plans for buybacks, given where your shares are today? Thanks.

Ken Seitz, President and CEO

Yes. Good morning, Andrew. And thank you. The short answer to your question is, yes, we would consider slowing down. We're really, as we talked about earlier this year, watching the market. We did delay our ramp-up. We talked about that earlier this year, $25 to $26 million in tonnes. Importantly, we're continuing to watch the market dynamics, the supply and demand dynamics. The reality is, again, that we are in a market that's growing, and we believe that's going to carry on for the foreseeable future, with 2.5% to 3% annual growth rates. New supply is going to be required to meet the growing demand. If we look at the supply side challenges continue to persist. While yes, we have seen some additional volume get out of Russia and Belarus, the reality is, again, we believe these supply challenges remain. We’re seeing a close connection with our customers every day about what their needs are in this environment and then planning our capital accordingly, as it relates to ramping up potash. These investments are really quite granular—dozens of projects across four mines. We have made some investments that will take our capacity up to around 15.5 million tonnes by the start of next year. We’ve demonstrated the value of that flexible approach. We demonstrated that in ’21 and ’22. When doing that math, yes, Andrew, the short answer to your question is, if we see that the market is not there, we’ll pace our capital accordingly. Yes, we’ll certainly, as Pedro mentioned, always look opportunistically at buying back our own shares.

Operator, Operator

Your next question comes from the line of Richard Garchitorena from Wells Fargo. Your line is now open.

Richard Garchitorena, Analyst

Great, thanks. Just wanted to ask a question on cash costs. We saw an uptick in the first quarter across potash and nitrogen. I think Pedro talked about bringing some maintenance forward in the quarters. Can you talk about how much of that increase in costs in the first quarter was attributed to that? And then just on the nitrogen side, ammonia costs went up in the quarter. But we are seeing ammonia coming down. And natural gas should be coming down in the second half. So could you talk about sort of maybe trends on the cash cost and nitrogen side as well? Thank you.

Ken Seitz, President and CEO

Yes, absolutely Richard, and thank you for the question. Yes, there's a number of moving parts there as it relates to natural gas costs in nitrogen, and we're obviously automating our mines to start enjoying some of the benefits of those investments in potash. The biggest one probably you talked about is volume and the volume impacts on cash costs in the quarter. But I'll hand it over to Chris Reynolds, President of our Potash Business, to talk about cash costs of potash. And then over to Trevor Williams, our President of Nitrogen Phosphate to talk about nitrogen.

Chris Reynolds, President of Potash

Yes, good morning, Richard. Thanks for the question. As we look at full year, our controllable cost of product manufacture in potash, we expect that to be fairly similar to what we saw in 2022. Now, in Q1, as Pedro mentioned, we do have some increased maintenance, we pulled some mines forward to be ready for the surge in demand we're expecting in the second half. However, as we look at that, controllable costs, we're still among the lowest cost in North America, and certainly one of the lowest costs across the industry. So we're still feeling good about that position today.

Trevor Williams, President of Nitrogen Phosphate

Yes, and thank you, Richard. Very similar on the nitrogen side, our volumes are down a little bit, primarily driven by Trinidad, where we did have some increased maintenance costs due to reliability issues, but because we’ve had some reduced volume. Looking forward to the majority of the fleet, we look to get back towards what we would expect in terms of cash costs for 2023.

Operator, Operator

Your next question comes from the line of Ben Theurer from Barclays. Your line is now open.

Benjamin Theurer, Analyst

Yes, thanks. Thank you very much. Good morning. Just wanted to go back a little bit on the supply-demand. And obviously, you've shown us in the graph, and you've highlighted the growth potential over the last couple of years and how you expect this to come back. But, as it seems, in the first quarter, demand was clearly softer than what you anticipated. I think you've talked about a year-over-year improvement of like 40%. But maybe help us understand, put that in a first half context. Whereas this first half of last year, and maybe also versus 2021, just to kind of get a little bit of a better feel, if the need for potash is really what you think it should be, and what the mismatch is? That would be like my first question. I have a quick follow-up after that.

Ken Seitz, President and CEO

Right. Thank you for the question, Ben. What we would say for the first quarter is that it was not necessarily demand was down, but that inventories were being drawn down—and this just-in-time buying behavior, so that when we look on an annual basis for potash, we continue to say 63 to 67 million tonnes. We haven't changed those numbers, which continues to be a supply-constrained market, continues to suggest a backdrop of growing demand over time. Jason Newton, our Chief Economist, I will hand it over to you to talk about some of those details.

Jason Newton, Chief Economist

Sure. Good morning, Ben. If we look globally—so I guess just as Ken mentioned off the start, we've maintained our 63 to 67 million tonnes shipping range for the year. As we look around the various markets, there's a bit of a split between standard grade and granular markets, and we have seen really strong demand in Brazil and strong shipments in North America from a granular perspective. But we know the contracts were delayed, particularly China’s delayed in terms of contracts, which had an impact on our sales. But we have seen strong shipments going into those markets, partly from rail from Russia and Belarus. So as we look through the various markets, there are a few minor shifts market-to-market, but overall demand has been pretty much as expected, and I’d say, even culture is at the higher end in some of the granular grade markets.

Operator, Operator

Your next question comes from the line of Martin Pradier from Veritas Investment Research. Your line is now open.

Martin Pradier, Analyst

Thank you. Yes. I hear all about this shortage in the supply chain in North America. And I was wondering what is the effect on price? Are you seeing the prices increase now, because there's no inventory and people have to buy right away?

Ken Seitz, President and CEO

Yes, the short answer, Martine, is yes. We are seeing some of those impacts on price. Maybe I'll just hand it over to Jeff Tarsi to talk about some of those observations that we're seeing, certainly in our retail business through the channel, and then over to Mark to talk about the impact on crop nutrient pricing.

Jeff Tarsi, Executive

Yes, Ken, thanks. And good morning, Mart. I think we have seen, as Ken spoke to, if I look at the first quarter, we were basically 6% off volume for the quarter. Very steady from that standpoint. We have seen a surge in the second quarter volume across our fertilizer portfolio. And look, as again, I think it speaks from a Nutrien Ag solutions perspective, it speaks to our supply chain and the investments we've made across our supply chain to get product moved. In many cases, on just-in-time basis from that standpoint. We have seen prices stabilize as we've gotten into the spring; probably more importantly, we’ve seen margins stabilize and normalize as we've gotten into the quarter as well. We spoke to earlier in the year what our soil testing was alluding to and there were some deficiencies in about 40% of our test round P&K. We certainly see our growers responding today to that rate—things are looking good. The demand has been exceptionally strong into the second quarter. We expect that to continue. We're right in the middle right now of the planting season. We continue to see a pull on demand, and we're working hand to mouth in some of those situations today from an inventory perspective. Mark, I might pass it over to you as well.

Mark Thompson, Executive

Sure. Thanks, Jeff. Good morning. So yes, as Jeff said, we’re seeing things move very quickly right now. After our first quarter, where, as we’ve mentioned, there was relatively low field activity in North America due to weather and just-in-time buying. We have seen things kick off at a frantic pace as planting activity started in April. So looking at benchmark prices that are published, as an example, if we look back to some of the lower values we saw in Q1, in the $370 per tonne range at Nola for potash, we’ve seen firming of approximately $40, and seeing really good uptake in those values. If we look at inland terminals that have been challenged logistically by the just-in-time purchasing behavior, we've seen values increase in excess of that, and in some cases, substantially. When we go back to talking about the North American agricultural supply chain, one of the things we discussed in February was that if we were to see this just-in-time purchasing behavior persist, we expect to see some logistical premiums emerge because of a supply chain crunch. I think we have seen that and certainly have seen potash prices firm in season and have sought to sell into that strength to the extent possible while supporting our customers. This is something that, whether it's in the Nutrien Ag Solutions business that Jeff talked about or in the NPK distribution assets that we have, does set us apart. We’ve been responding quickly to meet those needs and capture those higher price premiums in our market.

Operator, Operator

Your next question comes from the line of Edlain Rodriguez from Credit Suisse, your line is open.

Edlain Rodriguez, Analyst

Thank you. Good morning, everyone. A quick question on crop prices. I mean, they have come down a little bit, and as a result, farmer’s income is likely down. I understand the crop losses are still higher than historical averages. But do you think the lower prices could have an impact on farmer’s psychology and willingness to pay higher fertilizer prices?

Ken Seitz, President and CEO

Yes, thanks for the question. Maybe I’ll pass it over to Jeff Tarsi just to talk about the psychology among farmers. I think the reality is that given the way crop nutrient prices have softened relative to what we’re seeing with Ag commodities and again, the likes of corn, soybean, and wheat still 15% above the 10-year average, we are seeing strong application domestically in the planting season here. But Jeff, over to you.

Jeff Tarsi, Executive

Yes, Ken, thanks. No, we certainly don’t see any indication of that. You have to remember as well that a lot of growers have forward contracted prices when they enjoyed a really strong back half of last year. So you saw probably more forward contracting going on across the commodity pricing. But as we sit here today, again, we see growers using the best hybrids and the best trade packages. Again, we talked about our fertility rates in the second quarter up 40% right now year-over-year. We anticipate that they’re again going to want to try to maximize their yields. From that standpoint, I’ve said this many times before, these are science-based decisions today. So these growers are making their decisions based on what these crops need to maximize yields going forward. That’s your best chance to optimize ROI. So we expect to see continued strong input demand as we go through the rest of the spring and into the summer.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.