Earnings Call Transcript - NTR Q2 2024

Operator, Operator

Greetings, and welcome to Nutrien's 2024 Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference call over to Jeff Holzman, Vice President of Investor Relations. Please go ahead.

Jeff Holzman, Vice President of Investor Relations

Thank you, operator. Good morning. Welcome to Nutrien's Second Quarter 2024 Earnings Call. As we conduct this call, various statements that we make about future expectations, plans and prospects contain forward-looking information. Certain 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. I'll now turn the call over to Ken Seitz, Nutrien's President and CEO; and Pedro Farah, our CFO, for opening comments.

Ken Seitz, President and CEO

Good morning. Thank you for joining us today. Nutrien just delivered adjusted EBITDA of $3.3 billion in the first half of 2024, supported by increased crop input margins, strong global potash demand, and lower operating rate costs. Our uptrend fertilizer production assets and downstream retail business in North America and Australia have performed well in 2024, demonstrating our advantages across the ag value chain. The operating environment in Brazil has remained more challenged, and we will discuss today the actions we are taking to stabilize our business in this market. In potash, we generated adjusted EBITDA of $1 billion in the first half of 2024, which was down from the prior year due to lower benchmark prices. We increased potash production across our six mine network and lowered our controllable cash cost of production to $53 per tonne in the first half. The reduction in per tonne costs was driven by higher production volumes and supported by the benefits of mine automation investments. We sold record potash volumes in the first half, utilizing the advantages of our global supply chain to respond to increased demand from our customers in North America and offshore markets. In nitrogen, we delivered adjusted EBITDA of $1.1 billion in the first half of 2024, as lower benchmark prices were partially offset by lower natural gas costs. Our North American nitrogen assets remain very well positioned on the global cost curve, and we continue to progress reliability initiatives that contributed to higher operating rates. Nitrogen selling prices in the second quarter increased compared to the first quarter of the year, reflecting the advantages of our extensive North American distribution network and the strong execution of our commercial team. Phosphate fertilizer markets remained relatively firm through the first half of 2024, and we benefited from lower raw material input costs. Our phosphate sales volumes were consistent with the prior year as we had extended turnaround activity at our Aurora and White Springs plants in both periods. Retail adjusted EBITDA totaled $1.2 billion in the first half of 2024, up 17% from the prior year, driven by increased gross margin across all major product lines. Crop nutrient sales volumes were similar to the prior year as planting delays in May offset the benefits of an early start to the application season in the first quarter. Crop nutrient margins increased by $21 per tonne in the first half, supported by the stabilization of fertilizer markets and a lower cost inventory position compared to the prior year. Crop protection margins in North America returned to normalized levels, while wet weather in May impacted applications and shifted some demand into the third quarter. We ended the second quarter with retail crop protection inventory down 17% compared to the prior year. The majority of this reduction occurred in our Latin American operations, where we are focused on tightly managing inventory and working capital levels. Overall, we are pleased with the first half performance of our North American and Australian retail businesses. Excluding the impacts of delayed planting in North America, our results were in line with our previous expectations. Now, turning to Brazil, where we have seen more persistent challenges. As outlined at our Investor Day in June, we are accelerating a margin improvement plan focused on further reducing operating costs and rationalizing our footprint to optimize cash flow. This included the decision to curtail 3 fertilizer blenders and close 21 selling locations in the second quarter. We continue to evaluate our commercial footprint in Brazil to further extract efficiencies and see opportunities to grow our proprietary products business. During the second quarter, we also incurred a loss on foreign currency derivatives in Brazil. We have taken actions to remediate this issue and are confident that these actions have addressed the matter going forward. Now, turning to the market outlook for the remainder of 2024. Global grain stocks remain historically tight, while favorable growing conditions have created an expectation for record US corn and soybean yields. Despite lower crop prices, demand for crop inputs in North America is expected to remain strong in the third quarter, as growers aim to maintain optimal plant health and yield potential. We anticipate good affordability for potash and nitrogen will support fall application rates this year. Prospective soybean margins in Brazil are currently above 2023 levels supported by a weaker real. Brazilian soybean area is expected to increase by 1% to 3% in the upcoming planting season, and fertilizer demand is projected at approximately 46 million tonnes in 2024, in line with historical record levels. We are seeing strong underlying consumption trends in most major potash markets in 2024 and raised our full year global potash shipment forecast to 69 million to 72 million tonnes. Update on our summer fill program in North America has been strong, which is supportive of granular grade demand in the third quarter. The settlement of potash contracts with China and India in July is expected to support demand in standard grade markets through the second half. Global nitrogen markets are being supported by steady demand and continued supply challenges in key producing regions, including the extension of Chinese urea export restrictions into the second half of 2024. US nitrogen inventories were estimated to be below average levels entering the second half, and we have seen strong customer engagement on our summer fill programs in the third quarter.

Pedro Farah, CFO

Good morning. As Ken highlighted, we raised our outlook for global potash demand in 2024, increased our annual potash sales volume guidance to 13.2 to 13.8 million tonnes. Our sales volume range factors in the potential for a relatively short duration Canadian rail strike in the second half of 2024. We expect strong North American potash shipments in the third quarter and we are planning typical annual maintenance turnarounds with the majority occurring this year in the fourth quarter. In nitrogen, we narrowed our annual sales volume guidance range to 10.7 million tonnes to 11.1 million tonnes. We expect higher year-over-year volumes in both the third and fourth quarter, supported by lower planned turnaround activity in the second half. Our phosphate sales volume guidance range was lowered to 2.5 million tonnes to 2.6 million tonnes, reflecting the impact of extended turnaround activity and delayed mine equipment moves. For retail, our full year adjusted EBITDA guidance was lowered to $1.5 billion to $1.7 billion. The primary driver is the expectation for a more moderate recovery in Brazilian retail earnings as well as the impact of delayed planting in North America in the second quarter. We have taken a number of strategic actions in Brazil, including the containment of blenders that will result in lower near-term earnings potential, but will optimize cash flow. Capital expenditures were down 27% in the first half of 2024 and we maintained our full year CapEx guidance of $2.2 billion to $2.3 billion. As mentioned at our Investor Day in June, our capital priorities are focused on initiatives that drive organic growth in retail and operational improvements in potash and nitrogen. The focus in retail is to further expand our proprietary products portfolio and drive network optimization. We are targeting a more than 10% annual growth rate in proprietary products gross margin, which is expected to be a significant contributor to our 2026 retail adjusted EBITDA target of $1.9 billion to $2.1 billion. The majority of planned investment capital in our fertilizer operations are related to mine automation projects in potash and the completion of low-cost brownfield expansions in nitrogen. These investments support our 2026 target to increase fertilizer sales volume by 2 million tonnes to 3 million tonnes compared to 2023 levels, while improving the efficiency of our operations. I'll now turn it back to Ken.

Ken Seitz, President and CEO

Thanks, Pedro. Our results in the first half of 2024 highlighted the advantages of our world-class upstream production assets and downstream retail business in North America and Australia. We delivered record potash sales volumes, lowered our operating costs and improved retail margins. We continue to take actions to enhance the quality of our earnings and cash flow, with a focus on improving our ability to serve growers in our core markets, maintain the low-cost position and reliability of our assets, and position the company for growth. Finally, I would like to say a few words about the CFO transition that we announced yesterday. Mark Thompson will be moving into the CFO role on August 26. Mark has been with the company for 13 years and has held numerous executive and senior leadership positions, currently serving as our Chief Commercial Officer. He brings a strong track record of execution, proven financial and strategic acumen, and in-depth knowledge of our business that will support the advancement of our strategic priorities and drive a focused approach to capital allocation. On behalf of the Nutrien team, I would also like to thank Pedro for his service and commitment to Nutrien over the last five years. To support the transition, Pedro will move into an advisory role until the end of the year. We will now be happy to take your questions.

Operator, Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from the line of Chris Parkinson from Wolfe Research. Your line is now open.

Chris Parkinson, Analyst

Great. Thank you so much. Just given the performance in retail and kind of the puts and takes over the last season or two, could you just potentially speak to what you're seeing in end market grower demands in both of your major or, or I should say three perhaps, what you're hearing from growers, where your inventory levels are? Just anything that we could help compartmentalize where we stand today versus a normalized set up for 2025 and 2026?

Ken Seitz, President and CEO

Yeah. Great. Thanks for the question, Chris. And yes, obviously, with some softening ag commodity prices, we've seen that impact grower sentiment. That's true. At the same time, if we look at what cost of inputs is done, that affordability is still there and all the incentives exist for growers to maximize yields. But certainly, Jeff can talk about what he's seeing on the ground in key regions like North America and Australia.

Jeff Tarsi, Senior Vice President

Yeah. Thanks, Chris, and good question. Obviously, we've seen grower commodity prices higher. If I look at our business, we had a very strong print in the second quarter. And more importantly, we had very strong margins across all three shelves of our business: crop protection, seed, and fertilizer. If I look at it from a grower standpoint and what the USDA is projecting from a crop yield standpoint, I can tell you that I haven't seen growers pull back on giving their crops the inputs they need to maximize yields going forward. We think that from an inventory standpoint, we're in a really good position right now. We had a real strong focus on getting our inventory down as low as we possibly could. Through the first half, we brought our inventory down roughly $700 million. A large part of that is in the crop protection shelf, and we have a very clear focus on doing that. Probably more impressive is we've been able to bring our inventory down in each of the geographies. Never mind, we brought it down just under $250 million in our Brazil business. So, again, if I look going forward, if we pull the yields off that are projected, there's going to be an awful lot of nutrient removal from the soil, and we get an open fall, I would expect that we would see strong demand for MPK as we go into the fall season. Again, that's going to be weather dependent, but again, it's a really solid print across the first half. We've seen margins return to what we consider to be historical margins, some of them may be a bit above historical margins.

Operator, Operator

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

Andrew Wong, Analyst

Hey. Good morning. Thanks for taking my questions. So just on the potash segment, at the moment, you've got six operating potash mines. They're operating at about an 80%, 85% operating rate. Could it make sense to maybe curtail production or shut down one of the higher-cost mines like you had done previously and consolidate production, so it's a little bit more efficient around fewer mines, which could potentially save on costs?

Ken Seitz, President and CEO

Thank you, Andrew, for the question. I can assure you that we've looked at that very closely over the years. One of the benefits of having six mines is the flexibility in production, allowing us to respond to our customers. Even this year, we've seen delayed contracts in India and China for standard grade products, but we have the ability to produce additional granular and serve granular markets. Curtailing one mine definitely limits that flexibility, as we have some mines that produce more standard grade and some that produce more granular products. So I would say, in this environment, where we've seen shifting trade flows, additional volume coming out of Russia and Belarus, and a balance shifting between granular and standard grade markets, that flexibility is a big advantage for us and one that we want to preserve because it does create value for shareholders.

Operator, Operator

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

Jacob Bout, Analyst

Good morning. I have a few questions about the unauthorized execution of that derivatives contract that led to the significant charge. I'd like to understand the circumstances that contributed to that. Was this part of the normal course of actions for such a large exposure? Is this issue limited to Brazil? Additionally, could you comment on your use of derivatives as a risk management strategy?

Ken Seitz, President and CEO

Good. Thank you, Jacob. To answer your specific question, was this in the normal course? The answer is no. What led up to it was, obviously, we're doing a lot of work in Brazil and some organizational changes that led to challenges on segregation of duties and some of the checks and balances, governance, and controls that we have in place. We identified that quickly, we dealt with it quickly, and we have remediated the issue. It's certainly only contained to Brazil, and we've had our auditors have a look at all of this and certainly are on a path to remediation. With respect to how we use instruments to hedge, I'll pass that over to Pedro to provide some more explanation.

Pedro Farah, CFO

Thank you, Jacob. What we use is a typical combination of forwards and options. So there's nothing too exotic there to basically cover positions that we have short in dollars for that position. But as mentioned by Ken, the issues were more actions that were taken outside of the normal policy. Those were quickly identified, rectified, and we have all the controls being put in place now that we are quite confident will fully remediate the situation for the future.

Operator, Operator

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

Joel Jackson, Analyst

Good morning. Ken and team, you had your Investor Day in June. It was less than two months ago. I think the focus of that event was really on how you're going to grow retail over the next couple of years from about $1.75 billion this year, picking up maybe $0.25 billion of EBITDA over the next couple of years. With your update now, you're guiding down retail $150 million lower. What strikes me is how do you reconcile your view less than two months ago? This is a big growth engine for Nutrien. But now you're guiding down retail, making that challenge harder. Do you still stick to those targets? What's changed? Do you need to review everything? What do you think?

Ken Seitz, President and CEO

Yes. Thanks for the question, Joel. We absolutely still believe in those targets and are, in fact, progressing towards those targets. When we talk about our North American and Australian business organic growth, or what we can do on proprietary products and network optimization and some of the investments we are making in our digital platform. If we look at the margin improvements in the first half of 2024, we're very encouraged by the path that we're on in North America and Australia. When we talk about guiding down at the moment, we essentially have two challenges. One is what we talked about in Brazil. As it relates to Brazil, we can talk more about the challenges that we've seen in terms of taking longer for that market to stabilize. We were looking to move our inventories to clear through 2024 and emerge into 2025 in a better position. That said, we've seen some changes with grower buying patterns where there's been a shift to generic crop protection products and even straight commodity fertilizers, which is having the effect of taking longer for in-country inventories to clear through the system. We've also seen some unfavorable weather conditions, and we're also dealing with a change in buyer behavior where it's just-in-time purchasing on the farm, which obviously creates challenges through the supply chain. We do have a plan in Brazil, and it is one aimed at improving margins. We've talked about closing 21 locations, curtailing three blenders, and implementing cost reduction initiatives, and we are working to reduce our inventories. When we step back, we believe in our presence in Brazilian agriculture, and we believe in that market; it’s just taking time to stabilize. The other challenge is dealing with weather in agriculture; it's true that we had a wet spring in May in North America, which impacted product application that we would have normally seen. We're heading into the fall application season here and expect that this crop in North America will pull a lot of nutrition out of the ground. We had a strong summer fill program, heading into a strong fall application season. So, Joel, we absolutely believe in what we talked about at Investor Day, but we're dealing with some near-term challenges that we have a plan for.

Operator, Operator

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

Ben Theurer, Analyst

Yes, good morning and thanks for taking my question. Just two real quick ones. So one, as you look into the upgrade of your potash volumes globally, but then at the same time, your internal guidance raise is a little more muted; could you quantify what your expectation is as the potential disruption from the rail strike that you've mentioned?

Ken Seitz, President and CEO

Yes. Thanks, Ben. When we guide on potash volumes, we have considered the potential for a short rail strike. However, there are many moving parts there. I'll pass it over to Mark Thompson.

Mark Thompson, Chief Commercial Officer

Yes. Thanks, Ken. Good morning, Ben. First and foremost, we're concerned about the potential for the rail strike, as Pedro mentioned, given the impact this would have not only on nutrients but on our customers and the broader economy. Given the dependence, particularly of our offshore potash exports through Canpotex on Canadian rail, any work stoppage would impact the business. With the uncertainty surrounding the situation in recent months, we've done a few things within our control to prepare, such as charging up our domestic distribution network. Canpotex has also worked to support our customers and charge up their network to the degree possible. Regarding guidance, there are some unknowns given this unprecedented situation, but in our guidance, we’ve embedded a few days to a maximum of a week of potential impact from a rail strike. If we were to see that type of eventuality, we would expect to trend toward the lower end of our potash sales volume guidance. However, if we move through this without a logistics interruption, we’d expect to trend toward the midpoint or potentially even the upper end of our potash sales guidance.

Operator, Operator

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

Vincent Andrews, Analyst

Thank you. Good morning, everyone. I'm wondering if you could talk a bit more about Brazil and maybe crop chemicals, in particular. Your suppliers or some of your suppliers have reported challenges down there, and it seems like there’s price competition being led by generics. Are you seeing that? Are your inventory positions in terms of your costs where they need to be? Are you getting concessions from the suppliers, or is there more work to be done there? How much is Cropchem of the $150 million reduction in EBITDA for the year? How much of that is associated with Cropchem to the extent you can estimate?

Ken Seitz, President and CEO

No, thanks, Vincent. I think you identified a lot of the challenges in crop protection you mentioned earlier, and the switch to generic crop protection among some farmers is certainly having an impact. I'll pass it over to Jeff Tarsi to provide more detail.

Jeff Tarsi, Senior Vice President

Yes, Vincent, thanks. No one is exempt from the market pressures we've seen in Brazil over the last 18 to 24 months, especially in the crop chem sector, which started seeing intense pressure in the latter half of last year. We are seeing more interest on the generic side of the market, and growers, as they feel squeezed financially, are looking for lower-cost options, particularly around generic chemistry. In terms of what portion of our business is from a crop chem basis, we're basically a third, a third, a third there from a crop to fertilizer and seed standpoint. From an inventory standpoint, as I mentioned earlier, we brought our inventory down quarter-over-quarter by roughly about $250 million, and a large portion of that is in the crop chem sector. So I like where we've positioned ourselves from a crop chem standpoint. But we continue to see margin pressure there, and although we've effectively managed to get our inventory down, moving forward, there’s concern about retail industry positioning. As Ken mentioned earlier, we're very focused on margin improvement across all three shifts of our business, cash generation, and managing our inventories down as tightly as we can.

Operator, Operator

Your next question comes from the line of Ben Isaacson from Scotiabank. Your line is now open.

Ben Isaacson, Analyst

Thank you very much, and good morning, everyone. So back to Brazil, Ken, you mentioned that you have a plan in place for operational improvements in the near term, but maybe a bit of a longer-term question. You've taken roughly $800 million of write-downs in the region over the past year or so and then another $200 million of this FX issue. So, $1 billion of challenges against a business that generates somewhere between $80 million and $100 million in EBITDA, is that right? What are we playing for here? What is still at risk, and how has that run rate changed given that you're making some pivots in the region? Thank you.

Ken Seitz, President and CEO

Yes, thanks, and thanks for the question, Ben. We're doing a complete commercial review of our business in Brazil. We're still a small percent of the market, less than 2%. We've been through a period of extraordinary volatility ever since the conflict in Eastern Europe. Yes, Brazilian agriculture and Brazilian retail won't be challenged forever; that region continues to grow in agriculture, and farmers continue to look for ways to maximize yields. So, the market will come around. We know that. It's just a matter of time. As Nutrien, we've been assessing how to gain access to Brazilian agriculture as one of the largest potash suppliers into the country, while looking at proprietary products and growing that business. We’re also undergoing a strategic review to determine what makes sense for us going forward.

Operator, Operator

Your next question comes from the line of Jeff Zekauskas from JPMorgan. Your line is now open.

Jeff Zekauskas, Analyst

Thanks very much. You lowered your retail guide by about $150 million. How much of the lowering came from the weather in the U.S. and how much came from South American operations?

Ken Seitz, President and CEO

Yes, thanks, Jeff. The majority of that change was related to everything we've discussed regarding Brazil. The impact of the wet May in North America contributed to about a third of that adjustment.

Operator, Operator

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

Lucas Beaumont, Analyst

Thank you. This is Lucas Beaumont on for Josh. I just wanted to follow up on the pathway for retail towards the 2026 targets. I mean, you're sort of pointing to about $1.6 billion in EBITDA this year and then bridging that to the $2 billion. Over the last five years, retail has only kind of grown EBITDA at a mid-single-digit rate. To hit the $2 billion, you're going to need to get up to about 12% a year in the next two years. So could you please walk us through the buckets of the growth algorithm and how you see yourself getting there? Thanks.

Ken Seitz, President and CEO

Yes. Thanks, Lucas. We have a pathway and bridge from here to there, and I'll pass it over to Jeff to provide that.

Jeff Holzman, Vice President of Investor Relations

Yes. Ken laid out a little bit earlier. We laid out our investor strategy of $1.9 to $2.1 billion, and we continue to see a path to that number. As I look at it, I see three different buckets that we need to achieve on to deliver that $1.9 to $2.1 billion. Number one, it starts with the continued momentum in growing our proprietary products business, particularly when we emphasize our plant nutrition and biologicals. We've been growing that business at a pace greater than 10% a year, and we believe we can continue that trajectory through further penetration in our core retail markets. It's also important to have steady and stable growth at our base operations in North America and Australia, consistent with what we delivered over the last five years, including network optimization and organic growth. Finally, there's our Brazil business, which needs to stabilize to that effect. These are the three buckets we see, and we still believe we are on a path to achieving that.

Operator, Operator

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

Stephen Byrne, Analyst

Yes. Thanks. Jeff, in response to your comments about growing proprietary products 10% per year, it looks like our proprietary seed, chemical, and nutrients as a percent of the platform slipped in the first half of the year. Is there anything that you can call out that drove that? As you look into a year where grower margins are looking tight, does that favor a shift to your proprietary products, or do you see risks that they might seek out more generics?

Jeff Tarsi, Senior Vice President

Thank you, Steve. I believe that in tighter marketing conditions, our proprietary seed business, along with our biologicals and crop nutrition, tends to perform well. We've experienced strong growth this year in plant nutrition and biostimulants. I'm particularly pleased with one of our products, which saw around a 300% increase in usage last year, and we've seen another 75% increase this year. Our adjuvants sales are up 7% year-to-date, making up 5% of our crop protection segment. This indicates our strategic focus and that growers are mindful of their costs while looking for effective solutions. Regarding the decrease in the percentage of proprietary business, I would attribute it to last year's adjustments in the fertilizer market, which affected those percentages.

Operator, Operator

Your next question comes from the line of Aron Ceccarelli from Berenberg. Your line is now open.

Aron Ceccarelli, Analyst

Hello, good morning. Thanks for taking my question. I would like to ask a question about potash on the supply side. After the renegotiation of the contract, it seems like both India and China are coming back. Could you understand how much you have seen from Laos on the supply side, and how should we think about capacity addition from there for the remainder of the year?

Ken Seitz, President and CEO

Yes, thanks, Aron. As we look at 2024, we've seen strong demand leading us to increase our view to 69 million to 72 million tonnes of shipments for the year. We see demand increasing in granular markets and ongoing strong domestic consumption of potash in China. Our global supply-demand remains balanced, involving supplies from Laos, Russia, and Belarus. I will pass it over to Mark to share more about these figures.

Mark Thompson, Chief Commercial Officer

Yes, thank you. To summarize, the demand profile was strong in the first half of 2024. We've seen strong demand recovery in Southeast Asia and maintained strong domestic consumption in China. Regarding the supply side, we expect gradual supply increases from Laos; however, they are experiencing challenges addressing production levels. We expect incremental supply from Laos to be about 1 million tonnes in our SMD, but issues will likely slow achieving previously targeted production levels. Overall, we expect a balanced market in 2024, with demand continuing to grow but less incremental supply available over coming years. This could lead to tightening and firming in the market moving forward.

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. Continuing on that line of questioning, Mark, just with your update on global shipments up 1 million tonnes. I mean, you talked about approximately 20% market share, which equates to 200,000 tonnes, certainly at the low end of the range. Why wouldn't that lead to an increase in your high-end guidance? Is it just the rail strike that would impact this? What’s the outlook on your summer fill in North America for potash affordability and demand from corn and soybean growers, especially now that new crop prices suggest limited profitability for growers?

Ken Seitz, President and CEO

Great, Adam. I'll pass over to Mark here, but you've certainly identified many of the moving parts behind our guidance range. We are seeing strong volume recovery reflected in our cash cost of production of $53 per tonne; without rail challenges, this year is shaping up very positively, possibly one of the best. Mark, share your insights on that guidance.

Mark Thompson, Chief Commercial Officer

Yes. As Ken said, we are seeing strong demand and consumption in North America. To maintain our distribution network heading into 2025, we've charged up the distribution network in response to the ongoing rail situation. We're currently seeing very positive responses regarding potash consumption and our summer fill program is effectively sold out through the third quarter. Overall, we’re optimistic about our consumption side this year.

Operator, Operator

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

Richard Garchitorena, Analyst

Great. Good morning, everyone. If I could ask on capital allocation. You’ve got a strong balance sheet, fairly low leverage, and strong free cash flow this quarter. You’ve cut your CapEx needs for this year by $400 million to $500 million versus last year. And you've also guided, obviously, on the Investor Day, a significant production growth to 2026, which we’d assume is supported by ongoing demand growth. So, what do you need to see before you step up return of capital in the form of buybacks? How should we expect that to play out potentially over the next six to 12 months?

Ken Seitz, President and CEO

Yes, thanks, Rich. You've identified some key numbers in our CapEx program: $2.2 billion to $2.3 billion, which includes about $500 million aimed at investments in retail proprietary products and network optimization; and the other half for our upstream business involving investments in nitrogen and potash operations. We've maintained our dividend at about $1 billion, adding up to about $3.7 billion overall. As we monitor the year unfolding and approach the fall, we'll consider share buybacks among other opportunities, including potential acquisitions in our retail business and maintaining flexibility for future prospects.

Operator, Operator

Your next question comes from the line of Edlain Rodriguez from Mizuho. Your line is now open.

Edlain Rodriguez, Analyst

Thank you. Good morning. Forgive me if that question has been asked before. On phosphate, you seem to have concerns about affordability given the persistence of the high prices there. However, yesterday, the biggest player in the space didn't appear concerned about the high prices, believing they can last for a long time and that the disconnect between phosphate and product prices shouldn't be an issue. Why are you concerned about the high prices of phosphate and how detrimental that could be to demand and affordability going forward?

Ken Seitz, President and CEO

Yes, thanks for the question, Edlain. We just talked about affordability and margins as it relates to potash and our summer fill program. It is a bit different in phosphate with some of the tightness. Talking to farmers through our downstream channel, we’ve observed some growers expecting prices aligning more closely with nutrients. Weakness in terms of applications in the phosphate market might emerge, and early indicators are that some softness could present itself this fall. We see uncertainty around affordability being a possible interpretation of demand destruction in segments of the phosphate market. For our phosphate business, we have a diversified structure across ag and industrial markets, which allows us to withstand potential demand fluctuations, but we observe affordability concerns closely at grower levels.

Operator, Operator

There are no further questions at this time. I will now turn the call back to Jeff Holzman. Please continue.

Jeff Holzman, Vice President of Investor Relations

Thank you for joining us today. The Investor Relations team is available if you have follow-up questions. Have a great day.

Operator, Operator

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