Q3 2022 Nutrien Ltd Earnings Call
Okay.
Good morning, ladies and gentlemen, and welcome to the nutrient 2022 Q3 earnings conference call.
At this time all lines are in listen only mode. Following the presentation, we will conduct a question and answer session.
If at any time during the call you require immediate assistance. Please press star zero for the operator.
This call is being recorded on Friday November three 2022.
I would now like to turn the conference over to Mr. Jeff Hoffman, Vice President Investor Relations. Please go ahead.
Thank you operator, good morning, and welcome to nutrient third quarter of 2022 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 reports 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, President and CEO and Pedro Farah, our CFO for opening comments before we take your questions.
Well good morning, and welcome to nutrients third quarter earnings call.
2022 has been shaped by geopolitical events that have heightened the world's focus on food and energy security.
Nutrient has responded by taking a number of strategic actions to position our company to meet the demands of our customers and deliver superior long term value for our shareholders.
We expect to generate record earnings in 2022.
But acknowledged that potash market conditions in the second half of the year have been more volatile than previously anticipated.
Potash demand in North America, and Brazil declined in the third quarter as far as work through inventory that was built early in the year.
These regions represent the two largest markets for nutrient potash therefore, the decline in demand and prices had a more significant near term impact on our business.
However, we view this as a temporary lull in our confidence in the outlook for the fundamentals of our business has not changed.
Global grain supply remains very tight with the stocks to use ratio projected to fall to a more than quarter century load this crop year.
High energy costs and export restrictions continue to impact global fertilizer production and trade most notably in Europe , and we believe these supply constraints will persist well beyond 2022.
We maintained and in a supply constrained environment no. Other producer has an ability like nutrient to bring on additional low cost potash and nitrogen volumes to meet pent up demand.
Therefore, we continue to advance our strategic growth initiatives that are based on a positive multi year view of the fundamentals.
Pedro will speak more to our capital allocation plans for the remainder of 2022.
But I will first provide a review of our third quarter results and outlook.
Nutrient delivered record adjusted EBITDA in the third quarter and through the first nine months of the year supported by higher realized fertilizer prices and record results from our retail business.
Retail had a strong third quarter as growers, we're incentivized to invest in their crops.
This led to increased demand for our proprietary nutritional products, which partially offset a delay in purchases for commodity fertilizer products.
Demand for crop protection products was strong and we delivered higher margin was driven by growth in proprietary product sales and tight supply for many crop chemistries.
We closed the Marco agro and Cassa <unk> acquisitions in Brazil substantially increasing our national presence in this large and rapidly growing agricultural market.
We are on track to exceed our target of a $100 million in annual EBITDA from Brazil in 2023.
In potash Canpotex increased volumes sold to southeast Asia.
And delivered higher contract volumes to China.
Shipments to Brazil slowed in the third quarter as buyers worked down inventory that was built in the first half which.
Which included significant purchases that were made in advance of export restrictions on Belarus and Russia.
North American potash sales declined due to higher than expected carryover from the condensed spring season by our deferrals as prices moved lower during the quarter and higher carrying costs.
Our average realized potash price was well above the previous year, but declined from the second quarter tracking the reduction in spot prices in Brazil, and North America.
Over the last few weeks the pace of decline in Brazil has slowed in the U S. Inland prices have been supported by restricted barge movements and a strong start to the fall application season.
Nitrogen benchmark prices strengthened due to higher European gas costs and associated plant curtailments as well as continued supply restrictions on Chinese and Russian nitrogen products.
However, our realized prices were down from the trailing quarter as summer fill programs were impacted by the seasonal reset that occurred late in the second quarter.
We increased exports of nitrogen solutions to higher netback offshore markets in the third quarter, but experienced gas supply curtailments in Trinidad.
Primarily impacted our production and exports of urea.
Our phosphate business delivered solid results supported by having a more diverse product offering, including our high value feed and industrial products.
Over the past two quarters, we have recognized a noncash impairment reversals totaling $780 million associated with our phosphate operations, which is driven by improved market fundamentals and a more favorable view of phosphate margins.
Now turning to the outlook.
As mentioned in the opening global grain stocks to use is projected to decline to the lowest level in more than 25 years.
This would mark the sixth consecutive year that stocks have declined.
Crop futures have moved higher in recent weeks and are indicative of multi year strength in the market fundamentals with corn futures trading above $5 per bushel out to December 2025.
Prospective crop margins are well above historical average levels, which provides an incentive for growers to increase acreage and push to maximize yields.
The weather has been favorable in North America, and we anticipate that the rapid pace of harvest will support a large fall ammonia application season, and normal application rates of potash phosphate and crop protection products.
Our retail fertilizer sales volumes in October were up from the previous year, which is a good early indicator of robust grower demand.
Brazil spring planting season is proceeding with favorable conditions and soybean acreage is projected to increase by 3% to 4%.
We anticipate a similar increase in Supreme your corn acreage and strong input purchases over the next few months.
We expect robust agricultural fundamentals will drive increased fertilizer consumption in 2023.
And pent up demand for potash will emerge as inventories are drawn down and prices stabilize.
However, the current situation is unique in that global potash supply remains constrained.
Potash production and exports from eastern Europe continued to be impacted by sanctions on Belarus and restrictions on Russia that are related to the war in Ukraine.
For 2023, we forecast exports from Belarus to be down, 40% to 60% compared to 2021 levels and Russian exports to be down 15% to 30%.
Global potash shipments are projected to be between 64 to 67 million tons in 2023, which is up from 2022, but still well below our unconstrained demand forecast of over 70 million tonnes.
We expect increased demand in North America, and Brazil, following the Destocking that occurred in the second half of 2022.
Based on this supply and demand outlook, we anticipate nutrient sales volumes of approximately 15 million tons in 2023.
Global nitrogen supply remains tight and benchmark prices are projected to remain strong through the fourth quarter and into next year.
Despite a recent decline in European gas prices more than one third of the ERP is Europe's ammonia production is curtailed in European gas prices are expected to remain high and volatile through the winter.
We also anticipate a tight north American nitrogen supply and demand balance due to a record exports and lower import volumes in the second half of 2022.
I'll now turn it over to Pedro to review, our guidance and assumptions and capital allocation plans for the remainder of the year.
Thanks, Ken.
Starting with retail our annual EBITDA guidance range increased to $2 15 to $2 25 billion, which is a record year for our retail business the.
The most significant factor impacting our guidance range is the extent to which we continue to have a wide open fall application season in North America.
Our revised potash guidance assumes that spot prices stabilized around current levels and that we see limited restocking of supply chain in the fourth quarter.
We have adjusted our potash production plans in the near term and have brought forward maintenance activities. During this downtime that position us well for increased volumes in 2023.
We narrowed our nitrogen guidance range as ammonia and urea benchmark prices have been generally in line with our previous forecast.
We anticipate a strong fall ammonia application season in North America, but have lowered our nitrogen sales volume guidance to reflect the impact of recent gas curtailments in Trinidad.
Cash from operating activities.
Is projected at approximately 8 billion 2022, which is down from our previous outlook, but still roughly double the operating cash generated in 2021.
As Cam mentioned, we remain confident in the long term outlook for the business and intend to invest $1 4 billion on high return strategic growth and sustainability initiatives in 2022.
In retail we have invested approximately 500 million this year on acquisitions to grow our network and core geographies and continue to make investments to enhance our proprietary product offerings and digital capabilities.
Enhancing our low cost nitrogen network through brownfield Debottleneck and decarbonization projects.
The nitrogen team has completed projects at three sites. This year that I expect it to reduce annual cotwo equivalent emissions by more than 500000 tons.
We are advancing their front end engineering work for a $1 2 million ton Geismar clean ammonia project and recently signed an agreement with <unk> group.
To be the technology provider.
This is a key milestone for the project and anticipate making a final investment decision in 2023.
In potash, we continue to progress the ramp up of our low cost potash production capabilities the.
The projected global supply and demand balance supports nutrient space for increased production as a valuable evaluable and low cost option to close the projected supply gap. These.
These projects come with a very low capital cost of 150 to 200 per tonne and the investment is spread across multiple sites.
Therefore, we believe that there is low execution risk and asymmetric upside potential given the incremental margin opportunity in short expected payback period.
Finally on our plans for return for returning capital.
Last quarter, we announced our intention to return approximately 6 billion in capital to shareholders in 2022, including 5 billion in share repurchases.
While some of these repurchases may now extend into the first quarter of next year due to lower forecast operating cash flows in 2022.
Stealing Dan on completing our existing 10% share repurchase program prior to its expiry in February 2023.
As we target sustainable and growing dividends over time, the significant reduction in share count will be included in the decision criteria for future per share dividend increases.
I'll now pass it back to Ken.
Thanks Pedro.
I would just make a few final comments.
The longer term fundamentals for our business remains very strong and the challenge of feeding a growing world has not abated.
In fact over this past quarter, we have seen further pressure on global food supplies.
We will need to be addressed over several growing seasons.
In meeting with stakeholders over the past year my optimism for the opportunity. That's ahead for our business to serve the growing and evolving needs of our world has only strengthened.
As our business evolves, so will our people and I wanted to introduce a few new members of our executive leadership team that are on the call today.
Chris Reynolds as our new executive Vice President and President of potash.
Chris was previously leading our global sales organization and also served as interim president of potash since the start of the year.
He has been with nutrient for over 18 years and is extremely well positioned to lead our potash business.
Trevor Williams has taken on the role of interim president of nitrogen and phosphate.
Trevor has been with nutrient for over 11 years, most recently as our senior Vice President of nitrogen operations.
He has diverse global experience, leading large chemical operations and strategic growth initiatives.
In addition, Mark Thompson, who many of you have mentioned in the past is taking on the newly created role of executive Vice President and Chief Commercial Officer.
Mark has been with nutrient for over 11 years and will utilize his extensive experience working across all our business units to advance our global commercial strategy.
With that introduction, we would now be happy to take your questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone you will hear three Tom prompt acknowledging your quick question. Your questions will be pulled in the order they are received.
Wish to decline from the polling process. Please press star followed by the Q. If you are using a speaker phone. Please lift the handset before pressing any.
One moment. Please for your first question.
Your first question comes from Joel Jackson from BMO capital markets. Please go ahead.
Hey, Ken.
<unk>.
So interesting year shakeup in potash can we I mean, when you just made the decision to expand potash.
It is an obvious reason why you were going to do it right what's going on Sunday.
Some of your competitors and the restrictions.
But you must have known in June that the market the demand in the spring wasn't as good as thought that inventory was going to build that the situation could possibly happen you have to make a decision based on multiple years as well as Belarus, BPC Douglas Kelley issues.
<unk> for the world and for the market, but can you talk about.
How maybe nutrient got this wrong.
Understanding what demand should be this year.
And on what the right production would be for this year was that more Russian tons leaked out than you thought was that.
And elasticity at higher prices is worse than you thought and then what would be your entering production rate for January one 2023 is that 15 million tonnes. Thank you.
Yes, good morning, Jill and thank you for the question so yes.
If we look at 2022 and what's happened in the market. It really is two things and we can talk about North America, and we could talk about Brazil, starting with North America, We had a strong fall application.
In the fall of 2021, and so heading into this spring.
Looking with a backdrop of AG fundamentals looking at a very strong 2022, four for growers and certainly all the incentives there to lay down the appropriate crop nutrients to maximize yields but we are in agriculture and of course weather in the spring of this year a late start to the planting season, which led to a compressed planting season.
And so at the end of the planting season as we said we saw prevent plant acres. We saw cross switching and we saw and have talked about just fewer crop nutrients going to ground spring in North America, and therefore larger carryover volumes through the summer than we had anticipated.
And so right now heading into the fall.
What we've seen as farmers again incentivize to lay down the appropriate crop nutrients I mean, it was just core.
And wheat at 50% above the 10 year average.
Again, the backdrop is being very strong we see farmers incentivize to lay down crop nutrients.
This summer and into the fall to start of the application season here farmers looking at their bins, and seeing seeing fertilizer and their bins and also looking at the potash price and holding off on those purchases until until the last minute until they have to purchase.
And so in North America again, as we've seen inventories coming down now in fact, we are starting to see movement with Midwest pricing at about the $640 per short ton and in fact that again.
Through this destocking period, and now into the fall application season, and getting ready for the spring.
We're going to we're going to start to see that.
Replenishment of those inventory so that was in North America and Brazil.
Interesting year as well because again, the Brazilian farmers, having a strong year and what we saw in the first half of the year was.
Imports coming into Brazil at 37% above the previous year and really that was the Brazilian farmer and the Brazilian distributors looking to shore up volumes, knowing that there could be supply side challenges with the sanctions on Russia, and Belarus, and so we're able to get those volumes into the country prior to really those sanctions.
Starting to take effect building.
Building those inventories.
Brazilian farmers prepared for their big spring planting season, which they are in the midst of now but similar behavior and of course, we saw we saw through that big purchasing period Brazilian prices.
Fly up to over a thousand dollars a ton.
But now again with their planting season underway, those inventories being drawn down, but but the farmer again.
Watching price and reluctant to step into the market as prices come down and look only really going to step into the market when those inventories need to be replenished and in the case of Brazil through this application season, and looking forward to the Supreme Court crop those inventories again, we will need to be rebuilt.
Those two markets for us are some of our biggest largest export market. So that we feel it when when liquidity in terms of potash trait and again over the course of the summer.
As constraints and again Thats, what we saw now heading into 2023 again, we see a very strong backdrop for the AG fundamentals and we see a very challenged supply situation through 2022.
The export levels out of Belarus, and Russia played out.
Saying out as essentially as we had expected and that is somewhere around 50% of the volumes coming out of Belarus export constraint and 20% out of Russia. These are big numbers and frankly heading into 2023, we see a similar situation.
We know that sanctions are in full effect, but also that their minds in those parts of the world, they're having trouble sustaining that production getting hands on maintenance parts and those sorts of things.
So that again heading into 2023, we've been through a destocking period.
Inventories are going to need to be replenished and theyre going to be need to be replenished in a market where the supply side continues to be constrained and again as those inventories are rebuilt in places like North America, and Brazil Big export markets for US again, we will see that feel that disproportionately.
We respect to our decision to increase potash volumes Joel I would just say that.
Our view has not changed we had a lull in demand here in the third quarter, but again the backdrop for the AG fundamentals remain strong the supply side. It continues to be challenged we see that continuing into 2023, we know that.
60% of the new production that was going to come to the market over the next five years over and above nutrients production was going to be coming from Russia and Belarus.
We expect that.
That new production will continue to be challenged and we are maintaining our ramp up schedule to be at 18 million tonnes by 2025 and have conviction around that.
So to your question about entering 2023 Joel.
We mentioned that we expect volumes in sales for nutrient to be around that 50 million ton level.
Get more refined on guidance as we head towards February , but again with that restocking in 2023, we expect to have a strong year.
Your next question comes from Andrew Ross.
Sorry, Andrew Wong RBC capital.
Please go ahead.
Thanks, Good morning, I guess, you could call me wrong.
We were all wrong in the quarter I guess.
Looking at potash sales this year.
It'll be around $12 5 million tons based on guidance.
Capacity is set to be 15 to 16 million tons next year.
There's a lot of moving parts right now on both supply and demand side and I would say also it's fair that we also have a lot less visibility on bulks.
<unk>.
So does it make sense to kind of.
For nutrient to see sales and demand kind of catch up with capacity.
And just to see some more confirmation.
On the more positive view here before continuing to ramp up some more.
Yes. Thank you for the question, Andrew and what I'll say is that.
These investments that we make in our ramp up capability in our production capability are incremental so we're not jumping from 14 to 15 to 18 million tonnes all in all in one leaf and so.
We will be prudent with how we allocate capital in light of what we see going on in the market.
But Andrew I do go back to and ground ourselves in the fundamentals and again to say that.
The backdrop for agriculture is strong.
All we need to do is look at where commodities are today and where futures are trading at for the likes of corn.
Mentioned, even though its a 2025 and above $5, a bushel and so.
There was a strong pricing and again corny week, 50% above the 10 year average.
So we've got this strong backdrop, but then we know that we're in a supply constrained market and so when we say 64 to 67 million tons in 2023, that's because it's a supply constrained market.
An unconstrained you'd say, it's somewhere around 70 million tons, especially in an environment, where inventories are being rebuilt.
For our part we have been I would say prudent about expanding capacity pacing it with the market.
Looking at $2023 2020 for 2025.
We believe we continue to believe these these supply side challenges are real and that there is going to be a home for our volumes in the market.
Your next question comes from Christopher Parkinson with Mizuho. Please go ahead.
Operator, we'll move to the next question please.
Hello.
Chris.
Yes Hello.
We can hear you.
You can hear me now.
Alright, sorry, I'll ask it again.
I was just asking.
Given all the puts and takes and now that the dust has settled since the initial reaction to the Ukraine Warren trace wasn't adjusted on the potash side, we are a little bit of a better idea of what the Russians belarusians are capable of there's been some.
Volatility in Nat gas prices on the natural.
Nitrogen side can you just give us any additional framework on your specific way of thinking on a segment basis.
As it pertains to your 9 billion normalized EBIT estimate just any thought process would be very helpful. Thank you very much.
Yes, I think what I'll do is provide a few opening thoughts and then I'll pass it over to our Chief commercial officer, Mark Thompson to provide some color but.
Suffice it to say that given what we've seen with the conflict in Ukraine. The challenge that's going to present.
Over the medium term both in terms of the energy complex in Europe .
Just challenged exports for crop nutrients out of Russia and Belarus.
And then export restrictions and other parts of the world.
But we've seen a structural shift in our industry that makes us think differently.
About what mid cycle pricing and the price strip there it looks like and of course, we've talked about in the past that hasnt changed for US. We continue to believe that we are experiencing a structural shifts in our industry, but mark I'll pass over to you to provide some more color.
Thank you Ken.
Good morning, Chris.
Look so just to reiterate what Kevin said I mean fundamentally we don't see any different view around projection for normalized mid cycle earnings in and around that $9 billion range for EBITDA and I think theres two components to that one is on the volume side and when we look at potash for our business.
I think Ken has stated very clearly here. This morning that we continue to see the market needing the additional tonnes from nutrient and potash that will come in the years to follow and so we see that firmly intact and then from a pricing standpoint as Ken has said there is a variety of fundamental factors here from a supply demand standpoint that we believe will.
In structural changes in these markets.
Ultimately support that view that leads to that 9 billion level of normalized earnings.
When we look at pod.
Potash, specifically and double click on the situation in Russia.
Kenneth said.
Ultimately 2022 from a supply constraint standpoint, as a result of the conflict in Ukraine has played out much the way we've set.
And we see that continuing in 2023 and much the same way and ultimately the same surge of imports that we saw in the first half of 2022, we don't believe will be possible. In 2023 is the constraint to take full effect and then on a nitrogen standpoint again, despite some warmer weather here, we've seen over the past month or so.
The forward strip for Tcf gas and European gas prices would indicate again that Europe will be the high cost producer in these markets and that again is a result of the conflict in Ukraine and reduced energy supply from Russia that we see continuing for the foreseeable future. So those are the major factors that were supporting our outlook in that.
View of structural change in these markets and we're very confident in that view as we move forward.
Your next question comes from Vincent Andrews with Morgan Stanley . Please go ahead.
Thanks, I wanted to follow up on that Jason in terms of the nitrogen price. What you think the price setting mechanism is these days and what do you think it might be in 2023. There is a lot of debate as I'm sure you're aware in the investment community about that European TTS price and as European production costs, and whether those should actually be.
Setting a floor for nitrogen prices.
Or not.
Personally I can't tell over the past three or four or five months, what exactly has been setting the price. So maybe you could just give us your thoughts.
Great. Thanks, Vincent for the question I'll pass that one over to Jason Newton, our Chief economist and talk about the moving parts there Jason.
Yes, good morning, Vincent I think.
Depends a little bit when you look at marginal cost on the product and the time of year.
We've just come through the.
The third quarter, which is the seasonal low point in terms of global demand and as we look at where.
European production costs were in that quarter.
Obviously, they are well above where prices were and saw over 50% of the ammonia capacity idled in Europe at that time, and so I think as we look on a long term sustained basis, we need to.
Leased.
At prices in line with where marginal costs are and for ammonia and especially for ammonia and for nitrates that that's in Europe at the moment.
As we get into.
2023.
Production that was lost in.
In Q3 of 2022 and still there is a third of the ammonia capacity offline today.
That's gone and.
We expect to get into more of a demand driven environment in which case, it's really that.
Man, that's going to drive drive pricing and move above where marginal cost as.
We know we're at near full operating rates globally, and we expect that to continue over the medium term given the.
The production that's onstream.
So as we get into a tight supply and demand environment.
Realistically the cost curve is less important.
Then it has been in the low demand period of time.
Your next question comes from Jacob bout with CIBC. Please go ahead.
Good morning.
Historically, we used to talk about the balance of <unk>.
Icing versus new supply in the potash industry.
In your view what is the sweet spot on pricing.
How focused are you on.
Market share.
And what incentivize buyers step in I know you talked about inventories in the U S. But what does that look like in Brazil.
India China.
Just primarily price.
Great. Thank you Jacob for the question so.
As we approach the market, we have built our customer base over decades, now and so we look at it is meeting the needs of our customers and our customers continue to grow and we grow along with them.
So in terms of <unk>.
Pricing today in the sweet spot for pricing.
Ultimately.
The health of the farmer is it.
The center of everything that we do.
So affordable crop nutrients that among the backdrop of AG fundamentals that provide incentives for producers to provide that high quality page, which we do I mean.
For us that's kind of the sweet spot on on crop nutrient pricing, obviously with some of the supply side challenges that we've seen in the market and we can really go across the crop nutrients.
We've seen the volatility over the course of 2000 22022, that's been really quite dramatic and again, that's just based on the supply and demand fundamentals.
So as.
We look forward now and again, new supply that's coming to the market of course over the next five years. The majority of that is going to be our supply and again given some of the challenges that we see with new supply that was supposed to come to the market.
Out of Belarus, and Russia and so.
For our part that's the way we think about it today I would say that what's incentive farmers to come into the market is and coming into the market is really just the backdrop in AG fundamentals again, the incentives are there jacob to maximize yields and therefore apply the appropriate crop nutrients and as we've gone through.
This destocking period as I say, the incentives will be there for the farmer to restock and get ready for what will be a big saphenous season in Brazil in a big planting season in the northern hemisphere. So the incentives are there and really that will we will be causing farmers and distributors to separate.
And to the market.
Your next question comes from Ben Isaacson with Scotiabank. Please go ahead.
Thank you very much and good morning, everybody.
A question on potash prices and what it means for the retail business. So when I look back at the crop nutrient segment to retail it looks like generally earns about $1 billion a year of gross profit that went up to about $1 billion.
Last year.
Getting close to $2 billion this year.
Your EBITDA. However, your guidance is for around 2 billion, a little bit north of 2 billion. This year.
And in 2025.
Now that potash prices have retreated.
How do you expect the impact of that to hit retail EBITDA as crop nutrient gross profit goes down I mean should we be thinking about 1617 next year something like that thank you.
Great well. Thank you for the question, Ben and I will pass that one over to Jeff <unk>, Yes. Good morning, Ben look margins have been very attractive obviously.
Nutrient shift for us in retail both in 'twenty, one 'twenty two right.
Right now as Ken mentioned, just a little bit earlier.
We're seeing a lot of momentum this fall as well.
Crops come out early.
Growers or planning for 'twenty, three and our margins are still at a very attractive rate.
We talked about this at some point in time, we will seed market to return to a more historical basis, but even when I look at it from a historical basis. It will be a step up from what we would've seen in 2020 and such like that and again.
Again, the returns for the growers are strong.
They still see a tremendous amount of value and when we talk about these things again, it's a lease.
Decisions are becoming such based decisions.
Growers are putting a lot of input bags into an acre of ground and they're going to they're going to give that crop whatever it is every opportunity to maximize from a yield standpoint. So again I think we will see margins stay strong through the end of.
<unk> 22, as we get into 'twenty, three we will reset ourselves because I think we'll be in a good position from an inventory standpoint, our inventories will be low if we get if we have the titanfall it looks like we're starting with.
And we will return to something that is a bit more historical but again a step up from what we saw in 2020.
Your next question comes from John Roberts with Credit Suisse. Please go ahead.
Thank you.
Edlin Rodriguez on behalf of John .
John .
Speaking of the inventory Destocking thats going on right now.
How long do you think this will continue and with the increased production nutrient.
<unk>.
And more products coming out of eastern Europe next year any concerns that could put further pressure on potash prices.
Okay well. Thank you for the question I'll pass selling over to Mark.
Yeah. Good morning. Thanks for the question. So again I think just to reiterate some of Ken's comments.
Ultimately, we do see the market going through a period of inventory Destocking currently.
If we look at key markets for US again in North America, we are seeing movement of product in North America today, and seeing good engagement from growers and that product is going straight to ground and we're not seeing a lot of.
Inventory stocking at this point and we would expect that to begin in earnest as we entered 2023 and Brazil also as Ken mentioned, we are beginning to see the destocking process take place and I think importantly, when we step back and look at markets like Brazil, and look globally at the potash market, we believe that as we exit.
2022, we'll be at inventory levels that are at least the same or perhaps even lower than where we entered 2022 and that sets up in combination with the demand picture. That's very strong in terms of attractive crop commodity prices for growers to really pick up again on the pause that we saw in the second half of the year.
And continue that momentum I think the fundamental factor again here is the fact that in the first half of 2022, we saw a surge of product out of the former Soviet Union and anticipation of sanctions and physical disruptions and that product found its way into global markets, including Brazil, where imports were up significantly in the <unk>.
First half of the year and based on what we see today in terms of the continuation of the conflict in Ukraine.
Expectations at.
Exports from Belarus remain.
About 50% in exports from Russia remain.
<unk>, 20% to 25% as we head into next year at that same type of supply situation and import situation in markets like Brazil, just will not be possible as we enter 2023 and so we believe that the market will see the tightness in supply demand in a way that's not yet been seen so.
<unk> combined with our view on demand, we believe again that the nutrient volumes that we've talked about in terms of our ability to flex up production are going to be needed and that inventories are destocking as we speak and we'll begin to see that as we enter 2023.
Your next question comes from Steve Byrne with Bank of America. Please go ahead.
Yes, so I'd like to drill into potash a little bit more.
Shipments down into the U S. Corn belt just flows in the quarter worthy effectively zero in September was that what was.
Unexpected by you.
And is the.
As the retail business of yours.
Characterizing.
Competitor inventory levels in that retail channel.
No hi, normal or are they low now.
Are you seeing.
Application rates that are actually going on the ground no.
Normal or is there a potential for some to actually be above normal.
Sorry, one more on potash and that he is Ken you ran canpotex in the past I'm sure they would listen to your view now but.
Looking ahead at the 2023 contract.
You've got a domestic price.
China that's.
Almost got a four in the front.
And you have this view that the 2023 potash market is going to be supply constrained would it be your your guidance to canpotex.
Two to hold off on starting a contract until this recovery and demand is actually underway rather than.
Potentially near term.
Great. Thank you for the question, Steve, Yes, so theres quite a bit there and so maybe I'll start with again, just what we saw in North America as it relates to the.
Compressed spring and then carryover volumes that I'll hand, it to Jeff to Archie just to talk about what we're seeing in the retail space and then I'll come back on the Canpotex be so.
Yeah, Steve just to reiterate we will say is that carryover volumes from the spring season in North America were larger than than than we had anticipated.
We announced our our summer fill program.
In August at the beginning of August there.
And.
As we look to place volumes again farmers were holding off with.
With the inventories that had been carried over in.
And again, not wanting to catch a falling knife on price watching prices soften.
That.
Just buying at the last minute.
Again.
The application season that we're seeing in North America, and Jeff can talk more about that we'd call. It a normal application season, so that those inventories have been drawn down and we do see engagement in the market at this sort of $640 per short ton Midwest pricing. So I think I think the short answer is Steve yes, those carrier.
Carryover volumes were larger than anticipated we call it a lull in the market.
Just given buyer behavior and buyer sentiment and that restocking now is going to have to take place Jeff I'll pass. It to you just to talk a little bit about what we're seeing on the ground in retail and then ill come back on the 2023 contract. Yes. Good morning stay even look we've talked quite a bit about the fall of <unk>.
'twenty, one, but I always like to remind people we hit.
Really big <unk>, 2020, one big Bulge in.
Then when we got into the spring this year and got it to a real compressed market lot of growers, just decided to hook to the planners at plant.
Versus put some product down to the spring so from a pure retail perspective, we came we came out of the spring.
Say within.
Big overweight position in potash, we carried a little bit more than we probably plan to carry but we also layered some more product in.
As well this for this fall and calling round yesterday, we're starting that we're starting to run through that product now and going back out into the market with nutrient now for product and.
When I look at application rates.
Call and talk around Nobody's cutback on application rates I may I may defer mark a bit earlier. These are science based decisions I would weight. It waypoint analytical last week, which is vessel testing business and over three days last week. They had record solo testing network that was coming in so we're out doing.
So testing we're looking at what was removed from the crop this year and look into areas that we expect crop to be good. It was as good if not a little bit better than.
There were some areas that were weak, but removal was very strong and the strollers going to replenish that so with nutrient they need.
Looking ahead to next year and look at it that early seed book.
It certainly appears to corn acreage is going to be up next year and so we would expect our volumes in 'twenty three to return to where they were in in 'twenty one.
Great. Thank you, Jeff and so Steve just back to your question on Canpotex and <unk>.
Contract settlements in the contract markets.
So yes. It is true that the domestic price in China has softened, but the domestic price in China does not dictate the settlement level.
That supplier and by the way.
The suppliers that can negotiate a meaningful quantity under the contract.
Maybe just a very few and far between in fact in fact, we're probably talking about.
Canpotex and maybe just one or two other suppliers, but.
But that negotiation is going to be based on what we are seeing in the global market and this is a supply and demand driven market and you will not find whether its a spot market in Brazil, as we've said in North America anywhere in the world.
That is that is below the current contract price of $590 per ton in fact for standard grade products in southeast Asia, We're certainly well above that we looked at inventory levels in those parts of the world. We know that India is for all intents potash.
<unk> is going to have to step in and for their season renewal contracts you can get volume into the country and that we expect that before China before theyre planting spring planting season, they'll have to do the same.
Again, canpotex will be looking at where volumes are trading at internationally and certainly for standard grade markets and we'll be negotiating accordingly.
Your next question comes from Jeff <unk>.
Oscar.
With Jpmorgan. Please go ahead.
Thanks, very much sort of a two part question.
And your.
Potash forecasts for India.
For 2023.
Sure.
Way below where you were and where demand was in 2019 2020.
Why is that is that a function of <unk>.
Hello risks in Russia in shipments or is it something else.
And then in your AG solutions business.
What is it that you can do about these inflationary costs that are eating away at your margins.
Good. Thank you for the questions, Jeff and so we'll start with Jason Newton.
On.
And what we're forecasting for India as it relates to potash volume and then over to Jeff <unk>.
The discussion of those.
Sherri pressures in our retail business.
Yeah, Good morning, Jeff the major challenge with India.
<unk>.
The regulatory control within the domestic market and.
The profitability from both an importer standpoint, given where the nutrient based subsidy has been relative to the.
Domestic maximum retail price. In addition to the fact that maximum retail prices have increased year over year, which has had a negative impact on core demand and so the the policy environment within India. When we're in a high global pricing environment makes.
Important portability and grower economics that challenge.
It's why we've seen that demand weaken in 2022, and and we would expect it to grow in 2023, but still remain well below as you said, where it was back in 2020.
And from an agronomic perspective.
Optimal rates would be.
Probably two to three times, what they were this year and so in a in a different policy environment, we'd expect.
Strong growth in.
In that market.
And second part of that as it relates to inflation, obviously, we see inflation like any industry from that standpoint, but I also think if you look through the third quarter and what we've done from a cash operating coverage ratio. We can improved 55 from 59. So we're always focused on that.
Side of our business.
Obviously fuel is up this year and we were very strategic in moving our application rates up or the rates that we charge to apply chemistry and.
And nutrients as we go into that market and I think we've done a fair job of trying to keep up with that as it goes forward.
Our margin structure, whether it's rail crop protection seed fertilizer was very attractive this year I think our margins, you'll see we're up 60 basis points the third quarter.
Crop protection chemistry margins were up roughly 300 basis points from that standpoint. So we've worked hard to try to pass some of the costs through <unk>.
On that side of it and I think our results show today that we've done.
We've done a pretty good job of that but we will constantly stay we're constantly staying.
Tuned to that obviously people are big cost in our business to date.
We're constantly scrubbing that side of the business to control expenses no matter, what the environment that we're in.
Your next question comes from P. J <unk> from Citi. Please go ahead.
Yes, hi, good morning, a question on seeds.
But what are your expectations on seed pricing based on the price cards that have been put out earlier this year.
And then what does the market share of diner growth.
And then one.
A large U S based feed a company has been saying that they have been gaining share for <unk>.
Seeds in the retail channel I was wondering if you had any comments on that.
Great. Thank you P. J I'll pass it over to Jeff Turkey seed is always a competitive arena, we've just kicked off our 23.
<unk> selling season, we start at kind of as we go into the third quarter and through the fourth quarter on it if I look at it from a price book standpoint, I would probably characterize it characterize it as prices will be up for mid to upper single digits.
For the 23 season, those price books are out in the.
Just kind of go into lay somewhere in that range.
Say from a five to an 8% price increase depending on depending on the supplier and the and the hybrid is associated with look our market share in seed this year across everything was up 20 basis points.
And look I'm pleased with that because from our standpoint, we had a couple of areas that were hit with some really tough weather, where we have a substantial share of seed business, particularly the Texas market and.
As it relates to and we hedge we had crop shift as well.
Corn back to soybeans in some areas again, where we have a very large market share.
From a data grow perspective, we had a.
We had a really good year.
We saw significant <unk>.
Share increases on cotton rice and soybean for the 'twenty two season, so our down to grow.
Brand remains very strong as well as a proven brand in Kent in Canada associated with canola.
Your next question comes from Steve Hansen with Raymond James. Please go ahead.
Yes, good morning, just sticking to the potash theme.
I can respect the decision to hold the line on the expansion strategy given the backdrop, you've described but can you just remind us how the incremental capital outlays will place down here as we contemplate that.
Millions of tonnes a year effectively over the next three years or are you, making those investments predominantly upfront today for all 3 billion tonnes or will it come in incremental chunks as those capacity.
Conscious come through.
Yes, no great question, Steve Thank you for that.
It's a little bit of boats were ordering so long lead line items, but then stadion capital as well, but I'll pass it over to Chris Reynolds, our president of potash.
Yes, good morning, Steve Thanks for the question and yes, we are looking to stage that capital.
To date, we've committed about $200 million of.
Of that $590 million.
Investment to reach.
18 million tons of productive capacity.
By 2025, and so yes, it's going to be staged but as Ken said, we have.
A lot of that 200 million with committed already as to long lead items.
And as you can imagine getting all placed in Q with certain shops to make sure. We can secure that equipment, given some supply chain challenges, which actually remarkably haven't been too bad to date. So we still feel very good about this investment as Ken and Pedro Ive mentioned, we take a long term view when making these.
<unk> investments and despite the pause in demand we saw in Q3 believe strongly that the market in the world is going to need that incremental volume and really making these investments allows nutrient and the opportunity to be in a position to meet that demand going forward. So again temporary pause in demand we saw.
During Q3, not derailing our conviction around this investment.
Your next question comes from Adam Samuelson with Goldman Sachs. Please go ahead.
Yes. Thank you good morning, everyone, maybe continuing in potash.
Alright, it's really two parts one wanted to just get.
Your sense on inventories and in Southeast Asia.
Talking about India, being kind of being pretty dry on the inventory side, but they're also discussions about cutting subsidies. So just how how do we get to up imports.
Next year, if the affordability is going to get potentially worse.
And then I wanted to just think about the name of the connection between the wholesale and potash business and retail and just if we kind of reflect on how this year has progressed where.
It would seem like there might have been different differing singles in terms of how the retail business was asking in terms of positioning its own inventory and buying versus how the wholesale business was approaching the domestic market and just how do we.
What lessons are there to be gleaned from that as you've kind of reflected internally on where the forecasting this year was off internally.
Great well, we will start with thank you for the question Adam we'll start with Jason I'll, just Doug inventories in Southeast Asia, and then we'll move over to Jeff Tarr seed just talk about again, what we're seeing in retail and how it relates to our wholesale business.
Yes, good morning, Adam.
We don't have great.
Data in terms of the absolute number volume of inventories in southeast Asia, but we do know that they drew down on inventories to start the calendar year, which is one of the reasons why.
Shipments to that region are down.
Notice that market has lagged the rest of the world and the demand has remained relatively firm in the second half and as we look toward 2023, we are seeing.
Palm oil prices come back up in the veg oil market has certainly strengthened which improves the <unk>.
Economic outlook in that region, and we would expect just given the shipments.
Where we see consumption of that region.
<unk>.
Inventories will be down year over year and just to.
Reiterate what we've talked about already with India.
The inventories there are at.
Extremely low.
A levels and so while we don't see a huge increase in consumption.
Just if I could inventories are so low.
Supportive of an increase in shipments that region in 2023.
Yes, I'll add on the from the retail perspective of it and again I don't want to sound like a broken record, but we got into the spring and obviously nobody can predict late compressed spring and so we saw growers.
Ian.
More incentivized won't put planner and for some of you because of the two big falls that they had that they had some product they can mine out of the soul.
And.
And then a lot of people will work in hand to mouth from that standpoint.
Look we've seen we've seen this thing back re engages the bulk is coming in and.
We started this season, we were three weeks.
And remember here, we started the year about three weeks behind from a property standpoint.
And the way the fall ended up in the summer and it came in to fall with a lot of hot dry weather, there's crop progress really fast and so now if you look at where we are on harvest.
Back ahead of the five year average and I would have thought.
We've been a bit by an earlier in the year I wouldn't bet on that and so because of that we've got a really really good open market for the fall and we've talked a lot about PK, but we've got a really high demand right now for for nitrogen as well are in age three book in Canada has been.
It's been extremely strong and our book for the U S market is extremely strong as well and so as long as as far as opening now I fully expect a lot of product to hit the ground between now and the end of the year.
There are no further questions at this time, Mr. Hoffman I turn the call.
Back over to you.
Thank you for joining us today Investor Relations team is available for any follow up calls have a good day.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
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