Q1 2023 Nutrien Ltd Earnings Call
Greetings and welcome to the <unk> 2023 first quarter earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
A reminder, this conference is being recorded.
I would now like to turn the conference over to Jeff Holzman VP of Investor Relations.
Thank you operator, good morning, and welcome to nutrients 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.
Now I'll turn the call over to Ken Seitz, President and CEO and Pedro our CFO for opening comments before we take your questions.
Okay.
Good morning.
Thank you for joining us today.
<unk> 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.
<unk> 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.
Nutrient AG solutions results were impacted by delayed to grow our purchases and to lower margin as compared to the exceptionally strong period in 2022.
Retail fertilizer prices decline in the quarter, albeit at a slower pace than wholesale benchmark prices and margins were below normalized levels as we work 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 on grower and later grower engagement compared to the previous year.
This resulted in a temporary buildup crop protection inventory, but this product is moving through the channel in the second quarter as field work 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 for 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 winter fill program in North America. However, our volumes were down from the prior year as customers purchased on adjusting time basis.
Canpotex sold record volumes to Brazil, driven by strong demand for the Supreme you're 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 continue 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 activity activities preserving the flexibility to quickly ramp up production when stronger demand re emerge as.
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 cost in comparison to other global producers.
Trinidad was impacted by a 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 a significant external interest regarding co investment or.
Or potential equity partnerships in the project with.
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 crop 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. In particular for potash in 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 a 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 nutrients. It also represents a relatively small percentage of our total sales as we have shifted more volume to higher netback markets.
On the supply side, Belarus has gradually increased potash exports to reports and Russia, partially offset by a lower Russian production 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 to 67 million tonnes, which is well below the estimated trend demand if 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.
Thanks, Ken good morning.
Our revised full year guidance reflects changes in fertilizer benchmark prices since mid February and our expectation of a more stable market going forward.
In retail our initial guidance assume a reset and 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 dropped below normalized levels as we worked down higher cost inventory.
We expect to add this 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 remained firm.
The 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 at $13 five to $14 3 million tons due to the delayed contract settlements and slightly higher export volumes from eastern Europe .
We have adjusted our production plans accordingly, and we will maintain a flexible approach to our potash ramp up pacing the timing of capital expenditures for 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 season reset for urea and <unk> prices following spring.
We are assuming U S natural gas prices will average around $3 per btu in 2023, and western Canadian gas below that level continuing to position our nitrogen nitrogen assets at the low end of the global cost curve.
Cash from operating activities is projected at five 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 large increase.
The release of working capital with the reset in fertilizer prices and 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 sustainability sustainability and growth of the business and providing meaningful return to shareholders.
While our cash flow will allow 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 investments through the cycle.
We allocated $900 million of share repurchases in the first quarter and intend to remain opportunistic taking advantage of our existing and CIB.
We announced a 10% increase in our dividend per share in February that aligned to the significant reduction in share count over the previous 12 months.
Since 2018, we have reduced our outstanding share count by 23% and increase the dividend per share by 33% demonstrating our commitment to capital returns through the cycle.
I will now pass it back to Ken.
Thanks, Pedro and I would just make a few final comments.
The fundamentals for our business remains strong we.
We anticipate increased fertilizer demand in the second half of 2023 and supply issues that emerged in 2022 have yet to be a result.
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 we 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.
Thank you, ladies and gentlemen, we will now conduct the question and answer session. If you have a question. Please press star followed by the number one on your Touchtone phone.
We'll hear I want on prompt acknowledging your request.
Your first question comes from the line of Ben Isaacson from Scotiabank. Your line is now open.
Thank you very much and good morning, everyone.
Just on potash.
Talk about just in time buying southeast Asia is destocking can you or Jason or Chris remind us of.
When are the key buying times in each of the main regions and Howard 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 box and now it's about 60 Bucks has that changed your philosophy in terms of how aggressive youll be.
When it comes to buybacks. Thank you.
Yes, good morning, Dan and thank you for the question and yes, absolutely we can sort of walk market by market on potash as we've done in the past.
So maybe I'll hand that over to Mark.
Augmented by Jason and then on the share buyback question I'll hand, it over to Pedro So thanks, Ben Yes.
Morning, Dan.
This is mark so maybe I'll, just do a bit of a fly over on some of the key markets and then I'll pass it to Jason to talk about specific timing of application seasons.
Yes, I think.
As Ken said in his comments, there's really three key themes here are we seeing potash globally I think.
There remains a supply constrained market and.
Really what we see relative to our expectations in February .
1 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 really the biggest things that we see is that north American production is becoming more important and a bigger proportion of buying in markets like North America, Brazil.
And southeast Asia.
Former Soviet Union production is disproportionally moving into China, and then third.
Production out of allowances increasingly finding markets in China and southeast Asia. So I think those are the three biggest factors as it relates to the structural shifts there.
As Ken mentioned, we do see demand recovering in the second half and certainly do see long term trend demand in tax 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.
This year recovery, there and we do expect a rebound for the remainder of the year and buying to accelerate to meet their seasonal needs as we go through the second quarter and into the second half.
In India standpoint, obviously, those contracts signed with major producers and suppliers recently.
One of the big items that we're waiting for there while we have seen some products start to move.
Subsidy announcement from India right.
Right now we would probably be historic relates to that announcement. So we expect that at any time and we would anticipate that when that's announced we'll see further momentum product in India from a southeast Asia standpoint, we have seen some volume move into southeast Asia, We've seen inventories that were higher costs in 2022 continued.
To be worked down we did see some re engagement and buying following.
In contrast inventories are normalizing and we are starting to see fresh purchases and again, we would expect those to accelerate through the second quarter and into the second half and then I think finally on China from an inventory standpoint today, we would see port inventories in China between two.
And three and $2 5 million tonnes.
Probably about five to 600000 tons of that is sitting in bonded warehouses today and certainly we have seen that inventory be a little bit stickier because of the trade flow shifts that we've seen but as Ken said I think what we've seen over the past 12 months certainly from a China perspective is that while the contract markets have historically.
<unk> been bench.
Benchmarks are events that the global markets look to in a year like 2023 with these trade flow shifts we think China's.
Seaborne imports are only going to represent about 5% of global shipments and so we expect that this is going to be a trend that these contracts will be up less significance to the global market over time and really a smaller part of the picture.
So finally in North America, as we've talked about because of the lack of the field activity in Q1, we had.
Really slow Q1, but really in April things have picked up substantially I was just in the field last week with our team and as Ken said products moving extremely well we saw one of the biggest drawdowns in the last five years month over month between March and April and our customer owned inventories and certainly saw in.
Land production.
Potash moving very well at our distribution terminals. So I think from a timing perspective, I'll, just let Jason talk about some of the specifics on that.
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, Malaysia, where theres along.
Lead time between purchases and applications and that's part of the reason why the high priced inventories are holding up there. So there is.
Large volumes purchased.
Early 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.
In late Q1, and those inventories move lower through the <unk>.
Second quarter of the year and in <unk>.
Southeast Asia and Brazil.
In terms of the timing just did see unusually strong imports of of potash in Brazil in the second quarter of last year, which really led to a buildup in inventories in that market in front of Q3, and we would expect more normal levels of imports into Q2 and the seasonally normal.
Volume of imports coming in late Q2 early Q3 in front of the applications for their spring season in September .
And maybe just.
Just to address your last question about the buybacks. So we intend to remain opportunistic in the market.
As we mentioned before we already since Mou bought.
23% of our share count we.
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 compare.
In 2021, when our EBITDA was seven 7%.
<unk>.
Our free cash flow per share was $3 $4 per share.
If we jump now to kind of a similar year Im excluding 2022 because of course as like an anomalous year in 'twenty to 'twenty three we have a kind of a midpoint of our guidance of about seven three.
Our free cash flow per shares $4 seven so thats say almost.
40% increase in our free cash flow per share. So we think that strategy is paying off we intend to use the balance sheet.
We see value, we'll be opportunistic about it.
Your next question comes from the line of Jacob bout from CIBC. Your line is now open.
Good morning.
My question is on normalized EBITDA, and how you're thinking about that.
If we go back to your Investor Day last year, you kind of walk through the case of mid cycle EBITDA of around $9 billion.
Do you still think this is realistic I know youre, making some commentary about mid cycle prices for the remainder of the year.
But the midpoint of 23 guidance is well below that nine times, just any commentary there would be helpful.
Yes, good morning, Jacob and thank you for the question yes.
We would say is yes, we do and there's a few reasons for that if we look at the assumptions when we talk about.
Mid cycle EBITDA of 9 billion its really predicated on the structural shift that we've seen in energy agriculture, and crop nutrient markets and really lending to what we see is a strip going forward thats about $50 more across crop nutrients than we than we had assumed prior to this conflict in east.
In Europe .
It also assumes additional volumes and so theres a timing effect here, obviously as we look at wrapping up potash volumes over time and as we talk about our brownfield investments in our nitrogen fleet and also clean ammonia project, which is also going to bring volume and then 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 that we saw in crop nutrient markets in the first quarter that reset is bigger than we had anticipated thats reflected in our results.
When we think about normalized EBITDA ranges that are our retail business. It too contributes to that 9 billion mid cycle. So if we walk across those assumptions. There is a timing effect here, but we believe that those assumptions remain intact.
Okay.
Your next.
<unk> comes from the line of Joel Jackson from BMO capital markets. Your line is now open.
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. The best Q2 to Q4 in aggregate that <unk> ever had at 11 million tons can you do that in a year without meaningful seaborne Chinese volumes and what do you assume.
The midpoint of that for Chinese seaborne volumes and then just back on the buyback.
If you look at on slide the slide now, but where you show your operating cash flow like it looks like youre, suggesting there is really no more room for any additional repurchases this year.
<unk>.
At the midpoint.
Right. So as it relates to our plan for potash this year and the shifting trade patterns that Mark described earlier and how we are navigating that I will pass it back to Mark and then as it relates to as it relates to what we might do this year with share buybacks.
I'll ask Pedro.
Good morning, Joel So just to reiterate a couple of <unk>.
Comments I made earlier and then Ken space, we do see the shifting trade flow is playing a role here, but nonetheless.
Even at 5% of global segments, China is likely going to need.
5 million tons or give or take a half a million tons on either side of that in seaborne imports that are going to have to be met and.
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.
Third volumes that we've seen in Q1 from Canpotex into Brazil, and the fact that we are seeing Canadian production become far more important and some of these other key markets, including Brazil, and southeast Asia. So when we consider the fact that we do believe China is 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 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.
That we can get to a place that means the shipment numbers that we've talked about and certainly in working with Canpotex. We also believe that we've got supply chain can deliberate and our production planning and Christmas business unit that can also get us there as well.
Okay. So just on the buybacks I think we are not certain scribing ourselves to the fiscal year here kind of have said before we do have a strong <unk>.
Balance sheet, we are obviously.
Im going to be monitoring the business, but if we do see value and we see the direction of travel being as we expect we are intending to be opportunistic in the market and use the flexibility we have.
Two two to capture that value.
Okay.
Your next question comes from the line of Adam Samuelson from Goldman Sachs. Your line is now open.
Yes. Thank you good morning, everyone.
Maybe continuing on potash I mean, if I look at the your own shipment guidance for 2023 kind of volumes up about $1 million to $1 8 million tonnes.
Can you break out kind of the incremental of that day.
Domestic <unk>.
Versus versus offshore I would presume that at least 1 million of that was.
Implied domestic.
Over the balance of the year and if that's the case that would get your North America business back.
Back pretty close to historical norms.
Versus history, which would mean that you would need to see a disproportionate kind of offshore growth in 'twenty four and beyond really.
B the be the outlet for the your incremental.
For incremental production tonnes and I'm, just trying to get a sense of your confidence in that view and kind of where.
Do you think the market share gains from Canpotex can be it can be durable, especially with China.
More tons out.
Out of the former Soviet Union and Laos.
Yeah, Good morning, Adam and thank you for the question, yes. So I would just a few comments and maybe pass it over to Mark <unk>.
2021, we saw potash demand shipments on the planet of about 70 million tonnes, and we saw that dropped to 61 million tons last year and now seeing rebound, we expect to <unk> 63 to 67 million tons, and we're maintaining that range, albeit a supply constrained environment and importantly, this is a market that's growing.
We are we've seen two 8% compound annual growth rates.
In the potash market has for the last 20 years.
We expect that continue to grow for all the reasons that we 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 and when we talked about 61 million tons in North American market was down significantly and that was owing to the late spring weather last year and here. We are this year and while we have seen.
<unk>.
Some incredible volatility in 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 inventories are being drawn down and as I said in the opening remarks, we've seen a 40% increase.
<unk> in Q2 volumes quarter to date over over last year. So yes, as we look at where the volumes are going it is tilted to North America, maybe Mark do you want to provide some detail around around those numbers.
Yes, Thanks, Ken Good morning, Adam So yeah, maybe just to start with North America and again, the assumptions that are laid out in our.
Mr package for the call, but we do expect North America to be back to a relatively historical level of shipments. This year. So we are estimating nine five to $10 5 million tonnes of shipments in North America. So 2022 is certainly an anomalous year with what we saw in terms of inventory stocking we drawdown.
The return to normalcy us back at more normal levels in North America with.
Shipments somewhere between four and a half and five nine times. So the split we would see between domestic and international is much more difficult for us in sort of that one third roughly domestic and two thirds internationally moving through canpotex.
And then just on your second question about where that growth is going to come from EMEA as Ken talked about.
The last few years have been certainly a major shock to the market supply coming out and what we've seen from a pricing and inventory perspective, but we certainly believe that the long term demand trend is intact in these markets.
Certainly we expect to see a rebound as I've talked about already in markets like Brazil, and southeast Asia, where Canpotex and Canadian production has become increasingly important from a share perspective.
So the growth in those markets over time, certainly can sustain the volume growth in our business from our perspective, and there's other markets that have become opportunities for canpotex. In this environment I think a great example of that is a destination like Bangladesh, where we're expecting to ship over half a million tons through canpotex this year, which really provides incremental opportunity.
So notwithstanding the incremental production from the former Soviet Union SaaS, finding its way into China, we do see growth in a number of our important markets.
Okay.
Your next question comes from the line of Vincent Andrews from Morgan Stanley . Your line is now open.
Hi, guys. This is will hang on for Vincent Thanks for taking my question.
You mentioned, Belarus being more active in Russia being less active in the export market than what you had previously expected.
Can you mentioned can you talk about whether this changes how quickly you think salaries 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 as an exporting as much that would be helpful as well.
So yes, we had started the year with a set of assumptions or beliefs about shipments out of that region. It was really following last year, where we saw substantive volumes, though to Belarus, and Russia shut in.
With the effect of sanctions and to your question well.
Belarus, and really difficulty getting access to tidewater for seaborne exports and some of the logistical challenges with rare, albeit.
As Mark mentioned earlier, we are seeing those movements increase or have seen them increase out of Belarus to China. So there is a bit of an outlet there. So when we started the year, we thought that we.
We said the Russian volumes, we thought it would be down 15% to 30%.
And then belorussian 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 that we say, we think Belo restaurant volumes will be more like 25% to 40% and Russian volumes more like.
25% to 35%, but importantly, if we look at just supply out of the region. While it is closer than maybe even a little bit above the top end of what we had assumed for exports out of the region still 30% down from 2021 level, so that equates to about 9 million tons. So.
Yes.
There is movement among those numbers.
Well the reality is there's still a lot of volume thats not getting out of the country what would it take I mean, 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.
It seems to be displacing Russian volumes side of those sports and then finally one of the other outlets is of course, we're able to China. We've talked about that I think for Belarus to probably continue to increase volumes I assume there'll be maximizing those rail volumes, but at the same time, what we would we believe need to see is new port capacity that we're taking.
Volumes from the region, new port capacity on the Russian Coast and of course, we've talked about that's going to take a bit of time. So that we believe exports out of the region will continue to be challenged.
Your next question comes from the line of Steve Byrne from Bank of America. Your line is now open.
Yes. Thank you.
A couple of years ago, Ken if you had thought that they would.
9 million ton shortage, Sean of the former Soviet Union of potash, maybe net 5 million ton.
With some increases elsewhere.
Would you have predicted a.
$378 realized price for your offshore business is that does that seem fair to you.
On a going forward basis.
Maybe the math has got a few strange items in there, but it seems lower than what we were expecting for the quarter.
And then maybe another potash question on your on your domestic side.
The surge of sales through customer owned.
No warehouses.
That's your products and your customers' warehouse.
How is the price set there when that customer decides to pay you and do you have.
Negotiating or pricing power given what.
It seems like a tightening market in the U S. When your product is in there in their warehouse.
Good morning, Steve and thank you for the question so I'll start with.
These challenges on the supply side of the equation for <unk>, but as you put it some anomalous effects that are leading to what we are experiencing is 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.
Seeing.
But thats just one of the anomalous observations if you look at if 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 that created for some of the big potash importers in users and the inventory that the rush to get hands on inventory and the inventory build that took place and obviously, despite the price spike that followed that.
We saw that inventory build and there were some weather related effects. There so that when we headed into the fall.
They are.
The World started on a large inventory drawdown watching prices softened and that inventory drawdown and one of the most dramatic again that we've ever seen carried through the first quarter of this year as <unk>.
As farmers as growers and we saw that certainly in our North American markets exercise really cautious buying behavior, we talked about it just in time buying and really only stepping into the market now when they absolutely have to as all of these big volumes go to ground and so cautious buying me sorry.
Wanting to shore up inventory with supply concerns in 2022 movements in price and then inventory drawdown coming into 2023 and the associated movement in price and here. We are the backdrop for AG fundamentals remains strong grower affordability is good given the reduction in crop nutrient prices.
And so here, we are with inventories clearing and prices stabilizing and volumes moving so Steve how this all translates into price and market volatility. What we would say is that we've now approach 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 <unk>.
Once of the year as it relates to the supply shortages were watching that incredibly closely.
And it has impacted how we think about increasing our own volumes. It will continue to do that as we seek to meet the needs of our own customers, but yes. There is some of the supply challenges remain and we will see how that plays out over the balance of the year.
Maybe mark if you want to provide some some thoughts on pricing with our customers in the domestic market share.
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 I think the best film that most ideally positioned in the most robust.
Distribution network in North America for potash in the majority of those assets are owned assets as I mentioned I was just out at our Hammond, Indiana terminal last week, which added about 80000 tons of storage and so our primary.
Mechanism for moving products into the North American market through our own warehouse and distribution system.
From an efficiency perspective, we do have agreements with some customers nutrient AG solutions is one of those customers as well as our other major customers and Thats really efficiency from a logistics standpoint, so that we're not spending on unnecessarily unnecessary dollar where they're not needed on distribution infrastructure and taking advantage of the assets that exist in <unk>.
And from a pricing standpoint, actually things had been relatively straightforward as we've talked about.
The commentary today.
We saw product moved very quickly in a lot of hand to mouth buying so what was being sold was largely going directly to ground and moving through the channel quite quickly and what we found from a commercial perspective generally is that as we've seen the supply demand shortages emerge at inland distribution points, we've been tracking those prices higher.
As they emerge throughout the spring season.
Your next question comes from the line of Christopher Parkinson from Mizuho. Your line is now open.
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 youre exposures in other markets Southeast Asia, Brazil from a spot perspective.
Our continuously growing and it seems like there is.
<unk> the fluidity of the marketplace.
In terms of.
And thinking about the last several decades versus the future.
Can you just walk us through the kind of what you see as the merit of the current market dynamics. Thank you.
Yes, Thanks, Chris and I would say that as we look at our portfolio sales over 40 countries around the world.
Importantly, agriculture markets that we see growing and what are they I mean, we've talked about Brazil, but it's certainly India. It certainly southeast Asia, and it's certainly China and.
Right now the Canadian potash as an important supplier into all of these regions. We have worked hard in these regions to establish a really really enviable customer base. So we worked hard over the last 40 years to do that so we have had success in these growing markets of China, India Southeast Asia.
Of course, Brazil, when we talk about offshore markets and that we continue to believe that these will that customer base will be important to us as we as we grow our volumes.
Your next question comes from the line of Joshua Spector from UBS. Your line is now open.
Hi, Good morning. This is Lucas Beaumont on for Josh I, just wanted to follow up on the.
Mid cycle expectations that youre, saying pricing is basically now baked into the updated guidance. So could you just clarify for us exactly what youre expectations are.
They're directly or is that range in terms of pricing for potash ammonia urea phosphates and your energy cost assumptions. Thanks.
Yes, we can provide those.
Some ranges.
Lucas, Yes ill hand, it over to Mark to talk about those specifics.
Yes, Lucas so.
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 that we'd expected from all of the factors.
Today, our expectation was that generally on average across the fertilizer price complex.
That we would see prices shift by about $50 across all of the nutrients.
Probably specifics in every product line is beyond the scope of today's discussion, but I think what we're seeing generally is that as prices are stabilizing.
As Kevin talked about and that process continues for both nitrogen and potash domestically and internationally.
Currently prices are setting give or take probably within 12% to $30.
Those assumptions that 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 inherent in our guidance as Pedro on Ken I have described and we also think that's a good way to think about the business on a run rate going forward in terms of where we will see mid cycle prices in the future.
Sure.
Your next question comes from the line of Andrew Wong from RBC Capital markets. Your line is now open.
Hey, good morning.
With pricing now near what you would consider as mid cycle levels.
There being 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 in.
Maybe would it makes sense to use some of that capital. If you do delay some of those plans for buybacks given where shares are today.
Yes, good morning, Andrew and thank you.
The short answer to your question is yes, we would yes, we would consider.
Moving down.
We're really as we talked about earlier this year watching the market, we we did delay.
Our ramp up we talked about that earlier this year, 25% to 26 8 million tonnes and importantly, just continuing to watch the market.
<unk>.
And the supply and demand dynamics reality is again that we are in a market that's growing.
And we believe that thats going to carry on for the absolute foreseeable future, it's sort of two 5% to 3%.
Annual growth rates.
And that supply is going to be new supply is going to be required to meet the growing demand. If we look at the supply side challenge that challenges that continue to persist and while yes, we have seen some additional volume get out of Russia and Belarus. The reality is again, 30% down from 2021 levels. I mean these are big numbers.
1 million tons, and we're watching how those those tons find their way back into the market and the pace at which they will do that talking to our customers on a daily basis about what their needs are in this environment and then planning our capital accordingly, as it relates to ramping up at Ash.
These investments are really quite granular dozens of projects across four mines. We have made some investments that are going to 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 'twenty, one and 2022 and the value associated with preserving.
Some additional capacity, but when we're doing that math, yes, Andrew the short answer to your question is.
We see that the market is not there then we will pace our capital accordingly.
Yes, we'll certainly as Pedro mentioned always look opportunistically at buying back our own shares.
Your next question comes from the line of the chart Hernandez from Wells Fargo. Your line is now open.
Great. Thanks.
Just wanted to ask a question on cash costs. So we saw an uptick in the first quarter across potash and nitrogen I think petro talked about bringing some maintenance forward in the quarters. So maybe you can talk about how much of that increase in cost.
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 you could talk about sort of maybe trends.
On the cash costs in nitrogen side as well thank you.
Yes, absolutely Richard and thank you for the question, Yes, there is a number of moving parts there as it relates.
Natural gas costs in.
In nitrogen, where obviously automating our mines.
Starting to enjoy some of the benefits of those investments in potash.
The biggest one probably you can talk about is volume and the volume impacts on cash costs in the quarter, but I'll hand, it over to Chris Reynolds to talk about our president of our potash business in to talk about cash costs of potash and then over to Trevor Trevor Williams, our president of nitrogen and phosphates talk about nitrogen.
Yes, good morning, Richard Thanks for the thanks for the question. So as we look at the full year.
Controllable cost of product manufactured in potash, we expect that to be fairly similar in fact to what we saw in 2022 now yet in Q1.
Pedro mentioned, we did have some increased maintenance we pulled forward.
Forward to be ready for the surge in demand we're expecting in the in the second half, but as we look at that controllable.
Controllable costs still amongst the lowest cost in North America, and certainly one of the lowest cross costs across the across the industry. So we're still feeling good about that position today.
Thank you Richard and very similar on the nitrogen side, our volumes are down a little bit primarily driven from the churn out side. We did have some increased maintenance cost.
As we had a few reliability issues, but really because we've had some reduced volumes because of the curtailments, but really as we look towards the remainder of the fleet. The majority of the fleet, we look to get back towards what we would expect in terms of our cash cost for 2023.
Your next question comes from the line of Ben fiber from Barclays. Your line is now open.
Thank you very much good morning, just wanted to go back a little bit on the supply demand.
Obviously, you've shown us in Mcgrath <unk> highlight the growth potential over the last couple of years and how you expect this to kind of come back but.
As it seems in the first quarter demand was clearly softer than what you anticipated and I think you've talked about it.
Year over year improvement of like 40%, but maybe help us understand put that in our first half context versus first half 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're seeing.
It should be and what the mismatches that would be my first question I have a quick follow up after that.
Alright.
Thank you for the question Ben Yes, I think what we would say.
For the first quarter was not necessarily.
<unk> was down but that inventories are being drawn down.
And this just in time buying behavior. So that we when we look on an annual basis for potash. We continue to say 63 to 67 million tonnes. We haven't changed those numbers continues to be a supply constrained market continues to be the backdrop of growing demand.
Over time, but Jason Newton, our chief economist hand, it over to you maybe to talk about some of those details.
Sure Good morning, Ben.
If we look globally.
So I guess just.
Ken mentioned at the start we maintained our 63% to 67 million tonne shipment range for the year.
And as we look around the various markets is a bit of a split between standard grade and granular markets and that we have seen really strong.
Demand in Brazil, and strong shipments in North America as well from a.
Granular perspective, but we know the contracts were delayed and particularly China is delayed.
In terms of contracts, which has an impact.
On our sales but.
We have seen strong shipments going into those markets.
Rail from.
Russia, Belarus, and so as we look through the various markets. There is a few minor shifts market to market.
But overall demand has been pretty much as expected and I'd say.
Even probably closer to the higher end and some of the <unk>.
Daniel Great markets.
Your next question comes from the line of Martin throughout the year from <unk> investment Research. Your line is now open.
Thank you.
Yes.
I hear all about this shortage that is in.
In the supply chain.
In North America.
I was wondering what is the effective price how you're seeing the prices increase now.
Because there are no inventory and people have to buy right away.
Yes.
Yes, the short answer Martina is yes, we are seeing.
Some of those impacts on price, maybe I'll, just turn it over to Jeff to talk about some of those observations that we're seeing certainly in our retail business through the channel on that over to Mark to talk about the impact on crop nutrient pricing.
Ken Thanks, and good morning, Marc.
I think we have seen is key and spoke to.
If I look at the first quarter.
We were basically 6% all from volume for the quarter and so very steady from that standpoint, we have seen a surge in the second quarter.
Volume across our FERC <unk> portfolio and <unk>.
<unk> again, I think it speaks from a nutrient AG solutions perspective, which speaks to our supply chain and investments we've made across our supply chain in order to get product moved a lot of cases on a 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 bar.
<unk> stabilized normalized as we've gotten into the quarter as well and.
Look.
We spoke to earlier in the year, what our solo testing was alluding to and that there were some deficiencies and about 40% of our test round P and K and we certainly see our growers responding to date to that our rates are good and so the demand has been exceptionally strong into the second quarter, we expect that.
We're working.
We're working hand to mouth and some of those situations to date from an inventory perspective, Mark I might pass it over to you as well.
Sure. Thanks, Jeff.
Morning, So as Jeff said.
Seeing things move very quickly right now and after our first quarter were <unk>.
We've mentioned that was relatively low field activity in North America due to weather in the just in time buying we really have seen kick off at a frantic pace as planting activity started in April and so again just to look at benchmark prices that are published as an example, if we look back to some of the lower values. We saw in Q1.
$370 per ton range at NOLA for potash, we've seen firming of approximately $40 and seeing really good uptake at those values and if we look at inland terminals or inland distribution point. It really has been challenged logistically by the just in time purchasing behavior, we've seen values increase in excess of that and then.
Some cases substantially and I think when we go back to talking about the North American agricultural supply chain one of the things that we've talked about in February with that if we were to see this just in time purchasing behavior persist that because of the significant need for crop nutrients and how fast.
Crop can get flat that we would expect to see some logistical premiums emerge because of the supply chain correction. So I think we have seen that and certainly have seen.
Cash prices firm in season.
Sought to sell into that strength to the extent possible and support our customers and I think again. This is something that whether it's in the nutrient AG solutions business as Jeff talked about are in the SDK distribution assets that we have does set us apart and really we've been responding quickly to meet those needs and capture those higher price premia in our markets.
Your next question comes from the line of Ed leans or <unk> from Credit Suisse. Your line is now open.
Thank you good morning, everyone. A quick question on what prices they have come down a little bit and as a result, no plumbers and companies will likely be down.
I understand the questions are still higher than historical averages, but do you think the lower oil prices could have an impact on farmers psychology and willingness to pay higher prices.
Yes. Thanks for the question and then maybe I'll pass it over to Jeff Tarr. So you just talked about.
Psychology, among among farmers I think the reality is that given when the way crop nutrient.
<unk> have softened relative to what we're seeing.
With AG commodities and again, the likes of corn soybean wheat still 15% above the 10 year average that we are seeing strong application rates.
Domestically in.
In the planting season here, but Jeff over to you Kent.
Thanks in 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 the year last year. So you saw probably more forward contracting going in across the commodity pricing, but as we sit here to date again, we see growers using the best hybrids. The best trade packages again, we talked about our fertility rates up in the second quarter up.
<unk>, 40% right now year over year and.
We anticipate that Dario 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 to date and so these growers are making their decisions based off of what these crops need to maximize yields going forward and that's their best chance to optimize all flash so we see I.
I think we will see continued strong input demand as we go through the rest of the spring and into the summer.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.