Q2 2023 Nutrien Ltd Earnings Call
We will follow after the formal presentation. As a reminder, this conference call is being recorded I would now like turn the conference over to Jeff Holzman, Vice President of Investor Relations. Please go ahead.
Thank you operator, good morning, and welcome to nutrient second quarter 2023 earnings 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.
<unk> from those contained in our forward looking information additional information about these factors and assumptions are contained in our quarterly report to shareholders as well as our most recent annual report MD&A and annual information form filed with Canadian and U S Securities commissions.
I will now turn the call over to Ken Seitz, President and CEO and Pedro our CFO for opening comments before we take your questions.
Good morning, Thank you for joining us today as we review our Q2 results and the outlook for our business.
Fertilizer industry has gone through a period of unprecedented volatility over the past 18 months driven by a series of unique events.
However, we are encouraged by the continued improvement in demand as the year has progressed.
This is most evident in North America, where we had a strong spring season.
Relative fertilizer price stability and a significant reduction in channel inventories.
The positive sentiment has carried into the second half with solid customer engagement on all fertilizer products.
The process has been slower in certain offshore fertilizer markets with a lack of consistent buying but we believe the most significant period of volatility is now behind us.
Moving forward, we know there will be fluctuations in the market and requiring nutrient to maintain a flexible approach and focus on controlling what we can control.
The strategic actions, we announced yesterday reflect our commitment to disciplined capital allocation and our focus on initiatives that enhance free cash flow through the cycle.
Before I speak more about the outlook and specific actions, we are taking I'll turn it over to Pedro to review our Q2 results.
Thanks, Ken.
Our second quarter performance illustrated the contrast between how the market has progressed in North America compared to certain offshore markets.
Neutral and delivered adjusted EBITDA of $2 5 billion in the second quarter and $3 9 billion through the first half of the year.
This represented the second highest earnings total for both respective periods, but it was down significantly from the record prior year due to lower fertilizer prices.
Offshore potash sales volumes and retail margins.
Nutrient AG solutions results in the quarter was supported by strong grower demand in North America, and the relative stability of our business in Australia.
North America retail crop nutrient margins largely normalize as higher cost inventory moves through the channel.
Sales volumes were up 16% compared to the prior year and would have been even higher if not for the extremely dry conditions throughout the U S. Midwest.
We ended the quarter with fertilizer inventories at the multi year low down more than 40% from the prior year.
We expect this is generally indicative of retail inventory levels across North North America, setting up the potential for large purchasing requirements in the second half.
In crop protection gross margins were impacted in the quarter by lower prices for certain commodity products higher cost inventories and reduced demand as a result of the dry conditions in the U S. Midwest.
We recognized a noncash impairment primarily related to the goodwill of our South American retail business. This region has been impacted by volatility in crop input market and a sharp increase in local interest rates among auto macroeconomic factors the.
Long term prospects for agriculture in South America remains strong and we see opportunity for future growth. However in the near term we are pausing additional investments in this region until there is further market stabilization.
Now turning to our fertilizer segment still impacted in the quarter by lower benchmark prices compared to the exceptionally strong period in 2022.
In potash, we increased sales volumes in North America and achieved relatively.
Steel stable pricing compared to the trailing quarter.
This outcome was in line with our expectations offshore demand was weaker due to a lack of consistent engagement and spot markets and a delayed contract settlement with China.
Our offshore net realized price was impacted by lower benchmark prices and additional logistical costs associated with an unplanned outage at Canpotex export terminal in Portland.
North American nitrogen prices were down from the prior year with strengthened during the quarter as supply tightens. Following the start of the spring application season.
Global ammonia markets were pressured by lower European gas prices and weaker industrial demand.
Second quarter nitrogen sales volume has increased by 10% from prior year driven by strong fertilizer demand.
Our nitrogen gross margin as a percentage of sales was about 35% in the quarter highlighting the advantages of our strategically positioned assets.
The performance of our supply chain and order book positioning allowed us to capture incremental value associated with the <unk> season premiums that emerge in North America during the quarter.
Phosphate benefited from the strength of industrial and feed product lines, partially offsetting the impact of lower fertilizer prices.
We completed maintenance and reliability initiatives and are targeting utilization rates above 90% in the second half of the year.
During the quarter, we recognized a noncash impairment charge to a widescreen phosphate assets.
This facility has a short mine life than our warrants site. Therefore near term fluctuations in fertilizer prices and margins have agreed to impact on the carrying value of its assets.
The ISI asset counting this has resulted in the recognition of impairment losses and reversals in recent years.
To summarize our.
First half results were below the record prior year. However, we saw a number of positive market developments in particularly North America that provide opportunities for nutrients as we look forward to the second half of 2023 and beyond and I'll now turn it back to Kent.
Thanks, Pedro I will start with the outlook for the business and our updated full year guidance assumptions.
Weather and geopolitical challenges continue to prevent a replenishment of global grain and oilseed supply and is providing support for AG commodity prices.
Futures prices for corn, wheat, and soybeans are 15% to 20% above the 10 year average and fertilizer affordability has improved significantly over the last year.
North American crop development is tracking ahead of historical average pace, which could support an early harvest and extended fall application window for fertilizer.
The combination of low channel inventories and prospects for a strong fall season has contributed to increased demand for all fertilizer products in the third quarter.
We had a very positive response to our North American potash fill program and have closed the order book for third quarter deliveries with the targeted $30 per short ton increase for the fourth quarter.
Turning to Brazil, where growers have purchased a lower than normal proportion of inputs for the upcoming spring planting season, which we anticipate will lead to solid demand over the next few months.
Brazil fertilizer prices have strengthened in recent weeks with potash prices up around 10% since early June .
We expect Canadian potash exports will be constrained in the third quarter by logistical challenges related to the strike at the port of Vancouver, and the outage at Canpotex is Portland terminal.
It could take several more weeks until the backlog is cleared and the supply chain returns to normal.
As a result, we have lowered our estimate for global potash shipments to a range of <unk> 63 to 65 million tons in 2023.
Nutrients full year adjusted EBITDA is now projected between five 5% to $6 7 billion.
As disclosed in our news release on July 11th the revision largely reflects reflects factors impacting offshore potash sales through canpotex and lower offshore realized prices than previously anticipated, including the impact of higher logistics costs.
We reduced our potash sales volume guidance to a range of 12, 6% to $13 2 million tons and have adjusted our production plans accordingly.
We lowered our nitrogen adjusted EBITDA guidance range slightly due to a decline in global ammonia benchmark prices in the second quarter.
Urea prices have strengthened in the third quarter, and we anticipate a recovery in ammonia markets driven by low inventories and ongoing production curtailments.
Our revised retail guidance reflects greater margin pressure in South America, as we sell through higher cost inventory and the impacts of dry conditions in North America during the growing season.
We expect a strong fall fertilizer application season and per ton margins above historical average values, which is in large part due to growth in our proprietary nutritional products.
Based on the change in projected earnings and cash flow for 2023, we have taken a number of actions to reduce controllable costs and provide additional flexibility for future capital allocation.
We are indefinitely pausing, our potash ramp up following the completion of in flight projects in the second half.
These projects are primarily related to the procurement of new mining machines that support further automation of our fleet.
We will maintain operational flexibility in our potash business preserving the ability to quickly respond to changes in the market, while ensuring we maintain our low cost position.
We have also made the decision to suspend work on our Geismar clean ammonia project and to defer the timing of capital spend on select brownfield expansions.
We previously stated that a final investment decision on our Geismar project was contingent on obtaining a greater degree of certainty on capital cost estimates.
And as engineering work progressed, we have seen some escalation in costs.
Therefore at this time, we expect to have higher return alternatives for our capital.
We believe emerging uses for clean ammonia will provide a long term growth opportunity for the nitrogen industry, but there continues to be uncertainty on the timing of this demand.
We will monitor how this market evolves and evaluate future options with the objectives of preserving value and optionality for the project.
In retail we are reducing expenditures across a number of smaller investment projects as we prioritize capital across the business and maintain flexibility on future allocation opportunities.
The focus of the retail team will be to integrate recently acquired businesses in Brazil drive supply chain and operating efficiencies and enhance the free cash flow generation of the business.
In aggregate. These initiatives are expected to lower our 2023 capital expenditures by $200 million and reduce associated capital by two 5% to $3 billion over the next five years.
We will also taken measures to reduce operating expenditures by approximately $100 million in 2023 to offset some of the impacts from extraordinary events that occurred this year.
Looking ahead, we believe structural market shifts are supportive of higher average fertilizer benchmark prices through the next cycle.
This view is driven by the expectation for continued tightness and global crop markets higher energy prices and other inflationary impacts on the global cost curve.
Based on the changes to our capital plans, we have revised our mid cycle earnings scenario.
To reflect lower anticipated potash and nitrogen sales volumes for.
For potash, we assume assume a return to trend line global demand growth and nutrient sales volumes in the range of 14 to 15 million tons.
We now expect a mid cycle adjusted EBITDA scenario in the range of 7% to seven 5 billion, which.
Which is highlighted on slide 18 of our Q2 earnings presentation, along with a comparison to our previous mid cycle assumptions.
In closing, we expect to generate strong cash flow through the cycle and are committed to a balanced and disciplined approach to capital allocation.
We will leverage the advantages of our integrated business and continued to 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.
Sure.
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.
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Your first question comes from the line of Joel Jackson from BMO Capital markets. Your line is now open.
Hi, good morning.
So again, we talk about potash capability. So now that you pause.
Deferred adding warm machinery and people what is the maximum potash production that you were able to produce this year and next year, So run rate and then.
Maybe balancing out one of your competitors.
Thats partner suggests that potash demand potash shipments will not get backs, a 70 million ton level until 2025.
And the base that supply constraints that you have excess supply that you could run if you wanted to use a bit of confusion over how much of that is a demand story getting back versus constraints out of Belarus can you talk about your sort of your own views on that story on that theme.
Yes, good morning, Joel and thanks for the question so yes for 2023.
And based on some of the challenges shipping Canadian potash, we reduced total global shipments of 63 to 65 million tons and we re guided this year as you've seen 12, 6% to $13 2 million tonnes next year of customers, we're calling for $15 5 million tons, we would be able to supply into that so.
By the end of this year as is mentioned in the commentary well have procured mining machines was completed in flight projects and have the ability to meet customer needs to that level as.
As it relates to.
The return to historical trend line demand in potash when we talk about our new mid cycle. It's in that 70% to 75 million ton range and our assumptions are getting back to that sort of level over the next few years.
Your next question comes from the line of Steve Hansen from Raymond James Your line is now open.
Yes, good morning, Thanks for the time.
Just wanted to follow up on the potash expansion strategy.
Just the whole thing of it can you just give us a rough sense for the capabilities. After the in flight projects are completed I'm not sure. If that was delineated exactly and then as we think about sort of the year over year.
Improvement.
Export capabilities both in Vancouver.
In Portland.
Or do you feel about.
Moving the amount of volumes that you are talking about here in the next year, you still feel confident that that's doable.
Yes, Steve so.
When we talk about <unk>.
Sort of a global trend line demand of 70 to 75 million tons.
And our new mid cycle assumptions for for nutrient of that 14 to 15 million tons, and allowing ourselves some surge capacity to flex into the market and when customers are calling for it that's what we're planning for this.
If customers were calling for $15 5 million tons next year, we would be able to supply into that having completed this year our in flight projects in expanding some potash capability, so I'd say in and around that range as it relates to export capacity.
We have expansion capability in at Neptune, we have some expansion capability. This is all by a canpotex at Portland. So we have line of sight across at least certainly our five year plan to be able to.
But to be able to ship potash into a market that's growing.
Hence.
Our plans around the new mid cycle.
Okay.
Your next question comes from the line of Andrew Wong from RBC Capital markets. Your line is now open.
Hi, good morning, Thanks for taking my questions. So in that mid cycle. Adjusted EBITDA scenario can you talk about what you use there are assumed for retail.
It's been under pressure for that for this year and but we also saw a very high number last year. So.
What would you consider as a normal run rate or maybe put another way what would retail look like this year under normal conditions and then just secondly on retail SG&A.
<unk> down a little bit this year, but not down as much as the overall segment profitability was so the operating coverage ratio has gone up.
Your expectation on how that trends going forward. Thank you.
Yeah, Thanks, Andrew as it relates to our retail assumption for.
Mid cycle earnings, Yes last year was an interesting year in terms of.
Margins being quite strong and then obviously you're talking about.
The reset for 2023, which we're experiencing and we're experiencing that really across our retail business and probably.
More than more than anywhere in Brazil, with the extreme volatility we've seen there, but our assumption.
Prior to this current view of mid cycle and as we've described it in slide 18 of our presentation. Our assumption was $2 1 million billion dollars out of our retail business and we're now saying about one 9% to $2 billion when margins do normalize too.
Yes, so it's $1 90 to $2 1 billion.
As our assumption, Jeff maybe I'll pass it over to you to to talk about Andrew.
Andrew's question regarding SG&A, yes.
Yes, Andrew Thanks, when we look at SG&A and we look at this year on year over year basis from that perspective, a lot of our increased cost to come.
From a standpoint of our expansion into Brazil, and 60% of our cost and our sales and customer focused.
Customer focused organization comes with people and people are our largest cost and so we've obviously seen some wage inflation in that area, but with that said we started early in the year taken some very targeted actions this year to reduce head count where it is an absolutely essential in particular, we're very focused on.
Re evaluate now organizational needs in Latin America to ensure that we have right scale to operate efficiently and properly for the size of our current operations.
Ian mentioned in his comments and I think Pedro was well that we've been very deliberate about controlling our controllable and were taken out discretionary cost Kraushaar network. If you look at it on a percentage basis, we've managed to hold our cash expenses below 10% of revenue for the quarter, which is actually just slightly better than last year.
Despite an overall reduction in.
In revenue and in dollar terms, our adjusted cash expenses are down year over year on a year to date and quarter basis. So that's something I'd like to think that we're doing continuously.
And controllers are controllable and we're certainly going to put a lot of effort on in the back half of the year and going forward as we continue to drive efficiency in our organization.
Your next question comes from the line of Christopher Parkinson from Mizuho. Your line is now open.
Great. Thank you so much so when we take a step back and just look at the potash markets with the recently sanctioned Chinese contract and a little bit of a rebound in Brazilian spot. It seems like southeast Asia is a bit out of whack.
Due to the recent declines over the last let's say four to six weeks at what point in time would your team or Canpotex.
Expect.
At fairly robust demand response, obviously, there are a bunch of other moving factors inventories weather.
Crop outlooks, so on and so forth, but in terms of the eventual rebound in the potash market. How is your team currently thinking about that as a response to lower prices. Thank you so much.
Yes, great. Thanks, Chris.
Youre absolutely right, we have seen sort of illiquid trade in southeast Asia for some time for standard grade potash and part of that was held up by drawing down inventory as part of it.
We are waiting on the China contract in setting that benchmark.
But here we are so maybe I'll hand, it over to Mark hedges will provide some more detail.
Yes, Thanks, Chris Good morning, So look I think first above all else would just say, we're very encouraged by the continued stabilization and recovery of demand, particularly in North America, and Brazil, which are obviously really important markets for nutrients. So I'll, just maybe say a few words about North America and then talk.
Internationally as it is all part of a bigger picture here so.
As you heard Ken say in our commentary we saw a record Q2 for domestic sales in really strong and rapid customer engagement as spring activity unfolded in the U S. As we talked about previously Q2 was more of just in time basis, but following Q2 in North America, we really did see.
Most of our major customers with inventory levels that were at least at multi year lows if not.
The lowest levels they've ever had following a spring season. So you have got an attractive crop price backdrop the potential for early fall activity and this really has set up for what we've seen via exceptionally.
<unk> strong fill program that we've just laid out.
As Ken said, we saw really strong demand in fact, we have call. It overwhelming demand for customers on the sell we closed to the order book on Q3 at $3 70 per short ton level and have upped our reference price for Q4 by the $30 per short ton and in fact, just in the last 24 to 48 hours here, we've seen customers come back.
Occupancy.
Small volumes and transacted at that $400 per short ton level in the Midwest. So we're encouraged by what's going on in North America, I think moving internationally and just to talk about a couple of the markets that are important to canpotex all of which you mentioned, let's start with Brazil, Brazil really has led the demand recovery internationally.
It's been the strongest overseas market since the signing of the Chinese contract I think there was an anticipation.
That contract would put a floor under some of these markets and we've seen that in Brazil from a low of $3 10 or 320 around the time of the contracted today.
The industry publications would call the market $3 50 to $3 60.
And as Ken said, the pace of crop input demand. We think is a little behind last year, so that sets up well for a more normal consumption through the second half of the year. So we see things as being on track in Brazil.
In China with the signing of the contract we actually saw good shipments in the first half of the year into China and the contract is kept those moving so as you would've seen in our materials, we've upped our demand estimate for China. This year to 15 to 16 million tons and we've seen strong consumption domestically in nitrogen and phosphate and we also think that bodes.
Well for shipments into China in the second half of the year. So again.
<unk> and China looks on track.
Other important market to Canpotex as you mentioned is southeast Asia, and southeast Asia as the market.
That has been a little more varied in and more protracted and its recovery versus other markets. This was likely due to a few factors in our view one being the delayed timing of the Chinese contract buyers wanting to see some stability in global benchmark pricing and then some volatility in.
Palm oil pricing and key crops.
Just in recent weeks, we have seen some signs of demand re emerging in those markets and even within southeast Asia.
Next picture so in markets like Vietnam, and Thailand, we've seen prices anywhere from $3 30 level up to almost $400 level with more stability and I think Indonesia, and Malaysia are taking a little longer to recover but we do see demand picking up in Q4 and Chris as we move into 2024, we would.
<unk>, some recovery recovery and stabilization.
In Southeast Asia generally so as I said to start in my comments I think we're generally encouraged by the direction of the potash market and the rebound in demand.
Yes.
Your next question comes from the line of Ben Isaacson from Scotiabank. Your line is now open.
Thank you very much and good morning.
One more on the potash expansion if I may.
I actually really like it I think it's a good move to pause the potash expansion, but I don't fully understand the decision making process. When you talked about a strong Q2 in North America, Brazil is starting to come back.
But that's all short term in this year and even if there is weakness you're dealing with it by curtailing production. When we think about long term structurally nothing has really changed the demand growth trajectory is the same we haven't seen any meaningful change at the Belarus, Russia BHP is kind of still on track et cetera, So what actually.
Has changed from a long term outlook to pause.
Increasing capability to 18 million tonnes.
And then if I could just sneak in a clarification question you took a 4% to $500 million of impairment on Latam retail and one of the things you referenced was moderating long term growth assumptions does that change your strategy in Brazil retail in terms of.
Your investment spending over the next few years. Thank you so much.
Yes, great Ben Thank you for the question.
Maybe say a few words on the potash piecing hand, it over to Mark and Jason to expand on that but.
We do see demand to sort of trend line return to trend line growth in.
And demand in potash is set to an app, 3% average annual growth rates and again returning to that 70 to 75 million ton range over the next few years and if you look at the market share that we've picked up over the last few years and expect to maintain that has us at that mid cycle of 14 to 15 million tons is so continues.
To be quite a bit of uncertainty on the supply side of the equation and the reality is that while we have seen Russian and belorussian volumes coming out of the region. The region is still down 30% ish from 2021 levels about 8 million tons.
And that's.
Thats a little bit more than we had we had forecasted at the start of this year about 1 million tonnes that said, that's also being offset by some of the challenges for Canadian producers off the off the west coast. So.
Assumption today is we looked at 18 million tons in the ability of the Russian Belarusian producers to get to export markets. Some of that volume is coming back that's certainly happening but it is also true that there is a significant volume that's still challenged and again this year about 8 million tonnes, we see that.
Returning to the market over the next few years, we do but that has us.
Leading in flight projects to the end of this year and again with the capability to supply that.
$15 5 million tonnes meet the needs of our customers, but always preserving some flex capacity to surge tonnes into the market, which we've done in the past and created immense value. When we do that because there continues to be this really significant uncertainty on the supply side of the equation Mark Jason did you want to provide more color.
Look I think Ken covered it really well Ben I think the only thing I would add is maybe just to put a few numbers to the equation. I mean, obviously, we responded quite quickly last year. When we saw an unprecedented global disruption in supply at the time, we were talking about this last year, we probably saw on a run rate basis volumes out of the former Soviet Union.
On a run rate annualized basis, we're probably down about 13 million tonnes and so in that type of environment. We obviously look to quickly mobilize and understand what we could do from a supply perspective, I think one of the other things that we did see in that environment was that in <unk>.
Higher than normal price environment, because of the panic buying we did see demand be temporarily impacted and we mentioned there's going to be some period of time to rebuild vacuum to trend levels. So I think the simplest explanation for the company is really this is an optimization of capital deployment, how we deploy our resources and how we staff our operations.
Our long term belief in the fundamentals of the potash business have really not changed but it's really a decision on the timing of how we deploy that capital what resources, we carry at the assets and ultimately our go to market strategy Hasnt change, we're going to supply when our customers need and so as Ken said, we'll respond to market conditions, but we think the capacity we've built.
Through the work that we've done provides us ample flexibility at least for the foreseeable near term to meet that market demand.
Yes, great. So thanks Mark.
With respect to the question about Latin America.
The reality is that the Brazilian market continues to grow it continues to be one of the most exciting agricultural markets on the planet and we have a meaningful presence there.
As it relates to our plans pass over to Jeff, but really it is about pausing on further acquisitions as we integrate these nine.
These nine acquisitions that we have done and get our cost model and our operating model right. There for US certainly in these times, where we are very.
Volatility compression in crop margins and movement in interest rates, but Jeff over to you.
And Ken I'll, just reflect the knick open to comments you made I think we've mentioned several times. This morning, the factors and there were several factors that led up to.
Our impairment volatility, but much more severe volatility across the fertilizer segment in chemistry segment than we saw in North America, and Australia and again.
Raj in interest rates.
We're much more abrupt there as well and which led to a lot of devaluation and inventory and such.
Again, as Ian said, we still see long term, we still believe in the long term growth prospects for Brazil and is expected to be the fastest growing AG market in the world, but if we look at where we are to date.
In the near term, we are going to pause additional investments as we <unk>.
Really focus hard on integrating the non businesses that we bought over the last three years and when we say integrate and Thats from a system standpoint that from a standpoint of.
Procurement nessa standpoint of integrate in IOP app businesses into that base business, we're going to focus on driving down our cost and we're going to focus on growing our business organically as this market stabilizes.
I might add that we have seen positive signs over the last several weeks of growers back engaging into the marketplace. As we go into their very heavy spring season for planning.
Yes, Ben maybe I'll just add Pedro here.
Now, Brazil is a market characterized by very long cash conversion cycles, and as we accelerate growth.
Actually accelerating investment in working capital and the carrying cost at this point in time is punished by the highest Rio interest rates in the world, which is in Brazil.
So therefore, as we see now interest rates starting to.
To abate I mean, there was a.
Central Bank Brazilian Central Bank decision ready to reduce that in the futures are pricing further reductions.
Is it is good to wait a little bit until that becomes less punishing because otherwise we're going to be growing.
And all the.
Carrying costs and working capital is going to be rolled all of our margins. So that's a little bit of what's in our mind as well as we think about the growth in Brazil.
Your next question comes from the line of Jacob bout from CIBC.
CIBC Your line is now open.
The suspension of the clean ammonia plant in Geismar.
Is this just a cost issue.
Maybe just talk a bit how strategically important clean nitrogen eastern nutrient.
What needs to change for further investment in that.
Okay.
Yes Jacob.
The reality is that we do believe there'll be an opportunity.
In the ammonium business to clean ammonia business in.
In the future and of course, that's where we talked about marine field Thats, why we talk about energy hydrogen economy.
But it is also true that the timing of the evolution of that demand is unknown and it's a bit in question. So we're watching that very closely and that could be something that has us return to that conversation at some point in the future in the meantime, I think we have been fairly quite clear that we were heading toward a final investment decision in the <unk>.
The latter part of this year and working towards the class III engineering cost estimate for the project and as we did that we did see some cost escalation through that class III estimate about 15% to 20%, which.
When we when we rounded up all those numbers, we came to the conclusion that at this point in time from a from a capital allocation point of view and preserving flexibility into the future than now it wasn't the time and so while we will continue to monitor that those markets were clean ammonia and certainly that.
<unk>, we came to the conclusion just the way costs are going that we will have better opportunities for that capital in.
In the near term.
Your next question comes from the line of Steve Byrne from Bank of America. Your line is now open.
Yes. Thank you so your outlook for potash supply this year nearly a 10%.
Cut from 2021, you had a greater than that cut.
Global supply in 2022, and yet pricing right now.
Yes.
Pretty underwhelming, given two years of that level of supply costs.
What im wondering from you.
You just cut your your expected demand for potash capacity expansions near halting your your project.
Do you have a view that.
The old adage of all you can skip potash, one time and that's net debt.
Discretionary answer that.
Has that changed do you think that the world really doesn't need.
70 million tonnes of potash on the ground or are we really facing potentially some yield impacts from this.
A bit of a head scratcher.
Right, Steve Thanks for the question and.
Really what youre, describing when we talk about extraordinary events I think that's what you are describing here in terms of the volatility that we've seen in inventory levels and buying behaviors and net also therefore culminates in price. Our view has not changed that potash is an essential crop nutrient and then we have a lot of people to feed on this planet.
And that and Thats why we talk about a return to.
Historical trend lines growth in potash demand, so, but maybe I'll hand, it over to Jason just talk about yield impacts and the agronomy side of it.
Yes.
Yes, good morning, Steve.
I think it's really difficult to nail down the precise yield.
Yield impact of changes flash application rates over time.
But what we do know is where yields are at and we know that weather has played a.
A key role in driving.
Yields on a global basis.
Growing region around the world below trend levels over the past year.
We also know that.
Potash applications are important for drug resistance.
Sure.
For nitrogen use efficiency and a whole number.
Or is that are important for the growth of it.
Crop.
If we look at corn yields for example in last year or the second lowest level versus trend in the past 20 years.
Definitely can say that.
That's part of the struggle with drug resistance over the past two years could EBIT.
In place and so it's difficult to nail down the impact of flash applications and you don't know what youre, what youre, losing but we do know that yields have been below trend definitely impacted by weather.
Your next question comes from the line of Vincent Andrews from Morgan Stanley . Your line is now open.
Thank you and good morning, everyone. I'm wondering if you could just bridge your nitrogen expectations for the back half of the year.
In terms of what you were expecting three months ago in the prior guidance versus what Youre expecting now just given some of the changes in the market and pricing dynamics between then and now.
You bet, Thanks, Vincent yes.
A lot of moving parts, there, but I'll hand, it over to Mark to just walk through.
We're seeing it yes, good morning Vincent.
So first just bridging from last guidance to this guidance I would say, obviously, we've got one more quarter behind us in terms of actual so the actuals versus expectations.
At that point would play a part of the factor, but maybe I can just talk about what's embedded in the guidance for the second half of the year as.
As we look forward so as Ken mentioned in his comments, we have seen very good participation on fill programs not only on potash, but obviously nitrogen and phosphate as well so across the board.
We were part of that we rolled out a typical fill program schedule in Q3, a lot of those programs took place between late June and early July and we've layered in some spot tons since that time. So when you think about our AG nitrogen book for the second half we are about 65% to 70% sold at this point as a result of those programs.
So that is embedded in our guidance and then on price I would say that today on urea and <unk> and we are above.
On a spot basis whats implied at the midpoint of our guidance, but on ammonia. We do have a view that we're going to see some firming from current spot levels.
The back half of the year, so from a general price and in terms of our commitments, that's where we sit relative to our guidance.
Yes.
Your next question comes from the line of Jeff Zekauskas from Jpmorgan. Your line is now open.
Thanks very much.
Two part question in.
In the quarter your crop chemical revenues were about flat year over year.
But your gross profits were maybe down a $125 million and there was a similar pattern in the first quarter.
Can you talk about that.
The second part of the question is.
You say your mid cycle, EBITDA, 7% to $7 5 billion.
I.
I don't know May of this year I think that's where consensus estimates were for airtran.
So you were trading.
A mid cycle multiple on mid cycle earnings so how does that.
How can we create value over time when it seems that there's like a normal stair value calculation at the current price.
Great. Thanks, Jeff So maybe I'll hand, it over to.
Jeff <unk> to talk about crop chemistry, and then we'll get onto your second question about our mid cycle assumptions, yeah. Thanks, Geoff and you're correct. If you look at revenue line on our crop chemistry, particularly across the first half of the year, it's about flat compared to a year ago and keep in mind that we've seen a drastic reset.
In valuations across four major commodity active ingredient glyphosate fashion, they clip to them in paraquat.
From a revenue standpoint, if we look at the margin side of it we actually saw.
We came into the year.
<unk>, there would be a very sizeable reset a whole crop protection margins from a year ago. The margins. We saw in 'twenty, two one precedented because of supply chain issues and tightness wood inventory in the market, obviously that supply chain issues have eased up quite a bit today are much more normal if I look at our crop protection.
Margins in the second quarter they were 23%.
If I look back to historical crop protection margins before we saw this run up this is slightly elevated to what we would consider normal crop protection margins. So we just brought us back to a more normalized margin as it relates to that crop protection segment.
Thanks, Jeff.
And then Jeff with respect to your second question. So.
Earlier this year the industry was facing this extraordinary volatility and now as we see demand stabilize when we've talked about that and looking at our new mid cycle assumptions and our growth factors within those mid cycle assumptions. It really is when we talk about potash volumes. This return to trend line global demand grow 77.
5 million tons on our ability to supply into that 14 to 15 million tons, maintaining a 20% market share.
Our completing.
A round of nitrogen brownfield expansions geismar will be done this year and several others over the next couple of years, we have an assumption of 11, 5% to 12 million tons of nitrogen with operating rates of 92% to 94%. So there's opportunities to grow there we assume some some curtailments.
And curtailments in Trinidad, but nevertheless growth in nitrogen and in retail we continue to focus on growing our loveland products business. We continue to focus on our supply chain nutrient financial has been a growth vector for us.
And our digital investments as well so we have a number of opportunities to grow this company, but importantly, as we talk about capital allocation and maintaining flexibility there.
We've also demonstrated certainly since the inception of nutrient over the last five years significant redistribution of cash to shareholders. So if we look at what we've done it's been 23% reduction in the share count and a 33% increase in dividends per share and we will continue to sustain our assets will continue to high grade.
Our investment portfolio, but we will also continue to return significant cash to shareholders via the dividend and then opportunistically looking at share buybacks.
Okay.
Your next question comes from the line of Adam Samuelson from Goldman Sachs. Your line is now open.
Yes, Thank you and good morning, everyone.
I was hoping to dig in a little more on the retail assumptions in the back half of the year end.
Just make sure I'm clear on what is assumed from a market and gross margin perspective in South America that still has.
Some higher cost inventory to work through what is assumed from a from a sell through perspective on the crop Chem side.
Especially as you think about.
Producer.
<unk> programs that.
I imagine won't be hit given what the what the sales.
Many of the crop Chem producers have looked like in the second quarter.
And just the implications that that would have as we as we think about moving into moving into 'twenty four outside of some of the margin noise you've experienced this year.
Thanks for the question, Adam I'll hand, it over to Jeff, Turkey, Yes, if we deal with the question around.
Second half of the year. The majority the greatest majority of anything we would've pulled back in the second half of the year is around the notion of continued softness in the Latin American market.
There is still some higher price inventory because growers buying patterns change there.
Over the last 12 to 14 months.
We're carrying and I think most of the industry is carrying more inventory into the spring side season, then they'd want to so we got to work through that so that's where the majority of any pullback we have.
We also factored in a bit of weather.
Into our assumptions for the second half of the year as well as you would know July would have been the hottest month on record I think across North America is very key stage of crop maturity and stuff, especially as it relates to corn. So we kind of factored in some things how that might affect fungicide and insecticide applications and such but.
We also if I look at the back half also look at the fact just crop is maturing.
Very rapidly.
Right now and I think it leads to a very the possibility of a very open follow in North America, and so we're expecting some.
Expecting heavy application, we think growers will find pricing on MP NK very attractive for the fall as well.
Thank you you asked the question as it related to suppliers and inventory and look we've worked hard to bring inventory down.
I think most of the industry has been it has been in a strategy of Destocking.
Whether it's on the nutrient to whether it's on crop protection and.
From a crop protection that we ended the month of June .
Down on our crop protection inventory year over year, we expect that to look even better as we get through the third quarter and we'll get the fungicide and insecticide applications as it relates to purchases for the remainder of the year I think I mentioned earlier that there's supply constraints have eased considerably.
Over the last 12 months.
I don't see it that a lot of people are in a mood to add a lot of inventory in the back half of the year as it relates to crop protection. So we'll have to let the rest of the season play out but.
What kind of be the frame of mind, we would be in right now and I don't think it would be different than much of the industry.
Your next question comes from the line of Troy.
<unk> from Wells Fargo. Your line is now open.
Great. Thank you.
Just wanted to see.
Circle back on the Geismar plant deferral.
Just wanted to make sure that in terms of the plant economics, probably more a function of timing as to when demand returns or.
That overall cash cost increase.
Not economically attractive because I would've thought the IRS bill would've provided some support for that.
Then also just a follow up.
Is there interest from potential partners or maybe JV is that could potentially.
Project forward. Thank you.
Thanks for the question Richard and it is the combination of.
The evolution of those end markets, our view of capital and costs today and looking at our capital allocation priorities in the near to medium term.
And creating that flexibility that we talked about earlier, but I'll hand, it over to Trevor Williams, our president of our nitrogen business and then mark to provide a bit more color.
So thanks for the question in a couple of conference obviously, the IRS Q45 have been a big.
Improvements in terms of being able to try to justify some of these projects.
We're looking at an overall perspective in terms of the IRR that was built in when we look at our capital allocation decisions. So really at this point all while that is obviously a bit of a tailwind or improvement.
Really didn't get us over the hurdle in terms of the economics of the project at this point.
Yes, the second part is a great question.
That will continue to do.
We'll talk with our partners both on the technology side is as well as on the downstream side and evaluate opportunities, but at this point, we really look at the delay probably being at least a minimum of 24 months.
To your point, we would continue to look at opportunities from a partnership perspective going forward.
Mark.
Yes, I think Kevin.
Cover covered it pretty well Richard I mean, I would I'd say from an economic standpoint is that covered Ed mentioned earlier and Ken We did see some capital cost escalation relative to our original expectations.
Obviously, that's something that deteriorated the economic somewhat and then I think obviously a lot hinges on.
In the future and Ken said over the long term, we do have confidence that these new sources of demand related to cleanup man you have a number of reasons why they should emerge but today the evidence wouldn't be sufficient to justify the assumption of a premium at least not in the near term emerging for clean ammonia. So on the commercial side of things, we did an exceptional amount of work in terms.
Market development talking to partners and as Ken mentioned, we do see a day, where this could potentially become more attractive and really the <unk>.
Attitude at this point is to preserve value and Optionality for the project and really just making a decision that there are higher return better capital allocation alternatives.
Over the near term and possibly medium term, but the option to revisit this at a later point.
Okay.
Your next question comes from the line of Michael to pulp.
From DB Securities. Your line is now open.
Okay. Thanks. Good morning question on the potash side can you provide an update on the protective production curtailments, you announced last month that Corey and <unk> and what Youre, assuming in terms of bringing that production back online.
And then as a follow on can you also provide an update on the status of the equipment issue at the Portland terminal and and.
And when you would expect that terminal to be back up.
Great.
Absolutely with respect to the curtailments, yes, we've talked about those and talked about some reduced potash volume as it related to the challenges on the west coast, and hence having to bring down some production, but Chris I'll hand, it over to Chris to talk about the curtailments and then with respect to Portland, and how we are.
Evolving in terms of getting that back in service over to Mark. So so Chris Yes. Good morning, Michael Thanks for the question, Yes, you're right. We did were forced to curtail production at both <unk> and <unk> sites in the plan as it stands today is that where we're hopeful that the strike is resolved here formally by the end of the week.
In Vancouver, and that would enable us to bring <unk> back to normal production rates, but our plan at the moment is to keep.
Korea Little curtailed.
But if demand was to move.
Move up towards the end of the year, we could also remove that and bring some production back if the market needed. It so but but that's our plan as it stands today and regarding the west coast ports I'll hand, it over to Mark.
Sure. Thanks.
Thanks, Michael So look I'll start with Portland, but maybe just for completeness talk about Neptune as well given that is all part of the picture on the logistics constraints and your questions on potash production to Chris So from a Portland perspective repairs are progressing at the facility and what we hear from Canpotex is that we do expect completion of that work in <unk>.
Planned to be back in service by the end of Q4 from.
From a Neptune standpoint, as Chris said were hopeful we see resolution in the next few days and a definitive answer that there will be no more strike action there today at Neptune labor and productivity as we hear is about normal but there is a meaningful backlog that exists from the two weeks or so of strike action that did happen.
Canpotex does have numerous loaded trains at third party sites and producer sites are sitting in Western Canada that do need to be worked through so there is a backlog in.
Some time, it's going to take and right now we assume that time period will be until the end of August assuming no further disruption.
So right now thats, our expectations on both Portland and Neptune.
Your next question comes from the line of Josh Spector from UBS. Your line is now open.
Yes, hi, Thanks for taking my questions I guess two quick ones for me if I can first just to clarify on the Geismar clean ammonia facility.
I believe you had a letter of intent for some offtake of that did that partner change any of their willingness or time line to take any of that product in that play into your decision at all and then just secondly, Capex I think Pedro you mentioned, you would have said $3 billion range, which to operate in but you're still spending about $1 billion on growth this year.
We see a number closer to $2 billion next year or is that not realistic.
Great. Thanks, Josh.
With respect to the offtake in letter of intent there no no that was not part of the decision making process that was with Mitsubishi.
We have a very strong relationship with Mitsubishi that continues but that was not part of the decision making process really does boil down to the things that we talked about earlier evolution of end markets, increasing capital costs and.
And better uses for capital in the near to medium term and wanting to maintain flexibility with disciplined capital allocation in the near to medium term with respect to the.
Capex assumptions I will hand, it over to Pedro.
I think Josh.
I think just to clarify our two $5 billion to $3 billion is what we will be saving and the both the ramp.
And the Geismar project into the future. So those are capital expenditures that will not happen.
I've been in our five year plan for the next five years.
In addition to that we're looking at other.
Potential actions are.
Capital plan for this year next year, but I just wanted to make sure I clarify that.
Okay.
Your next question comes from the line of Ed Leans that Digest from Credit Suisse. Your line is now open.
Thank you.
Good morning, everyone.
One quick question on India, I mean, maybe maybe this is for Mark what are you seeing in India in terms of products.
422 versus a three year seven for China.
<unk> actually buying and paying that price.
Yeah. Thanks for the question Atlanta and.
Not seeing volumes move at the agreed for 'twenty two.
But also you may have seen that Canpotex pulled offers in India. As a result of the challenges off the west coast, but Mark do you want to provide more color, yes. Good morning, Atlanta, So upon the signing of the India contract it.
$422 I think right at the beginning of the.
Second quarter, we did see some canpotex shipments go into India, and we understand from other producers at that $422 price level, but subsequent to the signing of the Chinese contract, we have not seen meaningful volumes at least from a canpotex standpoint going to India.
And again, we can't speak for other suppliers, but as of now there is no new agreement with Canpotex and India as Ken said Canpotex pulled all of its offers following the disruption at the Neptune terminal and really looking at the overall portfolio of tons available for the last half of the year looking at the cost impacts from the outage and really.
Assessing where the best Netback Saar.
So it remains to be seen how the rest of the year evolves for India, We do know that because of the better than expected monsoon. We would expect there is going to be demand for potash in India and that India will need.
More potash for the remainder of the year.
Okay.
Your next question comes from the line of Irene <unk> from Baird. Your line is now open.
Hello, Hi, good morning, just a follow up on India.
Confidant that you announced with these in the contract expiring in September that this is not going to translate into a.
Paul.
The price recovery, we have seen now in many blowfish prices.
Yes. Thanks for the question Erin really looking at the region and standard grade I mean, obviously, the China contract had the effect of creating the stability in the market.
That was reflected really.
Almost immediately Brazil bouncing off that floor and now strengthening as we talked about earlier, 10% since June .
And that market continues to strength in southeast Asia, we talked about earlier and really with the China contract.
And CPO prices, making potash affordable affordability has gone up and inventory levels being drawn down that we expect move ins in southeast Asia, and India inventories are very low as Mark just said so heading into the fall here strong months soon we do expect demand in India, It's always subject to the discussion about the.
Subsidy in India, but but we expect.
Inventory replenishment in India as well the India has been a case of demand rationalization because with some of these supply challenges over the last 18 months simply not getting the volume.
But a question earlier about about yield.
Yield impacts I mean, India is a place where.
We could see yield impacts if some of these challenges persist.
There are no further questions at this time I will now hand over to Jeff. Please continue.
Alright, Thank you for joining us today in the Investor Relations team is available for follow up questions have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.