Nutrien - Q1 2023

Transcript

Operator (participant)

Welcome to the Nutrien's 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to Jeff Holzman, VP of Investor Relations.

Jeff Holzman (VP of Investor Relations)

Thank you, operator. Good morning and welcome to Nutrien's first quarter 2023 conference call. As we conduct this call, various statements that we make about future expectations, plans, and prospects contain forward-looking information. Certain material assumptions were applied in making these conclusions and forecasts. Therefore, actual results could differ materially from those contained in our forward-looking information. Additional information about these factors and assumptions are contained in our quarterly report to shareholders, as well as our most recent annual report, MD&A, and annual information form filed with Canadian and US Securities Commissions. I will now turn the call over to Ken Seitz, the President and CEO, and Pedro Farah, our CFO, for opening comments before we take your questions.

Ken Seitz (President and CEO)

Good morning. Thank you for joining us today. Nutrien's first quarter results reflect the impact of structural supply issues and shifting buying patterns that have contributed to an unprecedented period of market volatility. We delivered adjusted EBITDA of $1.4 billion, the second highest for any first quarter on record, continuing to demonstrate the advantages of our flexible, low-cost production assets and global distribution network. We invested $700 million to sustain and grow our assets and returned over $1.1 billion to shareholders in the first quarter. While our full-year outlook is lower than previously expected, we are encouraged by the continued stabilization of crop nutrient markets and anticipate increased fertilizer demand in the second half of the year. We expect to generate strong cash flows in 2023 and maintain a balanced and disciplined approach to capital allocation.

Shifting to the highlights from the first quarter, Nutrien Ag Solutions results were impacted by delayed grower purchases and lower margins compared to the exceptionally strong period in 2022. Retail fertilizer prices declined in the quarter, albeit at a slower pace than wholesale benchmark prices, and margins were below normalized levels as we worked through higher cost inventory.

We ended the quarter with U.S. fertilizer inventory down 10% year-over-year, leaving a significant amount of our spring fertilizer volume to procure in the second quarter. Crop protection product margins were impacted by lower prices for certain herbicide products and later grower engagement compared to the previous year. This resulted in a temporary build of crop protection inventory, but this product is moving through the channel in the second quarter as 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, volumes were down from the prior year as customers purchased on a just-in-time basis. K+S sold record volumes to Brazil, driven by strong demand for the Safrinha planting season and lower imports from Eastern European producers compared to Q1 2022.

Potash shipments to spot markets in Asia declined as our customers worked down inventory and contract settlements with India and China were delayed as buying patterns continued to evolve. Global potash prices were relatively stable to begin the year, but declined later in the quarter due to the lack of consistent market engagement. We adjusted potash production across our low-cost network and pulled forward maintenance activities, preserving the flexibility to quickly ramp up production when stronger demand reemerges. Nitrogen benchmark prices were highly volatile due to a sharp drop in European gas prices, lower Indian urea imports, and weaker industrial demand. Our North American nitrogen plants operated very well in the quarter and benefited from low natural gas costs in comparison to other global producers. Trinidad was impacted by gas curtailments of approximately 20%, which was in line with our previous expectations.

We are progressing well on engineering work for our Geismar clean ammonia project and remain on track to make a final investment decision in the second half of 2023. In recent months, we have received significant external interest regarding co-investment or potential equity partnerships in the project. We plan to explore these options as we continue our evaluation of the project with a view of maximizing value for shareholders. Our phosphate business benefited from the stability of our feed and industrial product lines, partially offsetting the impact of lower sales volumes and fertilizer prices. We completed maintenance and reliability initiatives during the quarter and are targeting utilization rates above 90% in the second half of the year. Turning to the outlook. Geopolitical and weather-related challenges continue to impact global agriculture commodity markets.

The global grain stocks-to-use ratio is at its lowest point in more than 25 years. We expect it will take multiple cropping cycles to restore stocks to more adequate levels. Agriculture is a seasonal business. There has been some near-term pressure on crop prices resulting from a record Brazilian soybean harvest and favorable planting progress in the US. 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 2Q US 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 and urea. This is highlighting the challenges that can emerge from just-in-time purchasing. Retail fertilizer inventories are projected to end the second quarter down significantly compared to last year, which supports the need for a strong summer refill. We expect second half global potash demand will be up significantly compared to the same period in 2022, with the majority of the increase in Brazil and North America, which are the two largest markets for our potash. The timing of a new China contract remains uncertain, we do not view this as a significant impediment to a recovery in global demand. Global trade flows have evolved over the past year, China's seaborne imports now represent only 5% of global shipments.

For Nutrien, it also represents a relatively small percentage of our total sales as we have shifted more volume to higher net back markets. On the supply side, Belarus has gradually increased potash exports through ports in Russia, partially offset by lower Russian production producer exports. We expect Eastern European potash shipments will be up approximately 15% in 2023 compared to last year, but still down 30% from 2021. We maintained our global potash shipment forecast at 63 million-67 million tons, which is well below the estimated trend demand of above 70 million tons. We expect increased demand as markets stabilize, driven by growth in global pro-crop production, lower channel inventories, and the need to replenish potassium levels in the soil. I will now turn it over to Pedro to review our guidance assumptions and capital allocation plans for 2023.

Pedro Farah (EVP and CFO)

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 in crop nutrient and crop protection margins compared to the extraordinary levels achieved in 2022. In North America, demand is accelerating as expected, but we have seen fertilizer margins temporarily drop below normalized levels as we work down higher cost inventory. We expect to end the spring season with very low inventories and for North America crop nutrient margins to recover in the second half. We could still see below normal margins in Brazil in the third quarter, as grower purchases are not likely to accelerate until closer to the spring planting season in September.

Turning to potash, we assume North American prices remain firm through spring and then follow a typical seasonal pricing pattern. Offshore prices have moved lower in the second quarter due to the lack of consistent buying. However, we forecast prices to stabilize in the second half as demand increases. We lower our 2023 potash sales volume guidance to 13.5 million-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 will maintain a flexible approach to our potash ramp up, pacing the timing of capital expenditures with 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 UAN prices following spring. We expect an increase in global ammonia prices during the second half as prices are currently trading well below the estimated margin of cost, which we do not believe is sustainable over an extended period. We are assuming U.S. natural gas prices will average around $3 per MMBtu in 2023 and Western Canadian gas below that level, continuing to position our nitrogen assets at the low end of the global cost curve. Cash from operating activities is projected at $5 billion-$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 a reset in fertilizer prices. Now 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 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 ROI through the cycle.

We allocated $900 million to share repurchases in the 1st quarter and intend to remain opportunistic, taking advantage of our existing NCIB. 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 increased the dividend per share by 33%, demonstrating our commitment to capital returns through the cycle. I'll now pass it back to Ken.

Ken Seitz (President and CEO)

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

Operator (participant)

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 touch tone phone. You will hear a one-tone prompt acknowledging your request. Your first question comes from the line of Ben Isaacson from Scotiabank. Your line is now open.

Ben Isaacson (Equity Research Analyst)

Thank you very much. Good morning, Ken and everyone. Just on potash, you 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 how are channel inventories in those regions? If I can just sneak in a really quick one. On the Q4 call, when you talked about your 5% buyback, the stock was about $80, and now it's about $60. Has that changed your philosophy in terms of how aggressive you'll be, when it comes to buybacks? Thank you.

Ken Seitz (President and CEO)

Yeah. Good morning, Ben, thank you for the question. Yes, absolutely. We sort of walk market by market on potash as we've done in the past. Maybe I'll hand that over to Mark and probably augmented by Jason. Then on the share buyback question, I'll hand it over to Pedro. Thanks, Ben.

Mark Thompson (EVP and CFO)

Yeah. Good morning, Ben. This is Mark. Maybe I'll just do a bit of a flyover on some of the key markets, and then I'll pass it to Jason to talk about specific timing of application season. You know, I think generally, as Ken said in his comments, there's really three key themes here we see in potash globally. I think first, it remains a supply-constrained market. Really what we see relative to our expectations in February is about 1 million more tons coming out of the former Soviet Union as a whole. I think second, as Ken mentioned, we are seeing trade flows shift structurally. Really the biggest themes there 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 disproportionately moving into China. Production out of Laos is increasingly finding markets in China and Southeast Asia. I think those are the 3 biggest factors as it relates to the structural shifts. As Ken mentioned, we do see demand recovering in the second half, and certainly do see long-term trend demand intact. Maybe just to drill down into some of the markets more specifically. Brazil was certainly a bright spot in Q1. Canpotex had record shipments into Brazil in Q1. We did see a recovery there, and we do expect a rebound for the remainder of the year and buying to accelerate to meet their seasonal needs as we move through the second quarter and into the second half.

From an India standpoint, obviously, there was 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, is a subsidy announcement from India. Right now, we would probably be historically late for that announcement. We expect that at any time. We would anticipate that when that's announced, we'll see further movement in product into India. From a Southeast Asia standpoint, we have seen some volume move into Southeast Asia. We've seen inventories that were higher cost from 2022 continue to be worked down. We did see some reengagement in buying following the Indian contract. Inventories are normalizing. We are starting to see fresh purchases.

Again, we would expect those to accelerate through the second quarter and into the second half. I think finally on China. From an inventory standpoint today, we would see port inventories in China between 2.3 million and 2.5 million tons. Probably about 500,000-600,000 tons of that is sitting in bonded warehouses today.

Ken Seitz (President and CEO)

Certainly we have seen that inventory be a little bit stickier because of the trade flow shifts that we've seen. 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 been benchmarks or 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 gonna represent about 5% of global shipments. We expect that this is gonna be a trend, that these contracts will be of less significance to the global market over time and really a smaller part of the picture. Finally, in North America, as we've talked about, because of the lack of field activity in Q1, we had a seasonally slow Q1.

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 5 years, month-over-month between March and April in our customer-owned inventories, and certainly saw inland production of potash moving very well at our distribution terminals. I think from a timing perspective, I'll just let Jason talk about some of the specifics on that.

Jason Newton (Chief Economist and Head of Market Research)

Sure. Thanks, Mark. Just to start with Southeast Asia and the timing of shipments and applications in that market. It is a region, particularly as we look at Indonesia and Malaysia, where there's a long lead time between purchases and applications. That's part of the reason why the high-priced inventories are holding up there. There's 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, start to see applications in late Q1, and those inventories move lower through the second quarter of the year in Southeast Asia.

In Brazil, in terms of the timing, just we did see unusually strong imports 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. We'd expect more normal levels of imports in through Q2 and a seasonally normal volume of imports coming in late Q2, early Q3 in front of the applications for their spring season in September.

Pedro Farah (EVP and CFO)

Maybe, Ben, just to address your last question about the buyback. We intend to remain opportunistic in the market. As we mentioned before, we already since MOE bought 23% of our share count, we do have a very strong balance sheet that allows us to take a long-term view in terms of value. That continues to pay off in terms of our free cash flow per share. Just to kind of give you a quick compare, in 2021, when our EBITDA was at $7.7 billion, our free cash flow per share was $3.4 per share. If we jump now to a kind of a similar year, I'm excluding 2022 because, of course, it's an anomalous year.

In 2023, we have a kind of a midpoint of our guidance of about $7.3, and our free cash flow per share is $4.7. That's a, almost 40% increase in our free cash flow per share. We think that strategy is paying off. We intend to use the balance sheet, and if we see value, we'll be opportunistic about it.

Operator (participant)

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

Jacob Bout (Managing Director and Senior Equity Analyst)

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

Ken Seitz (President and CEO)

Good morning, Jacob, and thank you for the question. What we would say is, yes, we do. There's a few reasons for that. If we look at the assumptions when we talk about mid-cycle EBITDA of $9 billion, it's really predicated on the structural shift that we've seen in energy, agriculture, and crop nutrient markets, and really lending to what we see is a strip going forward that's about, you know, $50 more across crop nutrients than we had assumed prior to this conflict in Eastern Europe.

It also assumes additional volumes, so there's a timing effect here, obviously, as we look at wrapping up potash volumes over time and as we talk about our brownfield investments and our nitrogen fleet and also our clean ammonia project, which is also going to bring volume.

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. That's reflected in our results. When we think about normalized EBITDA ranges out of our retail business, it too contributes to that $9 billion mid-cycle. If we walk across those assumptions, there is a timing effect here, but we believe that those assumptions remain intact.

Operator (participant)

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

Joel Jackson (Managing Director and Senior Analyst)

Hi, good morning. Maybe a two-parter for me. If we take your potash volume guide, it's gonna be the best 9 months, like the best Q2 to Q4 in aggregate that Nutrien's ever had at 11 million tons. Can you do that in a year without meaningful seaborne Chinese volumes? What do you assume in the midpoint of that for Chinese seaborne volume? Just back on the buyback, if you look at, you know, on slide, I forget the slide now, but it's where you show your operating cash flow. Like, it looks like you're suggesting there's really no more room for any additional repurchases this year at the midpoint. Thanks.

Ken Seitz (President and CEO)

Right. As it relates to our plan for potash this year and the shifting trade patterns that Mark described earlier and how we're navigating that, you know, I will pass that back to Mark. As it relates to what we might do this year with share buybacks, we'll ask Pedro.

Mark Thompson (EVP and CFO)

Good morning, Joel. Just to reiterate a couple of the comments I made earlier and that Ken's made, we do see the shifting trade flows playing a role here, but nonetheless, even at 5% of global shipments, China is likely going to need, you know, 3.5 million tons or give or take 0.5 million tons on either side of that in seaborne imports that are gonna have to be met. We ultimately believe that in the second half, China is going to need that volume. We do see Canpotex playing a role in meeting those needs.

One of the other points that I'll call out again is the record volumes that we've seen in Q1 from Canpotex into Brazil, and the fact that we are seeing Canadian production become far more important in some of these other key markets, including Brazil and Southeast Asia. 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. 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.

You put all of that together, and we do believe that we can get to a place that meets the shipment numbers that we've talked about. Certainly in working with Canpotex, we also believe that we've got a supply chain that can deliver it and a production plan in Chris's business unit that can also get us there as well.

Pedro Farah (EVP and CFO)

Okay. Just Joel, on the buybacks, I think we are not circumscribing ourselves to the fiscal year here. I kind of said before, we do have a strong balance sheet. We are obviously gonna be monitoring the business. 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 to capture that value.

Operator (participant)

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

Adam Samuelson (VP in Equity Research)

Yes. Thank you. Good morning, everyone. Maybe continuing on potash, I mean, if I look at your own shipment guidance for 2023, kinda volume's up about 1 million-1.8 million tons, can you break out kind of the increment of that that's domestic versus offshore? I'd presume that at least 1 million of that was implied domestic over the balance of the year. If that's the case, that would get your North America business back pretty close to historical kinda norms versus history, which would mean that you would need to see a disproportionate kinda offshore growth in 2024 and beyond to really be the outlet for your incremental production tons.

I'm just trying to get a sense of your confidence in that view and kinda where you think the market share gains from Canpotex can be durable, especially with China getting more tons out of the former Soviet Union and Laos.

Ken Seitz (President and CEO)

Yeah. Good morning, Adam, and thank you for the question. Yeah. I would just a few comments and maybe pass it over to Mark. I mean, 2021, we saw potash demand shipments on the planet of about 70 million tons, and we saw that drop to 61 million tons last year. Now seeing it rebound, we expect to 63 million-67 million tons. We're maintaining that range, albeit a supply-constrained environment. Importantly, this is a market that's growing. We've seen 2.8% compound annual growth rates in the potash market for the last 20 years, and we expect that continue to grow for all the reasons that we talk about growing population, and the need for more food.

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, the North American market was down significantly, and that was owing to the late spring weather last year. Here we are, this year, and while we have seen some incredible volatility and movements of inventory, we are now in, you know, 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 in Q2 volumes quarter to date over last year.

Yes, as we look at where the volumes are going, it is tilted to North America. Maybe, Mark, you wanna provide some detail around those numbers.

Mark Thompson (EVP and CFO)

Thanks, Ken. Good morning, Adam. Maybe just to start with North America, and again, the assumptions are laid out in our investor package for the call, but we do expect North America to be back to a relatively historical level of shipments this year. We're estimating 9.5 million-10.5 million tons of shipments into North America. 2022 is certainly an anomalous year with what we saw in terms of inventory stocking and drawdown. The return to normal will see us back at more normal levels in North America with, you know, shipments somewhere between 4.5 million and 5 million tons.

The split we would see between domestic and international is much more typical for us than sort of the 1/3 roughly domestic and 2/3 internationally moving through Canpotex. Just on your second question about where that growth is gonna come from. I mean, as Ken talked about, the last few years have been certainly a major shock to the market with supply coming out and what we've seen from a pricing and inventories perspective. 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.

The growth in those markets over time certainly can sustain the volume growth in our business from our perspective. 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. Notwithstanding the incremental production from the former Soviet Union that's finding its way into China, we do see growth in a number of our important markets.

Operator (participant)

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

William Tang (Managing Director and Senior Research Analyst)

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

Ken Seitz (President and CEO)

Right. Yes, we had started the year with a set of assumptions or beliefs about shipments out of that region and was really following last year where we saw, you know, substantive volumes out of Belarus and Russia shut in with the effect of sanctions. To your question, Will, Belarus had really difficulty getting access to tidewater for seaborne exports and some of the logistical challenges with rail, albeit, as Mark mentioned earlier, we are seeing those rail movements increase or have seen them increase out of Belarus to China. There is a bit of an outlet there. When we started the year, we thought that we said that Russian volumes we thought would be down 15%-30% and that Belarusian volumes would be down 40%-60% compared to 2021 levels.

If we look at export side of the region, we've adjusted those numbers so that we say we think Belarusian volumes would be more like 25%-40% and Russian volumes more like 25%-35%. Importantly, if we look at just supply out of the region, while it is closer, you know, and 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 levels. That equates to about 9 million tons. Yeah, I mean, while there is movement among those numbers, Will, the reality is there's still a lot of volume that's 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, that seems to be displacing Russian volumes out of those ports. Finally, one of the other outlets is of course, rail to China. We've talked about that. I think for Belarus to probably continue to increase volumes, I assume they'll be maximizing those rail volumes, but at the same time, what we would, we believe need to see is new port capacity. Now we're talking about volumes from the region, new port capacity on the Russian coast. Of course, we've talked about that's gonna take a bit of time so that we believe exports out of the region will continue to be challenged.

Operator (participant)

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

Steve Byrne (Managing Director in Americas Equity Research)

Yes. Thank you. A couple years ago, Ken, if you had thought that there'd be a 9 million tons shortage out of the former Soviet Union of potash, maybe net 5 million tons, with some increases elsewhere, would you have predicted a $370 realized price for your offshore business? Is that seem fair to you in 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. Then maybe another potash question on your domestic side. This surge of sales through customer-owned, you know, warehouses, that's your product in your customer's warehouse. How is the price set there when that customer decides to pay you?

Do you have negotiating or pricing power given a what seems like a tightening market in the US when your product is in their warehouse?

Ken Seitz (President and CEO)

Right. Good morning, Steven. Thank you for the question. I'll start with, you know, just obviously, as you've described it, these challenges on the supply side of the equation for potash. 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 seen. That's just one of the anomalous observations. 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.

The challenges that that created for some of the big potash importers and users, and the inventory that the rush to get hands-on inventory and the inventory build that took place, and obviously the price spike that followed that. I mean, we saw that that inventory build, and there were some weather-related effects there, so that when we headed into the fall, there, you know, the world started on a large inventory drawdown, watching prices soften. That inventory drawdown, one of the most dramatic, again, that we've ever seen, carried through the first quarter of this year 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. Cautious buying or 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. Here we are. The backdrop for ag fundamentals remains strong. Grower affordability is good given the reduction in crop nutrient prices. Here we are with inventories clearing and prices stabilizing and volumes moving.

Steve, you know, how this all translates into price and market volatility, what we would say is that we've now approached sort of a form of stability and what we would call sort of mid-cycle pricing for potash, and that's what we've assumed for the balance of the year. As it relates to these supply shortages, we're watching that incredibly closely. It's going to and 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. Yeah, some of the supply challenges remain, and we'll see how that plays out over the balance of the year. Maybe, Mark, if you wanna provide, some thoughts on pricing with our customers in the domestic market.

Mark Thompson (EVP and CFO)

Sure. Good morning, Steve. Yeah, I think this is a relatively simple answer overall. I think first and foremost, you know, we continue to contend that we've got, I think, the best built, the most ideally positioned and the most robust distribution network in North America for potash. The majority of those assets are owned assets. As I've mentioned, I was just out at our Hammond, Indiana terminal last week, which has about 80,000 tons of storage. Our primary mechanism for moving product into the North American market is through our own warehouse and distribution system. From an efficiency perspective, we do have agreements with some customers. Nutrien Ag Solutions is one of those customers, as well as our other major customers.

That's really efficiency from a logistics standpoint, so that we're not spending unnecessary dollars where they're not needed on distribution infrastructure and taking advantage of the assets that exist in markets. From a pricing standpoint, actually things have been relatively straightforward as we've talked about in the commentary today. We saw product move very quickly and a lot of hand-to-mouth buying. What was being sold was largely going directly to ground and moving through the channel quite quickly. What we found from a commercial perspective generally is that as we've seen these supply-demand shortages emerge at inland distribution points, we've been tracking those prices higher as they've emerged throughout the spring season.

Operator (participant)

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

Christopher Parkinson (Managing Director and Senior Equity Research Analyst)

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

Ken Seitz (President and CEO)

Yeah. Thanks, Chris. You know, I would say that as we look at our portfolio of 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's certainly Southeast Asia, and it's certainly China. Right now, you know, the Canadian potash is an important supplier into all these regions. We have worked hard in these regions to establish a really enviable customer base, and we worked hard over the last 40 years to do that. 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 customer base will be important to us as we grow our volumes.

Operator (participant)

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

Speaker 19

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

Ken Seitz (President and CEO)

Yeah, we can provide those, you know, some ranges, Lucas. Yeah, I hand it over to Mark to talk about those specifics.

Mark Thompson (EVP and CFO)

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

When we look across the fertilizer complex and we see things stabilizing today, that is what's inherent in our guidance as Pedro and Ken have described. We also think that's a good way to think about the business on a run rate going forward in terms of where we'll see mid-cycle prices in the future.

Operator (participant)

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

Andrew Wong (Managing Director and Senior Equity Analyst)

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

Ken Seitz (President and CEO)

Yeah. Good morning, Andrew. Thank you. The short answer to your question is yes, we would. Yes, we would consider slowing down. We're really, as we talked about earlier this year, watching the market, we did delay our ramp up. We talked about that earlier this year, 2025 to 2026, 18 million tons, and importantly, just continuing to watch the market and the supply and demand dynamics. The reality is again, that we are in a market that's growing, and we believe that that's going to carry on for the absolute foreseeable future at sort of 2.5%-3% annual growth rates. That new supply is gonna be required to meet that growing demand. If we look at the supply side challenges that continue to persist.

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, 9 million tons. We're watching how those tons find their way back into the market and the pace at which they'll 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 potash. These investments are really quite granular. Dozens of projects across 4 mines. We have made some investments that are gonna take our capacity up to around 15.5 million tons by the start of next year. We've demonstrated the value of that flexible approach.

We demonstrated that in 2021 and 2022 and the value associated with preserving some additional capacity. When we're doing that math, yes, Andrew, the short answer to your question is, you know, if we see that the market's not there, then we'll pace our capital accordingly. Yeah, we'll certainly, as Pedro mentioned, always look opportunistically at buying back our own shares.

Operator (participant)

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

Speaker 19

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

Ken Seitz (President and CEO)

Absolutely, Richard, thank you for the question. There's a number of moving parts there as it relates to natural gas costs in nitrogen. We're obviously automating our mines and starting to enjoy some of the benefits of those investments in potash. The biggest one probably we can talk about is volume and the volume impacts on cash costs in the quarter. I'll hand it over to Chris Reynolds to talk about our president of our potash business to talk about cash costs in potash, over to Trevor Williams, our president of Nitrogen Phosphate, to talk about nitrogen.

Chris Reynolds (EVP and President in Potash)

Yeah. Good morning, Richard. Thanks for the question. As we look at, you know, full year, our controllable cost of product manufactured in potash, we expect that to be fairly similar, in fact, to what we saw in 2022. Yeah, in Q1.

Ken Seitz (President and CEO)

As Pedro had mentioned, we did have some increased maintenance. We pulled some of that maintenance forward to be ready for the surge in demand we're expecting in the, in the second half. You know, as we look at that, controllable cost still amongst the lowest cost in North America and certainly one of the lowest cost across the industry. We're still feeling good about that position today.

Jason Newton (Chief Economist and Head of Market Research)

Yeah. Thank you, Richard. Very similar on the nitrogen side. Our volumes are down a little bit, primarily driven from the Trinidad side. We did have some increased maintenance costs, as we had a few reliability issues, but really because we've had some reduced volumes, because of the curtailments. Really as we look to towards the remainder of the fleet and majority of the fleet, we look to get back towards what we would expect in terms of our cash cost for 2023.

Operator (participant)

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

Benjamin Theurer (Managing Director and Head of Latin America Equity Research)

Yeah. Thank you very much. Good morning. Just wanted to go back a little bit on the supply demand. Obviously you've shown us in the graph and you've highlighted the growth potential over the last couple of years and how you expect this to kind of come back. As it seems in the first quarter, demand was clearly softer than what you anticipated. I think you've talked about it, that there was a year-over-year improvement of like 40%. Maybe help us understand, put that in a 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 think it should be and what the mismatch is.

That would be like my first question. I have a quick follow up after that.

Ken Seitz (President and CEO)

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

Jason Newton (Chief Economist and Head of Market Research)

Sure. Good morning, Ben. Yeah, if we look globally, so I guess just as Ken mentioned off the start, we've maintained our 63 million ton-67 million ton shipment range for the year. As we look around the various markets, there's a bit of a split between standard grade and granular markets, and that we have seen really strong demand in Brazil and strong shipments in North America as well from a granular perspective. We know the contracts were delayed, and particularly China's delayed, in terms of contracts, which has an impact on our sales. We have seen strong shipments going into those markets, in part by rail, from Russia and Belarus. As we look through the various markets, there's a few minor shifts market to market.

Overall demand's been pretty much as expected, and I'd say, even probably closer to the higher end in some of the, granular grade markets.

Operator (participant)

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

Martin Pradier (Investment Analyst)

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

Ken Seitz (President and CEO)

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

Jeff Tarsi (EVP and President in Global Retail)

Yeah, Ken, thanks, and good morning, Mark. I think we have seen as Ken spoke to, you know, if I look at the first quarter, we, we were basically 6% off on volume for the quarter, very, very steady from that standpoint. We have seen a surge in the second quarter on volume across our fertilizer portfolio. Look, this again, I think it speaks from a Nutrien Ag Solutions perspective. It speaks to our supply chain and investments we've made across our supply chain in order to get product moved in 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 margins stabilize and normalize as we've gotten into the quarter as well.

Look, we spoke to earlier in the year, you know, what our soil testing was alluding to, and that there were some deficiencies in about 40% of our test around P and K, and we certainly see our growers responding today to that. Rates are good. So the demand's been exceptionally strong into the second quarter. We expect that to continue. We're right in the middle right now of our planting season, so we continue to see a pull on demand and we're working hand to mouth in some of those situations today from an inventory perspective. Mark, I might pass it over to you as well.

Mark Thompson (EVP and CFO)

Sure. Thanks, Jeff. Good morning. Yeah, as Jeff said, we're seeing things move very quickly right now. After a first quarter where, as we've mentioned, there was relatively low field activity in North America due to weather and the just in time buying. We really have seen things kick off at a frantic pace as planting activity started in April. 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, sort of in, you know, $370 per ton range at NOLA for potash. We've seen firming of approximately $40 and seen really good uptake at those values.

If we look at inland terminals or inland distribution points that really have been challenged logistically by the just-in-time purchasing behavior, we've seen values increase in excess of that, and in some cases substantially. I think when we go back to talking about the North American agricultural supply chain, one of the things that we talked about in February was that if we were to see this just-in-time purchasing behavior persist, that because of the significant needs for crop nutrients and how fast a crop can get planted, we would expect to see some logistical premiums emerge because of a supply chain crunch. I think we have seen that and certainly have seen potash prices firm in season and have sought to sell into that strength to the extent possible and support our customers.

I think again, this is something that whether it's in the Nutrien Ag Solutions business that Jeff talked about or in the NPK distribution assets that we have, does set us apart. Really, we've been responding quickly to meet those needs and capture those higher price premia in our markets.

Operator (participant)

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

Edlain Rodriguez (Director and Equity Research Analyst)

Thank you. Good morning, everyone. I mean, a quick question on crop prices. I mean, they have come down a little bit. As a result, you know, farmers' income is likely gonna be down. I understand crop prices are still higher than historical averages. Do you think the lower prices could have an impact on farmers' psychology and willingness to pay higher fertilizer prices?

Mark Thompson (EVP and CFO)

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

Jeff Tarsi (EVP and President in Global Retail)

Ken, thanks. No, we certainly don't see any indication of that. You have to remember as well that a lot of growers have forward contracted prices when they enjoyed a really strong back half of the year last year. You saw probably more forward contracting going in across the commodity pricing. As we sit here today, again, we see growers using the best hybrids, the best trait packages. Again, we talked about our fertility rates in the second quarter, up 40% right now year-over-year. We anticipate that they're again gonna wanna try to maximize their yields.

From that standpoint, I've said this many times before, these are science-based decisions today. 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 ROI. I would see, I think we'll see continued strong input demand as we go through the rest of the spring and into the summer.

Operator (participant)

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